Projected Water Production, Consumption, and Losses, Koror/Airai

Final Report

Republic of Palau Project Number: 40122 July 2009

Technical Assistance Republic of Palau: TA 4977-PAL Preparing the Babeldaob Water Supply Project

CURRENCY EQUIVALENTS (as of 1 April 2009)

Currency Unit – United States dollar ($)

ABBREVIATIONS

ADB – Asian Development Bank ADF – Asian Development Fund AIFC – Asian Incremental Financial Cost AS – Administration Support BWSP – Babeldaob Water Supply Project BPW – Bureau of Public Works CAP – Community Awareness Plan CAPP – Community Action and Participation Plan CAT – Community Action Team CC – Construction Contractor CIP – Capital Infrastructure Projects CIP – Capital Improvement Projects CPP – Community Participation Program DOE – Design Office Engineering DSC – Design and Supervision Consultant DSCR – Debt Service Coverage Ratio EA – Executing Agency ECC – Environmental Clearance Certificate EA – Environmental Assessment EIB – European Investment Bank EIA – Environmental Impact Assessment EIS – Environmental Impact Statement EMP – Environmental Monitoring Plan EQPB – Environmental Quality Protection Board ES/C – Environmental Specialist/Consultant ETP – Effluent Treatment Plan FIRR – Financial Internal Rate of Return GDP – Gross Domestic Product GOP – Government of Palau HAS – Health Awareness Support HH – Households IA – Implementation Agency ICB – International Competitive Bidding IEE – Initial Environmental Examination IS – International Shopping KPI – Key Performance Indicator LIG – Low Income Group LS – Local Shopping MASL – Meters above sea level MG – Million gallons MOF – Ministry of Finance MPIIC – Ministry of Public Infrastructure, Industries and Commerce MRD – Ministry of Resources and Development NCB – National Competitive Bidding NPV – Net Present Value

NGO – Non-Governmental Organization NRW – Non-Revenue Water OCR – Ordinary Capital Resources O & M – Operation and Maintenance p.a. – Per Annum PIA – Project Implementation Assistance PIU – Project Implementation Unit PMO – Project Management Office PMU – Project Management Unit PPME – Project Performance Monitoring and Evaluation PPTA – Project Preparatory Technical Assistance PSC – Project Steering Committee ROP – Republic of Palau RPPL – Republic of Palau Public Law SI – Sensitivity Indicator SV – Switching Value TA – Technical Assistance UFW – Unaccounted for water WACC – Weighted Average Cost of Capital WASA – Water and Sewerage Authority WHO – World Health Organization

dia – diameter ft – feet gal – gallons gpm – gallons per minute gpcd – gallons per capita per day in – inch lpm – liters per minute m – meter m/sec – meters per second mg/L – milligram per liter

NOTE

(i) The fiscal year of the Government and its agencies ends on 31 December. (ii) In this report, "$" refers to US dollars.

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TABLE OF CONTENTS CURRENCY EQUIVALENTS……………………………………………………………………...…i ABBREVIATIONS………………………………………………………………………...………...…i MAP……………………………………………………………...…………...……………………...…ii Executive Summary………………………………………………………………………………....x

1 INTRODUCTION……………………………………………………………………..………1 1.1 Background to the Terms of Reference…………………………………………...1 1.2 PPTA Progress ...... …...... ……….1 1.3 Project Rational……………………………………….….………………………….1 1.4 Analysis of Key Problems and Opportunities………………………………….....2 1.4.1 Inadequate Investment……………………………………...….…………..2 1.4.2 Unsatisfactory Water Source Reliability…………………………………..2 1.4.3 High Water Production per Capita………………………………...………3 1.4.4 Unsustainable Tariffs……………………………………...…….………….3 1.4.5 Lack of overall responsibility…………………………………….…………4 1.4.6 Unsustainable Water Supply Systems……………………………………4 1.4.7 Fragmented Water Supply Legislation….……………………..………….4 1.4.8 Weak Institutional Capacity………………………………………...……...5 1.4.9 Private Sector involvement...... ……..….6

2 INTERIM REPORT INVESTIGATIONS & PROPOSALS & SUBSEQUENT STUDY...... ………………………………………………………………….…………7 2.1 Interim Report Investigations...... ……....…….……….7 2.1.1 New Sources...... ……...... …...………….7 2.1.2 Tariffs...... …..…...... …………..………………….7 2.1.3 Social Surveys...... ……...... ………...... …...………..8 2.2 Subsequent Studies...... ……... ………….8

3 INSTITUTIONAL…………………………………………………………………….……...10 3.1 Water and Sewerage Performance………………………………………..……..10 3.2 Institutional Recommendations………………………………..………………….11

4 GROUND WATER DEVELOPMENT……………………………………………………..13 4.1 Background………………………………………….………….…………………..13 4.2 Stage 1 Groundwater Investigation……………………………………..………..14 4.3 Stage 2 Groundwater Investigation…………………………………………..…..14 4.4 Preliminary Design of a Wellfield…………………………………………………15 4.5 Water Quality Analysis…………………………………………………………….16

5 THE PROPOSED PROJECT……………………………………………………………...18 5.1 Project Impact and Outcome…………………………………………..………….18 5.2 Components………………………………………...………………….……..……18 5.3 Component 1: Strengthen Sector Planning, Management, and Regulation….……………………………………………………………………….18 5.3.1 Institutional Strengthening and the creation of a corporatized National Water and Sewerage Authority………………………………..19 5.3.2 Preparing of a Draft Water Supply Law for Palau…….………………..21 5.4 Component 2—Development of Water Supply Wells and Associated Water Source Works………………………………………………………… .…….…....22 5.5 Component 3: Community Action and Participation Program…………….…..23 5.5.1 Community Participation Plan………………………………………...….24 5.5.2 The Community Awareness Plan………………………………….…….24 5.5.3 Health Awareness Support………………………………………….……24 5.6 Component 4: Rehabilitation and Expansion of the Koror-Airai Water Supply Network……………………………………………………………………………...25 5.6.1 Water Supply Rehabilitation……………………..………….. ……....….25 5.6.2 System Expansion……………………………...…………………….…...25 5.7 Component 5: Project Implementation Assistance and Administrative Support...... …………...... ……………………26 5.7.1 Project Implementation Assistance……………………………………...26 5.7.2 Administrative Support……………………………………….…………...27

6 COST ESTIMATES AND FINANCING PLAN……………………………………………….28 6.1 Cost Estimates…………………………………………….………..………………28 6.2 Financing Plan…………………………………………………………..………….29

7 SUMMARY ENVIRONMENTAL EXAMINATION……………………………………………30 7.1 Introduction……………………………………………………………………..…..30 7.2 Description of the Project………………………...………………………………..30 7.3 Description of the Environment…………………….………………………..……31 7.3.1 Physical Resources……………………….……………………..………..31 7.3.2 Biological Resources……………………………...…………………..…..32 7.3.3 Human and Economic Development……………………………….……32 7.4 Screening Environmental Impacts & Mitigation Measures…………...………..33 7.4.1 Potential Impacts and Mitigation measures………………………….....33 7.4.2 Climate Change and Adaption Measures………………………..……..35 7.4.3 Poverty and Social Assessment……………...……………………..…...35 7.4.4 Mitigation Costs…………………...……………………………………….36

7.4.5 Technical Assistance……………………..…….…………………………36 7.5 Environmental Management Plan and Institutional Requirements……..…….36 7.5.1 Environmental Management Plan……………………….…..…………..36 7.5.2 Institutional Arrangements…………...…………………………………...38 7.6 Public Consultation and Information Disclosure…………………………...……38 7.7 Conclusions…………………….……………………..…………………………….38

8 FINANCIAL ANALYSIS……………………………………………………….……………….40 8.1 Past Financial Performance……………………….…….………………………..40 8.2 Projected Financial Performance………………………….………………….….41 8.2.1 Financial Objectives……………………………………………………….41 8.2.2 Proposed Water Tariff…………………………………………………….41 8.2.3 Affordability and Willingness to Pay……………………………………..42 8.2.4 FIRR and Sensitivity Analysis……………………………………………42 8.3 Projected Financial Results…………………………….……..…………………..43 8.4 Project Financial Sustainability & Implementation Risks…………………...….43

9 ECONOMIC ANALYSIS……………………………………………………………..………...45 9.1 Background to the Analysis………………………………...……………………..45 9.2 Economic Benefits of the Project…………………………………...…………….48 9.2.1 Reduction in economic costs of supply……………………………….…48 9.2.2 Elimination of potential unserved demand……………………………...49 9.2.3 Protection against droughts………………………………………………50 9.2.4 Potential health benefits……………………...…………………………..51 9.3 Least Cost Analysis………………………………..………………………………52 9.4 Valuation of Economic Costs……………………………..………………………52 9.5 Results of the Economic Analysis…………………………..……………………53 9.6 Sensitivity Analysis…………………………………………………..…………….54

10 IMPLEMENTATION ARRANGEMENTS…………………………………………………55 10.1 Project Management………………………………………….……………………55 10.1.1 General Approach………………….……………………………………...55 10.1.2 Executing Agency………………………………….……………………...55 10.1.3 Project Management Unit……………………………….………………..55 10.2 Equipment for Project Implementation………………….………………………..56 10.3 Implementation Period……………………….…………………………………….57 10.4 Procurement……………….…………………………….………………………….57 10.5 Consulting Services……………….…………...…………………………… …….59

10.6 Disbursements Arrangements………………….…………………………………59 10.7 Accounting, Auditing, and Reporting…………………………….……………….60 10.8 Project Performance Monitoring and Evaluation………………………….…….61 10.9 Project Review…………………………………….……………………… ……….61

11 PROJECT BENEFITS, IMPACTS, ASSUMPTIONS AND RISKS…………………....62 11.1 Expected Benefits and Beneficiaries…………………………………………….62 11.2 Poverty Reduction……………………………………….…………………………62 11.3 Gender Impact………………….…………………………………………………..63 11.4 Environmental Impacts………………………….…………………………………63 11.5 Technical Risks………………………..………..………………………………….64 11.6 Financial Risks of Construction………………………………….…...…………..64 11.7 Institutional Reforms and Sector Restructuring risks………………...….……..64

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LIST OF TABLES Table 1 – Project Cost Estimate (by components)……………………………………………….xiii Table 2 – Financing Plan…………………………………………………………………………...xiv Table 3 – Proposed Water Tariff……………………………………………………………………xv Table 6.1 – Project Cost Estimate (by components)………………………………………...…..28 Table 6.2 – Financing Plan………………………………………………………………...…….…29 Table 7.1 – Potential Impacts and Mitigation Measures…………………………………………34 Table 7.2 – Environmental Management and Monitoring Plan………………………...……….37 Table 8.1 – Water and Sewerage Revenue and Expenses……………………………………..41 Table 8.2 – Proposed Water Tariff and Key Performance Indicators……………………….....42 Table 8.3 – FIRR and Sensitivity Analyses……………….………………………..……………..43 Table 8.4 – Summary of Financial Results and Key Performance Indicators……………..….43 Table 9.1 – Projected production, Consumption and Losses 2009-2020…………………...... 47 Table 9.2 – Calculation of EIRR……………………………………………………………………53 Table 9.3 – Summary Economic Sensitivity Test Results……………………………………….54 Table 10.1 – Proposed Composition of PMU……………………………………………………..56 Table 10.2 – Equipment for Project Implementation……………………………………………..57 Table 10.3 – Proposed Procurement Packages………………………………………………….58

LIST OF FIGURES Figure 4.1 – Airai Wellfield Pump Test Locations………………………………………………..16 Figure 9.1 – Future Water Production Requirements With and Without the Project…………47 Figure 9.2 – Projected Water Production, Consumption and Losses Koror/Airai……...……..48 Figure 9.3 – Volume of Unserved water without the Project……………………………...…….49 Figure 10.1 – Project Organizational Structure……………………………………………...…...55 Figure 11.1 – Desirable Water and Sewerage Sector arrangement…………………………...65

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LIST OF APPENDICES Appendix 1 – Detailed Financial Analysis Appendix 2 – Economic Analysis Appendix 3 – Project Development Appendix 4 – Detailed Cost Estimate and Implementation Schedule Appendix 5 – Technical Drawings Appendix 6 – Technical Work and Bid Documents Appendix 7 – Resettlement and Land Acquisition Report Appendix 8 – Draft Design and Monitoring Framework Appendix 9 – Institutional Report Appendix 10 – Initial Environmental Examination Appendix 11 – Establishment of Public Water Authority Appendix 12 – CAPP Program and Expenditure Appendix 13 – Geotechnical and Groundwater Information

EXECUTIVE SUMMARY

I. Terms of Reference

1. In essence the consultants for this project preparation technical assistance (PPTA) were to: (i) Prepare a water sector development plan focusing on water supply services to communities on Babeldaob and in Koror; (ii) Carry out a feasibility study to identify sources within Aimeliik to initially yield 1 million gallons of potable water per day with the potential to expand to 2 million gallons per day (with the Tabecheding River being the likely source), then do a preliminary design for intake works, water treatment plant, and raw and clear water pipelines; and (iii) Carry out a feasibility study to assess options for transporting 1 million gallons of treated water to the existing Koror-Airai water supply network, then do a suitable preliminary design of the necessary clear water reservoir and pipeline; and (iv) Recommend ways to make the water sector self-sufficient by 2013.

II. Initial Studies

2. The initial studies revealed a number of problems and opportunities such as: (i) Inadequate past and present investment in the water supply systems; (ii) Unsatisfactory water source reliability; (iii) Very high water production per capita; (iv) Unsustainable tariffs; (v) A lack of overall responsibility for the sector; (vi) The unsustainable nature of most State water system on Babeldaob; (vii) Fragmented water supply legislation; (viii) Weak institutional capacity; (ix) The desire of the government to move to full cost recovery for water supply; (x) Likely small population increase in Koror in the future; and (xi) Clear opportunities for reducing consumption and non-revenue water.

3. The technical studies revealed that: (i) None of the surface water sources in Aimeliik State (such as the Tabecheding River or the Ngerderar River) nor other streams in Ngatpang or Ngchesar states could meet the terms of reference conditions in times of low rainfall; (ii) Groundwater was unlikely to meet the specified criteria; (iii) Desalination was too expensive; (iv) A major storage was the only way to attain the desired reliability of supply but this was very expensive; and

(v) A reduction in per capita consumption and a parallel reduction in non-revenue water would substantially reduce the need to find additional water sources or increase storage.

4. These results were discussed in the Interim Report (July 2008) and as a result it was agreed between the Asian Development Bank (ADB) and the Government of Palau (GOP) that the proposed Project would be designed to: (i) Target a reduction in per capita consumption of water and in non-revenue water; (ii) Allow for sector strengthening and the development of a dedicated ‘corporatized’ water supply authority; (iii) Aim for financial sustainability for the Koror/Airai water system and then extend this to the small ‘State’ water schemes; (iv) Develop ways to increase supply to the Koror/Airai system during times of low surface water flow; and (v) Improve the existing infrastructure of the Koror/Airai water system and allow expansion into the adjoining state of Aimeliik.

III. The Project

5. There are five components within the Project:  Component 1: Strengthening sector planning, management and regulation;  Component 2: Development of water supply wells and associated water source works;  Component 3: Community action and participation program (CAPP);  Component 4: Rehabilitation and extension of the Koror-Airai water supply network;  Component 5: Project implementation and capacity building.

6. Component 1 aims to strengthen the water supply sector and improve sector sustainability. It is proposed that a dedicated Water (and Sewerage) Authority be established to plan, manage and develop the Palau water supply sector in conjunction with a water regulating authority. This will require: (i) Technical assistance and training to personnel within the Bureau of Public Works (BPW), and Ministry of Finance (MOF); (ii) Forming of a transition committee to manage the establishment of the new authority; (iii) Preparation of a new water law and amendments to water resources laws and others; (iv) Defining the ownership of water resources and the need for payment to extract; (v) Preparation of new regulations relating to water such as water saving devices; and (vi) Establishment of the necessary structure, aims and responsibilities of the new water and sewerage authority (WASA) particularly regarding financial targets and ability to determine water (and sewerage) tariffs.

7. Component 2 aims to develop a way to augment the supply to the existing Koror – Airai water supply system. This will improve the reliability of supply during periods of drought and will reduce current treatment and quality problems during periods of high rainfall. It will include: (i) Development of groundwater sources in Airai State through the drilling of 10- 15 production boreholes and various monitoring holes; (ii) Pumps, meters and raw water transmission pipelines; (iii) Access roads and electrical supply to bore sites as appropriate; (iv) Work at the existing Ngerikiil intake and provision of additional pumping equipment at the pumping station; (v) Replacement of the existing access bridge at the Ngerimel dam; and (vi) Work at the Ngerimel reservoir to allow either bypassing or delivery of water to the storage.

8. Component 3 is designed to enhance and sustain the benefits from investments in water supply systems in Palau. It comprises complementary activities that aim to: (i) Facilitate the implementation of the water supply system improvements and encourage water conservation to limit future demand; (ii) Enhance the sustainability of water supply benefits with activities that target improved household sanitation, environmental improvements and community health awareness; and (iii) Promote GOP objectives for a participatory and consultative process with equitable benefits shared by all residents of communities including women, all ethnic groups (about one quarter of the population comprises foreign nationals) and poor households.

9. There are three subcomponents: (i) Community Participation Plan (CPP) which will develop and implement a stakeholder participation plan that covers information dissemination, consultation and disclosure requirements for the new and rehabilitation works; (ii) Community Awareness Plan (CAP) which will develop and implement a plan to promote water conservation, make the community aware of the value of the water systems, and enhance an interest in water and sanitation issues; and (iii) Health Awareness Support (HAS) which will strengthen existing programs to promote behaviour change related to sanitation, hygiene, water use and health.

