Document of The World Bank
Public Disclosure Authorized FOR OFFICIAL USE ONLY
Report No: 59188-PE
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN
Public Disclosure Authorized IN THE AMOUNT OF US$54.5 MILLION
TO THE
REPUBLIC OF PERU
FOR THE
OPTIMIZATION OF LIMA WATER AND SEWERAGE SYSTEMS PROJECT
March 9, 2011 Public Disclosure Authorized
Sustainable Development Department Bolivia, Chile, Ecuador, Peru and Venezuela Country Management Unit Latin America and the Caribbean Region
This document has a restricted distribution and may be used by recipients only in the Public Disclosure Authorized performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
CURRENCY EQUIVALENTS
(Exchange Rate Effective December 31, 2010)
Currency Unit = Nuevos Soles US$1.00 = S./2.81 US$0.36 = S./1.00
FISCAL YEAR January 1 – December 31
ABBREVIATIONS AND ACRONYMS
IFR Interim Unaudited Financial Reports ANA National Water Agency (Agencia Nacional INC National Institute of Culture (Instituto del Agua) Nacional de Cultura) BOT Build Operate Transfer IPSAS International Public Sector Accounting BP Bank Procedures Standards CAF Andean Development Corporation IRR Internal Rate of Return (Corporacion Andina de Fomento) JICA Japanese International Cooperation Agency CO Country Office KfW German Cooperation (Kreditanstalt fur CPS Country Partnership Strategy Wiederaufbau) CQS Consultant Qualifications Selection LCS Least Cost Selection DA Designated Account MDG Millennium Development Goals DC Direct Contracting MEF Ministry of Finance (Ministerio de EA Environmental Assessment Economía y Finanzas) EGAm Environmental Management Team (Equipo MINAM Ministry of Environment (Ministerio del de Gestión Ambiental) Ambiente) EMP Environmental Management Plan MVCS Ministry of Housing, Construction and EPS Sanitation Services Provider (Empresa Sanitation (Ministerio de Vivienda, Prestadora de Servicios de Saneamiento) Construcción y Saneamiento) FBS Fixed Budget Selection NCB National Competitive Bidding FM Financial Management NGO Non Government Organization FONAFE State Companies‟ National Fund (Fondo NPS National Procurement System Nacional Empresarial del Estado) NPV Net Present Value FY Fiscal Year NRW Non Revenue Water GDI Research and Development Management O&M Operation and Maintenance (Gerencia de Desarrollo Institucional) OM Operations Manual GDP Gross Domestic Product OP Operational Policy GIS Geographical Information System PAD Project Appraisal Document GoP Government of Peru PAPT Water for All Program (Programa Agua HQ Headquarters para Todos) HR Human Resources PDO Project Development Objective IADB Inter-American Development Bank POA Annual Operational Program (Plan IBRD International Bank for Reconstruction and Operativo Annual) Development PP Procurement Plan ICB International Competitive Bidding PPIAF Public Private Infrastructure Facility IDA International Development Association
PROMESAL Lima Marginal Areas Sanitation SEPA Procurement Plans Execution System Improvement Project (Proyecto (Sistema de Ejecución de Planes de Mejoramiento Sanitario de las Áreas Adquisiciones ) Marginales de Lima) SIL Specific Investment Loan PRONASAR National Rural Water Supply and Sanitation SNTA Sub National Technical Assistance Project (Proyecto Nacional de Saneamiento SOE Statement of Expenses Rural) SSS Sole Source Selection PVC Polyvinyl Chloride SUNASS National Superintendence of Sanitation QBS Quality Based Selection Services (Superintendencia Nacional de QCBS Quality Cost Based Selection Servicios de Saneamiento) SBD Standard Bidding Document TORs Terms of Reference SCADA Supervisory Control and Data Acquisition UFW Unaccounted for Water SEDAPAL Lima‟s Water and Sewerage Service UNSGAB United Nations Secretary General Advisory (Servicio de Agua Potable y Alcantarillado Board on Water and Sanitation de Lima) WSP Water and Sanitation Program SEIA System for Environmental Impact WSS Water Supply and Sanitation Assessment WWTP Wastewater Treatment Plant
Regional Vice President: Pamela Cox Country Director: Laura Frigenti Sector Director: Laura Tuck Sector Manager: Guang Zhe Chen Sector Leader: Ousmane Dione Task Team Leader: Miguel Vargas-Ramirez
Table of Contents I. Strategic Context ...... 1 A. Country Context ...... 1 B. Sectoral and Institutional Context ...... 1 C. Higher Level Objectives to which the Project Contributes ...... 5 II. Project Development Objectives ...... 6 A. PDO ...... 6 1. Project Beneficiaries...... 6 2. PDO Level Results Indicators ...... 6 III. Project Description ...... 6 A. Project components ...... 6 B. Project Financing ...... 8 1. Lending Instrument ...... 8 2. Project Cost and Financing ...... 8 C. Lessons Learned and Reflected in the Project Design ...... 8 IV. Implementation...... 9 A. Institutional and Implementation Arrangements ...... 9 B. Results Monitoring and Evaluation ...... 9 C. Sustainability ...... 10 V. Key Risks and Mitigation Measures ...... 10 VI. Appraisal Summary ...... 10 A. Economic and Financial Analysis ...... 10 B. Technical ...... 12 C. Financial Management ...... 13 D. Procurement ...... 13 E. Social (including safeguards) ...... 13 F. Environment (including safeguards) ...... 15 Annex 1: Results Framework and Monitoring ...... 17 Annex 2: Detailed Project Description ...... 19 Annex 3: Implementation Arrangements ...... 28 Annex 4 Operational Risk Assessment Framework (ORAF) ...... 49 Annex 5: Implementation Support Plan ...... 52 Annex 6: Team Composition ...... 55 Annex 7: Economic and Financial Analysis ...... 56
PAD DATA SHEET
Peru Optimization of Water and Sewerage Systems Project
PROJECT APPRAISAL DOCUMENT
LATIN AMERICA AND CARIBBEAN Urban, Water and Disaster Risk Management Unit (LCSUW)
Date: March 9, 2011 Sectors: Water supply (50%); Sewerage (50%) Country Director: Laura Frigenti Themes: Access to urban services and housing Sector Director: Laura Tuck (90%); Other public sector governance (10%) Sector Manager: Guang Zhe Chen EA Category: B – Partial Assessment Sector Leader: Ousmane Dione Team Leader: Miguel Vargas-Ramirez Project ID: P117293 Lending Instrument: Specific Investment Loan (SIL) Project Financing Data: Proposed terms: Variable spread loan with a final maturity of 18 years, including a grace period of 17 years. [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: Source Total Amount (US$M) Total Project Cost: 64.9 Cofinancing: Borrower /SEDAPAL: 10.4 Total Bank Financing: IBRD 54.5
IDA New Recommitted
Borrower: Republic of Peru Responsible Agency: SEDAPAL Contact Person: Jorge Barco Telephone No.: +511 317 3000 Fax No.: +511 362 5148 Email: [email protected]
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Estimated Disbursements (Bank FY/US$ m) FY 2012 2013 2014 2015 2016 2017 Annual 2.00 8.00 10.00 13.50 16.00 5.00 Cumulative 2.00 10.00 20.00 33.50 49.50 54.50
Project Implementation Period: July 4, 2011 – March 31, 2016 Expected effectiveness date: June 6, 2011 Expected closing date: October 31, 2016 Does the project depart from the CAS in content or other ○ Yes ● No significant respects? If yes, please explain:
Does the project require any exceptions from Bank policies? ○ Yes ● No Have these been approved/endorsed (as appropriate by Bank ○ Yes ○ No management? Is approval for any policy exception sought from the Board? ○ Yes ● No If yes, please explain:
Does the project meet the Regional criteria for readiness for ● Yes ○ No implementation?
If no, please explain:
Project Development Objective The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima.
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Project description Component 1. Rehabilitation of water and sewerage networks in the First Northern Service Area of-Lima. This component will finance the rehabilitation of the water and sewerage networks in First Northern Service area of Lima, directly benefiting more than 158,380 low income people. The exact proportion of replacement and renovation will be determined during implementation based on a detailed hydraulic modeling of each subsector and an agreed methodology. Component 2. Improving SEDAPAL’s Efficiency. This component will finance studies and consultant services to provide decision-making tools to SEDAPAL‟s management to improve the company‟s efficiency. The activities will be focused on the following four areas: (a) support for the implementation of the Geographic Information System (GIS); (b) SCADA information technology standardization strategy and consolidation; (c) options for the development of a new organizational model, and (d) preparation of a strategy to efficiently meet user demand for water and sanitation services. Component 3. SEDAPAL Project Management. This component will finance the additional staff required for project management to establish a Monitoring and Evaluation System and undertake the required financial audits as well as physical and procurement reviews. Safeguard policies triggered?
Environmental Assessment (OP/BP 4.01) ● Yes ○ No Natural Habitats (OP/BP 4.04) ○ Yes ● No Forests (OP/BP 4.36) ○ Yes ● No Pest Management (OP 4.09) ○ Yes ● No Physical Cultural Resources (OP/BP 4.11) ● Yes ○ No Indigenous Peoples (OP/BP 4.10) ○ Yes ● No Involuntary Resettlement (OP/BP 4.12) ● Yes ○ No Safety of Dams (OP/BP 4.37) ○ Yes ● No Projects on International Waterways (OP/BP 7.50) ○ Yes ● No Projects in Disputed Areas (OP/BP 7.60) ○ Yes ● No
Conditions and Legal Covenants:
Loan Agreement Reference Description of Condition/Covenant Date Due The Subsidiary Agreement has been executed on Loan Agreement behalf of the Borrower and the Project Implementing Before effectiveness Article V, 5.01 (a) Entity. The Operational Manual, in form and substance Loan Agreement satisfactory to the Bank, has been adopted by the Before effectiveness Article V, 5.01 (b) Project Implementing Entity through a managerial resolution. The Borrower shall make the proceeds of the Loan By effectiveness and Loan Agreement available to the Project Implementing Entity under a throughout Project Schedule 2, Section I.A.1 Subsidiary Agreement implementation The Borrower shall take any actions necessary to Loan Agreement Throughout Project assist the Project Implementing Entity in complying Schedule 2, Section I.C implementation with its obligations related to safeguard compliance
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The Project Implementing Entity shall carry out the Project through PROMESAL in coordination with Project Agreement Throughout Project SEDAPAL‟s environmental and social units, and , Schedule, Section I.A Implementation for purposes of Part 2 of the Project, through PROMESAL in coordination with GDI The Project Implementing Entity shall maintain at all Project Agreement times during Project implementation, competent staff Throughout Project Schedule, Section I.A.2 in adequate numbers and with terms of reference and implementation experience satisfactory to the Bank. The Project Implementing Entity shall carry out the Project Agreement Project in accordance with the provisions and Throughout Project Schedule, Section I.C.1 recommendations of the Environmental Management implementation Plan and the Involuntary Resettlement Framework. Project Agreement The Project Implementing Entity shall carry out the Throughout Project Schedule, Section I.D.1 Project in accordance with the Operational Manual. implementation The Project Implementing Entity shall contract the No later than six Project Agreement auditors for purposes of Section 5.09(b) of the months after the Schedule, Section II.B.2 General Conditions, under terms of reference Effective Date acceptable to the Bank. Contract independent review by October 15 of each year during The Project Implementing Entity shall contract Project implementation; Project Agreement annual independent procurement reviews for furnish to the Bank the Schedule, Section III.B previous year of Project implementation and furnish report by July 31 of to the Bank the report of such independent reviews. each year; discuss with the Bank by September 15 of each year during Project implementation.
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I. Strategic Context
A. Country Context
1. Peru's economy has seen a sharp recovery in 2010, returning to the high growth rates recorded in the years before the global economic crisis. The Peruvian economy is expected to have grown in 2010 by around 9 percent, up from a low of 0.9 percent in 2009 when the impact of the global economic crisis affected the confidence of economic agents and resulted in sharply lower private investments. Overall, the rate of economic growth achieved in 2010 and the main drivers of the growth closely resemble those observed in the years 2006 to 2008 when the economy averaged a rate of growth of 8.8 percent fueled by strong domestic demand and supported by positive terms of trade shocks.
2. In light of the economic recovery the authorities have prudently started to gradually remove the fiscal and monetary policy stimulus put in place in the midst of the crisis. The severity of the global economic crisis in late 2008 and 2009 led the Peruvian authorities to launch a countercyclical policy response designed to cushion the impact of the crisis in Peru. Thus, a two-year economic stimulus plan of around US$4.8 billion, or about 3.5 percent of gross domestic product (GDP), was launched. The fiscal stimulus plan combined with lower fiscal revenues caused a fiscal deficit of 1.9 percent of GDP in 2009. As the economy picked up in early 2010 the authorities have been gradually removing this fiscal stimulus and, together with a sharp increase in fiscal revenues of around 18 percent in real terms, are expected to have narrowed the fiscal deficit to around 0.9 percent of GDP in 2010. Despite the sharp economic recovery, inflation in 2010 remained low at 2.1 percent, well within the inflation targeting band of 1 to 3 percent. Still, interest rates were also raised by the central bank throughout 2010 so as to gradually remove the monetary stimulus in place since late 2008.
3. The increase in public spending on infrastructure, one of the hallmarks of the stimulus plan, has been maintained. Sustained levels of public investment are key for both the competitiveness agenda and to improve access to opportunities for all Peruvians. In fact public investment reached 5.3 percent of GDP in 2009, up from around 4.3 percent in 2008 and contrasting with 2006 and 2007 where public investment had bottomed out at around 2.8 percent of GDP. This stepped up public investment was maintained in 2010 despite the fiscal consolidation efforts and public investment reached around 6 percent of GDP in 2010. The authorities have been able to maintain this higher level of public investment even after the stimulus plan concluded due to an overall prudent fiscal stance. The government has been able to bring down its debt to 22.7 percent of GDP in 2010, already below the pre-crisis level of 24 percent of GDP in 2008. Going forward, improving infrastructure has been identified as one of the top priorities to contribute to the competitiveness of the Peruvian economy as well as to provide opportunities for all Peruvians by improving access to adequate basic services.
B. Sectoral and Institutional Context
4. Although the fast economic growth of recent years was accompanied by poverty reduction and job creation,1 poverty incidence in Peru remains highly unequal in geographic terms, with some
1 Between 2005 and 2008 poverty fell from 48.7 percent to 36.2 percent, while extreme poverty was reduced from 17.4 percent to 12.6 percent. (Source: Instituto Nacional de Estadística e Informática –INEI). 1 regions posting poverty rates above 60 percent. This situation is also reflected in terms of access to water supply and sanitation (WSS) services, where there are large disparities in coverage and quality of services between urban and rural areas, socio-economic conditions and geographical regions (Coastal, Andean and Jungle). Most of Peru‟s abundant water resources are concentrated in the Amazon region, where less than 10 percent of the population lives and less than 10 percent of the country‟s GDP is generated. Two thirds of the country‟s population (about 19.2 million people) lives in the very dry Coastal area, receiving only about 1.8 percent of the national renewable fresh water resources, and where the country‟s major cities, including Lima, are located.
5. Within the urban population, most of those without access to WSS services are located in small urban centers or in peri-urban areas. At the national level, while 78 percent for the non-poor have access to a water connection, only 45 percent of the poor do. This proportion drops to only 28 percent in rural areas (41 percent for the non-poor). This is in spite of an overall increase in water supply coverage from 75 to 82 percent, and an increase in sanitation coverage from 54 to 68 percent at the national level between 1990 and 2008.
6. The Lima-Callao metropolitan area (hereafter Lima) has been the main engine of Peru‟s economic performance, accounting for 45 percent of the country‟s GDP in 2007. Rapid economic growth has enabled reductions in poverty levels; however, these gains remain fragile and infrastructure improvements are needed to sustain economic growth and further reduce poverty in Peru in general and in Lima in particular. The provision of adequate WSS services in Lima remains a challenge, given the explosive growth of the city (Lima‟s population has grown from 6.4 million in 1993 to 8.4 million in 2009) and its scarce water resources. Lima water and sewerage coverage rates are at around 91 percent, with the challenge to increase coverage for a population estimated to reach 11.4 million in year 2030.
7. Lima is the world‟s second largest city located in a desert (after Cairo), with an annual rainfall of 9 mm and an average total water flow of 20.5 m3/second, most of which (17.5 m3/second) is supplied by the Rimac River. During the dry season surface water flow in Lima drops by about 50 percent to 10 m3/second. Between 2004 and 2007 WSS coverage in the city has decreased by 3.5 percent for water and by 2.8 percent for sanitation services, mainly as a result of the city‟s high population growth, including high rates of migration. Coverage of peri-urban areas represents a key challenge in Lima, where about 40 percent of Peru‟s urban dwellers without access to piped water (total 3.1 million) live.
8. Quality of WSS services is also a major issue in the sector. According to a 2005 survey carried out in 1,628 municipalities, access to water services is not continuous in about half of them. In 7.7 percent of the municipalities continuity of water services was less than 11 hours per day. Large urban centers in Latin America have an average of 24 hours per day of water supply, while Lima has only 21.
9. Poor urban areas suffer from low service standards, as lack of maintenance and sub-optimal operation seriously affect the quality and sustainability of services. For instance, in the Northern Service Area of Lima, non revenue water is estimated to be above 50 percent, with only 37 percent of users receiving 24 hours of service and a very high frequency of pipe breaks and water leaks. The sewerage network is in poor physical condition with frequent blockages and breaks, mainly due to community self-construction using substandard building techniques and materials. In addition, some 2 of the older pipes have exceeded the lifetime use for which they were designed. Water quality is also an issue, especially in rural areas and in smaller urban areas where services are provided directly by the municipalities or by Water User Associations (Juntas Administradoras de Servicios de Saneamiento).
10. These challenges stem mainly from policies adopted in the 1980s and early 1990s, when Peru suffered from political and macroeconomic instability, which had long-term consequences for the WSS sector. Lack of resources to adequately operate and maintain the existing WSS infrastructure led to deterioration and need for considerable rehabilitation, while severe underinvestment2 compromised service coverage and quality of service provision.
11. In order to address the issue of scarce resources and low service quality, as well as with the goal to improve the efficiency of WSS service provision, over the past fifteen years the Government of Peru (GoP) has implemented important reforms steps in the WSS sector, resulting in a well established institutional framework, in which policy-setting, regulatory and service-provision functions are differentiated. Policy-setting is assigned to the Ministry of Housing, Construction and Sanitation (Ministerio de Vivienda, Construcción y Saneamiento – MVCS); regulatory functions to the National Superintendence of Sanitation Services (Superintendencia Nacional de Servicios de Saneamiento – SUNASS); and service-provision has been decentralized to Sanitation Service Providers (Empresas Prestadoras de Servicios de Saneamiento – EPSs), municipalities, and/or water user boards, with the exception of SEDAPAL (Servicio de Agua Potable y Alcantarillado de Lima) the utility responsible for WSS service provision in Lima, which remains linked to the central government.
