Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 36579-EC

PROJECT APPRAISAL DOCUMENT

ON A Public Disclosure Authorized PROPOSED ADAPTABLE PROGRAM LOAN (APL-2)

IN THE AMOUNT OF US$48 MILLION

TO THE

REPUBLIC OF ECUADOR

FOR THE

SECOND RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROJECT

Public Disclosure Authorized (PRAGUAS 11)

IN SUPPORT OF THE SECOND PHASE OF THE RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROGRAM

June 23.2006

Finance, Private Sector, and Infrastructure Bolivia, 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

Currency Unit = US Dollar

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

APL Adaptable Program Loan BCE Central Bank of Ecuador (Banco Central del Ecuador) BdE State Development Bank of Ecuador (Banco del Estado) BOT Build, operate and transfer contract CADS Consultancy to support the delegation of water, sanitation and/or solid waste services (Consultorias de apoyo a la delegacidn) CAS Country Assistance Strategy CGE General Controller's Office (Contraloria General del Estado) CNRH National Council on Water Resources (Consejo Nacional de Recursos Hidricos) CODAE Afro-Ecuadorian Development Corporation (Corporacidn de Desarrollo Afroecuatoriana) CODENPE Ecuadorian Council for Nationalities and Indigenous Peoples (Consejo de Nacionalidades y Pueblos Indigenas del Ecuador) DINEIB Nacional Bilingual Intercultural Education Directorate (Direccidn Nacional de Educacidn Intercultural Bilingiie) DNSPI National Directorate of Indigenous Health ECAPAG Former public Water and Sewerage Utility of Guayaquil (Empresa Cantonal de Agua Potable y Alcantarillado de Guayaquil) EMAAP Metropolitan Water and Sewarage Company of Quito (Empresa Metropolitana de Alcantarillado y Agua Potable de Quito) EMS Municipal Sanitation Unit (Equip0 Municipal de Saneamiento) ENDEMAIN Demographic and Mother-Child Health Survey (Encuesta Demogrdjka y de Salud Matema e Infantil) EPAS Provincial Water and Sanitation Teams (Equipos Provinciales de Agua y Saneamiento) FISE Ecuadorian Social Investment Fund (Fondo de Inversidn Social Ecuatoriano) FORMIA Project for the Strengthening of Alternative Municipalities (Proyecto para el Fortalecimiento de Municipalidades Altemas) GOE Government of Ecuador (Gobiemo de Ecuador) GOT Guide to Technical Options (Guia de Opciones Tkcnicas) ICB International Competitive Bidding ICE Special Consumption Tax (Impuesto sobre Consumos Especiales) EOS Ecuadorian Institute for Water and Sanitation Works (Instituto Ecuatoriano para obras sanitarias) IMIS Integrated Monitoring Information System (Sistema Integrado de Informacio'n de Monitoreo) INTERAGUA International Water Services Guayaquil IPP Indigenous Peoples Plan IS International Shopping JASS Water User Board (Junta administradora de 10s servicios de saneamiento) LOREyT Ecuadorian Fiscal Responsibility Law (Ley Orgdnica de Responsabilidad, Estabilizacidn y Transparencia) M&E Monitoring and Evaluation MEF Ministry of Economy and Finance (Ministerio de Economia y Finanzas) MIDUVI Ministry of Urban Development and Housing (Ministerio de Desarrollo Urbano y Vivienda) NCB National Competitive Bidding NGOs Non-governmental organizations NS National Shopping OITS Technical and Social Intermediary Organizations (Organismos de Intervencidn Tdcnicos y Sociales) OM Operation Manual (Manual de Operaciones) O&M Operation and Maintenance PAHO Pan-American Health Organization PDO Project Development Objective PMU Project Management Unit (Unidad de Gestidn del Proyecto, UGP) POA Annual Investment Plan (Plan Operativo Anual) PRA Participatory rapid appraisals PRAGUAS Rural and Small Towns Water Supply and Sanitation Project *RFp Request for Proposals SANEPAR ParanA State Water Utility (Companhia de Saneamento do Parand) SAPSyRS Sub-secretariat of Water, Sanitation and Solid Waste (Sub-Secretaria de Agua Potable Saneamiento y Residuos Sdlidos) SBD World Bank's Standard Bidding Documents SCP Strategic Communication Program SIG Management Information System (Siestera de Informacidn Gerencial) SIISE Integrated Social Indicators System (Sistema Integrado de Indicadores Sociales) SINDEPE System of Social Indicators for the nationalities and peoples of Ecuador (Sistema de Indicadores Sociales de las Nacionalidades y Pueblos del Ecuador) SINSOC Social Impact Information System (Sistema de Informacidn de Impacto Social) SISASAR Sector information system for water, sanitation and solid waste (Sistema de Informacidn para 10s sectores de agua, saneamiento y desechos sdlidos) STP Sewage Treatment Plant TA Technical Assistance VIP Ventilated Improved Pit (Latrine) UBS Basic Sanitation Unit comprising shower, sink and toilet (Unidad Bdsica de Saneamiento) WSP Water and Sanitation Program (Programa de Agua y Saneamiento) wss Water Supply and Sanitation

Vice President: Pamela Cox Country Director: Marcel0 Giugale Sector Manager: John Henry Stein Task Team Leaders: Franz R. Drees-Gross and Maria Angelica Sotomavor ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE...... 1 1. Country and sector issues ...... 1 2 . Rationale for Bank involvement ...... 2 3 . Higher level objectives to which the project contributes ...... 3 B. PROJECT DESCRIPTION...... 4 1. Lending instrument ...... 4 2 . Program objective and Phases ...... 4 3 . Project development objective and key indicators ...... 6 4 . Project components ...... 6 5 . Lessons learned and reflected in the project design ...... 13 6 . Alternatives considered and reasons for rejection ...... 16 C. IMPLEMENTATION ...... 17 1. Partnership arrangements (if applicable) ...... 17 2 . Institutional and implementation arrangements ...... 17 3 . Monitoring and evaluation of outcomes/results ...... 18 4 . Sustainability ...... 19 5 . Critical risks and possible controversial aspects ...... 21 6 . Loadcredit conditions and covenants ...... 22 D. APPRAISAL SUMMARY ...... 23 1. Economic analysis ...... 23 2 . Technical ...... 26 3 . Fiduciary ...... 27 4 . Social ...... 28 5 . Environment ...... 29 6 . Safeguard policies ...... 30 7 . Policy Exceptions and Readiness ...... 31 Annex 1: Country and Sector Background...... 32 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 40 Annex 3: Results Framework and Monitoring...... 41 Annex 4: Detailed Project Description ...... 54 Annex 5: Project Costs ...... 79 Annex 6: Implementation Arrangements ...... 80 Annex 7: Financial Management and Disbursement Arrangements ...... 85 Annex 8: Procurement Arrangements ...... 100 Annex 9: Economic Analysis ...... 105 Annex 11: Program Letter ...... 136 Annex 12: Project Preparation and Supervision ...... 141 Annex 13: Documents in the Project File ...... 143 Annex 14: Statement of Loans and Credits...... 144 Annex 15: Country at a Glance ...... 145 Annex 16: Map IBRD 34551...... 146 ECUADOR

SECOND RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROJECT (PRAGUAS 11)

PROJECT APPRAISAL DOCUMENT

LATIN AMERICA AND CARIBBEAN

LCSFW

Date: June 23,2006 Team Leaders: Franz R. Drees-Gross and Maria Angelica Sotomayor Country Director: Marcelo Giugale Sectors: Water supply (50%); Sanitation Sector ManagerLlirector: John Henry Stein/ (35%); Solid waste management (10%); Makhtar Diop Central government administration (5%). Themes: Rural services and infrastructure (P); Small and medium enterprise support (S); Decentralization (S) Project ID: PO95555 Environmental screening category: Partial Assessment Lending Instrument: Adaptable Program Loan Project Financing Data [XI Loan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other:

For Loans/C r edit s/O t her s : Total Bank financing (US$m.): 48.00 ProDosed terms: FSL

RECONSTRUCTION AND DEVELOPMENT MUNICIPALITIES OF BORROWING 28.00 0.00 28.00 COUNTRY Total: 5 1.70 24.92 76.62

Borrower: Republic of Ecuador Quito, Ecuador

Responsable Agency: SAPS yRS/MIDUVI Toledo 684 y Le'rida Quito, Ecuador Tel: 593 2 2549-333 Fax: 593 2 322-7961 praguas @praguas.gov.ec

Project implementation period: Start November 1, 2006 End: September 1,2010 Expected effectiveness date: November 1,2006 Expected closing date: February 28,201 1 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Ref. PAD A.3 Does the project require any exceptions from Bank policies? Ref. PAD D. 7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [XIYes [ ]No Ref. PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Ref. PAD D. 7 Project development objective Ref. PAD B.2, Technical Annex 3 The development objective for phase I1of the APL program (“the project”) is to (i)provide sustainable access to WSS services for approximately 285,000 new rural beneficiaries and to promote their effective use; (ii)provide improved and sustainable WSS services to approximately 205,000 beneficiaries in cantonal capitals; (iii)promote sustainable solid waste services in cantonal capitals; and (iv) improve overall sector performance by the national government by promoting performance-based investment financing for the urban WSS sector. Project description [one-sentence summary of each component] Ref. PAD B.3.a, Technical Annex 4 Component 1 (Sector Reform and Institutional Strengthening) will strengthen the capacity of the SAPSyRS as well as other key WSS sector actors (municipalities, WSS operators, water users associations etc.)

Component 2 (Rural Water Supply and Sanitation) will design and build rural water supply and sanitation systems, train communities, organize water user boards into regional organizations and finance a nationwide hand-washing campaign.

Component 3 (Promotion of New Management Models for Water, Sanitation and Solid Waste) will provide technical assistance to help municipalities (i)delegate their water and sanitation services to autonomous operators and (ii)develop sustainable arrangements for solid waste services, while providing investment finance to upgrade municipal water, sanitation and solid waste services.

Component 4 (Project Administration) will finance project management activities as well as a strategic communication program. ~~ Which safeguard policies are triggered, if any? Ref. PAD 0.6, Technical Annex 10

0 Environmental Assessment (OPBP 4.01) 0 Cultural Property (OPN ll.O3/OP 4.11) 0 Indigenous Peoples (OPBP 4.10)

Significant, non-standard conditions, if any, for:

Loadcredit effectiveness (Ref. PAD C.6):

1. The PMU has been staffed for APL-2 with a general coordinator, technical, social and planning directors and area coordinators for (i)procurement, (ii)financial management, (iii) handwashing, (iv) strategic communications, (v) promotion and capacity building; (vi) rural WSS investments, (vii) WSS delegation; (viii) solid waste management and (ix) information systems as well as with an accountant and treasurer.

2. Revised bidding documents and standard formats for bid evaluation have been submitted to the Bank.

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Ecuador’s water and sanitation (WSS) sector is characterized by (i)low coverage levels (particularly in rural areas); (ii)low service quality and efficiency; (iii)limited cost recovery through tariffs and a high level of dependence on financial transfers from national and sub-national governments; and (iv) an incomplete legal and regulatory framework that fails to provide incentives for improved sector performance and leads to overlapping responsibilities both within the national government and between different levels of government.

Coverage. In 2001, water supply coverage stood at 82% in urban and 39% in rural areas while sanitation coverage reached 73% of urban and 29% of rural households. Coverage for both water and sanitation services tends to be lower in the costa and oriente than in the sierra’. In addition, water supply coverage varies greatly by income, reaching about 90% for the top three income deciles in urban areas compared with levels of only about 60% for the bottom three income deciles2.

Service quality and efficiency. In many small and medium size cities, water supply services are intermittent and water pressure is well below standard, particularly in poor outlying areas. While WSS service efficiency is often difficult to estimate in small municipalities (where they are often provided directly by the municipal government in conjunction with other services), many municipal water companies in medium-size cities have between 5 and 14 employees/1000 water connections, a number well in excess of regional best practice (below 3 employees/1000 water connections).

Limited cost recovery through tariffs. A study3 commissioned by the government under the first stage of the PRAGUAS APL, concluded that nationwide, tariffs covered only about 2/3 of system operation and maintenance costs in 2001. National and sub-national (provincial and municipal) government transfers are required to cover the operation and maintenance (O&M) gap and to finance coverage expansion.

Incomplete legal and regulatory framework. While Ecuador has a National Water and Sanitation Policy (Politica Nacional de Agua y Saneamiento under Executive Decree No. 2766 of 30 July, 2002), it is set out in relatively vague terms and avoids a clear position on such sensitive issues as WSS investment subsidies (by national and sub-national governments) and who should receive them. A multitude of national and sub-national actors (Fondo de Solidaridad, the Banco del Estado (BdE), FISE, regional development corporations, various government ministries, provincial and municipal governments,etc.)

“Plan Nacional de Desarrollo del Sector de Agua Potable y Saneamiento BBsico”, G. Yepes, B. G6mez and E. Carvajal, October, 2002. “Desigualdades en el acceso, us0 y gasto con el agua potable en Ame‘rica Latina y el Caribe”, Ecuador, Technical Report Series No. 5, Panamerican Health Organization, Washington DC, Febuary, 2001 “Plan Nacional de Desarrollo del Sector de Agua Potable y Saneamiento BBsico”, G. Yepes, B. G6mez and E. Carvajal, October, 2002.

I provide financing for urban and rural water supply investments under different terms and with little regard for the policy-setting role legally vested in the Sub-Secretariat of Water Supply, Sanitation and Solid Waste (SAPSyRS) of the Ministry of Urban Development, Housing and Territorial Development (MIDUVI). In addition, there is neither an independent regulator of WSS services nor a clear definition of roles and responsibilities between various national and sub-national actors.

2. Rationale for Bank involvement

Over the past 5 years, the World Bank’s Rural and Small Towns Water Supply and Sanitation Project (APL-1PRAGUAS I),has become the government’s primary vehicle for addressing the sector challenges outlined above.

0 In terms of coverage, to date PRAGUAS Ihas provided new water supply systems for 252,000 people and on-site sanitation for 127,000 people, approximately 5% and 3% of Ecuador’s total rural population of 4.7 million. Given that designs have already been prepared for over 600,000 inhabitants (about 13% of Ecuador’s rural population), coverage expansion is expected to increase rapidly under APL-2.

To address service quality, efficiencv and cost recovery, PRAGUAS I has provided technical assistance and financial incentives to municipalities interested in delegating their municipally-run WSS services to autonomous (public, private, cooperative etc.) operators. Out of 219 municipalities nationwide, 32 are currently in the process of delegating and 14 have completed the transition, well in excess of the APL-1 target of 5 municipalities established jointly by the Bank and the national government in 2000. An initial evaluation4 shows that the initial batch of municipalities that have delegated their WSS services (Cayambe (municipal company), Pedro Moncayo (municipal company with private operator), Pujili (municipal company), Guaranda (municipal company), Caluma (mixed-capital company) and Echeandia (cooperative)) have significantly increased their operational efficiency and raised their tariffs to cover at least O&M costs.

0 Finally, the government has taken a bold step to improve Ecuador’s incentive framework for WSS investments by adopting an Executive Decree (Decreto Ejecutivo No. 2562 published on 21 February, 2005) that links national government transfers to municipalities under a special tax on telephone calls that is earmarked for WSS investments (Impuesto sobre Consumos Especiales, ICE) to operator performance, service model and poverty indicators. In addition, a draft Water and Sanitation Sector Law has been prepared. Given unstable political conditions over the past several years, however, it has yet to be presented to Congress.

Delegating Water and Sanitation Services to Autonomous Operators, Water and Sanitation Program (WSP) field note, February, 2005.

2 While Ecuador’s legal framework is incomplete, this weakness is not expected to undermine the sustainability of the project’s investments in rural areas and small municipalities, which are executed under a demand-driven, community-and-municipality- centered project cycle. International experience has shown that water supply and sanitation systems are more likely to be sustainable over time when communities are provided with service levels they want and are willing to pay for and local governments are involved in the project cycle from the start. Only then can communities be expected to develop a sense of commitment to operate systems effectively and municipalities to provide technical assistance to rural communities when needed. Beyond community and municipal commitment, regional experience (e.g. in Paraguay) has demonstrated that sustainability is further enhanced when water user boards form regional associations that provide long-term technical assistance and training.

The Bank’s experience in rural water supply in Ecuador under APL-1, as well as in other South American countries such as Peru and Paraguay under similar projects, provides a solid basis to support Ecuador with the second stage of its rural and small towns water supply and sanitation program. Component 1 (see section B4 for details) will provide support for consolidating Ecuador’s incentive framework for WSS investments as well as technical assistance for presenting a sector law to Congress and appropriate regulations for its application. Component 2 (Water Supply and Sanitation in Rural Areas) provides for a mix of complementary activities designed to expand coverage in a demand- responsive way, enhance the hygiene benefits of new infrastructure and provide long- term support to juntas to bolster system sustainability. Component 3 (Promotion of new management models for water, sanitation and solid waste in cantonal capitals), provides technical assistance and investment finance to increase service quality, efficiency and cost recovery for water supply, sanitation and solid waste services provided in municipal capitals. Component 4, finally, includes a communications program to help build a constituency for reform in the sector.

“We are well organized. As responsible members of our community we get together every 15 days to evaluate the ongoing water operation and to assess whether we need to get together to clean up the tank. We also have latrines at school and in the community building and we have been trained to use them properly. Our children no longer suffer from parasites, thus we no longer need to spend money on medication or doctors who often work far away from our communities. In this sense, we encourage the project to further help those in need. God will recognize their effort.”

(Josefa, PRAGUAS I beneficiary, El Cebadal, Pimampiro Canton, Imbabura Province, December 200.5.)

3. Higher level objectives to which the project contributes

The APL-2 stage of the Rural and Small Towns Water Supply and Sanitation program supports the CAS goal5 of a “concerted fight against poverty, through coordinated advances on the economic and social fronts”. On the economic front, this involves

World Bank Country Assistance Strategy for the Republic of Ecuador, April 29,2003, items 71 and 72.

3 “improved) basic infrastructure”. To this end, the CAS aims to “strengthen governance by helping the Ecuadorian officials build an accountable and efficient government, the services of which are accessible to all Ecuadorians”.

Beyond the CAS, APL-2 also supports progress towards the drinking water and sanitation targets contained in Millennium Development Goal No. 7 (“Ensure Environmental Sustainability”).

B. PROJECT DESCRIPTION

1. Lending instrument

The Rural and Small Towns Water Supply and Sanitation Program was presented to the World Bank’s board in 2000 as a 10-year initiative supported by a 3-stage Adaptable Program Loan (APL) with loans of US$32 million (APL-l), US$48 million (APL-2) and US$50 million (APL-3). The APL-1 loan is now fully committed and is expected to close on 31 October, 2006. Given the implementation speed reached under APL-1 in 2004 and 2005, APL-2 is expected to disburse in 4 years.

2. Program objective and Phases

The overall program objective of the PRAGUAS program is to “increase the coverage and effective use of sustainable water and sanitation services in Ecuador, with a focus on the poorer populations in rural communities and small towns6.” The program’s phases can be summarized as follows:

APL Phase IBRD Amount Financing by Total Begin End (US$m) Others (US$m) Financing (US$m) 1 32.00 18.25 50.25 200 1 2005 (actual:2006) 2 48.00 28.62 76.62 2006 2010 3 50.00 33.13 83.13 2010 2013 TOTAL 130.00 80.00 210.00 2001 2013

From the outset, the 3-stage PRAGUAS APL has been designed to support a moderate pace of policy reform accompanied by an emphasis on institution building at all levels and an accelerating pace of water supply, sanitation and solid waste investments in rural areas and small towns. The following table shows the triggers established when APL-1 was appraised in 2000 and progress towards meeting them.

Indicator Category Triggers for Phase I1 Triggers for Phase 111

Policy Reform Draft Water Sector Law Water Sector Law presented

~~ ~ Project Appraisal Document for the First Phase of the PRAGUAS Program, September 20,2000, Annex 1.

4 presented to the Bank for to Congress; review. +COMPLIED WITH. Nonetheless, the draft law has yet to be presented to Congress. Consistent financial policies (including tariffs and subsidies) are applied by all sector financiers.+ NOT COMPLIED WITH. SAPSyRS has thus far been unable to exercise a leadership role in the sector. Institution Building: SAPSyRS restructured and SAPSyRS remains responsive SAPSy RSNDDUVI, responsive to new sector to new sector policies; municipalities, service policies. -+PARTIALLY At least 20 cases of WSS providers COMPLIED WITH. service delegation by SAPSyRS has been municipal authorities to restructured but its new autonomous operators have working groups are not yet been conducted in municipal fully operational. capitals. At least 5 cases of WSS service delegation by municipal authorities to autonomous operators have been conducted in municipal capitals. +FULLY COMPLIED WITH. In fact, 14 municipalities have already delegated municipal water andlor sewerage services and another 18 municipalities are in the process of doing so. Investment Program 90% of APL-I funds for 90% of APL-2 funds for rural rural component component (component 2) (component 2) committed. committed. -+FULLY COMPLIED WITH.

As the table shows, the program has fully complied with (and in some cases exceeded) the requirements set out for three of the five APL-2 triggers, partially complied with a fourth and failed to comply with a fifth (“Consistent financial policies (including tariffs and subsidies) are applied by all sector financiers”). Progress towards this fifth indicator is expected to benefit from passage of a Water and Sanitation Sector Law, expected during APL-2. In the absence of this law, SAPSyRS has recently begun to exercise sector leadership informally though an inter-agency working group, designed, i.a. to harmonize the financial policies used by different sector agencies.

5 3. Project development objective and key indicators

The development objective for phase I1 of the APL program (“the project”) is to (i) provide sustainable access to WSS services for approximately 285,000 new rural beneficiaries and to promote their effective use; (ii)provide improved and sustainable WSS services to approximately 205,000 beneficiaries in cantonal capitals; (iii)promote sustainable solid waste services in cantonal capitals; and (iv) improve overall sector performance by the national government by promoting performance-based investment financing for the urban WSS sector.

4. Project components

The second phase of the PRAGUAS program (APL-2) is valued at US$76.5 million and would be supported by a US$48 million loan. It is expected to comprise the following components (amounts show total component costs with loan proceeds in parentheses):

Component 1: Water and Sanitation Sector Reform and Institutional Strengthening - US$2 million (US$2 million)

Restructuring of the SAPSyRS proceeded at a slow pace over the course of APL-1, in part due to high turnover in ministerial and subsecretary ranks over the past 5 years. SAPSyRS’ transition to a normative role as a standard-setter and facilitator of sector investments carried out by municipalities and communities is still incomplete. APL-2 will focus on (i)strengthening the capacity of SAPSyRS through training and the development of technical norms; (ii)operationalizing the sector information system (SISASAR) developed as part of APL-1; (iii)sectoral planning and policy development; and (iv) strengthening the capacity of other key sector actors (municipalities, WSS operators, water users associations (“juntas”) etc.) to assume their roles in the sector. Component 1 will also enhance environmental management for the water, sanitation and solid waste sector by (a) creating, accrediting and strengthening an environmental unit within the SAPSyRS; (b) financing a study to determine appropriate standards for sewage discharges to receiving water bodies as well as reforms to environmental norms; (c) developing environmental guidelines for water, sewerage and solid waste investments; (d) strengthening the capacity of municipalities to manage environmental impacts through training, updates to the project’s environmental checklist and compliance audits carried out by the SAPSyRS’ environmental unit. Finally, this component will also include funding to upgrade the physical working environment of the SAPSyRS.

In addition, some activities under this component would strengthen MEF’s ability to target approximately $75 milliodyear in telephone taxes (Zmpuesto sobre Consumos Especiales, ICE) earmarked for the WSS sector more effectively and to develop coherent overall financial policies for the WSS sector.

6 Component 2: Rural Water Supply and Sanitation - US$39.0 million (US$25.0 million)

2A: Promotion, Community Development, Hygiene Education, Designs and Supervision - US$6.5 million (US$6.5 million)

The project cycle for rural WSS investments will be similar to the one under APL-1: the project will be marketed to eligible municipalities (the 174 municipalities with populations of 50,000 or less according to the 2001 census). This universe is somewhat larger than the one targeted under PRAGUAS I,which invested only in the rural areas of the 152 smallest municipalities. Municipalities and communities willing to (i)co-finance 20% and 30% of RWSS investments7, respectively, (ii)adopt rural tariffs that cover the cost of operation and maintenance (O&M) and some equipment replacement; and (iii) agree to a demand-driven approach, will received TA for engineering designs, community development (including training and hygiene education) and the supervision of works at no charge.

“The PRAGUAS project supported our community with latrines and washbasins. Before the project was implemented, we asked for these things for 10 or 12 years, now we finally have them and we are truly happy. Also, every family in this community has water treated with chlorine. Now there are not as many mosquitoes, and in general terms our hygiene has improved. Before, we used to urinate in the field, on the grass that was later eaten by the pigs, but now we use the latrines and we wash our hands in the washbasins. We are happy, and so are our children who no longer suffer from parasites or amoebas.”

(Sr. Miguel, PRAGUAS I beneficiary, El Cebadal, Pimampiro Canton, Imbabura Province, December 2005.)

2B: Rural WSS Investments - US$31 million (US$17.0 million)

This sub-component would finance the construction of water supply systems, on-site sanitation systems and - new under APL-2 -rural sewerage systems where soil conditions and population density make on-site systems unviable. Under a two-year pilot phase, new rural sewerage systems will be rolled out in approximately 5 rural settlements that (i)have appropriate physical prerequisites (population density, soil conditions, etc.); (ii)agree to PRAGUAS II financial rules (cost sharing and tariffs); (iii)have an established users association that has successfully operated a water supply system for at least 2 years; and (iv) can access needed TA for system maintenance from the municipality or private operators in the area. After the pilot phase, sewerage systems may be expanded to other (large) rural communities (primarily parroquias) up to an aggregate value of about US$3 million in overall investments.

’ As under APL-I, municipalities will be required to make their financial contribution up-front in cash before works are contracted. Communities will contribute at least 10% of project cost in cash and may contribute the remaining 20% in labor and materials.

7 2C: Strengthening of Existing Water and Sanitation User Boards (Juntas) - US$O.S million (US$0.5 million)

This subcomponent aims to provide long term technical assistance, training and operational and management services to existing Juntas (Water User Boards) through the creation of Associations of Juntas at the provincial level to promote sustainability. Currently there are several thousand juntas in Ecuador and it has become virtually impossible for MIDUVUSAPSyRS to provide post-construction assistance to them on an individual basis. While municipalities are being strengthened to provide post-construction TA to juntas in areas under their jurisdiction through municipal sanitation teams (equipos municipales de saneamiento, EMS), an ex-post evaluation of systems constructed for 41 communities under APL-1 suggests that additional support to juntas is critical to long- term system sustainability. This sub-component would finance basic equipment (e.g. vehicles, computers and printers), parts (pumps, macro and micro-meters, valves, chlorination equipment etc.) and supplies (such as sodium hypo-chloride), that each association will sell or lease to its associates at the discounted cost that the association can obtain by buying in bulk under a revolving fund. The project may also pay for a first year of an accountant, lawyer, and plumber, to provide training and technical assistance to the water user boards. The associations could also provide services like billing and help the boards on sensitive issues such as disconnecting users for non-payment. In terms of training, the association could host specific training activities or organize study tours for its juntas according to their own needs and the project could co-finance those activities.

2D: National Handwashing Initiative - US$l.O million (US$l.O million)

In order to maximize the health benefits of rural water investments, a handwashing initiative will be integrated into the project under APL-2. Child mortality in Ecuador remains high at 34 deaths per 1,000 * given the country’s general level of development and its per capita GDP. Much of this high child mortality rate is due to diarrheal disease and acute respiratory infections (acute respiratory infections, viral, and bacterial pneumonias). Handwashing with soap at critical times can reduce childhood diarrhea by as much as 50%’ and will reduce the likelihood of contamination of household water. Handwashing with soap also has the potential to significantly reduce childhood respiratory infections.