10. Component 4 includes rehabilitation works to improve supply reliability, make operations more effective and allow for full metering of the Koror – Airai water supply system. A full leak detection and repair operation will be undertaken as part of this component. There is also an extension of the pipeline along Compact Road into Aimaliik. Work will include: (i) Installation of flow meters within the existing network and at all storage tanks; (ii) Repair of leaks and replacement of pipes after a thorough leak detection study; (iii) Rehabilitation of storage tanks and surrounds;

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(iv) A new raw water pipeline between the Ngerimel reservoir and the water treatment plant; (v) Additional pumps and pump house at the water treatment works; (vi) A new supply pipeline to Malakal; (vii) The provision of new pumps at booster pumping stations; (viii) Installation of service connection meters on all unmetered connections; and (ix) The testing and calibration of all existing service connection meters.

11. Component 5 has two subcomponents: (i) Project implementation assistance which will provide consulting services to assist the Project Management Unit (PMU) to implement the Project by providing technical and management support, capacity building and training to the PMU throughout the implementation stage; and (ii) Administration support which will provide allowances, vehicles, office, and computer equipment for the PMU office for project implementation.

IV. Project Cost

12. The Project cost estimates are based on the preliminary design of the various components using March 2009 prices. The Project cost is estimated at $8.241 million equivalent, including taxes and duties, plus contingencies, interest and service charges during construction i.e. $9.894 million total. A summary of the cost estimates by component is given in Table 1.

Table 1 - Project Cost Estimate (by Components) Component Total Cost ($) % of Total 1 Strengthening Sector Planning, Management & Regulation 750,000 7.5 Development of Water Supply Wells and associated Water 2 1,501,000 15.2 Source Works 3 Community Action and Participation Program 270,000 2.7 4 Rehabilitation and expansion of the Koror-Airai supply network 4,270,000 43.2 5 Project Implementation & Administrative Support 1,450,000 14.7 TOTAL (1 – 5) 8,241,000 6 Contingencies 1,190,000 12.0 7 Interest and service charges during construction 463,000 4.7 TOTAL ESTIMATED PROJECT COST 9,894,000 100

13. The project capital cost is assumed to be funded by way of loan and government equity/grant. The European Investment Bank (EIB) is assumed to finance 50% of the total project cost while 49% will be funded by ADB and 1% by GOP. The ADB loan is assumed to come from 2 sources. The first $1.8 million of the ADB loan will be a soft-loan sourced from its Asian Development Fund (ADF) and the balance of $3.15 million will come from its Ordinary Capital Resources (OCR).

14. The assumed financing plan is outlined in Table 2.

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Table 2 – Financing Plan Amount Sources of Funds Percent ($ Million) Asian Development Bank: Asian Development Fund 1.80 18% Ordinary Capital Resources 3.05 31% Sub-total 4.86 49% European Investment Bank 4.94 50% Government of Palau 0.09 1% Total 9.89 100%

V. Environmental Examination

15. The Project is classified under the Asian Development Bank (ADB) guidelines as Category B. In the ROP, the Environmental Quality Protection Board (EQPB) within the MPIIC is the governing body for environmental protection and Title 24 of the National Code provides the framework for protection of resources and environmentally sound development.

16. The screening of the potential environmental impacts of the Project demonstrates minor or moderate impacts that can be readily mitigated using available means. The total mitigation costs for these impacts is estimated at about US$ 40,000, and are considered normal construction costs and the responsibility of the contractor. The implementation of mitigation measures can be readily enforced and monitored using the means described in the IEE.

17. In summary the recommended approach to environmental management comprises:

18. Planning and Design: The selection of groundwater to provide the supplementary source to cover drought periods has overcome the need for, and the adverse environmental impacts of, additional surface water storage.

19. Construction: Construction impacts are mitigated through application of the earthmoving regulations, environmental clauses for incorporation into construction contract tender documents, and mitigation measures described in the IEE.

20. Operations: Impacts during operations are limited to the possibility of over-pumping of the groundwater aquifer during drought periods and a program of water level monitoring will ensure that this does not occur.

21. One of the results of The Community Action and Participation Program component of the Project will be to educate the consumers regarding the ‘value’ of the water supply and a significant reduction in the per-capita consumption is expected to be achieved.

22. No irreplaceable resources are threatened by the proposed Project. Any land acquisition will be minimal and no resettlement will be needed. The poverty and social assessment will assure the benefits of the Project are distributed among all members of the community, that there is involvement of women during execution of the Project, and that Project interventions will assist in the livelihoods of women.

23. The Project is being prepared in conformance with the Asian Development Bank’s social and environmental safeguard policies. The Project does not require preparation of any more comprehensive Environmental Impact Assessment than the IEE.

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VI. Financial Analysis

24. We understand that the objective of the GOP is to move to a full recovery of costs. The ultimate aim is to make the supply of water a self-sustaining and efficient operation. If this aim is to be attained, full recovery of costs must be achieved gradually within the next five years. In addition to achieving full recovery of costs, the proposed WASA must also comply with the financial covenants in the loan agreement with the financing institutions like debt service coverage ratio (DSCR) and accounts receivable collection efficiency.

25. To meet the financial objectives, the existing tariff will need to be increased annually in real terms within the next 5 years. However, the proposed tariff should have a structure which includes a lifeline block (first 2,000 gallons monthly consumption) for domestic consumers to ensure that the low-income group (LIG) can afford the projected water tariff levels that can meet the financial objectives. After 2014 when full recovery of costs is achieved, tariffs should be adjusted annually at the inflation rate to keep up with increases in O&M costs due to inflation.

26. Table 3 shows the tariffs necessary to achieve sustainability.

Table 3 - Proposed Water Tariff Item 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Proposed Tariff Domestic First 2,000 gal 0.85 1.02 1.22 1.47 1.76 1.80 1.83 1.87 1.91 1.95 > 2,000 gal 1.79 2.14 2.57 3.08 3.70 3.78 3.85 3.93 4.01 4.09 Non-domestic 1.79 2.14 2.57 3.08 3.70 3.78 3.85 3.93 4.01 4.09 Average Tariff 1.70 2.04 2.45 2.94 3.53 3.60 3.67 3.74 3.82 3.89 Tariff Increase (%) 100% 20% 20% 20% 20% 2% 2% 2% 2% 2%

27. An affordability analysis was undertaken to ensure that domestic consumers, particularly those in the LIG, can afford the proposed water tariff levels that meet the financial objectives. The results of the analysis show that the percentages of monthly household income spent on water are below 5% and thus the proposed water tariffs are considered affordable.

28. The results of the socio-economic survey conducted by the consultant last year revealed that 96% of respondents are willing to pay twice the existing tariff of $0.85 for their water. Residents presently pay an average of $17/month for their water bill. If residents are willing to pay twice the amount they are currently paying, the average monthly bills are within the residents’ willingness to pay, except in year 2014 when the bill is slightly higher by 3%.

29. The Project is expected to reduce non-revenue water (NRW) due to rehabilitation of the existing system and installation of meters for all customers. With lower NRW, it is projected that production of water will decline while billed water will increase. Savings in O&M costs are anticipated with lower production level while the increased volume of water billed will result to increased revenues. Results of the calculation show robust FIRRs under the base case and adverse scenarios, all above the Weighted Average Cost of Capital (WACC) of 4%. The Project is most sensitive to increase in capital costs.

30. The summary of financial results and key performance indicators for the period 2009 to 2018 indicate that after completing the proposed tariff increases by 2014, the Koror-Airai water supply operation is projected to earn positive net income each year over the forecast period. Annual O&M costs as well as depreciation and interest charges are fully recovered during the forecast period. The operation is also projected to generate positive net cash flow

each year over the forecast period, which can be used to fund capital asset replacement, rehabilitation or expansion in the service area. The operation can likewise subsidize the sewerage service in the area.

VII. Economic Analysis

31. The Project benefits comprise: (i) Reduction in economic costs of supply and improved sector management required to meet water demand; (ii) Elimination of future potential unserved water demand; (iii) Protection of the supply against droughts and avoidance of some key drought- related costs to consumers and the economy; and (iv) A potential health benefit.

32. The first three of these are partially quantifiable and are included in the calculation of the economic internal rate of return (EIRR). The fourth is not quantifiable but, in view of evidence of rising risks to the public health, is included in the analysis qualitatively.

33. In a comparison of the Without-Project and the With-Project scenarios, taking into account the lesser volume of production required, loss reduction, and staffing and other efficiency improvements associated with the With-Project scenario, annual savings in the economic cost of supplying water to meet projected demand are calculated and included as a benefit of the Project. (Under full operation, these savings amount to approximately $350,000 worth of labour, chemicals, energy input, etc., per year.)

34. A comparison of the With-Project and Without-Project scenarios reveals a large gap between the respective treated water production requirements. The production requirement With the Project is below the requirement Without the Project due to (i) demand management and (ii) loss reduction. The volume of unserved water demand is valued at the estimated willingness to pay for water (i.e., the unmet demand volume as valued by consumers), assessed by survey at $1.70 per 1000 gallons.

35. An attempt has been made to quantify the benefit of the Project for tourism, in the form of drought protection. The other drought impacts that would also be addressed by the Project, such as the costs and risks imposed on households and constraints on social services, are real but are not presently quantifiable. It is assumed that a drought event, comparable in severity to the one that occurred in 1997/98, will occur in Palau every 7-10 years (8.5 years is the specific return period selected). The economic impact of such a drought will be similar to that recorded in 1997/98 (i.e., a 3.3% reduction in GDP), but since not the entire drought’s impact is addressable by the Project, a 1.0% reduction in GDP has been assumed as the cost that will be avoided With the Project.

36. Project economic costs include institutional reform and sector planning strengthening activities, civil and mechanical works associated with the development of groundwater resources, community action and participation programs, pipeline and other materials and associated structural works associated with rehabilitation and expansion of the existing water supply system, and consulting services.

37. The period of economic analysis comprises a four-year construction period followed by a 25-year operation and maintenance period. At a 12% economic opportunity cost of capital (EOCC, or discount rate), the water supply Project is found to be economically viable. The net present value (NPV) is $3.0 million and the economic internal rate of return (EIRR) is

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approximately 16.8%. A sensitivity analysis shows that the Project is robust to 20% changes in each parameter. The initial cost has the highest sensitivity in the EIRR calculation.

VIII. Project Implementation

38. The Ministry of Public Infrastructure, Industry and Commerce (MPIIC) will be the Executing and Implementing Agency for the Project. A Project Steering Committee (PSC) will be formed to oversee the Project, give overall direction and provide policy guidance. The PSC will be chaired by the Minister of Public Infrastructure, Industry and Commerce. The full PSC will include representatives from GOP, the States and the private sector including the Project Management Unit (PMU), the MOF, Koror and Airai States and others.

39. A PMU will be established within the Ministry of Public Infrastructure, Industries and Commerce. It will be responsible for overall planning and coordination of project implementation, including programming, budgeting, financial planning, accounting and reporting. It will manage subproject preparation, detailed design, procurement of works and goods with the assistance of the Project Implementation Assistant (PIA) consultants. The PMU will recruit and manage the PIA consultants, who will assist the PMU with project implementation and undertake capacity building activities.

40. The Project will be implemented over a four-year period from 2010 to 2013. The order in which subprojects are implemented will be determined by agreement between the GOP and ADB and appropriate targets set at the commencement of the Project.

41. Goods, works and services financed under the loan will be procured following the ADB’s Guidelines for Procurement. A total of 75 person-months of consulting services (45 person-months international, and 30 person-months domestic) will be required to support the Project, covering Components 1 to 5. Consulting services will be procured under a single consulting package, by associations of international consulting firms and domestic consultants.

42. Payment of eligible expenditures from the proceeds of the loan will be made in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). To ensure the timely release of loan proceeds and counterpart funds and expedite Project implementation, the Government will, immediately upon loan effectiveness, open and maintain a project imprest account at a local bank acceptable to ADB for disbursement of eligible expenditure. The MOF will be responsible for establishing, managing, replenishing, and liquidating the account.

43. The PMU will prepare quarterly project progress reports in such form and detail satisfactory to ADB and other co-financiers. The MOF will prepare the annual financial statements of the water and sewerage operations. MPIIC will ensure that a comprehensive program for project performance monitoring and evaluation (PPME) acceptable to ADB and other co-financiers is carried out during implementation and subsequent operation.

IX. Project Benefits, Impacts and Risks

44. The Project will benefit about 17,000 residents and many visitors in 2013 in Koror, Airai and parts of Aimaliik by providing safe and reliable piped water supplies that will have a direct impact on the health and living condition of the communities. If a new Water and Sewerage Authority is established with responsibility for the Koror sewerage system, additional benefits will be experienced by Koror residents and visitors.

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45. There will also be financial benefits for the GOP and all citizens. The current water production figures per person are high and any increase in demand in the future will force the GOP to develop new sources, increase storage, and increase the capacity of the treatment plant and other key components. This will be very expensive.

46. The higher individual contributions to the cost of water will mean that GOP subsidies will reduce, allowing these funds to be diverted to other areas or to be used to improve and expand the existing or new systems. It is proposed that a stepped tariff be used by the WASA which will make the service more affordable to the poor. This tariff would have an initial ‘lifeline’ component at low cost for the first volume of water and this would then rise as consumption increased.

47. There will also be risks associated with the Project. These include: (i) Continuous pumping over a long period may deplete the safe yield of the aquifer; (ii) Construction impacts such as noise and dust generation, silt release, public and worker safety, and impedance to traffic may disrupt lifestyle; (iii) Repair or removal of fibro-cement pipe which can cause workers to be exposed to asbestos fibres; (iv) Underestimation of resource allocation and improper employment of appropriate construction methods and equipment might cause delays and increase costs; (v) As all manufactured goods are imported into Palau, supply of essential construction materials, could pose some difficulties; (vi) Grant-financed budgetary allocations for the Project could be inadequate as a result of underestimated construction costs, inflation during implementation, and the potential cost of defending construction claims lodged by contractors; (vii) Government budgetary allocations for restructuring, maintenance, and counterpart staff could be inadequate due to poor national financial management; and (viii) The Government’s commitment to the reform process, and associated development and implementation of operational and management procedures, could wane.

48. We believe that these risks can be overcome by specific design activities during the Project and by close co-operation between the GOP and ADB. It is expected that there will be several covenants required by the ADB to ensure that tariff increases, the development of a new water law, and the GOP’s commitment to the timely establishment of a Water and Sewerage Authority will proceed as anticipated.

xviii 1

1. INTRODUCTION

1.1 Background to Terms of Reference

1. In May 2007, the Government of Palau (GOP) requested technical assistance from the Asian Development Bank (ADB) to prepare a project to develop water supply and sanitation systems on the island of Babeldaob. As a result, a project preparatory technical assistance (PPTA) was prepared to develop a water supply sector development plan for the island of Babeldaob and Koror State and carry out feasibility studies to improve the security of the treated water supplies to communities on Babaldaob and within the State of Koror and to enable the expansion of the Koror-Airai water supply network to the State of Aimelik.

2. In March 2008, ADB commissioned consulting firm GHD Pty Ltd of Australia in association with GK2 Inc. of Palau, to undertake the Technical Assistance Study, TA 4977- PAL.

1.2 PPTA Progress

3. The technical assistance (TA) has prepared a proposed project for funding by ADB, the Government of Palau and other possible partners. This has been done in 3 phases.

4. Phase 1 was the Inception phase. An Inception Workshop was held late April 2008 in Palau and this was followed by the issuing of the Inception Report in early May.

5. Phase 2 of the Technical Assistance led to the Interim Workshop and the preparation of an Interim Report in July 2008 which detailed activities, analyses, and determinations of Phase 2 and proposed a possible project for consideration in Phase 3. This was considered by the ADB and GOP and a decision made to proceed to the next phase.

6. This Draft Final Report provides information of phase 3 activities and develops a Proposed Project for implementation. A Final Workshop will be held a week after the issuing of this draft final report.

7. Any findings and recommendations presented in this report are preliminary, and will be subject to further discussions and agreements between the Government of Palau, ADB and other stakeholders.

1.3 Project Rational

8. The Project has been prepared after considering the goals of the GOP and the ADB and assessing the ability of the GOP to undertake the work.

9. A goal of the proposed Palau National Policy on Population and Sustainable Development1 is “to stimulate controlled economic development in balance with the carrying capabilities of Palau’s environment and infrastructure.”

10. This is consistent with the third element of ADB’s strategic focus for assistance to Palau, “to facilitate sound infrastructure development and management.”2

1 National Policy on Population and Sustainable Development, Govt. Of Palau, Koror 2007 2 Palau (2007 – 2009) Country Strategy and Program Update, ADB, Manila 2006.

11. Despite some positive achievements in Palau’s development, government, business, culture and community life, the changes in institutions, laws and capacity in the infrastructure sector have been inadequate to serve the national strategy of reduced government subsidies and involvement in the sector.3 This is particularly clear in the water and sanitation sector where services are heavily subsidised by the national government.

12. GOP revenue covers about 60 percent of recurrent expenditure, but almost none of capital works.4 The extremely limited GOP revenue in turn means that there is no local funding for GOP investment and little prospect of any over the medium term. So there is a need to develop alternative commercial arrangements for utilities. This has already occurred in the telecommunications and electricity sectors. The general need is for governance and regulatory arrangements that will lead to improved commercial performance of public enterprises and an improved enabling environment for the private sector. This has been a major consideration in this PPTA study.

1.4 Analysis of Key Problems and Opportunities

1.4.1 Inadequate investment

13. Palau has reasonable coverage of piped water systems. The main Koror-Airai system is said to supply almost all households within the coverage area and in addition there are single or multiple small water supply systems in all other States. The national government’s vision is to provide adequate and potable reticulated water to all Palau citizens by the year 2020. This vision is close to being met in Koror where coverage is almost universal and water quality at the treatment works is generally good. Quality at the consumers tap, however, is less adequate at times.

14. While the present coverage is high, reliability and quality are inadequate in most systems and maintenance is very limited. This is due to inadequate investment in the existing schemes, inadequate source development and treatment facilities and a general run-down in facilities, many of which are 50 years old. No schemes are self-supporting so direct Government investment is required on an on-going basis. This has traditionally been inadequate to maintain or improve the systems and increasingly this is leading to unacceptable service.