12. The GoP has also undertaken a number of important reform steps on the water resource management side to deal with water scarcity and pollution by approving a new Water Resources Law (on March 31, 2009) and creating the National Water Authority (Agencia Nacional de Agua – ANA) with a clear mandate for integrated, participative basin-scale management of water resources with financial and administrative autonomy. The World Bank, through the Water Resources Management Modernization Project, is supporting GoP in strengthening water resources management institutional capacity to implement the new Water Resources Law, supporting the creation, capacity building and operation of river organizations in three pilot basins and strengthening ANA at the central level to support them.
13. The implementation of this institutional framework has enabled improved sector management across different institutions, in particular sector service providers, who now work under a clearer framework for tariff revisions. Nonetheless, there is much room for further improvement and a need for deeper coordination among various sector entities at the central and local government levels in the areas of investment planning, financing, as well as on the implementation of mechanisms that further improves and brings accountability to the management of EPSs.
2 During 1985-89 investments in water and sanitation infrastructure represented just 0.15 percent of GDP, one of the lowest figures in Latin America. Latin American countries with better service had invested about 1 percent of their GDP in water and sanitation infrastructure. 3
14. In 2007, the GoP launched the Water for All Program (Programa Agua para Todos – PAPT) as a flagship initiative initially focused on providing sustainable access to WSS services for poor neighborhoods in Lima. However, it soon became a national program focusing on complementing existing initiatives and financing access to WSS for the poor, mostly located in peri-urban, small towns and rural areas of the country and contributing to the achievement of the Millennium Development Goals (MDGs) targets of reaching a national coverage rate of 82 percent for water services and 77 percent for sanitation by 2015. Under the PAPT, the GoP plans to develop a common platform and methodology to scale up investments in sustainable access to WSS, which takes into account lessons learned from previous initiatives.
15. On the small towns and rural front, the MVCS is working with donors, including the World Bank, the Water and Sanitation Program (WSP), the Inter-American Development Bank (IADB), the Japanese International Cooperation Agency (JICA), as well as the German Cooperation (Kreditanstalt fur Wiederaufbau – KfW), in reviewing the experience to date on providing access to WSS and developing a common platform for intervention aimed at scaling up sustainable access to WSS in these areas. The current World Bank-financed National Rural Water Supply and Sanitation Program (Programa Nacional de Agua y Saneamiento Rural – PRONASAR) and its associated Additional Finance are also part of this common platform. On the urban and peri-urban front, the GoP is focusing on providing financing to EPSs and Municipalities to expand their service coverage to poorer neighborhoods. In 2010, new rules to access financing from the PAPT, focused on ensuring the sustainability of the systems built under the program, were adopted through a Ministerial Resolution (No. 693-2008).
16. The PAPT has helped SEDAPAL‟s objective of expanding services. Indeed, under PAPT, the utility has built 165,000 new water connections and 148,000 new sewerage connections in the last 4 years, benefitting a population of around 732,000. This has meant doubling the expansion rate in both water and sewerage, from a yearly rate of 20,220 for water and 19,220 for sewerage connections between 2000 and 2005, to 43,750 and 38,450 new water and sewerage connections during the past 4 years.
17. The following table presents some key performance indicators from SEDAPAL:
Figure 1. SEDAPAL’s Performance Indicators Unit of Actual Programmed Indicator Measure 2005 2006 2007 2008 2009 2010 2011 2012 2013 New Water x1000 17 17,3 50,3 48,6 58,8 37,0 55,7 68,5 59,2 Connections connections New Sewerage x1000 16,2 13,8 37,1 47,7 55,4 32,7 46,8 62,3 52,5 Connections connections Continuity hours 21,5 21,1 21,2 21,5 21,6 21,5 21,6 21,8 21,9 meter of Pressure 21,1 22,3 21,1 21,9 22,6 21,1 21,2 21,3 21,4 water column Metering % 60,4 68 70,1 70,3 68,8 78,9 85,9 87,4 87,4 Non revenue % 41,1 38,3 37 37 38,1 36,3 34,6 33,8 33,2 water Working Ratio % 60,8 58 51,3 44,2 42,2 50,0 55,2 56,3 56,3 Volume of Wastewater m3/s 1,6 1,57 2,43 2,53 2,77 2,70 2,77 17,84 17,86 Treatment
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18. Since the mid 1990s SEDAPAL embarked on an ambitious program for rehabilitation of water and sewerage networks to avoid physical losses and delay investments on new sources. The Bank supported a program for rehabilitation of networks on two of Lima‟s three regions: the Southern and Central Areas (Lima Water Rehabilitation and Management Project, 3811-PE). The investment program for the remaining Northern Service Area consists of interventions that include: (i) supply-side management by increasing Rimac River‟s flow through a trans-boundary transfer, as well as the expansion of water treatment and main distribution systems; (ii) demand-side management by reducing physical and commercial losses and controlling demand through installation of domestic meters, progressive tariff structures, and promotion of in-house water saving devices; and (iii) increasing the wastewater treatment capacity through partnerships with the private sector.
19. The first stage of this program consists of interventions aimed at (i) augmenting the flow of the Rimac River by 2.8 m3/second by drawing water from the Huascacocha lagoon (the Huascacocha Project, under implementation); (ii) increasing the drinking water treatment capacity by constructing the Huachipa water treatment plant (a BOT with a private sector partner scheduled for completion in mid 2011), as well as building/rehabilitating the distribution mains for the treated water; (iii) rehabilitating the water supply and sewerage networks; and (iv) increasing wastewater treatment capacity with the construction of the Taboada wastewater treatment plant (treatment capacity of 14 m3/second) through a BOT with a private sector partner. The Huachipa and Huascacocha projects, both under implementation, will increase the supply of drinking water in Lima by 25 percent from 20.5 m3/second to about 25.5 m3/second.
20. With the increase in water supply in the Northern Service Area of Lima, rehabilitation of the water and sanitation network becomes particularly urgent. Given the poor physical condition of the infrastructure it is expected that, without an adequate rehabilitation program, the increased water pressure will take the already high frequency of pipe breaks and water leaks to unmanageable levels. Within this context, SEDAPAL has developed a US$211 million program to rehabilitate and optimize the WSS networks in the Northern Service Area of Lima, to be financed in parallel by the World Bank through this proposed operation, JICA, KfW and SEDAPAL‟s own resources.
C. Higher Level Objectives to which the Project Contributes
21. The proposed operation would directly contribute to the Government‟s priority objective of reducing inequality by ensuring that the poor get access to adequate basic services and improving the quality of WSS services provided to low income urban dwellers. The proposed Project contributes to the achievement of all three pillars of the current World Bank Group‟s Country Partnership Strategy (CPS) for Peru3, as improving water services contributes to sustaining growth and widening its base, as well as meeting basic needs in underserved areas, and promoting the institutional and operational strengthening of SEDAPAL contributes to modernizing state institutions.
3 The World Bank Group‟s Country Partnership Strategy 2007-2011 (Report #37913-PE) discussed by the Executive Directors on December 19, 2006. 5
II. Project Development Objectives
A. PDO
22. The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima.
Project Beneficiaries
23. Project beneficiaries include the urban dwellers living in SEDAPAL‟s Northern Service Area of Lima, which comprises 16 districts.4 It is envisaged that physical investments will largely benefit the First Northern Area of Lima that means the following districts of the Borrower: Comas, Independencia, San Martín de Porres y Los Olivos. The total beneficiary population is 158,380 in an area of approximately 118 km2.
PDO Level Results Indicators
24. Achievement of PDO will be monitored by the following outcome indicators:
(a) Number of daily hours water services are provided in the project area5; (b) Annual incidence of water pipe breakages per km of water supply network in the project area; (c) Annual incidence of sewerage blockages per km of sewerage network in the project area; (d) Volume of water saved in the project area; and (e) Number of learning events on strategic planning and management
III. Project Description
A. Project components
25. In order to improve the efficiency, continuity and quality of the services, SEDAPAL will follow a two-tier strategy. The first is to make more water available by reducing the physical losses in the system, and the second is to improve the operational and commercial management of the water and sanitation system by: (a) reducing commercial losses, and (b) optimizing the technical operation of the systems (pressure management, sectorization and valve control, automatization for the control systems and others). The proposed project will consist of three components, as follows:
26. Component 1. Rehabilitation of water and sewerage networks in Northern Service Area of Lima (US$61.2 million, of which US$51.3 million will be financed by the Bank loan). This component will finance the rehabilitation of the water and sewerage networks in First Northern Service area of Lima, directly benefiting more than 158,380 low income people. The exact proportion of replacement and renovation will be determined during implementation based on a detailed hydraulic modeling of each subsector and an agreed methodology.
4 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los Olivos, Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla. 5 Project area means the following SEDAPAL‟s hydraulic sub-sectors within the First Northern Service Area: 86, 334, 335, 336, 337 and 338. 6
27. To improve the appropriate management of the rehabilitated network and reduce losses the component will also finance: (i) rehabilitation of water reservoirs (concrete storage tanks) to increase storage capacity and pressure stabilization; (ii) replacement of household connections and installation of new domestic water meters; and (iii) installation of bulk water meters and valves to allow sectorization.
28. Social interventions will complement these physical investments to maximize the Project‟s expected benefits by taking measures to facilitate the transition to a full pressure, continuous and metered service. These will include gender-tailored initiatives such as the provision of guidance to manage consumption in particular through the use of in-house water saving equipment.
29. Component 2. Improving SEDAPAL’s Efficiency (US$2.3 million, of which US$1.88 million will be financed by the Bank loan). This component will finance studies and consultant services to provide decision-making tools to SEDAPAL‟s management to improve the company‟s efficiency. The activities will be focused on the following four areas:
(a) Support for the implementation of the GIS: including an evaluation of the cadastre to determine priority zones for updating and the identification of a process for regular updating, as well as support to the training and institutional arrangements needed within SEDAPAL to maximize the potential of the GIS; (b) SCADA information technology standardization strategy and consolidation: including support to SEDAPAL in the preparation of a SCADA Master and Investment Plan to ensure the compatibility of current and future SCADA strategies; (c) Preparation of a strategy to efficiently meet user demand for water and sanitation services: including an evaluation of the exogenous and endogenous factors that affect demand for WSS services, an estimation of future demand trends backed by adequate sensitivity analysis, and identification of priority actions to meet such demand as efficiently as possible; and (d) Options for the development of a new organizational model: including the preparation of a strategic vision for SEDAPAL‟s management over the medium and long-term incorporating new technologies, aligning human resources management with modern practices, exploring options for sustainable financing of capital investments and rearranging institutional structure along functional lines; and
30. Component 3. SEDAPAL Project Management (US$1.4 million, of which US$1.32 million will be financed by the Bank loan). This component will finance the additional staff required for project management to establish a Monitoring and Evaluation System and undertake the required financial audits and physical and procurement reviews. Additionally, it will finance individual consultants to strengthen the team on procurement, financial management and communication, as well as the training for strategic planning, and selection of technical options to allow full compliance with the Investment Plan 2009-2013 and subsequent plans. This component will also support SEDAPAL‟s efforts to document the Project‟s process and results, and to mainstream lessons learned and good practices.
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B. Project Financing
1. Lending Instrument
31. The Project will be supported by a specific investment loan (SIL) in the amount of US$54.5 million.
2. Project Cost and Financing
Project Components* Project cost IBRD Financing 1. Rehabilitation of water and sewerage networks in Northern Service Area of Lima 61.2 51.3 2. Improving SEDAPAL‟s efficiency 2.3 1.88 3. SEDAPAL Project management 1.4 1.32 Total Project Cost 64.9 54.5 *These amounts include physical and price contingencies.
C. Lessons Learned and Reflected in the Project Design
32. Using resource conservation techniques to liberate water resources for new clients. The project design makes use of a comprehensive and synchronized application of demand and supply management techniques, through non-revenue water investments as well as the social intervention aimed at water conservation, in order to liberate scarce water resources to new users, with the objective of increasing coverage and improving the quality of service provision. The project will include conservation activities targeted to consumers, actively involving users in these efforts through the promotion of water saving behaviors and equipment.
33. Verify the actual need for pipe rehabilitation or replacement through the use of hydraulic modeling and field tests. Given the unknown state of the physical network, the most accurate approach to determine the exact length of pipe to be replaced or rehabilitated is through hydraulic modeling, paired with field tests, once the contractor is deployed rather than using these resources on detailed designs that can only provide limited information. Thus, no network rehabilitation/replacement will take place for a section of pipe that is not seen to be relevant based on the results of the hydraulic modeling and field tests.
34. Implementation Arrangements. The proposed project has modeled its implementation arrangements on the successful experience of the Lima Water Rehabilitation and Management Project.6 SEDAPAL‟s project implementation division (PROMESAL) will be in charge of project management and implementation reporting to SEDAPAL‟s management.
35. In addition, the Bank has learned important lessons from undertaking large complex investment projects, such as not loading them with unrealistic policy reform measures or measures which lack Government ownership. The proposed Project recognizes the need for further reforms in the water sector in Peru, but proposes that: (i) the reforms and the pace at which they can be implemented are Government owned; and (ii) the imposition of conditions or rigid covenants on the proposed operation is not appropriate. This approach has already generated results, as the Bank is involved in a number of parallel sector initiatives in partnership with: (i) SEDAPAL through a
6 Loans 3811-PE and 7180-PE 8
Public-Private Infrastructure Advisory Facility (PPIAF) proposal, under the Sub-National Technical Assistance window that will evaluate the company‟s prospects for issuing debt instruments, (ii) SUNASS and UNSGAB to provide technical assistance and support to EPSs in order to enable them to access market financing, and (iii) the MVCS in developing a common platform for the scaling up of sustainable investments in WSS in small towns and rural areas.
IV. Implementation
A. Institutional and Implementation Arrangements
36. PROMESAL will be the unit responsible for implementing the project, reporting directly to SEDAPAL‟s General Manager (Gerencia General). Its responsibilities include: carrying out bidding processes, selection of contractors, supervision, approval of contract amendments, and general Project management. SEDAPAL‟s General Management (Gerencia General) will be responsible for approving final designs, complementary studies, while Operations Management (Gerencia de Operaciones) is in charge of the final reception of the works. PROMESAL is in charge of most network rehabilitation and expansion projects in SEDAPAL, including recently closed Bank-financed projects and parallel operations financed by JICA and KfW, and has proven implementation capacity.
37. Through PROMESAL, SEDAPAL has been successfully implementing projects with bilateral and multilateral institutions since 1995, including the US$170 million Lima Rehabilitation and Management Project (3811-PE) and its associated Additional Finance Operation (7160-PE) for the rehabilitation and expansion of water and sewerage services in the Southern and Center Service Areas that closed in March 2009. Currently, PROMESAL is executing a US$410 million JICA loan for the construction of the Huachipa Water Treatment Plant.
38. SEDAPAL strategy for intervening in rehabilitation of networks is a phased one, starting with works on First Northern Area of Lima, continuing with the Second Northern Area of Lima, following with interventions in San Juan de Lurigancho District and finalizing with network rehabilitation in La Molina district. PROMESAL will be starting implementation of the first tranche in First Northern Area of Lima in 2011, financed partially by JICA (US$67.1 million) and KfW (US$50 million).
39. The Research and Development Unit (Gerencia de Desarrollo e Investigación- GDI) will be in charge of overall coordination of Component 2, although contracting processes would be done through PROMESAL. GDI has already designated teams to coordinate each consultancy of the component, as well as the procedures and responsibilities for selection of consultants and approval of products and payments. The IT Team at GDI will lead the support for the implementation of the GIS and the SCADA information technology strategy and consolidation consultancies; the Research, Standardization and Physical Planning Team will lead the preparation of a strategy to meet user demand for water and sanitation services consultancy and the Operational Planning and Financing Team will lead the options for the development of a new organizational model study.
B. Results Monitoring and Evaluation
40. The results framework and monitoring strategy are included in Annex 3. This framework has been developed in close coordination with SEDAPAL. PROMESAL will consolidate the data at 9 the project level and produce semi-annual reports to monitor progress. An impact evaluation survey – Encuesta de Evaluación de Impacto del Proyecto –will analyze the effect of the planned investments on improving the quality of service delivery in the Project area.
41. Overall responsibility for monitoring and evaluation of the Project will lie with the PROMESAL, which will provide timely information about the Project‟s implementation progress, including qualitative information on the execution of selected activities, procurement and contractual decisions, accounting and financial recording, and other operational and administrative matters. The Project‟s Operations Manual will provide specific details regarding monitoring and evaluation responsibilities, including data collection requirements, timing and use of information.
C. Sustainability
42. A financial analysis was undertaken to assess SEDAPAL‟s overall long-term financial sustainability as well as its capacity to operate and maintain the investments supported under the Project. The results of the analysis shows that SEDAPAL is in relatively good financial standing, and its projected financial position is also relatively robust, provided that the company ensures the availability and predictability of resources (about US$817 million) to implement the investments under the PAPT. The projection results show that the company‟s working ratio will be maintained below 0.89, and its debt service coverage is projected to reach 1.80 at the end of the projection period.
43. Stakeholders’ engagement. The Project‟s beneficiaries will actively participate in all Project stages through a robust social component, that has been designed using some specific gender consultations, and which includes activities to be carried out by contractors as part of the construction phase, civil society and interventions by SEDAPAL. Additionally, the Project includes: (i) strengthening of the company‟s client relationship mechanisms (i.e., claims management, information disclosure, and others); and (ii) water savings equipment promotion using social marketing tools to contribute both to resource conservation and lowering monthly payments by families.
V. Key Risks and Mitigation Measures
44. Potential risks are summarized in the Operational Risk Assessment Framework (see Annex 4). The overall risk within this Project is rated as Medium, driven by likelihood. Risks identified are manageable and mitigation measures are in place.
45. The two main risks identified are: (i) Institutional Risk: Lack of alignment in visions regarding sector policy and investment priorities between sectoral actors (SEDAPAL, MVCS, SUNASS, Municipality) could affect institutional priorities and impact tariff and subsidy decisions, and (ii) Project implementation is delayed or discontinued due to competing priorities, compromising the achievement of the PDO. Mitigation measures are an integral part of the Project‟s design (for further details see Annex 4).
VI. Appraisal Summary
A. Economic and Financial Analysis
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46. The proposed Project is economically feasible with returns of US$184 million and internal rate of return of 20 percent. The evaluation shows positive economic results of US$181 million and US$3 million for the water and sewerage components respectively and internal rate of returns of 20 percent and 13 percent. The financial evaluation shows that the project will be financial feasible only with at least a ten percent tariff increase. A summary of the evaluation is presented in Annex 7, and the full analysis is available in the project files.