This sub-component will support the implementation of a National Handwashing Initiative. The Initiative will involve key public and private sector organizations as partners in the design and implementation of a communication program to promote handwashing with soap. At the outset, a handwashing behavioral and baseline study will be conducted. The findings from the study will inform the design of the communication program and messages. The communication program would consist of three main components: (a) mass media communication activities; (b) direct handwashing marketing

~~~~ ~ * ENDEMAIN-2004. WHO data indicate that child mortality stood at 27 per 1,000 in Ecuador in 2003. Curtis, V. and Cairncross, S. “Effect of washing hands with soap on diarrhea risk in the community: a systematic review.” Lancet, Vol 3, May 2003.

8 at the district and community levels as well as in schools; and (c) integration of handwashing promotion into existing training and capacity-building activities in communities and schools.

Component 3: Promotion of new management models for water, sanitation and solid waste - US$31 million (US$17 million)

3A: Technical Assistance for the Delegation of Water and Sewerage Services and the Sustainability of Solid Waste Services in Cantonal Capitals - US$3 million (US$3 million)

Of Ecuador’s 219 municipalities, about 180 currently provide water (and, where applicable, sewerage) services through a municipal department rather than an autonomous (public, private, mixed-capital or cooperative) operator. Under APL- 1, 32 municipalities embarked upon a delegation process supported by the project. As of March, 2006, 14 of these municipalities have established autonomous WSS service providers (though in practice the delegation of sanitation services has been limited), while 18 others are in various stages of picking a new service model from a menu of options or operationalizing the model they have selected. PRAGUAS Ifunded TA for this process on a grant basis for interested municipalities, but required that municipalities sign a Jideicorniso (withdrawal authorization) that allows the national government to withhold the cost of TA from transfer payments should the municipality go back on its decision to delegate. Municipalities that do delegate are currently eligible for incentive payments that vary based on the size of the municipality, the model selected and the level of cost recovery achieved through tariffs according to a defined and well-publicized formula. Currently, the incentive payments can only be used to finance improvements to water supply systems.

Under the proposed APL-2 loan, municipalities that delegate successfully would be able to use their incentive payments for both water and sanitation investments. Given generally poor experiences with sewerage system operation in Ecuador, sewerage investments would only be authorized for a pilot group of up to 5 municipalities initially, to ensure that lessons learned from system operation can be widely incorporated. Sub- component 3A would finance both TA for the delegation process, as well as the cost of engineering designs and supervision. New to the proposed APL-2 loan, TA will be explicitly provided for the delegation of sanitation services as well as water and the TA for engineering designs for sewerage will include a social component that will engage urban citizens in the planning and decision making about levels of sanitation services to ensure household connections to sewer systems and willingness to pay for operation and maintenance costs. Building on the successful Bank experience in Brazil, Bolivia and Peru, TA (both engineering and social) will also be provided to introduce municipalities to lower cost sanitation solutions such as simplified/small bore sewer systems.

The second phase of the PRAGUAS project will also include assistance to strengthen the collection and disposal of solid waste in municipalities with populations between 10,000

9 and 50,000 inhabitants. Currently, there are 55 municipalities within this population range, most of them characterized by high rates of population growth, significant levels of poverty and an inadequate management of solid waste (i.a. collection usually takes place only within the cantonal capital (cabeceru cantonal) while other population centers are excluded). According to information compiled by the Solid Waste Management Team of the SAPSyRS, collection coverage in these municipalities is currently in the range of 75%, and only 17% of this solid waste is disposed in an effective manner. In parallel, an IDB-financed project (the “Solid Waste Znvestment Project”, PIRS) would provide technical assistance and investments in larger towns.

Finally, under this sub-component, the project will contract successful regional operators from other Latin American countries (e.g. Colombia, Argentina, etc.) to provide post- delegation TA to new WSS operators in Ecuador.

3B: Water and Sanitation Investments in Cantonal Capitals - US$20 million (US$lO million)

Under APL-2, this subcomponent would finance water and sanitation investments using incentive payments in eligible municipalities (all except Quito, Guayaquil and Cuenca and municipalities receiving delegation support under other programs) that have successfully delegated their water and/or sanitation services to autonomous operators. Given that relatively few (about 6) of the 32 municipalities who began delegation processes under APL-1 are expected to receive project-financed incentive payments under APL-1, a substantial backlog of municipalities already awaits APL-2 financing. Most of these municipalities have moved from direct service provision to municipal water and sanitation companies with either a municipal majority (mayor, city counselors etc.) or a community majority (typically, neighborhood representatives) on the board of directors. To qualify for incentive financing, the new water operators must provide counterpart financing for investments equal to 50% of the works to be carried out. About US$6 million of the loan amount available under this sub-component is expected to go to sewerage investments, while about US$ 4 million is expected to finance water supply improvements.

As discussed under sub-component 3A above, sewerage investments would only be authorized for a pilot group of up to 5 municipalities initially, to ensure that lessons learned from system operation can be widely incorporated. Sewerage investments will be made only in municipalities where sanitation services have been delegated from the municipality and where the autonomous utility has agreed to charge sanitation-specific tariffs at a level that will allow for adequate operation and maintenance of the sewer systems. The priority for capital investments will be for extending existing sewer networks to low-income neighborhoods that are not currently connected but as appropriate, can also be used for rehabilitating existing systems that have deteriorated over the years do to lack of maintenance. In all cases, engineering TA, utility strengthening and capital investments will seek to support the provision of sanitation services that are sustainable and effective at protecting public health and the environment. Where sewage treatment plants (STP) are required, design-build-operate-

10 and-transfer (BOT) bidding processes would be promoted under which some contractual payments would be subject to proper plant performance.

3C: Solid Waste Investments in Cantonal Capitals - US$8 million (US$4 million)

Under APL-2, a new sub-component will be introduced to promoted effective solid waste management in municipalities with population in the range of 10,000 and 50,000, using an incentive-based approach. The level of investment incentive that a municipality could receive will be based on the degree of commitment a municipality is willing to make to the following:

0 Adoptation of effective accounting and cost recovery mechanisms; 0 Outsourcing one or more component(s) of its solid waste management system, including collection, equipment maintenance, and provision of equipment (bull dozers etc.) for management of a disposal site, to private or community operator(s); 0 Development or promotion of a composting program for source separated organics (food and garden wastes, non-recycled paper); 0 Participation in a regional disposal site (landfill) and transfer systems (both transfer stations and a transportation network).

As under component 3B, 50% counterpart financing for investments by municipalities will be required. Municipal governments may use investment incentives both for equipment (including collection vehicles, waste composting and landfill management equipment) and civil works (including composting facilities, landfills, transfer stations). The actual amount of the investment incentive would be determined based on a formula described in Annex 4.

The solid waste sub-component of PRAGUAS I1 will be rolled out in three phases. In Phase 1, the program will involve a pilot group of 4 municipalities. The program for Phase 2 and 3 will be based on Phase 1, but the program will be modified based on the lessons learned in Phase 1 (including the design of the investment incentive matrix and the potential investment amount municipalities of different sizes can access). The phase 1 investment focus will be on waste collection and composting. The focus of the technical assistance to be provided in Phase 1 will be on the potential for regional disposal systems. The municipalities in Phase 1 will be eligible for investment in disposal systems in Phase 2 and 3. Other municipalities will also be eligible to participate in Phase 2 and 3. Throughout PRAGUAS 11, technical assistance will be provided to pilot communities on accounting, cost recovery, outsourcing, collection, composting, public education, and other elements of solid waste management.

Component 4: Project Administration - US$4.50 million (US$4 million)

Like the APL-1 operation, PRAGUAS I1 will be managed by a project management unit (PMU) under MIDUVI staffed by external consultants complemented by staff from the SAPSyRS. This component will finance the cost of salary, travel and general operating

11 costs of the PMU. It will also cover the cost of a strategic communication program (being designed as part of project preparation) that would (i)promote the PRAGUAS project with eligible municipalities and other actors nationwide; and (ii)support a technical dialogue with mayors, city councils and beneficiary populations in cities interested in service delegation in support of component 3. The communication program will therefore be a cross-component initiative that will support dialogue, participation and behavior change activities across all the projects’ components. Finally, component 4 would also finance monitoring and evaluation (M&E) activities, including updates to the information systems developed under APL-1, the collection of information and development of reports for continued evaluation throughout the project cycle by both project management and the Bank’s supervision team. It will also cover audits and other project management activities.

Participation by Municipalities under the rural investment component

Under the APL-1 loan, 152 cantons with small cantonal capitals (population of less than 10,000 inhabitants as per the 1990 census) were eligible to participate in the rural water supply and sanitation component. Loan proceeds financed 50% of total construction costs and were passed on from the national government to participating municipalities as grants (municipalities and communities contributed 50% of the cost of works in cash and in kind). Under APL-2, 174 municipalities (those with total cantonal populations of 50,000 or less as per the 2001 census) would be eligible to participate in the rural investment component. In addition, a number of rural systems will be built in larger municipalities, to take advantage of designs already prepared under PRAGUAS I.

As part of project preparation for the APL-2 loan, the project team has assessed whether Ecuador’s municipalities would be in a position to pay back loan proceeds channeled through the national government. To this end, the team has (i)assessed compliance with the debt service and debt stock criteria set out in Ecuador’s Fiscal Responsibility Law (Ley Orgdnica de Responsabilidad, Estabilizacio’n y Transparencia (LOREyT)); and (ii) prepared debt and management capacity ratings for the first batch of 47 municipalities expected to participate in APL-2 during its first 2 years, in conjunction with the Ministry of Economy and Finance (MEF)”. The assessment concluded that all of the small municipalities surveyed lack either the management or the debt service capacity (or both) necessary to repay loan proceeds to the national government. For this reason, the financial scheme developed under PRAGUAS I (i.e. passing loan proceeds to municipalities for rural investments as grants) will be maintained under PRAGUAS 11. As agreed with MEF, however, municipal debt and management capacity will be reviewed annually during the execution of PRAGUAS 11 to ensure that only eligible small municipalities receive loan proceeds for rural investments as grants.

loValeriano F. Garcia, “Calificacih de 10s Municipios del Ecuador”, October, 2005 and March, 2006

12 5. Lessons learned and reflected in the project design

An ex-post evaluation of a sample of 36 water supply and 23 sanitation systems was carried out in 2005 and complemented by a 1,752-household survey”. The sample included the pilot projects (completed in 2001) and new systems completed at least 18 months prior to the evaluation. The purpose of the evaluation was to assess the technical, social and economic efficiency and sustainability of the WSS systems provided by PRAGUAS I and to evaluate the efficacy of the technical and financial processes, procedures and norms of the projects located in small municipalities with cantonal capitals of less than 10,000 inhabitants. An evaluation of water boards was carried out in 2004 and in 2005, the institutional arrangements for the two largest components (WSS investments in rural areas (component 2) and small towns (component 3), respectively) were assessed by independent international consultants. Evaluation results and lessons learned have been incorporated in the project design of PRAGUAS 11. Key findings and lessons include:

In Rural Areas:

0 Water supply systems sampled were classified as A, B, C or D based on observations known to correlate with long-term sustainability as follows:

Category Percentage Description A 21% All physical system components fully functional. The water board meets regularly and tariffs are appropriately set and collected. Water is disinfected and service is continuous B 42% The water supply system exhibits operational problems that can be resolved without major investmenthehabilitation C 18% The water supply system exhibits operational problems and may also exhibit technical problems related to service provision. Solutions to these deficiencies are within the community’s technical and financial abilities. D 19% The water supply system is not operational and serious problems are evident. Remedying these problems requires solutions beyond the community’s technical and financial reach.

Given that more than a third of systems sampled are classified as C or D, additional ex-post technical support to communities and water boards is required. Only 53% of systems surveyed provide sufficient chlorination to ensure a chlorine residual, either because communities try to cut operating costs or because they are unaware of proper chlorination procedures. 79% of spring catchments tapped by systems surveyed are not fenced in and are therefore subject to contamination.

0 As a result of the APL-1 intervention, 90% of municipalities have institutionalized a Municipal WSS Team (EMS) as part of the Water Supply, Sewerage, Planning and Community Development Unit of the municipal Public Works Department. The

l1Quintero, Rojas & Duefias consultants association, March 2006. “Evaluacibn Ex-Post de la Primera fase del Programa PRAGUAS”.

13 inclusion of the EMS has significantly improved the technical capacity of the municipal teams.

0 The financial scheme of PRAGUAS Ihas proven to be socially acceptable. Ex-post evaluation results indicate satisfaction of municipalities and communities with the established contributions. Moreover, experience in Ecuador shows that communities are more likely to maintain projects where they made some investment, and neglect maintenance of donated projects. Therefore, contrary to the approach favored by some other institutions, PRAGUAS I1 will continue its tripartite financial policy: PRAGUAS (50 %), municipality (20 %) and community (30 % - 10% in cash and 20% in kind).

0 Monitoring and evaluation of completed projects and those under construction is weak - with both local municipalities and the regional offices of the SAPSyRS (EPAS) giving priority to the development of a pipeline of new projects. A related point is that it has been difficult to mount an effective project management information system since the local municipalities and EPAS are not collecting performance data.

0 In general, community water boards are more efficient in water systems operation than in maintenance, administration and financial management. Water boards interviewed during the evaluation had not received technical assistance to create a set of norms for efficient financial operation of their systems and the water board training by OITS and EPAS respectively was not deemed satisfactory.

The on-site sanitation alternative of Basic Sanitation Units (UBS, comprising a toilet, sink, and shower) is a great success in the communities assessed, as it has significantly contributed to improve the living conditions and self-esteem of users. Many families have improved the UBS with ceramic tiles, water heaters, etc. The operation and maintenance of the sanitation systems lies with individual households without any support from the water boards, OITS, EPAS and EMS. In more concentrated rural areas, many communities expressed an interest in piped sewerage as an option to be considered.

Procurement processes and contract administration by local municipalities that contract out essential community organization, engineering design and construction of water supply and sanitation systems to local private sector actors was found to be cumbersome and time-consuming for the local municipality, the private sector and the PRAGUAS PMU.

0 Hygiene Promotion. An enabling social context exists for the promotion of handwashing with soap. Findings from the ex-post evaluation demonstrate a high level of awareness of handwashing as a socially approved practice, with more than 70% of respondents reporting that handwashing is a common practice in their household prior to eating and after defecation. While household level data on soap use were not available at the time of writing, findings from the ex-post evaluation

14 show that the majority of school children do not wash their hands with soap after using school sanitary facilities.12

In Municipal Capitals:

The combination of technical assistance and financial incentives for service delegation were effective in creating autonomous operators in a large number of municipalities. Nonetheless, the range of models actually rolled out (mostly municipal companies with either a municipal or community majority in the board of directors) was quite limited. This appears to be explained by the fact that local consultants advising municipalities on the range of available models (“consultorias de apoyo a la delegacidn”, CADS) lack experience with any model other than municipal companies.

Based on these lessons, the APL-2 loan has adapted the design of the project in the following key areas: In Rural Areas:

Improve “on the job” training of water boards and community members and promote the creation of associations of water boards (see component 2C) that can play a key role in providing technical assistance, training and other support to the water boards after construction of projects has been completed. In addition, tighten specifications for several system components (sedimentation tanks and filters) that have often been under-dimensioned (apparently to cut costs) and others (valves, household water meters and accessories) whose quality has been inconsistent. Also tighten requirements for the protection of spring catchments. Include a “community supervisor” (“veedor social”) to strengthen community oversight of construction contractors.

Improve the PRAGUAS monitoring and evaluation systems, with user-friendly information systems that allow the utilization of the baseline and diagnostic data for monitoring of the social plan by consultants, the municipality, water board and community.

Capacity-building activities should adopt a strengthened emphasis on the promotion of healthy hygiene habits and the appropriate use of sanitary facilities. Inadequate maintenance of sanitary facilities, owing to insufficient hygiene knowledge, has been a problem encountered in PRAGUAS Ibeneficiary communities.

InMunicipal Capitals:

0 Strengthedrevise the financial incentive framework for delegation of cantonal WSS services in order to achieve more autonomous service models (including those

l2The most common reason indicated for not using soap was that it was not available.

15 involving the private sector). Successful regional operators from other Latin American countries will be contracted under APL-2 to provide delegation assistance to larger municipalities and TA to new operators.

j Develop a communications strategy to garner consumer support for sustainable tariff levels and models that ensure the sustainability of infrastructure investments and public services.

“Since we no longer need to fetch water from far away areas we now have more time to work our land. Women now dedicate their time to sow and clean up the fields and children use their time to do homework and help their mother with household chores.

Children are now clean. They bathe and brush their teeth. They wash themselves everyday before going to school. Since they now have more time to study, their performance at school has substantially improved and their interest in continuing their education has increased. .. . Truly, the PRAGUAS project has been of great help to our community.”

(Sr. Pedro, PRAGUAS I beneficiary, Guamote Canton, Chimborazo Province, November 2005)

6. Alternatives considered and reasons for rejection

Three project design alternatives were considered for APL-2:

(a) Pace of policy reform and sector restructuring. Under APL-1, the PRAGUAS program was designed around a moderate pace of sector reform at the national and municipal level combined with the aggressive nationwide roll-out of a demand-responsive rural water supply project cycle. For APL-2, the project team considered whether or not to set a more ambitious reform agenda. Given the high turnover of ministerial and sub-secretarial leadership over the past 5 years, the slow pace of SAPSyRS restructuring, and the uncertainty surrounding the country’s presidential elections in October, the project team decided to maintain modest sector reform objectives.

(b) Scope of project activities. The project team also considered whether simply to continue existing project activities (rural water supply and on-site sanitation, delegation support in municipal capitals) under APL-2 or whether to widen and deepen the engagement with municipalities. Given the success of the delegation component under APL- 1 (18 municipalities are currently in the process of delegating and 14 have completed the transition as compared with a total APL-1 target of 5), the project team decided to deepen its engagement with municipalities by adding solid waste to the project’s menu of services and piped sewerage to the technical solutions offered to rural communities and cantonal capitals. In addition, the universe of municipalities eligible for rural investments has been widened from about 152 to 174.

16 (c) Implementation Arrangements. Implementation of APL- 1 was managed by a project management unit (PMU) staffed by external consultants selected through an open, competitive process by independent human resource management firms. For APL-2, the government and the project team considered whether to abolish the PMU and transfer project implementation to the SAPSyRS. After some discussion, direct implementation of all project activities by the SAPSyRS was discarded in light of the high turnover of ministerial and subsecretarial leadership over the past 5 years. The relative autonomy of the PMU and the long-term contracts used to retain key staff have allowed the project to maintain a steady course despite frequent political changes. Instead of fully mainstreaming APL-2 within the SAPSyRS, the Borrower and Bank agreed that SAPSyRS staff would be seconded to the PMU to head the implementation of several new subcomponents (handwashing and solid waste) alongside external consultants. These implementation arrangements will be reviewed once again during the design of APL-3.

C. IMPLEMENTATION

1. Partnership arrangements (if applicable)

The PRAGUAS program is implemented by the SAPSyRS through a project management unit in cooperation with municipalities and rural communities. An inter- agency coordination group (“Comisi6n de Agua y Saneamiento, Educaci6n y Salud”) comprising MIDUVYSAPSyRS, the Ministry of Health, the National Directorate of Intercultural Bilingual Education (DINED), the National Directorate of Indigenous Health (DNSPI), UN-Habitat, Plan International, the Water and Sanitation Program (WSP) and the World Bank has been set up to strengthen the links between PRAGUAS and other sector actors. Cooperation Agreements will be signed with the Consejo de Desarrollo de las Nacionalidades y Pueblos Indigenas del Ecuador (CODENPE) and the Corporacih de Desarrollo Afroecuatoriana (CODAE). The Handwashing Initiative (component 2D) will be carried out in cooperation with private-sector actors (soap manufacturers, media, etc.).

2. Institutional and implementationarrangements

The main implementing agency for the PRAGUAS program is the Ministry of Urban Development and Housing (MIDUVI) through the Subsecretariat for Water Supply, Sanitation and Solid Waste (SAPSyRS). Together with the Subsecretariat of Urban Development, the Subsecretariat of Housing and the Subsecretariat of Territorial Planning, the SAPSyRS is a second-level dependency of MIDUVI. A project management unit (PMU) established under MIDUVI will be responsible for day-to-day project implementation and coordination. Component 1 will be carried out directly by the SAPSyRS. Subprojects in rural areas and small towns (components 2B as well as 3B and

17 3C) will be carried out using a decentralized approach with key implementation roles played by municipalities and rural communities. Detailed implementation arrangements are presented in Annex 6.

3. Monitoring and evaluation of outcomes/results

An extensive and innovative set of monitoring and evaluation tools have been developed under PRAGUAS I:

the project’s Management Information System (SIG), which is geared towards processing data used for monitoring the physical and financial processes of the different phases of the water and sanitation program. the Social Impact Information System (SINSOC) which includes the baseline and diagnostic data collected from the participating communities during the community project preparation phase, and will be repeated ex-post to determine the project’s impact. the Integrated Water and Sanitation, Sewerage and Solid Waste monitoring system (SISASAR) which includes detailed technical, socio-economic and administrative data of investments on delegated water, sewerage and solid waste service providers.

The first two systems will be upgraded and integrated under PRAGUAS I1 into an Integrated Management Information System (MIS) to ensure a better integration of monitoring inputs, outputs and outcomes.

Tracking key operational and process monitoring indicators will be primarily based on inputs, outputs and intermediate outcomes recorded in the MISand through participatory rapid appraisals (PRA), focus group discussions and sample consumer satisfaction surveys of beneficiaries through the Associations of Water User Boards (juntas) and EPAS to ensure direct feedback from beneficiaries during project implementation.

This type of monitoring and evaluation will be supplemented by an impact evaluation to be carried out for a sample of project and control communities. The impact evaluation will be based on baseline surveys that were developed under PRAGUAS Ias well as ex- post surveys to be carried out at different points in time following project implementation (mid-term PRAGUAS 11 review, final PRAGUAS II review and final PRAGUAS 111 review).

Management of the M&E system will be carried out by the PMU (for the SIG and SINSOC systems) and by SAPSyRS (for the SISASAR system). These teams will be responsible for upgrading the systems, daily oversight, operation and maintenance of the databases and the generation of periodic reports that provide information on the effectiveness of project implementation and the progress in improving water sector performance for specific service providers. Periodic monitoring and the development of various feedback mechanisms (rapid assessments, consumer satisfaction surveys and participatory focus group discussions) will allow the project to improve implementation.

18 The impact evaluation will directly contribute to the design of PRAGUAS 111, and can feed into policy decisions of the Government. Details on project monitoring and evaluation are provided in annex 3.

“It is an excellent service, and it is great. Water is a basic element, and it allows us to properly clean our food and improve our personal hygiene. It is no longer necessary to be in the city to have good health and good hygiene, it is all up to us now to achieve these objectives. We use water for cooking, to clean ourselves, to wash our vegetables and to irrigate our gardens. Our lives have improved substantially and now they entirely depend on us and on our work in the field. We have one faucet in the kitchen and one outside the house; we use this last one to wash our clothes.”

(Sr. Gerardo, PRAGUAS I benejicialy, Virgen del Carmen, Chimbo Canton, Bolivar Province, November 2005.)

4. Sustainability

The sustainability of the water, sanitation and solid waste facilities to be financed under this loan will be supported by a comprehensive and integrated strategy that addresses the key institutional, financial, social, environmental and technical building blocks required for the provision of sustainable water as well as sanitation services. Specific supporting elements include:

A. Community Willingness and Capacity to Manage and Sustain Rural Water Supply Services: In rural areas this will be achieved by requiring communities to demonstrate their commitment to service improvement upfront, including taking initiative, selecting their preferred service level and management option, making a cash contribution (no less than 10% of overall investment costs), agreeing to an adequate tariff, and assuming organizational responsibilities (forming a Junta) before funding is approved. Overall, beneficiaries will finance 30% of their water supply investments in cash and through community labor. PRAGUAS will strengthen community capacity in the areas of organization, operations and maintenance, financial management, hygiene and environmental education, and effective water use and disposal. New to the proposed APL-2 loan will be the creation of an institutional support mechanism through associations of water and sanitation boards (juntas) to provide ongoing monitoring of community water systems as well as the management capacity of the juntas and to provide technical assistance as needed.

B. Rural Demand, Willingness and Capacity to Manage Household On-site Sanitation: Key indicators for the sustainability of household level sanitation service is that on-site sanitation infrastructure (VIP latrines, pour flush latrines with septic systems, etc.) is built, properly used by all family members and maintained. In rural communities, effective hygiene promotion activities will be carried out during the early stages of the project development phase to inform households about the importance of sanitation and hygiene in protecting health and to create an effective demand for household level sanitation. Informed and motivated households will then select a sanitation solution based on a menu of options and their willingness and ability to pay for the selected option

19 (higher levels of service will require a higher household financial and in-kind contribution). New to the APL-2 loan, community junta organization and training will also include guidance on having members responsible for sanitation and hygiene coupled with training and provision of guidance materials on household sanitation and hygiene so that designated junta members can monitor sanitation operations and maintenance at the household level as well as monitoring key hygiene behaviors (such as handwashing and proper disposal of children’s faeces). As needed, junta members will provide refresher courses to households on the importance of sanitation and hygiene.

C. Municipal Government support to Community Management of Rural Water Systems: Municipal governments, too, will demonstrate their ownership by funding 20% of overall investment costs upfront before rural water sub-projects under their jurisdiction can be approved. Municipal governments will be strengthened to provide the required technical backstopping to juntas and small companies, without taking over direct operational responsibilities.

D. Community Willingness and Capacity to Manage and Sustain Rural Sewerage Services: In more densely populated rural areas where community sewerage systems will be financed, sustainability will be achieved by strengthening existing water boards to add management of community sewerage systems to their areas of responsibilities with relevant training and technical assistance to be provided. Special care will be taken during the initial phase of the project to insure that the sewerage technology that is chosen is within the financial, technical and management capacity of a rural junta to operate and manage. Sewerage systems will only be financed where communities agree to pay a tariff consistent with the needs for operation and maintenance.

E. Urban (Small and Medium Cities) Water, Sanitation and Solid Waste Service Provision: Sustainability of urban water and sanitation services is predicated on the delegation of service provision responsibilities to autonomous service providers. For solid waste, clear cost-recovery targets, some outsourcing (to local private sector and/or community entities) and a willingness to achieve economies of scale by sharing landfills, composting facilities and transfer stations between municipalities are factors critical to long-term sustainability. Once these conditions are met, then upfront and on-going technical assistance will be provided to strengthen the management and technical capacity of the service provider. A critical and key element of this will be a focus on charging and collecting tariffs that will be sufficient to operate and maintain services. New to the APL-2 loan will be a professional communications campaign to create political willingness by local authorities and service providers to raise tariffs in parallel with a communications campaign to increase household willingness to pay appropriate tariffs for improved water, sanitation and solid waste services.

20 5. Critical risks and possible controversial aspects

Overall Risk Rating: M (Moderate)

Risks Qualification Mitigation Political instability at the S APL -2 will be executed by a PMU, staffed by Ministerial and Sbbsecretary :onsultants with long-term contracts hired through a level affect project :ompetitive process carried out by a specialized HR implementation. management firm. The impact of possible political :hanges over the life of APL-2 will further be mitigated by creating a constituency for the project at the municipal and community levels. Institutional issues resulting S Under APL-2, several (sub-) components (such as from rivalry between solid waste management) will be managed by SAPSyRS and the PMU. SAPSyRS staff seconded to the PMU where they will work under the responsibility of the PMU Coordinator. A training plan for SAPSyRS staff as well as physical upgrades to the work environment in the SAPSyRS are further expected to smooth interaction between PMU and SAPSyRS staff. Creating the Sectoral Communication Committee could create another space to reduce frictions between the main institutions involved. ~~ Municipalities don’t M The financial situation of the municipalities will be contribute counterpart funds better controlled under APL-2 by the introduction of a financial policy linked to the financial performance of each municipality and its compliance with LORFiyT. In addition, the credibility gained with Ecuador’s small municipalities under APL-1 is expected to enhance the municipalities’ willingness to contribute counterpart funds. Communities don’t contribute M Emphasis on social and strategic communication counterpart funds work with communities, during the promotion phase will ensure that investments are only carried out in communities that prioritize WSS and are willing to pay part of the investment cost. In addition, the project’s track record under APL-1 and a streamlined project cycle are expected to contribute to the communities’ willingness to pay. Municipalities not willing to M The communications strategy will target different delegate services decision makers at the municipal level to ensure grassroots support for the project in a more systematic way. In addition, larger investment incentives under APL-2 (in comparison with APL-I), as well as the option of investing in both sewerage and the expansion of water services, are expected to enhance municipal interest in delegating service provision. Local private sector not M Under APL-2, successful regional operators (i.a. willing to engage with mid- from Colombia and Argentina) will provide TA and size municipalities support to new operators. In addition, the project will reach out to construction companies, consulting firms and other entities to generate interest in oDerating WSS services. in line with exDerience from

21 Colombia and Paraguay. S While a Water and Sanitation Sector Law has been water and sanitation sector is drafted, there is a risk that MIDUVI will feel too not modernized weak to introduce it to Congress. In addition, the government may fail to fully operationalize the new incentive framework for WSS investments (contained in Executive Decree No. 2562 published on 21 February, 2005) under pressure from municipalities with a vested interest in the status quo. To mitigate these risks, a public communications campaign has been included under APL-2 to help build a constituency for sector reform. In addition, the project will also partner with the Ecuadorian Association of Municipalities (AME)to promote the new Sector Law. Inherent financial M Municipalities will receive FM support from large management risk due to social consulting firms recruited at the national level decentralized implementation as well as PRAGUASPMU staff. Project staff will set-up, counterpart funding be recruited under multi-annual contracts to limit requirements for turn-over. municipalities and communities as well as overall political and budget uncertainties (see annex 7 for details). Overall financial M Monthly reconciliation between project accounts and management control risk is SIGEF will be required and the integrity of the high due to weaknesses in the GUBIPROY system will be enhanced by making it current version of the impossible to change records once accounting GUBIPROY accounting periods have closed. system, difficulties in reconciling GUBIPROY with the central government’s accounting system (SIGEF) and payment delays to contractors and consultants (see annex 7 for details).

H= High Risk, S=Substantial Risk, M=Moderate Risk, N=Negligible or Low Risk

6. Loadcredit conditions and covenants

Effectiveness Conditions:

1. The PMU has been staffed for APL-2 with a general coordinator, technical, social and planning directors and area coordinators for (i)procurement, (ii)financial management, (iii)handwashing, (iv) strategic communications, (v) promotion and capacity building; (vi) rural WSS investments, (vii) WSS delegation; (viii) solid waste management and (ix) information systems as well as an accountant and treasurer.

22 D. APPRAISAL SUMMARY

1. Economic analysis

The economic viability of the PRAGUAS 11 Project, was assessed based on the results of the analysis for components 2A and 2B, rural investments and complementary activities for the provision of sustainable rural water and sanitation services (US$37.5 million or 49% of total project costs) and of the analysis of Components 3A and 3B, investments in small towns water and sanitation services and complementary activities for the provision of sustainable services in small towns (US$ 23 million or 30% of total project costs). Given that there are no revenue earning entities involved in this Program, a financial analysis was not performed. However, the Operation Manual includes clear guidelines for tariff setting to ensure financial sustainability of the water users associations.

Rural water and sanitation:

A detailed economic ex-post cost-benefit analysis was conducted for a random sample of subprojects financed under APL-I, which have been under operation for at least one year. This sample represents different types of technological options financed and all major regions of the country (Sierra, Costa and Oriente). The size range of the systems analyzed was between 3 1 to 654 connections.

To determine the net incremental costs and benefits of the project, "with" and "without" project scenarios were constructed. On the basis of these scenarios, the net incremental financial benefits and costs of the proposed investment programs were assessed, which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted using a discount rate of 12 percent, which is estimated to be a proxy of Ecuador's opportunity cost of capital. The following sections provide more detailed information on the estimation of economic benefits and costs.

To estimate the benefits from increased water consumption due to improved water quality, more reliable and lower cost water service provided by the project, data was collected from direct beneficiaries (household surveys) and from the Juntas. This data was compared with the results from baseline surveys of households in the same project communities. The availability of actual consumption information as reported by the Juntas and the direct beneficiaries from this sample of communities served by PRAGUAS Isystems, improves the robustness of the analysis conducted for APL 11 and presented in Annex 9 considerably. For the estimation of benefits in the "with project scenario" it was assumed that beneficiaries in communities to be served by systems financed by PRAGUAS I1will behave in the same way as those of communities served by systems financed under the APL I.