1.4.2 Unsatisfactory water source reliability

15. The required yield of the Koror-Airai water supply system at present is around 3.8 million gallons per day. Experience over the past 30 years indicates that the reliable yield of the current resources is less than this. Disruptions to the water supply, affecting approximately 14,000 people are experienced during severe droughts, as in 1983 and 1997. During these periods the available yield of the surface sources has reduced dramatically and water has been severely rationed.

16. Emergency measures have been put in place during these times (new bore holes, temporary desalination plants etc.) but these have been expensive and only partially satisfactory. Fortunately, because of the relatively reliable rainfall in Palau, shortages have not been prolonged. The GOP considers that the present reliability of supply for the Koror- Airai system is inadequate. Reliability can be improved by the development of additional water sources or by reducing demand, or both.

3 Infrastructure Needs, Priorities, Maintenance and Regulations, FEIM Project Report, Townsend, D., March 2008 4 Asian Development Bank Pacific Islands Economic Review, ADB, Manila 2007

17. The smaller water systems in the other States also experience this reliability problem as most use surface supplies as their source. There are difficulties in increasing the yield of many systems and the GOP is keen to extend pipelines from the Koror-Airai system into adjacent States to cater for increased demand on Babeldaob and to increase the reliability of some of the small systems.

1.4.3 High water production per capita

18. The production of treated water per person is extremely high in the Koror-Airai system and also in some of the small systems. The rate is higher than any other Pacific country, considerably higher than Western countries and higher by factors of 5-10 of Asian countries.

19. The high water production figure appears to arise from two sources – high-metered consumption and high non-revenue water. We believe that this is caused by inadequate low pricing of water, the lack of full consumer metering, old reticulation pipework, insufficient metering and ability to controls sections of the reticulation system, low public appreciation of the value of reticulated water, and poor operations and maintenance practices on the systems.

20. With appropriate public awareness campaigns, correct pricing of water, and leak detection and remedial programs we believe that it is possible to reduce both components which cause high production. By comparison with comparable water supply systems elsewhere, it might be possible to reduce the water production per capita by 40% from present levels. A 20% reduction is considered possible in the short-term.

1.4.4 Unsustainable tariffs

21. The cost recovery results of the Koror-Airai water supply system operation for the past three years can be summarised as follows. It should be noted that there is no charge for sewerage service at present:

 Water supply operations only - revenue earned was about 44% of water supply operating expenses and about 34% of water supply operating expenses plus water supply depreciation;

 Combined water supply and sewerage operations - revenue earned was about 34% of water supply and sewerage operating expenses and about 21% of water supply and sewerage operating expenses plus water supply and sewerage depreciation.

22. For the outlying states water supply systems, revenue earned based on estimate was about 10% of water supply operating expenses and about 3% of water supply operating expenses plus water supply depreciation for the last three years.

23. Clearly, the current water rates are not enough to cover even the operation and maintenance expenses of the water supply systems. Low tariffs have resulted in inefficient water usage, a lack of concern about non-revenue water, and they have reduced the resources available for further investment in the sector.

24. We understand that the objective of the Government of Palau is to move to a full recovery of costs by 2013. The ultimate aim is to make the supply of water and sewerage services a self-sustaining and efficient operation. If this aim is to be attained, full recovery of costs must be achieved gradually within the next five years.

1.4.5 Lack of overall responsibility

25. It appears that there is no one agency responsible for all water and sewerage services. The Capital Infrastructure Projects organisation (CIP), which is actually a division of the Bureau of Public Works (BPW), is responsible for design and development of water and sewerage infrastructure. The BPW’s Division of Utilities is responsible for operating the plant, maintaining the assets and delivery of water and sewerage services. The Ministry of Finance, Division of Utility Collections is responsible for metering, billing and collection of water bills. This division is also responsible for customer service but it appears that there is no way of tracking or analyzing complaints or system problems. There appears to be no comprehensive water or sewerage master plan.

26. With this confusing array of institutions we can only deduce that there is no one institution or person responsible for water and sewerage services. This lack of responsibility makes it difficult for any organization to take initiatives to improve supply and does nothing to improve customer service. We feel that the interests of the people of Palau would be best served by placing responsibility for water and sewerage services in one institution, independent of political interference and with an independent regulator.

27. It would seem that establishing one separate institution whose sole purpose is the delivery of clean water (and sewerage) to the people of Palau at a reasonable price would be extremely advantageous. This would follow the pattern set in the telecommunications and electricity sectors.

1.4.6 Unsustainable water supply systems

28. The cost of water to consumers in outlying systems is, at present, very inexpensive or completely free. Generally, where small systems provide water for a limited number of customers, cost per unit of water supplied exceed the cost of larger systems. The reasons concern economies of scale, distances between customers, water source differences and other factors.

29. While we have not prepared a comprehensive analysis of water expense for any individual outlying system, it is clear that should individual States decide to corporatize their own systems, individual tariffs would need to far exceed current rates. This would mean that water would become unaffordable to customers or if tariffs are made affordable, the system will be unsustainable.

30. This problem may be overcome if there is a National Water Utility as customers in more densely populated areas, such as Koror, might be called upon to cross subsidize these smaller systems. Alternatively, the Government may provide a specific subsidy to the water utility for small systems so that they will not be a drain on the Utility’s finances.

1.4.7 Fragmented water supply legislation

31. Current laws are a barely sufficient legislative basis for current water supply operations, and would in no way support major or minor institutional reform for the supply of water in the Koror-Airai scheme, and any extended reforms.

32. Current laws for the operation of water supply systems are limited to out-of-date regulations which fixed tariffs in the 1980’s. These make limited provision for the collection of rates through disconnection of services and otherwise.

33. Useful provision is made, however, in other Acts to state and implement the general policy of the government to provide water supply services, to protect underground water infrastructure and to require the provision of water services in approved subdivisions.

34. Some further useful provision is made in other laws for the creation or recognition of easements and other rights applicable to public water supply systems. The rights of public water supply entities to enter lands and to install, repair and maintain water supply infrastructure and its associated fittings, however, needs further legislative support.

35. It appears that substantial legislative reform is needed in relation to nearly all aspects of the provision of water supplies throughout Palau. This requires the enactment of a new law. The new law must take account of the relevant provisions of a number of current laws which deal, to some extent, with issues related to the operation and regulation of public water supply systems.

36. If it is decided that a new water utility should also be responsible for sewerage, additional legislation is necessary to cover this sub-component as well.

37. A new corporatized utility cannot be expected to be a self-regulating entity, so there is a need for legislation to define the powers and responsibilities of a regulation authority for the water and sewerage sector.

1.4.8 Weak institutional capacity

38. A key lesson learned from previous ADB projects in the Asia/Pacific region is that most national and provincial agencies have low capacities for project implementation, and for management, operation and maintenance (O&M) of the completed water supply systems. This problem has contributed to delays and cost increases during Project implementation and to unsustainable water supply systems following Project completion.

39. We believe that the capacity in Palau, at present, to provide consumers with a clean, reliable water supply and sewerage system at a sustainable but reasonable cost is very limited. This is due to several factors, some of which are discussed above.

40. In the early stages of Project implementation, we envisage that the consultants appointed to help with implementation will undertake a detailed assessment of:

(i) the capacity of the Project Management Unit (PMU) to implement the project, and;

(ii) the capacity of the Bureau of Public Works (BPW) or a new Water and Sewerage Authority (WASA) to manage, operate and maintain the improved system.

41. Currently there are very few specialist managers, planners, water supply engineers and other experienced staff in the country. The Project will, therefore, include capacity building and training programs, budgets and sources of funds to build the capacity of the PMU and BPW and other bodies or individuals.

1.4.9 Private Sector involvement

42. The Ministry of Finance has expressed a desire to privatise water and sewerage services.5 This would require the GOP to encourage greater private sector participation in urban water supply systems by creating the enabling environment for private investment in the sector. The Government, cognizant of the need to reduce budgetary subsidies for water supply services and to tap into the private financing of investments, would need to act to create more appropriate water tariffs to improve cost recovery before this alternative could be considered.

43. While private sector ownership and operation may be possible in the future, we do not see this as a short-term possibility due to the present low tariffs, high non-revenue water and insufficient legislation. Corporatization appears to be a better short-term option with a government – private partnership a possibility in the future.

5 ADB Terms of Reference for This PPTA

2 INTERIM REPORT INVESTIGATIONS & PROPOSALS & SUBSEQUENT STUDY

2.1 Interim Report Investigations

2.1.1 New Sources

44. The Interim Report produced in July 2008 reported on the work that had been carried out to that date. It outlined how the original proposal to develop the Tabecheding River as a new water source as outlined in the Terms of Reference had been investigated and had been found unsuitable. It reported on investigations on other sources including the Ngebeduul River in Ngatpang State, the Ngerderar River in Aimeliik State and the Ngerdorch River in Ngchesar State. None of these were found to be suitable sources for the volume required by the terms of reference.

45. Groundwater and desalination were also considered but it was concluded that neither of these and none of the surface sources will alone increase the desired reliability of yield in a cost effective manner. It became clear that to meet the suggested increase in demand and to attain the desired reliability of supply, a major storage was needed on the Koror-Airai system.

46. If storage is required, it is best achieved close to the existing treatment plant and other facilities. We thus confined our investigations to potential dam sites on the Ngerimel River (where the existing small dam is located), on the Edeng River above the existing Ngerikill pump station, and on tributaries of these systems. Five potential sites were identified.

47. Visits were made to each of the possible dam sites and consideration given to the suitability of the site, the area likely to be inundated, the required infrastructure needed for the development of the storage and the likely land acquisition issues associated with the site. This resulted in a prioritising of the sites and a detailed survey was carried out at the three most likely sites. The surveys indicated that each site was potentially suitable for a dam and storage. Preliminary cost estimates, however, showed that the cost at each was high.

48. In parallel with this investigation, the consultants had been investigating the likely population growth in the service area, the level of consumption and the rate of non-revenue water being produced. It was found that the likely population increase in the service area was small, the water production per person was extremely high and the non-revenue water volume was excessive. This led to the conclusion that it would be possible to reduce per capita consumption and reduce non-revenue water thus eliminating the near-term need to find additional water sources or increase storage for the ‘normal’ situation. This would also improve, but not totally overcome, the reliability issue during times of lower than normal rainfall which result in reduced stream flow.

2.1.2 Tariffs

49. The level of water tariffs is low in Palau. The majority of connections in Koror are metered and are charged per volume but some connections on Koror and most in Airai are simply charged a flat rate per month. Most consumers on the small ‘State’ schemes are charged a flat rate but some pay nothing. The current water rates are not enough to cover even the operation and maintenance expenses of any of the water supply systems. We understand that the objective of the Government of Palau is to move to a full recovery of costs by 2013. The ultimate aim is to make the supply of water a self-sustaining and efficient operation. If this aim is to be attained, full recovery of costs must be achieved.

50. Our calculations indicated that for the Koror-Airai system the present charge of $0.85 per kgal of water used would need to rise to $1.90 per kgal just to cover present water O&M costs, to $2.55 to cover present water O&M costs plus depreciation, to $2.85 to cover water and sewerage O&M costs and to $4.40 to cover water and sewerage O&M and depreciation. This is a very significant jump in prices for Palau consumers and we would expect that there would be a real interest in reducing consumption to help reduce the water bill if these tariff levels were adopted. If consumers were made aware of the situation with non-revenue water we are sure that there would be an interest in reducing the amount of water in this category as well.

51. The situation with the State small schemes is even worse. The present tariff of nil or $5.00 per month would need to rise to $33.00/month to cover present O&M and to $72.00/month to cover present O&M and depreciation. These figures do not appear to be affordable for many consumers.

2.1.3 Social Surveys

52. The results of social surveys were presented in the Interim Report. These show that a doubling of the present water rate would have a limited impact on most family budgets or residents in Koror and Airai but there would be more impact on the so-called impoverished and vulnerable income groups in Aimeliik. Accordingly, affordability and willingness to pay for additional water charges should be considered more carefully for rural households outside of Koror and Airai.

53. The survey results show a high-level of gender equity in Palau and a changing socioeconomic pattern where women have become more economically, socially and politically active.

2.2 Subsequent Studies

54. The very high water production per person, the low level of cost recovery and the high percentage of non-revenue water made us focus on the existing operation of the water and sewerage sector. It was decided to bring a specialist institutional expert to Palau to examine the present organisation and to make recommendations for future development. Unfortunately, this work was just starting as the Interim Report was being prepared but even then it was obvious that future institutional change was necessary. The report of the Institutional Expert is attached to this report as Appendix 9 and a summary is presented in chapter 3 of this Draft Final Report.

55. The Interim Report contained a chapter on environmental assessment but the initial input of the Environmental Specialist was not complete at the time the Interim Report was being prepared. An Initial Environmental Examination document was subsequently produced and submitted to ADB based on the alternative proposals contained in the Interim Report. This has now been modified to specifically relate to the Proposed Project components only. The document is attached as Appendix 10 and a draft summary is shown in Chapter 7 of this report.

56. Preliminary work was done on land acquisition and resettlement. This has now been modified to specifically target the proposed Project components. The only Project components planned for construction in new locations consist of a 10-15-hole borefield, access roads and electricity supply to it, and pipelines between the borefield and the existing raw water pipeline from the intake to the treatment plant. The 5.5 km pipeline for water supply distribution to Aimeliik will be constructed underneath the shoulder of the Compact Road and the new supply main to Malakal will be within the existing road reserve so no

9 resettlement or acquisition will be necessary for these. It is expected that the new pipeline from the existing reservoir to the water treatment plant will follow the existing pipeline. The need for a formal easement over this line will be considered during design.

57. The report concluded that as there is no settlement on any of the existing bore sites or proposed access roads, a resettlement framework and resettlement plans does not need to be prepared. The land acquisition and resettlement document is attached as Appendix 7.

3 INSTITUTIONAL

58. The work of the Institutional Specialist was only just commencing at the time the Interim Report was being finalized. The Institutional Report has since been issued as a separate document and is attached to this Draft Final Report as Appendix 9. This summary chapter is included here for purposes of completeness.

59. This PPTA must, by necessity, look at new infrastructure and physical assets needed for a continuous and reliable supply of water and sewerage services. However, we should not overlook the need to ensure that current systems can provide consumers of Palau with a clean reliable water supply and sewerage at a reasonable cost.

60. The purpose of the Institutional Report is to examine the institutions engaged in water and sewerage supply. With a profile of operations we can determine institutional changes that would improve service and benefit all consumers.

61. The original Terms of Reference required consultants to meet with key stakeholders including Government, non-government organizations and community service organizations and identify options for institutional reform of water and wastewater services. However, no expertise was provided initially to complete this review. Later the contract was amended to provide an Institutional Specialist to perform a review and identify options for institutional reform.

3.1 Water and Sewerage Performance

62. The report notes that generally, water utility performance provides clean water to almost all citizens of Palau. Water pressures are generally high, and water is available 24 hours per day and is relatively clean (although not necessarily potable). What is most disturbing, however, are the either high levels of water usage or high levels of water losses (non-revenue water) or both.

63. Furthermore, tariffs by world standards are exceptionally low. Not all water is metered and tariffs do not encourage conservation. It is our belief that these low tariffs further contribute to either the high level of use or the excessive water losses or both.

64. We also found that there is no one agency responsible for all water and sewerage services. The Capital Infrastructure Project (CIP) organization is responsible for design and development of water infrastructure. BPW’s Division of Utilities is responsible for operating the plant, maintaining the assets and delivery of water and sewerage services. Ministry of Finance, Division of Utility Collections is responsible for metering, billing and collection of water bills. This division is also responsible for customer service but it has no way of tracking or analyzing complaints or system problems.

65. With this confusing array of institutions we can only deduce that there is no one institution or person responsible for water and sewerage services. We feel that placing responsibility for water and sewerage services in one institution independent of political interference with an independent regulator would be in the best the interests of the people of Palau.

66. This report strongly recommends establishing one separate institution whose sole purpose is the delivery of clean water to, and safe disposal of sewage for, the people of Palau at a reasonable price. Secondly, that new legislation needs to be introduced to increase water and sewerage tariffs periodically, and ensure that tariffs are set at levels that encourage conservation of this precious resource.

67. The report also details needed new water and sewerage legislation and environmental protections. However, new legislation must be achieved in conjunction with the legislative changes altering the institutions involved in water delivery.

3.2 Institutional Recommendations

68. The institutional analysis is aimed at determining institutional obstacles and actions to address them. For the institutional analysis the key obstacles appear to be the absence of a single focused entity that is responsible for delivering all water and sewerage services efficiently and recovering all its costs of operations.

69. There appears to be an acceptance by the GOP and ADB that under the present system, satisfactory performance of the sector does not seem likely. As an alternative, we have been asked to look at the option of corporatization of water and sewerage services. By corporatization we mean that water and sewerage operations, development, planning, financing, accounting, billing, customer service and human resources fall under a government-owned corporation operating for the benefit of the community. Corporations by their nature are for-profit entities and require revenue to continue to operate.

70. By creating this new utility as a corporation, the Government has, in fact or tacitly, agreed to increase tariffs or specifically target subsidies to ensure the continued operation of the utility. Under the present structure, the government is directly paying for water and sewerage services without compiling specific details of operating costs.

71. The utility will be required to not only provide ongoing service but to report directly to government and the Corporation’s Board of Directors revenues, costs, profits and losses.

72. During our many discussions with the people of Palau, National Government officials, and State officials it has become clear that everyone expects a change in responsibility for delivery of water and sewerage services. The change in responsibility signifies a move toward greater efficiency, universal water metering and higher water tariffs. It does not appear that there are many attitudinal impediments to Corporatization. Instead, the impediments appear to be more one of structure than of substance. There are, however, concerns over how the utility would be run, who would be the owner and who would provide input to water and sewerage coverage and service.