47. The economic benefits were estimated as: (i) savings that SEDAPAL will get when water is used more efficiently and water losses are reduced; (ii) savings that beneficiaries will obtain when water intermittence is eliminated; and (iii) improving on living condition, which were assimilated as appreciation of dwellings values. Given that a hedonic price study was not carried out, simulations of property value increases were included.
48. The distributive analysis shows that the big winners will be the customers, whose economic benefits will offset the higher bills to be paid to SEDAPAL once the service is improved. The sensitivity and risk analyses shows very reassuring results for the economic evaluation, with a probability of 100 percent of having positive returns for the water component and 69 percent for the sewerage component.
Financial Assessment of SEDAPAL 49. A financial analysis was undertaken to assess SEDAPAL‟s overall long-term financial sustainability as well as its capacity to operate and maintain the investments supported under the project. The analysis is based on SEDAPAL‟s audited historical and pro-forma financial statements for the 2007 to 2010 period and its projected financial performance for the next 10 years. SEDAPAL is in relatively good financial standing. The company‟s audited accounts from 2007 to 2009 and estimates for 2010 results show that the company has been profitable. In 2007, the company reported a net operating income of US$38 million. In 2008 this income was substantially lower at US$1.3 million, mainly due to increased financial costs as a result of exchange rate differences in its external debts. In 2009 the company had a net profit of US$74 million.
50. Projections to assess SEDAPAL‟s future financial position and performance were carried out for the period of 2011 to 2021, with the following main assumptions in the base scenario: (a) tariff adjustments for inflation, the real tariff increases already approved by SUNASS from 2010 to 2012 were incorporated; (b) a 6 percent real tariff increase was added in 2015 and 2016 as additional planned investments expected to be approved by SUNASS are implemented, likely in partnership with the private sector; (c) the investment plan excludes the investments related to the PAPT and its associated benefits, given that the source and availability of funding are currently under discussion; and (d) water losses are reduced to 32 percent company-wide by 2015 and 30 percent by 2021.
51. The implementation of the above assumptions ensures positive cash flow and a net profit for SEDAPAL, enabling the company to meet its current operating expenses and debt obligations. The company‟s working ratio will be maintained below 0.89 in all years and its debt service coverage is projected to reach 1.80 at the end of the projection period. In 2015 the debt service coverage will reach 1.15, highlighting the need for the company to carefully evaluate its debt position in an ongoing basis. From 2015 onwards, SEDAPAL will also be able to finance a portion of its
11 investment needs (up to 50 percent depending on the overall levels of investment) from its own resources.
B. Technical
52. SEDAPAL has carried out a detailed feasibility study on the status of the water and sewerage pipes in the project area, and found that about 42 percent outlived their effective lifetime. Also, the majority of pipes in the Northern Service Area were not laid by SEDAPAL and their installation did not follow proper pipe installation standards, consequently they exhibit high water losses of at least 50 percent. In addition, a large portion of these networks, especially the large diameter pipes, are asbestos-cement pipes (89 percent of the water network is asbestos-cement and 10 percent PVC), which are not recommended for use considering their age and poor installation practices. Under these conditions, the number of bursts and breaks in the networks is higher than acceptable (about 3 bursts/km/year), leading to high frequency and cost of repair.
53. SEDAPAL, through its Northern Service Management Unit (Gerencia de Servicios Norte), divides the system according to micro-watersheds grouping zones that share the same sewerage outfall. The Northern Service Area corresponds to the Comas-Chillon primary outfall and is considered priority as it is the closest to the Huachipa main branch bringing an additional water flow of 5 m3/s. The Northern Service Area covers 12 operational sectors and 16 districts7. Given the nature of the intervention that encompasses not only the rehabilitation but also the creation of hydraulically viable operational sectors, the four districts of Los Olivos, Independencia, San Martin de Porres and Comas were prioritized.
54. Based on the hydraulic modeling, which provided information on pressure, length, network layout and geographical distribution, it is expected that there will be 18 new operational sectors replacing the current 12 ones. An operational sector is determined to be water-tight based on its distribution lines so there is only one entry and exit point for interconnection with other sectors, while a subsector is defined with valves mainly for operation and maintenance, which allows for the carrying out of hydraulic balances to estimate physical losses.
55. The Project will finance works comprising the rehabilitation of 143km of PVC pipe with diameters from 100 mm to 400 mm (about 130 km of 100 mm), 96 km of trenchless pipe rehabilitation (cracking and/or relining), rehabilitation and/or replacement of about 26,000 household meters and provision, installation of 4 bulk meters and 700 water valves, and rehabilitation of 4 reservoirs. Sewerage works will include the provision and installation of about 110 km of PVC pipe with diameter from 200 mm to 300 mm, as well as rehabilitation of about 14,000 sewerage connections and rebuilding/reconstruction of 1,300 manholes. More specific information will be available once the detailed designs are completed, and these planned works are also contingent to the availability of financing from other institutions.
56. SEDAPAL has divided the intervention zone in different independent areas, according to available financing from the Bank, JICA and KfW. This will entail the independent contracting and execution of each area, thus parallel financing of works is envisioned instead of co-financing. As a
7 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los Olivos, Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla. 12 stand-alone project, the indicators developed for this Project and presented in Annex 1 refer exclusively to the Bank‟s and SEDAPAL counterpart‟s investments.
57. The Taboada wastewater treatment plant, under construction, will collect and treat the sewerage of the Northern Service Area, achieving a 70 percent increase in the wastewater volume being treated. This plant is being implemented using a BOT contract that includes the design, 44- month construction and operation and it is expected to start working in 2013.
C. Financial Management
58. A Financial Management (FM) assessment has been undertaken (see Annex 3) in SEDAPAL, taking into account the entity‟s FM arrangements and performance during the implementation of the previous Lima Water Rehabilitation project.
59. The Bank will consider retroactive financing for payments made up to one year before the date of signature of the Loan Agreement and after February 16, 2011, provided that the works, services and goods are procured in accordance with the Bank‟s guidelines and that the works are executed in compliance with the Bank‟s safeguard policies. These expenditures would be paid in advance by SEDAPAL and should not exceed US$10.9 million.
60. SEDAPAL through its Project Implementation Unit (PROMESAL) will implement the proposed project. SEDAPAL previously implemented the Lima Water Rehabilitation project financed through loan IBRD-3811-PE and additional financing IBRD-7160-PE. Hence, SEDAPAL has developed experience in working with Bank funds and was consistently assessed during Bank supervision and by external auditors showing satisfactory performance. On the basis of the FM assessment performed, we can conclude on the adequacy of the FM arrangements for the project. SEDAPAL will continue working on improving its financial information system with a module capable to provide project financial reports and statement of expenditure (SOEs) from SEDAPAL‟s current system. The Bank will follow up the progress made on this aspect during Project implementation.
D. Procurement
61. An assessment of SEDAPAL‟s capacity to implement procurement actions for the Project was conducted on November 2010 and a detailed action plan was prepared to address all risks identified (see Annex 3). PROMESAL, SEDAPAL‟s project implementation unit, will be in charge of project management and implementation, with guidance from a Managerial Investment Committee that ensured ownership by SEDAPAL‟s management of the project activities under implementation. PROMESAL has capacity for selecting consultants and procuring goods, works and services and, as part of Project preparation, has updated the OM which provides detailed procurement information for implementation. The proposed corrective mitigating measures are: (i) establish a system to monitor and expedite contract modifications or change orders and (ii) publish and manage the Procurement Plan through the Procurement Plans Execution System SEPA. SEDAPAL has prepared an acceptable Procurement Plan.
E. Social (including safeguards)
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62. SEDAPAL has prepared a social assessment covering the Project‟s area, including consultation with female leaders, which provided information on the characteristics of the population, a map of stakeholders, and social and economic issues affecting the Project‟s potential beneficiaries. The report includes a directory of civil society organizations, NGOs and community based groups for project implementation. The outcomes and findings of the social assessment were disclosed in SEDAPAL‟s website.
63. The Project will benefit families of the districts of Comas, Independencia, Los Olivos and San Martin de Porres, that includes 12 water service distribution sectors. About 28 percent of the population are living under extreme poverty, located on the hills in the city‟s periphery, with the risk of accidents due to rockslides; sub-stocked with drinking water 3 hours a day, and with a high incidence of skin, respiratory and gastrointestinal diseases.
64. Women and men are mostly self-employed in commercial activities. The districts of San Martin de Porres, Los Olivos and Independencia concentrate about 77.6 percent of the areas‟ small enterprises in textiles, apparel, metalworking and wood furniture, having attracted the financial services of 14 banks, microfinance institutions and village banking for credits focusing on women‟s initiatives. A large union of micro and small business‟ network operates in the area.
65. SEDAPAL‟s policy is to guide the design and implementation of Involuntary Resettlement Plans, establish policies and guidelines to mitigate and compensate the negative effects derived from the involuntary taking of land to be used in the construction or rehabilitation of reservoirs, wells, pumping stations, cisterns, tunnels, lagoons, networks, etc. aiming at reestablishing equivalent and/or improved social and economic conditions to affected families. Even though the preliminary designs in the known location for the works indicated that no resettlement will take place, SEDAPAL has developed an Involuntary Resettlement Framework in accordance to OP 4.12, in case some people could be potentially temporarily affected during construction. The Involuntary Resettlement Framework will guide the preparation of Resettlement Plans, if necessary, during Project implementation, and has been adopted and disclosed by SEDAPAL on February 16, 2011 as corporate policy to guide all future investment operations.
66. The proposed Project also includes a social intervention to facilitate the transition to a full- pressure, 24 hour metered service. The Project will select a marketing consultancy that will strengthen SEDAPAL‟s efforts in promoting mechanisms to allow poor households to upgrade their sanitary facilities with newer, water-saving equipment in order to minimize the impact of billing according to actual rather than estimated consumption. This will be done through the creation and expansion of current partnerships, development of new capacities at the utility and communication management with the different stakeholders (employees, suppliers, private companies, clients, users, community leaders and community-based associations). Given the traditional role of women in water household consumption and use, special emphasis will be given to incorporate their concerns and suggestions during the focus groups prior to intervention.
67. The Project‟s grievance mechanism will be disclosed as a part of the Project‟s general social strategy. In other words users will interact personally with social professionals who will explain their rights in terms of expressing complaints and grievances and the due redress process it will follow. This mechanism is meant to cater especially to cases of involuntary taking of land. In addition, SEDAPAL manages a claims system called AGUAFONO, which is considered best 14 practice in the public sector and is well-known by the population. This mechanism is another channel where the company can receive feedback from civil society.
F. Environment (including safeguards)
68. The Project is expected to have very positive environmental impacts overall, by (i) consolidating and improving water resources management in Lima; (ii) connecting people to rehabilitated sewage collection systems in the Northern Service Area of Lima, thereby improving human and environmental health conditions and protecting very scarce underground water sources, and (iii) increasing the efficiency of the water supply services provided by SEDAPAL.
69. The Project will directly improve SEDAPAL‟s capacity of efficiently using water resources by reducing water losses and the contamination of underground water sources. This reduction of water losses is critical in a city like Lima, whose main water resources come from rapidly retreating glaciers in the highlands due to climate change.
70. According to the Country Environmental Analysis, (World Bank, 2006), of all the impacts of environmental degradation in Peru, those related to health are the most significant. The study of the costs of degradation carried out as part of the Country Environmental Analysis estimated the annual damages from environmentally related sources at S/. 8.2 billion (US$2.45 billion). Over 70 percent of that, around S/. 5.85 billion (US$1.75 billion) is attributable to environmental health, arising from poor quality water supply, sanitation and inadequate hygiene. The project will directly improve the environmental health conditions of the population to be served. Rehabilitation of sewerage systems will decrease the rate of breaks in pipes that expose the population to water borne diseases with significant human health impacts. Provision of full pressure, 24-hour service will also eliminate the need for storage devices, change water use patterns and facilitate the adoption of better hygiene practices. This behavioral change will in turn eliminate fertile ground for water borne diseases, such as dengue and gastrointestinal cases associated with lack of hygiene. It is expected that improved sewage collection systems will have a positive impact on the quality of aquifers in Lima, as well as provide a healthier urban environment.
71. As the project is classified as Category B, an Environmental Assessment (EA) was undertaken, in accordance with OP 4.01, including an Environmental Management Plan. The detailed EA has identified potential direct and indirect environmental impacts associated with the Project and other alternatives, and developed mechanisms and measures to avoid, minimize and/or mitigate negative impacts. The Environmental Management Plan, contained in the EA study, has specific activities, budget and responsibilities to ensure the implementation of these mitigating measures. Detailed information on environmental impacts and mitigation measures is presented in Annex 3. A copy of the full EA has been made available through the Bank‟s InfoShop on December 21, 2010. The EA report and its Addendum were also made available through SEDAPAL‟s website on September 20, 2010.8
72. Physical Cultural Resources (OP 4.11). Peru has a well-developed legislative and normative framework for management of physical cultural property, which is under the oversight of the National Institute of Culture (Instituto Nacional de Cultura – INC). In accordance with local
8 http://www.sedapal.com.pe/estudio-impacto-ambiental 15 legislation and Bank requirements, SEDAPAL will include procedures for screening any known cultural property in the Project area and incorporate „chance find‟ procedures in the event that culturally significant resources are discovered during implementation. Procedures for the identification and protection of physical cultural resources have been included in the EMP.
73. The EA report includes a list of archeological sites located in the project area and an Archeological Monitoring Plan which specifies the following measures to be considered by project contractor during the rehabilitation works: (i) preventive measures, (ii) immediate measures, (iii) measures for the intervention of the monitoring Archeologist, (iv) prevention and mitigation measures, and (v) a system for recording, analyzing, storing and delivering archeological materials to Peru‟s INC.
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Annex 1: Results Framework and Monitoring
PERU: Optimization of Lima Water and Sewerage Systems Results Framework Project Development Objective (PDO): The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima
Responsibility Description Unit of Cumulative Target Values** Data Source/ PDO Level Results Indicators* Baseline Frequency for Data (indicator
Core Measure Methodology YR 1 YR 2 YR3 YR 4 YR5 Collection definition etc.) Weighted average Northern SEDAPAL‟s Indicator One: Number of daily in average service Management Northern hours water services are provided Hrs/day 16.09 -. - 16.09 23.00 24.00 Bi-annual hours for sectors Zone bi-annual Management in the project area. 86, 334, 336,337 report Office and 338. Leakage Weighted average Leakage Reduction and in kilometers Indicator Two: Annual Reduction and Control, and rehabilitated times incidence of water pipe Breaks/ Control, and 0.214 - - 0.214 - 0.107 Bi-annual Commercial the average of breakages per km of water supply km/yr Commercial Management water pipe network in the project area. Management Teams Annual breakages per Teams Report district Weighted average Annual Report Leakage in kilometers Indicator Three: Annual from the Reduction and rehabilitated times incidence of sewerage blockages Blockage/ Network Control, and 8.75 - - 8.75 - 4.38 Bi-annual the average of per km of sewerage network in km/yr Operation and Commercial sewerage the project area. Maintenance Management blockages per Team. Teams district Cumulative of Northern SEDAPAL‟s weighted average Indicator Four: Volume of Management Northern in kilometers m3/yr 0 0 - 2,000 7,500 12,000 Annual water saved in the project area. Zone annual Management rehabilitated times report Office the average water loss per district Indicator Five: Number of learning events on strategic Events 0 2 4 6 8 10 Annual PROMESAL PROMESAL planning and management INTERMEDIATE RESULTS Intermediate Result (Component One): Rehabilitation of water and sewerage networks in Northern Service Area of Lima. This component will finance the rehabilitation of the water and sewerage networks in Northern Service Area of Lima, directly benefiting more than 158,380 low income people. The exact proportion of replacement and renovation will be determined during implementation based on a detailed hydraulic modeling of each subsector and an agreed methodology.
17
Intermediate Result indicator Monthly Quarterly, One: Km of water pipes supervision once Supervisor rehabilitated. Km. 0 0 0 75 150 250 report from constructio consultant supervisor n started consultant Intermediate Result indicator Monthly Quarterly, Two: Km of sewerage pipes supervision once Supervisor rehabilitated. Km. 0 0 0 25 80 100 report from constructio Consultant supervisor n started consultant Intermediate Result indicator Monthly Quarterly, Three: Pipe household water supervision once Supervisor connections affected by Number of 0 5,000 20,000 35,000 report from households constructio Consultant rehabilitation works undertaken supervisor n started under the Project consultant Intermediate Result indicator Number of Five: Water utilities that the utilities 1 1 1 1 1 1 N/A N/A N/A Project is supporting Intermediate Result indicator Six: Number of stakeholders reached Number of Progress with information on how to stakeholder 0 100 250 300 300 300 Bi-annual PROMESAL Report invest on water saving s equipment Intermediate Result (Component Two): Improving SEDAPAL’s Efficiency. This component will finance studies and consultant services to provide decision-making tools to SEDAPAL‟s management to improve the company‟s efficiency. The activities will be focused on the following four areas: (a) support for the implementation of the Geographic Information System (GIS); (b) SCADA information technology standardization strategy and consolidation; (c) preparation of a strategy to efficiently meet user demand for water and sanitation services, and (d) options for the development of a new organizational model. Intermediate Result indicator Study One: Action plan completed for Progress Yes/No None - - - complete - Annual None the integration of GIS and Report d SCADA systems. Intermediate Result indicator Two: Evaluation of current and future demand for water and Study Progress sanitation services completed Yes/No None - - - complete - Annual None Report together with identification of d priority actions to meet such demand as efficiently as possible. Intermediate Result indicator Study Three: Study on options for the Progress Yes/No None - - - complete - Annual None development of a new Report d organizational model completed. .
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Annex 2: Detailed Project Description
1. The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima. The project beneficiaries include the urban dwellers living in SEDAPAL‟s Northern Service Area of Lima, which comprises 16 districts.9 It is envisaged that physical investments will largely benefit the First Northern Area of Lima that means the following District of the Borrower: Comas, Independecia, San Martín de Porres and Los Olivos. The estimated beneficiaries reached are distributed as follows: in the district of Los Olivos-San Martin de Porres (44,920 inhabitants), Independencia (66,516 inhabitants) and Comas-Los Olivos (10,994 inhabitants), with a total beneficiary population of 158,380 in an area of approximately 118 km 2.