The benefits for resource savings were also estimated using observed information from the ex-post surveys of PRAGUAS I,basically time savings and other costs (monetary and non-monetary) reported in the interviews. For the analysis it was assumed that all

23 sources of water used would be replaced by the PRAGUAS source. Health benefits known to users are captured in their willingness to pay for good quality water; additionally, a reduction in costs related to water borne diseases (diarrhea) were assessed based on the frequency of occurrence and monetary expenditures (in the last two weeks of the survey) by the potential beneficiaries. The surveys showed a reduction of illness- related monetary expenditures and a reduction of the time lost (related to the episode), both of which were included in the analysis.

Additional benefits are expected from the on-site sanitation component, although these will not be quantified. Rather least-cost analyses of the alternatives and cost- effectiveness criteria will be used for investment decisions. The strategy calls for strong promotion and demand generation of user investment in sanitation, low levels of subsidy, targeted coverage levels of at least 60 percent of households per community to achieve its associated full health impacts and promoting a wider range of lower cost options. These should bring additional positive health benefits to the communities. The estimation of an overall Program net present value is based on an assumed distribution of community choices of capital investments. This was done based on the results of PRAGUAS I,which is not necessarily representative of PRAGUAS II. It was considered more important to establish some economic criteria to increase the probability that each of these possible choices generates acceptable economic returns. The returns to this second phase investments, will be calculated at the end of the project and will be used again as an input to refine the eligibility criteria for sub-projects to be financed in the third phase. The results of the economic cost benefit analysis of the sample of projects (NPV, B/C ratio and ERR) defined for the ex-post analysis were used to design the eligibility criteria for the sub-projects to be financed during the implementation phase and for improving the financial policy of the Program.

The main results of the ex-post economic analysis of the sample of subprojects performed are presented in Annex 9. Of the 27 subprojects evaluated as part of the ex-post analysis of PRAGUAS 113, 67% (18 subprojects) were economically viable, with economic internal rates of return (ERR) ranging from 12.8% to 93.9%, presenting an average return of 31% and an average net present value (NPV) of US$ 120,240. The results of the ex-post analysis compare favorably to the average results from the ex-ante economic analysis14 for a sample of 19 subprojects which presented at appraisal an average NPV of US$ 35,543 and an average ERR of 28%. The overall result of the ex-post analysis of PRAGUAS Iis substantially positive for the sample analyzed; even after compensating for the unfeasible projects, the economy has gained a net US$ 1,940,217 by investing in these 27 projects. Extrapolating this result to the investments in rural water supply in the overall PRAGUAS I- which has built approximately 844 systems -- the economic net present value of the first phase can be estimated as US$ 60.6 millions. If conservatively l3The results presented are based on the economic analysis of a sample of 27subprojects financed by PRAGUAS, for which there was sufficient information to undertake a detailed ex-post cost-benefit analysis (the incremental benefit and costs were based on the comparison of the “without project situation” based on the baseline’s household surveys and the “with project situation” based on the ex-post’s household surveys. l4The ex-ante cost benefit analysis of PRAGUAS Iwas based on the economic analysis of a sample of 19 subprojects. It is presented in detail in Annex 4 of the Project Appraisal Document for PRAGUAS I, September 2000 (Report No. 20438 EC).

24 we maintain the same profitability observed from the ex-post sample and we use it as a proxy to estimate the results for investments in rural water for PRAGUAS II,assuming 920 systems will be build, the expected net present value for this component would be approximately US$ 66 million. In PRAGUAS 11, it is expected that the handwashing campaign will contribute to a 60% increase of economic benefits related to health, which conservatively was not included in this base case scenario.

Cost benefit analysis for Component 3B: Water and Sanitation Investments in Cantonal Capitals:

To determine the net incremental costs and benefits, "with" and "without" project scenarios were constructed based on the results and observations from the subprojects financed under APL-I. On the basis of these scenarios, the net incremental financial benefits and costs of a constructed investment program was assessed (this program is based on an hypothetical mix of delegation of service provision to a municipal company in 15 cases and to a private or more independent specialized operator in 5 of the cases), which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted using a discount rate of 12 percent, which is estimated to be a proxy of Ecuador's opportunity cost of capital. The following sections provide more detailed information on the estimation of economic benefits and costs.

The main benefits of the subprojects include (i)resource savings generated by the optimization of the system and introduction of efficiency gains supported by the technical assistance and investment program supported by the project; and (ii)improved water supply and sanitation services, including a reduction or elimination of supply rationing and intermittent services and ultimately improved heath conditions, estimated by resource savings related to expenditures in health costs associated to treating water borne diseases. Costs include capital costs, operation and maintenance costs, rehabilitation, resettlement, environmental mitigation and contingencies. For all the different components, costs of complementary actions necessary to derive the expected benefits and sustainability levels targeted, were considered. It was deemed necessary to include these additional costs in order to permit the assumption that the expected benefits of the project will actually be realized.

Based on the results from the first 5 processes supported by the APL 1, the scenario of efficiency was constructed in a conservative fashion, considering that 75% of the municipalities will favor delegating to a municipal company (reducing the efficiency gains) and that 25% will select an specialized operator, it is assumed that given the incentive structure there are more efficiency gains introduced by the specialized operator than by the municipal company.

The main benefit from the intervention is the resource savings generated in the utility, as it is assumed that operating costs will be reduced, commercial efficiency improved, unaccounted-for-water reduced and that the utilities will increase their operating income and adjust tariffs to reduce the need for subsidies from the municipality.

25 Other assumptions include increasing coverage to unconnected users (by 30% of those not currently connected), which would have a benefit by substituting the source from tankers with the associated resource savings and an increase of consumption associated with the improved quality and convenience of the service.

It was assumed that 15% of users were rationed or that they buy bottled water because of poor service quality. In the with project scenario, resources would be saved by substituting piped water for bottled water. The conservative assumption was that a bottle of water would be saved per day (US$O.5O/day/household).

It was also assumed that the project will contribute to reduce negative health impacts. A health benefit was included in the analysis corresponding to one water borne disease per family per year with the conservative assumption that with the project, families would save one episode per household per year at a cost of 5% of the monthly minimum salary. As a result, the component is highly feasible with a net present value of US$ 3,157,605 and an economic internal rate of return of 16%.

2. Technical

PRAGUAS II faces no major technical issues, since all technologies considered for water supply, sanitation and solid waste systems are well-established. New to the proposed APL-2 loan is the introduction of simplified low-cost sewerage based on the successful World Bank experiences in Brazil, Bolivia and Peru. APL-2 preparation has focused on revising and updating the comprehensive Guide of Technical Options ("Guia de Opciones TCcnicas", available on CD ROM) that provides design consultants with (i)standardized designs for a range of technical options and service levels; (ii)standard costs for individual components (sand filters, storage tanks, latrines etc.); and (iii)revised design standards that reduce construction costs - including low cost sewerage options. Based on the World Bank experience in Brazil and Bolivia, work will continue on assisting the Government in revising its technical standards to allow for the inclusion of low-cost sewer systems.

The availability of standardized designs and cost tables will make it easier for engineers to present rural and urban communities with a range of technical options and associated service levels that allow beneficiaries to weigh what they want and are willing to pay for. PRAGUAS Iwas successful in identifying and promoting the application of lower cost and more appropriate technologies for dispersed rural communities since many Ecuadorian engineers tended to standardize on gravity-flow or pumped piped systems with house connections and meters. While these service levels may be appropriate for larger communities whose members are willing to pay the associated tariffs, alternative options are more appropriate for smaller communities in the Costa and Oriente regions. Sanitation options include (i)improved traditional latrines; (ii)ventilated improved pit (VIP) latrines with one or two pits and a variety of superstructures; (iii)pour-flush toilets with a variety of superstructures; and (iv) basic sanitation units ("unidades basicas de saneamiento", UBS) that comprise a shower, sink and flush toilet. For larger

26 communities, piped sewerage (standard, small-bore and condominial) will also be an option. Water supply options include (i)rainwater harvesting systems; (ii)spring catchments; (iii)boreholes with hand pumps; (iv) piped systems feeding rnulti-farnily taps (public taps have been rejected because of a history of poor maintenance) and/or household connections.

When appropriate, wastewater treatment plants using well established waste stabilization pond technologies will also be financed. When land costs or topography make waste stabilization ponds unfeasible, alternative technologies will be considered. Given the poor history of performance of sewage treatment plants in Ecuador, training will be provided to the Ecuadorian engineering community on the design, operation and maintenance of wastewater treatment plants.

3. Fiduciary

Procurement: A procurement capacity assessment has been prepared for the PRAGUASPMU and municipalities (who will contract works) and the overall procurement risk was deemed to be average. Key issues and risks concerning procurement for implementation of the project have been identified and include: (a) modest planning capacity within the PMU and the EPAS; (b) inadequate supervision of works; and (c) political influence in the selection of contractors within the municipalities. An action plan has been agreed to reinforce the project’s procurement capabilities. Several improvements (introduced based on the lessons of PRAGUAS I)include: (i)a reduced number of invoices to be submitted by construction contractors to streamline the flow of payments; and (ii)centralization of design, community development and supervision activities through engineering consulting firms and social consulting entities (NGO’s and others) to be contracted at a national level by the PRAGUASPMU.

Financial Management. The PRAGUAS program (APL-2) will be implemented at the central and municipal level as under APL-1. Component 1 will be implemented by SAPSyRS in coordination with the PMUPRAGUAS and (sub) components 2A, 2C, 2D, 3A and 4 will be carried out directly by PMUPRAGUAS. Subprojects in rural areas and in small towns under components 2B, 3B and 3C will be carried out using a decentralized approach by municipalities and rural communities with a key implementation supervision role played by the PMUPRAGUAS.

Financial statements will be prepared on the basis of accrual accounting and shall be in line with the Bank requirements. The financial statements would include all sources and uses of funds of the whole project and would be available by categories and components. They should be prepared in the local currency in accordance with the accounting principles used in Ecuador, which are compatible with the IASC’s accounting standards. Financial statements should include accounting policies adopted and explanatory notes to the financial statements and any other useful additional information. PMUPRAGUAS will also prepare and furnish to the Bank not later than one month after the end of each calendar semiannual, interim un-audited financial reports for the project covering the semester.

27 In accordance with the Memorandum of Technical Understanding, the Controller General of the State would be responsible for hiring an independent private auditor acceptable to the Bank under a multi-year contract. The project will prepare terms of reference for hiring an audit firm acceptable to the Bank in Ecuador and submit them to for the World Bank for approval. Acceptable audit reports should be submitted to the Bank within six months of the end of the Borrower’s fiscal year. Audit costs would be covered by loan funds.

Project financial procedures regarding financial management, disbursement and procurement arrangements will be documented within an Operation Manual for the project’s second phase (APL-2). The current Operation Manual will be reviewed and updated accordingly.

MIDUVI is responsible for opening the Special Account and a Government Transfer Account at the Central Bank of Ecuador (BCE) in U.S. Dollars and in the project’s name. The PMUPRAGUAS will open different bank accounts to manage funds from BRD and local counterpart funds. At the provincial level, eligible municipalities and operators are also expected to open different bank accounts for each financing source. The second phase of the PRAGUAS program (APL-2) will incorporate the Bank’s New Policy Framework on Eligibility of Expenditure in World Bank Lending, in line with the Country Financing Parameters (CFP) approved for Ecuador on May 25, 2005 by the Bank’s Regional Vice Presidency.’’ Loan proceeds would be disbursed against expenditures incurred by the project under goods, civil works, consulting services; incremental expenditures, front-end fee and unallocated categories. The Bank would finance 100 percent for goods and works under categories 1 and 4, goods under category 2C, as well as consulting services. It will also finance 100% of such amounts for goods and works under sub-components 2B, 3B, and 3C as are specified under agreements between MDUVI and project municipalities. Disbursements to the Government will be transaction-based. PMUPRAGUAS will be responsible for sending all withdrawal applications. Partial advances may be made to the Special Account up to verification of authorized signature (PMUPRAGUAS’s Coordinator’s signature) and as long as the aggregate amount advanced does not exceed the authorized allocation determined by the World Bank. Deposits into the Special Account and replenishments up to the authorized allocation set out in the legal agreement would be made on the basis of withdrawal applications in an acceptable form confirming compliance with procurement procedures and accompanied by acceptable supporting documents. All supporting original documentation will remain at the municipality level and a copy will be maintained in PMUPRAGUAS. All supporting documentation and reports will be available at any time for the Bank’s supervision, at the PMUPRAGUAS for auditing purposes.

4. Social

Several assessments have contributed to improve the project design of PRAGUAS II. First, an evaluation of the pilot projects of PRAGUAS Itook place in 2002 and the l5 OP 6.00 -Bank Financing

28 results and lessons learned from the evaluation were useful for improving the social, technical and financial aspects of the Program. Then, an evaluation of Water Boards was carried out by NOLASCO Associates with financing from the Canadian Consultant Trust Fund in 2004. In 2005, the institutional arrangements for the two largest components (WSS investments in rural areas (component 2) and small towns (component 3), respectively) were assessed by independent international consultants.

In 2005, an ex-post evaluation of a sample of WSS projects financed under PRAGUAS I was carried out by the Quintero, Rojas & Dueiias consultants association. Important conclusions include that (a) the targeting of PRAGUAS Iwas pro-poor: 92% of the beneficiaries of the pilot program and 72% of beneficiaries of the regular WSS program were small rural farmers, 5.6% were artisans or worked in small industry; 5.3% in trade and 0.5% own micro-enterprises; (b) the tripartite financial contribution policy is widely accepted: PRAGUAS (50 %), municipality (20 %) and community (30 %: 10% in cash and 20% in kind), and it is widely recognized that communities that pay cash contributions are more likely to maintain their systems; (c) as a result of PRAGUAS’ intervention, 90 % of municipalities have institutionalized a Municipal WSS Team (EMS) as part of the municipal Public Works Department. The inclusion of the EMS has significantly improved the technical capacity of the municipal teams. Some key recommendations are that (a) the emphasis of PRAGUAS I1 should be on strengthening EMS and Water Boards; (b) a more participatory hands-on, training scheme (away from lecturing) of EPAS, EMS, OITS, water boards, system operators and communities is needed; and (c) sustainability should be promoted by pre-selecting municipalities that have: (i)a technical, social and financial team; (ii)municipal plans that include WSS and watershed protection plans; (iii)a capable administrative/financial team; (iv) up-to-date tax payments.

The ex-post evaluation also assesses the intercultural and gender focus of the program. Given that a good number of beneficiaries of PRAGUAS are Indigenous or Afro- Ecuadorian, and in compliance with the World Bank’s OP 4.10 on Indigenous Peoples, the PMUPRAGUAS and the SAPSyRS together with the World Bank have carried out informed consultations with the Consejo de Nacionalidades y Pueblos Indigenas del Ecuador (CODENPE) and the Corporaci6n de Desarrollo Afroecuatoriana (CODAE), the Ministries of Health and Education and their Departments of Indigenous Health and DINEIB respectively, to coordinate the promotion and dissemination of information and training through these organizations, schools and health posts.

Annex 10 provides details of assessment results and recommendations, and a summary of the Indigenous Peoples Plan.

5. Environment

The safeguards category for the project is (“B”).

29 A comprehensive strategy is proposed for environmental management (OPBP 4.01). No major environmental problems are foreseen for the majority of projects which are small scale water supply and sanitation investments in rural areas and small towns. Minor environmental impacts (proper disposal of construction wastes, erosion control etc.) will be addressed by appropriate guidelines prepared under the APL-1 loan and which were incorporated into the technical specifications governing the work of construction contractors. Appropriate environmental screening criteria for water and sanitation sub- projects have been incorporated into the project evaluation manual ("guia de evaluacih de proyectos") that was cleared by the Bank (for APL-1) and forms part of the overall Operation Manual. These screening criteria are currently used by the provincial SAPSyRS teams (EPAS) to evaluate the technical, social, environmental, financial and economic feasibility of WSS designs prepared by consultants in conjunction with program communities. PRAGUAS provides training and technical assistance to the EPAS to support effective use of the screening criteria. As the APL-2 loan also proposes investments in sewerage and solid waste projects, project preparation activities included an Environmental Assessment for the Water, Sanitation and Solid Waste Sectors. Specific EIA's will be carried out as part of subproject preparation for the more substantial civil works in cantonal capitals and densely populated rural areas where sewer systems and solid waste management projects are to be financed. Based on the findings of the sectoral environmental assessment, the environmental screening criteria will be updated accordingly as part of the Operation Manual and guidelines for management of construction impacts as part of bidding documents.

In addition, APL-2 project preparation activities included reaching an agreement with the Ministry of Environment and MIDUVI to have environmental licensing authority for WSS and solid waste projects delegated to MIDUVI. Based on this agreement, project preparation activities also included processes and institutional requirements to formally and legally authorize MIDUVI to license certain types of investments and to create a functioning environmental office within MIDUVI. This office will then work with the local municipalities and the provincial SAPSyRS teams (EPAS) to develop procedures for carrying out environmental impact assessments and environmental management plans.

Finally, screening criteria will be incorporated into the Operation Manual that will make any investment that could (i)lead to significant loss or degradation of terrestrial or aquatic natural habitats or (ii)require involuntary resettlement, ineligible for financing under the project.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) Natural Habitats (OPBP 4.04) Pest Management (OP 4.09)

30 Cultural Property (OPN 11.03being revised as OP 4.11) [XI [I Involuntary Resettlement (OPBP 4.12) [I [XI Indigenous Peoples (OP/BP 4.10) [XI [I Forests (OPBP 4.36) [I [XI Safety of Dams (OPBP 4.37) [I [XI Projects in Disputed Areas (OPBP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI

7. Policy Exceptions and Readiness

This project complies with all applicable Bank policies. The engineering designs for the first year's activities are complete and ready for the start of project implementation.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

31 Annex 1: Country and Sector Background ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

A. Background and Sector Structure

1. History. The structure of the water and sanitation sector in Ecuador from the 1950s to the 1980s was characterized by centralized planning, primarily by the Ecuadorian Institute for Water and Sanitation Works (IEOS). From the time of its creation in 1965 until its abolition in the mid-l990s, IEOS built, operated and maintained potable water systems at the national level, financed by central government resources coming mostly from oil exports. When these resources diminished in the early 90s, the central government decided to transfer the systems it had built to municipalities and communities. These communities would operate and maintain the system as part of a broader nationwide decentralization and modernization process. IEOS was replaced by the Subsecretariat of Water Supply, Sanitation and Solid Waste (SAPSySB) of the Ministry of Urban Development and Housing (MIDUVI), and its staff was sharply cut from about 2,500 public employees in the early 1990s, to 148 in August 2002. Along with this reduction and supported by two studies by external consultants in 1999 and 2002, the SAPSySB began a still unfinished transformation from its former role as an implementing agency to its new role as sector leader. Its new role meant it was in charge of planning the development of the sector, establishing policies and regulations, providing technical assistance to municipalities, communities and operators, and developing and maintaining an information system for the sector.

2. The Institutional Structure at the Central Government Level. In addition to the SAPSySB, several other institutions have overlapping functions related to the sector:

Table 1: Institutions related to the water and sanitation sector

Institution Functions MIDUVVSAPSyRS Formulates sectoral policies, establishes regulations and defines the development strategy for the sector at the national level. Ministry of Public Regulates the quality of potable water. Health Ministry of the Responsible for environmental protection and conservation and for Environment regulating the control of water pollution. National Council on The CNRH comprises 8 regional development authorities responsible for Water Resources managing water resources, including granting water extraction rights. (CNRH) Ecuadorian Channels resources to the municipalities. Development Bank

32 3. Service Providers (SPs). As a result of decentralization in the 1990s, Ecuador today has a very large number of SPs, with utilities in big and medium-size cities, and municipal water and sanitation departments in small cities (see table 2). A few small municipalities created autonomous SPs. However, most decided to provide water and sanitation services to the cantonal capital via municipal departments, where staff is very often shared with other activities, and where income and expenditures become confused with the municipality’s general accounts. In rural areas, water and sanitation boards (JASS) provide water supply (and sometimes sanitation) in small communities, usually with very limited technical support from the cantonal capital.

Table 2: Service Providers (SPs)

Population Number of Type of SP Pop. Pop. municipalities (mill.) Growth 90s More than 1 Guayaquil (1.7 m) Concession (W+S) to the private 3.35 +2.3% million sector (Interagua) Quito (1.6 m) Municipal water company (EMAAP) 100 to 300 12 11 Municipal water companies + 1 1.92 +7.8% thousand Municipal Department (Loja) (of which: PRAGUAS (1): Riobamba)

30 to 100 37 14 Municipal water companies (of 0.80 -2.2% thousand which: PRAGUAS (6): Guaranda, TulcBn, Ventanas, Cayambe, Vinces, Pujili.) + 29 Municipal departments Less than 30 169 21 Municipal water companies (of 1.30 +3.5% thousand which PRAGUAS (21): Pedernales, Gualaceo, Eloy Alfaro, Valencia, Morona, Saraguro, San Miguel, Pedro Moncayo, Colimes, Chimbo, Bolivar, Espejo, Pimampiro, Chunchi, Caluma, Echeandia, Suctia, Pedro Vicente Maldonado, CumandB, El Tambo, Las Naves.) + 1 Municipal company with a private operator (“Pedro Moncayo”) + 1 Mixed- capital Company (Caluma) + 2 Cooperatives (Echeandia, Las Naves) (all PRAGUAS) + 144 Municipal departments

Rural areas Approx. 2000 JASS 4.72 +0.9% TOTAL 220 12.09 +2.1%

Note: Autonomous WSS operators created under PRAGUAS Iare shown in parentheses.

33 B. Diagnosis of the Main Problems and Challenges

4. The water supply and sanitation sector in Ecuador is characterized by (i) low levels of coverage, especially in mral areas; (ii)low quality services and poor efficiency; (iii)low cost recovery through tariffs and high dependence on transfer payments from central and municipal governments to close deficits; (iv) an incomplete legal and regulatory framework, leading to overlapping functions and confusion within the national government and among different levels of government; and (v) the lack of an integrated national water resource management system.

5. Coverage. Despite significant improvements made in the past decades (total water and sanitation coverage rose from 48 and 43 percent in 1980 to 67 and 57 percent, respectively, in 1999), water supply and sanitation coverage in Ecuador remains relatively low compared with other South American countries, even when this coverage is adjusted for differences in per capita GDP in the region. Figure 1 shows that current levels of coverage with adequate water and sanitation services (water 82 percent in urban areas and 39 percent in rural areas; sanit~tion'~:73 percent in urban areas and 29 percent in rural areas) are particularly low for water supply (both urban and rural) and for rural sanitation. On the other hand, urban sanitation stands out as a sub-sector with relatively high coverage.

~ ~ ~ ~~~~~ Figure 1: Water supply and sanitation coverage (%) in Latin America compared with per capita GDP

r , Agua Urbano Saneamiento Urbano I 1 g 120007 g 10000~ I N

5 4000' 2000 I 4 PY I 0 5,000 10,000 15,000 0 2,000 4,000 6,000 8,000 10,00012,00014,000 PIE per Capita (ajustado por poder adquisibvo. 2000) I PIE per Capita (ajustado por pder adquisttivo, 2000) I I I1 I

! Agua Rural Saneamiento Rural I

AR I IS 0 5,000 &pita PIB per Caplta (ajustado por pderadquirlttvo, 2000) I PIE per (ajustado pw meradquisibvo, 2000) I,'

l6 Potable water service available either via house connections or protected and easily accessible public sources (boreholes, wells, spring catchments, rainwater collection systems) " Sanitation service either via sanitary sewage system (untreated) or on-site disposal systems (dry latrines and flush systems)

34 6. Inequalities in the provision of services. Coverage of adequate water and sanitation services is characterized by a number of inequalities’*:

Regional inequalities: As table 3 shows, the lowest levels of potable water and sanitation coverage are on the coast (costa) and in the east of the country (oriente):

Table 3: Coverage of potable water and sewage services, 1999 (%)

Region Service National Sierra. Costa Oriente Islands Potable water 67 Urban 82 90 70 73 98 Rural 39 56 22 26 48 Sanitation 57 Urban 73 83 60 61 19 Rural 29 34 30 22 22 Source: MIDUVI. (Coverage numbers below the national average are shown in bold)

0 Inequalities between urban and rural areas. In percentile terms, rates of coverage with an adequate service are higher in urban areas than in rural ones (twice as high for water supply and 2.5 higher for sanitation).

0 Inequalities in terms of income level. Both in urban and rural areas, low-income families are those with the least access to water and sanitation services (see figure 2).

Figure 2: Access to Potable Water Supply (connection) by Income LeveP9

% Servido I00 90 Urbano 80 70 60 Rural 50 Amanzanado 40 30 20 Rural Disperso 10 0 I2345678910 Decil de gasto

Note: 1 =lowest; 10 =highest.

’*“Plan Nacional de Desarrollo del Sector de Agua Potable y Saneamiento BBsico”, G. Yepes, B. G6mez and E. Carvajal, December, 2002; pp. 11-14 l9“Desigualdades en el acceso, us0 y gasto con el agua potable en Ame‘rica Latina y el Caribe”, Ecuador, Technical Report Series No. 5, Pan American Health Organization (PAHO), Washington DC, February, 200 1

35 7. Quality of services. At the natic 31 level, it is estimated that only half of all water supply systems have disinfection Figure 3: Water treatment by income2’ installations and only 11 percent of urban systems have complete water Farnilias que tratan el agua treatment plants2’. Even in big cities % like Guayaquil there are still areas with intermittent water supply (12 hours of service in residential 60 neighborhoods in the center and south parts of the city) and low pressure 1: F, (less than 5 m.c.a. in the south, center 0 and poor outskirts). In Guayaquil, 12345678910 Decil de gasto however, a concession contract with Interagua establishes clear goals for ~ \i------/’--

8. Efficiency of Service. Available figures on the efficiency of water supply and sanitation services provided in large and medium-sized cities of Ecuador are very alarming, since the number of employees in almost all these companies (except Guayaquill INTERAGUA) is 2 to 7 times higher per 1,000 water connections than the best levels in Latin America (see table 4).

2Q “Desigualdades en el acceso, uso y gasto con el agua potable en Ame‘rica Latina y el Caribe”, Ecuador, Serie Informe TCcnico No. 5, Pan American Health Organization (PAHO), Washington DC, February, 200 1 ’’ “Project Appraisal Document, Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS)”, World Bank, September 2000, p. 6 22 “Proceso de Modernizacih de 10s Servicios Ptiblicos de Agua Potable y Saneamiento de Guayaquil”, ECAPAG, 2001

36 Table 4: Operational efficiency of water supply companies in large and medium-size cities

Employees (N)Per Water Number of IO00 water connections employees connection Company (total) (N S Cities with more than 1 million inhabitants Quito (EMAAP) 3 18,000 2,060 6.5 Guayaquil (INTERAGUA) 266,000 900 3.4 (estimate) (estimate) (estimate) Cities with 100 to 300 thousand inhabitants (examples) Santo Doming0 de 10s 20,375 196 9.6 Colorados Machala 29,685 173 5.8 Manta 29,000 220 7.6 Portoviejo 24,051 340 14.1 Duran 27,369 195 7.1 Ambato 34,741 300 8.6 Riobamba 30,122 180 6.0 Milagro 16,35 1 69 4.2 Ibarra 23,866 205 8.6 Esmeraldas 22,387 167 7.5 Examples of the best Water Supply Companies in Latin America Santiago (Chile) 1,200,000 1.2 SANEPAR-ParanB (Brazil) 1,914,000 2.6

Source: MIDUVI and World Bank, 2002.

9. The conclusion is that in addition to low tariffs, high personnel costs deprive companies of the resources they need to finance coverage expansion to reach the unserved poor. In 2001, for example, personnel costs at EMAAP/Quito were equivalent to 115 percent of income. Based on the limited data available, it is difficult to reach a conclusion regarding the efficiency of service in small municipalities where employees are often shared with other services and separate accounts are not kept. However, regional experience suggests that the absence of economies of scale in these small systems (needed to maintain technically skilled personnel and specialized equipment) goes hand in hand with inefficient service.

10. Global financing situation. The water and sanitation sector is characterized by low tariffs and high dependence on transfer payments from the central government and municipalities. Nationwide, cumulative income from tariffs covers only about two thirds of the cost of adequate system operation with sufficient provision for routine maintenance. The deficit is closed by transfers to the water and sanitation sector by the national government and by municipalities.

11. Impact on the Poor of Tariffs and Transfer Payments. Low tariffs are commonly justified by references to widespread poverty and by the fact that water is both a social and economic good that is vital for life itself. Unfortunately, it is not the poorest

37 who benefit from the lowest rates and transfer payments to the sector. As figure 2 shows, almost 40 percent of the poorest residents in urban areas (the 3 lowest income deciles) do not have access to piped water supply. The situation is even worse in rural areas with limited infrastructure, where more than 60 percent of the poorest population (the 3 lowest income deciles) do not have household connections. These people, who often get their water from untreated sources far from home (in rural areas) or from tanker trucks (in marginal urban areas) spend much more time and money getting water of unreliable quality than their connected neighbors. In Ma~hala~~(see table 5 below), for example, it is estimated that a poor family connected to the water supply system spends only 0.4 percent of its monthly income on its water bill, while an unconnected family spends approximately 9 percent.

Table 5: Machala: Monthly expenditure on water supply and sanitation services - families with and without home connection User With household Supplied by Tanker Item connection Truck Monthly consumption, poor 15 at 4 to 5 bt family (m3) Monthly expenditure per 1.20 ct 29.00 family Monthly expenditure - % family income 0.4 9.0

a/ World Bank estimates. b/ World Bank estimates based on approximately 30 litersldaylperson consumption. c/ The rate depends on the type of housing. The amount indicated is for the most inexpensive housing.

12. The World Health Organization recommends that no more than a maximum of five percent of household income be spent on water supply. When the figures above are compared to this standard, it is clear that low tariffs deprive water and sanitation service providers of the resources they need to extend services to unserved areas, where users pay much more for water of unreliable quality. Operational deficits are only partly offset by national and municipal transfer payments that become little more than a subsidy for the relatively privileged population that already has access to services.

13. Incomplete Regulatory and Legal Framework. A National Water and Sanitation Policy (Executive Decree 2766 of July 30, 2002) establishes guidelines and basic principles to increase water and sanitation coverage. It also aims to improve the quality of services provided and make more efficient use of water resources, all within a framework open to participation by the private sector and the benefiting communities. However, the document does not take a clear position on key issues such as subsidies to the sector and objective criteria for the municipalities receiving them. Current legislation

23 “National Plan for the Development of the Potable Water and Basic Sanitation Sector”, G. Yepes, B. Gdmez and E. Carvajal, .October, 2002; p. 13

38 also does not establish an independent regulator of water and sanitation services - an issue that must be dealt with in the context of a new Water and Sanitation Sector Law. As mentioned previously, while Ecuador’s legal framework is incomplete, this weakness is not expected to undermine the sustainability of the project’s investments in rural areas and small municipalities, which are executed under a demand-driven, community-and- municipality-centered project cycle.

Management of Water Resources

14. General Situation. Although in general, Ecuador seems to have sufficient water resources to cover its needs, there is constantly increasing competition for its use and greater conflict over its allocation. This leads to environmental degradation that particularly affects poor and indigenous communities. Efforts made to date by the government to protect water quality, promote efficient water use (especially in agriculture), increase the availability of water resources year around and control flooding have been insufficient. Ecuador needs a systematic long-term program to modernize the management of its water resources and to guarantee sustainable management both at the local and national levels.

15. Main Challenges. The main problems affecting the sustainable management of water resources are: (i)the lack of updated information on quantity, quality and seasonal availability of water and its use by different sub-sectors (human consumption, agriculture etc.), which impedes sectoral planning (stock was last taken of water resources in 1985); (ii)the lack of political consensus regarding water as a social and economic good; (iii) weakness of the institutions responsible for managing water resources and overlapping functions among the National Council on Water Resources (CNRH), the ministries of agriculture and of the environment, provincial councils, regional development councils and municipalities; (iv) degradation of water quality in several rivers (some already considered “dead”) due to chemical effluents and pesticides; (v) flooding (especially on the coast) and erosion (accelerated by deforestation); (vi) sedimentation of hydroelectric reservoirs (the Paute station has lost approximately 20 percent of its generating capacity in the past decade); and (vii) increasing conflict among different users of water resources, which is especially harmful to poor and indigenous groups.

39 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

/i)o-s sustainability of rural and small towns' water and sanitation services. Improved water and iI sanitation sector performance. PROMEC I23M 1 IBRD 1 IP-s 1 Power and communications 2M GEF (grant) DO - S sector modernization project. PROLOCAL 25 M IBRD IP - s Social investment fund, social DO-S services, infrastructure, agriculture and central I pol'ernment administration.

Financed by Other Agencies Under preparation - appraisal stage. The project will finance rehabilitation, efficiency 77M IDB improvements and expansion of water and I I I sanitation services in Cuenca. 48M I IDB I Under preparation (2006). Expansion of I services and PSP in peri-urban areas I28M I IDB I Under preparation (2007). Expansion of services to poor peri-urban areas (to be executed by private concessionaire). PRASCI 30 M IDB Under preparation (2007). Water and sanitation project for intermediate cities.

18 M IDB Under preparation (2007). Solid waste investments and institutional reform in several medium sized municipalities. Quito Water and Sanitation 40 M IDB Under execution. Closes in December 2006. 12 M IDB Under execution. Environmental program Management Program which finances the construction of water and sanitation systems in the coastal region.

Frontera Sur 20 M CAF Rural water and sanitation project for the southern border area, following the same philosophy and similar co-financing rules as PRAGUAS.

40 Annex 3: Results Framework and Monitoring ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

Monitoring and Evaluation Framework

A monitoring and evaluation (M&E) framework has been developed for the Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11) to track progress in implementation, measure intermediate outcomes and evaluate project impacts. The framework outlines key performance indicators, data collection methods, a timetable for collection, and responsible agencies. This framework forms part of a project management and evaluation system that will be used to supervise and monitor the implementation of the project.

Methodology and Objectives

The M&E framework for the project aims to integrate process monitoring and both medium- and longer-term project impact evaluation utilizing a mix of outcome and process indicators in the results framework. The framework aims to capture the benefits of improved water and sanitation services in the project communities as measured for instance in terms of (i)health improvements among children, particularly with regard to reduction of diarrhea and parasitic infections; (ii)change of hygiene habits of household members, particularly hand washing with soap after using a latrine or before consuming food.