73. We have suggested that all interested parties’ meet to determine the most beneficial form of corporate structure. The options are between National and State Government owned utilities. If a national utility is chosen, there is the option of creating an organization just for water supply, for water supply and sewerage or for water supply, sewerage and electricity. Creating a National Water and Power Utility, may help Palauans enjoy possible economies of scale.

74. While there are many options that can be considered, we have offered a number of possible solutions and recommendations. We reiterate those recommendations as follows:

 Create a National Water and Sewerage Utility – While having State input is necessary it is clear from the impediments to implementation we have examined that capacity at State level is insufficient to create 14 utilities serving many disparate and small communities. Legal precedents for establishing a National utility are readily available from Power and Telecom.

 Encourage State Participation in Decision-making – While State Government would not be the right venue for a utility, their input would be invaluable to ensure all

Palauan citizens accept these changes and that they have a voice representing their interests.

 Tariff increases are needed and should be regulated – Current regulation by an appointed Board of Directors for Power and Telecom is accepted by most citizens and appears to work well. However, for a water and sewerage authority we would encourage open public hearings to discuss not just tariffs but utility performance. Tariffs must encourage conservation but provide lifeline rates for the needy.

 A Combined Power and Water Utility can Fast Track Corporatization – While there are concerns over corporate cultural differences at least initially, and there is some political concerns, combining the utilities as occurs in many European countries can avoid additional costs, time and effort in developing a stand-alone water utility.

 Environmental/Watershed Protection is essential – We understand that at times there are unsuitable discharges from the water treatment plant and the sewerage treatment plant and in certain areas sewerage leaks are causing environmental damage. As a corporatized entity, the utility would be responsible for repair and subject to severe penalties for failure. Laws must place responsibility on all citizens including corporate citizens to be responsible for their actions or inactions.

75. These questions were considered by the ADB and the GOP between the time of the Interim Report and when the consultants commenced the final phase of the PPTA. It was determined that a national water and sewerage authority (WASA) should be established as part of the Project. We recommend that initially the WASA assume responsibility for the Koror-Airai water system and Koror sewerage. The aim would be to make these systems financially viable by 2013 and then the WASA would progressively take over other systems on Babeldaob and throughout the country (with the approval of the States).

4 GROUND WATER DEVELOPMENT

4.1 Background

76. The general geology and hydrogeology of the southern Babeldaob - Airai - Koror area which is the subject of this TA study is described in Appendix 13 - Geotechnical & Groundwater Information

77. In summary, the hydrogeological regime is such that potential aquifers may exist within the weathered and fractured basaltic bedrock in the 40 to 100 feet depth range beneath the lower elevation areas. It appears unlikely that significant groundwater resources exist beneath the upper elevation areas.

78. During the mid 1980’s a groundwater study was carried out in the area around the existing surface water collection points on the Ngerimel and Ngrikil River systems in Airai. This study was commissioned following a significant ‘dry’ period during 1983 as part of an evaluation of proposed water supply for various Palau rural water systems mostly on Babeldaob and Koror.

79. This study6 comprised the drilling of 8 exploration bores and 6 of these were converted to wells by reaming to a larger diameter and installation of well casing. It appears that subsequent pump testing was carried out to provide a more comprehensive evaluation of the groundwater resource, however this information could not be found in BPW records.

80. A 1996 report7 to provide a Comprehensive Groundwater Protection Strategy for Palau refers to this 1984-86 program of drilling as comprising 14 bores, 8 of which were completed as wells 4 in Koror & 4 in Airai. The testing indicated the wells to vary in yield from 25 to 85 gpm. In this report the conclusion is drawn that “this groundwater development showed significant potential for future success and could supply an additional 0.48Mgpd (20 hr/day) of very high quality water” and “preliminary results also demonstrate that a substantially greater groundwater supply could be developed through further well development.” However a recommendation is made that further pumping tests are required to determine a safe yield.

81. Discussions with the BPW personnel (Director Mr Techur Rengulbai, and Mr Joe Reklai) have indicated that much of the factual information from these two drilling and testing programs was apparently sent to Guam and is no longer available, however we were able to locate some of the original information in the BPW files. This comprised bore logs & well installation details for 6 bores (Well Nos 1, 3, 5, 6, 7 & 8); and also bore log, well installation details & pump test data for Well No1447-03, located on the west side of Gihmel dam.

82. The pump test data for Well #1447-03 indicates that in July/Aug 1988 it had a short term yield of >60 gpm. The other investigation bores were reported (from Daryl Lund) to generally have low yield or to not have reached target depth and were not converted to wells.

83. Anecdotal information (from Joe Reklai) indicates the yield from the pump testing for Well #7 was about 100gpm and for Well # 1 much lower, 30 to 50 gpm.

6 Results of Exploratory Drilling & Well development on Airai and Koror States by Tom Nance of Belt Collins & Associates May 1986 7 Comprehensive Groundwater Protection Strategy - for Palau Environmental Quality Protection Board by Winzler Kelly Consulting Engineers Dec 1996

84. Well # 3 and #1447-03 located on the eastern and western sides of the dam at Gihmel Reservoir were connected up to the pipework system feeding the treatment works and pumped for a period of about 3 months in 1988 with Well #3 having a yield exceeding 100 gpm (from Techur Rengulbai), then pumping was terminated as the supplementary supply was no longer needed. These wells were again pumped during the water shortage in 1997-98, however the yield had reduced significantly and the water had an increased iron content (from Techur Rengulbai). No further use appears to have been made of these wells.

85. A more detailed account of this historical information is presented in Appendix 13.

4.2 Stage 1 Groundwater Investigation

86. Field visits by the geotechnical and groundwater specialist during late June established that Well Nos 1, 3, 5 & 7 and 1447-03 still exist. In order to gain more information regarding the potential yield of these old well installations a short field investigation program was planned involving the test pumping of three of these wells; Nos 3, 5 & 7. Although the condition of the wells is unknown and there is a risk of significant blockage of the well screen due to biological growth, chemical decomposition of the well screens and casing, or both, these tests were considered to provide some indication of the lower bound potential yield of each installation.

87. The testing was carried out during the late July to mid October 2008 and involved pumping each well for a period of 24 hours whilst monitoring the drawdown within the well at regular time intervals. The work was carried out by Daryl Lund, a local water well driller experienced in such testing procedures. The results of this Stage 1 testing program are detailed in Appendix 13.

88. The pump tests of these 3 wells indicated likely short term yields of 25 to 60 gpm. These wells are each over 20 years old and new wells drilled a little deeper into the bedrock formation and /or of slightly greater diameter would be expected to have sustainable yields of 50 to 100gpm.

4.3 Stage 2 Groundwater Investigation

89. In view of the encouraging yield values obtained from the pump testing of the three old wells a more comprehensive pump test program was planned. This program involved the drilling of two new wells, together with the drilling of (one or two) monitoring bores located (about 30 ft) away from each well. In addition (one or two) of the old wells was converted to a monitoring bore. The purpose of the monitoring bores is to enable the ‘drawdown cone’ surrounding each well to be defined and thus to determine the hydrogeological parameters; transmissivity and storage coefficient which can be used to model the longer term performance (yield and drawdown) of an individual pumping well and the combined effects of a wellfield.

90. This program was commenced during the field visit by the geotechnical and groundwater specialist in February and completed in mid April 2009. The scheduled program was curtailed to only one location, due to very slow drilling progress and numerous equipment breakdowns, and limited to:

 Drilling of one well (GHD#2) in 15 cm (6”) diameter to 34m (80ft) deep; the upper 11.6m was clayey overburden soil, underlain by slightly weathered basalt bedrock.

 Drilling of one observation (GHD#1) bore in 15 cm diameter to 24 m deep and installation of 5 cm (2”) diameter slotted PVC standpipe sealed within the weathered fractured basaltic rock. This bore was located 10 m from the well;

 Installation of 5 cm diameter slotted PVC standpipe within the existing Well No. 5, sealed within the fractured rock; and pump testing.

91. The water level in the three bores was monitored several times over a few days, to ensure the groundwater regime had stabilized, then pump testing commenced. Analysis of the pump test data was carried out by an experienced hydrogeologist.

92. As the drawdown level in the pump well remained constant during the test period and the drawdown level in the monitoring bore was increasing quite slowly an initial analysis was made assuming steady state conditions. After making a few assumptions regarding “well losses” the indicated transmissivity (T) could be estimated.

93. The data for the drawdown of the monitoring well was then analysed for unsteady state flow conditions for a confined aquifer, using 2 methods. There is considered to be quite good agreement in the results of the three methods of analysis used. The storage coefficient values determined are quite high for a fractured rock aquifer and indicate a quite high degree of fracturing and connectivity. As there was no response to pumping at the monitoring point 250m away the ‘zone of influence of pumping is not known, other than that it is less that 250m.

4.4 Preliminary Design of a Wellfield

94. Firstly, it is considered that the drilling equipment and expertise presently available in Palau is not adequate to construct good quality water wells. In this geological formation a large rotary percussion drill rig using compressed air to lift the cuttings would be appropriate. Such a rig would be able to drill a 25 to 30 cm dia. bore down to 30 to 40m depth in a few hours and the entire well installation would take a day or two. This equipment and the operating expertise would need to be imported from Guam, Philippines or Hawaii.

95. Such a larger diameter deeper well penetrating at least 20 to 30m into the confined fractured rock aquifer would be expected to have a sustainable yield of at least 300 m3/day and up to 500 m3/day, compared to the 150 m3/day of the test well.

96. At a yield per well of 300 m3/day 13 wells would be required, whereas if the average yield was 500 m3/day then 8 wells would be required. It is therefore considered that a wellfield comprising about 10 wells would be required to meet the periodic requirement of 1 Mgpd during drought periods. It may be prudent to install one or two additional wells whilst the drilling equipment is present in Palau.

97. As the length of the Ikoranges and lower part of the Nkerikiil valley is about 3000m it would be possible to space 10 wells up to 300m apart, however this may mean that the ‘zone of influence’ of the wells overlap, although the drawdown beyond 200m is not expected to be very large.

98. In addition to the drilling of the wells it is recommended that a series of 6” diameter observation bores be drilled and fitted with PVC standpipes to enable monitoring of drawdown during pumping operations. A series of about 10 new monitoring bores, plus retrofitting of 3 or 4 existing bores is considered appropriate.

99. Although the wellfield will only be required for operation reasons for a few months every 10 years or so, it is recommended that the system be used for a few days up to a week every few months to ensure that it is working properly and will do so when absolutely needed. The most appropriate time may be following heavy rainfall periods when the surface water being pumped from the Nkerikiil River is quite turbid. This would ease the pressure on the treatment works in terms of sediment management and chemical dosing and may even result in some economy in the operations.

100. Figure 4.1 indicates the well field sites in Airai.

Figure 4.1 – Airai Wellfield Pump Test Locations

4.5 Water Quality Analysis

101. Towards the end of the pump test a sample of the water being pumped was collected. Well head tests were carried out on site by a technician from EQPB and a 2 litre sample was stored in two clean glass containers, kept chilled and transported to Manila by air, under appropriate chain-of–custody documentation for more detailed analysis.

102. The results of the chemical analysis are as follows:

Field Test results - determined using a YSI 6920 multiparameter meter Electrical Salinity Dissolved Date pH conductivity mg/L Oxygen mg/L mS/cm 9 Apr 09 8.1 1.189 590 8.3

Laboratory Test Results - provided by Fast Laboratories, Manila, Philippines

Carbonate / Calcium Sodium Magnesium Potassium Sulfate Chloride Nitrate Bicarbonate (Ca) (Na) (Mg) (K) (SO4) (Cl) (NO3) (CO3) / (HCO3) Sample 1 20.7 31.1 3.2 <0.02 2 1 50 <0.05 Criteria X X X X 250 250 X 10 Principal Cations & Anions - all results in mg/L

Iron (Fe) Manganese (Mn) Fluoride (F) Arsenic (As) Sample <0.06 0.03 0.20 0.03 Criteria .3 .05 2.0 <0.05 Metals all results in mg/L Drinking water criteria are in the Palau standards.

103. Testing carried out by FAST Laboratories in Quezon City Manila, Philippines indicates the main cations to be sodium and calcium, with minor magnesium, and the principal anion to be carbonate / bicarbonate. The other commonly present anions; chloride and sulfate were found to be of particularly low concentration. The charge balance error for anions-cations is quite high, indicating either another anion is present in significant concentration, or there is an error in the sulfate or chloride results. Hardness which is a function of calcium and magnesium concentrations is calculated to be 65 mg/L (as CaCO3) which is relatively low.

104. Four potential contaminants were analysed, three; iron, manganese and fluoride were all found to be well below commonly adopted health standards for drinking water. The concentration of arsenic is above the WHO criteria, however several countries have higher criteria (eg VietNam is 0.05 mg/L). It is recommended that more comprehensive analyses be carried out the for two forms of arsenic: arsenite (As3+) and arsenate (As5+). The fluoride level of 0.2 mg/L is considered beneficial for dental health.

5 THE PROPOSED PROJECT

105. The proposed Project has been formulated to overcome many of the existing legislative, institutional, environmental, financial and technical problems which currently exist within the water supply sector. While the physical infrastructure is concentrated in Koror, Airai and Aimeliik, the aim is to create a sector that will be more effective and efficient and which will warrant further infrastructure expenditure in the future. The Project increases the reliability of supply, reduces necessary water production by introducing water conservation concepts and tackling the high rate of non-revenue water, improves community awareness of water, sanitation and health, and establishes appropriate legislative and institutional arrangements for the future.

5.1 Project Impact and Outcome

106. The expected impact of the Proposed Project is:

(i) Improved quality of life of residents in Koror and on Babeldaob; and

(ii) Enhanced opportunities for economic development particularly for the important tourism industry.

107. The Project’s expected outcome is improved access, quality and reliability of water supply and sewerage services in Koror and improved water supply in Airai and Aimelik on Babeldaob.

5.2 Components

108. The PROPOSED Project would have five components, namely:  Component 1: Strengthening sector planning, management and regulation;  Component 2: Development of water supply wells and associated water source works;  Component 3: Community action and participation program (CAPP);  Component 4: Rehabilitation and extension of the Koror-Airai water supply network;  Component 5: Project implementation and capacity building.

5.3 Component 1: Strengthen sector planning, management and regulation

109. This component aims to strengthen the overall water supply sector and improve sector sustainability. It comprises two subcomponents:

(i) Institutional strengthening of the water and sewerage section of the Bureau of Public Works and others, so that a new water and sewerage authority with appropriate technical, financial and operational skills can be created; and,

(ii) Preparing of a Draft Water Supply Law for Palau including the designation of a water regulator.

5.3.1 Institutional Strengthening and the creation of a corporatized National Water and Sewerage Authority

110. Delivery of certain public services in Palau is the responsibility of the Bureau of Public Works which was within the Ministry of Resources and Development when the PPTA commenced but is now within the Ministry of Public Infrastructure, Industry and Commerce. Operating under the BPW’s Division of Utilities, physical water and sewerage services, where available, are delivered by this agency.

111. The Division of Utilities is responsible for all water, sewerage and solid waste removal services, but is not responsible for design or construction of physical structures and plant, or of finance. The BPW’s Division of Design and Engineering (CIP) is responsible for the design, procurement and construction of any physical plant. However, procurement responsibility to ensure the process is open and transparent and follows government rules falls under the Ministry of Finance, Procurement Division. The Procurement Division relies on CIP to prepare the specifications and terms while Procurement sends out the notices, advertises and works closely with CIP to ensure that technical and financial evaluations follow government standards.

112. The Ministry of Finance (MOF) is responsible for all metered and un-metered connection installation and maintenance, meter reading, billing and collection in Koror and Airai. This MOF department, working with, but not reporting to, the BPW has overall responsibility for all customer contact.

113. This current arrangement is not suitable for the development of a corporatized water and sewerage authority, however, we believe that the institutional strengthening must start in the BPW and work towards a suitable corporatized structure.

114. The institutional strengthening will provide consultant support over the period 2010- 2012, and will assist the Bureau of Public Works organization to become stronger and more efficient in planning, managing, operating and maintaining water supply schemes and the Koror sewerage scheme.

115. The support will strengthen BPW’s capacity to formulate policy, and to plan, manage and develop the water supply sector. It will assist BPW to:

(i) Complete key technical guidelines and standards;

(ii) Prepare and update water sector investment plans;

(iii) Build the capacities of BPW staff to undertake their core planning and management functions;

(iv) Develop a human resource strategy for the urban water supply sector, and;

(v) Disseminate technical and management guidelines and the Water Supply Law to the States.

116. The strengthening will assist BPW to:

(i) Develop and implement staff training programs;

(ii) Undertake its core monitoring and operations functions over 2010-12;

(iii) Undertake a tariff review;

(iv) Raise awareness of Ministries and State governments of the objectives and benefits of sector regulation and the role of BPW and/or the corporatized entity; and

(v) Help to establish a regular financial source for financing its activities.

117. It is anticipated that this strengthening will enable a corporatization of the water and sewerage section of BPW or the creation of a new water supply and sewerage operating authority based on BPW personnel and others who have participated in the Project Management Unit and received training under the proposed Project. To achieve this, this sub-component needs to specifically address:

(i) The preparation of a national water and sanitation utility plan;

(ii) Preparation of an asset transfer plan;

(iii) Preparation of a new asset acquisition plan:

(iv) Preparation of a staff/organization plan;

(v) Preparation of a capacity building plan;

(vi) Development of a public awareness program;

(vii) Development of a meter installation and tariff regime;

(viii) Development of a State government outreach and co-operation plan; and

(ix) Development of environmental and water/sewerage regulations.

118. It is hoped that some key staff of the future WASA will be members of the Project PMU and will receive on the job and formal training from the Project Implementation Assistance (PIA) consultants. To ensure that the institutional strengthening is efficient, it will consist of short term, intermittent inputs by international specialists in key areas and longer-term inputs by domestic consultants where available, supplemented by workshops and a targeted study tour within the Asian or Pacific region.