2. SEDAPAL‟s objectives are to prioritize the expansion, quality improvement and sustainability of water, sewerage and wastewater treatment services. These utility‟s objectives, included on the Optimized Master Plan and the Strategic Institutional Plan, aim at (i) increasing access to WSS services, (ii) improve service quality, (iii) achieve financial viability, (iv) increase service sustainability, and (v) modernize management. This project contributes to objectives (ii), (iii), (iv) and (v) by increasing hours of service, increasing financial viability by recovering water losses, augmenting water availability by reducing leaks supporting service sustainability and modernizing management with the aim at introducing an unified SCADA and GIS.
3. PAPT has helped SEDAPAL‟s objective of expanding services. Indeed, the utility has built 165,000 new water connections and 148,000 new sewerage connections in the last 4 years, benefitting a population of around 732,000. This has meant doubling the expansion rate in both water and sewerage, from a yearly rate of 20,220 for water and 19,220 for sewerage connections between 2000 and 2005, to 43,750 and 38,450 new water and sewerage connections during the past 4 years. Such an important increase in coverage has been possible with investments that have shifted from an average of US$66 million per year in the period 2000-2005 to an average of US$150 million per year, and an estimation to increase this to US$225 million annually.
4. These investments have been financed with 46 percent external debt and 54 percent own resources for the period 2001-2005, while for the period 2006-2009 they were financed with 52 percent external debt, 36 percent own resources and 12 percent with funds from the Treasury. For the period 2010-2014, it is estimated to finance investments with 47 percent external debt, 31 percent own resources, 12 percent from the Treasury and 10 percent with connection sales.
5. The Project supports SEDAPAL‟s request for structural and non-structural measures to improve service delivery and sets the basis for the modernization of the utility. Structural measures include the rehabilitation of water and sewerage networks in the Northern Service Area of Lima, and the non-structural measures will encompass the utility as a whole – the complete service area – to enhance the management capabilities by integrating automated systems, better assessing current and future demand and identifying priority actions to meet such demand more efficiently, and analyzing options to develop a new organizational model.
9 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los Olivos, Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla. 19
6. The Project will support the implementation of SEDAPAL‟s development strategy consisting of: (i) supply-side management by increasing Rimac River‟s flow through a trans- boundary transfer, as well as the expansion of water treatment and main distribution systems; (ii) demand-side management by reducing physical and commercial losses and controlling demand through installation of domestic meters, progressive tariff structures, and promotion of in-house water saving devices; and (iii) increasing the wastewater treatment capacity through partnerships with the private sector.
7. Through the rehabilitation of the water and sewerage network, the Project will support the proper distribution (and sewerage conveyance) of the increased flow from the Huachipa water treatment plant as well as contribute to the reduction of physical losses by renovating ageing infrastructure and correcting construction problems. The institutional strengthening component, particularly the standardization of the SCADA and the identification of information gaps for the GIS systems combined with better demand assessment, will support the reduction of both commercial and physical losses.
8. Currently, SEDAPAL divides its operation into three main geographical areas: the Northern, Central and Southern Service Areas. Rehabilitation activities will be undertaken on the Northern Service Area for the following reasons: (i) under a previous Bank financed project (Lima Water Rehabilitation and Management Project, Loan 3811-PE) efforts were directed to the rehabilitation of the water supply networks in the Southern Service Area, which achieved success in reducing physical water losses; and (ii) when the Huachipa water treatment plant project begins operation, the pressure in the water supply system in the Northern Service Area will increase, with consequent increases in water losses necessitating further water loss reduction efforts.
9. SEDAPAL strategy for intervening in rehabilitation of networks is a phased one, starting with works on First Northern Service Area of Lima, continuing with the Second Northern Service Area of Lima, following with interventions in San Juan de Lurigancho District and finalizing with network rehabilitation in La Molina district. PROMESAL will be starting implementation of the first tranche in First Northern Service Area of Lima in 2011, financed partially by JICA (US$67.1 million) and KfW (US$50 million).
10. For un-rehabilitated networks, a negative relation exists between Non Revenue Water (NRW) and increase of hours of service. However, the quantity and continuity of service in the area are unacceptable, and improving it is the higher objective, even though NRW may increase in absolute terms. The Project will finance activities aimed at improving rational use of water, contribute to lower consumption –in particular through the installation of water meters, but overall use will increase with more water availability which is necessary since the current consumption levels (of piped water) are sub-standard. Full metering, demand management and optimal system operation are only achieved on a continuous full-pressure water network.
Component 1. Rehabilitation of water and sewerage networks in the First Northern Service Area of Lima (US$61.2 million, of which US$51.3 million will be financed by the Bank loan)
11. This component will finance the rehabilitation of the water and sewerage networks in the First Northern Service Area of Lima, directly benefiting more than 158,380 low income people
20 living in the area. The exact proportion of replacement and renovation will be determined during implementation based on a detailed hydraulic modeling of each subsector and an agreed methodology.
12. To improve the appropriate management of the rehabilitated network and reduce losses the component will also finance: i) rehabilitation of water reservoirs (concrete storage tanks) to increase storage capacity and pressure stabilization; ii) replacement of household connections and installation of new domestic water meters; and iii) installation of bulk water meters and valves to allow sectorization.
13. Social interventions will complement these physical investments to maximize the Project‟s expected benefits by taking measures to facilitate the transition to a full pressure, continuous and metered service. These will include the provision of guidance to manage consumption in particular through the use of in-house water saving equipment.
Background
14. Based on a pre-feasibility design and preliminary allocation of the intervention zones among the different sources of finance, Component 1 will finance works comprising the rehabilitation of 143km of PVC pipe with diameters from 100 mm to 400 mm (about 130 km of 100 mm), 96 km of trenchless pipe rehabilitation (cracking and/or relining), rehabilitation and/or replacement of about 26,000 household meters and provision, installation of 4 bulk meters and 700 water valves, and rehabilitation of 4 reservoirs. Sewerage works will include the provision and installation of about 110 km of PVC pipe with diameter from 200 mm to 300 mm, as well as rehabilitation of about 14,000 sewerage connections and rebuilding/reconstruction of 1,300 manholes. More specific information will be available once the detailed designs are completed, and these planned works are also contingent to the availability of financing from other institutions.
15. SEDAPAL through its Northern Service Management Unit (Gerencia de Servicios Norte) divides the system according to micro-watersheds, grouping zones that share the same sewerage outfall. The Northern Service Area (First and Second) corresponds to the Comas-Chillon primary outfall and is considered priority as it is the closest to the Huachipa main branch bringing an additional water flow of 5 m3/s. Virtually all sewerage discharge will go to the WWTP at Taboada with a capacity of 14 m3/s, which is currently under construction and is scheduled to start operating in 2013. The First Northern Service Area covers 12 operational sectors and 16 districts. It is envisaged that physical investments will largely benefit the districts of Los Olivos- San Martin de Porres (44,920 inhabitants), Independencia (66,516 inhabitants) and Comas-Los Olivos (10,994 inhabitants), with a total beneficiary population of 158,380 in an area of approximately 118 km2. Given the nature of the intervention that encompasses not only the rehabilitation but also the creation of hydraulically viable operational sectors, the aforementioned four districts were prioritized. The Second Northern Service Area lies in the districts of San Martin de Porres, Callao, Comas, Los Olivos, Carabayllo and Puente Piedra and its intervention is scheduled for future undertakings,
16. An economic analysis carried out by SEDAPAL demonstrated that it is advisable to rehabilitate all the water pipes installed for more than 10 years in the First Northern Service
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Area, or about 90 percent of the water network in this zone. This relatively new (10 years) network was not installed or supervised by SEDAPAL but by community dwellers that used substandard construction procedures and materials. The infrastructure was later transferred to the utility when it went from being a bulk water provider to a retail distributor of water services. SEDAPAL estimates that 60 percent of the water pipes would have to be replaced and 40 percent renovated, while about 50 percent of the sewerage pipes would have to be replaced and 50 percent renovated.
17. Experience has shown that replacement/rehabilitation of all or most of the pipes is not always the most efficient alternative. Many pipes installed 25 years ago, and certainly 10 years ago, still have a remaining useful life. In general, a large portion of the leaks and water losses occurs in the household connection installations, which can be replaced fairly easily. The fact that most of the large diameter network is made of asbestos-cement pipes points to an advantage of rehabilitation rather than replacing as the disposal of old asbestos-cement pipes is a difficult environmental problem due to the toxic nature of such waste material. Even if asbestos-cement pipes are replaced, it would be advisable to leave the old pipes in place and install new pipes in parallel. Several trenchless rehabilitation methods are currently in common use; however, choosing between an open cut or trenchless rehabilitation should be based on local conditions, with Peru‟s low labor costs making the former more economical. As to the sewerage collectors, it would be more advisable to use rehabilitation methods rather than replacement of pipes. Such an approach still takes advantage of the large diameter perforated conduits by re-lining them, even if the pipes inside themselves are highly corroded.
The Intervention
18. This component primarily consists of rehabilitating the primary and secondary water and sewerage network by replacing old pipes and rehabilitating existing ones through various open cut and trenchless methods. Currently, the number of bursts and breaks in the pipe network in the First Northern Service Area is high (about 3 bursts/km/year), with consequent high required repair frequency and costs.
19. Prior to replacing each pipe section, tests and estimates will be made to establish the need for replacement, rehabilitation or no action, the detailed methodology for carrying out these tests will be improved and finalized during project implementation. The methodology will be based on a detailed hydraulic modeling of the subsector to confirm the initial conceptual design (i.e. new requirements for pipe diameters, network layout and location), followed by gathering data on the material and age of the pipe section under consideration as well as information on the frequency of breaks and leaks per pipe unit length in this section and comparing this with performance standards , carrying out measurements for detecting leaks without uncovering the pipe through leak detection instruments based on various commonly used methods (noise, electromagnetic, specific methods for asbestos-cement and PVC pipes, closed circuit TV for large diameter pipes), laboratory test and, if necessary, uncovering various strategic points in the pipe section. The works contractor will carry out the tests for each pipe section and the tests will be supervised and approved by a supervision firm.
20. Component 1 also includes the rehabilitation of water reservoirs (built concrete storage tanks) for safeguarding storage capacity and for pressure stabilization. Damaged and
22 nonfunctioning domestic water meters will be replaced, and new meters will be installed for unmetered connections. Bulk water meters and valves will be installed in the required points of the primary water network to allow sectorization (pressure-control).
21. Based on the hydraulic modeling, which provided information on pressure, length, network layout and geographical distribution, it is expected that there will be 18 new operational sectors replacing the current 12 ones. An operational sector is determined to be water-tight based on its distribution lines so there is only one entry and exit point for interconnection with other sectors, while a subsector is defined with valves mainly for operation and maintenance, which allows for the carrying out of hydraulic balances to estimate physical losses.
22. Social interventions will complement the physical investments to facilitate the household transition to a full pressure, continuous service (elimination of in-house storage devices and change of water use patterns), while providing guidance to users on reducing the new water bills based on actual consumption, reducing consumption and using water saving devices which SEDAPAL will be promoting as part of the Project.
23. The number of estimated beneficiaries for this component is 158,380 people, representing approximately 19,000 households (water connections). First Northern Service Area includes 27 percent of the blocks in Metropolitan Lima, but has a lower proportion of Socio-Economic Level A (higher income) and Level B, with 93.9 percent of the population in the C, D and E (lower) socio-economic levels.
24. JICA and KfW are also financing part of required investments in parallel in the First Northern Service Area (see table below). These investments are in different areas and under different contracting arrangements, and their performance will not impact the deliverables of the Bank financed works.
Table 1– Interventions in First Northern Service Area by Source of Financing (estimated from preliminary designs)
Item unit JICA IBRD KfW Total Water Pipe supply and installation trenchless(Φ 100-500) PVC and ductile iron m 201,795 142,914 21,116 365,825 Pipe supply and installation with trench(Φ 100-500) cracking and/or relining m 110,798 96,791 0 207,588 Rehabilitation of water house connections un 35,443 26,700 1,602 63,745 Pressure-reduction chambers and valves (Φ 100-350) un 16 20 0 36 Provision and installation of stainless steel and ductile iron valves un 1,117 1,277 117 2,511 Reservoirs to be rehabilitated un 13 4 2 19 Macro-meters to be installed un 13 4 2 19 Water Sectors to be intervened un 8 8 1 17 Sewerage PVC Pipe provision and installation (Φ 200-300) m 224,930 109,835 5,186 339,951 Rehabilitation of sewerage connections un 28,478 13,906 657 43,041 Rehabilitation of inspection chambers un 2,666 1,302 61 4,030
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Component 2. Improving SEDAPAL’s Efficiency (US$2.3 million, of which US$1.88 million will be financed by the Bank loan)
25. This component will finance studies and consultant services to provide decision-making tools to SEDAPAL‟s management to improve the company‟s efficiency. The rehabilitation, sectorization and micro-metering activities from Component 1 that will result on reduction of non revenue water, will be complemented with the undertaking of additional actions that would allow SEDAPAL to improve its management, in particular the governance and transparency of its operational and commercial management. Terms of Reference for each consultancy, including deliverables, key personnel, calendar and budget have been prepared. The following represent the priorities studies at this stage for the complement of the investments in Component 1.
a) Support for the implementation of the GIS:
26. SEDAPAL is in the process of developing a corporate GIS that includes the standardization and inter-operation, unified database, corporate access to the digital maps and plans, and flexible geo-architecture among others. The main expected benefits are to reduce time, effort and costs in the operational and commercial management, accelerating and making more efficient the decision making process and the response to the clients.
27. However, to achieve those benefits, the GIS requires a good level of update and data quality, which means improving the technical cadastre, users cadastre and the maps base. Thus, the Project would support a study that identifies the information gaps that need to be bridged for a proper GIS operation, designing a Plan for updating the system and to put in place organizational procedures within SEDAPAL that allows the utility to keep updated information in a systemic way.
28. The Project will support an evaluation of the cadastre to determine the priority zones for cadastre updating and the continuous process to follow for updating. Based on the results of this evaluation, the Project will finance selected updates of the cadastre. Additionally, the Project will finance a study with recommendations to SEDAPAL on the structural changes needed to ensure that the GIS unit is fully integrated to maximize the potential of this tool, including the training of personnel and establishing formal linkages to other parts of the utility.
b) SCADA information technology standardization strategy and consolidation. Integration of the Supervisory Control and Data Acquisition (SCADA) systems
29. Since 1995, the Bank has supported SEDAPAL on the automatization of operations with SCADA, beginning with the study for the sectorization of the central supply in Lima (El Agostino, Callao, Chorrillos). In 1997, a wastewater treatment SCADA control center was financed, and in 2000 the metropolitan SCADA with 220 remote stations started operations. As a result of this positive experience, SEDAPAL continues operating the metropolitan SCADA, and is increasing the remote stations. It has also implemented an additional number of SCADAs for water re-pumping and in the main wastewater treatment plant such as Carapongo and Huáscar among others.
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30. Currently, SEDAPAL has at least 7 SCADA systems in operation with 5 different technologies, and 4 new systems in preparation or implementation stage with no relation to one another. Existing SCADA systems are built on different technologies, are operated independently by different areas and staff in the company and use different policies and criteria which results in important inefficiencies. The following table shows the diverse platforms currently used for SCADA in SEDAPAL:
Table 2 – Different SCADA systems being used in SEDAPAL
Item SCADA Software 1 SCADA Primary Network Aspen One 2006- Aspentech 2 SCADA Re-pumping Survalent 3 Atarjea Water Plant Oasys 4 Huachipa Water Plant (in construction) TBD 5 Miraflores Wastewater Treatment Plant Wizcon 6 Huascar Wastewater Treatment Plant Wizcon 7 San Bartolo Wastewater Treatment Plant Wizcon 8 Carapongo Wastewater Treatment Plant CIMPLICITY 9 Machay Wastewater Treatment Plant (in construction) TBD 10 Taboada Wastewater Treatment Plant (in construction) TBD 11 La Chira Wastewater Treatment Plant (in construction) TBD
31. The Project will finance the consolidation of these systems into one corporate SCADA system, grouping all current and future systems using a unified design for the integration of SCADAs to guide all future investments in this field. Integration of SCADA systems is a priority for SEDAPAL and is part of their current efforts to consolidate their rapidly growing, extensive and complex network management systems. The fact that the current SCADA systems are not properly managed has had a direct negative effect on the decision making process and has made technical operation more costly and cumbersome. Other issues related to the SCADA system are the need for systematic maintenance of equipment, development of preventive maintenance plans, update of equipment inventory and staff training.
32. Notwithstanding the importance of a unified SCADA, until now a strategy for its standardization and determination of future requirements has not been developed. The Project will finance the formulation of the SCADA Master and Investment Plan to guide the new SCADA investments and produce a specific plan and budget for SCADA integration including the identification of the hardware and software required to make the different SCADA systems compatible.
c) Options for the development of a new organizational model
33. This activity will support SEDAPAL in building a strategic vision for the medium and long term, including developing its planning system. It will help the utility in the establishment
25 of long-term financial planning according to its expected capital investments and restructuring of liabilities as well as exploring HR policy restrictions.
34. Building on the information generated by the previous studies, it will ensure that the proposed changes can be accompanied by the correspondent institutional adjustments. The new organizational model will not be limited to the information technology for management but it will also consider the evaluation of organizational improvements in the area of Production, Primary Distribution, and Works and Projects as well as recommendations for enhancing the commercial system. It will finance high-level consultants to advise SEDAPAL on strategic priorities regarding resource mobilization, technical alternatives and HR policies that accompany the implementation of their Strategic Plan 2009-2013 and beyond, as well as the training of existing staff to front the new challenges to establish the new institutional structure.
35. Other priority areas identified during Project preparation are Planning, Financing and Regulation. There is a need to centralize the information and personnel with dedicated expertise on areas such as regulatory control and mechanisms, financial expertise to determine the optimal mix of financing sources and planning in a changing economic and political environment, and dealing with the long-term liabilities with the tax agency. Such critical mass of personnel and resources may be able to help the utility towards a sustainable access to capital markets, devising the ideal combination of resources (multilateral, public or private) on its investment plan. This support builds on the recommendation of the recent UNSGAB report and on several initiatives sponsored by PPIAF SNTA aimed at identifying the utility‟s weak areas and bottlenecks that have prevented the access to local and international private markets.
d) Preparation of a strategy to efficiently meet user demand for water and sanitation services
36. According to SEDAPAL‟s data, water consumption in Lima and Callao appears to have followed a relatively erratic progression over the past decade, for instance, there has been a 57% increase in the number of users but no increase in the volume of water produced. At the same time, 7% of connections are currently inactive and 20 percent of water consumed is not paid for. This is due to a mix of endogenous and exogenous factors which have not been systematically identified and analyzed by SEDAPAL. As a result, SEDAPAL lacks the tools to predict future demand accurately and take appropriate steps to manage and efficiently meet such demand.