Process Monitoring and Evaluation: Continuous project monitoring will be carried out with the help of the Monitoring Information Systems developed under PRAGUAS I(the Management Information System (SIG) and the Social Impact Information System (SINSOC)). This system is supplemented by the Integrated Water, Sanitation, and Solid Waste monitoring system (SISASAR) which includes detailed technical, socio-economic and administrative data of water, sewerage and solid waste service providers. These systems will be upgraded and integrated under PRAGUAS I1 to ensure a better integration of monitoring inputs, outputs and outcomes. Tracking key operational and process monitoring indicators will be primarily based on inputs recorded in the Integrated Management Information System (IMIS) and through participatory rapid appraisals (PRA), focus group discussions and sample consumer satisfaction surveys of beneficiaries through the Associations of Water User Boards (juntas) and EPAS. Results will be presented in formal reporting through Quarterly and Semi-annual Progress Reports. The Quarterly Reports will measure progress against a series of key indicators summarized in the results framework below and other key management and operational indicators to be identified between PRAGUAS and key external stakeholders.

Mid-tern Review: The mid-term review will include a sample household survey in PRAGUAS I1 communities. Progress and primary data will be analyzed against key

41 indicators in the results framework. In an effort to minimize costs, the mid-term household survey will utilize a reduced survey instrument - as compared to the one used for the baseline study - focusing on key impact indicators. Additionally, the evaluation will be conducted in a smaller sample of communities.

Impact Evaluation. A rigorous impact evaluation will be designed to assess project impacts on beneficiary households and communities over time. A specially designed baseline survey will be carried out for a sample of households in the selected project communities. In addition, the sample household survey will also be conducted for a sample of control communities similar in characteristics to the project communities. Follow-up surveys will be carried out for households in a sample of project and control communities at the mid-term review. At the end of PRAGUAS I1 after four years of project implementation, a second survey will be carried out. This impact evaluation will enable the Government of Ecuador and the Bank’s team to effectively assess the overall success of the project and that of individual components. These lessons will be valuable in the design of the third and final phase of this APL.

A final impact evaluation will follow after completion of PRAGUAS I11 to assess project impacts on beneficiary households and communities and their sustainability over time. The end-of-project impact evaluation will be conducted in all communities included in the sample and control groups, the same way it was done for PRAGUAS Iin its ex-post evaluation.

The impact evaluation will be based on a mix of data sources: primary data collection through baseline surveys, participatory focus group discussions, consumer satisfaction surveys, and selected secondary data sources (SISASAR, census and other type of secondary health-related information).

Feedback mechanisms for M&E results. Results from ongoing process monitoring, participatory focus group discussions, mid-term and final impact evaluations will be discussed at three levels. First, results from ongoing operational monitoring and focus group exercises will be discussed at the community level with participation of the water board and social consultants contracted under the project. At this stage, key lessons from monitoring will be reflecting in revised work programs or special initiatives to address identified operational weaknesses. Important results from ongoing operational monitoring and focus group discussions will also be discussed at the PMU level and in quarterly supervision missions with the Bank team. Finally, information will be discussed with the PMU as well as senior officials in MIDUVI and SAPSyRS who will take decisions on project implementation strategy based on findings from operational monitoring and impact evaluations.

Data sources

The key data resources to be used for the monitoring and evaluation of the project are the following:

42 Integrated Management Information System. The upgraded monitoring and evaluation system will be used to determine the efficiency and effectiveness with which the project is implemented. It will provide full information on the project’s financial status. The system will include complete information on contracts, procurement, disbursements, inputs, number of beneficiaries and other outputs, and a range of additional operational indicators to track project status. This information system will be web-based and as such the data will be available continuously and will feed directly into the process monitoring and evaluation system.

0 Baseline and Follow- Up Household Survey: A socio-economic household baseline survey will be carried out in a representative sample of households in project communities and in control communities with characteristics similar to the project communities. The survey measures beneficiaries’ current satisfaction with, and perceptions of their water and sanitation services (part of the communications strategy and hygiene education / hand-washing campaigns), water consumption patterns, use of sanitation facilities, level of social and human capital, income (by proxy) and perceptions and incidence of water borne diseases in their community. Control communities will be selected and surveyed based upon four key factors of similarity with PRAGUAS communities including: (i)population density and size; (ii)location (Costa, Sierra, Oriente); (iii)level of basic services available; and (iv) prevailing socio-economic conditions. The baseline survey in project and control areas will enable the impact of project interventions to be measured. The household survey data will be collected by survey staff and entered into the upgraded web-based SINSOC system as part of the consultancy, and will form the basis of the impact evaluation.

0 Participatow Focus Group Discussions. The household surveys will be complemented by participatory focus groups in project communities. As data from the household survey will only become available at the end of the project, focus group discussions will be used as part of process monitoring and evaluation. These focus groups discussions with beneficiaries in project communities (who may not be part of the Juntas) will be held to build a profile of project impact.

0 Consumer satisfaction surveys. As data from the household surveys will only become available at the end of the project, sample consumer satisfaction surveys of beneficiaries through the Associations of Water User Boards (juntas) and EPAS will be used to determine the status of project implementation. These surveys will be part of the communication strategy that is included in the project. Results will be presented in formal reporting through Annual Progress Reports.

0 SISASAR. The SISASAR (Le., Integrated Water, Sanitation, and Solid Waste monitoring system) includes detailed technical, socio-economic and administrative data on the performance of delegated water, sewerage and solid waste service providers. It is managed by SAPSyRS and will be upgraded during PRAGUAS I1to include performance data from water, sewerage and solid waste

43 service providers in urban areas, and water boards in rural areas. Experience elsewhere has shown that building such a service-provider-based system takes time, but will gradually be a very useful tool in assessing the performance of the water, sanitation and solid waste sector.

0 Secondary Data. Existing data from the National Census, indigenous and afro- Ecuadorian associations, and the health ministry will be used to supplement the primary data collected from PRAGUAS I1 and control communities for process monitoring and impact evaluation.

Institutional Arrangements

The PRAGUAS Project Management Unit will be responsible for the overall management and implementation of the Monitoring and Evaluation Framework. This will include maintaining the database for monitoring, managing the flow of information and producing periodic monitoring reports. It will directly manage the SIG and SJNSOC systems, and be directly responsible for upgrading them. The SISASAR system is managed by SAPSyRS, and will also require minor upgrades during PRAGUAS II. Training of PMU staff to operate and maintain these databases after upgrading will be needed.

MIDUVI’s field teams as well as technical and social consultants hired under the project will have a key role in providing timely monitoring reports with operational data. The social team in the PMU will be responsible for carrying out periodic focus group discussions and participatory exercises, and contracting and supervising the mid-term review and final project impact evaluation. Bank supervision teams will provide technical assistance on the design and analysis of the impact evaluation.

Within the PMU, one senior person will be responsible for managing the M&E plan, with one technical staff responsible for the operation and maintenance of the database, and for producing periodic reports.

44 Results Framework

Project Development Project Outcome Indicators Use of Project Objective Outcome Information

The development objective for phase I1of the APL program (“the project”) is to (i)provide sustainable access J The total number of additional Year 5: To inform ex-post to WSS services to people with sustainable accessz4 decisions regarding the approximately 285,000 new to water supply services in rural projected APL-3 loan rural beneficiaries and to areas25 promote their effective use; J The total number of additional people with sustainable access to improved sanitation26 in rural areas J Percentage increase in the rates of target population groups washing their hands with soap at key times

(ii)provide improved and J The total number of additional sustainable WSS services to people with sustainable access2’ approximately 205,000 to improved water supply beneficiaries in cantonal services in cantonal capitals capitals; J The total number of additional people with sustainable access to improved sanitation in cantonal capitals

J The total number of additional (iii)promote sustainable solid people with sustainable access to waste services in cantonal improved solid waste services in capitals; and cantonal capitals

J 100% of ICE resources assigned YRI-3 gauge compliance to

24 ‘Sustainable access to improved rural water supply or sewerage services’ is defined as the number of people with access to improved water or sewerage services delivered by the water boards or water supply and sewerage companies in a sustainable manner (classified with ranking of “B” or higher according to agreed scale). Systems are considered to have a sustainable ranking of “A” if (i)the systems are functioning as intended and deliver the service either continuously or regularly depending on the service level selected; (ii)the water boards meet on a regular basis; (iii)tariffs are set at a level that guarantees operation and maintenance of the system, and collected; (iv) drinking water quality conforms to the standards set. A sustainable ranking of “B” includes systems that have problems but the problems can be solved without any major investments. 25 Improved water supply services relate to improvement in the access to piped water (for those households without access to piped water) or to improvements in the quality of service (as measured by an increase in consumption, reduction of intermittent service, or improvements in drinking water quality) for those with access to piped water 26 “Sustainable access to improved sanitation in rural areas” is defined as the number of households in randomly selected communities that are effectively using sanitation facilities. *’‘Sustainable access to improved small towns water supply and sewerage services’ is defined as a water and sewerage company that has a working ratio of 80 percent or less and collects at least 80 percent of its tariff revenues

45 46 ’*A cost recovery based tariff is defined as a tariff that covers at least the cost of operation and maintenance and the replacement cost of major equipment. This tariff will be agreed with the community during sub-project preparation.

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0 0 0 0 3 3 Annex 4: Detailed Project Description ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

The second phase of the PRAGUAS program (APL-2) is valued at US$76.5 million and would be supported by a US$48 million loan. It will comprise the following components (amounts show total component costs with loan proceeds in parentheses):

Component 1: Sector Reform and Institutional Strengthening - US$2 million (US$2 million)

WSS Sector Financial Policy

Background. A multitude of national and sub-national actors (Fondo de Solidaridad, the Banco del Estado (BdE), Fondo de Znversidn Social Ecuatoriano (FISE), regional development corporations, various government ministries (including the Ministry of Economy and Finance (MEF), MIDUVI and the Ministry of Social Welfare) and agencies (CODENPE, provincial and municipal governments etc.) provide financing for urban and rural water supply investments. Each actor applies different eligibility criteria and historically, very little of the assistance has been conditioned to performance improvements by the water service providers it is designed to benefit. A commissioned by the government under the first stage of the PRAGUAS APL, concluded that nationwide, tariffs covered only about two thirds of system operation and maintenance costs in 2001. Against this backdrop, national and sub-national (provincial and municipal) government transfers often become de facto operational cost subsidies (which benefit relatively privileged existing consumers) rather than investment cost subsidies (which benefit the marginalized and as yet un-served poor).

The Ministry of Economy and Finance has a keen interest in ensuring both the quality of public expenditures in the WSS sector and in leveraging public funds to improve the effectiveness and efficiency of WSS service providers. At MEF’s behest, the government took a bold step to improve Ecuador’s incentive framework for WSS investments by adopting an Executive Decree (Decreto Ejecutivo No. 2562 published on 21 February, 2005) that links about US$75 milliodyear in national government transfers to municipalities under a special tax on telephone calls that is earmarked for WSS investments (Zmpuesto sobre Consumos Especiales, ICE) to operator performance, service model and poverty indicators. In the past, the ICE transfers for the water sector had generally returned funds to those municipalities that had generated the phone calls. In effect, this meant that Quito and Guayaquil (which between them account for only about a third of the national population) received nearly three quarters of all transfers! According to the executive decree, the new assignment mechanism is to come into full force in 2006, after a transitional year in 2005 during which only incremental ICE revenues (available in 2005 as compared with 2004) were to have been distributed according to the new formula.

29 “Plan Nacional de Desarrollo del Sector de Agua Potable y Saneamiento BBsico”, G. Yepes, B. G6mez and E. Carvajal, October, 2002.

54 PRAGUAS I1 will finance studies and technical assistance to (i)apply the new ICE assignment formula; (ii)improve the overall quality of public expenditure in the WSS sector; and (iii) develop coherent policies for the use of public funds in the WSS sector.

Sector Reform and Strengthening of the SAPSyRS

Restructuring of the SAPSyRS proceeded at a slow pace over the course of APL-1, in part due to high turnover in ministerial and subsecretary ranks over the past 5 years. SAPSyRS’ transition to a normative role as a standard-setter and facilitator of sector investments carried out by municipalities and communities is still incomplete. A new organizational structure for the SAPSyRS has been adopted which provides for a “Planning & Evaluation Department” and a “Technical Assistance Department” (“Direccidn de Fomzulacidn y Evaluacidn del Plan Nacional de Agua Potable, Saneamiento y Residuos Solidos” and “Direccidn de Fortalecimiento a 10s Sewicios de Agua Potable, Saneamiento y Residuos Sdlidos” respectively), each composed of two clusters and a total of 8 working groups. Nonetheless, in practice, staff have not been fully mapped to the new departments, clusters and working groups and few of the units actually produce the products for which they were designed. Moreover, under APL-1, MIDUVI was unable to make staff whose skills no longer fit SAPSyRS’ new role redundant or to bring in economists, business specialists, public health experts and other professionals needed to round out the skill mix of SAPSyRS staff. On the positive side, SAPSyRS staff were enrolled in a comprehensive training program developed in conjunction with a local university and exposed to sector reforms in a number of Latin American countries via two regional seminars and a study tour to Colombia.

Under APL-2, this component will

(i)provide topic-specific training to the members of each of SAPSyRS’ working groups; (ii)jump-start the preparation of each group’s products. An external consultancy will be hired, for example, to help the working group on technical norms prioritize those standards that require the most urgent updates. Similarly, resources will be provided to staff in the sector information systems working group to collect and continuously update data for a sector information system for the water, sanitation and solid waste sector (SISASAR) which was developed under APL-1; (iii)provide technical assistance for strengthening sectoral planning and policy development; (iv) provide expert consultant support for developing the regulations to operationalize a Water and Sanitation Sector Law drafted by external consultants in cooperation with the SAPSyRS under APL-1. While the political turmoil effecting Ecuador over the past two years has made it impossible to present the draft Law to Congress, it is expected that this could occur in the near future. (v) upgrade the physical working environment of the SAPS yRS. (vi) support workshops, study tours and other training activities for key sector actors in line with WSS sector development objectives.

55 Environmental Management

The environmental management framework for the water supply, sanitation and solid waste sector will be strengthened under APL-2 through activities in four broad areas:

(a) creation, accreditation and strengthening (technical assistance, equipment etc.) of an environmental management unit in the SAPSyRS; (b) legal reforms (including studies to suggest appropriate discharge standards for sewage and reforms to environmental norms); (c) preparation of environmental guidelines for water supply, sanitation and solid waste investments; (d) strengthening the environmental management capacity of project municipalities through training, updated environmental checklists and compliance audits by the SAPSyRS’s environmental management unit.

Component 2: Rural Water Supply and Sanitation - US$39.0 million (US$25.0 million)

“We are thankful that now we are able to provide water to our community. Previously, we had to fetch water from the ditch or from mountain causeways located one hour away from our homes. We had to transport water on horse back or the children had to fetch it after school. Today, we have access to water to drink, cook, wash our hands and the potatoes before we cook them. Now we have more time to work, and children have more time to do their homework.

Children have water for bathing and they are happy. Now we are able to clean ourselves every day after work, and children have more time to concentrate on their school duties. They are happy. We now also have a latrine and we even bought a shower.”

(Sra. Doris, PRAGUAS I beneficiary, Seucer, Saraguro Canton, Loa Province, November 2005)

2A: Promotion, Community Development, Hygiene Education, Designs and Supervision - US$6.5 million (US$6.5 million)

The project cycle for rural WSS investments will be similar to the one under APL-1: the project will be marketed to eligible municipalities (the 174 cantons with populations of 50,000 or less according to the 2001 census). This universe is somewhat larger than the one targeted under PRAGUAS I, which invested only in the rural areas of the 152 smallest municipalities. Municipalities and communities willing to (i)co-finance 20% and 30% of RWSS investments3’, respectively, (ii)adopt rural tariffs that cover the cost of operation and maintenance (O&M) and some equipment replacement; and (iii)agree to a demand-driven approach, will received TA for engineering designs, community development (including training and hygiene education) and the supervision of works at no charge.

30 As under APL-1, municipalities will be required to make their financial contribution up-front in cash before works are contracted. Communities will contribute at least 10% of project cost in cash and may contribute the remaining 20% in labor and materials.

56 Subcomponent 2A provides support to eligible municipalities to help rural communities under their jurisdiction prepare water and/or sanitation projects that qualify for PRAGUAS investment financing. Project funds will be used to finance, inter alia, (i)promotional activities (workshops, etc.), (ii)contracting of engineering consultants and social consultants (e.g. NGOs); (iii)training for EPAS, as well as EMS; and (iv) the production of required training materials.

Subcomponent 2A activities will be accomplished in phases as follows:

Promotional phase (2 months)

The PMU, SAPSyRS/Quito and the EPAS promote PRAGUAS and invite expressions of interest from those cantons that: 0 have populations of 50,000 or less; 0 agree to operate rural systems under management models consistent with Ecuador's sector policy; 0 agree with the financial policy for the sector as well as PRAGUAS rules and procedures; 0 are willing to form municipal sanitation teams (EMS).

Once municipalities have been selected, the EPAS help city authorities establish EMS's (typically, though not necessarily within the Public Works Department of the municipality). The EMS's will then proceed to promote PRAGUAS among community leaders and rural populations. Interested communities submit standardized request forms (solicitudes comunitarias) that demonstrate acceptance of PRAGUAS rules and provide baseline information to the municipal government. The municipal government, in turn, will prioritize the requests in an open forum (with EPAS participation) using criteria developed by PRAGUAS, to draw up a first list of subproject requests for the pre-investment phase. The EPAS will support the selection process by ensuring that all eligible communities have an equal opportunity to apply for project funds and that community selection is conducted in an open and transparent manner.

The PMUPRAGUAS will hire about 4 engineering consulting firms, and 4 social consulting organizations (NGOs and/or private firms) who will be deployed in the next phases of the project cycle to packages of communities (most likely based on geographic proximity).

Pre-selection phase (2 months)

Once the municipality has presented its list of proposed communities, the EPAS verifies the availability of municipal government resources to cover 20% of expected investment costs and adjusts the list of communities accordingly. With support from the EMS and EPAS, the PMU will then group these finalists into packages that match the community developmentlengineering design capacity of the engineering consultants/social consultants that are already under contract by the PMU. Standard Umbrella Agreements (Convenios Murcos) and Pre-investment Agreements (Convenios de Pre-Znversia'n) are then signed between the municipality and the SAPS yRS to define commitments and responsibilities during the pre-investment phase.

57 “We are happy with the water system and we are thankful to the PRAGUAS project. The Municipality now provides us with a continuous flow of water and children no longer have to bring it from far away rivers. Now we have water for cooking, cleaning and bathing. Water is fundamental and now it is available to us directly from the faucet for cooking, thus avoiding its contamination and microbes. We women are thankful to the project for helping those that need it the most. (kunan tu kar kushilla mikanchi wasipi yaquituan). We are happy to have water in our houses, and so are our children.”

(Sra. Zoraida, PRAGUAS I beneficialy, Sandia Yuca, Pastazo, November 2005)

Pre-investment phase (4 months)

During this phase, the PMU will deploy the engineering consultants and social consultants to assist program communities in selecting and planning service levels and design alternatives that they want and are willing to pay for. The municipal government will supervise the engineering and social consultants and will authorize disbursements (subject to approval from the EPAS) once agreed pre-investment products (designs, BOQ’s etc.) have been satisfactorily completed. The social consultants and communities will agree on activity plans, prepare baseline community assessments and set up gender and ethnicity- balanced water and sanitation boards (juntas administradoras de 10s servicios de saneamiento). Terms of reference for separate engineering consultants and social consultants will be designed to emphasize close collaboration and coordination resulting in an integrated approach to water, sanitation, health and hygiene promotion. Since PRAGUAS requires communities to cover at least 30% of the cost of water supply and sanitation infrastructure overall and no less than 10% in cash up front, beneficiaries will be encouraged to open community savings accounts for RWSS investments as early as possible. The social consultants will help communities to choose service levels and technological options from standardized design alternatives that have been prepared as part of the Operation Manual (OM), and will explain the investment cost, tariff, operational and environmental implications of each choice. APL-1 designs and cost estimates have been updated during the preparation of APL-2.

Table 3 summarizes eligible investments, investment ceilings, financing rules, eligibility requirements and cost recovery policies. Through a strengthened hygiene and sanitation promotion effort, PRAGUAS I1 will encourage rural communities and households to adopt appropriate sanitation solutions and to improve hygiene behaviors that protect household and community health. Communities that mobilize enough households to reach an overall coverage level of 60% (a threshold that reduces environmental health risks and provides individual household and community public health benefits) will be offered grants that cover 70% of the cost of household on-site sanitation facilities up to a ceiling of US$315 per unit during the investment phase (see component 2B below). A demand-based approach will be used where the households will choose from a menu of possible sanitation options based on their willingness and ability to pay. Given that most of the households will also be gaining access to household water connections and based on the experience from PRAGUAS I,it is expected that a majority of

58 households will opt for the Unidad Basica de Saneamiento (UBS) which includes a pour flush toilet, wash basin and on-site septic system. The inclusion of the wash basin coupled with the handwashing component of this project will provide additional health benefits at the household level. Beneficiary households (supported by municipalities) will be required to put up 30% of the cost of the units they select in cash and/or in kind up to the overall ceiling of US$315 and 100% of any costs above the ceiling. During the pre-investment phase, the social consultants will make the rounds of all households in a given community with a “sanitation menu” that shows pictures and diagrams of each system (VIP latrines, pour-flush toilets, basic sanitation units (UBS), etc.) as well as a materials list that allows each household to instantly price the value of its contribution. Households will sign simple standard contracts that define the contribution to be provided by them and by PRAGUAS. The construction contractors will then pool the materials required for each community. In communities that request both water and sanitation services, these materials will be tendered together with the goods and works required for the water supply system. For communities that request only sanitation, at least 3 bids to supply (and deliver) latrine materials will be solicited from local sources. During the investment phase (see below), households will receive technical assistance as needed to ensure that their on-site sanitation solutions are completed to a minimum technical standard. To stimulate the demand for sanitary facilities, PRAGUAS will finance 100% of the cost of on-site school sanitation systems (not counting excavation of the pit which must be accomplished by the community) up to a ceiling of US$8 per pupil during the pre-investment phase.

New to the APL-2 loan, for densely concentrated rural communities /small towns (Parroquias) of 250 or more families, the “sanitation menu” will be expanded to include sewer systems (and when needed, wastewater treatment plants). This option will only be made available in communities that meet key criteria of population density, plot size, soil conditions, water availability, existence of a community water and sanitation management board Uunta administradora de Zos sewicios de saneamiento), and where households agree to pay tariffs in the amount needed to sustainably maintain the sewer system. The expanded “sanitation menu” will include simplified sewer systems that have been shown in World Bank projects in Brazil, Boliva, Peru and other countries to significantly reduce costs and are therefore more affordable and financially feasible for communities and households to support. The alternative sewer systems are not widely known in Ecuador and so training will be carried out for the SAPSyRS, EPAS, PMUPRAGUAS, EMS and the engineering and social consultants. In addition, the PRAGUAS Technical Manual will be revised and updated and will include detailed information on alternative sewer systems. To be consistent with the financial policies for on-site sanitation, beneficiary households (with support from the community and local municipality) will be required to put up 30% of the cost of household pour flush toilets, wash basin and internal plumbing connections to the piped sewers in cash and/or in kind (households are 100% responsible for the superstructure if needed) plus 50% of the costs for the piped sewers and connections to the plot up to the overall total ceiling of US$315 and 100% of any costs above the ceiling. In addition, communities/municipalities will be required to pay 30% of the capital costs for wastewater treatment if needed.

A detailed training and hygiene promotion program will be drawn up by the social consultants in conjunction with community members as well as school and health clinic personnel who work at the community level. The pre-investment packages will be reviewed by the EPAS using

59 standardized technical, environmental, economic, financial, legal and social criteridcheck-lists. Once community sub-projects have been reviewed, the EPAS will verify the availability of community and municipal contributions and package investments. Communities that fail to mobilize at least 10% of their contribution in cash, will be deferred to the following funding cycle. The overall investment package in each municipality will be sized so that municipal contributions cover 20% of projected investment costs.

Once community subprojects have been screened and tendered, PRAGUAS will support the following activities:

Investment phase (6 months)

During the investment phase, local contractors and communities will construct the water supply and sanitation infrastructure designed under component 2A using resources provided by PRAGUAS 11, the municipalities and the beneficiary communities themselves. During this phase, the EPAS will support the EMS in (i)contracting construction firms to carry out physical works in communities; (ii)supervising social consultants and (iii)providing regular information on implementation progress (physical and social) to the PMU. The social consultants will carry out the community development and hygiene education activities designed during the pre- investment phase and the engineering consultants will supervise the construction contractors who will construct water supply/sanitation systems. To the extent possible, small local construction contractors will be used for these activities. Contractors will provide community liaison officers that organize community labor inputs (known as "mingas" in quichua) and will supply materials for the construction of on-site household sanitation systems by beneficiaries under the supervision of the social and engineering consultants.

Follow-up and TA for community management phase

The PRAGUAS approach to post-construction sustainability can be summarized as follows:

*The social consultants will stay on in the communities for a period of 12 months after water supply systems have been completed (provisional reception of works) to support system start- up. The social consultants will (i)work with the juntas to launch the collection of the agreed tariffs; (ii)reinforce hygiene behavior change messages and (iii)strengthen the "juntas administradoras de 10s sewicios de saneamiento" in such tasks as basic accounting, maintenance, etc. New to PRAGUAS II,the social consultants will provide guidance to the juntas to broaden their mandate and give training and support to households in sanitation and hygiene behavior change. Communities, through their '?juntas administradoras de 10s sewicios de saneamiento", will own and operate the water systems built with PRAGUAS assistance.

*Once the contractor and the engineering and social consultants have withdrawn, the EMS and EPAS will conduct regular technical support visits at 6 month intervals for a period of 3 years to monitor system operation and management by the "junta". A management information system has been introduced in which the EMS and EPAS collect information in each community that will then be used to assess the status of the physical infrastructure and the

60 institutional capacity of the Juntas. These assessments will be used to ratekategorize the communities as A, B, C or D - with A indicating the physical and institutional systems are functioning effectively and sustainably and a rating of D indicating a worst case scenario of physical and institutional system collapse.

*The EPAS and EMS will encourage the “juntas” to join regional associations of water user boards (see sub-component 2C) that will provide long-term TA and make bulk purchases of basic inputs (meters, sodium hypo-chloride etc.) on behalf of member boards as needed.

Coordination with Government Agencies assisting Indigenous and Afro-Ecuadorian Populations

To enhance benefits for indigenous and Afro-Ecuadorian populations, the PMUPRAGUAS (or the SAPSyRS) will sign cooperation agreements with CODENPE and CODAE. The agreements may include:

(a) Cooperation of PRAGUAS with CODENPE and CODAE at the central level, to coordinate supply and demand of water and sanitation interventions in indigenous and Afro-Ecuadorian communities. (b) Coordination of PRAGUAS with CODENPE and CODAE for the promotion of PRAGUAS II components and technical assistance at the provincial (prefecturas indigenas), municipal (Indigenous Alternative Municipalities), and community level (Juntas Parroquiales). PRAGUAS will provide promotional materials of the program in Spanish, Kichwa and Shuar. PRAGUAS will socialize the program with the Direcciones de Desarrollo Integral (Planning units) of CODENPE (8), CODAE (6), and ECORAE, Indigenous Prefecturas and Alternative Municipalities, and Juntas Parroquiales. (c) Coordination of PRAGUAS with CODENPE and CODAE for the dissemination of information on PRAGUAS rules, norms, procedures, financing scheme and participatory budgeting, social controls and monitoring for water and sanitation interventions, as well as sewerage and solid waste. (d) CODENPE and CODAE may provide (i)financial support to “extremely poor” communities which would otherwise not be able to pay the 10% cash contribution to participate in PRAGUAS; (ii)possible financial support to strengthen the water boards or the WSS systems needing repairs or rehabilitation; (iii)technical assistance to small communities to achieve the level of organization required by PRAGUAS to meet the eligibility criteria to participate in the Program. (e) PRAGUAS will continue to honor local traditional “cabildos” (water boards) instead of enforcing the creation of new water boards. (0 Coordination of PRAGUAS with CODENPE and CODAE for the training of water boards and communities. (g) PRAGUAS will finance a desk review of water and sanitation, sewerage and solid waste among the Nationalities and Indigenous People of Ecuador.

61 (h) PRAGUAS will also finance a desk review of water and sanitation, sewerage and solid waste among Afro-Ecuadorian communities. In addition, the following activities were agreed as part of project preparation under the Indigenous Peoples Plan (IPP):

0 Elaboration and production of bilingual materials (manuals, posters, brochures) for community training by social consultants accompanying indigenous communities throughout the different phases of the PRAGUAS water and sanitation project cycle.

Promotion campaign for ‘hand-washing’ in Kichwa and Shuar.

e Elaboration and production of bilingual materials for training of indigenous cabildos and water boards in financial, administrative, technical and social management of WSS systems with an intercultural focus.

0 Socialization/ training through in-situ workshops with Alternative Municipalities and Juntas Parroquiales.

0 Inclusion of a module in the mid-term evaluation of water, sewerage and solid waste investments on a sample of sub-projects benefiting Indigenous and Afro-Ecuadorian communities.

a Inclusion of a module for the ex-post evaluation of water, sanitation and solid waste investments at the end of PRAGUAS I1 on a sample of sub-projects benefiting Indigenous and Afro-Ecuadorian communities.

2B: Rural WSS Investments - US$31 million (US$17.0 million)

This sub-component would finance the construction of water supply systems, on-site sanitation systems and -- new under APL-2 -- rural sewerage systems where soil conditions and population density make on-site systems unviable. Under a two-year pilot phase, new rural sewerage systems will be rolled out in approximately 3 rural settlements that (i)have appropriate physical prerequisites (population density, soil conditions, etc.); (ii)agree to PRAGUAS 11 financial rules (cost sharing and tariffs); (iii)have an established users association that has successfully operated a water supply system for at least 2 years; and (iv) can access needed TA for system maintenance from the municipality or private operators in the area. After the pilot phase, sewerage systems may be expanded to other (large) rural communities (primarily parroquias).

All eligible rural communities that lack appropriate water and/or sanitation infrastructure are eligible for PRAGUAS 11 financing, subject to the rules and procedures described below. Communities that have water and/or sanitation facilities but wish to expand and/or rehabilitate them are also eligible, provided that they accept PRAGUAS’ financing rules and cost recovery requirements.

62 Basic Principles

The following table summarizes the principles governing the implementation of the PRAGUAS iral WSS component: PRAGUAS Rural WSS Implementation Principles

Criteria Observations

Eligible investments Construction or rehabilitation of water supply and sanitation investments such as: 0 Water suuulv : (i)rainwater harvesting systems, (ii)spring catchments, (iii)boreholes with handpumps, (iv) piped systems feeding multi-family taps and/or household connections; Sanitation: (i)improved traditional latrines, (ii)ventilated improved pit (VIP) latrines with a range of superstructures, (iii)pour-flush toilets with a range of superstructures and septic tank, (iv) basic sanitation units that integrate a shower, sink, flush toilet and septic tank; (v) piped sewerage (standard, small-bore and condominial) for larger communities (vi) appropriate wastewater treatment systems such as stabilization ponds.

Investment ceilings Water : Investment ceiling for water will depend on the technological option selected, the size of the communities and the distance to an existing water source.

On-site single-household sanitation systems : US$315 per unit;

0 On-site sanitation systems in schools : US$8 per pupil.

Piped sewerape systems: o US$3 15 without WW treatment o US$125 additional if treatment is required

Financing rules Proiect preparation : Non-refundable technical assistance to municipalities (subcomponent 2A)

Proiect implementation (subcomponent 2B):

Water supply: PRAGUAS: 50% (grant) Municipalities: 20% (cash) Communities : 30% (no less than 10% in cash) Individual beneficiaries pay full cost of individual household connections and 100% of any costs above ceiling

0 On-site household sanitation systems: PRAGUAS: 70% (grant) Households + Municipality: 30% up to ceiling, (at least 20% of materials in cash), 100% of any costs above ceiling

On-site sanitation systems in schools: PRAGUAS: 100% (grant): (except excavation of pit) Beneficiaries: excavation of pit

Piped Sewerage systems PRAGUAS: 50% Municipalities/Communities/households50% (cash/labor) Households: 30% % of household sanitary installations ( water flushed toilet, wash basin

63 and connection to sewer box) but individual beneficiaries pay full cost of bathroom superstructure and 100% of any costs above ceiling

Wastewater Treatment Plants PRAGUAS: 70% Municipalities: 30% Household: 0%

Eligibility Rural communities in small cantons (population of less than 50,000 inhabitants under requirements the 200 1 census); Once municipalities have been selected, rural communities within these municipalities that accept program rules are selected using a community prioritization matrix; Sanitation investments will be limited to rural communities that achieve at least 60% coverage; Piped sewerage investments will be limited to concentrated rural areas with populations greater than 250 households where existing household sanitation coverage is at least 80%. Water Board (Junta) must have demonstrated existing capacity to manage its community water supply system sustainably And must be prepared to convert the junta to a water and sewerage board and charge additional tariffs for the O&M of the piped sewer systems. Systems will be built only where spatial density and/or soil conditions make on-site septic tank systems non viable, Communities must have legal control over water source before WS investments can proceed.

Cost recovery For water, piped sewerage and wastewater treatment systems, communities must agree requirements to tariffs that cover at least O&M costs as well as the replacement cost of all electrical and mechanical equipmenthalve work over 10 years.

2C: Strengthening of Existing Water and Sanitation User Boards (Juntas) - US$0.5 million (US$0.5 million)