119. The study tour would only be undertaken when the future WASA employees have been identified and have undertaken some training. It would also be desirable to include at least two people who have been identified as members of the WASA board of directors. The tour should be to a corporatized water authority that has been operating successfully for at least five years. It would be ideal if this organization was prepared to ‘twin’ with the Palau WASA to offer on-going support into the future.

120. There will also be a need to strengthen the designated water regulating authority as corporatisation or shifting of responsibilities occurs. We believe that this could be the Environmental Quality Protection Board but this decision is best left to a time when the new water law is being drafted and there is GOP agreement on the future shape of the sector.

5.3.2 Preparing of a Draft Water Supply Law for Palau

121. Consultant support will be given to assist in preparing a new Draft Water Supply Law and amendments to Water Resources Laws. If a Water and Sewerage Authority is proposed, the new law should include both water and sewerage. This PPTA has not, however, examined the existing legislation regarding sewerage.

122. Substantial legislative reform is needed in relation to nearly all aspects of the provision of water supplies throughout Palau. This requires the enactment of a new law. The new law must take account of the relevant provisions of a number of current laws which deal, to some extent, with issues related to the operation and regulation of public water supply systems.

123. Some legislative reform is needed in relation to water resource management, but this appears to be limited to matters associated with rights to abstract water from surface and ground water sources, and related provisions. This may only require minor amendment to the Environment Quality Protection Act 1983, and the promulgation of new regulations made under that Act.

124. The proposed law reforms could make provision for:

(i) One or more approved water supply and sewerage system operators. These can be vested with authority over designated water supply areas or schemes. They can apply the operational and administrative provisions of the new Act (including powers relating to fees and charges) to their designated area or scheme.

(ii) The possibility of a phased implementation of the reforms (so that a new water supply operations entity is not burdened with the obligation to assume management and operational control over all current water supply systems from the outset). The GOP has already experienced problems in this regard with the Palau Public Utility Corporation (PPUC) where this was not considered. It may be appropriate, for instance, that a new corporatized water supply and sewerage entity assume control of only the major Koror-Airai water supply system and the Koror sewerage scheme at the outset until these systems have reached the stage of full-cost recovery.

(iii) The transfer of certain systems and their associated staff and assets to a corporatized entity, with the possibility of further transfers on a phased implementation basis.

(iv) The expanding of the operational functions of the corporatized entity to include the management and operation of sewerage systems.

(v) The formal creation of a regulating body for the water and sewerage sector.

(vi) The clear definition of the powers of a corporatized body’s board of directors including the power to develop and implement tariff reforms.

125. The new water law (and an amended water resources management law) should include the right of approved water supply system operators to abstract water, but this would be subject to regulatory requirements of EQPB. Amendment to the EQP Act is required to provide a clear mandate for EQPB to regulate water abstractions based on an approved

National Water Resources Management Plan, and to allow for the resolution of issues that involve the competing claims to rights of access to the water resources.

126. The question of ownership of the water resources and the payment of extraction fees needs to be well defined. Within the Koror/Airai system at present, residential properties in Airai pay less than those in Koror because the water for this system is sourced from Airai. This lowers the fee for Airai residents but doesn’t provide the State of Airai with any direct benefit. Perhaps a better system is to allow an extraction charge based on volume to be paid to the States for all water extracted within their boundaries. In the case of water supply systems, this extraction fee would be paid by the system operator and would be an additional known charge to be included in operating costs in a similar way to chemical, electricity etc. costs.

127. We believe that the GOP could take other measures to encourage conservation of water. These could be incorporated into regulations associated with the new laws. It would be easy, for instance, to regulate the importation of appropriate fixtures such as dual-flush toilets and low-flow showerheads. If these were the only fixtures available, all new building and replacement fixtures would be of this type. If desired, the regulations could go further and mandate these fixtures in all buildings by say 2015.

5.4 Component 2 – Development of water supply wells and associated water source works

128. This component aims to develop a way to augment the supply to the existing Koror – Airai water supply system. This will improve the reliability of supply during periods of drought and will reduce current quality problems during periods of high rainfall. It will include:

(vii) Development of groundwater sources in Airai State through the drilling of 10- 15 production boreholes and various monitoring holes;

(viii) Pumps, meters and raw water transmission pipelines;

(ix) Access roads and electrical supply to bore sites as appropriate;

(x) Work at the existing Ngerikiil intake and provision of additional pumping equipment at the pumping station;

(xi) Replacement of the existing access bridge at the Ngerimel dam; and

(xii) Work at the Ngerimel reservoir to allow either bypassing or delivery of water to the storage.

129. Equipment for O&M of the water supply systems will be procured under the component.

130. During the PPTA, pump testing was undertaken on three existing wells (developed during the 1980s) and a new borehole was drilled and pump tested. Monitoring wells were also constructed and water level observations made during flow testing. The results of these tests indicated that there was a good possibility of using groundwater from Airai as an emergency supply source for the Koror-Airai water system in time of drought. Indications are that a total of 10-15 production wells could produce a desired one million gallons a day under short-term pumping conditions (of say three months).

131. This component includes the rehabilitation and completion of three holes already in existence and the construction of 10 new production wells in the Airai area together with construction of a number of monitoring wells which will be used to safeguard the supply in the underground aquifer.

132. The details of the component are shown in Appendix 6 – Technical Work and Bid Documents.

5.5 Component 3: Community Action and Participation Program

133. The Community Action and Participation Program (CAPP) is designed to enhance and sustain the benefits from investments in water supply systems. It comprises complementary activities that aim to:

(i) Facilitate the implementation of the water supply system improvements and encourage water conservation to limit future demand;

(ii) Enhance the sustainability of water supply benefits with activities that target improved household sanitation, environmental improvements and community health awareness; and

(iii) Promote GOP objectives for a participatory and consultative process with equitable benefits shared by all residents of communities including women, all ethnic groups (about one quarter of the population comprises foreign nationals) and poor households.

134. The three subcomponents of the CAPP are:

(i) Community Participation Plan (CPP) which will develop and implement a stakeholder participation plan that covers information dissemination, consultation and disclosure requirements for the new and rehabilitation works;

(ii) Community Awareness Plan (CAP) which will develop and implement a plan to promote water conservation, make the community aware of the value of the water systems, and enhance an interest in water and sanitation issues; and

(iii) Health Awareness Support (HAS) which will strengthen existing programs to promote behaviour change related to sanitation, hygiene, water use and health.

135. The CAPP Component will add value to the physical works by maximizing community participation, integrating health and hygiene awareness, and reducing demand on the system. This will be achieved by establishing an integrated community action team (CAT) with a full-time team leader in the PMU and representatives from the health office, education office and a women’s organization, as required, as advisors. The Project consultant will assist the CAT to implement the CAPP at the community level, by providing technical and management support, training and education materials.

136. We believe that it is important that the CAPP component links closely with existing GOP initiatives rather than simply establish a separate program to run for the life of the Project. We are suggesting that programs already in existence (but finding funding difficulties) within the Ministry of Health (Environmental Health), Ministry of Finance (Water Education for Teachers program in schools) and Ministry of Education be supported and expanded as part of the CAP and HAS sub-components. It may be necessary to obtain a

GOP commitment that funding will be provided for these programs after the life of the Project.

5.5.1 Community Participation Plan

137. The CPP is a comprehensive stakeholder participation plan that will be tailored to the needs of the Project. It draws on lessons learned that extensive stakeholder consultation and participation are needed at all stages of the subproject cycle to promote community support and ownership and to maximize sustained benefits. The CPP complies with the ADB requirements for consultation, information dissemination and public disclosure.

138. The range of activities in the CPP include, among others, informing, promoting and educating about the project, its activities and schedules; and the benefits and needs of metering, extending the boundaries of the service area and the advantages of a corporatized entity operating to good international practice.

5.5.2 The Community Awareness Plan

139. The CAP is perhaps the key part of this component and considerable effort will go into developing effective programs to change public attitudes towards the water and sewerage sector. Palau consumers must reach an understanding that a piped water supply is an important resource and considerable cost and expertise is involved in constructing, operating and maintaining such a system. The cost of collecting, treating and reticulating water is significant and wastage of water adversely affects all consumers.

140. An assessment of current and alternative methods and tools for existing public awareness and education programs will be undertaken and a campaign strategy and implementation program will be put in place. It is expected that this will have components involving:

(i) Media advertising and editorial activities;

(ii) A schools campaign to educate children in conservation practices and the value of good water and sewerage systems;

(iii) Public meetings with community leaders, women’s groups and others; and possibly

(iv) Public inspections of water facilities (intake, dam, treatment plant, bore field, reservoirs etc)

5.5.3 Health Awareness Support

141. The HAS subcomponent will strengthen existing programs to promote behavioural change related to sanitation, hygiene and health. HAS activities are expected to include:

(i) A knowledge, attitude and practices survey to provide a clear understanding of the relationship between people’s knowledge and hygiene and water use practices;

(ii) Assessment of current and alternative methods and tools for existing public awareness and education programs;

(iii) Assisting authorities to design new methods and tools for existing programs; and

(iv) Contributing resources to expand these programs.

5.6 Component 4: Rehabilitation and expansion of the Koror-Airai water supply network

5.6.1 Water Supply Rehabilitation

142. The subcomponent includes rehabilitation works to improve supply reliability, make operations more effective and allow for full metering of the Koror – Airai water supply system. A full leak detection and repair operation will be undertaken as part of this component.

143. Work will include: (x) Installation of flow meters within the existing network and at all storage tanks; (xi) Repair of leaks and replacement of pipes after a thorough leak detection study (xii) Rehabilitation of storage tanks and surrounds; (xiii) A new raw water pipeline between the Ngerimel reservoir and the water treatment plant; (xiv) Additional pumps and pump house at the water treatment works; (xv) A new supply pipeline to Malakal; (xvi) The provision of new pumps at booster pumping stations; (xvii) Installation of service connection meters on all unmetered connections; and (xviii) The testing and calibration of all existing service connection meters.

144. Free connections and meters will be provided for unmetered households in Koror and Airai that apply to connect during the designated construction period. This measure will assist poor and low-income groups to continue to participate in the piped water supply system, encourage unmetered connections to convert and enhance financial sustainability. To encourage this, it may be necessary to dramatically raise the flat rate paid by un-metered connections.

145. Commercial and institutional customers will pay for connections at the full cost of labor and materials. After the designated period, it is proposed that the water operating authority would continue to provide free connections for the poor, and charge other new customers for the cost of the connection, including labor and materials.

146. It will be necessary to establish permanent facilities for testing and calibration of existing meters. The cost of this is included in the Project cost. Whether the testing and calibration is done by personnel within the BPW or by contract will be decided during the Project. An allowance of half the cost of a new meter has been allowed for removing an existing meter, calibrating it and replacing it in position, in the preliminary estimate.

5.6.2 System expansion

147. The GOP is keen to see an expansion of the Koror-Airai water supply system into adjacent areas. It has identified an expansion to Aimelik State as a high priority so a bulk

26 supply line has been included along the Compact Road reserve from the end of the present pipe network.

148. There is little demand for this pipeline at present but the GOP sees future demand. It was suggested that this pipeline be constructed along the Compact Road (west) as far as the Aimeliik turn-off. To transmit water to this point would involve the construction of one or more pumping stations and some storage facilities because this point is the high point on the entire western section of the Compact Road.

149. Our view is that to construct pumping stations and storage facilities at this time and then not use them is not cost effective so we propose that the pipeline only be constructed for such a distance where water can be supplied at suitable pressure by the existing treatment works pumps. Our calculations indicate that this is for seven kilometres along the road from the Shell service station or 5.5 kilometres from the end of the existing 6 inch uPVC water main.

150. We have done our cost estimates on this basis using 8 inch pipe as directed. We believe this pipe should be in HDPE.

151. The details of the component are shown in Appendix 6 – Technical Work and Bid Documents.

5.7 Component 5: Project Implementation Assistance and Administrative Support

152. Component 5 has two subcomponents:

(iii) Project implementation assistance (PIA); and

(iv) Administration support (AS).

5.7.1 Project Implementation Assistance

153. This subcomponent will provide consulting services to assist the Project Management Unit (PMU) to implement the Project.

154. The Project Implementation Assistance (PIA) consultants will provide technical and management support, capacity building and training to the PMU throughout the implementation stage in such areas as:

(i) Project planning, project management and coordination;

(ii) Setting up project management, accounting, auditing and reporting systems; developing project administration procedures and manuals;

(iii) Feasibility studies;

(iv) Detailed design of the Project components and preparation of bid documents;

(v) Bid evaluation, and contract management;

(vi) Social and environmental assessments;

(vii) Procurement;

(viii) Construction supervision of water supply systems;

(ix) Environmental management and monitoring;

(x) Financial and economic analyses;

(xi) Benefit monitoring and evaluation;

(xii) Project reporting, accounting, budgeting and disbursements; and

(xiii) Community participation, awareness and development activities.

155. The PIA consultants will also provide training and support to the PMU for implementing the CAPP. The PMU and the PIA consultant will work to develop a strategy and awareness materials for the WASA customer base and will also ensure that accounts and billing systems are ready to go as soon as WASA becomes operational.

156. During the Project implementation, the PMU and PIA consultants will conduct a series of Project orientation workshops in Koror and Airai, to explain the Project scope, objectives, implementation schedule, implementation arrangements, water meter eligibility criteria, ADB and Government procedures to be followed during implementation, and the roles of various stakeholders. The workshops will include concerned national and State government agencies, media organizations, private sector representatives, community leaders, women’s organizations and communities.

157. In consultation with local agencies, the consultants will develop guidelines and system-specific manuals for operating and maintaining the water supply, and sewerage systems. This will extend to the small State systems no matter if they are taken over by the WASA immediately or remain with the States for some time.

158. Identified future WASA staff will receive training in water and sewerage utility management, budgeting and planning, water supply engineering, asset management, water and sewerage pipe installation and repair, operation and maintenance, water and sewerage treatment plant operation and control, pump operation and maintenance, asset management, water supply connections, record keeping, meter reading and customer relations.

159. The Project will also procure essential O&M equipment, including O&M tools and minor construction equipment, workshop tools, computer hardware and software, meter test bench and water laboratory test equipment.

5.7.2 Administrative Support

160. This will provide allowances, vehicles, office, and computer equipment for the PMU office for project implementation.

161. Administration support includes PMU operating expenses (support staff, allowances, transport costs, and office running costs for implementation and training activities); and provision of vehicles, office and computer equipment for the PMU office. It also includes the costs of monitoring and evaluation, and financial auditing of PMU accounts, which will be undertaken by specialized domestic or international contractors and independent consultants engaged by the PMU.

6 COST ESTIMATES AND FINANCING PLAN

6.1 Cost Estimates

162. The Project cost estimates are based on the preliminary design of the various components using March 2009 prices. The Project cost is estimated at $8.241 million equivalent, including taxes, plus contingencies, interest and service charges during construction i.e. $9.894 million total. A summary of the cost estimates by component is given in Table 6.1.

Table 6.1 - Project Cost Estimate (by Components) Total % of Component Cost Total $000's 1 Strengthening Sector Planning, Management & Regulation 1.1 Strengthening of BPW and EQPB and the creation of a new Water and Sewerage Authority 600 1.2 Preparing a Draft Water Law and amendments to Water Resources Laws 150 Total for Sector Strengthening 750 7.5 2 Development of Water Supply Wells and associated Water Source Works 2.1 Development of 13 production wells 280 2.2 Land acquisition 100 2.3 Access roads, fencing, standby power and electricity supply 450 Supply & installation of pumps, pump houses, meters and pipework connections to existing raw 2.4 528 water pipelines 2.5 Improvement to intake, standby pump, bridge at dam, production meter and by-pass line 143 Total for Development of wells 1501 15.2 3 Community Action and Participation Program 3.1 Community Participation Plan 60 3.2 Community Awareness Plan 180 3.3 Health Awareness Support 30 Total for Community Action and Participation Program 270 2.7 4 Rehabilitation and expansion of the Koror-Airai supply network 4.1 Supply and installation of 700 service meters and supply of 300 new meters 85 4.2 Remove, calibrate and reinstall existing meters 150 4.3 Leak detection survey 150 4.4 Supply new pumps and pump house at treatment plant 180 4.5 Supply and install new transmission line from reservoir to Treatment plant 400 4.6 Repair tanks, new booster pumps, generator, zone metering 605 4.7 Supply and install 18000 feet of 8 inch HDPE pipe and fittings in Compact Road 990 4.8 Supply and Install 6500 feet of 8 inch HDPE pipe and fittings to Malakal 490 4.9 Supply and install new 4, 6, 8, 10, and 12 inch HDPE pipe 1220 Total for rehabilitation and expansion 4270 43.2 5 Project Implementation & Administrative Support 5.1 Project Implementation Assistance 800 5.2 Administrative Support 650 Total for Implementation & Administrative Support 1450 14.7 TOTAL BASE COST FOR PROJECT 8241 6 Contingencies 6.1 Physical contingencies 824 6.2 Price contingencies 365 Total Contingencies 1190 12.0 7 Interest and service charges during construction 463 4.7 TOTAL ESTIMATED PROJECT COST 9,894 100 Notes: a) In March 2009 prices. b) Includes taxes of $323,000. c) Physical contingencies at 10% of base cost. d) Price contingencies at 2% p.a. for local costs; 0.4% to 1.4% p.a. for foreign costs.

e) Financing charges during construction: 1% p.a. for ADB’s ADF portion of loan, 2.99% p.a. for EIB loan and ADB’s OCR portion of loan; and 0.15% commitment fee for undisbursed amount of loan.