37. The Project will support an evaluation of the various factors that affect demand for water supply and sanitation services, as well as an estimation of future demand trends backed by adequate sensitivity analysis. This diagnostic will then be used to design an action plan identifying and prioritizing the steps that need to be taken in order to proactively manage and respond to user demand.
38. The Project will also help identify the structural as well as the process-related measures that SEDAPAL might need to implement in order to ensure that this demand analysis becomes part of normal operations and is updated on a regular basis. Appropriate training for relevant staff will also be designed as needed.
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Component 3. SEDAPAL Project Management (US$1.4 million, of which US$1.32 million will be financed by the Bank loan)
39. Currently, PROMESAL has 20 full time staff to undertake its responsibilities; however this unit will be in charge of implementing 4 new loans and will continue the support for the supervision of the construction of the large wastewater treatment plant at Taboada.
40. Therefore, PROMESAL will need to be strengthened with hiring of additional personnel, as well as the training of existing ones on engineering, contract administration, accounting and financing services to ensure the proper and timely execution of the Project. This component will finance the additional staff required for project management to establish a Monitoring and Evaluation System and undertake the required financial audits as well as physical and procurement reviews. Additionally, it will finance individual consultants to strengthen the team on procurement, financial management and communication, as well as the training for strategic planning, and selection of technical options to allow full compliance with the Investment Plan 2009-2013 and subsequent plans. This component will also support SEDAPAL‟s efforts to document the Project‟s process and results, and to mainstream lessons learned and good practices.
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Annex 3: Implementation Arrangements
1. Project Administration Mechanisms
1.1 Project implementation institutional arrangements
1. The Republic of Peru will be the Borrower. The implementation agency will be SEDAPAL. The Project will be managed by PROMESAL (Lima‟s Marginal Areas Sanitary Improvement Project), a unit depending directly from SEDAPAL‟s General Manager (Gerencia General). The unit will be responsible for overall management of the Project, and will ensure consistency in the application of Bank guidelines and compliance with the Loan Agreement, the Project Agreement, the Subsidiary Agreement, and the Operational Manual. The proceeds of the loan will be passed on to SEDAPAL as a loan.
SEDAPAL
2. SEDAPAL (Servicio de Agua Potable y Alcantarillado de Lima) is a State owned enterprise, constituted as a Sociedad Anónima, under the Ministry of Housing, Construction and Sanitation. It has technical, administrative, economic and financial autonomy. It was created through a Legislative Decree Nº150, dated June 12, 1981. It is ruled by its Estatuto and the General Law of Societies (Law Nº26887), the norms that rule water and sanitation providers, and the related laws in Peru. In March, 2006 Law Nº28696 modified the area under SEDAPAL‟s responsibility, indicating that it includes the Province of Lima, the Constitutional Province of Callao and those other provinces, districts or areas from the Province of Lima attached to the service area through a ministerial resolution of the Housing Sector, as long as the territory is adjacent and coverage can be provided directly.
3. SEDAPAL has been successfully implementing projects with bilateral and multilateral institutions for several years, including the recently closed Lima Rehabilitation and Management Project (3811-PE) and the associated Additional Finance Operation (7160-PE) for the rehabilitation and expansion of water and sewerage services in the Southern and Center Service Areas. Currently SEDAPAL is executing a US$65 million IFC bridge loan for the construction of the Huachipa Water Treatment Plant, as well as parallel operations financed by JICA and KfW for the rehabilitation of water and sewerage networks in the First Lima Norte Service Area.
Project Management Unit – PROMESAL
74. The implementation phase of the Project will be under the responsibility of PROMESAL (Lima‟s Marginal Areas Sanitary Improvement Project), a unit depending directly from SEDAPAL‟s General Manager (Gerencia General). Its responsibilities include: carrying out bidding processes, selection of contractors, supervision, approval of contract amendments, and general Project management. SEDAPAL‟s General Management (Gerencia General) will be responsible for approving final designs, complementary studies, while Operations Management (Gerencia de Operaciones) is in charge of the final reception of the works. PROMESAL is in charge of most network rehabilitation and expansion projects in SEDAPAL, including recently
28 closed Bank-financed projects and parallel operations financed by JICA and KfW, and has proven implementation capacity.
4. Following the successful implementation arrangements of the previously Bank financed Project, the Managerial Investment Committee, comprising the full quorum of the company‟s managers and headed by the General Manager of SEDAPAL, will provide a high level interface with the rest of SEDAPAL. This committee will be responsible for approving all of the key procurement and implementation decisions prior to the Bank‟s no objection, and it will ensure coordination between PROMESAL and other areas of the company.
5. The operation and maintenance of the infrastructure will be in charge of SEDAPAL‟s Norte Management (Gerencia Norte), as part of its overall responsibility of service provision in the area. The following SEDAPAL organization chart shows the relation between the different Management Units (Gerencias).
1.2 Measures to address capacity constraint
6. The administrative structure of PROMESAL will be strengthened in order to meet the incremental needs associated with the administration and execution of the Project. Measures include hiring individual consultants, training, and the use of firms for the supervision of large contracts.
SEDAPAL ORGANIZATIONAL CHART
BOARD OF DIRECTORS
INTERNAL AUDIT MANAGER GENERAL MANAGEMENT
HUMAN FINANCIAL LOGISTICS RESEARCH & PROMESAL - RESOURCES MANAGEMENT MANAGEMENT & DEVELOPMENT PROJECTS & MANAGEMENT SERVICES MANAGEMENT WORKS MANAGEMENT
PRIMARY COLLECTION, COMMERCIAL NORTHERN CENTRAL SERVICE SOUTHERN PRODUCTION & TREATMENT & MANAGEMENT SERVICE MANAGEMENT SERVICE DISTRIBUTION DISPOSAL MANAGEMENT MANAGEMENT MANAGEMENT MANAGEMENT
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2. Financial Management, Disbursement and Procurement
2.1 Financial Management
Executive Summary of Financial Management Assessment
7. As part of the preparation process of the proposed project, the FM team has performed a financial management capacity assessment to determine the adequacy of the entity “Servicio de Agua Potable y Alcantarillado de Lima” SEDAPAL‟s financial management arrangements to support project implementation. The assessment was performed in accordance with OP/BP 10.02 and the “Financial Management Manual” dated March 1, 2010.
8. SEDAPAL is a continuing entity with experience in working with Bank funds and was consistently assessed through supervision of Bank‟s previous projects and external auditors showing satisfactory performance. The FM arrangements will be similar to the previous project implemented by SEDAPAL. As of the date of this document, SEDAPAL has the required fiduciary staff to support beginning of project activities; and an additional Financial Management Specialist will be selected and hired once implementation starts. Therefore, proposed project implementation will rely widely on existing arrangements, strengthening them in specific areas identified and agreed during the assessment in view of the expected increase in SEDAPAL‟s operations and towards facilitating the preparation of financial reports. On such basis, SEDAPAL is working on the following actions: recruiting the additional financial management specialist whose terms of reference have been agreed with the Bank, and improving the financial information system with a module to produce financial reports of the project and the Statement of Expenditures (SOEs).
9. At present, the project‟s inherent risk and control risk are rated modest, mainly taking into account SEDAPAL‟s experience with Bank-financed projects, and the existence of overall acceptable FM arrangements, which are being strengthened in terms of staffing, information system, and update of the Operational Manual. Thus, the overall FM risk rating is defined as modest.
10. Based on the assessment performed, in general proposed FM arrangements are considered acceptable subject to the successful implementation of agreed strengthening measures, aimed at enhancing SEDAPAL‟s capacity for project implementation.
Programming and budget
11. PROMESAL will coordinate with SEDAPAL‟s technical area the activities to be executed during the year to prepare the Annual Program (POA) and the budget of the project. The Board of Director‟s of SEDAPAL has the responsibility to approve the budget of the project which is submitted for approval to the Fondo Nacional Empresarial del Estado (FONAFE). Thereafter, the Minister of Finance (MEF) will also include this budget under the national budget and will approve the disbursements for loan resources to be used for project implementation. As in the previous operation, the budget is operated under the Sistema de Administración Financiera (SAP). The PROMESAL will be responsible for preparing and monitoring the overall project
30 budget, including all sources of financing –BIRF and SEDAPAL contributions– following the functional classification in terms of components, sub-components and activities of the project. The Financial Department of SEDAPAL will record the budget of the project in its information system. The budgetary control will consist of: (i) timely preparation and approval of annual programs, budget and procurement plans, establishing a clear relation among them; (ii) proper recording of the approved budget in the financial management system; and (iii) timely recording of commitments and payments as required, to allow an adequate budget monitoring, and (iv) also provide accurate information on project commitments for programming purposes.
Accounting – Information System
12. Accounting records of SEDAPAL follows private sector regulations including the use of the General Chart of Accounts established for the private sector entities. SEDAPAL accounting follows the accrual basis of accounting; however, for the preparation of the financial statements of the project, the PROMESAL will follow the cash basis of accounting. With this object, the General Chart of Accounts will need to be complemented with a more functional classification, including project components/sub-components/activities. Currently, SEDAPAL uses the SAP financial information system for budget and accounting records. SEDAPAL will add a module to its SAP system to prepare the project financial reports to guarantee the timely and reliable preparation of financial information reports, SOEs, and to monitor the project execution to control budget variances. The main FM regulatory framework for the project will consist of: (i) Peru‟s laws governing financial management for the private sector and the entity‟s operating manuals and norms. Project-specific FM arrangements that are not contemplated in the above mentioned documents have been complemented in a concise FM section of the project‟s operational manual. Among others, specific reference will be made to: (i) the appropriate internal controls for the project; (ii) the formats of project financial reports; and (iii) auditing.
Procedures and Internal Controls
13. PROMESAL has submitted to the Bank for review the version of the Operational Manual (OM) of the Financial Management chapter. The OM reflects processes, procedures, and internal control mechanisms for the new project, including, chart of accounts according to the functional classification of the project, the IFRs, terms of reference of the additional financial management specialist, the flow charts that describe the procedures, roles and responsibilities, and specific internal controls –ex-ante and ex-post- to be followed for the implementation of the project. Therefore, this chapter of the OM is satisfactory to the Bank.
Financial Reports
14. On a semester basis, PROMESAL will prepare unaudited interim financial reports (IFR) containing at least: (i) a statement of both sources and uses of funds for each calendar quarter and cumulative uses (with expenditures classified by component/subcomponent, use of funds by component and beginning and ending cash balances; along with a reconciliation of the Designated Account accompanied by the copy of the bank statement; (ii) a statement of budget execution per component/subcomponent (with expenditures classified by the major budgetary accounts) and all sources of financing and including variances between budget and actual
31 expenses with the respective explanatory notes of main variances. PROMESAL will be responsible for submitting the IFRs to the Bank not later than 45 days after the end of each semester. The reports should be prepared in local currency and in US Dollars. On an annual basis, PROMESAL will prepare the project financial statements including cumulative figures for the year and as of the end of that year. The financial statements will also include explanatory notes in accordance with the Cash Basis International Public Sector Accounting Standard (IPSAS), and the entity‟s assertion that loan funds were used in accordance with the intended purposes as specified in the Loan Agreement. As described above, IFRs will be prepared using the information provided by SAP. Any working paper generated for the preparation of IFRs and annual financial statements will be maintained by PROMESAL as supporting documents.
Auditing arrangements
15. Internal Audit. SEDAPAL has an Internal Audit Department, which depends on the Board of Directors. The audit department may include under their annual program an ex-post review of the project activities and proposed recommendations if needed. If such audits occur, PROMESAL will provide the Bank with copies of internal audit reports covering project activities and financial transactions.
16. External Audit. SEDAPAL through PROMESAL will prepare the annual project financial statements, which will be audited following International Standards on Auditing (ISA), by an independent firm and in accordance with terms of reference (TORs), both acceptable to the Bank. The audit opinion covering project financial statements will contain a reference to the eligibility of expenditures. An audit firm will be hired by SEDAPAL, through the General Comptroller Office of Peru, which will perform the audit of the project and provide the audit report. The audit report will be required to include a section on the state of the internal control of the implementing entity. PROMESAL will submit the audit report to the Bank no later than 6 months after the end of each fiscal year. In addition to the audit report of the project, SEDAPAL will submit its entity annual audited financial reports to the Bank. The audit work for the project described above can be financed with loan proceeds. PROMESAL will ensure that the first external audit is contracted within six months after Loan Effectiveness.
Flow of funds and Disbursement Arrangements
17. SEDAPAL will be the sole responsible entity for managing loan proceeds SEDAPAL will co-finance the project and those funds will become available for the project implementation, as counter-part funds, upon budget approval by SEDAPAL‟s Board of Directors.
Disbursement Methods 18. On a preliminary basis and following the general practice of the current portfolio, the following disbursement methods may be used to withdraw funds from the credit: (a) reimbursement, (b) advance, and (c) direct payment. Under the advance method and to facilitate project implementation, a Designated Account in US Dollars would be opened and maintained by SEDAPAL in the commercial financial institution. The ceiling of the Designated Account will be of US$1 million for outstanding advances for the first six months after effectiveness and US$2 million thereafter. Funds deposited into the Designated Account as advances, would
32 follow Bank‟s disbursement policies and procedures, to be described in the Legal Agreement and Disbursement Letter.
Payment mechanism 19. To process payments, the entity will be able to withdraw the required amount to a local currency bank account from where payments to consultants and suppliers would be made. The procedures and internal mechanism are reflected in the Operational Manual and are being updated to reflect particularities for this new operation.
Disbursement Deadline Date
20. Four months after the closing date specified in the Loan Agreement. Loan proceeds will be disbursed against the following expenditure categories:
Amount of the Loan Percentage of Expenditures to be Table of Loan Proceeds Category Allocated financed (expressed in USD) (exclusive of taxes)10 (1) Goods, works, consultants‟ services, Non-Consultant Services and 51,300,000 100% Training for Part 1 of the Project (2) Goods, consultants‟ services, Non- Consultant Services and Training for 1,880,000 100% Part 2 of the Project (3) Goods, consultants‟ services, Non- Consultant Services and Training for 1,320,000 100% Part 3 of the Project TOTAL AMOUNT 54,500,000
2.3 Procurement Plan and Procurement Arrangements.
A. General
21. 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 2004 revised October 2006 and May 2010; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 revised October 2006 and May 2010, and the provisions stipulated in the Loan Agreement. For each contract to be financed by the Loan, the different procurement methods or consultant and non-consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Borrower has prepared a Preliminary Procurement Plan for the entire scope of the Project and a detailed and comprehensive procurement plan, that includes all contracts for which bid invitations and invitations for proposals are to be issued in the first 18 months of project implementation. The Procurement
10 It will be important to ensure that the invoices sent to the Bank clearly indicate amounts net of taxes for Bank financing which is exclusive of taxes. 33
Plan will be available at the Procurement Plans Execution System (SEPA). Goods and works shall be procured under contracts awarded on the basis of International Competitive Bidding, National Competitive Bidding, Shopping or Direct Contracting. Consultants‟ services shall be procured under contracts awarded on the basis of Quality and Cost-based Selection, Quality- Based Selection, Selection under a Fixed Budget, Least Cost Selection, Selection Based on the Consultants‟ Qualifications, Single Source Selection and, Procedures set forth in Section V of the Consultant Guidelines for the Selection of Individual Consultants, including Sole Source Selection for Individual Consultants.
B. Assessment of the agency’s capacity to implement procurement
22. Country. The national procurement system of Peru has made significant progress in the last few years, particularly with regard to access to information and adoption of standard bidding documents. However, it still suffers from serious setbacks that affect both the efficiency and transparency of government purchasing. Of most concern, is the distortion of competition generated by the use of the referential price and the permanent concern for literal compliance with the requirements set forth in the national regulatory framework, as well as the lack of procurement capacity in some sectors, particularly at the local level.
23. Agency. Following the implementation arrangements, PROMESAL will be responsible for the administration of the Project, including procurement, disbursement and financial management matters of this operation. PROMESAL is adequately staffed and will maintain its capacity to conduct Procurement under this new operation. As part of Project‟s preparation, PROMESAL has updated the Operational Manual which provides detailed procurement information for project‟s implementation.
24. An assessment of the implementation agency‟s capacity to implement procurement actions for the project was finished on November 2010. The capacity assessment looked into PU: (a) organizational structure, (b) facilities and support capacity, (c) qualifications and experience of the staff that will work in procurement, (d) record-keeping and filing systems, (e) procurement planning and monitoring/control systems used, and (f) capacity to meet the Bank‟s procurement contract reporting requirements. It also reviewed the procurement arrangements proposed in the Procurement Plan.
25. The overall project risk for procurement is Moderate
26. The corrective mitigating measures proposed are:
MITIGATING MEASURES STAGE
An external procurement review must be contracted To be carried out during/throughout The Procurement Plan must be included and managed through project implementation SEPA Procurement Special Provisions.
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27. In addition and without limitation or restriction to any other provisions set forth in this Section or the Procurement Guidelines, the following provisions shall govern the procurement of goods, non-consultant services and works with National Competitive Bidding procedures: (a) Foreign bidders shall not be required to be locally registered as a condition of participation in the selection process. (b) No reference value shall be required for publication in the bidding documents or used for the purpose of evaluation. (c) Award of contracts shall be based exclusively on price and, whenever appropriate, shall take into account factors that can be quantified objectively, and the procedure for such quantification shall be disclosed in the invitation to bid. (d) Foreign bidders shall be allowed to participate in National Competitive Bidding without restriction and shall not be subject to any unjustified requirement which will affect their ability to bid such as, but not limited to, the requirement to authenticate their bidding documents or any documentation related to such bidding documents with either Peruvian Consulates, the Ministry of Foreign Affairs, or any Peruvian authorities as a prerequisite of bidding. (e) The Borrower shall use standard bidding documents and standard evaluation formats, all satisfactory to the Bank.
28. In addition and without limitation or restriction to any other provisions set forth in this Section or the Consultant Guidelines, the following provisions shall govern all employment of consultants: (a) Foreign consultants shall not be required to be locally registered as a condition of participation in the selection process. (b) Foreign consultants shall not be required to authenticate any documentation related to their participation in the selection process with either Peruvian Consulates, the Ministry of Foreign Affairs, or any Peruvian authorities as a condition of participation in said selection process. (c) The Borrower shall use standard requests for proposals and standard evaluation formats; all satisfactory to the Bank. (d) Foreign consultants, either individuals or firms, shall not be required to pay fees to the Peruvian Consultants‟ Association that are different from those required for Peruvian consultants. (e) No consultant hired for the Project, at the time he or she is carrying out his or her contractual obligations as consultant, may hold civil service office or any other position in any agency of the Borrower, nor shall such consultant have any right to re-entry into any such office or position upon the conclusion of his or her consulting services.