This subcomponent aims at providing long term technical assistance, training and operational and management services to existing Juntas (Water User Boards) through the creation of Associations of Juntas at the provincial level to promote sustainability. Currently there are several thousand juntas in Ecuador and it has become virtually impossible for MIDUVUSAPSyRS to provide post-construction assistance to them on an individual basis. While municipalities are being strengthened to provide post-construction TA to juntas in areas under their jurisdiction through municipal sanitation teams (equips municipals de saneamiento, EMS), an ex-post evaluation of systems constructed for 41 communities under APL-1 suggests that additional support to juntas is critical to long-term system sustainability. This sub- component would finance basic equipment (e.g. vehicles, computers and printers), parts (pumps, macro and micro-meters, valves, chlorination equipment etc.) and supplies (such as sodium hypo-chloride), that each association would sell or lease to its associates at the discounted cost that the association can obtain by buying in bulk under a revolving fund. The project may also pay for the first year of an accountant, lawyer, and/or plumber, to provide training and technical assistance to water user boards. The associations could also provide services like billing and help the boards on sensitive issues such as disconnecting users for non-payment. In terms of training, the association could host specific training activities for its juntas according to their own needs and the project could co-finance those activities.

64 2D: National Handwashing Initiative - US$l.O million (US$l.O million)

To maximize the health benefits of rural and town water and sanitation investments, PRAGUAS I1 will incorporate a National Handwashing Initiative. The single most effective intervention to improve hygiene has been found, in many studies, to be handwashing with soap at critical times (Le., after defecation, after cleaning up a baby, before preparing meals, and before eating). Curtis and Cairncross (2003) provide a meta-analysis of close to 20 handwashing studies and report a mean reduction in diarrheal illness of 42-47 percent. Fewtrell and Colford (2004), in their meta- analysis, report a mean reduction in diarrheal illness of about 45 percent from handwashing interventions. About two-thirds of the studies reviewed in the two meta-analyses assessed the effect of hand-washing on diarrheal illness in children under the age of 5 years. Fewtrell and Colford also found that personal hygiene promotion was more cost effective than alternative interventions, such as improved sanitation, improved water supply, and water quality improvement.

While child mortality in Ecuador has decreased over the past ten years, it remains high at 34 deaths per 1,000 given the country's general level of development and its per capita GDP.3' Diarrheal diseases are among the main causes of morbidity and mortality in children under five years of age in Ecuador. Diarrheal prevalence32in this age grou is 21.7% (ENDEMAIN-2004)' and diarrheal infections as a cause of death in children (8%) 3P are second only to respiratory infections (16%).34

Recent scientific evidence also suggests that handwashing with soap can significantly reduce respiratory infection rates. Prevalence of respiratory infections35in children under five years of age in Ecuador is 42.3% (ENDEMAIN-2004).

Objective of the sub-component: This sub-component will support the implementation of a National Handwashing Initiative. The Initiative seeks to reduce rates of diarrheal mortality and morbidity, in particular in children under 5 years of age, by increasing rates of handwashing with soap at key times.

National Handwashing Initiative implementation: The National Handwashing Initiative will design and implement a communication program aimed a promoting handwashing with soap at scale. The Initiative will be implemented using the public-private partnership model tested and systematized by the Global Public Private Partnership for Handwashing. A partnership of handwashing and child health stakeholders (MIDUVI, relevant government ministries and agencies, NGOs, soap manufacturers, media companies, etc.) will be formed to guide and implement the initiative. Inputs from partnership members will be strategic, technical, and financial in nature.

Preparation: Key activities to be carried out in the preparatory phase of the Initiative include:

3' ENDEMAIN-2004. WHO data indicate that child mortality stood at 27 per 1,000 in Ecuador in 2003. 32 Prevalence of diarrhea in the two weeks preceding the survey, classified according to symptoms as provided by mother. (ENDEMAW-2004). 33 PAHO, 2003 34 PAHO, 2003 35 Prevalence of respiratory infections in the two weeks preceding the survey, classified according to symptoms as provided by mother. (ENDEMAIN-2004).

65 Formation of a steering committee consisting of key public and private sector partners. The steering Committee will form the backbone of the Initiative and will provide guidance for the design and implementation of the handwashing communication program. Execution of a detailed handwashing behavioral study and baseline. The behavioral study will identify (i)current handwashing practices and their context, (ii)drivers and facilitators of handwashing in communities, (iii)target audiences, and (iv) the best channels of communication to reach the target audience. Results from the behavioral study will enable the design of a communication program to promote handwashing with soap, which is carefully tailored to the Ecuadorian,context, using the optimal mix of communication channels and activities and targeting most intensively the regions with . greatest need.

Design, implementation, and evaluation: A handwashing communication program will be designed and implemented by the Initiative, drawing extensively on the findings from the behavioral study. The communication program will consist of three main components: (a) mass media communication activities, (b) direct handwashing marketing at the district and community level as well as in schools, and (c) integration of handwashing promotion into existing training and capacity-building activities at the community and school level.

Mass Media Communication Activities: The National Handwashing Initiative will supervise the design and implementation of a mass media communication program, which makes use of strategic marketing methods. The program will employ national and local radio, TV, and print mass communication channels in the mix determined as optimal for reaching the target audience. Target audience, media mix, and message design will be grounded in findings from the behavioral research study.

Direct Handwashing Marketing at District, Community, and School Level: District, community, and school level handwashing promotion events and activities will be designed and implemented, reinforcing the handwashing message through interpersonal communication and providing participants with an opportunity to practice the target behavior. Activity choice, message design, and geographic target areas are to be informed by the findings of the behavioral study. The community and school level events and activities will be designed to complement and strengthen the message and effect of the mass-media-based handwashing campaign.

Integration of Handwashing Promotion: Handwashing promotion will be integrated into the community- and school-level capacity-building activities of PRAGUAS II.To enhance the reach and sustainability of the handwashing message, the National Handwashing Initiative will work with public and private partners, such as the Ministry of Health, Ministry of Education, soap manufacturers, public agencies, and NGOs, to integrate handwashing promotion into their ongoing and future training, capacity-building, education, and promotion activities at the community and school level. Integration may include training of trainers, dissemination of handwashing promotion materials, inclusion of handwashing into training manuals, and more.

Financing will be provided to evaluate the effectiveness of the communication program, and assess whether the appropriate messages and channels are being utilized to increase awareness of

66 the benefits of handwashing with soap. Based on the results of the evaluation, the communication program will be adapted and improved during project implementation. In the final years of the project, behavioral changes (changes in handwashing at key times) will be evaluated in comparison with the program’s baseline data.

A coordinator will be recruited to oversee implementation of the National Handwashing Initiative. The coordinator will report to the PMUPRAGUAS and will be responsible for attracting new partners and building strategic alliances, as well as pursuing fundraising activities, and providing support to the program’s continued operation.

Component 3: Promotion of new management models for water, sanitation and solid waste - US$31 million (US$17 million)

3A: Technical Assistance for the Delegation of Water and Sewerage Services and the Sustainability of Solid Waste Services in Cantonal Capitals - US$3 million (US$3 million)

Water/Sanitation. Of Ecuador’s 219 municipalities, about 180 currently provide water (and, where applicable, sewerage) services through a municipal department rather than an autonomous (public, private, mixed-capital or cooperative) operator. Under APL- 1, 32 municipalities embarked upon a delegation process supported by the project. As of March, 2006, 14 of these municipalities have established autonomous service providers, while 18 others are in various stages of picking a new service model from a menu of options or operationalizing the model they have selected. PRAGUAS I funded TA for this process on a grant basis for interested municipalities, but required that municipalities sign afideicomiso (withdrawal authorization) that allows the national government to withhold the cost of TA from transfer payments should the municipality go back on its decision to delegate. Municipalities that do delegate are currently eligible for incentive payments that vary based on the size of the municipality, the model selected and the level of cost recovery achieved through tariffs according to a defined and well- publicized formula. Currently, the incentive payments can only be used to finance improvements to water supply systems.

Under the proposed APL-2 loan, municipalities that delegate successfully would be able to use their incentive payments for both water and sanitation investments. Given generally poor experiences with sewerage system operation in Ecuador, sewerage investments would only be authorized for a pilot group of about 3 municipalities initially to ensure that lessons learned from system operation can be widely incorporated. Where sewage treatment plants (STP) are required, design-build-operate-and-transfer (BOT) bidding processes would be used under which some contractual payments would be subject to proper plant performance. Sub-component 3A would finance both TA for the delegation process, as well as the cost of engineering designs and supervision.

In addition, under this sub-component, the project will contract successful regional operators from other Latin American countries (e.g. Colombia, Argentina, etc.) to provide post-delegation TA to new WSS operators in Ecuador.

67 Once municipalities have delegated the provision of water and sanitation services to autonomous (public, private, mixed-capital or cooperative) operators, they will qualify for PRAGUAS grants (see component 3B below) that will cover 50% of the cost of water supply and sewerage infrastructure up to an agreed limit.

The SAPSyRS Department of Technical Assistance has defined a general framework for TA to municipalities and a system of provincial TA officers that will respond to requests for delegation assistance from interested municipalities. When municipalities request TA for delegation, SAPSyRS will assist them by contracting teams of local consultants (consultorias de apoyo a la delegacidn, CADS) that will (i)help municipalities to identify appropriate models and (ii) prepare the legal, financial, technical and social instruments required to implement them. Based on experience with the pilot delegation cases discussed above, the consulting teams would typically comprise a lawyer, a financial analyst, an engineer and a community development specialist. Where municipalities are very small or where they request only minimal levels of delegation assistance (e.g. the formation of a municipal water and sanitation department), TA will be provided directly by the SAPSyRS. For large municipalities or those likely to adopt more ambitious service provision models, TA will be provided by the Latin American regional operator(s) mentioned above. Over the course of APL-2, it is expected that approximately 30 municipalities will receive delegation assistance from PRAGUAS and that no less than 20 of these will successfully delegate service provision.

Solid Waste. The PRAGUAS I1 project includes a plan designed to strengthen solid waste collection and disposal in municipalities with populations in the range of 10,000 and 50,000. There are 55 municipalities within this population range. Most of these communities are characterized by:

High rates of population growth; Significant levels of poverty; Inadequate management of solid waste (Le., collection usually takes place only within the cabecera cantonal and not within the whole canton).

According to information compiled by the Solid Waste Management Team of the SAPSyRS, while about 75% of solid waste is collected for disposal, only 17% of all waste is disposed in an environmentally sound manner (landfill rather than an open dump).

Solid waste services, such as waste collection and disposal, are the responsibility of local governments. In general, municipal governments provide solid waste services directly, using municipal crews and equipment. Some communities have contracted private companies andor community-based entities (micro-enterprises) for waste collection services.

Although solid waste management programs were not addressed under PRAGUAS I,a three- phase pilot program will be introduced under PRAGUAS 11. In Phase 1, the program will involve support for 4 municipalities (from the pool of 55 municipalities mentioned above). The Phase 1 investment focus will be on waste collection and composting. Technical assistance to be provided to the Phase 1 municipalities will focus on the potential for regional disposal systems. The municipalities in Phase 1 will be eligible for investment in disposal systems in Phase 2 and

68 3. Other municipalities also will be eligible to participate in Phase 2 and 3. Throughout PRAGUAS 11, technical assistance will be provided to pilot communities on accounting, cost recovery, outsourcing, collection, composting, public education, and other elements of solid waste management. The experience gained through this pilot program will provide the basis for larger scale engagement in solid waste management under PRAGUAS 111.

The success of the pilot program will depend upon the desire of the selected municipalities to improve current services and achieve the long-term sustainability of their waste management program. The municipalities that will be selected for PRAGUAS I1 are those that have readily identifiable problems with waste collection (uncollected waste) and/or environmentally poor disposal operations (open dumps). In addition, municipalities need to have a combination of the conditions below:

0 Willingness to phase in a tariff for waste management services that accounts for 100% of operation and maintenance expenditures (OPEX). This transition may be phased in over four years. 0 Willingness to outsource a portion of their waste management system, including collection, equipment maintenance, and provision of equipment (e.g. bull dozers) for management of a disposal site, to private or community operator(s). Willingness to develop or promote a composting program for source separated organic waste. Composting will reduce the quantity of waste for disposal. 0 Willingness and ability to participate in a regional disposal system that might include a regional transfer system comprising transfer station(s) and a transportation network.

Turifl. The tariff charged for waste management services tends to be significantly less than OPEX. One municipality visited during the pre-evaluation mission, for example, charged a waste management service tariff of US$0.25 per year per household.

Another aspect of the municipal waste management system is that it tends to be combined with other public works and service activities. In these instances, local governments typically lack suitable accounting systems to track the costs of waste collection and disposal. This results in an inability to identify the actual cost of existing waste management services and thus set tariffs to recover the cost of operations or even adjust tariffs to an appropriate level of cost recovery.

Tariff collection for waste management services is often done in conjunction with other utility services such as electricity or water. Some municipalities collect a solid waste tariff with the property tax. The utility approach appears to be the most reliable. In addition, other utilities are invoiced on a regular basis thereby generating a reliable cash flow throughout the year.

Outsourcing. Outsourcing would introduce competition and cost effectiveness into the provision of waste management services. The program provides an incentive for a municipality to outsource a portion of its waste management system, including collection, equipment maintenance, and/or provision of equipment (e.g. bull dozers) for management of a disposal site. Competition should lead to more economically efficient waste management, which should result in a lower OPEX, and correspondingly a reduced tariff for waste services.

69 Composting. Composting programs, which have been introduced by several municipalities in Ecuador, reduce the quantity of waste for disposal. Composted organic waste can be returned to productive use. Composting programs should focus on source separated organics (food and garden waste, non-recycled paper).

Regional Systems. Most communities have their own disposal sites. Because of the small quantity of waste generated by municipalities in the target population group (about 5 to 25 metric tons per day), these disposal sites tend to be poorly sited and operated (open dump).

An environmentally sound landfill begins to achieve economies of scale at about 300 metric tons per day, which means the individual landfills for each municipality could be expensive to build and operate per ton of waste processed. A shift towards regional disposal facilities that serve several local governments either within the target population group or in combination with larger municipalities would achieve greater economies of scale.

A regional facility could be either an existing disposal site that has sufficient area for expansion as well as appropriate environment and social characteristics or a ‘greenfield’ site (new landfill).

Combining several municipalities into a regional disposal facility could require that waste be transported further than is currently the case. Development of a regional transfer system, including transfer stations and a transportation network, would be important to minimize costs.

3B: Water and Sanitation Investments in Cantonal Capitals - US$20 million (US$lO million)

Under APL-2, this subcomponent would finance water and sanitation investments using incentive payments in eligible municipalities (all except Quito, Guayaquil and Cuenca and municipalities receiving delegation support under other programs) that have successfully delegated their water and/or sanitation services to autonomous operators. Given that relatively few (about 6) of the 35 municipalities who began delegation processes under APL-1 are expected to receive project-financed incentive payments under APL-1, a substantial backlog of municipalities already awaits APL-2 financing. Most of these municipalities have moved from direct service provision to municipal water and sanitation companies with either a municipal majority (mayor, city counselors etc.) or a community majority (typically, neighborhood representatives) on the board of directors. To qualify for incentive financing, the new water and sanitation operators must provide counterpart financing for investments equal to 50% of the works to be carried out. About US$6 million of the loan amount available under this sub- component is expected to go to sewerage investments (both for rehabilitation of existing systems or for extension to un-served areas), while about US$4 million is expected to finance water supply improvements (both for rehabilitation of existing systems or for extension to un-served areas).

Sewerage investments would only be authorized for a pilot group of about 3 municipalities initially to ensure that lessons learned from system operation can be widely incorporated. Sewerage investments will be made only in municipalities where the sanitation services have

70 been delegated (and made operational) from the municipality and where the autonomous utility has agreed to charge sanitation-specific tariffs at a level that will allow for adequate operation and maintenance of sewer systems. The priority for capital investments will be for extending existing sewer networks to low-income neighborhoods that are not currently connected, but as appropriate, can also be used for rehabilitating existing systems that have deteriorated over the years do to lack of maintenance. In all cases, engineering TA, utility strengthening and capital investments will seek to result in the provision of sanitation services that are sustainable and effective at protecting public health and the environment. Where sewage treatment plants (STP) are required, design-build-operate-and-transfer (BOT) bidding processes may be used under which some contractual payments could be subject to proper plant performance.

Simplified low-cost sewerage will be encouraged based on the successful experiences in Brazil, Bolivia and Peru. APL-2 preparation has included revising and updating the comprehensive Guide of Technical Options ("Guia de Opciones Tecnicas", to include low cost sewerage options. Work will continue on assisting the Government to revise its technical standards including the inclusion of low-cost sewer systems.

When appropriate, wastewater treatment plants using well-established waste stabilization pond technologies will also be financed. When land costs or topography make waste stabilization ponds unfeasible, alternative technologies will be considered. Training will be provided to the Ecuadorian engineering community on the design, operation and maintenance of wastewater treatment plants.

The revised incentive formula for delegation of water and sanitation services is as follows:

Z = I* (T + M)

Where: Z = Maximum subsidy from PRAGUAS program; I= Subsidy available based on the number of existing household water connections; T = Operating factor M = Delegation factor for model to be implemented.

T, M and Iare calculated as follows:

co CO < 0.50 0.5<=CO=C0 < 1.50 T Only TA 0.00 1.oo 1.20

OPERATIONAL INCOME co = I COST OF ADMINISTRATION, O&M

71 In ¶ e a 3i -m m Q A 0 0 0 0 0 0 0 0 0 0 0 0 0 0 v) 0 v) 0 v) m N N r r 3C: Solid Waste Investments in Cantonal Capitals - US$8 million (US$4 million)

Municipalities that commit to cost recovery and outsourcing measures under component 3A, development of composting programs and/or enter into agreements with other municipalities for sharing landfills will be eligible for an investment incentive under APL-2. As under component 3B, 50% counterpart financing for investments by municipalities will be required. Municipal governments may use the investment incentives for equipment such as collection vehicles, waste composting, landfill management equipment as well as civil works such as landfills, composting facilities, and transfer stations. In Phase 1, the investments are limited to collection and composting programs.

Component 3C will be composed of three phases that will involve 4 municipalities in pilot programs. The programs for Phases 2 and 3 will be based on Phase 1, but may be modified based on the lessons learned in Phase 1, i.a. with respect to the design of the investment incentive matrix and the maximum investment amount for municipalities of different sizes. Phase 1 investments will focus on waste collection and composting. Technical assistance to be provided under Phase 1 will focus on the potential for regional disposal systems. The municipalities in Phase 1 will be eligible for investment in disposal systems in Phase 2 and 3. Other municipalities also will be eligible to participate in Phase 2 and 3. Throughout PRAGUAS 11, technical assistance will be provided to pilot communities on accounting, cost recovery, outsourcing, collection, composting, public education, and other elements of solid waste management.

Program Objectives. This program will build upon the work done in PRAGUAS Iby extending the modernization of municipal services to solid waste management in municipalities with populations between 10,000 and 50,000. The sub-component will emphasize greater responsibility for proper waste collection and disposal services, accountability for management of program costs (OPEX and CAPEX) as well as tariff setting and cost recovery, development of composting operations to reduce the quantity of waste for disposal, and movement towards regional disposal facilities combined with a transfer system to achieve environmentally sound facilities at reasonable cost.

Program Implementation. The PRAGUAS I1 project will provide technical assistance to municipalities included in the pilot program as well as resources for investments under an incentive-based program. In all cases, municipalities included in the pilot program will be required to introduce a tariff that should cover at least the OPEX portion of solid waste collection and disposal. The tariff adjustment may be phased in over four years. Pilot municipalities also will be required to create separate accounts for full cost accounting of solid waste (including depreciation and debt service). In addition, 50% counterpart financing for investments will be required. The actual amount of the incentive provided to a municipality will be determined based on the incentive matrix provided below.

74 Incentive Matrix to Determine the Investment Incentive for Municipal Solid Waste, Phase 1 (W

Incentive Category Incentive Points Max. Points

RSI) Cost Accounting and Recovery' Tariff Adjusted to a Minimum of 50 % 0.100 75 % 0.200 100% 0.300 0.300

RS2) Outsourcing2 Collection 10% 0.025 20 % 0.050 Maintenance 0.150 Disposal Equipment 0.200 0.400

RS3) Composting3 10% - 25% of Organic Waste 0.100 > 25% of Organic Waste 0.200 0.200

RS4) Regional Disposal System4 Landfill 25 - 100 tons I day 0.025 101 - 200 tons I day 0.050 > 201 tons I day 0.075 Transfer System 0.025 0.100 rOTAL 1.000

1. Cost Accounting and Recovery: Municipality is to adopt a set of cost recovery mechanisms, create a plan for steady improvement of cost recovery, create a separate account for full cost accounting of solid waste services (including depreciation and debt service) and recover a defined percentage of recurrent costs (OPEX and/or any outsourcing contract payments) during the project period. Pilot municipalities must commit to full OPEX cost recovery within four years of the start of participation in PRAGUAS 11. 2. Outsourcing: Solid waste services including collection, equipment maintenance, and/.or provision of equipment (e.g. bull dozers) for landfill management, should be (partially) outsourced to private or community operators through any arrangement that clearly articulates performance specifications, deliverables, and nonperformance disincentives. 3. ComDosting. Development or promotion of composting of source separated organic wastes. 4. Regional DisDosal System: Two or more municipalities develop inter-municipal agreements with clearly defined shared responsibilities and a plan, as appropriate, to site, design, build and operate a landfill. Such facilities should have sufficient area (hectares), identification of potential environmental issues such as ground and surface water, existing land uses, and natural resources.

Note: Under the project, the Bank will provide technical assistance for the development of full-cost accounting, cost recovery mechanisms, tariff structures, willingness to pay surveys, inter-municipal agreements, outsourcing agreements, operations assessments, composting system development and/or promotion, sitting studies, design studies, and social/environmental assessments of facilities and systems, and other elements of solid waste management as needed.

75 The investment incentive for Phase 1 will vary by the population of a community, based on the following schedule: The investment incentive schedule provided below will be adjusted in Phases 2 and 3.

Potential Investment Incentive (I),Based on the Population in a Municipality

- Population Investment Incentive

10,000 US$300,000

20,000 US$350,000

30,000 US$400,000

40,000 US$450,000

50,000 US$500,000 I

The total investment incentive that will be available to pilot municipalities under Phase I will be US$ 1.0 million. In Phases 2 and 3, the total maximum investment incentives for pilot municipalities will be US$1.5 million in each phase. Unused investment incentives in a phase will be made available in subsequent phases.

The formula to calculate the municipal investment incentive is provided below.

Z,, = I* (RS1 + RS2 + RS3 + RS4)

Where I= Potential investment incentive.

Again, as under component 3B, 50% counterpart financing for investments by municipalities will be required.

Investment Incentive Matrix, Example Calculation. An example of the application of the investment incentive for a hypothetical municipality is provided below, based on the following conditions.

0 Municipal population: 40,000. 0 Potential investment incentive: US$450,000.

Incentive Matrix Points Points Commitment to cost accounting and recovery level: 75% 0.200 Outsourcing: Maintenance 0.150 Landfill equipment 0.200 Composting (10% - 25% of organic waste) 0.100 Regional disposal systems Landfill (25 - 100 tons / day) 0.025

TOTAL, Incentive Points 0.675

76 &, = I* (RS1+ RS2 + RS3 + RS4) = US$450,000 * (0.200 + 0.350+ 0.100 + 0.025) = US$450,000 * (0.675) = US$303,750

Component 4: Project Administration - US$4.5 million (US$4 million)

General Pro.iect Administration. Like the APL-1 operation, PRAGUAS II will be managed by a project management unit (PMU) under MlDUVI staffed by external consultants complemented by staff from the SAPSyRS. This component will finance the cost of salary, travel and general operating costs of the PMU as well as incremental operating costs for the SAPSyRS’s provincial technical teams (“Equipos Provinciales de Agua y Saneamiento”, EPAS) that have been key to the implementation of APL-1. In addition, this component will finance equipment and software for the PMU (and EPAS as necessary). It will also cover the cost of a strategic communication program (designed as part of project preparation) that would (i)promote the PRAGUAS project with eligible municipalities and other actors nationwide; and (ii)support a technical dialogue with mayors, city councils and beneficiary populations in cities interested in service delegation in support of component 3. The communication program will therefore be a cross- component initiative that will support dialogue, participation and behavior change activities across all the projects’ components. Finally, component 4 would also finance updates to monitoring and evaluation (M&E) systems developed under APL- 1 (including SZNSOC, the program tracking the socio-technical baseline in beneficiary communities and SIG, the project’s management information system), audits and other project management activities.

Strategic Communication Program. The strategic communication program (SCP) objectives are to (i)promote the PRAGUAS project with eligible municipalities and other actors nationwide; (ii)support a technical dialogue with mayors, city councils and beneficiary populations in cities interested in service delegation or institutional improvements more generally, in support of component 3; (iii)bring into the public opinion environment the key issues of the WSS sector; and (iv) promote appropriate hygiene behavior in rural communities and urban areas to maximize the health benefits derived from water and sanitation investments in support of component 2. The main guidelines for the SCP might imply both internal communication as well as external communication, to reinforce community participation and bring about the adoption of changes in relation to hygiene and water systems management.

The program will base the development of its activities on initial qualitative and quantitative research which will collect relevant information relative to: (i)stakeholders’ knowledge about water sector issues, (ii)attitudes toward tariffs, (iii)education and participation needs and (iv) hygiene behavior (integrating the results of the HW initiative assessment). The information of the initial research will be used as a baseline for the communication program M&E system and as a tool for decision making. Different channels will be used with different audiences and the messages will be audience- specific.

77 The SCP will be implemented under the responsibility of the PMU communication specialist, who will report to the social director. The design, production and dissemination of the activities will be contracted out.

The SCP will involve the PMU, the SAPSyRS and the MIDUVI who will coordinate their activities through the Sectoral Communication Committee formed by (i)the communication specialist of the PMU; (ii)the leader of the Planning and Monitoring Unit in the SAPSyRS; (iii)the Director of the social communications unit of MIDUVI; (iv) the handwashing specialist; and (v) the social specialist of the PMU. The main task of the Committee will be to enhance (a) the dialogue among the sector’s stakeholders, (b) transparency of processes, (c) information flow at the inter-institutional level, (d) community participation and behavioral change with respect to hygiene and water system management. In order to fulfill its tasks, the Committee will coordinate the messages to be addressed to different stakeholders, giving the sector more coherent and credible visibility and enhancing the position of the PRAGUAS I1 project vis-a-vis the Government and public opinion. The Committee will be a consultative body for the discussion of communication strategies and activities. The execution of most activities will be contracted out, the remainder will be executed directly by the institutions. The communication specialist will coordinate the use of channels and the coherence of messages with the handwashing coordinator of the PMU.

The SCP will include specific training activities for PMU, SAPSyRS and MIDUVI personnel with respect to strategic communications for the WSS sector.

The strategic communication program will cover (i)the operational costs related to the planning, implementation and supervision of activities, (ii)the cost of training related to strategic communication, (iii)costs of strategic planning and (iv) the costs related to the production and dissemination of communication products.

78 Annex 5: Project Costs ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

Local Foreign Total Project Cost By Component and/or Activity us us us $million $million $million Component 1: Sector Reform and Institutional 1.36 0.24 1.6 Strengthening Component 2: Rural Water Supply and 19.7 11.0 30.7 Sanitation Component 3: Promotion of new management 16.8 8.0 24.8 models for water, sanitation and solid waste Component 4: Project Administration 2.8 0.4 3.2

Total Baseline Cost 40.66 19.64 60.3 Physical Contingencies 5.52 2.58 8.1 Price Contingencies 5.52 2.58 8.1 Total Project Costs 5 1.7 24.8 76.5 Interest during construction Front-end Fee 0.12 0.12 Total Financing Required 5 1.7 24.92 76.62

79 Annex 6: Implementation Arrangements ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

Component 1: Sector Reform and Institutional Strengthening

This component would be carried out by the SAPSyRS with support from the PRAGUASPMU. The SAPSyRS would (i)identify training needs for each of its working groups, (ii)prepare TOR’S for consultancies to jump-start the operations of each group, (iii)prepare TOR’s for technical assistance as well as specifications for equipment to start-up the SAPSyRS’ environmental unit; (iv) prepare TOR’S for strengthening sectoral planning and policy development; (v) prepare TOR’s for expert consultant support to develop the regulations required to operationalize a Water and Sanitation Sector Law; and (vi) develop the specifications for the works and goods needed to upgrade the SAPS yRS’ physical working environment. The PRAGUASPMU would then contract the corresponding consultants, goods and works. In addition, under this component, consultants would be hired for studies and technical assistance to (i)apply the new ICE assignment formula; (ii)improve the overall quality of public expenditure in the WSS sector; and (iii)develop coherent policies for the use of public funds in the WSS sector.

Component 2: Rural Water Supply and Sanitation

Sub-component 2A will be carried out by MIDUVI through the project management unit in cooperation with project municipalities. Sub-component 2B will be carried out by small and medium size municipalities who would contract civil works contractors with support from EPAS and the PRAGUASPMU. The PRAGUASPMU would contract engineering consultants to do the technical designs for community water systems and household sanitation systems, and social consultants who would carry out the initial community organization, orientation regarding design options, and training of water boards to operate and maintain the water systems. Social consultants would also provide hygiene behavior change training at the household level. It is expected that about 4 engineering consulting companies and about 4 social consultants (NGOs, private consulting firms etc.) will be contracted by the PMU and initially assigned to packages of communities.

Three types of legal agreements (“convenios”) have been developed under APL-1 and would continue to be used between the different parties under APL-2:

0 Umbrella Agreement (Convenio Marco) between the Borrower (through MIDUVI) and a municipality participating in the rural investment component. The Umbrella agreement sets out the basic program rules and terms of engagement of the project in each municipality.

0 Promotion and Pre-investment Agreement (Convenio de Prk-lnversio’n) between the Borrower (through MIDUVI) and a municipality interested in preparing technical and

80 social designs for a group of rural communities under its jurisdiction. The agreement sets out, i.a., conditions for (i)technical assistance to the municipalities; and (ii)the preparation of investments in rural areas.

0 Rural Water and Sanitation Grant Agreement (Convenio de Inversi6n) between the Borrower (through MIDUVI) and a municipality interested in carrying out the water supply/sanitation investments that have been prepared under the Promotion and Pre- investment Agreement. This agreement sets forth (i)the works and training activities to be carried out in rural communities; (ii)the financial contributions of the respective parties; (iii)the ownership of assets constructed under the Grant Agreement; (iv) the responsibility of the communities’ “Juntas” to operate the systems; (v) the municipality’s responsibility to provide technical support; and (vi) the municipality’s obligation to carry out activities under the Grant Agreement in accordance with the Operation Manual.

Within this general framework, the role of PRAGUAS’ main actors can be summarized as follows: A project management unit (PMU) previously set up within SAPSyRS MIDUVI under PRAGUAS Iwill be strengthened and will be responsible for overall coordination. To the extent they haven’t already done so under PRAGUAS I,provincial SAPSyRS offices will form EPAS (equipos provinciales de agua y saneamiento) which will assist municipalities that join PRAGUAS in setting up municipal sanitation teams (EMS’S, equipos municipales de saneamiento) and then support them in program promotion and pre-investment activities. Technical consultants as well as social consultants - private companies and/or NGOs that have been pre-qualified to undertake community development activities, prepare engineering designs and supervise works-- will work with rural communities to plan investments, set-up water and sanitation boards (“juntas administradoras de 10s sewicios de saneamiento”) and prepare them for system operation. The sub-project cycle and the roles of key actors are summarized in the following diagram.

81 System operation Promotion in Provinces -Communities-= -PMU and SAPSyRS- Additional Training and operational Assistance: -Social Consultant then EMS Selection of Municipalities -- PMU and + Association of Juntas- EPAS 1 I Follow-up -EPAS, EMS- Municipal Capacity Building -- EPAS ;t Execution of Works -Contractor, Community- Prioritization of Communities Supervision of contractor: Engineering -EMS- Consultant Execution of sadhygiene education + campaign: Social Consultants I I Pre-Selection and Packaging of i I Communities Supervision of on-site Sanitation Systems: Engineering Consultants I -EMS- I I t I Contracting of Construction Firms f.---IIXI1~-"~~1 .-..,-..---I -EMS- \ Promotion and Pre-investment i 4 i Agreement I ! (Municipality -MIDUVI) I Rural Water and Sanitation Grant I I Agreement I -MIDUVI, Municipalities, Communities--

Engineering consultants and Social t Consultants deployed to communities: -- Technical, Social, environmental, financial and economic evaluation -Social Consultants-

Baseline Community Assessment and t formation of WSS Committees Final Designs (Engineering Consultants) -Social Consultants, Communities - and Definition of Training and Sanitation Promotion Plan (Social Consultants) .Communities-

1Initiate Collection of Community ,Financial Contribution -Communities-

Pre-designs and costs of alternatives Selection of technical alternative Engineering consultants - -Social Consultants with Communities- Note: Primary actors (bold), supporting institutions (italics),

Figure 1: PRAGUAS I1Project cycle for rural communities Sub-component 2C: Strengthening of Existing Water and Sanitation User Boards This sub-component will be carried out by the SAPSyRS through the PMUPRAGUAS in cooperation with associations of water and sanitation boards that will be created under APL-2. The PMUPRAGUAS will contract consulting services and goods that will allow the nascent associations to provide TA for WSS service provision to their member juntas.

Sub-component 2D: National Handwashing Initiative

This sub-component will be carried out by the SAPSyRS through the PMUPRAGUAS in cooperation with private sector actors (e.g. soap manufacturers, media companies, etc) and other handwashing and child health stakeholders (Ministry of Health, Ministry of Education, NGOs, women's groups, etc.). All studies, media campaigns, assessments and evaluations contracted with loan proceeds will be contracted by the PMUPRAGUAS.