6.2 Financing Plan

163. The project capital cost is assumed to be funded by way of loan and government equity/grant. The European Investment Bank (EIB) is assumed to finance 50% of the total project cost while 49% will be funded by ADB and 1% by GOP. The ADB loan is assumed to come from 2 sources. The first $1.8 million of the ADB loan will be a soft-loan sourced from its Asian Development Fund (ADF) and the balance of $3.05 million will come from its Ordinary Capital Resources (OCR). The ADF portion is assumed to have a 32-year term including an 8-year grace period with an interest of 1.0% charged during the grace period and 1.5% p.a. thereafter. The OCR portion is assumed to have a 25-year term with a 5-year grace period. Interest rate for the OCR portion is assumed at 2.99% p.a. A commitment fee of 0.15% p.a. of undisbursed balance of loan are also assumed. The EIB loan is assumed to have the same financing terms as the OCR portion of the ADB loan.

164. It is assumed that the Ministry of Finance (MOF), on behalf of the GOP, will sign the main loan agreement with ADB and EIB. Then the proposed WASA, which will assume ownership and operating responsibility upon completion of the project, will in turn sign a subsidiary loan agreement (SLA) with the MOF under the same terms and conditions of the main loan agreement.

165. The assumed financing plan is outlined in the following table.

Table 6.2 – Financing Plan Amount Sources of Funds Percent ($ Million) Asian Development Bank: Asian Development Fund 1.80 18% Ordinary Capital Resources 3.05 31% Sub-total 4.86 49% European Investment Bank 4.94 50% Government of Palau 0.09 1% Total 9.89 100% Source: Consultant’s Calculation

7 SUMMARY ENVIRONMENTAL EXAMINATION

7.1 Introduction

166. The purpose of this Summary Initial Environmental Examination (SIEE) is to provide an environmental assessment of the proposed construction and operation of the Babeldaob Water Supply Project (BWSP). The objective of the Project is to improve the security of water supply, in the face of occasional drought, for the communities of Koror and the State of Airai on the south end of Babeldaob Island. In addition the Project considers savings to be achieved by reduction of ‘unaccounted for water’ (UFW) and the potential for extending the Koror-Airai system to the nearby state of Aimeliik.

167. The Project Applicant is the Bureau of Public Works (BPW) within the Ministry of Public Infrastructure, Industry and Commerce (MPIIC), Government of the Republic of Palau (ROP).

168. The BWSP is classified under the Asian Development Bank (ABD) guidelines as Category B and this SIEE has been prepared in accordance with the ADB guidelines (2003) to meet the ADB requirements for the Draft Final Report. The more comprehensive IEE for the Project is included as Appendix 10 of this Draft Final Report.

169. In the ROP, the Environmental Quality Protection Board (EQPB) within the MPIIC is the governing body for environmental protection and Title 24 of the National Code provides the framework for protection of resources and environmentally sound development. The Environmental Quality Protection Act and regulations which concern EIS’s are set out to “insure that environmental concerns are given appropriate consideration in decision making” for projects. A two-step assessment process is used similar to the ADB environmental safeguard policy.

170. This SIEE is based upon an analysis of the potential impacts of the proposed works following inspection of the project site by the Project Environmental Specialist and the Geotechnical and Groundwater Specialist, together with other PPTA team members during two site visits; in June-July 2008 and February-March 2009. During these visits the specialists had discussions with various GOP representatives and other stakeholders, obtained information relating to the physical and ecological resources, inspected sites of prospective water supply infrastructure improvements and arranged for some field investigation work to be undertaken.

7.2 Description of the Project

171. The Project evolved from a perceived need for capacity expansion, increase in system coverage and reduction in the risk associated with shortages in water supply that may occur during drought periods. Despite the perception of a shortfall in capacity, investigations have shown that the Koror-Airai supply is sufficient to meet all future demand scenarios up to year 2020, the project planning horizon. However reliability of supply is such that a shortfall can be expected one year in 10 due to drought conditions, which typically last for 2-3 months, whereas a shortage frequency of no more than one in 25 years is considered acceptable.

172. The existing system has a very high per capita consumption rate of about 225 gpd, which is between 3 and 10 times that of other Pacific Island nations and urban areas in the USA and Australia. Less than 60% of water produced at the Airai water treatment plant is billed to customers and household connections in Airai are not metered, just billed a low flat monthly fee. The very high consumption rate is considered to be due to several factors

31 including leakages in the pipeline system and wastage due to the perception that ‘water is free’.

173. The proposed Project has the following five components: (1) Strengthening Sector Planning, Management and Regulation – aimed at institutional strengthening of the BPW to enable a new ‘Water and Sewerage Authority’ to be created and preparation of a Draft Water Supply Law for Palau. (2) Development of a Water Supply Wellfield in Airai State – to augment the existing surface water supply to improve its reliability during the occasional drought periods. This will involve the drilling of some 10 to 15 wells, 80-100 feet deep, along the shallow valley of the Ikoranges watercourse, just to the north of the airport. Each well would be fitted with an electric submersible pump feeding a new raw water main to the existing water treatment plant. This system is expected to yield up to 1Mgpd for a 1-2 month period. Some improvements to the Ngerikiil pump station, the Ngerimel dam and some additional pipework would also be included to improve the efficiency of these facilities. (3) Community Action and Participation Program – designed to facilitate implementation of the improved water supply system, encourage water conservation and enhance sustainability of the system. (4) Rehabilitation and Expansion of the Water Supply Network – to improve supply reliability and effectiveness of the entire water supply system. Rehabilitation work would include; replacement of unserviceable pipes, refurbishment of storage tanks, full metering of the entire delivery system, duplication of the raw water mains between the Gehmil reservoir and the treatment works, a new main to the Malakal reservoir and installation of a bulk supply line for about 5.5 km along the Compact Road into Aimiliik State. (5) Project Implementation Assistance and Capacity Building - in water supply system planning, management, administration, operations and maintenance, including environmental assessment and review and support of the Project Management Unit (PMU) during loan implementation.

7.3 Description of the Environment

7.3.1 Physical Resources

174. Palau has a tropical monsoon climate characterized by slight seasonal variation in rainfall, moderately warm temperatures, and high humidity. Two seasons are generally recognized; a rainy season from May to December and a dry season, although rainfall occurs relatively uniformly throughout the year. Average annual rainfall is some 148 in (3,760 mm). The monthly average temperature range is 24o to 32o C with March and April the warmest months. The north-eastern trade winds prevail with a mean wind speed of about 15 knots. High strength winds recorded during typhoon events range up to 140 knots.

175. The geology of the Palau Archipelago is quite variable and complex. There are four main types of island landforms; volcanic, high limestone, low platform and atoll or reef islands. Babeldaub Island is almost entirely volcanic and composed of andesitic and basaltic volcanic breccia bedrock generally overlain by 10 to 20 feet of residual clayey soil. The upper 100 feet or so of the bedrock is partially decomposed. Over much of the coastal fringe and within the major river valleys a surface alluvial or colluvial layer overlays the weathered

32 rock profile. A few high limestone ridge areas occur at the very southern extremity of this main island. Similar geological conditions exist on the smaller island of Koror, except for the eastern extremity, which together with the even smaller islands of Malakal and Ngerekbesang, comprise limestone.

176. The project area is blessed with ample surface water resources from generous rainfall distributed relatively evenly over the year. The surface water resource of the Ngerikiil and Ngerimel Rivers is of special relevance as they provide the source for the existing water supply system. The Ngerikiil watershed covers over 2,850 ha and three main tributaries feed the river: the Edeng, the Kmekumel and the Ikoranges watercourses. The Ngerimel watershed to the west is smaller and is dammed to form the Gihmel Reservoir.

177. The parent volcanic bedrock underlying the project area is most unlikely to contain significant groundwater, as the fresh rock is very dense, has low porosity and typically very few discontinuities to store and transmit groundwater. However the zone of weathered material, overlying the fresh rock commonly has a greater primary porosity and significantly more discontinuities and therefore, has the potential to contain groundwater aquifers.

178. During the mid 1980’s a groundwater study was carried out in the area between the surface water collection points on the Ngerimel and Ngrikiil River systems in Airai. This study was commissioned following a significant ‘dry’ period during 1983. This study involved the drilling a series of exploration bores, some of which were converted to wells and subsequent pump testing was carried out, indicating a short-term yield ranging from 25 to 85 gpm.

179. A subsequent Comprehensive Groundwater Protection Strategy report in 1996 concluded that “this groundwater development showed significant potential for future success and could supply an additional 0.48Mgpd (20 hr/day) of very high quality water” and “preliminary results also demonstrate that a substantially greater groundwater supply could be developed through further well development.”

7.3.2 Biological Resources

180. Terrestrial habitat in Palau includes upland (volcanic), mangrove, swamp, high limestone, low limestone and atoll forests. Savannas and grasslands are also prevalent on Babeldaob and are covered by a mixture of bare soil, ferns, grasses, and shrubs. Freshwater habitats are found in lakes, streams, and rivers. Estuarine, brackish water habitats are found at the mouths of rivers and in embayments along shorelines. Coral reefs are found offshore.

181. Palau’s network of protected areas covers over 40% of near-shore marine areas and 18% of terrestrial habitats. There are 36 protected areas in total.

182. The Palau upland forest is the most diverse vegetative community in Micronesia, with a survey recording over 342 plant species of which 243 were native, 60 species were endemic to Palau and another 31 were introduced. A total of 36 important forest areas or individual rare trees were identified primarily in upland forests. Palau has some 200 species of endemic plants and 50 additional species that are candidate endemics.

7.3.3 Human and Economic Development

183. Palau has a significant history of foreign occupation and administration. Spain sent missionaries in the late 19th century, Germany then developed copra and mining operations, and later Japan used the islands establishing farming, mining and infrastructure development and a strategic military base during World War II. After the war Palau came under the

33 administration of the United States as part of the United Nations Trust Territory of the Pacific Islands. On October 1, 1994 the new nation of the Republic of Palau was born.

184. The Palauan economy has been dominated by the public sector for many decades, and public administration is currently estimated to account for some 27% of GDP. The national economy is dependent on foreign aid. The largest and fastest growing industry in the country is tourism. The services sector accounts for 83% of GDP. Agriculture, forestry, and fishing activity are estimated to represent only about 4% of GDP. Although the agriculture and fisheries sector makes only a small contribution to GDP, it provides the main livelihood for the 20% of Palau’s population, who live far from Koror.

185. The population of Palau was 19,200 in 2000, with an additional 6,500 Palauans living abroad. The latest population estimate (2005) was 20,300. Ethnic Palauans represent 73% of the population with the remaining 27% comprising primarily people from the Philippines, Japan, China, United States and other Micronesian Islands. Some 24% of the Palau population is younger than 24 years, with 70% between the age of 14 and 65. Population growth has been very low over the last 20 years.

7.4 Screening Environmental Impacts and Mitigation Measures

7.4.1 Potential Impacts and Mitigation Measures

186. The principal purpose of the BWSP is to provide significant improvement in the quality of life environment for the community of Palau, initially to those in the Koror-Airai region, but many aspects will progressively apply to the other states in Babeldaob and other islands communities. The proposed works may also benefit the physical and ecological environment. Those activities which are considered to have the potential for significant negative environmental impact occur during the construction phase of the Project.

187. A summary of the potential negative environmental impacts associated with various aspects of the Project and the proposed mitigation measures to neutralize or minimize the impact presented in Table 7.1. They are discussed in greater detail in the IEE (Appendix 10).

188. During the operational phase the up-graded water supply system is considered to have an overall positive environmental impact, compared to the previous system, which resulted in a high proportion of treated water loss through leaks in the system and wastage by consumers. The previous leakage areas are considered to have periodically (particularly during drought periods) allowed ‘dirty’ water into the delivery lines, thus contaminating the system. The risk of this happening will be significantly reduced by the Project.

Table 7.1 Potential impacts and mitigation measures

PROJECT ACTIVITY ENVIRONMENTAL IMPACTS MITIGATION MEASURES

DESIGN /PRECONSTRUCTION PHASE Siting of the wellfield and The wellfield may prevent or disrupt All bores, access tracks and pipelines will alignment of delivery other development of the land area. be located on state land where possible, in pipeline. areas remote from present development.

CONSTRUCTION Environmental Clauses for Incorporation in the Construction Contract tender documents are used to mitigate potential negative impacts, together with the ROP EQPB PHASE Regulations. Airai wellfield - drilling, Disturbance to vegetation, use of small Drilling activities will generally be located on pump well & monitoring earthmoving equipment to provide relatively flat areas, removal of vegetation well installation, building access, discharge of drilling cuttings, will be minimal and where essential silt access roads and power- erosion during heavy rainfall and stream traps will be installed to prevent erosion and lines. sedimentation. sedimentation. Noise, dust and air pollution generated Activities will be remote from residential by drilling and associated activities. areas and work will be restricted to daylight hours Trenching, installation of Disturbance of vegetation, erosion and Where necessary silt traps will be installed HDPE pipes and sedimentation. to prevent erosion and sedimentation. backfilling for delivery Noise, dust and air pollution generated Most activities will be remote from pipeline from wellfield to by earthmoving activities residential areas and work will be restricted WTP. to daylight hours. Stand-by pump for No significant impacts are expected Not applicable Ngerikiil Pump Station Improvement of Ngerikiil Pump station may need to be closed The work will be scheduled to ensure Pump Station Intake. down for a short time. Possibility of minimal inconvenience to the operation of some increase in turbidity immediately the water supply. after construction. Replacement of Ngerimel No significant impacts are expected Not applicable dam bridge Bypass pipeline to Sediment contamination of the water The pipeline alignment will be chosen to Gihmel Reservoir stored in the reservoir. ensure that no significant sedimentation is possible. Rehabilitation of the following parts of the existing water supply infrastructure Duplication of raw water Disturbance of vegetation, erosion and Silt traps will be installed to prevent erosion pipeline from reservoir to sedimentation. and sedimentation. the water treatment plant Noise, dust and air pollution generated Most activities will be remote from by earthmoving activities residential areas and work will be restricted to daylight hours. Additional pump No significant impacts are expected Not applicable equipment and building alterations. Refurbishment of water Noise dust and air pollution generated Most sites are remote from residential storage tanks servicing by sand blasting activities. areas and work will be restricted to daylight the reticulation areas. hours. If necessary the work sites will be shrouded to prevent escape of air pollutants

PROJECT ACTIVITY ENVIRONMENTAL IMPACTS MITIGATION MEASURES

Replacement of Repair or removal of fibro-cement pipe Where practicable fibro pipe should be damaged or which can cause workers to be exposed abandoned in-place and replaced with new unserviceable distribution to asbestos fibres. The risk exists that plastic piping located in a parallel trench. pipes in residential areas. local residents could also be subject to Where fibro-cement pipes must be removed short-term exposure to asbestos fibres. this would be carried out using special procedures to limit worker exposure. Work areas would be cordoned off from public access. Excavation for pipe repairs can cause Ensure there is sufficient budget to damage to roadways, footpaths and reinstate all surfaces to original or better paved areas. condition. Noise, dust and air pollution generated Work will be restricted to daylight hours and by trenching activities maybe further restricted to avoid peak traffic periods. Leak detection and meter No significant impacts are expected Not applicable replacement activities Installation of 8” dia Excavation of trenches adjacent to Corridor adjacent roadway needs to be HDPE pipeline for 18,300 roadways, stockpiling of spoil, laying of cordoned off to provide safe workplace. ft along the Compact pipe, and backfilling of trenches can Silt traps and temporary drainage will be Road towards Aimeliik result in disruption to traffic and installed to prevent sedimentation. State, and 6,600 ft along sedimentation. Malakal Road to the Excavation for pipe installation can Ensure there is sufficient budget to Malakal sump tank. cause damage to roadways, shoulders reinstate all surfaces to original or better Extension of existing and other paved areas. condition. pipelines in distribution area to provide new Noise, dust and air pollution generated Work hours restricted to avoid peak traffic service connections. by trenching activities periods. OPERATIONAL PHASE Airai wellfield pumping for Continuous pumping over long period Pumping for more than a few days will only periods of greater than a may deplete the safe yield of the aquifer. be carried during drought periods. few days per month. Observation wells will be installed around the wellfield perimeter to monitor drawdown during operation.

7.4.2 Climate Change and Adaptation Measures

189. Possible impacts of climate change on the Palau Islands include: seawater warming and the consequent bleaching of coral formations; potential changes in rainfall that could alter fresh water flow of streams; increased temperatures and their effect on water quality; potential for more intense and frequent storm events, and sea level rise.

190. The adaptation is to improve the reliability of supply and introduce both physical and social means for water conservation, so the project mitigates impacts related to variability of supply. The proposed use of the groundwater as the supplementary water resource is appropriate in the face of climate change impacts. The aim of the project to significantly reduce both the per-capita usage of water, and the leakage from the system is also considered appropriate to the needs dictated by climate change.

7.4.3 Poverty and Social Assessment (PSA)

191. The results of the PSA indicate that at present the impoverished and vulnerable households in the Koror-Airia area have access to the water supply. It is also confirmed that water use relative to cost paid has become excessive and may have been abused. The Project will result in a significantly increased tariff for water. The principal mitigating measure

36 will be a reduced and more responsible water usage while a ‘lifeline tariff’ will be introduced to help the poor. The Project will ensure equitable gender participation and benefits.

7.4.4 Mitigation Costs

192. The overall cost of environmental mitigation includes: the costs associated with mitigation measures related to the proposed Project activities; the costs for technical support during implementation of the loan; the costs for government personnel and operations to support the environmental measures; and special studies that may be necessary to support the detailed design of the Project. The cost of the mitigation measures is estimated at US$30,000 and the cost of EQPB monitoring is estimated at a further $10,000. These direct costs will be the responsibility of the Contractor and are considered part of normal construction costs.

7.4.5 Technical Assistance

193. A national Environmental Consultant is proposed to work as part of the project implementation assistance team and provide the technical inputs needed to implement the environmental work on the project. It is proposed that 12 months of input would be provided, about 30% involvement over a loan duration of 36 months. BPW should provide a single individual to serve as Environmental Coordinator to provide support for environmental management within the PMU alongside the Environmental Consultant.