29. Annual Procurement External Reviews. The Project Implementing Entity shall: not later than October 15 of each year during Project implementation or such other date agreed with the Bank and set forth in the Operational Manual, contract annual procurement reviews for each year of Project implementation, with independent reviewers of experience and qualifications satisfactory to the Bank operating under terms of reference satisfactory to the Bank, and have all the procurement records and documentation for each fiscal year of the Project reviewed, in accordance with appropriate procurement review principles; ii) not later than July 31 of each year during Project implementation or such other date agreed with the Bank and set forth in the
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Operational Manual, furnish to the Bank the procurement review (covering the previous calendar year), of such scope and in such detail as the Bank shall have reasonably requested; iii) furnish to the Bank or to said reviewers such other information concerning said procurement records and documentation as the Bank shall from time to time reasonably request; and iv) not later than September 15 of each year during Project implementation or such other date agreed with the Bank and set forth in the Operational Manual, discuss the results of such review with the Bank and take into account the Bank‟s comments thereon
C. Procurement Plan
I. General
Bank’s approval Date of the procurement Plan – March 3, 2011 Expected Date of General Procurement Notice: April 2011 Period covered by this procurement plan: 4 years
II. Goods, Works and non-consulting services.
30. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement:
Thresholds for procurement methods and prior review (thousands of USD) Expenditure Contract Value (Thresholds) US Contracts Subject Procurement Method Category $ thousands to Prior Review 1. Works >3.000 ICB All 250 – 3,000 NCB First <250 Shopping First Regardless of value DC All 2. Goods >250 ICB >350 50 - 250 NCB First <50 Shopping First Regardless of value DC All Note: ICB = International Competitive Bidding NCB = National Competitive Bidding DC = Direct Contracting
Reference to Project Operational/Procurement Manual:
31. The Borrower, as part of Project‟s preparation, has updated the Operational Manual which provides detailed procurement information for project‟s implementation.
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III. Summary of the Procurement Packages
1 2 3 4 5 6 7 Ref. Description Estimated Packages Domestic Review by Comments No. Cost US$ Preference Bank million (yes/no) (Prior/Post)
CIVIL WORKS 1 Rehabilitation of 50 2(Packages No Prior water and (excluding 3 and 4) sewerage taxes) networks in Northern Lima
IV. Selection of Consultants
32. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants:
Thresholds for methods and prior review (thousands of USD) Contract Value (Thresholds) US Contracts Subject to Consulting Services Procurement Method $ thousands Prior Review >200; 3.a Firms >100 QCBS, QBS, FBS, LCS <200 Terms of Reference QCBS, QBS, FBS, LCS, <100 CQS Terms of Reference Regardless of value SSS All Comparison of 3 CVs in accordance with Chapter >100; 3.b Individuals V of the Guidelines <100 Terms of Reference Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-Based Selection FBS = Fixed Budget Selection LCS = Least-Cost Selection CQS = Selection Based on Consultants' Qualifications SSS: Single Source Selection
33. Short list comprising entirely of national consultants: Short list of consultants for services, estimated to cost less than US$350,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.
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Consultancy Assignments with Selection Methods and Time Schedule 1 2 3 4 5
Estimated Cost Review by Bank Ref. No. Description of Assignment Processes US$ (Prior/Post) Firms 1.1 Communication Strategy for Social 150,000 QCBS Prior Intervention (excluding taxes) 1.2 Social Marketing for Water Saving Devices 1,250,000 QCBS Prior (excluding taxes) 2.1 Support for the implementation of the GIS 432,000 QCBS Prior (excluding taxes) 2.2 SCADA information technology 648,000 QCBS Prior standardization strategy and consolidation (excluding taxes) 2.3 Preparation of a strategy to efficiently meet 300,000 QCBS Prior user demand for water and sanitation (excluding taxes) services 2.4 Options for the development of a new 500,000 QCBS Prior organizational model (excluding taxes) Individuals 1 Contract Management Engineer $54,000 (per year) 3 CVs Prior 2 Works Supervisor Engineer $42,000(per year) 3CVs Prior 3 Procurement Specialist $42,000 (per year) 3CVs Prior 4 Financial Specialist 1 $42,000 (per year) 3CVs Prior 5 Financial Specialist 2 $36,000 (per year) 3CVs Prior 6 Procurement external review $10,000 (per year) 3CVs Prior
34. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post review of procurement actions. The size of the sample for post- review will be not less than 1 in 10 contracts.
3. Environmental and Social (including safeguards)
35. The proposed development objective of this project is to improve the water and sewerage services in the Northern Service Area of Lima. This will be achieved by the rehabilitation of the infrastructure network and by the strengthening of SEDAPAL‟s operational capacity.
36. In order to improve the continuity and quality of the services, SEDAPAL will follow a two-tier strategy. The first is to make more water available by reducing the physical losses in the system, and the second is to improve the operational and commercial management of the water and sanitation system by: (a) reducing commercial losses, (b) optimizing the technical operation of the systems (pressure management, sectorization and valve control, automatization for the control systems and others). Given the new water source that will become available in the Northern Service Area in mid-2011 by the construction of Huachipa Water Treatment Plant, it is important to count on a working water and sewerage system that is able to withstand the new pressures and volumes.
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37. The proposed project will consist of three components: (i) rehabilitation and improvement of water and sewerage networks in the First Northern Service Area of Lima, which include social interventions aimed at enabling households to maximize water benefits, such as promoting the use of water saving equipment; (ii) improving management for better transparency and governance, which will provide technical assistance for the institutional strengthening of SEDAPAL; and (iii) Project management.
38. This section provides information as to the World Bank Safeguard Policies triggered by the project, safeguards-related risks and/or impacts identified through field visits to the project area and discussions with SEDAPAL staff, the measures to be taken to address those safeguards related risks as stated in the terms of reference for the EA undertaken according to the national environmental regulations, and procedures for ensuring those measures are implemented during project execution. The project has been designed to comply fully with the World Bank Environmental and Social Safeguards Policies.
Compliance with the World Bank Safeguards and the Peruvian Environmental Legislation
39. Following the World Bank safeguards principles, the project was classified as an Environmental Category B and the following safeguards were triggered: OP 4.01 Environmental Assessment; OP 4.12 Involuntary Resettlement; OP 4.11 Physical and Cultural Resources.
40. According to the sectoral environmental legislation for water and sanitation projects, enforced by the Ministry of Housing, Construction and Sanitation (MVCS), SEDAPAL has to conduct a detailed Environmental Assessment (EA). Terms of reference for this detailed EA were prepared by SEDAPAL in close coordination with the World Bank in 2009 to fully comply with the letter and spirit of relevant World Bank Safeguard Policies. The preparation of the EA has been completed.
Environmental Assessment (OP 4.01)
41. As the project is classified as Category B, an Environmental Assessment (EA) is in required, in accordance with OP 4.01, including an Environmental Management Plan. The detailed EA has identified potential direct and indirect environmental impacts associated with the project and other alternatives, and developed mechanisms and measures to avoid, minimize and/or mitigate negative impacts. The Environmental Management Plan, contained in the EA study, has specified activities, budgets and responsibilities to ensure the implementation of these mitigating measures.
42. Since the detailed EA has been reviewed by the World Bank, an Addendum to the original EA report was prepared by the consulting firm. The full EA report (including the Addendum) was disclosed at SEDAPAL‟s Webpage in September 20, 2010. A copy also has been disclosed at the Bank‟s InfoShop on December 21, 2010.
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Positive Environmental Impacts
43. The project is expected to have a very positive environmental impact overall, by (i) consolidating and improving water resources management in Lima; (ii) connecting people to rehabilitated sewage collection systems in the First Northern Service Area of Lima, thereby improving human and environmental health conditions and protecting very scarce underground water sources, and (iii) increasing the efficiency of the water supply services provided by SEDAPAL.
44. Efficient water supply services. The project will directly improve SEDAPAL‟s capacity of efficiently using water resources by reducing water losses and the contamination of underground water sources. This reduction of water losses (estimated at 12,000 m3/yr after project completion) is critical in a city like Lima, the second largest city in the world located in a desert area after Cairo and a city whose main water resources come from rapid retreating glaciers in the highlands due to climate change. This support will consist of the rehabilitation of the primary and secondary water networks as well as the construction of several water reservoirs for storage and pressure stabilization, the installation of water sectors for consumption and water meter and pressure management, and the replacement of water and sewerage connections.
45. This component will include a social intervention to facilitate the households transitioning to a full-pressure, 24 hour-service, while minimizing the impact of the new water billed based on actual consumption rather than estimated by replacing the current sanitary installation with water-savings devices. This support will also include support to SEDAPAL aimed at maximizing the benefits gained by the infrastructure interventions under Components 1 (listed above), and also includes: (a) automatization and operational control systems, (b) enhancing the micro-credit mechanisms to allow poor households to upgrade their sanitary facilities with newer, water-saving devices, and (c) Project Management to include also studies, audits, as well as monitoring and evaluation.
46. Improvements in environmental and human health conditions. According to the Country Environmental Analysis, (World Bank, 2006), of all the impacts of environmental degradation in Peru, those related to health are the most significant. The study of the costs of degradation carried out as part of the Country Environmental Analysis estimated the annual damages from environmentally related sources at S/. 8.2 billion (US$2.45 billion). Over 70 percent of that, around S/. 5.85 billion (US$1.75 billion), is attributable to environmental health, arising from poor quality water supply, sanitation and inadequate hygiene. The project will directly improve environmental health conditions of population to be served. Rehabilitation of sewerage systems will decrease the rate of breaks in pipelines what exposes population to water borne diseases and odors with significant human health impacts. This full pressure, 24-hour service will also eliminate storage devices, change water use patterns and modify hygiene practices. This behavioral change will in turn eliminate fertile ground for water borne diseases such as dengue and gastrointestinal cases associated with lack of hygiene. It is expected that improved sewage collection systems will generate positive environmental benefits to the quality of aquifers in Lima, as well as provide a healthier urban environment due to improved sanitation and water services to the urban population to be served by this project.
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Potential Negative Impacts
47. During construction: The environmental and social impacts associated with these works are considered low and no significant and irreversible environmental damage is expected. Potential temporal minor negative environmental impacts, mostly nuisances (e.g., disposal of waste from works and replaced pipelines, occasional spills from liquid waste in machinery camps, odors, dust and noise, traffic congestion, access-related restrictions on neighbors, temporary effects on socioeconomic activities and small businesses, street vendors proliferation, etc.) might happen, associated with the construction works. To avoid these potential negative impacts, appropriate measures will be incorporated in the project‟s design. These measures have been addressed in detail in the EA report and its constituent Environmental Management Plan (EMP). Table 1 presents the major negative environmental impacts identified during the EA process.
Table 1 Negative Environmental Impacts during construction Generation of particulate matter and dust during transportation of materials and due to manipulation of asbestos-cement pipelines Accumulation of pipelines waste materials due to excavations Temporal interruption of water and sewage services Increase in congestion due to restricted access to vehicles and pedestrians Unpleasant odors due to wastewaters Noise produced by machinery and trucks and by demolition of existing infrastructure Removal of trees and bushes due to rehabilitation of reservoirs located in parks Soil contamination generated by accumulation of concrete waste in the area of works, solid waste generated by workers and spillover of fuels, painting material and oils Human health and security risks during excavations and construction works in reservoirs Source: EA report (Nippon Koei, 2010)
Environmental Management Plan (EMP)
48. The Environmental Management Plan (EMP) includes a series of very detailed and adequate mitigation and enhancement measures designed to ensure the project minimizes any negative impacts, and improve the positive ones. Costs of these measures have been estimated. The EMP is organized into several programs to be implemented during the construction/rehabilitation and operation phases. The EMP includes the following measures and programs:
Environmental impacts control and mitigation measures Water management program Soil management program Solid waste management and final disposal program (includes disposal of wastes from asbestos-cement pipelines) Vegetation conservation, restoration and compensation program Environmental compensation measures program Construction materials management program Social management program
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49. The EA report also includes other plans and programs such as: (i) Environmental monitoring plan, (ii) Environmental training and education plan, (iii) Surveillance program, (iv) Investment program, (v) Occupational health and safety plan, (vi) Closing program, and (vii) Contingency plan.
50. Table 2 summarizes the main negative environmental impacts and the corresponding mitigation measures:
Impacts Mitigation Measures Air pollution due to combustion Preventive inspection and maintenance of engines and vehicles gases, dust from works in pipelines (trucks, machinery, etc.) and others Optimization of transport time Preventive maintenance of unpaved access roads, considering wetting down those roads Permanent wetting down of streets to avoid dust Carefully selecting the places to store construction materials and excavation wastes and materials Provide health protection equipments to workers Wetting down of land to be removed Speed limits to tipper trucks and cover the tipper to avoid dust Use of protection equipment by workers exposed to particulate matter from polyethylene and asbestos-cement pipelines Compliance with safety measures to replace asbestos-cement pipelines Transport of asbestos-cement wastes in the minimum possible time to an identified landfill for hazardous materials (located in Chilca, south of Lima) Soil alteration due to operation of Prevent dumping of materials from excavations in adjacent land heavy duty equipments plots and properties Heavy load machinery will limit their movement to the project area and access ways Minimize the area to be excavated Nuisances due to noise generated by Frequent maintenance of equipments engines transit of heavy duty vehicles Use of protection equipments against noise by workers Landscape alteration due to heavy Proper management of wastes duty machineries and equipments Move equipments and machinery immediately after completion of works Clearing and leveling only the minimum area required by construction activities Soil contamination due to solid and Distribution of containers for collection of wastes in the project liquid wastes, wastewaters, fuels areas and spillovers, etc. Collection of wastes in specific containers, avoiding to mix them, according to the procedures established Proper disposal of solid wastes in designated sanitary landfills Containers for fuels and oils must be hermetic and in perfect conditions Hire of portable chemical toilets and hygiene facilities for workers Disposal in appropriate landfills and recycling of industrial wastes (e.g. bottles, cans, used filters, cement residuals, etc.) Store fuels and lubricants in appropriate containers in a designated area within the camp site
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Impacts Mitigation Measures Generation of waste materials Segregate and accumulate solid wastes in hermetic containers for disposal in authorized landfills Impacts on health due to workplace Hire experienced and trained personnel for operation of machinery accidents and equipments Permanent use of personal protection equipment by personnel Training on safety measures Training on hygiene habits and cleaning up of facilities Impacts on green areas Restore trees and gardens in areas affected by civil works Source: EA report (Nippon Koei, 2010)
51. Project Environmental Management: The environmental management of this project will be undertaken by SEDAPAL‟s Environmental Management Team (EGAm) in close coordination with the Ministry of Housing, Sanitation and Construction‟s Office for Environment. SEDAPAL‟s EGAm and SEDAPAL‟s Social Unit will be responsible for coordinating the project‟s environmental and social actions respectively, while the Ministry of Housing, Sanitation and Construction‟s Office for Environment will be in charge of providing inspection, follow-up and guidance to the execution of mitigation measures required according to what was established in the EA report, that has to be approved by the Ministry of Housing, Construction and Sanitation‟s National Directorate for Sanitation, as well as environmental oversight of the works. The Ministry of the Environment (MINAM) will be permanently informed since it is the ruling authority o the National System for Environmental Impact Assessment (SEIA) and is allowed o randomly review this project‟s EA according to the regulation of the law that created the SEIA.
Borrower’s institutional capacity for environmental and social safeguard policies and institutional strengthening needs.
52. The Borrower‟s institutional capacity for safeguard policies is good. SEDAPAL‟s Environmental Management Team (EGAm) is ascribed to the Management Unit for Logistics and Services. EGAm‟s main functions are: (i) prepare SEDAPAL‟s Environmental Management Plan and assuring its implementation and updating11; (ii) develop planning, implementation, enforcement and evaluation actions in investment projects for maintenance and expansion of green areas, reforestation and landscape development in SEDAPAL‟s Operations Center located in La Atarjea and the Rimac River Landscape Reserve; (iii) undertake inter-institutional coordination for the proper management of the Rimac, Chillon and Lurin River watersheds, including their environmental restoration; and (iv) establish linkages with national and international entities on environmental management issues.
53. In order to fulfill these tasks, EGAm‟s structure currently includes a 13-person environmental management team in charge of environmental aspects of water and sanitation
11 This in turn will require: (i) coordinate with project, services and activities affecting SEDAPAL‟s environmental management, (ii) propose to and coordinate with SEDAPAL‟s different teams the preparation of procedures to ensure that SEDAPAL personnel‟s behavior conducts to improvements in the environmental performance of their activities, products and services, (iii) coordinate with projects and teams the inclusion of EAs into sewerage projects, and (iv) develop environmental awareness programs targeted to workers, suppliers and clients. 43 projects. At present, out of these, 5 people are specialists in environmental impact assessments and environmental management.
54. A Plan for the Organizational Strengthening of SEDAPAL‟s Environmental Management has been recently prepared. Under this Plan, EGAm will be transferred from the Logistics and Services Management Unit to the Research and Development Management Unit. Also, tasks such as maintenance of La Atarjea Operations Center‟s green areas, operation of the irrigation system and management of forested areas in the Rimac River Ecological Reserve will be transferred from EGAm to SEDAPAL‟s Administration and Conservation Team. In practice this internal reforms in SEDAPAL‟s organizational structure will imply a reduction in personnel allocated to EGAm, which will be reduced to a team of 6 professionals. Out of these, only 3 people will be in charge of environmental management issues, including EAs review and monitoring of measures contained in the corresponding EMPs on the basis of information reported by an independent supervision company.
55. Implementing the aforementioned Plan for the Organizational Strengthening of SEDAPAL‟s Environmental Management will also include the following actions: (i) preparation of EGAm‟s Organization and General Responsibilities Manual, (ii) preparation and implementation of SEDAPAL‟s 2011-2015 environmental management plan,12 (iii) approval of EGAm‟s Personnel Allocation Chart (EGAm will be reduce from a 13 person team to a 6 person team), and (vi) allocation of human resources to EGAm to strengthen its environmental management capacity.
56. Main responsibility for oversight implementation of the EMP will lay on SEDAPAL‟s Lima Marginal Areas Sanitation Improvement Project (PROMESAL) and SEDAPAL‟s Environmental Management Team (EGAm). PROMESAL will count on the technical support to be provided by a consulting firm responsible of supervising contractor‟s compliance with the World Bank‟s social and environmental safeguards. This supervision company will send its supervision reports to PROMESAL which in turn will send them to EGAm and the World Bank. EGAm and PROMESAL‟s Social Team will be responsible for verifying proper implementation of the project‟s environmental and social actions respectively. Also, PROMESAL, in permanent coordination with EGAm, will be in charge of providing inspection, follow-up and guidance to the technical execution of civil works and implementation of mitigation measures required according to what was established in the EA report and its EMP as well as environmental oversight of the works.