Component 3: Promotion of new management models for water, sanitation and solid waste

Under sub-component 3A, the Borrower (through the PMUPRAGUAS) will contract specialized consultants (consultorias de apoyo a la delegacidn, CADS) and regional operators (empresas consultoras de apoyo a la delegacidn, ECADS) to provide TA to municipalities wishing either to delegate their water and/or sanitation services to autonomous operators or to strengthen the sustainability of municipal solid waste services. To this end, the Borrower (through MIDUVI) and the interested municipality will sign an

.Institutional Reform TA Agreement setting forth, (i)the technical assistance to be provided to that municipality; and (ii)the municipality's obligation to carry out the delegation studies (for water and/or sanitation) or the solid waste strengthening studies with support from consultants.

Sub-component 3B will require municipalities which have become eligible for investment subsidies under the PRAGUAS program to contract works and procure goods to strengthen water and sanitation services. To this end, the Borrower (through MIDUVI) and the interested municipality will sign an

Institutional Reform Water and Sanitation Investment Grant Agreement which sets forth (i)the goods and civil works for water supplyhanitation system expansionhehabilitation to be procured; (ii)timetables for implementation; and (iii)the municipality's obligations for the goods and works.

Sub-component 3C will require municipalities which have become eligible for investment subsidies under the PRAGUAS program to contract works and procure goods to strengthen solid waste management services. To this end, the Borrower (through MIDUVI) and the interested municipality will sign an

.Institutional Reform Solid Waste Investment Grant Agreement which sets forth (i)the goods and civil works for solid waste system investments to be procured; (ii)timetables for implementation; and (iii)the municipality's obligations for the goods and works.

83 Component 4: Project Administration

All consulting services and goods required for this component will be procured directly by the PMUPRAGUAS.

84 Annex 7: Financial Management and Disbursement Arrangements ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

As part of the Preparation Mission conducted on site on January 11 and 12, 2006 and the Appraisal Mission carried out in March, 2006 a Financial Management (FM) Assessment of the second phase of the Rural and Small Towns Water Supply and Sanitation Project - PRAGUAS (APL-2), was performed by the Financial Management Team for Ecuador in conjunction with the staff of the PRAGUAS Project Management Unit (PMUPRAGUAS). This assessment was conducted in accordance with OPBP 10.02 and the Guidelines for Assessment of Financial Management Arrangements in World Bank Projects. The assessment was also completed in accordance with the Manual on Financial Management Practices in World Bank-Financed Investment Operations approved by the Financial Management Sector Board and published on November 3, 2005.

Executive Summary and Conclusions

Overall, the Project Management Unit - PMUPRAGUAS under the Ministry of Urban Development, Housing and Territorial Development (MIDUVI) / Sub Secretariat of Water, Sanitation and Solid Waste (SAPSyRs) has developed important skills and experience during the implementation of Praguas APL I.In this context, the Financial Management Team concluded that, under the management of the PMUPRAGUAS, the Project would be able to maintain financial management arrangements compatible with Bank requirements. Agreements were reached on an action plan on the standards to be met by the financial statements and the time frame for their submission to the Bank after being certified by the auditors, and on the un-audited interim financial reports (IFR) format. Specific recommendations were made regarding the organizational arrangements, the strengthening of human resources and the Operation Manual.

At pre-appraisal, the FM team identified several inherent and control risks related to the project that result in substantial risks. Nonetheless, after the application of mitigating measures, the residual rating risk could be considered as modest. The principal risks relate to: (i) Weak fiduciary environment in Ecuador; (ii) High turnover in ministerial and subsecretarial ranks which represents a challenge for project continuity. Additionally, the financial management coordinator for APL-2 has not yet been hired. (iii) Effective inter-agency coordination is essential since the project is decentralized and funds will be managed at a municipal level; (iv) The complex flow of funds structure. During APL-1, these arrangements made project operation difficult and caused delays in project disbursements; (v) The accounting system is not reliable, since it allows modifications to accounting records of previous periods; (vi> Lack of reconciliation of systems and information generated therein between MIDUVI’s system - SIGEF and the PMUPRAGUAS’ system - Gubiproy; (vii) Concerns related to possible delays in delivering timely audit reports; and

85 (viii) Payment delays to contractors between the day of transfer and the day of payment to contractor.

An action plan has been designed to address these issues, including specific implementation arrangements to mitigate the risks identified during the FMA to ensure proper financial management arrangements, oversight and accountability. The mitigation measures include:

(i) An Operation Manual that provides for a robust financial management system, including the designation of the financial management team and proper financial management arrangements; (ii) Improvements to the accounting system weaknesses detected; (iii) Project Chart of Accounts, IFRs format, including project components, and cost categories. Definition of specific procedures for budget control and monitoring, including records and control of commitments; (iv) Preparation of terms of reference for external audits (financial and technical) and hiring of external auditors under multi-annual contracts.

Country Issues

CFAA. The first Country Financial Accountability Assessment (CFAA) for Ecuador was completed on June 30,2005. The study reviewed the practices and systems of the Central Government Administration. The CFAA concludes that fiduciary risk in Ecuador is currently s~bstantial.~~Of particular importance in arriving at this rating are the following weaknesses that undermine efficiency, transparency and accountability: An outdated classification system and significant amounts of extra-budgetary resources hinder budget realism and limit the government’s ability to plan, control and direct expenditures. Timely and comprehensive fiscal, revenue and expenditure records and information are not produced, maintained or disseminated to meet decision- making, control, management and reporting purposes. The lack of timely and centralized information for cash and treasury management results in cash rationing mechanisms and persistent domestic arrears. The lack of prompt and virtual consolidation of the budget, and the lack of information available to the public undermine transparency and accountability. A weak internal control environment contributes to operational inefficiency and a lack of accountability and stewardship in the use of public funds. Arrangements for external transparency and scrutiny of public finances by the legislature and civil society are inherently weak.

The Public Sector Financial Management Project will include the design and implementation of a new financial management IT system, the implementation of the main recommendations of the CFAA in MEF and the General Controller’s Office, and the introduction of transparency mechanisms in the design of the new system that will positively affect project implementation throughout the country portfolio.

36 Risk classificationsfor the purposes of CFAA are: I)low, 2) moderate; 3) substantial; and 4) high. 86 Integrated System of Financial Management (SZGEF). Since the early 1990's, successive Governments have viewed the modernization of public financial management as crucial to aligning expenditure more closely with policy priorities. In accordance with Agreement No. 181 of December 9, 1999, published in the Official Gazette No. 344 of December 22, 1999, the Government of Ecuador makes official the use and application of the Integrated Financial Management System (SIGEF) in the entities and agencies that form the non-financial Public Sector. Currently, the Government of Ecuador has demonstrated interest in reforming the SIGEF.

Memorandum of Understanding. A Memorandum of Understanding (MOU) between the Bank and Controller General of the State was signed on September 18, 2003. The purpose of this memorandum is to improve the timeliness and quality of audits of Bank financed projects and to strengthen the relationship with the CGE.

Operations Procedures to Open and Manage Funds from Multilateral Institutions in Ecuador. According to new dispositions of MEF and the Central Bank of Ecuador, funds from multilateral institutions will be managed separately from local counterpart funds. For this purpose, separate bank accounts will be created to differentiate financing sources.

Country Financing Parameters. Loan proceeds will be disbursed against expenditure categories, following application of the New Policy Framework on Eligibility of Expenditure in World Bank Lending, in line with the Country Financing Parameters (CFP) approved for Ecuador on May 25,2005 by the Bank's Regional Vice Presidency.

Implementing Entity, Organization Structure and Staffing

The second phase of PRAGUAS will be implemented by Ministry of Urban Development and Housing (MIDUVI) through the Subsecretariat for Water Supply, Sanitation and Solid Waste (SAPSyRS) and the project management unit, PMUPRAGUAS. This unit established under MIDUVI will be responsible for day-to-day project implementation and coordination with municipalities, communities, EPAS (equipos provinciales de agua y saneamiento), EMS'S (equipos municipales de saneamiento) and water & sanitation boards (')juntas ").

The PMUPRAGUAS, was created specifically for the implementation of the Rural and Small Towns Water Supply and Sanitation Project (APL-1Praguas I)in 2001. The organizational structure, responsibilities and attributes of this unit were defined through Ministerial Agreement No. 061. For the second phase of Praguas, the Ministerial Agreement would be reviewed and updated accordingly.

The PMUPRAGUAS has developed important technical expertise during the implementation of APL- 1Praguas I;however it also has experienced some turnover of project management unit staff. Like APL-1, the second phase APL -2 will be executed by a PMUPRAGUAS.

The PMUPRAGUAS will be staffed by a mix of consultants (with long-term contracts hired through a competitive process carried out by a specialized HR management firm) and line staff from the SAPSyRS sharing their responsibilities but working full time for 87 the project. The project’s financial coordinator, treasurer and acountant would be hired as external consultants.

Disbursement and Flow of Funds Arrangements

New Eligibility Policy The second phase of the PRAGUAS Project (APL-2) will incorporate the Bank’s New Policy Framework on Eligibility of Expenditure in World Bank Lending, in line with the Country Financing Parameters (CFP) approved for Ecuador on May 25, 2005 by the Bank’s Regional Vice Presidency for Bank financing.37

Disbursement Methods and Documentation The Bank will disburse the proceeds of the loan, using the disbursement methods (Le. against Statements of Expenditures (SOEs), full documentation, considering the advance, reimbursement and direct payments methods). The PMUPRAGUAS will be responsible for sending withdrawal applications. The PMUPRAGUAS in coordination with MlDUVI would submit the first withdrawal application (Form 1903) to the World Bank requesting funds as needed for initial advance to the Designated Account - DA. The Designated Account type is “segregated”. Partial advances may be made to the DA as long as the aggregate amount advanced does not exceed the authorized allocation set at US$4,800,000. This authorized allocation will be revised according to project needs and as informed by the Bank in an amendment to the Disbursement Letter. All withdrawal applications will be complemented by appropriate supporting documentation.

Supporting Documentation andfrequency of reporting

The Bank must receive all withdrawal applications in an acceptable form confirming compliance with procurement procedures and accompanied by acceptable supporting documentation as detailed in the Disbursement Letter.

For reporting eligible expenditures paid from the Designated Account and reimbursement, PMUPRAGUAS is expected to submit:

. Statement of Expenditures (SOEs) for those payments made for contracts which are below the following thresholds: US$250,000 for works, US$250,000 for goods and non consulting services, US$200,000 for consulting firms, US$50,000 for individual consultants, and any other eligible expenditure such as training activities.

- List of payments against contracts that are subject to the Bank’s prior review.

Other supporting documentation including Designated Account Statement reconciliation and bank statements with each withdrawal application.

Frequency of reporting eligible expenditures paid from the Designated Account is on a monthly basis.

37 OP 6.00 -Bank Financing 88 For requests for direct payment and reimbursement, the minimum value of applications would be US$900,000. The PMUPRAGUAS is expected to submit:

Records evidencing eligible expenditures, e.g., copies of receipts and supplier invoices.

Flow of Funds

Operational Procedures to Open and Manage Funds from Multilateral Institutions in Ecuador - According to new dispositions of MEF and the Central Bank of Ecuador, funds from multilateral institutions will be managed separately from local counterpart funds. For this purpose separate bank accounts will be created to differentiate financing sources.

MIDUVI, PMUPRAGUAS, municipalities and operators are responsible for opening the necessary bank accounts at the Central Bank of Ecuador (BCE), (including the Designated Accounts for IBRD financing and TR Account for local counterpart sources) as well as at private banks selected for project implementation under the project’s name in accordance with local requirements3* and in U.S. Dollars. In addition, Payment Accounts linked to each funding source would be opened at the private Banks appointed by BCE. The table below describes the bank accounts that would be opened for project implementation:

The PRAGUAS I1 program (APL-2) will be implemented at the central and subnational level (municipalities) as in APL-1. At the central level, component 1 will be implemented by the SAPSyRS in coordination with the PMUPRAGUAS and components 2A, 2C, 2D, 3A and 4 will be carried out directly by PMUPRAGUAS. Subprojects in rural areas and

38 Operations Procedures to Open and Manage Funds from Multilateral Institutions in Ecuador. 39 Central Bank of Ecuador 40 The Designated Account - TE will receive directly advances and reimburses from the Bank. 41 Appointed by the Central Bank of Ecuador - BCE at private commercial bank. 42 Cuenta Transferencias de Gobiemofor local counterpartfunds 43 Cuenta de Tip0 Exclusivafor Bank funds 89 in small towns under components 2B, 3B and 3C will be carried out using a decentralized approach by municipalities, rural communities and operators with a key implementation supervision role played by the PMUPRAGUAS.

At the sub-national level, the Bank will finance 100% of the amount specified under Agreements signed between MIDUVI and the municipality under terms and conditions stipulated in the Operation Manual and as described in annex 6.

A “fideicomiso” (payment authorization) may be used when an eligible municipality is not able to contribute funds at the time the Agreement is signed. In these cases, the PMUPRAGUAS will agree with the municipality to finance a higher percentage of works initially against a payment commitment to receive funds from the municipality at a later date. To this end, the municipality will sign a fideicomiso contract with the BCE and PMUPRAGUAS, whereby the BCE withholds funds from budgetary transfers (from the municipality’s General Account) and transfers them to the PMU-TR Account.

Transfers of funds (as cash advances and payments) by PMUPRAGUAS to municipalities and operators would be subject to confirmation of local counterpart availability. Transfers from the central level to sub-national level would be carried out depending on supporting documentation sent by municipalities and operators to the PMUPRAGUAS (Le. a) a copy of the contract which allows for the transfer of a cash advance as stipulated in the contract; b) review and approval of invoices (“planillas”) by the PMU’s Technical Department which allows the PMU’s Financial Coordinator to transfer funds to municipalities or operators).

No withdrawals for payments made prior to the date of this Agreement are foreseen. PMUPRAGUAS in coordination with MIDUVI will request access to the Bank’s Client Connection System which is a secure website that would provide the project implementing entities with rapid information about their portfolio, disbursement status, withdrawal applications, formats and guidelines.

90 1 MUNICIPALITY MUNICIPALIM TE.Acco,~st 28 MUNICIPALITY IC Paymeiit Accuiiiil MUNICIPALITY MUNICIPALITY 1hco11~Accouirt Geitaral Acrotinl

EPA EPA I E-Account

Table of Loan Proceeds Category Amount of the Loan Percentage of Expenditures to be Allocated financed (expressed in USD)

(1) Goods under Parts ,2 (c) and 1,000,000 00% 4 of the Project

(2) Works under Parts and 4 of 500,000 00% the Project

(3) Consultants’ services and 6,000,000 100% Training under Parts 1 and 4 of the Project

(4) Consultants’ services and Training under Parts 2 (a), 2 (c), 2 7,500,000 100% (d) and 3 (a) of the Project

(5) Goods, works and training for 19,000,000 100% * Rural Water and Sanitation Subprojects

91 (6) Goods, works and training for 10,000,000 100% * Institutional Reform Water and Sanitation Investment Subprojects

(7) Goods, works and training for 4,000,000 100% * Institutional Reform Solid Waste Investment Subprojects

TOTAL AMOUNT 48,000,000

Note (*) - The Bank will finance 100% of the amounts stipulated under Rural Water and Sanitation Grant Agreements and Institutional Reform Investment Grant Agreements excluding the counterpart contributions provided for in these agreements. The Bank would finance 100 percent including taxes for all categories of the project.

Information System

PRAGUAS I1will use the PMUPRAGUAS’ Gubiproy accounting system and upgrades will be introduced to enhance the system’s reliability and integrity. In addition, the Bank and MlDUVI will continue to explore ways to mainstream use of the government’s SIGEF system under PRAGUAS I1in the medium term.

The accounting method utilized by PRAGUAS is the accrual basis. The chart of accounts of the project will allow producing information by components, subcomponents, activities, categories, source of financing and beneficiaries.

Operation Manual

Project financial procedures regarding financial management, disbursement and procurement arrangements will be documented in an Operation Manual for the project’s second phase (APL-2). It would include: accounting policies and procedures, chart of accounts, format of project financial statements, IFRs format, internal controls, administrative procedures for processing payments to beneficiaries, accounting system description, disbursement mechanisms, flow of funds details and audit arrangements.

Financial Reporting and Monitoring

The PMUPRAGUAS (Accountant under Financial Coordinator supervision) is responsible for preparing all financial statements and reports required for ensuring that all the necessary information is available for decision making, audits and supervision missions.

Accounting policies and procedures are based on the Operation Manual created for APL- 1 implementation and the Manual Gubernamental issued through the Official Gazette No. 182 of MEF; and government accounting standards which are based on International Accounting Standards. PMUPRAGUAS uses accrual accounting. Adequate segregation of functions should be assured by the PMUPRAGUAS considering that a) the authorization to execute transactions; b) recording of the transaction; c) paying for goods

92 and services and d) the custody of assets involved in the transaction should be performed by different persons or units. The description of functions and duties will be part of the Operation Manual.

At the moment, Annual Budget Programming is prepared in July and is sent directly to MlDUVI and then to MEF in August. PMUPRAGUAS is responsible for preparing the Annual Investment Plan (Plan Operutivo And, POA) taking into account the project objectives. The Financial Coordinator will meet with each component representative in order to evaluate the appropriateness and coherence of the POA. Afterwards, the POA will be sent to the Bank for approval. Once the POA is approved, it will be submitted to MEF.

The Financial Coordinator of the PMUPRAGUAS is responsible for defining the Chart of Accounts applicable to Praguas 11, capable of producing information by categories and components. The PMUPRAGUAS would furnish to the Bank consolidated financial statements not later that 45 days after the end of each semester as interim un-audited financial reports. The interim un-audited financial reports required by the Bank would include: a) Financial Reports (Statement of Sources and Uses of Funds; Statement of Cumulative Investments); b) Physical Progress Reports and c) Procurement Reports (Procurement Plan). The financial statements would include all sources and uses of funds for the whole project and would be available by categories and components. They should be prepared in local currency in accordance with the accounting principles used in Ecuador, which are compatible with the IASC’s accounting standards. The financial statements should include accounting policies adopted, explanatory notes to the financial statements and any other useful information.

External Audit

In accordance with the Memorandum of Technical Understanding, the Controller General of the State would be responsible for hiring independent private financial auditors acceptable to the Bank under a multi-year contract. The project will prepare terms of reference for hiring an audit firm acceptable to the Bank in Ecuador and submit it for the World Bank’s approval.

Annual project financial statements will be audited in accordance with International Standards on Auditing (ISAs) issued by the International Federation of Accountants (IFAC). The audited financial statements should reflect all project activities, financing and expenditures, including the part financed by the Bank and local counterpart funds. Acceptable audit reports should be submitted to the Bank no later than six months after the end of the Borrower’s fiscal year. Audit costs will be covered by loan proceeds.

Auditors would submit an opinion on: a) project financial statements; b) an additional opinion on the statement of expenditures; and c) a management letter. The Management Letter should include weaknesses in the internal controls systems, inappropriate accounting policies or practices; non-compliance with covenants and any other matter the auditor considers significant.

Auditors are expected to have a good understanding of project execution, and to follow- up closely on internal control, accounting and budgeting processes and procedures. It is 93 expected that this understanding would not affect their independence and objectivity. External auditors would have the opportunity to assist or guide the project in correcting any deviations from the procedures to avoid any possible problems during the fiscal year. There is no need to wait until the end of the fiscal year to perform the audit review; therefore auditors should carry out two visits before the end of the closing year.

94 0 Z

P -3

Y * M " e, 8 -a 2 5 Financial Management Action Plan

The financial management team has identified a minimum set of actions needed to ensure that proper financial management arrangements will be in place in order to mitigate control risks. The following actions should be considered:

-# Action Productnndicator Responsible Deadline Status 1 Submission of The Operation Manual is PMU I ?rior to :ompleted draft Project completed (including all PRAGUAS iegotiations Operation Manual financial management and disbursement arrangements) and submitted to the Bank. 2 Recruitment of the CV and terms of reference for the PMUI Zffectiveness ’ending financial PMUPRAGUAS’ financial PRAGUAS management management team have been coordinator, submitted for the Bank’s review accountant and and personnel is ready for project treasurer as implementation. external - consultants 3 Provide stability to The Operation Manual will PMUPRAG Final Operation :ompleted project staff during specify that the consultants’ UAS Manual project contracts will be automatically spproved implementation renewed, unless consultants fail to meet the performance standards established in their contracts based on objective and transparent performance reviews 4 Close and constant Include as part of the Operation PMUI Final Operation Zompleted monitoring at the Manual, a plan of visits to the PRAGUAS Manual municipal level is municipalities where the approved necessary to ensure financial team would be able to efficient project recommend timely corrective implementation. actions. Assurance that Investment Grant Agreement PMU/ Final Operation Sompleted local counterpart would stipulate the importance of PRAGUAS Manual funds will be having local funds available approved available for before civil works contracts are project signed. In addition, a streamlined implementation. project cycle is expected to contribute to the communities’ willingness to pay. 6 Define if Agreement between the Bank MIDUVI Effectiveness Pending PMUPRAGUAS and MIDUVI confirming will be eligible to arrangements for managing the manage the designated bank account designated account or define other alternatives Submission of Included as part of the Operation PMU Final Operation Completed Project Chart of Manual and reviewed by the PRAGUAS Manual Accounts, IFRs Bank approved format, including

98 project components, and cost categories. Define specific procedures for budget control and monitoring, including record and control of commitments. 8 Preparation of Audit terms to be part of the Within 1 month ?ending terms of reference of effectiveness for external audits 9 Hiring of external Signed contract for provision of Within 3 months ?ending auditors on multi- external financial audit. PRAGUAS of effectiveness annual contracts. 10 Termsof TOR’s that reflect CDF PMU/ Within 2 months Pending Reference (TOR’s) responsibilities for reviewing PRAGUAS of effectiveness for design and invoices presented by contractors supervision (CDF)consultants sent to WB for review 11 A FM mission to Additional measures for World Bank Within 3 months Pending assess MIDWI’s institutionalizing MIDUVI’s FM and of effectiveness FM capacity and capacity have been identified MIDUVI the institutional capacity building process

Supervision Plan

The Financial Management team would conduct a combination of off-site and on-site supervision. Off-site supervision would consist of quarterly desk reviews of the interim financial statements and financial monitoring reports and annual reviews of the external audit reports. Given the residual risk profile, two on-site supervision missions would be conducted during the first year of implementation and one per year thereafter.

Timing Mechanism Objective Twice a year for Integrating supervision Review FM system. supervision) the rest of the missions as much as Supervise Designated Account reconciliation project. possible. and use of funds. Follow up on external auditors’ recommendations/ issues identified. Review staffing. IFR Review Semiannually The IFR submitted to the Review IFR information consistency. 1 Bank. Raise issues disclosed in IFR. lAudit Once a Year The audit report submitted Review audit report. Review to the Bank Raise issues disclosed in audit report

99 Annex 8: Procurement Arrangements ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under lBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or 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 Procurement Plan will be updated twice a year or as required to reflect actual project implementation needs.

Procurement of Works: Works procured under this project would include the constructionhehabilitation of water supply and sanitation systems in rural and urban areas, solid waste infrastructure, and works to improve the physical working environment for the SAPSyRS. Procurement will be done using SBD agreed with or satisfactory to the Bank for NCB and Shopping.

Procurement of Goods: Goods procured under this project would include the supply of meters, valves, and accessories for water supply and sanitation systems, solid waste collection vehicles, landfill management and other related equipment, computer equipment, software and licenses, office equipment, furniture, service vehicles (approx. 5) and maintenance equipment for associations of community water boards. Procurement will be done using the Bank's SBD for ICB and SBD agreed with or satisfactory to the Bank for NCB and Shopping.

Procurement of non-consulting services: Non-consulting services would include: communication campaigns, opinion surveys, and logistical services for training events. Procurement will be done using the Bank's SBD for ICB; and SBD agreed with or satisfactory to the Bank for NCB and Shopping.

Selection of Consultants: Consultant services to be procured under this project would include: TA for drafting the regulations for a proposed water and sanitation sector law, TA for the definition of WSS sector financial policies, training for SAPSyRS staff, reengineering of information systems, studies to launch the work programs of various working groups in the SAPSyRS (sector norms, solid waste etc.); TA to community water boards, design and supervision of water supply, sanitation and solid waste infrastructure, a regionalization study for solid waste; TA for delegating and strengthening water supply, sanitation and solid waste services in cantonal capitals, community training and capacity building; financial and technical audits, consulting services for selecting PMU staff, PMU staff themselves, and design of a strategic communication campaign. Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in

100 accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The selection of consultants will be done using the Bank’s RFP documents.

Operating Costs: Operating costs to be financed by the project would include per diems and travel costs for SAPSyRS and municipal staff as well as community representatives etc as part of training activities, and operating costs for informatiodinternet systems on a declining basis. They will be procured using normal commercial procedures.

The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for goods procured, are presented in the Project Operation Manual.

B. Assessment of the agency’s capacity to implement procurement

Procurement activities will be carried out by the Project Management Unit (PMU) for the PRAGUAS I1 Project within the Ministry of Urban Development and Housing and by municipalities guided and supervised by the PMU. The PMU was created by Ministerial Decree No. 061 of June 1, 2001 as a special unit reporting directly to the Minister. An assessment of the capacity of the PMU to implement procurement actions for the project was carried out by Marcel0 Osorio, PAS, on January 13, 2006. The assessment reviewed the organizational structure for implementing the project and the interaction among the project’s staff responsible for procurement. The key issues and risks concerning procurement for implementation of the project have been identified and include: (a) modest planning capacity within the PMU and the EPAS; (b) inadequate supervision of works; and (c) political influence in the selection of contractors within the municipalities. The following actions have been agreed to mitigate the above risks:

By Negotiations: (a) Submit an Operation Manual that includes: (i)definition of a plan for supervision by the PMU of the procurement implemented by the municipalities, (ii)the procedure to select the construction firms, (iii)the procedure for filing and managing procurement records, (iv) the procedure for bid evaluation reports for works which will mandate that they be prepared by a team, be approved by an Evaluation Committee, and be reviewed by the EPAS, (v) the procedure for bid evaluation for contracts implemented by the PMU, indicating that they will be prepared by a technical team nominated by the General Coordinator and approved by an Evaluation Committee composed of the General Coordinator, the Procurement Specialist and the Technical Director; (b) submit the TORS for the selection of Consultants for the supervision of works ; (c) Annex 4 to the Loan Agreement to include: (i)a set of special provisions agreed for Ecuador for all projects in the Bank portfolio (ii)a requirement for the use of standard bidding documents agreed in advance with the Bank; and (iii) a statement that all project procurement will be carried out following Bank Guidelines and agreed procedures; and (d) Submit a Plan to provide training on procurement to EPAS.

By effectiveness: submit revised bidding documents and standard formats for bid evaluation.

101 During Project implementation: (a) update the Register of Contractors and Consultants by publishing and advertising every six months, (b) submit to the Bank final audit reports each year six months after the end of fiscal year; and (c) submit to the Bank procurement audit reports carried out by an independent auditor six months after completion of each year.

The overall project risk for procurement is AVERAGE.

C. Procurement Plan

The Borrower submitted a procurement plan for project implementation which provides the basis for the procurement methods. The Procurement Plan will be updated in agreement with the project team annually or as required to reflect actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended yearly supervision missions to carry out post review of procurement actions and yearly procurement audits of works contracts implemented by the municipalities.

E. Details of the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non-Consulting Services

(a) List of contract packages to be procured following ICB and direct contracting:

1 2 3 4 5 6 7 8 9

Ref. Contract Estimated Procurement P-Q Domestic Review Expected Comments No. (Description) cost Method Preference by Bank Bid- (yedno) (Prior / Post) Opening Date None

2. Consulting Services

(a) List of consulting assignments with short-lists of international firms.

1 2 3 4 5 6 7

Ref. No. Description of Estimated Selection Review Expected Comments Assignment cost Method by Bank Proposal US$million (Prior I Submission Post) Date Design and supervision 1.2 QCBS Prior 08115/06 of rural water supply and sanitation systems

102 TA for delegation/ 0.5 QCBS Prior 08/15/06 strengthening of water, sanitation and solid waste management services in cantonal capitals

(b) Consultancy services estimated to cost more than $100,000 per contract for the selection of consulting firms; individual consultant assignments estimated to cost more than $50,000; and employment of consulting firms and individual consultants under single source selection will be subject to prior review by the Bank.

(c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than $200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

Expenditure Contract Value Procurement Contracts Subject to category (Threshold) Prior Review Method US $ thousands US $ millions 1. Works > 3,000 ICB All - None 250< Contract < 3,000 NCB First two each year < 250 Three Quotations First two 2. Goods and Non Consulting Services >250 ICB All - None

103 50< Contract <250 I NCB I All <50 IS, NS First two contracts Contracts defined in Direct Contracting All above $50,000 the Procurement Plan 3. Consultants Firms > 200 QCBS All 100< Contract < 200 QCBS, FBS All < 100 QBS, FBS, LCS I First two contracts Individuals I >10 See Section V of Guidelines I < 10 I I None

104 Annex 9: Economic Analysis

ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

The development objective for the second phase of the Ecuador Rural and Small Towns Water Supply and Sanitation Program (PRAGUAS) is to (i)provide sustainable access to WSS services for approximately 285,000 new rural beneficiaries and to promote their effective use; (ii)provide improved and sustainable WSS services to approximately 205,000 beneficiaries in cantonal capitals; (iii)promote sustainable solid waste services in cantonal capitals; and (iv) improve overall sector performance by the national government by promoting performance- based investment financing for the urban WSS sector.

This annex presents the results of the economic cost benefit analysis for the investment program to achieve the first two objectives: Component 2A and 2B -- rural investments and complementary activities for the provision of sustainable water supply and sanitation services - US$37.5 million, related to the first objective, and Component 3A and 3B - investments in small towns water supply and sanitation and complementary activities - US$23 million, related to achieving the second objective. The components analyzed correspond to 79% of the proposed US$ 76.5 million Project. Given that there are no revenue earning entities involved in this Program, a financial analysis was not performed. However, the Operation Manual includes clear guidelines for tariff setting to ensure financial sustainability of the water users associations.

Component 1, sector strengthening, which corresponds to the investment program related to the achievement of the fourth development objective, will not be analyzed as its specific benefits could not be quantified at this time. Component 3C, related to the third objective is a pilot project for solid waste in cantonal capitals that will not be analyzed as the investments have not been clearly defined.

Cost benefit analysis for Component 2, Water Supply and Sanitation in Rural Areas

The envisaged strategy for implementing this component under the APL 11, builds on the experiences from the first phase, maintaining the same demand responsiveness principles, aiming at maximizing overall benefits for each specific subproject, including those related to health impacts by promoting better hygiene practices (specifically handwashing with soap); leaving the responsibility for O&M costs to the beneficiaries who will also pay a 30 percent cash and labor contribution toward capital costs for project implementation.

The project requires communities to initiate participation in project activities and to validate their commitment and need for the project via a cash contribution towards the expected capital cost. The self-selected project communities (from those poor communities already identified as eligible) will choose their preferred level of service from a menu of options. The selection of specific investments will be subject to negotiations among prospective users and district assemblies. The final size of the community and the level of service that will be achieved are not known at this point, and would be determined during project implementation. However, the

105 project design would incorporate eligibility criteria to screen proposed technical solutions to maximize the likelihood of the interventions being economically feasible. The methodology used to design these eligibility criteria and the resulting benefitkost ratio for different combinations of community size, technology and time spent fetching water, is presented later in this annex.

Agreement to project rules regarding cost recovery is a prerequisite for community participation, increasing the odds of sustainable investments. In particular, the project rules require that user charges cover operation and maintenance expenses and the replacement of electro-mechanical equipment, and that communities confirm and demonstrate their willingness to adopt these charges. Communities also need to accept responsibility for service provision through a water board (junta) as a condition for participation in the Project. To increase the likelihood that the systems built by PRAGUAS are and remain economically feasible, a new component to deliver post-construction support to the juntas was added, and sub-project performance will be closely monitored and information collected on a continuous basis, to increase the useful life of the systems.

Methodology A detailed economic ex-post cost-benefit analysis was conducted for a random sample of subprojects financed under APL-I, which have been under operation for at least one year44. This sample represents different types of technological options financed and all major regions of the country (Sierra, Costa and Oriente). The size range of the systems analyzed was between 31 to 654 connections.

To determine the net incremental costs and benefits of the project, "with" and "without" project scenarios were constructed. On the basis of these scenarios, the net incremental financial benefits and costs of the proposed investment programs were assessed, which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted using a discount rate of 12 percent, which is estimated to be a proxy of Ecuador's opportunity cost of capital. The following sections provide more detailed information on the estimation of economic benefits and costs.

The costs included in the analysis were: (i)capital investment costs, (ii)recurrent costs (operations, maintenance and depreciation), (iii)institutional development costs, and (iv) community development costs (organization, training, social promotion activities, hygiene education and handwashing campaigns). For the analyzed components, the costs of complementary actions necessary to derive the expected benefits and targeted sustainability levels were included. It was deemed necessary to include these additional costs in order to permit the assumption that the expected benefits of the project will actually be realized and maintained over the 20-year timeframe of the project. All transfers including taxes and subsidies are excluded from the analysis. All costs included in the economic analysis were adjusted to reflect economic prices using conversion factors calculated by the Banco del Estado de Ecuador.

44 Although information was collected from 40 communities (36 water systems and 4 communities served by on-site sanitation) detailed economic cost benefit analysis could only be done for 27 subprojects for which there were sufficient information, to undertake a detailed analysis.