7.5 Environmental Management Plan and Institutional Requirements

7.5.1 Environmental Management Plan

194. The environmental management and monitoring plan detailing the various potential impacts, appropriate mitigation measures, responsibility for mitigation and monitoring and monitoring parameters are presented in Table 7.2 below.

Table 7.2 Environmental Management and Monitoring Plan

IMPACT MITIGATION IMPACT MONITORING Potential Implementing Mitigation Monitoring Monitoring Monitoring Project Activity Proposed Mitigation Measure Frequency Environmental Impact Responsibility Cost Parameter Responsibility Cost CONSTRUCTION PHASE Earthworks Erosion and Limit the amount of trench excavation Contractor Included Inspection, Weekly or PMU C C activities for sedimentation of underway at any time. Installation of silt in contract water as required EQPB C C pipeline nearby traps as required. rates quality installation watercourses. Replacement of Occupational health Wherever possible old pipe will be left in- Contractor Included Inspection Weekly or PMU C C old distribution & safety of the situ and a new pipeline installed in in contract as required EQPB pipes which may workers and general parallel. Where asbestos materials need rates include public to be removed precautions will be taken to asbestos fibres. minimize risk of handling and disposal Trenching and Traffic congestion Limit stockpiling of spoil in road reserve. Contractor Included Inspection Weekly or PMU C C pipeline during peak hour Modify working hours to avoid peak in contract as required BPW/WASA installation periods. periods. Use of flagmen to manage rates along roads traffic. Refurbishment Noise, dust and Use of appropriate health & safety Contractor Included Inspection Weekly or PMU C C of water storage other airborne procedures for workers. Where work sites in contract as required EQPB tanks. emissions from sand close to residential areas, some shrouding rates blasting activities of work areas may be necessary. OPERATIONAL PHASE Operation of the Excessive drawdown Monitoring bores will be installed around BPW or Included Inspection, As BPW / WASA BPW /WASA Airai wellfield of the groundwater the wellfield and during prolonged usage WASA in water level required EQPB during drought aquifer of the groundwater the water level will be operations monitoring periods. regularly monitored

Abbreviations: PMU – Project Management Unit; EQPB – Environmental Quality Control Board; BPW – Bureau of Public Works; WASA – Water Supply and Sewerage Authority; CC – Included in Construction Costs

7.5.2 Institutional Arrangements

195. The loan will be implemented by the MPIIC, which is the Executing Agency for the Project. A Project Management Unit (PMU) will be established within BPW to oversee implementation, under the supervision of a Project Director (PD). The PMU may be located within the Capital Improvement Projects (CIP) Division, which is generally responsible for technical aspects; whereas the Ministry of Finance is responsible for tendering significant infrastructure projects. Further information concerning implementation arrangements and organization of the PMU can be found in Chapter 10 of this DFR.

196. The responsibilities of the PMU would include; preparation of project designs, updating the IEE document, award of construction contracts and monitoring of construction and rehabilitation works. The work will be supported by a project consultant hired under the loan, which will include the Environmental Consultant. Capacity building will be provided by the Environmental Consultant to staff assigned to the Project and to BPW and EQPB.

7.6 Public Consultation and Information Disclosure

197. The BWSP has developed around a participatory approach involving parallel activities: stakeholder consultations and socioeconomic surveys that facilitated water supply sector planning, which are documented in the Project Social and Poverty Assessment. Hence a wide range of formal and informal stakeholders had the opportunity to provide substantive contributions concerning existing conditions and preferences.

198. A public consultation to review the findings of the initial draft IEE was held on 23 July 2008, following advertisements in three newspapers in advance of the meeting. NGOs and representatives of local government agencies received individual invitations to the meeting. TA staff presented prepared materials that addressed environmental issues for all project components, described the project alternatives, provided an overview of the potential environmental impacts, and explained proposed mitigation measures. Three persons from the public attended the meeting, allowing for informal discussion of the issues.

199. Additional public consultation will be held at the start of the project loan, and review project proposals. A means should be established for public redress of impacts during the construction phase of the Project.

7.7 Conclusions

200. Technical analyses conducted during the PPTA determined that supply is not a constraining factor; however high per capita consumption is a key issue. Within a 2020 design horizon, achieving reasonable conservation targets that bring per capita consumption down by 20% would not necessitate an increase in supply. However, reliability in the face of occasional drought seems to justify additional sources, for which various alternatives were considered. These alternatives have varying levels of environmental impact.

201. At the time the Interim IEE was prepared various alternative means of providing a supplementary water supply to cover drought periods were incorporated into the environmental evaluation. Under alternatives involving the development of a dam and reservoir, the impacts were significant and would require a more comprehensive environmental impact assessment (EIA). These alternatives have been dismissed on economic as well as environmental grounds and are no longer being considered.

202. The supplementary water source is now planned to be provided by a wellfield located in Airai and connected via the WTP to the distribution system. During drought periods groundwater would be pumped from a confined fractured rock aquifer located at a depth of

30 - 100 ft below ground surface. This has overcome the need for, and the adverse environmental impacts of, additional surface water storage.

203. The rehabilitation of some of the existing pipelines, and minor additional equipment for pump stations and the treatment works will provide a significant improvement to the reliability of these facilities and the extension of the pipeline network will provide the water supply to additional consumers. The provision of new or recalibrated water meters to all consumers will enable greatly improved management of the ‘unaccounted for water’ situation.

204. The screening of the potential environmental impacts of the Project demonstrates minor or moderate impacts that can be readily mitigated using available means. The total mitigation costs for these impacts is estimated at about US$40,000, and are considered normal construction costs and the responsibility of the contractor. The implementation of mitigation measures can be readily enforced and monitored using the means described in the IEE.

205. In summary the recommended approach to Environmental Management comprises:

206. Planning and Design: The selection of groundwater to provide the supplementary source to cover drought periods has overcome the need for, and the adverse environmental impacts of, additional surface water storage.

207. Construction: Construction impacts are mitigated through application of the Earthmoving Regulations, environmental clauses for incorporation into construction contract tender documents, and mitigation measures described in the IEE. These include means for controlling the production of noise and dust in the vicinity of construction, preventing spillage of oil and fuel from construction equipment, and managing occupational health and safety issues for construction workers in some particular work areas.

208. Operations: Impacts during operations are limited to the possibility of over-pumping of the groundwater aquifer during drought periods and a program of water level monitoring will ensure that his does not occur.

209. One of the results of The Community Action and Participation Program component of the Project will be to educate the consumers regarding the ‘value’ of the water supply and a significant reduction in the per-capita consumption is expected to be achieved. The need for the provision of technical assistance and government staffing to assist mitigation and monitoring during project implementation is recognized and costs will need to be budgeted.

210. No irreplaceable resources are threatened by the proposed Project. Any land acquisition will be minimal and no resettlement will be needed. The poverty and social assessment will assure the benefits of the Project are distributed among all members of the community, and that there is involvement of women during execution of the Project, and that Project interventions will assist in the livelihoods of women.

211. The Project is being prepared in conformance with the Asian Development Bank’s social and environmental safeguard policies. The BWSP Project does not require preparation of any more comprehensive Environmental Impact Assessment than the IEE.

8 FINANCIAL ANALYSIS

212. Financial analyses were undertaken in accordance with the Asian Development Bank's Framework for the Economic and Financial Appraisal of Urban Development Sector Projects (January 1994), Handbook for the Economic Analysis of Water Supply Projects and the Guidelines on the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank (January 2002). The analyses covered the Koror- Airai water supply operation and include the following:

(i) Determination of appropriate water tariffs,

(ii) Tariff affordability analysis;

(iii) Project FIRR and sensitivity analysis, and

(iv) Projection of financial performance after completion of the project.

213. Appendix 1 contains the full account and details of the financial analyses.

8.1 Past Financial Performance

214. The GOP finances the operation, maintenance and capita costs of water supply and sewer systems, including those in the outlying states, through the BPW. The annual budget of the BPW’s Division of Utilities covers the Koror-Airai and outlying states water supply and sewer systems. Revenues of the Koror-Airai water supply system are collected by the MOF while the state governments handle collections for the systems in the outlying states. All water supply customers in the outlying states are not metered and are charged a flat monthly rate that varies from state to state (none to $5). There are no fees collected for the sewer service, which is provided in Koror and the capitol area.

215. The Koror-Airai water supply system has metered and unmetered customers. All metered domestic and non-domestic customers are charged uniformly at $0.85 per 1,000 gallons while unmetered customers are charged flat monthly rates ranging from $5 to $10. The tariffs have been unchanged since 1 February 1992. Presently, there are 3,009 metered and 734 unmetered water connections in Koror and Airai states. For FY 2005 to FY2007, revenue earned was about 44% of water supply operating expenses and about 34% of water supply operating expenses plus water supply depreciation. On a combined water supply and sewer operations, revenue earned was about 34% of water supply and sewer operating expenses and about 21% of water supply and sewer operating expenses plus water supply and sewer depreciation.

216. The revenue and expenses, including depreciation, of the water supply and sewer systems in Koror-Airai and outlying states for FY 2005 to FY2007 are shown in Table 8.1.

Table 8.1 - Water and Sewer Revenue and Expenses In Thousand $ FY 2005 FY 2006 FY 2007 Water Revenue Koror-Airai Water Sales 658 696 685 Other Income 9 14 12 Total Water Revenue 667 710 697 Operating Expenses Koror-Airai Water (see note below) 1,355 1,699 1,678 Outlying States Water 403 400 357 Sewer 450 384 547 Total Operating Expenses 2,208 2,483 2,582 Operating Loss (1,541) (1,773) (1,885) Depreciation Koror-Airai Water 452 452 462 Outlying States Water 694 706 726 Sewer 651 705 827 Total Depreciation 1,797 1,863 2,016 Total Loss (3,338) (3,636) (3,901) Note: includes expenses of MOF units related to water supply service Source: Ministry of Finance

8.2 Projected Financial Performance

8.2.1 Financial Objectives

217. We understand that the objective of the GOP is to move to a full recovery of costs. The ultimate aim is to make the supply of water a self-sustaining and efficient operation. If this aim is to be attained, full recovery of costs must be achieved gradually within the next five years. In addition to achieving full recovery of costs, the proposed WASA must also comply with the financial covenants in the loan agreement with the financing institutions like debt service coverage ratio (DSCR) and accounts receivable collection efficiency. WASA must always maintain each year a DSCR not lower than 1.2 times and accounts receivable balance must not be more than 60 days of annual water sales.

8.2.2 Proposed Water Tariff

218. To meet the financial objectives as outlined in the previous section, the existing tariff will need to be increased annually in real terms within the next 5 years. However, the proposed tariff should have a structure which includes a lifeline block (first 2,000 gallons monthly consumption) for domestic consumers to ensure that the low-income group (LIG) can afford the projected water tariff levels that can meet the financial objectives. After 2013 when full recovery of costs is achieved, tariffs shall be adjusted annually at inflation rate to keep up with increases in O&M costs due to inflation.

219. The proposed tariffs and key performance indicators (KPI) for 2009 up to 2018 are presented in Table 8.2.

Table 8.2 - Proposed Water Tariff and Key Performance Indicators Item 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Proposed Tariff Domestic First 2,000 gal 0.85 1.02 1.22 1.47 1.76 1.80 1.83 1.87 1.91 1.95 > 2,000 gal 1.79 2.14 2.57 3.08 3.70 3.78 3.85 3.93 4.01 4.09 Non-domestic 1.79 2.14 2.57 3.08 3.70 3.78 3.85 3.93 4.01 4.09 Average Tariff 1.70 2.04 2.45 2.94 3.53 3.60 3.67 3.74 3.82 3.89 Tariff Increase (%) 100% 20% 20% 20% 20% 2% 2% 2% 2% 2% KPI Cost Recovery Ratio 0.53 0.62 0.72 0.82 1.03 1.06 1.07 1.12 1.16 1.24 DSCR (times) 0.0 0.0 0.0 0.0 0.0 4.8 2.0 2.1 2.3 2.2 Receivable (days) 70 65 60 55 50 50 50 50 50 50 Source: Consultant’s Calculation

220. The above projections indicate that the proposed tariffs will achieve the financial objectives for the delivery of water supply service in the Koror-Airai area.

8.2.3 Affordability and Willingness to Pay

221. An affordability analysis was undertaken to ensure that domestic consumers, particularly those in the LIG, can afford the proposed water tariff levels that meet the financial objectives. The analysis was done for years 2010-2014 when the proposed real price increases are implemented. The results of the analysis show that the percentages of monthly household income spent on water are below 5%. Based on generally accepted principle on affordability that the expenditure on water should not exceed 5% of household income, the proposed water tariffs are considered affordable.

222. The results of the socio-economic survey conducted by the consultant last year revealed that 96% of respondents are willing to pay twice the existing tariff of $0.85 for their water. Residents presently pay an average of $17/month for their water bill.8 If residents are willing to pay twice the amount of what they are currently paying, the average monthly bills are within the residents’ willingness to pay.

8.2.4 FIRR and Sensitivity Analysis

223. The Project is expected to reduce NRW due to rehabilitation of the existing system and installation of meters for all customers. With lower NRW, it is projected that production level will decline while billed water will increase. Savings in O&M costs are anticipated with lower production level while the increased volume of water billed will result to increased revenues. Only the incremental project costs (net of O&M cost savings) and incremental revenues are considered in the calculation of the FIRR. Results of the calculation below show robust FIRRs under the base case and adverse scenarios, all above the WACC of 4%. The project is most sensitive to increase in capital costs.

8 Source: MOF’s Water Reading, Billing and Collection Section.

Table 8.3 - FIRR and Sensitivity Analyses NPV / 1 % Scenario FIRR (%) SI / 2 SV / 3 (‘000 $) Change Base Case 2,272,487 6.38% 20% Increase in Capital Costs 409,943 4.38% 2.28 44% 20% 20% Decrease in O&M Costs Savings 1,340,703 5.44% 0.87 115% 20% 20% Decrease in Revenues 887,230 4.97% 1.42 71% 20% Project Delayed by One Year 1,833,127 5.87% 1/ NPV = Net Present Value discounted at WACC of 4% 2/ SI = Sensitivity Indicator (ratio of % change in FIRR above the cut-off rate of 4% to % change in a variable) 3/ SV = Switching Value (% change in a variable to reduce the FIRR to the cut-off rate of 4%) Source: Consultant’s Calculation

8.3 Projected Financial Results

224. The summary of financial results and key performance indicators for the period 2009 to 2018 shown below indicate that after completing the proposed tariff increases, the Koror- Airai water supply operation is projected to earn positive net income each year over the forecast period. Annual O&M costs as well as depreciation and interest charges are fully recovered during the forecast period.

225. The operation is also projected to generate positive net cash flow each year over the forecast period, which can be used to fund capital asset replacement, rehabilitation or expansion in the service area. The operation can likewise subsidize the sewer service in the area. As a result, the Koror-Airai water supply operation will require no further subsidies from the GOP, be able to repay the debt service obligations, and generate an increasing cash surplus. The DSCR is projected to remain well above 1.2 times in all years.

Table 8.4 - Summary of Financial Results and Key Performance Indicators

In Thousand $ 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Net Profit (1,078) (888) (655) (440) 73 166 195 336 441 652 Cash Balance 75 119 195 197 996 1,924 2,556 3,272 3,271 4,081 Performance Indicators Water Production (MG) 1,396 1,396 1,396 1,396 1,183 1,197 1,211 1,225 1,239 1,253 Water Billed (MG) 665 665 665 665 780 797 812 828 845 861 NRW % 42% 42% 42% 42% 34% 33% 33% 32% 32% 31% Cost Recovery Ratio 0.53 0.62 0.72 0.82 1.03 1.06 1.07 1.12 1.16 1.24 Working Ratio 1.5 1.3 1.1 1.0 0.7 0.6 0.6 0.6 0.6 0.5 Operating Ratio 1.9 1.6 1.4 1.2 1.0 0.9 0.8 0.8 0.8 0.7 Return on Assets % -29% -27% -23% -18% 5% 4% 5% 6% 7% 10% Debt Service Ratio 0.0 0.0 0.0 0.0 0.0 4.8 2.0 2.1 2.3 2.2 Current Ratio 1.4 1.6 1.9 1.9 4.7 3.6 4.5 5.5 5.0 6.0 % Debt on Debt plus Equity 0% 10% 57% 74% 77% 76% 74% 71% 67% 62% Days Receivable 70 65 60 55 50 50 50 50 50 50 Source: Consultant’s Calculation

8.4 Project Financial Sustainability and Implementation Risks

226. The projected financial performance of the Koror-Airai water supply operation has shown that the financial objectives of cost recovery and debt service for the project could be met. The attainment of the financial objectives, however, would require that tariffs are periodically raised as proposed. The financial sustainability of the project and the proposed WASA largely depends therefore on GOP’s positive action on the proposed tariff increases.

227. The main risks associated with the Project related to financial aspects are:

 Uncertainty regarding tariff increases necessary to ensure financial sustainability of the water supply project and the proposed WASA;

 Inadequate funding of the required subsidy for the right level of operations and maintenance of the system while full cost recovery tariff has not been attained; and

 Delay in establishing the proposed WASA which would be solely responsible for the Koror-Airai water supply service upon completion of the Project.

9 ECONOMIC ANALYSIS

9.1 Background to the Analysis

228. The current water supply system serving Koror and Airai is operating at or near its full capacity of 3.8 million gallons per day, or about 1.4 billion gallons per year. There is no capacity in the system to accommodate future growth due to population increase, nor can it sustain increases in water losses through leaks in the transmission/distribution system without decreasing the supply available to consumers.

229. Further, as will be familiar to many Palauans, the current system cannot cope with temporary shortages due to droughts which, when they occur, cause massive disruption in the economy and the conditions of living. Options to increase raw water supplies to Koror/Airai economically are essentially nil, apart from limited development of groundwater.

230. However, the equivalent population9 will inevitably increase over the next twenty years and, if nothing is done to rehabilitate the system, the system will continue to deteriorate and losses will inevitably increase. The advancing deterioration of the system also raises risks to the public health, though these cannot at present be quantified.