57. Social Management Program: As part of the detailed EA, a social management plan will be developed for this project. This plan will ensure a permanent and timely communication among social and institutional stakeholders and allow mitigation of social and economic impacts that might occur during the project construction and operation phases.
58. Disclosure, Consultation and Communication program: A public consultation on social and environmental issues was held in October 2010 with sector stakeholders and civil society to
12 This Environmental Management Plan includes: (ii) SEDAPAL‟s Solid Waste Management and Minimization Plans, (iii) Implementation and operation of the Integrated Management System (ISO 14001), and (iii) Coordination with national and international institutions working on environmental management. 44 discuss the findings of social assessments, and present the EA report and mitigation measures contained in the EMP. The EMP includes strategies on disclosure, consultation and communication to inform the affected groups on management of environmental impacts. Specific procedures to permanently inform the local groups on the scope of works and the EMP proposed have also been prepared. Mechanisms to ensure consultations with these groups during the project implementation have been designed aimed at addressing environmental issues that might affect them.
59. In addition, SEDAPAL manages a grievance mechanism called AGUAFONO, which is considered best practice in the public sector and is well-known by the population. This mechanism is another channel where the company can receive feedback from civil society. During preparation the Project team discussed the integration of system data acquired by AGUAFONO and the technical department, with regards to pipe breakages and network issues, in order to have a comprehensive picture on the performance of its networks. The undertaking of this activity will be further considered during project implementation.
Physical Cultural Resources (OP 4.11)
60. Peru has a well-developed legislative and normative framework for management of physical cultural property, which is under the oversight of the National Institute of Culture (Instituto Nacional de Cultura – INC). In accordance to local legislation and Bank requirements, SEDAPAL will include procedures for screening any known cultural property in the Project area and incorporate „chance find‟ procedures in the event that culturally significant resources are discovered during implementation. Procedures for the identification and protection of physical cultural resources have been included in the EMP.
61. The EA report has included a list of archeological sites located in the project area and an Archeological Monitoring Plan which specifies the following measures to be considered by project contractor during the rehabilitation works: (i) preventive measures, (ii) immediate measures, (iii) measures for the intervention of the monitoring Archeologist, (iv) prevention and mitigation measures, and (v) a system for recording, analyzing, storing and delivering archeological materials to Peru‟s National Institute for Culture (INC). The contractor will hire two archeologists to support its personnel to take into account the aforementioned measures. Implementation of the Archeological Monitoring Plan will be supervised by the National Institute for Culture (INC).
Involuntary Resettlement (OP 4.12)
62. SEDAPAL has developed an Involuntary Resettlement Framework to be applied on all its future interventions, regardless of source of financing. The Involuntary Resettlement Framework (Norma Técnica de Reasentamiento) was developed in accordance to OP 4.12, and will guide the preparation of Resettlement Plans, if necessary, during Project implementation, and has been adopted and disclosed by SEDAPAL on February 16, 2011 as corporate policy to guide all future investment operations.
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63. SEDAPAL‟s policy is to guide the design and implementation of Involuntary Resettlement Plans, establish policies and guidelines to mitigate and compensate the negative effects derived from the involuntary taking of land to be used in the construction or rehabilitation of reservoirs, wells, pumping stations, cisterns, tunnels, lagoons, networks, etc. Aiming to reestablish equivalent and/or improved social and economic conditions to the ones families enjoyed previous to the institution‟s intervention.
64. Specific objectives include: (i) Acknowledgment of involuntary displacement; (ii) fair and assisted compensation for physical, economic and social losses; (iii) reestablishing previous social and economic living conditions; (iv) assisting resettled families in their transition and adaptation to their new surrounding until they have started to rebuild social networks; (v) Inform, consult and engage affected people in the objectives of the project; (vi) assistance in the productive use of compensation payments; (vi) minimizing the social and economic impacts that derive from land acquisition, lots, housing or limitations in their use; (vii) Reestablish and improve, if possible, affected people‟s living; ( viii) In the case that the affected person prefers to receive economic compensation for their house, ensure that the affected people, families and communities participate in the decision.
65. Grievance Mechanism: The project‟s grievance mechanism will be disclosed as a part of the project‟s general social strategy. In other words users will interact personally with social professionals who will explain their rights in terms of expressing complaints and grievances and the due redress process it will follow. This mechanism is meant to cater especially to cases of involuntary taking of land. In addition, SEDAPAL manages a grievance mechanism called AGUAFONO, which is considered best practice in the public sector and is well-known by the population. This mechanism is another channel where the company can receive feedback from civil society. During preparation the Project team discussed the integration of system data acquired by AGUAFONO and the technical department, with regards to pipe breakages and network issues, in order to have a comprehensive picture on the performance of its networks. The undertaking of this activity will be further considered during project implementation.
Social Assessment
66. Beyond the safeguards that were triggered: OP 4.01 Environmental Assessment; OP 4.12 Involuntary Resettlement; OP 4.11 Physical and Cultural Resources, SEDAPAL has prepared a social assessment for the area of the Northern Service Area, focusing on the four prioritized districts (Los Olivos, Independencia, San Martin de Porres and Comas), which provided information on the characteristics of the population, map of stakeholders, social and economic issues of the beneficiaries and developed a consultation with female leaders. The report includes a directory of civil society organizations, NGOs and community based groups, for project implementation. The outcomes and findings of social assessment will be disseminated via SEDAPAL‟s web site including a video of a social consultation with women.
67. The social report has identified the following social risks and mitigation measures.
68. The social assessment evidences opportunities and risks in the project, among the relevant opportunities there is the improvement of the capacities of the water management of the
46 population, participation in the decisions, control of works and surveillance of the system for its sustainability, and access to temporary employment in the works (estimate a hiring capability of 2600 people). It identified as potential risks, potential social conflicts during the installation of meters of water consumption, for the excessive extension of the duration of the works, and/or for the increasing of the costs of the works beyond the expected ranges.
69. People‟s participation and social consultations can be a mechanism for good government, and therefore requires resources for its appropriate implementation. There are four aspects for to follow, (i) commitment of the local actors for preventive group actions to avoid unwanted outcomes, (ii) public investment (SEDAPAL, Municipalities) to strengthen the mechanisms of social participation and water management; (iii) management planning by results; and (iv) transparency and social accountability.
3.1 Institutional Arrangements for Management of Environmental and Social issues
70. In order to fulfill these tasks, the EGAm‟s structure includes an 11-person environmental management team in charge of environmental aspects of water and sanitation projects. Out of these, 5 people are specialists in environmental impact assessments. EGAm‟s team with count on the support of the technical experts from the company in charge of rehabilitation supervision to be hired by SEDAPAL. This rehabilitation supervision company will have a team in charge of environmental oversight of the works.
4. Monitoring & Evaluation
71. The results framework and monitoring strategy are included in Annex 3. This framework has been developed in close coordination with SEDAPAL. PROMESAL will consolidate the data at the project level and produce semi-annual reports to monitor progress. An impact evaluation study – Encuesta de Evaluación de Impacto del Proyecto – that will analyze the effect of the planned investments on improving the quality of service delivery in the Project area is currently being designed.
72. Overall responsibility for monitoring and evaluation of the Project will lie with PROMESAL, which will provide timely information about the progress and execution of the project, including qualitative information on the execution of selected activities, procurement and contractual decisions, accounting and financial recording, and other operational and administrative matter. The Project Operations Manual provides specific details regarding monitoring and evaluation responsibilities, including data collection requirements, timing and use of information.
5. Role of Partners
73. The proposed project is part of SEDAPAL‟s program to rehabilitate the water supply and sewerage networks in the Northern Service Area of Lima. This program will be financed in parallel by the World Bank through this proposed operation, JICA, KfW and SEDAPAL‟s own resources.
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74. SEDAPAL has already secured resources from JICA and KfW, and the corresponding specific designs are being prepared. The social interventions financed by the proposed project will encompass the entire program (including the areas financed by JICA and KfW), complementing the physical investments to facilitate the household transition to a full pressure continuous service, improve hygiene practices, and provide guidance to manage consumption including the use of in-house water saving equipment. During implementation bi-annual/annual meetings will be scheduled with all financiers in order to review overall progress of the program and resolve any identified issues.
75. The Bank implementation team has signed an Aide Memoire with JICA and KfW representatives expressing the intention to share information and knowledge about the implementation of the Program, as well as standardization of technical project reporting and social intervention with the beneficiaries‟ communities. This Aide Memoire is in Project files.
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Annex 4 Operational Risk Assessment Framework (ORAF)
Project Development Objective(s)
The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima
PDO Level Results 1. Number of daily hours water services are provided in the project area Indicators: 2. Annual incidence of water pipe breakages per km of water supply network in the project area 3. Annual incidence of sewerage blockages per km of sewerage network in the project area 4. Volume of water saved in the project area 5. Number of learning events on strategic planning and management
Timing for Risk Proposed Mitigation Measure Mitigation Risk Category Risk Description Rating Prep/Imp.
Project Stakeholder
Risks Borrower relation: Project This project is part of a larger investment program in the Northern implementation is delayed or Service Area of Lima, one of the poorest and more marginalized discontinued due to competing areas of the city, considered a priority by SEDAPAL. priorities.
Bank, JICA and KfW teams have kept fluid communications since the Donor relation: A potential conflict identification phase of the Project to ensure good levels of or tension of objectives amongst the cooperation, coordination and complementarity. All contract three donors active in the area (JICA, Stakeholder L packages are independent which limits inter-dependency and the X X KfW, WB) could cause delays and implementing unit is the same, which prevents overlapping. undermine PDO achievement.
Disclosure and consultation have begun during Project preparation Direct Stakeholder view: Envisaged and will continue throughout its implementation. SEDAPAL has an consultation and information sharing experienced team working on social outreach and appropriate activities fail to gain stakeholder communications channels (including grievance and redress support, delaying or obstructing mechanisms) are in place. Project implementation.
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Implementing Agency Risks (including FM & PR Risks) The lack of reliable and updated The Bank team will keep involved in its current dialogue with the information on the situation of the government as well as the multilateral and bilateral –participation water and sanitation services makes in the AGUA forum, and joint missions- to ensure that projects the formulation of far reaching adhere to single sector policies. Sector Policies and programs very difficult. M-L X X Institutions The Bank will increase its support to the standardization and collection of information though the PRONASAR project. SUNASS has already agreed to this investment Project, and given the strong justification for the investments, strong support from all actors is to be expected. Project Risks The Project will be negatively affected The team will maintain close coordination with the technical staff at if the drinking water treatment plant SEDAPAL to monitor the progress of the complementary works and (Huachipa) or the wastewater to be able to adapt the proposed investments accordingly. The treatment plant (Taboada) are not construction of the Huachipa water treatment plan has a 94 percent Design fully operational by their scheduled completion rate as of January 31, 2011. M-I X X completion time. There is also the risk of inefficiency in the investment by A methodology was developed to guide the infrastructure replacing more parts of the system investment with an aim at cost containment and ensuring that than what would be technically and expected benefits are fully realized. This methodology will be economically feasible. adapted and incorporated into the design of the bidding packages. SEDAPAL prepared and adopted an Involuntary Resettlement Framework following Bank’s policy. Once the exact intervention is defined, SEDAPAL may need to prepare an Involuntary It is possible that the population’s Resettlement Action Plan. Additionally, the population will be shelter, assets, and/or income may be adapting to new infrastructure and thus it may take some time to temporarily or permanently affected adjust their use and behavior. In order to support this process, the once the exact interventions are project will include awareness-raising activities to help them adapt identified. The inappropriate to the new volumes and regularity of water. handling and disposal of asbestos
Social & Environmental M-I residuals could have significant health X X The Environmental Management Plan will include specific actions to and environmental impacts. mitigate the health and environmental risks from asbestos pipelines The full benefits of the Project will not residuals. be achieved if the beneficiaries (i.e.
SEDAPAL’s customers) don’t adjust The social intervention, which is an integral part of the Project, will their behavior to the new levels of be focused on preparing beneficiaries for the new levels of service. service being provided.
The Bank will continue working with SUNASS to point out any tariff affordability issues.
50
Given the Project is part of a wider investment program in the area The objectives of the Project are shared by the other donors. Bank financed by multiple donors, lack of and other donor’s teams will continue to keep fluid communications Program & Donor L X X success in other programs or mere to ensure good levels of cooperation, coordination and capacity constrains could negatively complementarity. affect the impact of the Project. Direct mitigation measures to be undertaken are included in the Given the beneficiaries’ low levels of institutional development component. Component 2 of the Project income; there is a risk that the will support a series of measures aimed at improving SEDAPAL’s Delivery Quality L nonpayment of water bills affects the X X capacity to efficiently provide water and sanitation services. The proper maintenance and sustainability sustainability equation for SEDAPAL is computed as a whole, thus of investments. there is an intrinsic cross-subsidy to this population.
Overall Risk Rating at Overall Risk Rating During Comments Preparation Implementation M-L M-L
51
Annex 5: Implementation Support Plan
Strategy and Approach for the Implementation Support
1. The Implementation Support Strategy has been designed based on the following considerations: The Project is part of a larger investment Program for water and sanitation in the Northern Service Area of Lima, which includes financing by JICA and KfW. The Project‟s implementation will be managed by PROMESAL, a unit with experience in managing large projects with international finance institutions. All investments in the area (even those financed by other institutions and SEDAPAL‟s own funds) will need to comply with Bank‟s safeguards. The Project will be supervised by a mix of HQ and CO based staff. In addition to sector specialists and safeguard and fiduciary staff, the Bank‟s team will also be supported by local and international consultants. Frequency of supervision missions will likely be higher at the beginning (4 per year) to decrease to 2-3 per year after project implementation regularizes. Fiduciary and safeguards training will be offered as necessary to PROMESAL.
2. The Implementation Plan will be revised regularly during implementation on the basis of project progress and continuous risk assessment.
Implementation Support Plan
3. Technical Support. SEDAPAL counts with a large body of engineers with many years of experience in the management of their complex network of water and sewerage. However, the rehabilitation in such a scale for water supply systems will require hiring high level engineers to assist in the reviewing technical studies.
For Component 1, world-class engineers advising the local firms on the methodology to assess block by block whether the pipe may be replaced, rehabilitated, removed or left on site abandoned. This involve specialized knowledge on Leak Detection Processes and Technology, Water Loss Management in Developing Countries, Assessment of pipe infrastructure and materials to further refine the methodology for pipe replacement or rehabilitation. Additionally, technical advisors alternative construction technologies, and construction site management for large works among others may be desirable.
4. Fiduciary support. As stated in Annex 3, SEDAPAL has experience implementing several programs financed by multilateral banks. Additional measures will be taken during implementation to strengthen SEDAPAL to support its implementation of the Program with different financiers at the same time. Specifically:
Procurement: Implementation support will include: (i) providing training to members of SEDAPAL; (ii) reviewing procurement documents and providing timely feedback to the procurement units/specialists; (iii) providing detailed guidance on the Bank‟s
52 Procurement Guidelines; and in the SEPA system (iv) monitoring procurement progress against the detailed Procurement Plan. Financial Management. Supervision will review the Project‟s financial management system, including but not limited to, accounting, reporting and internal controls. Supervision will also cover sub- projects on a random sample basis.
5. Safeguards support. Given the scale of investment undertaken by SEDAPAL, particular in the last years has created the capacity in the institution to implement large works according to environmental and social considerations. However, the nature of the interventions as well as the innovations introduced in the additional social activities envisaged in the Component 1, requires advise of specialized social and marketing consultants.
6. Thematic support. The Bank has a large portfolio in Peru, including water resources and water supply systems, and has kept engaged in policy dialogue with the Ministry of Housing, Construction and Sanitation, the Water Regulator and Service Providers. This projects would allow further engagement on utility management, for which SEDAPAL, the largest utility sets up the example and innovative approaches countrywide, The team expects that most of this dialogue will be led by the Project‟s sector specialists, particularly in the areas of financial planning, project implementation on low-income areas and efficiency improvement. together with representatives from the Country team and the Water and Sanitation Project. Specific support from other sector specialists or specialists from other fields might be needed at certain times of project implementation, particularly in the discussions about the products of the studies financed under Component 2.
7. Implementation main focus. The following table summarizes the main focus of implementation during the life of the project:
Time Focus Resource Estimate Partner Role First 12 months Project launch, establishing of Project‟s procedures, review of bidding documents Joint missions, when 150 % supervision budget (including technical possible. designs) and monitoring selection of consultants for Component 2. 12-24 months Ensuring quality of works and monitoring of 150 %Normal supervision Joint missions, when safeguards, review and budget possible. dissemination of Component 2 products. 24-36 Ensuring quality of works Joint missions, when and monitoring of Normal supervision budget possible. safeguards 36-60 Ensuring quality of works Joint missions, when and monitoring of Normal supervision budget possible. safeguards Closing Collect final technical and 50% of Normal NA financial information. supervision budget
53
Skills Mix Required
8. The following table summarizes the proposed skill mix and number of staff weeks in the initial phase of project implementation. It is expected that demand will change with time.
Skills Needed Number of Staff Number of Trips Comments Weeks HQ based Sector Specialists 20 4-5 Based in HQ Environmental Specialist 3 1-2 Based in Country Office Social Specialist 3 4 Based in Country Office Procurement Specialist 3 1 Based in Country Office Financial Management Specialist 1 1 Based in Country Office Disbursement Specialist 1 0 Based in Country Office Consultant(s) on Institutional and 6 2-4 International Consultants Technical Issues Other specific consultants 6 4-6 International and Local Consultants
Partners
Name Institution/Country Role JICA Japan Parallel Financer KfW Germany Parallel Financer
54 Annex 6: Team Composition
World Bank staff and consultants who worked on the project:
Name Title Unit
Miguel Vargas-Ramírez Task Team Leader, Senior Water and LCSUW Sanitation Specialist Lizmara Kirchner Water and Sanitation Specialist LCSUW Michel Kerf Sector Leader LCSSD Iris Marmanillo Senior Water and Sanitation Specialist TWILC Raúl Tolmos Environmental Specialist LCSEN Maria Elizabeth Dasso Senior Social Development Specialist LCSSO Gabriela Arcos Environmental Specialist LCSEN Kimberly Vilar Social Development Specialist LCSSO Francisco Rodríguez Procurement Specialist LCSPT Ana Lucia Jimenez Financial Management Analyst LCSFM Silvia Delgado Program Assistant LCSUW Mara Elena La Rosa Team Assistant LCC6C Elizabeth Huaman Team Assistant LCC6C Pilar Gonzalez Senior Counsel LEGLA Maria Del Rocío Florez de Water and Sanitation Specialists, TWILC Cilloniz Handwashing Patricia de la Fuente Hoyes Senior Finance Officer CTRFC Nelly Ikeda Financial Management Analyst LCSFM Menahem Libhaber Consultant, Lead Sanitary Engineer LCSUW Luz Maria Gonzalez Consultant, Economist LCSUW Augusta Dianderas Consultant, Water utility expert Fabio Garzón Consultant, Networks Rehabilitation LCSUW James Thomson Consultant, Pipe Materials and LCSUW construction techniques Guillermo Hernandez Consultant, Automatization Specialist LCSUW Malva Rosa Bascovich Consultant, Sanitation Markets TWILC Ana Lucia Barragan Team Assistant LCSUW Ignacio Urrutia Junior Professional Associate LCSUW
55 Annex 7: Economic and Financial Analysis
Cost-Benefit Analysis
Overview
1. The project will improve water supply reliability and water and sewerage service provision in the Northern Service Area of Lima, through: (i) rehabilitation of current water and sewerage network; and (ii) installation or replacement of equipment to induce water use efficiency, such as: meters, and sanitary tools. On this basis, a cost-benefit analysis was undertaken to evaluate the economic and financial viability of the project, its distributive impact, and risk analysis.