106 To estimate the benefits from increased water consumption due to improved water quality, as well as more reliable and lower cost water service provided by the project, data was collected from direct beneficiaries (household surveys) and from the Juntas. This data was compared with the results from baseline surveys to households in the same project communities. The availability of actual consumption information as reported by the Juntas and the direct beneficiaries from this sample of communities served by PRAGUAS Isystems, improves the robustness of the analysis conducted for APL I1 considerably, as presented in this Annex. For the estimation of benefits in the “with project scenario” it was assumed that beneficiaries in communities to be served by systems financed by PRAGUAS I1will behave in the same way as those of communities served by systems financed under the APL I.

The benefits for resource savings were also estimated using observed information from the ex- post surveys of PRAGUAS I, basically time savings and other costs (monetary and non- monetary) reported in the interviews. For the analysis it was assumed that all sources of water used would be replaced by the PRAGUAS source. Health benefits known to users are captured in their willingness to pay for good quality water; additionally, a reduction in costs related to water borne diseases (diarrhea) were assessed based on the frequency of occurrence and monetary expenditures (in the last two weeks of the survey) by the potential beneficiaries. The surveys showed a reduction of illness-related Monetary expenditures and a reduction in the time lost (related to the episode), both of which were included in the analysis.

Additional benefits are expected from the on-site sanitation component, although these will not be quantified. Rather, a least-cost analysis of the alternatives and cost-effectiveness criteria will be used for investment decisions. The strategy calls for strong promotion and demand generation of user investment in sanitation, low levels of subsidy, targeted coverage levels of at least 60 percent of households per community to achieve its associated full health impacts and promotion of a wider range of lower cost options. These should bring additional positive health benefits to the communities.

The estimation of an overall Program net present value is based on an assumed distribution of community choices of capital investments. This was done based on the results of PRAGUAS I, but will not necessarily be representative of PRAGUAS 11. It was considered more important to establish some economic criteria to increase the probability that each of these possible choices generates acceptable economic returns. The returns to these second phase investments will be calculated at the end the project and will be used again as an input to refine the eligibility criteria for sub-projects to be financed in the third phase. The results of the economic cost benefit analysis of the sample of projects (NPV, B/C ratio and EIRR) defined for the ex-post analysis were used to design the eligibility criteria for the sub-projects to be financed during the implementation phase and for improving the financial policy of the Program.

The main results of the ex-post economic analysis of the sample of subprojects performed are presented in Table 1. Of the 27 subprojects evaluated as part of the ex-post analysis of PRAGUAS 145,67% (18 subprojects) were economically viable, with economic internal rates of

45 The results presented are based on the economic analysis of a sample of 27 subprojects financed by PRAGUAS, for which there was sufficient information to undertake a detailed ex-post cost-benefit analysis (the incremental benefits and costs were based on the comparison of the “without project situation” based on the baseline’s household surveys and the “with project situation” based on the ex-post’s household surveys.

107 return (EIRR) ranging from 12.8% to 93.9%, presenting an average return of 31% and an average net present value (NPV) of US$ 120,240. The results of the ex- ost analysis compares favorably to the average results from the ex-ante economic analysis 86 for a sample of 19 subprojects which presented an average NPV of US$ 35,543 and an average ERR of 28% at appraisal. The overall result of the ex-post analysis of PRAGUAS Iis substantially positive for the sample analyzed; even after compensating for the unfeasible projects the economy has gained a net US$ 1,940,217 in 27 projects. Extrapolating this result to the investments in rural water supply in the overall PRAGUAS Iproject (which has built approximately 844 systems), the economic net present value of the first phase can be estimated at US$ 60.6 million. If conservatively we maintain the same profitability observed from the ex-post sample and we use it as proxy to estimate the results for investments in rural water for PRAGUAS 11, assuming 920 systems will be built, the expected net present value for this component would be approximately US$ 66 million. In PRAGUAS I1 it is expected that the handwashing campaign will contribute to a 60% increase of economic benefits related to health, which conservatively was not included in this base case scenario.

Table 1. Results of the Economic Cost-Benefit Analysis of the Ex-Post Sample for APL I

Ex-post NPV Connection Ex-ante Community(s) (Canton-Province) EIRR (12%) cost EIRR* Economically unfeasible projects: Baber (Saraguro-Loja) 0.3% ($70,742) $625 El Pache Salado(Portove1o -El Oro) 6.3% ($52,446) $1,288" * Ulucata (Nabon-Azuay)" - 1.7% ($28,505) $1,079"" 7.4% Buravalle (Nabon-Azuay)" 4.4% ($23,949) $1,034"" -3.1% Arcapamba (Zaruma-El Oro) 9.3% (S 17,622) $791"" El Guayabo (Portovelo-El Oro) 3.4% (SI 7.525) $952"" Y anasacha-(Nabon- Azuay)" 10.3% ($5,839) $866"" 1.3% Pull Chico. (Guamote-Chimborazo) 10.9% ($4,346) $632 Chiriboga - Caiias (Las Lajas-El Oro) 10.9% ($3,121) $1,161"" Sub-Total NPV ($224,095) Average NPV, EIRR and Conn. cost 6.0% ($24,899) $936 Economically feasible projects: Guayabal (Bolivar-Caluma)" 12.8% $2,010 $771"" 5.4% Seucer - Seucer Alto (Saraguro - Loja) 12.8% $2,979 $553 Virgen Del Carmen (Bolivar -Chimbo) 13.7% $4,254 $610 Arroz Ucu (Bolivar-Echandia) 14.1% $10,961 $667 Puchun Zhotor (Sigsig-Azuay) 13.2% $11,915 $863"" Capricho (Santa Clara - Pastaza)" 20.6% $14,630 $318 45.9% Parig (Chuachapala -Azuay) (Sanitation Only) 29.3% $16,482 $228 Charquiyacu (Bolivar - Caluma)" 18.7% $18,197 $585 19.1% Chilla Pata Calera (Saquisili-Cotopaxi) 19.7% $47,476 $490

46 The ex-ante cost benefit analysis of PRAGUAS Iwas based on the economic analysis of a sample of 19 subprojects. It is presented in detail in Annex 4 of the Project Appraisal Document for PRAGUAS I,September 2000 (Report No. 20438 EC).

108 San Jorge (Santa Clara- Pastaza) 39.9% $52,515 $273 Puca (Nabon-Azuay)" 24.0% $63,930 $415 20.1% fiufiurco Don Julo (Guachapala- Azuay) 20.7% $67,244 $553 Agllan Andacocha (Guachapala Azuay) 71.1% $68,930 $128 Saracay (Piiias - El Oro) 23.3% $106,996 $549 Cachi Alto (Pujili-Cotopaxi) 37.6% $168,136 $247 Puerto Loor (Rocafuerte-Manabi) 39.0% $213,101 $218 Palo Largo (Santa Ana - Manabi) 93.9% $397,7 18 $170 Sosote (Rocafuerte-Manabi) 53.0% $896.839 $188 Sub-Total NPV $2,164,312 Average NPV, EIRR and Conn. Cost 31.0% $120,240 $435 28%""" * Subprojects that were part of the sample analyzed at appraisal (see Annex 4 of PAD for APL1) ** Subprojects with an investment costlconnection above the financial policy for APLl (US$700/connection) *** Average EIRR of the sample of 19 subprojects analyzed at appraisal (see Annex 4 of PAD for APL1)

From these results it can be seen that with two exceptions unfeasible subprojects did not apply the financial policy of PRAGUAS I,and should have been restructured before construction or subjected to a detailed economic analysis (which would have resulted in the projects not being financed as designed), except for the three projects that were part of the pilot phase of APL 147. On the other hand, only two feasible projects had an investment cost per connection higher than the financial policy of APL I. It is interesting to note that the average investment cost per connection of the unfeasible projects is double that of the feasible projects. This means that if the adopted criterion was unable to guarantee benefits from the projects it did a good job at limiting the eventual losses. In fact, the more important counter-performances are due to projects that were carried out even though they didn't meet the connection cost criterion. Some of those projects were scrutinized in the ex-ante analysis and were found to be economically unfeasible. The ex-post analysis confirmed the previous finding. To be fair, one must recognize that a couple of projects produced positive NPV despite their high connection costs. The decision makers "in situ" have obviously chosen to overlook the ex ante analysis recommendations; they certainly did so to include some projects where high costs coincide with subsequent social impacts. But as displayed above, it was often a wrong decision. Indeed, the overall NPV from the ineligible projects is - $135,081.75.

For that reason, under APL I1 the project will use a matrix that would take into account the size of the community, the type of system, the connection and operating costs and the associated benefits. The approval approach here is quite different and helps project managers to incorporate all their inputs in the decision-making. The main technical parameters (cost of connection per household, water system type) and social parameters (savings in time to carry water, population size) of the project are all put together in the eligibility test. With a detailed table of B/C for different levels of service or types of parameters, decision makers will able not only to approve or reject a specific project but, more importantly, to compare, classify and prioritize different projects of dissimilar ranges.

47 The communities included in the pilot were already organized for the project had already paid their upfront contribution and had already prepared final designs when the cost benefit analysis was performed.

109 Eligibility criteria for rural water investments under APL I1

This section explains the work done and the assumptions used to construct the eligibility criteria for APL 11, which intends to improve the selection criteria used under APL I.

A given project is economically justified if the benefits it generates outweigh the costs of carrying it out.

Estimation of economic benefits: The main benefits from rural water supply projects include the savings in time to carry water and other related health benefits. The computation of benefits (BT)from time savings is obtained using the formula:

B, =Wxt,xN,

Where W is the daily wage, tc refers to the annual amount of time spent to carry water4*, and Nh is the number of beneficiary households in the community.

In previous analyses, health benefits were roughly approximated as savings in medication costs generated by the project. The calculation of those savings consisted in multiplying the reduction in the rate of occurrence of disease per household (AR) by the average cost of medication (CM) then multiplying by the number of households, as in the formula:

SM-c =ARxC, xN,

This estimate however doesn’t capture all the health benefits generated by the project. Consequently, we propose to augment this amount by:

S, =(ARxn)xW*xN,

Where n is the number of days per episode of diarrhea and W* is a composite wage obtained as a compound of a daily wage for adults and the value of a day at school for kids.

Estimation of economic costs: costs of water supply can be divided into two main components: the investment costs of the water system including connection costs and the associated operating costs of the systems, given by:

C, =C,xN, +C,

Where CC is the average cost of a connection per household, multiplied by the number of connections it provides us with the total cost of connection. Operating costs (CO) depend on the population size and the type of water system; they are given by the following table:

48 Expressed in days.

110 System Population CO Gravity Nh5 100 $ 54000.00

Economic Cost Benefit Analysis: For the project to be economically feasible, it requires the summation over its expected life time, T, of discounted benefits to be higher than the invested costs, which can be expressed as:

T 1 B=C(Wxt,xN, +ARxC, xN, +(ARxn)xW*xN, ) i=O (1+rC)j

Wages and prices are assumed to be increasing at a steady rate of rp while the rate for total number of connected households is rN. Therefore B becomes:

T rP + 'N ) B=z( W'xt,xNi+ARxCixN; +(ARxn)xW*'xN;)[ + i=l (1+%) 1'

The subscript 0 indicates the value of the corresponding parameter at the starting period. We notice easily that only the last part of the formula changes over time and B simplifies to:

B= Ni(Woxt, +ARxC; +(ARxn)xW*') a

For rp= 3.00 %, rc = 12.00 % and rN = 1.00 %, we obtain a value of a = 10.07

Therefore a sufficient condition for a project to be accepted is for B to be greater or equal to the whole costs which leads after simplification to the following condition:

C 10.07(Woxt,+AR(C~ +nW*'))-C, -o>O Nh Now, if we assume that

Wo= 5.0, W*O = 2.5, AR = 1.95, CM' = 10.99 and n = 1 we end up with the condition:

10.07(5tc +26.3l)-Cc -->Oco

Nh

111 The following tables present the results of the estimation of the BenefitKOst Ratio (benefit divided by cost) for rural water and sanitation projects for the different combinations of total number of households, water system transportation type (pumping or gravity), time to carry water and connection cost. Operating costs are not mentioned since we assume that they are perfectly known for a given number of households and water distribution system. The qualitative results from the net present value are easily matched: a negative NPV is equivalent to a Benefit Cost factor less than one. A negative B/C factor indicates that the benefits from the project are even below the operating costs; such a result cannot be reached solely by way of NPV. Also, the B/C factor has the advantage of bringing all projects to scale, helping us to spot the more profitable projects, dollar-for-dollar. This way it is easy to prioritize the different projects starting with the ones with the highest B/C factor.

Net Present Value for gravity fed systems:

Nh co 5 10 15 20 25 50 $54,000 -$38,165 -$25,578 -$12,990 -$403 $12,185 150 $58,000 -$10,496 $27,266 $65,029 $102,791 $140,554 250 $69,000 $10,173 $73,110 $136,048 $198,985 $261,923 350 $69,000 $41,842 $129,955 $218,067 $306,180 $394,292 450 $69,000 $73,511 $186,799 $300,086 $413,374 $526,661 550 $69,000 $105,180 $243,643 $382,105 $520,568 $659,030

Nh co 5 10 15 50 $54,000 -$43,165 -$30,578 -$17,990 150 $58,000 -$25,496 $12,266 $50,029 250 $69,000 -$14,827 $48,110 $1 11,048 350 $69,000 $6,842 $94,955 $183,067 450 $69,000 $283 11 $141,799 $255,086 550 $69.000 $50.180 $188.643 $327,105

Nh co 5 10 15 20 25 50 $54,000 -$48,165 -$35,578 -$22,990 -$10,403 $2,185 150 $58,000 -$40,496 -$2,734 $35,029 $72,791 $1 10,554 250 $69,000 -$39,827 $23,110 $86,048 $148,985 $21 1,923 350 $69,000 -$28,158 $59,955 $148,067 $236,180 $324,292 450 $69,000 -$16,489 $96,799 $210,086 $323,374 $436,661 550 $69.000 -$4.820 $133.643 $272.105 $410.568 $549.030

112 $69,000 -$63,158 $24,955 $1 13,067 $201,180 $289,292 $69,000 -$61,489 $51,799 $165,086 $278,374 $391,661 I 550 $69.000 -$59.820 $78.643 $217.105 $355.568 $494.030

150 $58,000 -$70,496 $80,554 250 $69,000 -$89,827 $161,923 350 $69,000 -$98,158 $254,292 450 $69,000 -$106,489 $346,661 -550 $69,000 -$114,820 $439,030

tc Nh co 5 10 15 20 25 50 $54,000 -$63,165 -$50,578 -$37,990 -$25,403 -$12,815 $58,000 -$85,496 -$47,734 -$9,97 1 $27,79 1 $65,554 $69,000 -$I14,827 -$51,890 $1 1,048 $73,985 $136,923 $69,000 -$I33,158 -$45,045 $43,067 $13 1,180 $219,292 450 $69,000 -$151,489 -$38,201 $75,086 $188,374 $301,661 $69,000 -$169,820 -$31,357 $107,105 $245,568 $384,030

150 $58,000 -$100,496 -$62,734 -$24,97 1 $12,79 1 $50,554 250 $69,000 -$139,827 -$76,890 -$13,952 $48,985 $111,923 350 $69,000 -$168,158 -$80,045 $8,067 $96,180 $184,292 450 $69,000 -$196,489 -$83,201 $30,086 $143,374 $256,661 550 $69.000 -$224.820 -$86.357 $52.105 $190.568 $329.030

113 C, 25 $54,000.00 $5 8,000.00 1.62 $69,000.00 1.78 350 $69,000.00 1.90 450 $69,000.00 1.96 $69.000.00 2.00

114 The results of the analysis show that most of the possible interventions would be economically feasible, depending on the size and the time spent fetching water in the without project situation. This information will be easily known from the initial baseline surveys. The tables provide a decision making tool for the control of the PMU to control and prioritize the investments. It shows that given the size of the community (number of households to be connected that effectively will benefit from the intervention and that would pay a tariff), and the availability of water in the initial (without project) situation, the cost that would be invested per household would yield a different return, and although the Project would only participate in those eligible subprojects with the Benefitkost ratio greater than 1, the PMU should prioritize those with the highest B/C ratio. In APL 11, the project is expected to concentrate in rural communities of 100 connections or more, however communities with a minimum of 50 connections could participate with gravity fed systems with a connection cost of up to US$ 300 per connection provided that the benefits would be substantial in terms of time expended fetching water (e.g. situations where beneficiaries currently spend 20-25 days fetching watedyear).

Net Present Value for systems requiring pumping:

tc I r I I 1 Nh co 5 10 15 20 25 50 $1 10,000.00 $94,165 -$81,578 -$68,990 -$56,403 -$43,815 150 $120,000.00 -$72,496 -$34,734 $3,029 $40,791 $78,554 250 $137,000.00 -$57,827 $5,110 $68,048 $130,985 $193,923 350 $137,000.00 -$26,158 $61,955 $150,067 $238,180 $326,292 450 $137,000.00 $5,511 $1 18,799 $232,086 $345,374 $458,661 550 $137.000.00 $37.180 $175.643 $314.105 $452.568 $591.030

115 tC

Nh CO 5 10 15 20 50 $110,000.00 -$109,165 -$96,578 -$83,990 -$71,403 150 $120,000.00 -$117,496 -$79,734 -$41,971 -$4,209 $33,554 250 $137,000.00 -$132,827 -$69,890 -$6,952 $55,985 $118,923 350 $137,000.00 -$131,158 -$43,045 $45,067 $133,180 $22 1,292 450 $137,000.00 -$129,489 -$16,201 $97,086 $210,374 $323,661 550 $137,000.00 -$127,820 $10,643 $149,105 $287,568 $426,030

tC I I I I 1 Nh CO 5 10 15 20 25 50 $1 10,000.00 -$114,165 -$101,578 -$88,990 -$76,403 -$63,815 150 $120,000.00 -$132,496 -$94,734 -$56,971 -$19,209 $18,554 250 $137,000.00 -$157,827 -$94,890 -$31,952 $30,985 $93,923 350 $137,000.00 -$166,158 -$78,045 $10,067 $98,180 $186,292 450 $137,000.00 -$174,489 -$61,201 $52,086 $165,374 $278,661 550 $137,000.00 -$182,820 -$44,357 $94,105 $232,568 $371,030

Nh CO 5 10 15 20 25 50 $1 10,000.00 -$119,165 -$106,578 -$93,990 -$81,403 -$68,815 150 $120,000.00 -$147,496 -$109,734 -$71,971 -$34,209 $3,554 250 $137,000.00 -$182,827 -$119,890 -$56,952 $5,985 $68,923 350 $137,000.00 -$201,158 -$113,045 -$24,933 $63,180 $151,292 450 $137,000.00 -$219,489 -$106,201 $7,086 $120,374 $233,661 550 $137.000.00 4237.820 499.357 $39.105 $177.568 $316.030

116 BenefitKOst Ratio results for systems requiring pumping:

117 Nh 50 150 250 350 450 550

For systems requiring pumping, with higher operational and maintenance costs, the number of households per community needed for a feasible subproject is considerably higher, as is the minimum time spent fetching water in the without project situation; all these variables will restrict considerably the investment cost per connection that will yield a positive economic result.

Sensitivity Analysis:

In this part of the analysis, we will try to test for the sensitivity of our previous results to a change in our assumptions on the rates of increase of population and prices. We are mainly interested in two scenarios: the case where population is constant and the case where prices evolve at lower rates or are frozen.

In our economic analysis, a constant population translates into a null rate rN and a lower rate of increase in prices means a lower rate rp.

Given our cost structure C, = C, x N, + C, the impact of a change in the rate of increase in population and prices is to be found solely on the benefit side:

B= Ni(Woxt, +ARxC; +(ARxn)xW*O ) a

118 For the qualitative side, a decrease in rN (same for rp)leads to an unequivocal decrease in benefits and no effect on costs, therefore, an overall unfavorable effect on the NPV.

For the quantitative assessment of sensitivity we will need to consider that all parameters are the same as in the economic analysis, only rN and rp are changed. Therefore we have: Wo= 5.0, W*O = 2.5, AR = 1.95, CMO = 10.99, n = 1 and rc = 12.00 %, leading to the final formula:

B= NE(5xt, +26.31) cz

The results in the economic analysis were derived for rp = 3.00 % and rN = 1.00 %, for the sensitivity analysis we consider four other cases, complete results are part of the project files. However, to facilitate the reading, results for investment costs of US$ 400 /connection for a gravity fed system are presented bellow:

0 rp= 3.00 % and rN = 0.00 % 0 rp = 2.00 % and rN = 1.00 % 0 rp= 2.00 % and rN = 0.00 % 0 rp= 0.00 % and rN = 1.00 %

n= 9.315828165 rp= 2.00 % and rN = 1.OO %

tc

50 150 250 350 450 550

119 The sensitivity analysis confirms the robustness of the model, showing that even in the case of simultaneously reducing the population growth rate and the prices, most of the options will remain economically feasible, with the exception of systems with less than 50 households that would be ineligible.

Cost benefit analysis for Component 3B: Water and Sanitation Investments in Cantonal Capitals:

To determine the net incremental costs and benefits, "with" and "without" project scenarios were constructed based on the results and observations from the subprojects financed under APL-I. On the basis of these scenarios, the net incremental financial benefits and costs of a constructed investment program were assessed (this program is based on a hypothetical mix of delegation of service provision to a municipal company in 15 cases and to a private or more independent specialized operator in 5 of the cases), which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted using a discount rate of 12 percent, which is estimated to be a proxy of Ecuador's opportunity cost of capital. The following sections provide more detailed information on the estimation of economic benefits and costs.

The main benefits of the subprojects include resource savings generated by the optimization of the system and introduction of efficiency gains supported by the technical assistance and investment program financed under the project. Improved water supply and sanitation services, including a reduction or elimination of supply rationing and intermittent services and ultimately

120 improved heath conditions, result in resource savings related to expenditures in health costs associated with treating water borne diseases.

Costs include capital costs, operation and maintenance costs, rehabilitation, resettlement, environmental mitigation and contingencies. For all the different components, costs of complementary actions necessary to derive the expected benefits and sustainability levels targeted, were considered. It was deemed necessary to include these additional costs in order to permit the assumption that the expected benefits of the project will actually be realized.

Based on the results from the first 5 delegation processes supported under PRAGUAS I,the efficiency scenario was constructed in a conservative fashion, assuming that 75% of municipalities will favor delegating to a municipal company (reducing the efficiency gains) and that 25% will select a specialized operator, who may be more likely to respond to incentives that favor efficiency gains.

The main benefit from the intervention is the resource savings generated in the utility, as it is assumed that operating costs will be reduced, commercial efficiency improved, unaccounted-for- water reduced and that utilities will increase their operating income and adjust tariffs to reduce the need for subsidies from the municipality.

Another assumption involves increasing coverage to unconnected users (by 30% of those not currently connected), which would produce a benefit by substituting water from tankers with the associated resource savings and an increase of consumption associated with the improved quality and convenience of the service.

It was assumed that 15% of users were rationed or -- because of poor service quality -- buy bottled water. Under the with project scenario, users would reduce their costs by eliminating this source of water. The conservative assumption was that a bottle of water would be saved per day and per household (i.e.US$ 0.5O/day/household).

It was also assumed that the project will contribute to reducing negative health impacts. A health benefit was included in the analysis corresponding to one water borne disease per family per year with the conservative assumption that with the project, families will save one episode per household per year at a cost of 5% of the monthly minimum salary.

Under these assumptions, sub-component 3B is highly feasible with a net present value of US$ 3,157,605 and an economic internal rate of return of 16%.

121 Annex 10: Safeguard Policy Issues ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

1. ENVIRONMENTAL ASSESSMENT

Rural Areas: No major environmental issues are expected in the implementation of this project, given the small scale of the water supply and sanitation (WSS) investments envisioned in rural areas. Minor environmental impacts (proper disposal of construction waste, erosion control, protection of spring catchments etc.) will be addressed by appropriate guidelines that will be incorporated into the technical specifications governing the work of construction contractors and environmental checklists used to screen proposed WSS investments.

Small Cantonal Capitals: The project may finance sewage collection and treatment as well as solid waste infrastructure (landfills, transfer stations etc.) on a pilot basis in small municipalities that strengthen the management and cost recovery of their water, sanitation and solid waste services.

A sectoral environmental assessment for the water, sanitation and solid waste sector has been prepared, including a detailed diagnostic of environmental management capabilities and an environmental management plan with detailed activities to be financed as part of the APL-2 loan. In the run-up to APL-2, SAPSyRS is seeking accreditation for environmental licensing of water supply and sewerage systems as well as sanitary landfills from the Ministry of the Environment. APL-2 will (i)strengthen SAPSyRS’ new environmental management unit; (ii)review laws and norms governing sewage discharges, landfill construction etc. and recommend appropriate standards; (iii)produce environmental guides for water, sanitation and solid waste; and (iv) provide technical assistance to small municipalities to strengthen their environmental management capabilities

Cultural Property

While activities to be carried out under the project are not expected to impact any known cultural heritage sites, technical specifications for works and the Operation Manual will include “chance find procedures” to be followed in the event that culturally significant materials are discovered during the execution of civil works financed under the project.

2. SOCIAL ASSESSMENT

PRAGUAS 11’s targeting of rural WSS investments to the rural areas of cantons with populations of up to 50,000 inhabitants, as well as the provision of technical assistance for the delegation of WSS services and improved sustainability of solid waste investments in cantonal capitals responds to growing demand for these interventions in urban and rural areas. This is consistent with the phenomenon called the “urbanization of poverty” at the turn of the century. According to the World Bank Poverty Assessment of Ecuador (April, 2004), between 1990 and 2001, the number of poor classified under “severe and high poverty” by the System for the Selection of

122 Beneficiaries of Social Programs -SELBEN) increased from 3.5 million to 5.2 million. Poverty, remained constant in coastal rural areas, and increased by 15% in the rural highlands. The highest increases took place in urban areas of the coast and highlands where the poverty rate increased by up to 80%. Thus, the number of poor living in urban areas increased from 1.1 million to 3.5 million. Also, according to the 2001 census, 12.1 % of Indigenous and 36 % of Afro-Ecuadorians live in the main cantons of Quito and Guayaquil. The above phenomenon is noteworthy for the provision of water and sanitation, and particularly to respond to the demand for sewerage and solid waste services by the urban and rural poor.

2.1. The situation of water, sanitation, and solid waste management for the majority of Ecuadorians and for the Nationalities and Peoples (nacionulidudes and pueblos) of Ecuador

The Demographic Mother-Infant Health Survey (ENDEMAIN 2004) underscores the direct impact of clean water in the household on the health and nutrition of indigenous and non- indigenous families, as well as the community at large. Water-born diseases are preventable with proper water treatment and sanitation. Some 22% of surveyed children 0-5 yrs old had diarrhea in the two weeks prior to the survey and prevalence was similar in urban and rural areas, but higher for indigenous (27%) than non-indigenous people (19%).

According to the survey, about 80% of Ecuadorians have access to piped water: 48 % inside the house; 29 % outside the house, and 3 % from public standpipes. Another 7 % use public/ private well water; 5 % purchase water from trucks, and another 5 % use river or spring water.

Table 1: Household access to water service in urban and rural areas, in the 4 geographic regions:

I Source: ENDEMAIN. 2004

The situation of Indigenous and Afro-Ecuadorians differs greatly from the national averages. According to ENDEMAIN, only 23% people self-identified as Indigenous and Afro-Ecuadorian have access to piped water inside and 37% outside the household; 13% use public standpipes or wells; 28% use river or creek water; and 2.2% purchase it from trucks.

A similar service gap between the national average and autochthonous people is apparent for sewerage. Only 19% of domestic sanitation solutions for indigenous people are connected to a sewer system, as opposed to 44% for the national average; 34% of autochthonous people’s sanitation is connected to a septic tank or soak-away pit; and the remaining 47% have no sanitation facilities at all.

123 Table 2: Access to Sewerage in the 4 geographic regions

1 Sanitation Service by I Urban I Rural I Coast I Highland I Amazonia I Galapagos I Toilet wlsew connect 44.4 64.4 15.3 30.5 57.0 50.5 26.4 Toilet w/septic tank 20.0 19.3 21.1 28.9 11.9 14.9 72.0 Toilet disp to river 18.6 11.5 28.9 22.2 15.4 18.0 0.4 Latrine 6.5 2.5 12.4 10.7 3.0 2.3 0.8 No sanitation 10.5 2.4 22.2 7.7 12.8 14.4 0.4

In terms of solid waste, 65% of Ecuadorians have public trash collection, but only 39% of autochthonous people do. Some 25% of Ecuadorians in general burn or burry trash; but approximately 40% of autochthonous households dispose of it in rivers, over cliffs or in empty lots.

Table 3: Management of Solid waste in the 4 geographic regions

Source: ENDEMAIN, 2004

2.2. The demographics of PRAGUAS I

PRAGUAS is demand-driven. So far, PRAGUAS Ihas benefited approximately 94,800 families distributed as follows: 66,157 families with both water and sanitation systems; 13,800 families only with water, and 14,845 families only with sanitation. The baseline in the SINSOC system gives demographic results: 58% are mestizo, 15% are indigenous, and 0.7% are Afro- Ecuadorian. In terms of occupation 77% of beneficiaries are small farmers and only 3% are traders. 20% have other occupations. One third of beneficiaries were children.

3. EVALUATIONS AND STAKEHOLDER CONSULTATIONS

The results of the following evaluations have been used to improve the project design of PRAGUAS 11:

(a) The evaluation of 16 pilot projects of PRAGUAS Iwas used in 2003 to improve the original social, technical and financial design under APL-1.

(b) The ex-post evaluation of a purposeful sample of 40 projects was carried out in 2005 by the Quinteros, Rojas & Dueiias consultants association. The sample included pilot projects (completed in 2002) and a selection of new projects completed at least 18 months prior to the evaluation. The purpose of the evaluation was to assess the technical, social and economic efficiency and sustainability of the WSS systems provided by PRAGUAS and to evaluate the efficacy of the technical and financial processes, procedures and norms of the projects located in

124 small municipalities with cantonal capitals of less than 10,000 inhabitants. A total of 190 focus groups and interviews with mayors and EMS teams, water boards, community leaders and WSS male and female users were conducted; a 1,752 household baseline survey instrument was applied, and 36 schools were used for observation. Some 38 water systems were assessed, and 237 water samples were analyzed in laboratories. Evaluation results and lessons learned are reflected below.

(c) An evaluation of water boards was carried out by NOLASCO Associates and financed by the Canadian Consultant Trust Fund in 2004.

(d) In 2005, the institutional arrangements for the two largest components (WSS investments in rural areas (component 2) and small towns (component 3), respectively) were assessed by independent international consultants.

The Ex-post Evaluation

The main conclusions and recommendations of the ex-post evaluation are:

General Conclusions: As a result of PRAGUAS intervention, 90% of municipalities have institutionalized a Municipal WSS Team (EMS) as part of the Public Works Unit. The inclusion of the EMS has significantly improved the technical capacity of the municipal teams. The PRAGUAS participation scheme in the design as well as in the implementation phases of each WSS project was applied in 100 % of communities evaluated, however, results show a demand for a more standardized hands-on training of EMS, OITS (Technical and Social Intermediary Organizations), water boards, and communities. The financial scheme of PRAGUAS Ihas proven to be socially acceptable. Ex-post evaluation results indicate satisfaction of municipalities and communities with the established contributions. Moreover, experience in Ecuador shows that communities are more likely to maintain projects where they have made some investment, and neglect maintenance of donated projects. Therefore, contrary to other institutions’ paternalistic approach, PRAGUAS I1 will continue its tripartite financial policy: PRAGUAS (50 %), municipality (20 %) and community (30 %: 10% in cash and 20% in kind). The selection criteria for rural water should remain: municipalities and communities willing to (i)co-finance 20% and 30% of RWSS investments, respectively, (ii)adopt rural tariffs that cover the cost of O&M and some equipment replacement; and (iii)agree to a demand-driven approach. Under these circumstances, the PRAGUAS program will provide TA for engineering designs, community development (including training and hygiene education) and supervision of works at no charge. The ex-post evaluation indicated that the targeting of PRAGUAS Iwas pro-poor: 92% of the beneficiaries of the pilot program and 72% of beneficiaries of WSS systems in 2002- 2004 were small rural farmers, 5.6% were artisans or worked in small-scale industry; 5.3% worked in trade and only 0.5% own micro-enterprises.

125 General Recommendations: Provide an integrated vision of PRAGUAS to include water and sanitation of economically viable and sustainable systems. Provide water boards and communities with the skills and tools to protect their water sources. Promote sustainability by pre-selecting municipalities that have: (i)a technical, social and financial team; (ii)municipal plans that include WSS and watershed protection plans; (iii) a capable administrative/financial team; (iv) up-to-date tax payments. Include in the criteria for selection of beneficiaries for piped systems, those organized communities of 100 or more households willing to pay tariffs. Smaller communities with less than 100 household connections will be encouraged to consider lower cost alternatives, although exceptions can be justified by an economic analysis on a case-by- case basis. The emphasis of PRAGUAS IT should be on strengthening of EMS and water boards. A periodic strengthening program of the Municipal Technical-Social-Financial Teams (EMS) to ensure adequate skills of staff that have turned over should be developed. Improve the PRAGUAS Monitoring and Evaluation systems, with user-friendly information systems that allow the utilization of the baseline and diagnostic data for monitoring of the Social Plan by the Municipality, Water Board and community. A more participatory, hands-on, training scheme (away from lecturing) of EPAS (Provincial Water and Sanitation Teams, subunits of the Ministry of Urban Development and Housing (MIDUVI)), EMS (Municipal Sanitation Teams), Water Boards, systems operators and communities is needed across the project. Promote internships and workshops to learn-by-doing. Assist Water Boards and communities in the formulation of Social Plans that include community planning, tax payment, assessment of natural resources, and management of water sources. Social Plans should be implemented by both the water board and the community. Disseminate more extensively PRAGUAS’ Operation Manual for financial and technical operations, administration, social control and auditing in general. PRAGUAS procedures should be standard and universally known.

Financial and Economic Conclusions: The distribution of the investment in the systems assessed was: 72 % in water works; 20 % in sanitation and 8 % in social strategy. The municipal supervision of the social-technical work is weak, perhaps due to absence of appropriate supervision instruments. There was no assessment of water sources, or planning/ budgeting for protection of water sources in the majority of projects assessed. Water tariffs. The original water tariffs agreed on duing the promotion phase of the project (ranging between $0.30 and $3.0/m3) have not been revised in most systems. Some 82.5% of users consume water amounts below the expected levels. Some 91.4 % of beneficiaries are farmers. Some 15 systems with higher numbers of connections (165 average) were financially profitable; 10 systems with 78.9 connections on average were marginally profitable; 3 systems with lower number of connections were not financially viable. The last 12 could not be assessed due to lack of information.

126 f) Water boards interviewed have not received technical assistance to create a set of norms for efficient financial operation of their systems. The EPAS are responsible for this activity.

Economic and Financial Recommendations: a) Review the investment cost ceiling for household water connections, and ceilings for sanitary options to avoid incomplete or inefficient solutions. b) Contract technical and social consultants separately to achieve more autonomy, accountability and tangible results for the social experts. c) Improve accountability of the municipalities to the communities, by introducing social control mechanisms to report to the community about their investment operation. d) Provide water boards with training in accounting, regulation, and financial management of systems, revenue investment, tariff collection, and enforcement of penalties, etc. e) A differential water tariff should be assigned to productive activities such as flower and chicken farming. f) Review the EPAS’ terms of reference to ensure the technical and financial feasibility studies are being implemented according to the norms of the Program.

Technical Conclusions: (a) In general, designs meet SAPSyRS norms. No technical problems were detected in hydraulic calculations for transmission mains and water distribution. (b) Quality of civil works and operation of the WSS units. The overall quality of the civil works, choice of construction materials (PVC-P pipes, ferro-cement), valves and accessories is satisfactory. All the WSS systems evaluated are in acceptable working conditions. Problems found are related to the choice of technical option and community organization to manage the system. A considerable number of water meters in unsatisfactory condition were found. (c) Water quality. Insufficient attention is given by water boards and users to water quality. People seem to be content with having piped water, disregarding water-born health problems. Water tests show only 53 % of water systems have potable water, which reflects poor training of water boards and communities. 63 % of communities disinfect raw water in treatment plants, but 29 % make technical errors in preparing disinfectants and measuring residual chlorine in the network. In a few cases, a poor choice of surface water source (prone to contamination or high in turbidity) results in high costs of disinfection. 0 Water meters. 100 % of families in most provinces, except for Manabi (67%) and Sucumbios (22%) have water meters, however not all of them operate well. Some 83.4% of users pay by water volume, and the other 16.6 % pay fixed tariffs. (d) Training. The results of community and water board training by OITS and EPAS respectively are not satisfactory. Water boards are expected to show managerial expertise but in many cases they have not been adequately trained. (e) Protection and conservation of water sources. Some 74 % of water sources evaluated may be prone to contamination and water volume reduction in coming years due to unprotected catchments, deforestation, farming, and the excessive use of pesticides/fungicides. Only a few municipalities and water boards implement watershed protection plans.

127 (f) Sanitation. Basic Sanitation Units (“Unidad BBsica de Saneamiento”, (UBS), comprising a toilet, sink, and shower) are a great success in the communities assessed, as they have significantly contributed to improve the living conditions and self-esteem of users. Several families have improved the UBS with ceramic tiles, hot water, etc. In sum, 37 % of users have selected UBS, 40 % selected only toilet and sink, and 23 % improved their pour flush latrines.

Social Conclusions: In general, results show high satisfaction in beneficiaries as well as positive impact on the improvement of hygiene habits and maintenance of water systems in rural communities, through the development of Social Plans.

Beneficiaries. Both mestizos and the Indigenous population benefited from PRAGUAS I: over 70 % of users in Azuay, Bolivar, El Oro, Imbabura, Loja and Manabi are mestizos, and 74 % of users in Cotopaxi, Chimborazo and Sucumbios are Indigenous. Both groups were equally served in Pastaza (Amazonia). Coverage. Between 90 and 99 % of people in participating communities in most provinces were connected to the WSS system; 100 % in Cotopaxi, 70 % in Loja and 25 % in Sucumbios (Amazonia). On average, systems operate 20 hrs/day, except for Manabi (1 2 hrs/day). Water quality and quantity. The perceived water quality of 75 % of interviewees in most provinces, and 100 % of Cotopaxi and Tungurahua is “good”. However, 60 % of users in Pastaza, 30 % in Manabi, 24 % in Loja and 21 % in Imbabura believe that water quality is ‘so so’. Some 85 % of households overall, and 20 % in Cotopaxi rate water quantity as ‘sufficient’ for their needs. Health. Prevalence of diarrhea in the 15 days prior to the survey was of less than 10 % in Azuay, Bolivar, Cotopaxi, Chimborazo, El Oro and Manabi, but between 17 and 23 % in Sucumbios, Loja, Imbabura and Pastaza. User satisfaction with WSS systems. Over 75 % of surveyed users are ‘fully satisfied’ with water systems in all provinces, except in Pastaza (69 %). However, the level of satisfaction with sanitation is mixed. Over 90 % of families in Azuay, Imbabura, Loja and Manabi are fully satisfied, but between 50 and 80 % in Pastaza, Sucumbios and El Oro, and between 90 and 100 % in Bolivar and Cotopaxi are not satisfied with the systems. Almost 100 % of families having UBS used them. Environmental impact. Insufficient work has been done towards conservation of water sources. Community participation for reforestation was evident only in Chimborazo, Loja and Sucumbios (60 to 100 % participation). The majority of beneficiaries have no trash collection, except for Bolivar, Pastaza and El Oro (between 42 and 65 %). Use of chemicals for agriculture is high in all provinces, e.g. in Cotopaxi (99 %), Imbabura (91 %), and Pastaza (66 %). Hygiene. The majority of families do not disinfect water, except for Imbabura and Loja. However, more than 70 % of users “wash hands before meals”, “wash foods before eating them”, and “wash hands after using the latrine”. Water boiling is more uneven: it ranges from over 50% of families in Chimborazo, Pastaza and Sucumbios to 25% in Azuay and Cotopaxi. The number of liters boiled ranges between 3 (Azuay) and 8 (Sucumbios), mostly with gas (wood in Chimborazo). Direct observation of water storage indicates that 80% of receptacles were covered, although receptacles are often unclean.

128 0 Utilization of W&S systems in schools. Most problems were found in schools in the highlands and Amazonia. Sanitation items such as soap, are rarely available. 0 Community Contributions. Beneficiary participation in preparation and implementation of WSS processes, and labor is high (over 80 %) for men and women. Participation in monetary contributions was highest in Azuay, Cotopaxi, Chimborazo, El Oro, Loja and Sucumbios (over 90 %) and contributions ranged between US$12 and US$120 (Chimborazo).

Technical and Social Recommendations: Technical Supervision. Improve the technical supervision of construction contracts and enforce quality controls. Reinforce the requirement that communities have title to water sources before works commence. Enforce the use of Operation Manuals for water boards and EMS. Verification of demand. Ensure the selection criteria used for municipalities, communities, water sources and number of connections responds to demand, and not to political pressures. Consider contracting this activity separately. PRAGUAS should assist communities in fixing water tariffs to maintain economically sustainable systems. At the moment, tariffs adopted by many communities are not economically viable to provide quality water. Social control/supervision. More involvement of the water boards and community members is needed during the processes of technical supervision of civil works, to promote beneficiary awareness of materials used, agreed implementation timelines, costs and contractual terms and to empower them with the knowledge and skills needed to demand efficiency from the EMS, consultants, contractors and PRAGUAS. Enforce the protection of water sources under the environmental protection plan of each project that includes prevention and mitigation measures. Community training. Evaluation of community training results highlight the need to adjust training to local needs with more efficient focus on gender and interculturality of beneficiaries (language, world view). Community Social Management Plans should include a module on community planning for Operation and Maintenance of the systems. Communities request that the community contribution in cash and in kind be calculated and also advertised on the project signs, next to that of the municipality and PRAGUAS.

Water Boards Strengths Index - Conclusions: a) In general, water boards are more efficient in water systems operation than in maintenance, administration and financial management. Some deficiencies may be due to low schooling, (e.g. 20 % of Presidents, 42 % of Secretaries, and 47 % of Treasurers only have primary education). b) The most efficient water boards are those of the coastal region, administrating new water systems, and serving non-indigenous populations. The 27 water boards administrating new systems show significant improvements over the 11 boards of the Pilot PRAGUAS program in all areas, except for Local Planning, Performance and Products. The water boards located in Parish capitals (5) (“parroquias”) are found to be more efficient than the 32 boards serving disperse rural communities. Likewise, boards serving non-

129 indigenous communities are found to be more efficient than the 12 boards serving the Indigenous. The Social Management Plans do not have separate strategies for (i)community and (ii) water board training in management and administration of systems. Training of water boards. Only 53 % of present water boards interviewed have been trained by the EPAS in financial management (turnover of boards every two years). Evaluation results show deficiencies in training to operate, maintain, and administer systems and protect water sources. At the moment, low cost recovery does not allow capitalization /reinvestment or adequate maintenance of systems, much less the protection of water sources. Water boards have not participated in the operation, maintenance and administration of on-site sanitation systems. In some communities, neither the WSS systems nor the water sources are accounted for as assets. Participatory Planning. Only 25 % of water boards included community leaders and civil society in operations planning, and only half of those include monitoring and evaluation mechanisms. The other 75 % lack a plan (operational, financial, management, maintenance), and a budget. Legal and tax issues. Only 8 % of assessed water boards have a tax-payer ID (RUC) and pay taxes, the other 92 % don’t. Tariff collection. Some 81 % of Water Boards have revenues from tariff collection. Collection is regular in 50 % of communities, but the other 50 % refuse to pay for non- potable water.

Water Boards -Recommendations: a) Increase education standards of water board members. Arrange literacy training particularly for treasurers and secretaries. b) Provide hands-on training of water boards in basic accounting (control of inputs and outputs), administration (calculation of real costs of tariffs, and differential tariffs for commercial, industrial and household use), use of stationary for billing, payment registration, etc. Avoid ‘lecture style’ training. c) Provide “intercultural” training for water boards serving Indigenous communities. d) Ensure water boards are aware of tax administration procedures, and comply with the legal requirements. e) Train operators to ensure water quality is acceptable.

4. PARTICIPATION AND GENDER STRATEGY OF STAKEHOLDERS AND CIVIL SOCIETY IN PRAGUAS I1

The successful social participation scheme of PRAGUAS Iwill be enhanced in PRAGUAS I1for WSS investments in rural areas as well as for the delegation of WSS services and the strengthening of solid waste management.

A key element of success of PRAGUAS Iis its participation policy on team composition of technical, social and financial staff in the PMU, at the provincial (EPAS) and municipal (EMS) levels, as well as with consultants and contractors.

130 A comprehensive communications strategy will be developed for the promotion of PRAGUAS I1 components, and proper dissemination of information and standard procedures and rules will take place at the provincial, municipal and parish levels. Promotion materials will be carefully designed to convey program goals, procedures, requirements, gender focus and participation opportunities in the different project components and phases. Materials will be designed with a linguistic, intercultural and gender focus.

Participation in the Rural WSS Program. The participation arrangements for the rural water component will continue as in PRAGUAS I, however, hands-on training of EPAS, EMS, consultants and communities will be improved, as suggested by the ex-post evaluation. Capacity building of water boards in administrative (tariff calculation and collection), technical (system maintenance) and operational skills will be carried out, as well as community training for water systems maintenance. Participatory monitoring and budgeting will be important items of the Social Plans. Training of Water Boards is a building block for the creation of the associations of water boards, under sub-component 2C.

An improvement over PRAGUAS Iis that training at the community level will be a coordinated effort of new, larger Social Consultants (hired at the national level) with other stakeholders dedicated to hygiene education and health promotion, i.e. local schools and health posts. To this effect, an “Intersectoral Commission of Water, Health and Hygiene Education” has been formed by PRAGUASI SAPSyRS, and will be led by the PRAGUAS Social Team. Commission members are the Ministries of Health (including the Indigenous Health Unit) and Education (including the Direccidn Nacional de Educacidn Intercultural Bilingue, DINEIB), and the World Bank Water and Sanitation Program (WSP). The goal of the Commission will be (a) to standardize concepts, guidelines and contents of hygiene and health education through proper use of water and sanitation, including concepts based on the world view of indigenous and afro- Ecuadorian peoples; (b) to standardize the materials used for training, and materials left with the community at schools and health posts, including materials in indigenous languages -Kichwa and Shuar; (c) to monitor, sustain and reinforce health practices from schools and health posts after the Social Consultants are gone; and (d) to evaluate changes and impact in a random sample of communities periodically. “Hand-washing” is an important topic.

Delegation of WSS Services to Autonomous Operators in Cantonal Capitals. A new social communication scheme for this component is being prepared. It includes (a) Phase I:informed consultations, social and financial feasibility studies of demand; and (b) Phase 11: the consultants hired to advise municipalities on options for service provision models (Consultoria de Apoyo a la Delegacidn, CAD) will carry out a diagnostic as well as planning of the technical, social, administrative, financial and commercial aspects of delegation of WSS etc. to allow stakeholders and beneficiaries to make informed decisions. Periodic informed consultations of Board members and beneficiaries of the new1y-formed enterprises are planned.

A mid-term impact evaluation as well as an ex-post evaluation are planned for PRAGUAS 11.

5. DEMOGRAPHIC PROFILE OF ECUADOR

Given that Ecuador is a multi-cultural, multi-ethnic and pluri-lingual country, the ethnic stratification of the population is difficult. Estimates of Indigenous and Afro-Ecuadorian

131 population range from as low as 12 % to 40 % (National Indigenous Council of Ecuador, CONAIE). According to the 2001 census the total population of Ecuador is 12.2 million inhabitants. Based on “self-identification”, the resulting ethnic disaggregation is as follows: 6.8 % (830,418) of the population is Indigenous; 5 % are Afro-Ecuadorian (2.3 % black and 2.7 mulatto); 10.5 % (1,271,051) are white; and 77.4 % (9,411,890) are mestizo. Thus, the official total of Indigenous, Afro-Ecuadorian and mulatto is approximately 12 % of the total population. In “Ethnicity and Exclusion in Ecuador”, M. Leon points out that the “self-identification” question in the 2001 census is useful to characterize the socio-economic inequities of population, rather than to quantify ethnic groups. That is achieved by the Sisterna de Zndicadores Sociales de las Nacionalidades y Pueblos del Ecuador (SIDENPE), agreed on by the STFS and CODENPE, and included in the Integrated Social Indicators System (SIISE).

In terms of geographic distribution, the Central Highland provinces are home to almost 50 % of the Indigenous Peoples of Ecuador: Chimborazo (17.6 %), Pichincha (12.2 %), Imbabura (10 %), and Cotopaxi (9.8 %). The provinces with the highest Indigenous population are in Amazonia and the Central Highlands: Nap0 (56.1 %), Morona Santiago (41.3 %), Chimborazo (38.7 %), Pastaza (38.4 %), Orellana (31.4 %), Imbabura (25.8 %), Cotopaxi (24.8 %), Bolivar (24.4 %), Caiiar (17.3 %), Tungurahua (15 %), Zamora Chinchipe (12.8 %), and Sucumbios (11 %). The provinces with the highest number of Afro-Ecuadorian peoples are Esmeraldas (39.9 %), Guayas (6.6 %), Carchi (5.4 %), El Oro (5.4 %), Sucumbios (5.2 %) and Imbabura (4.8 %). However, 75% of Afro-Ecuadorians live in Guayas (35.9 %), Esmeraldas (25.5 %), and Pichincha (13 %). In general, 12.1 % of Indigenous and 36 % of Afro-Ecuadorians live in the main cantons of Quito and Guayaquil.

(a) The Nacionalidades and Pueblos of Ecuador and their Institutions

There are 13 autochthonous na~ionalidades~~and 14 pueblos5’ in Ecuador, but the number of Indigenous peoples varies according to the data source, as seen below.

Table No. 4: Indigenous and Afro-descendant Peoples of Ecuador

(a) 2001 (b) Nationality Language 2003 Location Census CODENPE AwB Awapit 3,082 3,750 Provinces of Esmeraldas, Carchi, Imbabura. (Coaiquer) Chachi Chappalaa 8,040 2,300 Provinces of Esmeraldas Epera Siapedee 250 250 Prov Esmeraldas. Tsa’chila Tsa’fiqui 2,000 2,640 Prov Pichincha (Santo Doming0 de 10s Colorados) Kichwas Kichwa No data 1,077,360 Prov Carchi, Imbabura, Pichincha, Cotopaxi, Tungurahua, Bolivar, Chimborazo, CaA&, Azuay, Loja, I I Zamora Chinchiue.

49 A nacionalidad is defined as “a historical and political entity with its own identity, history, language and culture, living in a determined territory, having its own institutions and a traditional, economic and legal organization”. 50 A pueblo is defined as “an ancestral collectivity composed of communities or centers with cultural identities which distinguish them from other groups of the Ecuadorian society; regulated by their own organizational, social, political and legal systems.

132 A’I Coffin A’ingae 500 728 Prov Sucumbios. Secoya Caicoca 380 400 Prov Sucumbios. Siona Paicoca 400 3 60 Prov Sucumbios. Wuaorani Huao 2,000 3,000 Prov Orellana, Pastaza, Napo. 1 Tiririo Shiwiar I Shiwiar I 697 1 no data I Prov Pastaza. Chicham Zaparos Zapara 150 114 Prov Pastaza.

Achuar Achuar 3,000 4,000 in Prov Pastaza, Morona Santiago. .+ Chicham 830 fam Shuar Shuar 110,000 110,000 Prov Morona Santiago and Sucumbios. Migrants in Prov Chicham in 668 Guayas, Esmeraldas, Pichincha. National Parks: comm I Sangay, Podocarpus, Fauna Reserve of Cuyabeno.

Kichwa Runa Shimi

,, I Total 1.290.642 Sources: (a) Census 2001; (b) SIISE. CODENPE, SIDENPE, Nacionalidades y Pueblos del Ecuador. 2003

Table No. 5: Indigenous Pueblos within the Nucionalidad Kichwu

Province Socio-political organization Bolivar 49 communities, organized in Cabildo Councils, Community Assemblies, Corporations and Federations. Bolivar Council of Mayors and the Indigenous Governor of the Natabuela Peoples. Bolivar 157 Communes, form pre-councils of Cabildos, Cabildos and Cabildo Councils. Pichincha 13 1 communes, organized in associations, cooperatives and provincial federations. Kiru Kara Pichincha 64 communities, organized in Community Assemblies. Cotopaxi Communities represented by Cabildos and General Assemblies. Tungurahua 7 communities, represented by Community Assemblies. Tungurahua Decisions made at Community Assemblies. Community Boards. Waranka no data Bolivar 2 16 communities, semi-concentrated and dispersed. Chimborazo Decisions made at Community Assemblies. Community Board. Caiiar, Azuay 387 communities. Highest authorities are the Elders and the Community Assembly. Loja, Zamora Communities. Community Assemblies and Board. Chinchipe Napo, Pastaza, 438 communities, organized in Associations, Cooperatives, Amazonia Sucumbios, Centers, Federations and provincial Organizations. Orellana TOTAL I 1,077,360 Source: CODENPE and Indicators Systems for the Nacionalidades y Pueblos del Ecuador, 2003

133 Table 6: Linguistic profile of poverty quintiles 1,2 or 3

Source: STFS - SELBEN 2005

It must be noted that 430,000 people in rural highlands and the Amazonia region are bilingual (Spanish-Indigenous language), and at least 45,000 are monolingual in their Indigenous 1angu age.

6. COORDINATION WITH INDIGENOUS MUNICIPALITIES (MUNZCZPZOS ALTERNATIVOS)

There are 36 “Alternative Municipalities’’ and 4 “Mancomunidades” (Rio Chanchan-Chimbo, Pelileo-Patate, Plaora-Pablo VI and Wamboya -- Jubones River) in the Highlands and Amazonia whose mayors are Indigenous. Alternative Municipalities are financed by the Project for the Strengthening of Alternative Municipalities (FORMIA) with Spanish funds. An important goal of the municipalities is to coordinate with other GOE institutions and with NGOs, and to exercise social controls for the efficient implementation of development projects. In the case of PRAGUAS 11, alternative municipalities would coordinate (a) the supply and demand of WSS in Indigenous municipalities to ensure that PRAGUAS I1 is accessed by those who meet the eligibility criteria; (b) promotional and training activities under the umbrella agreement of CODENPE-PRAGUAS/S APS y RS .

7. INDIGENOUS AND AFRO-ECUADORIAN PEOPLES PLAN (IPP)

Given the presence of Indigenous and Afro-Ecuadorian peoples in the project area, O.P. 4.10 is triggered. An Indigenous Peoples Plan for the project has been discussed with the Consejo Nacional de Nacionalidades y Pueblos Indigenas del Ecuador (CODENPE) and the Coordinadora de Desarrollo Afro Ecuatoriano (CODAE). The main objectives of the Plan will be (a) to coordinate the supply and demand of water and sanitation investment in Indigenous and Afro-Ecuadorian communities, (b) to coordinate efforts of SAPSyRS, MOH (including Indigenous Health Dept), MOE (including the National Directorate of Intercultural Bilingual Education) to standardize training contents and strategies to train WSS users and water boards in Indigenous and Afro-Ecuadorian communities, in order to improve health conditions and achieve sustainability of the water systems by optimizing their financial administration, (c) to coordinate the promotion and dissemination of information on PRAGUAS I1with CODENPE, CODAE and “alternative municipalities and mancomunidades” to ensure that information reaches the poor and isolated.

134 The IPP has been discussed with CODENPE, CODAE, DINEIB, and Indigenous Health (MOH). It has been disseminated in the WB Infoshop (English) and through the SAPSyRS/ MlDUVI Webpage (Spanish) in Ecuador. A letter signed by the GOE reflecting its commitment to implement the IPP and to include it in the Operation Manual has been submitted to the Bank.

Key IPP items include:

1. Cooperation agreements between CODENPE and SAPSyRS and CODAE and SAPSyRS should be developed and signed by these institutions. Moreover, the agreements between DINED (MOE) and SAPSyRS and Indigenous Health (MOH) and SAPSyRS are based on existing umbrella agreements between the institutions. Some agreement items may include:

(a) Coordination of PRAGUAS supply and demand with CODENPE and CODAE at the central level on a monthly basis. (b) Coordination for the promotion of PRAGUAS II components and technical assistance at the provincial, municipal (particularly Indigenous Municipalities), and community level. PRAGUAS will provide promotional materials in Spanish, Kichwa and Shuar. (c) Coordination for the dissemination of information on PRAGUAS rules and regulations, procedures, financing scheme and participatory budgeting, social controls and monitoring. (d) CODENPE may provide (i)financial support to “extremely poor” communities which would otherwise not be able to pay the 10% cash contribution required to participate in PRAGUAS; (ii)financial support to strengthen the water boards or WSS systems needing repairs or rehabilitation; (iii)technical assistance to small communities to achieve the level of organization required by PRAGUAS to meet the eligibility criteria to participate in the Program. (e) PRAGUAS will continue to honor local traditional “cabildos” (water boards) instead of insisting on the creation of new water boards. (f) Socialization of WSS experiences in alternative indigenous municipalities (Pallatanga, Guano, Chunchi) or mancomunidades. (h) Coordination in the training of water boards and communities to present proposals.

2. Program promotion campaign through the media, in Spanish but with an intercultural focus.

3. Dissemination of information in the Indigenous languages of the beneficiaries (Spanish, Kichwa, Shuar) as needed.

4. Training of Indigenous Cabildos and Water Boards in financial, administrative, technical and social management of WSS systems with an intercultural focus. 5. Regional Workshops with Alternative Municipalities, and Juntas Parroquiales, at the national level.

6. Mid-term evaluation of WSS, sewerage and solid waste projects benefiting Indigenous and Afro-Ecuadorian communities.

7. Ex-post evaluation of WSS, sewerage and solid waste projects benefiting Indigenous and Afro-Ecuadorian communities.

135 Annex 11: Program Letter ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

MIDUVT

UNOFFICIAL TRANSLATION FROM SPANISH ORIGINAL

(original available upon request)

Quito, June 19, 2006

Engineer Franz Drees-Gross TASK MANAGER Finance, Private Sector and Infrastructure Department Latin America and the Caribbean Region The World Bank Washington, D. C.

Dear Sir:

The Ministry of Urban Development and Housing, under my responsibility, as the lead agency for the Water, Sanitation and Solid Waste sector in Ecuador, continues committed to strengthening the sector, implementing the sector Policy issued by this Ministry in January 2002, and the Medium and Long Term Sector Plan financed by the first phase of the Rural and Small Towns Water Supply and Sanitation Program (PRAGUAS), which is partially financed by The World Bank.

It is important to mention that within the framework of sector development and modernization, a draft Law for the Provision of Water and Sanitation Services has been prepared, which includes the current sector policy as well as criteria for the efficient, effective and sustainable provision of services.

The financial Policy establishes the co-financing of investments to empower its beneficiaries. In this context, the Central Government co-finances up to 50% of the investments only in Municipalities that are not creditworthy. The complementary investments are financed by the municipalities and user fees. This approach has been applied under the PRAGUAS Program in the rural areas of small municipalities, where water systems and individual sanitation solutions were implemented in more than 300 communities through a partnership between the following actors:

136 !

MIDUVI

0 30% from beneficiaries (which contributed 20% in unskilled labor and/or materials and 10% in cash), 0 20% from the municipality in cash, and 0 50% as a contribution from the Central Government.

In municipal capitals, where the PRAGUAS program provided technical assistance for service provision under new and sustainable management models, delegating the services to specialized operators with autonomy from the municipality, the improvements were co-financed by the Municipality (50%) and the Central Government (50%).

Another Policy introduced to the sector over the last 4 years by PRAGUAS, allows the Central Government to respond to requests from beneficiary communities and eligible municipalities, obtaining the commitment from the users to co-finance the investments and to pay tariffs and fees improving sustainability. This has enabled building, together with the communities, systems with service levels and technical options that can be managed and paid for by the community.

Regarding sector tariff policy for urban areas or cantonal capitals in which PRAGUAS participates, tariffs must cover all service costs, including administrative, operational, maintenance, replacement and debt service expenses; in rural areas the tariff covers the administrative, operational, maintenance and replacement of 30% of the goods.

A regulation was established for the allocation of resources derived from the Law of Taxes for Special Consumptions (ICE) (Fixed and Mobile Telephone services, and radio communications), which generates approximately USD 75 million annually to be invested in drinking water projects for all Cantons nationwide. MIDUVI, with support from PRAGUAS, defined regulations for the ICE Law, which were issued through a Presidential Decree in January 2005, and have been applied since January 2006, allowing a better allocation of resources, based on the needs of different municipalities, the management model for service provision, and the operational efficiency of the operator.

With regard to the service operators in urban areas, the Policy requires services to be provided by specialized operators independent of the Municipalities, who will work according to a defined regulatory framework issued through a Municipal Decree by the Municipal Council, thus seeking a service with adequate quality, quantity, coverage, continuity and cost efficiency. For the rural areas it is foreseen that the Municipalities in their relevant jurisdictions, will delegate service management to the Water and Sanitation Management Boards (JAAPS) which are community organizations governed by their Law of creation and operation.

137 MIDUVI

The regulatory framework that appears in the Draft Law for the Provision of Water and Sanitation Services, establishes a wide range of requirements for satisfactory service provision; among these, that municipalities select the conditions under which they want services to be provided in their jurisdictions, and establish indicators for the proper control and for decision making by the Municipality. The Central Government provides incentives for efficient service provision and the amount of the funds allocated by the Government to the sector, which are transferred to the Municipalities or to service providers, are to be determined by efficiency indicators similar to those used in the regulations for the ICE Law described above.

To ensure quality in the use of the funds allocated by the Government for investment in services, as well as to determine the control indicators established in the regulatory framework, it has been established that the Municipalities should hire external audits certified by the General Controller of the State. Results are to be reported to the sector information system SISASAR of MIDUVI, which will be published on MIDUVI’s Web Page for general consultation.

MIDUVI is the office in charge of the development, implementation and monitoring of sector policies, through the Under Secretariat for Water, Sanitation and Solid Waste (SAPSyRS). The strengthening of this leading entity is crucial, requiring an organizational structure that has assigned roles, works according to processes, provides technical assistance to the various sector actors, and plans for coordinated national development in services in rural and urban areas nationwide.

Despite the progress achieved with World Bank support, policies for finance, service fees, interventions and efficient service provision must still be applied in a compulsory way by all institutions that invest in the sector. This requires an increased effort from the Ministry of Urban Development and Housing to achieve implementation, control and monitoring of the Sector Policy, a commitment on which the Minister is working.

The PRAGUAS Program of MIDUVI is closely linked to this process; it has implemented the relevant Sector Policies and generated a favorable response from the various Municipalities and Communities where the interventions have been carried out during APL I,and from those waiting for implementation of APL 11. Since the beginning of my term in office, Ihave supported and prioritized the project so that it may benefit the thousands of Ecuadorians who expect this project to lead to improvements in the quality of life of their families.

Iconsider it necessary to highlight that the Rural and Small Towns Water Supply and Sanitation Program (PRAGUAS) was conceived as a Sector Program to be partially financed by the World Bank through an “Adaptable Loan“ in three phases, the amounts and terms of which can be seen in the following chart:

138 MIDUVI

WORLD MUNICIPALITIES TOTAL START COMPLETION PHASE BANK AND PROGRAM DATE DATE LOAN COMMUNITIES CONTRIBUTIONS APL I 32.00 18.25 50.25 2001 2006 APL I1 48.00 28.00 76.00 2006 2010 APL I11 50.00 33.75 83.75 2010 2013 130.00 80.00 210.00 2001 2013 TOTAL

The first Phase, entitled APL I, was dedicated to studies and the construction of Water and Sanitation systems with loan financing in the amount of USD 32 million, to which we add contributions by Municipalities and Communities in the amount of USD 18 million, and national counterpart funds amounting to USD 1 million; altogether this amounts to approximately USD 51 million, which will be used through October 31, 2006, the closing date of the First Phase.

The National Government, through the Ministry of Urban Development and Housing, is aware that our actions must be continued and strengthened in order to meet the initial objectives established in the year 2000 for the implementation of APL I; therefore it has decided to negotiate the second phase of the PRAGUAS Program (APL 11) with a cost of USD 76 million, for which the IBRD contribution will be USD 48 million.

The second phase of the Program is critical and will allow for the consolidation of sector policies, the continuation of the work and achievements made, and the expansion of the activities with the new specific objectives of PRAGUAS 11, such as:

Consolidate the restructuring of the SAPSyRS to perform its role as the lead institution for the water, sanitation and solid waste sectors. MIDUVI has already approved the new organic structure of the SAPSyRS through a Ministerial Decree; 9 Prepare financial incentives for efficient service provision in conjunction with the Ministry of Economy and Finance (MEF); . Increase sustainable coverage of water and sanitation in the rural areas; . Delegate water and sanitation services in cantonal capitals; . Incorporate the hand washing component, which the MIDUVI considers to be of special importance to improving the hygiene ha bits of the population;

139 MIDUVI

9 Consolidate sustainability in service provision through the strengthening of municipalities, so that they may provide technical assistance to the water and sanitation management boards in their jurisdictions; this will be complemented by board associations at the regional level, to be implemented in the second phase; . Sustainable arrangements for the provision of solid waste services, the goals of which include: i) separate accounting for the total service cost; ii) participation of private and/or community operators as third parties in at least one aspect of the services; iii) composting and recycling; and, iv) the use of sanitary landfills, transfer stations and infrastructure works shared among several municipalities.

In consideration of the above, MIDUVI fully supports the continuation of the program into the second phase; PRAGUAS has cooperated with the sector in a most valuable way and this new phase will allow us to meet the objectives established in our Five-year Plan.

Sincerely,

Eng. Hkctor Vdez Andrade MINISTER OF URBAN DEVELOPMENT AND HOUSING

140 Annex 12: Project Preparation and Supervision ECUADOR R Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

Planned Actual PCN review 1 1/2 112005 11 /2 1/2005 Initial PID to PIC 01/17/2006 0 1/06/2006 Initial ISDS to PIC 0 1/17/2006 OM1/2006 Appraisal 03/20/2006 03/20/2006 Negotiations 04/ 17/2006 06/2 1/2006 Board approval 07/06/2006 07/20/2006 Planned date of effectiveness 11/01/2006 Planned date of mid-term review 11/01/2008 Planned closing date 02/28/20 11 ____~~~~ ~~~~~~

Key institutions responsible for preparation of the project:

Ministry of Urban Development and Housing (MIDUVI) Subsecretariat of Water Supply, Sanitation and Solid Waste (SAPSyRS) Toledo 684 y LCrida Quito, Ecuador

Bank staff and consultants who worked on the project included:

Name Title Unit Franz Drees-Gross Sector Leader, TTL LCSFP Maria Angelica Senior Economist, Co-TTL LCSFW Sotomayor Ximena Traa-Valarezo ConsultantlSocial Specialist LCSFU Charles Peterson Sr. Environmental Specialist TUDUR Daniel Hoornweg Sr.Environmenta1 Engineer LCSFW Lene Odum Jensen ConsultantA-Iandwashing Specialist EWDWS Eduardo Perez ConsultantlSanitation Specialist EWDWS Alejandro Tapia Consultanthfrastructure Specialist LCCBO Gustavo Guerra Garcia Consultanthnplementation Specialist LCSFW Franz Rojas Ortuste ConsultanWSS Service Model Specialist LCSFW Valeriano Garcia ConsultantPiscal-financial specialist LCSFW Pilar Gonzalez Senior Counsel LEGLA Luis Schwarz Sr. Financial Mgt. Specialist LCSFM Ana Lucia Jimenez ConsultantPMS LCSFM Marcel0 Amador Osorio Consultant/Procurement Specialist LCSPT Morag van Praag Senior Finance Officer LOAGl Xiomara Morel Senior Finance Officer LOAGl Caroline van den Berg Senior Economist EWDWS Michele Bruni ConsultantlCommunicationsSpecialist EXTCD Carmen Tene Sarango ConsultantlSocial Specialist LCSFW

141 ~~ Tarik Chfadi ConsultantEconomist LCSFW Mukami Kariuki Peer Reviewer EWDWS Carl Bartone Peer Reviewer EWDWS Patricia Rodriguez Consultant/ACS LCSFW

Bank funds expended to date on project preparation: 1. Bank resources: US$l82,247.94 2. Trust funds: 0 3. Total: US$l82,247.94

Estimated Approval and Supervision costs: 1, Remaining costs to approval: US$ 25,000.00 2. Estimated annual supervision cost: US$ 70,000.00

142 Annex 13: Documents in the Project File ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

0 Curtis, V and Cairncross, S., “Effect of washing hands with soap on diarrhea risk in the community: a systematic review.” Lancet. Vol 3, May 2003.

0 Delegating Water and Sanitation Services to Autonomous Operators, Water and Sanitation Program (WSP) field note, February, 2005

0 “Desigualdades en el acceso, us0 y gasto con el agua potable en Ame‘rica Latina y el Caribe”, Ecuador, Technical Report Series No. 5, Panamerican Health Organization, Washington DC, Febuary, 2001

0 Encuesta Demografica y de Salud Materna e Infantil, ENDEMAIN 2004.

0 Garcia, Valeriano F., Calificacibn de 10s Municipios del Ecuador, octubre, 2005 y marzo, 2006.

0 Guerra Garcia-Picasso, Gustavo, “Evaluacih Institucional del Programa de Agua y Saneamiento para Comunidades Rurales y Pequeiios Municipios (PRAGUAS), versi6n definitiva y Res6men Ejecutivo”, 25 de octubre de 2005.

0 Moreno Cirdenas, Constanza, Ing., “Evaluaci6n Ambiental del Sector de Agua, Saneamiento y Residuos S6lidos del Ecuador-Informe”, mayo 2006.

0 Yepes G., G6mez B., and Carvajal, E., “National Plan for the Development of the Potable Water and Basic Sanitation Sector”, October, 2002.

0 Project Appraisal Document for the First Phase of the Rural and Small towns Water Supply and Sanitation Program (PRAGUAS), September 20,2000.

0 Rojas Ortuste, Franz, “Evaluaci6n del Proceso de Delegaci6n de 10s Servicios de Agua Potable y Saneamiento PRAGUAS”, noviembre 2005.

0 Rojas-Ortuste, Franz, “Evaluaci6n del Proceso de Delegaci6n de 10s Servicios de Agua Potable y Saneamiento PRAGUAS, Informe Complementario”, enero 2006.

0 World Bank Country Assistance Strategy for the Republic of Ecuador-Report 25817 EC, April 29,2003.

0 Quintero, Rojas & Dueiias consultants association, March 2006. “Evaluaci6n Ex-Post de la Primera fase del Programa PRAGUAS”.

143 Annex 14: Statement of Loans and Credits ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

Difference between expected and actual Original Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb orig. Fm. Rev’d PO85302 2004 EC Institutional Reform 20.00 0.00 0.00 0.00 0.00 20.00 6.00 0.00 PO66752 2003 GEF EC NT PARKSiBlODIVER II 0.00 0.00 0.00 8.00 0.00 2.89 2.50 0.00 PO39437 2002 EC RURAL POVERTY (PROLOCAL) 25.20 0.00 0.00 0.00 0.00 4.59 2.99 I.89 PO63644 2002 EC Power&Comm.Sect Modemiz.&Rural 23.00 0.00 0.00 0.00 2.00 12.17 14.17 2.85 Servi PO72527 2002 EC-Power&Comm.Sctrs Modmiz.&Rural 0.00 0.00 0.00 2.84 0.00 1.90 2.84 I.58 Srvs PO742 18 2002 EC Public Sector Financial Management 13.86 0.00 0.00 0.00 0.00 10.05 10.05 0.00 PO49924 2001 EC Rural Water Supply & Sanitation 32.00 0.00 0.00 0.00 0.00 2.05 2.05 1.85 PO39084 1998 EC- HEALTH SERVICES 45.00 0.00 0.00 0.00 0.00 9.35 9.35 9.35 MODERNIZATION PROJ. Total: 159.06 0.00 0.00 10.84 2.00 63.00 49.95 17.52

ECUADOR STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed LFC IFC FY Approval Company Loan Equity Quasi Panic. Loan Equity Quasi Partic 2004 BPC Ecuador 1.67 0.00 0.00 0.00 1.67 0 00 0.00 0.00 1998 Concessionaria 11.50 0.97 0.00 15.00 2.93 0.00 0.00 3.82 1999 FV Ecuacobre 2.19 0.00 4.00 0.00 2.19 0.00 4.00 0.00 1998 Favorita Fruit 4.44 5.00 0.00 0.00 4.44 5.00 0.00 0.00 2003 Favorita Fruit 11.69 0.00 0.00 0.00 11.69 0.00 0.00 0.00 2004 PRONACA 19.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00 Total portfolio: 50.99 5.97 4.00 15.00 27.42 5.00 4.00 3.82

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

144 Annex 15: Country at a Glance ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11) Ecuador ’

PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Inflation (%) Domestic prices 1 (%change) 150 Consumer prices 312 27.4 7.9 2.7 100 Implicit GDP deflator -2.0 7.8 9.0 4.1 50 Government finance (%of GDP, includes current grants) 0 Current revenue 218 25.4 26.9 -50 Current budget balance 6.3 6.6 7.6 -GDPddlator -CPI Overall sutplus/deficit 0.5 17 2.3 1 I

TRADE 1984 1994 2003 2004 Export and import levels (US$ mill.) (US$ millions) Totaleqorts(fob) 2,622 3,843 6,038 7,655 Oil 1,835 la5 2,372 3,899 .,------1 Bananas t36 708 1,099 1,023 8,000 Manufactures 684 1,584 1,658 6.000 Total imports (cif) 1,529 3,622 6,534 7,861 4,000 Food Fuel and energy 63 104 664 785 2,000 Capital goods 555 I390 1,789 2,054 0 98 99 00 01 02 03 04 Eqort price index (2000=100) 131 75 135 im Import price index(2000=WO) u5 1u 99 a3 Exports e Imports Terms of trade (2OOO=WO) 75 67 137 115 I

BALANCE Of PAYMENTS 1984 1994 2003 2004 Current account balance to GDP (%) (US$ millions) Exports of goods andservices 2,849 4,601 7,079 8,734 10 T Imports of goods andservices 2,064 4,894 7,858 9,301 Resource balance 785 -293 -779 -567 Net income -860 -940 -1,465 -1,493 Net current transfers 20 322 1,772 1,894 Current account balance -56 -911 -472 -66 Financing items (net) -44 t38 609 447 Changes in net reserves 130 774 -07 -281 Memo: Reserves including gold (US$ millions) 736 2,010 181 1,245 Conversion rate (DEC, local/US$) 1.0 to 10 1.0

EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 ‘Composition of 2004 debt (US$ millions) I Total debt outstanding and disbursed 8,306 15,061 6,864 8,868 A a34 206 830 888 834 IBRD G i516 B 16 IDA 35 28 B 8 Total debt service l,t?O 1,000 2290 3,731 IBRD 38 153 03 10 IDA 1 1 1 1 Composition of net resourceflows Official grants 25 46 81 Official creditors 220 81 61 -3 n Private creditors 413 -44 604 598 Foreign direct investment (net inflows) 50 576 1,555 1,130 Portfolio equity(net Inflows) 0 7 9 World Bank program Commitments 0 64 14 0 IA-IBRD E- Bilateral Disbursements 67 le 152 29 , B - IDA D - Other mltilateral F - Private Principal repayments 20 95 93 83 C-IMF G-Short-term I

145

Annex 16: Map IBRD 34551 ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11)

90° GALAPAGOS ISLANDS ECUADOR ARCHIPIÉLAGO ISLA PINTA DE COLÓN RURAL AND SMALL TOWNS WATER SUPPLY ISLA MARCHENA AND SANITATION PROGRAM ISLA GENOVESA PACIFIC OCEAN CANTON CAPITALS 0° 0° PROVINCE CAPITALS ISLA SAN SALVADOR PROJECT CANTONS: ISLA NATIONAL CAPITAL FERNANDINA DELEGATION OF WATER/SANITATION SERVICES UNDER PRAGUAS I PAVED ROADS ISLA SANTA CRUZ INITIAL CANDIDATES FOR DELEGATION OF WATER/SANITATION OTHER ALL-WEATHER ROADS ISLA ISLA SAN SERVICES UNDER PRAGUAS II ISABELA CRISTÓBAL RAILROADS 1° CANDIDATE AREAS FOR SEWERAGE PILOT 1° CANTON BOUNDARIES CANDIDATE AREAS FOR SOLID WASTE PILOT 0 25 50 75 100 ISLA SANTA MARÍA PROVINCE BOUNDARIES KILOMETERS ° ° ISLA 91 90 ESPAÑOLA INTERNATIONAL BOUNDARIES

81° 80° 79° 78° 77° 76°

San Lorenzo Valdez

Río Verde 1° ESMERALDAS 1° Rio COLOMBIA

Atacames San Rio CARCHI TULCÁN Miguel Huaca EsmeraldasESMERALDAS El Angel PACIFIC Muisne San Gabriel San Miguel Mira de Urcuquí Bolívar IMBABURA Pimampiro La Bonita Rosa Atuntaqui Zárate Cotacachi OCEAN Puerto IBARRA Rio San Mig Quito Otavalo NUEVA LOJA uel Pedro Vicente Maldonado Cascales (Lago Agriao) Puerto el Carmen Pedernales San Miguel Lumbaquí de los Bancos Tabacundo de Putumayo La Cayambe SUCUMBIOS 0° 0° Concordia PICHINCHA Shushufindi Santo Domingo QUITO Joya de los Rio Aguarico de los Colorados El Chaco Sangolquí Sachas Flavio El Carmen Alfaro Baeza PUERTO FRANCISCO DE ORELLANA MANABI Machachi NAPO Rio Nap Bahía de Caráquez Sigchos Chone Manga Loreto o del Tosagua Cura ORELLANA Saquisilí Archidona Buena COTOPAXI Rio Nuevo Calceta Rocafuerte Fé LATACUNGA YasuniRocafuerte Manta Junín La Maná Pujilí 1° Valencia 1° Montecristi Pichincha Ibarra Quevedo Salcedo PORTOVIEJO El Corazón TENA AMBATO Píllaro Santa Ana Rio Cononaco Mocache TUNGURAHUA Santa Clara Las Naves Cevallos Patate Pelileo SucreOlmedo LOS RIOS Tisaleo Daule Baños Rio Cur Jipijapa Palenque Ventanas Echeandía Mocha Quero Mera Balzar aray Puerto Pueblo BOLIVAR PUYO López Vinces Catarama GUARANDAGuano Penipe Rio Viejo Paján Colimes RIOBAMBA Palestina Caluma Chimbo Santa Lucía Baba San Miguel Villa Palora PASTAZA Rio Pedro Lomas de Montalvo la Unión Chambo Carbo Sargentillo Salitre BABAHOYO Pintoy Manglaralto acu Daule Alfredo Chillanes CHIMBORAZO o Baquerizo Huamboya Ri Isidro Rio Guamote o 2° Ayora Sambor- Moreno 2° Narcisa Pallatanga R i de Jesus Babahoy ondón Simón Bolívar o Bob GUAYAS Yaguachi Milagro Pastaza Cumandá o Naranjito Alausí na Salinas Santa Elena GUAYAQUIL za Durán Cnl. Marcelino MORONA La Libertad Maridueña Chunchi El Triunfo Juncal MORONA- La Troncal Sucúa El Tambo Cañar SANTIAGO ano Gral. Villamil p Naranjal CAÑAR u Mendez R Biblián AZOGUES me ngai Déleg Paute Ca Guachapala Sevilla de Oro Rio Gulf of Balao CUENCA El Gualaceo Pan General Leonidas 3° Plaza Gutiérrez 3° AZUAY Chordeleg Sigsig Guayaquil San Fernando San Juan El Guabo Pucará Girón Bosco ISLA MACHALA Zamora SANTA CLARA Santa Nabón Pasaje Isabel Rio Santa Chilla Gualaquiza Huaquillas Rosa EL ORO Paccha Saraguro PERU Arenillas El Pangui Piñas Zaruma 28 de Mayo Portovelo Balsas Yantzaza La Marcabelí Chaguarpamba Victoria Zumbi LOJA Alamor Catacocha Guayzimi 4° Catamayo 4° Pindal Celica ZAMORA Gonzanamá LOJA ZAMORA- Sozoranga Quilanga Zapotillo Cariamanga CHINCHIPE Macará

0255075100125 150 Amaluza KILOMETERS

Zumba This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown 5° PERU 5° on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or

acceptance of such boundaries. IBRD 34551 MAY 2006

81° 80° 79° 78° 77° 76°