2. The cost-benefit evaluation was made from financial and economic perspectives. From a financial perspective, each component was evaluated appraising its costs and benefits at market price, in the same way that SEDAPAL will be paying or getting from each component. From an economic perspective, each component was evaluated converting financial cash flows into economic cash flows through: (i) the use of conversion factors for the costs; and (ii) the estimation of savings and other benefits that beneficiaries and SEDAPAL will have when the project is implemented.
3. The proposed Project is economically feasible with returns of US$184 million and internal rate of return of 20 percent. The evaluation shows positive economic results of US$181 million and US$3 million for the water and sewerage components respectively and internal rates of return of 22 percent and 13 percent. The financial evaluation shows positive results only when the tariff is raised by at least 10 percent additional to the increase already approved by the regulator (SUNASS). The detailed cost-benefit analysis carried out for the project is available in the project files, along with the distributive, sensitivity and risk analyses.
Summary of Methodology
4. All project components were appraised measuring their flow of costs and benefits for the project lifetime, estimated as 30 years. Costs and benefits were expressed in constant prices of June 2009.13 The discount rate corresponds to the opportunity cost of capital for Peru estimated as 10 percent.
5. The benefit of the project was estimated as the incremental benefit of two scenarios: with and without project situations. The with project situation includes the proposed investment program and its associated targets. The without project situation considers the service would be provided under the same conditions as it is today, and current operational indicators remain the same or worsen along the years.
6. The with and without project scenarios were built taking into consideration that SEDAPAL is constructing a new water treatment plant, Huachipa, and the North main water pipe, which will bring in the first phase, an additional 5 m 3/second to the water distribution
13 The exchange rate used was S/. 3.00: US$1
56 system. The Huachipa plant will treat water from the Rimac River up in the North and will improve the water supply system through a better use of water resources. Specific considerations were made in both the with and the without project scenarios using SEDAPAL‟s historical data to ensure that the impact of the entry of Huachipa is properly taken into account.
7. Cost. The analysis includes investment and operating costs, and encompasses the totality of the short-term/priority rehabilitation investments planned in the Northern Service Area of Lima regardless of source of financing. Financial investment cost include: (i) project cost with physical contingencies, supervision and taxes; and (ii) operation and maintenance cost (i.e., production cost of each of the water sources, distribution and energy costs, as well as network maintenance). The volume of water produced is calculated based on the production capacity and projected losses under each scenario (with and without project). Water capacity remains the same in both scenarios; however, water losses vary in each scenario. In the with project scenario, water losses improve from current level of 50.3 percent to 30 percent; while in the without project an increases of one percent per year was assumed due to the high water pressure that the increase of water supplied by Huachipa will bring. Financial prices were converted into economic prices through the use of conversion factors.
Table 1. Investment Cost (million) Investments S/. US$ 1. Water rehabilitation, coverage expansion, and 427.3 142.4 reduction of water losses 2. Sewerage rehabilitation and coverage expansion 180.5 60.2 Total 607.8 202.6
8. Benefits. The benefits were measured in market prices and economic prices. The financial prices correspond to the prices SEDAPAL pays for each input and the price that it receives for each component, while the economic price corresponds to the real cost to the society when market distortions are eliminated. Service levels in the project area are lower than company averages, due to the shortage of water. Intermittence is high, with about 59 percent of users receiving less than 9 hours of service per day. Non revenue water is estimated at 50.3 percent in the project area (compared with 37 percent in SEDAPAL), 80 percent of which corresponds to physical water losses, and the remaining 20 percent to commercial losses; 33 percent of connections are metered.
9. The proposed Project is expected to improve service reliability in such a way that rationing will be eliminated; water losses reduced to 30 percent: 25 percent of physical water losses, and 5 percent of commercial losses; micro metering extended to 100 percent of customers. Another benefit that comes along with an efficient water usage is the release of some water that can be used to serve population in other areas in Lima with similar levels of water intermittence.
10. Project benefits were measured in financing terms as follows: (a) increase of revenues, measured as volume of water billed, times the average tariff per cubic meter for each category of users, (b) reduction of operating costs, measured as savings on operating costs when reduction of water losses is attained, and operation improvement is achieved, and (c) water release that comes along with measures for an efficient water usage is included as a financial benefit when sold to
57 vicinity areas (the social tariff was used to calculate this benefit, which was also partially offset for the operating cost required to distribute this water).
11. The Project‟s economic benefits were estimated as follows: (a) elimination of intermittence in the water supply, (b) savings on operating costs, as a result of network rehabilitation and reduction of water losses, and (c) savings on operating costs associated with a reduction in the number of sewer pipes plugged. In addition, households that currently are connected to the sewerage are subjected to bad odors, overflow of wastewater on the streets and sometimes inside their houses. When the project is implemented none of these problems will persist, which will bring along improvement in the quality of life and health benefits. To identify the economic benefits, surveys were done during preparation, with results showing that the most important impact could be measured through increase in property value of the households. Given that no hedonic price study was carried out, different value increases on the properties were tested for this evaluation. Finally, health benefits are likely occur when environmental conditions improve; however they were not quantified in this evaluation.
Results
12. Economic Results. The economic evaluation shows positive results for both components with overall returns of US$184 million and internal rate of return of 20 percent. The water component alone shows profits of US$181 million and 21.8 percent of rate of return, while the sewerage component‟s profit is US$2.6 million and 12 percent return. For sewerage component the evaluation was done assuming an increase in property values of US$1,000 per dwelling already connected to the service, which corresponds to a 5 percent increase on property value. Additional benefits are expected from the sewerage component, which were not included in the evaluation such as health and environmental benefits.
Table 2. Summary of Economic Results NPV of flows („000 US$) IRR Benefits Costs Net benefit Water 258,532 77,447 181,085 21.8% Sewerage 19,630 16,981 2,649 12.8% Water and sewerage 278,162 94,428 183,734 20.2%
13. Financial Results. As Table 3 shows, neither water nor sewerage component are financially viable showing losses of US$14 million and 9.1 percent internal rate of return. If tariffs were increased an additional 10 percent, the internal rate of return would increase to 10 percent and the profit to US$25 million. This increase would be additional to the already approved in June 2010 by sector regulator (SUNASS); the higher the tariff, the bigger the financial benefits will be.
Table 3. Summary of Financial Results NPV of flows („000 US$) IRR Benefits Costs Net benefit Water 79,860 89,417 (9,557) 9.1% Sewerage 15,745 20,325 (4,580) 8.9% Water and sewerage 95,605 109,742 (14,137) 9.1%
14. Distributive Analysis. The difference between economic and financial flows represents rents or monetary flows that accrue to someone else than SEDAPAL. Winners and losers were
58 identified when decomposing inputs of all economic and financial costs. The big winners are the customers who reap US$182 million benefits, which are explained mainly in the savings they will have when service is provided continuously. The increase in bills they will have to pay to SEDAPAL is paid off with the averted costs when rationing is eliminated. The same with the sewerage project, customers will have higher economic benefits that compensate bills payments. The fiscal impact for the government is positive as well increasing the taxes by US$17.5 million. On the other hand, suppliers will have a loss of US$2 million. Society as a whole will have a net gain of US$197 million.
15. Sensitivity Analysis. The sensitivity analysis measures the impact on the results when variations occur on the assumptions. The outcome is measured changing one variable while all others remain constant. The variables selected as those believed of carrying major risks were: (i) investment cost overrun; (ii) operating cost overrun; (iii) project delays; (iv) reduction on rationing cost; and (vi) increase of property values.
16. Results from the sensitivity analysis show that the project would have positive economic results even when investment increases by 117 percent and when operating cost are doubled. The rationing cost could decrease by 74 percent and the project would still be profitable. Regarding the changes in property value, the results are highly sensitive; a one percent increase would mean additional profit of about US$3 million.
Table 4. Results of the Sensitivity analysis. Break-even Point of Benefits Economic results Investment costs overrun 117% O&M costs overrun 250% Project Investment delays (# years) 4 Rationing costs decreases 74%
17. Risk Analysis. To enhance the accuracy of the financial and economic analysis, the uncertainties of the real world are approximated using Monte Carlo simulation with the Crystal Ball software. Based on a simulation of 1,000 trials the model recalculates the results of the financial and economic analyses by simultaneously changing each of the selected risk variables according to their assigned probability distributions. As seen in Table 5 below, the result of the risk analysis confirms the robustness of the economic results. The probability of having positive economic returns is 100 percent for the water component and 69 percent for the sewerage component.
Table 5: Risk Variables and their impact on economic results Economic Results
Probability of positive NPV Mean expected NPV („000 US$) Water 100% 159,914 Sewerage 69% 19,333 Total project 100% 179,142
59 Financial Assessment of SEDAPAL
18. A financial analysis was undertaken to assess SEDAPAL‟s overall long-term financial sustainability as well as its capacity to operate and maintain the investments supported under the project. The analysis is based on SEDAPAL‟s audited historical and pro-forma financial statements for the 2007 to 2010 period and its projected financial performance for the next 10 years.
Summary of Institutional Framework
19. Since 1990, the responsibility for water and sanitation service provision has been decentralized to subnational governments (district or provincial municipalities).14 Local municipalities received the ownership of the water supply and sanitation infrastructure and were mandated15 to create urban water utilities as autonomous ring-fenced corporations under private company law. The only exception is the service provision in Lima, which remains under the responsibility of the central government, who retained the ownership of the infrastructure and created SEDAPAL as a public utility operating under private law.16 SEDAPAL is the biggest utility in the country serving more than one million connections, and its service area includes the Lima Metropolitan Region and Callao.
20. The Ministry of Housing construction and Sanitation (MVCS) is the ruling entity for the water and sanitation sector. Within the Ministry, the Vice Ministry of Construction and Sanitation (Viceministerio de Construcción y Saneamiento, VMCS) is in charge of formulating, approving, executing and supervising the country‟s water and sanitation policies.
21. The Ministry of Economy and Finance (Ministerio de Economia y Finanzas, MEF) plays an important role in the sector, related to the terms of investment, sector planning, and regulation. The General Directorate of Multiannual Planning for the Public Sector assesses the multiannual strategic plans for each sector and the viability of selected infrastructure projects through the National Public Investment System (Sistema Nacional de Inversion Pública, SNIP). The General Directorate of Public Budget plans and assigns budget resources to each sector, while the General Directorate of Public Credit is responsible for approving and for issuing the national guarantee for any external debt or international cooperation for the sector. The Directorates of Public Budget and Public Debt, determine to some extent the financing policies of water utilities. They do so by setting limits on their indebtedness and by guaranteeing their debts before local and international lenders.
22. The National Agency of Sanitation Services (Superintendencia Nacional de Servicios de Saneamiento, SUNASS) was created in 1992 through the Law Decree No. 25965, and is the sector regulator. SUNASS reports directly to the Presidency of the Council of Ministers. In particular, the SUNASS is in charge of regulating the activity of the 50 Peruvian water and
14 Decree 574-1990 and Decree 601-1990, transfers the responsibilities for service provision to local governments. The Constitution of 1993 and the Organic Law of Municipalities (23853) confirms that local responsibility. 15 Law No. 26338 of July 22, 1994 known as the General Water and Sanitation Law (Ley General de Servicios de Saneamiento). 16 Decree-Law No. 25491 (May 7, 1992), which merges the Ministry of Housing and Construction with the Ministry of Transport, with the exception of SEDAPAL that is transferred to the Ministry of Presidency.
60 sanitation utilities, including SEDAPAL. The agency publishes regularly reports on the performance of the service operators and proposes management frameworks such as tariffs models.
23. The main planning tool for public water and sanitation utilities in Peru is the optimized master plan, which defines the needs in terms of investments and resources for a period of around 30 years. Every optimized master plan has to propose an investment program meeting the five following priorities: (a) improvement of water quality; (b) increased efficiency in the use of water resources; (c) increased access to water supply and sanitation services; (d) increase in the level of wastewater treatment; (e) and other required investment projects. In addition to investment planning this plan is required to determine the tariff structure and level (calculated according with a specific methodology developed by SUNASS) and the performance indicators to be achieved by the each utility. In the absence of an approved optimized master plan, SUNASS does not allow a water and sanitation utility to revise their tariffs. However, adjustments to reflect the country‟s inflation index are automatic.
Past and Current Performance of SEDAPAL
24. SEDAPAL‟s main source of revenue is the provision of water supply and sanitation services to the population in Lima. Until August 2010, the company charged a volumetric water tariff, with no separate tariff structure for the provision of sanitation services. Thereafter, the tariff was disaggregated between water and sanitation charges (70 and 30 percent respectively); the sanitation tariff represents 43 percent of the water tariff. Audited accounts from 2007 to 2009 and estimates for 2010 results show that the company has been profitable. In 2007, the company reported a net operating income of US$38 million. In 2008 this income was substantially lower at US$1.3 million, mainly due to increased financial costs as a result of exchange rate differences in its external debts. In 2009 the company had a net profit of US$74 million. As shown in the table below, SEDAPAL is in relatively good financial standing.
Table 6: SEDAPAL Historical Indicators INDICATORS 2,007 2,008 2,009 2,010 Liquidity Indicators Current Ratio 0.9 1.0 1.0 1.4 Profitability Indicators Operating ratio 0.8 0.8 0.8 0.77 Working ratio 0.6 0.5 0.6 0.58 EBITDA Operating margin 20% 24% 23% 23% EBIT Operating margin 20% 4% 27% 12% Leverage/coverage Total Debt/Equity 0.5 0.5 0.6 0.67 Total Debt /Revenues 1.9 1.8 2.2 2.08 EBIT/Interest expense 3.6 1.1 5.1 2.04 EBITDA/Interest expense 8.1 11.6 8.2 7.05
25. In the first half of 2010, SEDAPAL submitted to the regulator (SUNASS) a new optimized master plan containing an ambitious 5-year investment program valued at US$1.5
61 billion and proposed associated tariff increases.17 After evaluating the company‟s proposal SUNASS approved a lower tariff increase than that requested from SEDAPAL, given that 54 percent the investments proposed (about US$817 million) were to be implemented under the National Water for All Program for which SEDAPAL is supposed to receive investment subsidies from the national government. SEDAPAL, SUNASS and the government are currently discussing this issue, given that the investment subsidies from the national government are not materializing as predictable as originally envisaged – e.g., the company invested about US$100 million under the program in 2009 and has not received the full equivalent subsidy from the government. Given the large nature of these investments and their potential impact on the company‟s long-term financial sustainability, SEDAPAL needs to ensure the availability and predictability of resources (either via subsidies or tariff increases) before these planned investments are undertaken.
Future Performance of SEDAPAL
26. Projections to assess SEDAPAL‟s future financial position and performance were carried out for the period of 2011 to 2021. The main assumptions and a summary of the main projected indicators are presented below, while the detailed analysis is in the project files.
27. In the base scenario, projections were based on the following key assumptions:
a. In addition to adjustments for inflation (including the 3 percent increase approved in January 2011), the real tariff increases already approved by SUNASS for 2010 (3.2 percent) was incorporated. A 6 percent real tariff increase was added in 2015 and 2016 as additional planned investments are implemented, likely in partnership with the private sector. These are expected to be approved by SUNASS in due time. b. The investment plan excluded the investments and associated benefits related to the National Water for All Program, given that the source and availability of funding are currently under discussion. c. Water losses are reduced to 32 percent companywide by 2015 and 30 percent by 2021.
28. The implementation of the above assumptions ensures positive cash flow and a net profit for SEDAPAL, enabling the company to meet its current operating expenses and debt obligations. The company‟s working ratio will be maintained below 0.89 in all years and its debt service coverage is projected to reach 1.80 at the end of the projection period. In 2015 the debt service coverage will reach 1.15, highlighting the need for the company to carefully evaluate its debt position in an ongoing basis. From 2015 onwards, SEDAPAL will also be able to finance a portion of its investment needs (up to 50 percent depending on the overall levels of investment) from its own resources. Table 7 below provides an overview of the company‟s main indicators based on the projected financial results.
17 The proposed project represents 3.5 percent of SEDAPAL‟s proposed investment program.
62 Table 7: SEDAPAL Projected Indicators
INDICATORS 2,011 2,012 2,013 2,014 2,015 2,016 2,017 2,018 2,019 2,020 2,021 Liquidity Indicators Current Ratio 2.4 2.3 2.4 3.7 4.7 5.8 6.6 7.2 6.9 6.8 7.0 Profitability Indicators Operating ratio 0.81 0.85 0.89 0.83 0.88 0.83 0.82 0.80 0.81 0.77 0.76 Working ratio 0.62 0.66 0.71 0.66 0.72 0.67 0.67 0.66 0.66 0.63 0.62 EBITDA Operating margin 19% 15% 11% 17% 12% 17% 18% 20% 19% 23% 24% EBIT Operating margin 19% 15% 11% 17% 12% 17% 18% 20% 19% 23% 24% Leverage/coverage Total Debt/Equity 0.70 0.71 0.72 0.74 0.77 0.76 0.72 0.68 0.59 0.48 0.39 Total Debt /Revenues 2.27 2.23 2.14 2.07 2.07 1.96 1.90 1.81 1.59 1.31 1.11 EBIT/Interest expense 3.17 2.62 1.72 2.68 2.01 2.85 2.87 3.05 3.05 4.44 5.81 EBITDA/Interest expense 6.45 5.86 4.61 5.39 4.84 5.35 5.21 5.36 5.39 7.12 9.14 Debt service coverage 2.75 2.33 1.68 1.32 1.15 1.28 1.27 1.22 1.19 1.57 1.80
63