231. Further, the system left unimproved will result in lower diurnal reliability and decreasing delivery pressures, including increasingly frequent outages to certain areas at times of peak demand.

232. Future droughts cannot be predicted with certainty but are highly likely to recur in the foreseeable future, perhaps, due to climate change, with increasing frequency and severity compared to past experience10. The result is that, without the proposed project, the ability of the system to meet future demand for water will steadily diminish, supply shortages become more frequent, and the quality of the water supply decline.

233. The difficulty with the present system is that, in addition to its deteriorating condition and rising losses, consumption per capita is extremely high by Pacific and world standards11, reflecting a high degree of wasteful usage. Many consumers are presently not metered but are charged low flat monthly rates, which provide no incentive to conserve (indeed they perversely encourage waste), and the tariff for metered consumers is heavily subsidised. This implies that the marginal benefit of consumption to users on the public system is well below its marginal cost. The Project is designed to ensure that the benefits of exploiting Palau’s water resources are better allocated to users in line with their costs, which in the long run is the sole means to ensure that the supply can be sustained.

234. The Project includes a number of components (discussed further below) to reduce wasteful consumption, reduce losses, strengthen the integrity of the system through better management and maintenance under an autonomous and commercially-oriented agency,

9 The growth in “equivalent” population arises mainly because of an increase in visitors to Koror/Airai. The natural increase of households in the area in the foreseeable future is not, according to government estimates, expected to be great: a slight decrease in the resident population is expected in Koror because of the new settlement possibilities in Babeldaob due to the Compact Road, and a slight increase is expected in Airai. However, growth in tourism is expected to remain strong in the long term, leading to an expected growth in “equivalent” population that needs to be considered in the demand for local services, such as road transport, electricity, sewerage services, and the water supply. 10 Climate models are uncertain on this point, but generally indicate a hotter, drier world. The ‘pessimistic’ scenarios of even five years ago have become the mainstream outlook today. 11 At about 110 gallons (more than 400 litres) per person per day, household consumption in Palau is about 200% of that of most other Pacific island countries.

46 and develop groundwater resources to help cover shortfalls during droughts. Wasteful consumption will be reduced by:

(i) Metering all consumers and gradually imposing a cost-recovery tariff; and

(ii) Mounting a community awareness program to ensure that consumers are cognizant of the costs of a sustainable water supply, accept the need for higher tariffs, and are aware of the national need to conserve water.

235. These measures are designed to reduce demand pressure on the available supply while fully meeting the needs of the population and the economy for water. Further, the measures will reduce the cost of supply and place the sector in the care of a financially sustainable entity with adequate capacity in skills and equipment, thus reducing the draw on the core civil service and the need for explicit or hidden subsidies from government.

236. With the Project,

(i) The water production requirement that fully meets the needs of consumers will be held below the current capacity of the system by loss reduction and demand management including full metering;

(ii) Limited groundwater will be developed to help cope with droughts; and

(iii) Institutional capacity to manage the sector will be strengthened.

237. Without the Project,

(i) The water production requirement will rise due to equivalent population growth and will inevitably exceed the current capacity of the system;

(ii) There will be no protection from droughts; and

(iii) The integrity of the system will continue to deteriorate with rising losses and diminished capacity to meet even static demand.

238. Increasing volumes of unserved demand will result, with disruptions growing in severity to the economy (the mainstay of which is tourism, which crucially depends on a reliable water supply) and to the quality of life.

239. The fundamental magnitudes that arise in a comparison of the With-Project and Without-Project scenarios are illustrated in Figure 9.1. A 4-year construction period is assumed.

Fig 9.1 – Future Water Production Requirement With and Without the Project

2.00

1.80 Additional Expected Losses as System Deteriorates, Without the Project 1.60 Additional Volume Required due to (billions) Population Growth, 1.40 Without the Project annum Volume Saved from per

Current Production, With the Project 1.20 Gallons Production Requirement With the Project

1.00

0.80 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 240. Water consumers are categorised as Residential, Commercial, or Government. A projection of customer numbers, consumption, and water losses is shown in Table 9.1. Projected water production, consumption, and losses are depicted in Figure 9.2.

Table 9.1. Projected Production, Consumption, and Losses, 2009-2020

2009 2013 2020 Population in Koror/Airai 17,000 18,000 19,500 Total W ater Production (m gallons) 1,396 1,183 1,281 W ater Production/Capita/Day (gals) 225 180 180 Number of Consumers Metered Residential 2,431 3,232 3,501 Comm ercial 546 629 681 G overnm ent 32 103 111 Total Metered 3,009 3,963 4,293 F lat Rate Residential 621 - - Comm ercial 48 - - Government 65 - - Total Flat Rate 734 - - Consumption, m gallons Metered Residential 387.53 405.76 454.91 Comm ercial 272.59 321.40 348.18 Government 5.23 52.48 56.86 T o ta l M e te re d 66 5.3 6 779.64 859.95 F lat rate, est Residential 107.00 - - Comm ercial 25.90 - - Government 11.49 - - Total Flat Rate 144.39 - - Total M etered Consumption as % Total Water Production 47.66% 65.93% 67.12% T otal Flat Rate (est) Consumption as % To tal W ater Production 10.34% 0.00% 0.00% T otal Losses (Non-R evenu e Water) as % Total W ater Production 42.00% 34.07% 32.88%

Fig 9.2 – Projected Water Production, Consumption and Losses Koror/Airai System

1,600

1,400

1,200

1,000 Technical Losses (Non‐ Revenue Water) millions 800 Flat Rate Consumption

Gallons, 600 Metered Consumption

400

200

‐ 2009 2013 2020

9.2 Economic Benefits of the Project

241. The Project benefits comprise:

(i) Reduction in economic costs of supply and improved sector management required to meet water demand;

(ii) Elimination of future potential unserved water demand;

(iii) Protection of the supply against droughts and avoidance of some key drought-related costs to consumers and the economy; and

(iv) A potential health benefit.

242. The first three of these are partially quantifiable and are included in the calculation of the economic internal rate of return (EIRR) below. The fourth is not quantifiable but, in view of evidence of rising risks to the public health, is included in the analysis qualitatively. Further, the considerable benefit of achieving high standards of service reliability due to the proposed standby pumps throughout the system and consistently good delivery pressures to all consumers due to pipe replacement and reservoir improvements cannot be readily quantified.

9.2.1 Reduction in economic costs of supply

243. In a comparison of the Without Project and the With Project scenarios, taking into account the lesser volume of production required, loss reduction, and staffing and other efficiency improvements associated with the With Project scenario, annual savings in the economic cost of supplying water to meet projected demand are calculated and included as a benefit of the Project. (Under full operation, these savings amount to approximately $350,000 worth of labour, chemicals, energy input, etc., per year.)

9.2.2 Elimination of potential unserved demand

244. As discussed above and shown graphically in Figure 9.1, a comparison of the With Project and Without Project scenarios reveals a large gap between the respective treated water production requirements. The production requirement With the Project is below the requirement Without the Project due to (i) demand management and (ii) loss reduction.

245. The current Koror/Airai water supply system is entirely dependent on surface water sources. Other sources of surface water were investigated as options to augment the current supply, but none has been found that would make a meaningful incremental contribution under dry conditions (all accessible surface water sources would be diminished more or less equally in an extended dry). A large-scale storage scheme interconnecting a range of new surface water sources has been identified that would significantly augment supply and meet demand growth with reliability, but its cost is prohibitive.

246. The only economically viable means to augment supply is to develop groundwater resources, and such development is included in the Project. However, sustainable extraction of groundwater is limited and will be utilised only to partially make up for dry period shortfalls.

247. The current Koror/Airai water supply system is subject to two sources of stress under the Without Project scenario:

(i) As the equivalent population grows, water demand will exceed production capacity; and

(ii) As the system’s assets continue to deteriorate, capacity to produce treated water and especially to convey it to consumers will be reduced by higher losses through leaks, further undermining the system’s ability to meet demand.

248. The combined effect of these two stresses is illustrated in Figure 9.3.

Fig 9.3 Volume of Unserved Water Without the Project

1.80

1.60 Volume of Unserved (billions)

Water

1.40 annum Effective Capacity per Without the Project (reflecting losses)

Gallons 1.20

1.00

0.80 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

249. In estimating the volume of unserved water demand Without the Project, it is assumed that the water volume lost through leaks in the deteriorating system increases on average by 3% per year, and that the production requirement per capita, for reasons of sustained high consumption rates, remains at its current level of 225 gallons/person/day.

The volume of unserved water demand is valued at the estimated willingness to pay for water (i.e., the unmet demand volume as valued by consumers), assessed by survey at $1.70 per 1000 gallons (as discussed elsewhere in the PPTA report).

9.2.3 Protection against droughts

250. A severe drought–a period of at least three months of substantially below-average seasonal rainfall–occurs in Palau with a frequency of 7-10 years. According to a recent ADB environmental overview report, severe drought events are usually associated with the El Nino Southern Oscillation (ENSO), an “...ocean-atmosphere circulation that affects Palau significantly on a regular basis. During an El Nino year, Palau generally experiences drought conditions that can last from weeks to months, and the country must ration fresh water use. Recent climate change studies have projected that ENSO extremes are likely to become more frequent with increasing greenhouse gas concentrations.” 12

251. The most severe drought in recent memory occurred in 1997/98, associated with a deep El Nino oscillation. The duration of the dry in 1997/98 was some nine months and a severe water shortage developed. Consumers connected to the Koror/Airai system were restricted to 4 hours/day of supply (2 hours in the morning and 2 hours in the evening)13. The limited water that was supplied was highly turbid and contaminated as the raw water resource was muddy beyond the capability of the treatment plant’s filtration systems to cope, and as shown clearly in the EQPB’s water quality test results from the period, the transmission/distribution system was subject to ingress of contaminants. Uncontrolled bushfires were widespread across Babeldaob and destroyed a great deal of Palau’s natural vegetation and farmland.

252. The economic impacts of a severe drought in Palau are wide and varied. For households, severely restricted access to potable water drives up costs in terms of time and money expended on obtaining alternatives14, including increased purchases of commercial bottled water and at-home water treatment (e.g., boiling); normal water consumption patterns for washing and gardening are denied, and health risks and associated costs are greatly increased. For retail and wholesale businesses, manufacturers (e.g., breweries), and providers of social services (schools, hospitals), output capacity is directly reduced. Agricultural output is sharply reduced or destroyed.

253. Of great significance in Palau, the service sector, especially tourism, is badly affected: tourist accommodations and other services (e.g., restaurants, attractions) cannot supply proper amenities to their guests or can do so only at increased cost. The attractiveness of Palau as a tourist destination declines as the countryside withers; sea surface temperatures rise during El Nino events causing coral bleaching, diminishing Palau as a dive destination. Tourist stays are cut short and tourist arrivals decline. In the face of all of these impacts, national income and the quality of life decline.

254. Though the Project includes a component—development of groundwater resources—to compensate for surface water shortages during dry periods and ease some of the impacts of droughts, it cannot address all of the impacts mentioned above. The drought- protection component will directly assist households to maintain access to potable water,

12 Draft Environmental Overview and Stock-Take Report, Facility for Economic and Infrastructure Management Project, Asian Development Bank, December 2007. 13 Personal communication, Director, National Emergency Management Office. 14 Most households in Palau have rain-water tanks and these are normally an important source of augmented supply. However, during severe droughts, tank supplies are exhausted soon after the onset of shortages.

51 social service providers to maintain operations, and it will assist businesses, manufacturers, and tourist facilities to remain operating with high standards of service. The drought- protection component will have little impact, however, on agricultural output or the degree to which droughts affect the land and marine environment.

255. For the present analysis, an attempt has been made to quantify the benefit of the Project for tourism, in the form of drought protection. The other drought impacts that would also be addressed by the Project, such as the costs and risks imposed on households and constraints on social services, are real but are not presently quantifiable.

256. Tourism accounts for 45% of Palau’s GDP. In the wake of the 1997/98 event, tourist arrivals fell from some 70,000 in 1997 to about 45,000 in 1999 and, importantly, remained relatively depressed until about 2003.15 The recovery of tourism after a severe event is a multi-year process, and this has been reflected in the analysis. (Tourist arrivals have since recovered to the current level of about 80,000, close to the present maximum capacity of the country of 90,000.16) It has been estimated that the economic cost to the country of the 1997/98 drought event in terms of tourism losses was a 3.3% reduction in GDP.17

257. It is assumed that a drought event, comparable in severity to the one that occurred in 1997/98, will occur in Palau every 7-10 years (8.5 years is the specific return period selected). The economic impact of such a drought will be similar to that recorded in 1997/98 (i.e., a 3.3% reduction in GDP), but since not the entire drought’s impact is addressable by the Project, a 1.0% reduction in GDP has been assumed as the cost that will be avoided With the Project.18 Further, it is assumed that the drought’s economic impact will extend over more than one year; a gradually diminishing impact over a five-year period is assumed. The economic costs of recurring droughts, estimated as above, are included as a Project benefit.

9.2.4 Potential Health Benefits

258. Health statistics, particularly related to the incidence of water-borne diseases, are not readily available in Palau. There is not even much anecdotal evidence among the local population and visitors suggesting that the public water supply has caused a serious public health issue. However, the quality of the public water supply is tested regularly by the Environmental Quality Protection Board (EQPB). The tests, carried out monthly, measure the level of residual chlorine, the level of turbidity, and the presence or absence of total coliforms and fecal coliforms at the water treatment plant (WTP) and at the taps at 12 locations in Koror and Airai. The results indicate that there is a health risk in the present water supply that is likely to increase in the future Without the Project, notwithstanding greatly improved operational and chemical dosing practices implemented by the Bureau of Public Works (BPW) since 2003.

259. An important finding of a review of the EQPB’s test results from October 1998 to January 2009 is that, since 2003, water quality at the WTP has generally been within acceptable limits for a potable water supply. Since 2003, in only three tests has turbidity greatly exceeded an acceptable limit (NTU>1), whereas it substantially exceeded the limit in about half the tests prior to that. Similarly, residual chlorine was found to be below standard (< 0.2 parts per million) in only two tests since 2003 and in none since 2005, but in nine tests between 1999 and 2003. No coliforms have been found in the EQPB’s WTP samples since August 1999.

15 Tourism Action Plan, Facility for Economic and Infrastructure Management Project, Asian Development Bank, June 2008. 16 Personal communication, Managing Director, Palau Visitors Authority 17 Reference: footnote 3. 18 GDP impacts are measured in constant 2009 dollars.

260. Water quality testing at geographically well distributed points of consumption in Koror and Airai, however, do indicate the presence of contaminants, suggesting that they enter the transmission and distribution network after the treated water leaves the WTP, perhaps during periods of supply interruptions or low pressure. Though the tests show a marked improvement in water quality at the taps since 2002, a health risk remains present. For example, excessive turbidity levels were found in over 500 tests in 1998-2001, and in 280 tests since 2002. Deficient chlorine was found in about 140 tests in 1998-2001, and in about 90 tests since 2002; coliforms were observed in 46 tests in 1998-2001, and in 17 tests since 2002. The Project will reduce leaks and increase the reliability of pumping equipment and thus lower the risks to public health that they impose.

261. Apart from supporting an assertion of the existence of a potential health benefit of the project, the above test results do not permit the benefit to be quantified, as there are no data on human health impacts. Nevertheless, increased confidence in the integrity of the transmission/distribution system and an expectation of a beneficial impact on the public health will be justified With the Project.

9.3 Least Cost Analysis

262. The PPTA has undertaken investigations of a wide range of possible options to meet future demand in the Koror/Airai system for delivery of high-quality water with high reliability, including integration of additional surface water sources, development of groundwater sources, and development of a large surface water storage scheme under a network of multiple sources. Groundwater development was found to have limited capacity but is suitable for supporting mitigation of drought-induced supply shortages, and has been included in the Project. Apart from the large integrated storage scheme, no other option was found capable to meeting the design criteria of high reliability during dry periods. The storage scheme was found to meet the design criteria—indeed is the only option found capable of doing so—but at an estimated cost of $15-$20 million, is prohibitively expensive. The recommended option (the Project), which focuses on reducing the annual requirement for treated water production to below the sustainable extraction rate from existing sources, is thus the least cost method of meeting water demand with acceptable reliability.

9.4 Valuation of Economic Costs

263. Project economic costs include institutional reform and sector planning strengthening activities, civil and mechanical works associated with the development of groundwater resources, community action and participation programs, pipeline and other materials and associated structural works associated with rehabilitation and expansion of the existing water supply system, and consulting services.

264. A pipeline to extend water supply services to Aimeliik in southern Babeldaob has been included in the Project at the request of the government for use at a later time, but as the pipeline is unlikely to be connected to any user by the Project, it will not in itself carry any economic benefit and its cost has been excluded from the economic costs.

265. The local currency in Palau is the United States dollar. There are no levies or duties on imported materials. Local labor is taxed at 6% on income up to $8,000 per year, and at 12% on income exceeding $8,000/year. Fuel is taxed at $0.05/gallon. Taxes are excluded from the economic costs.

266. As Palauans have free rights to migrate and work and claim social benefits in the United States, there is virtually no unemployment in Palau and wage rates are an accurate measure of the opportunity cost of labor. Under these circumstances, it is estimated that the shadow wage rate and exchange rate factors necessary to equilibrate the border and

53 domestic price levels of traded and nontraded goods in Palau are not materially different from 1.0.

9.5 Results of the Economic Analysis

267. The period of economic analysis comprises a four-year construction period followed by a 24-year operation and maintenance period. All economic costs and benefits are expressed in constant 2009 dollars. At a 12% economic opportunity cost of capital (EOCC, or discount rate), the water supply project is found to be economically viable. The net present value (NPV) is $3.0 million and the economic internal rate of return (EIRR) is approximately 16.8%. The basecase EIRR calculation is tabulated in Table 9.2.

Table 9.2: Calculation of the EIRR (US$ million) O&M Expected Savings Unserved Avoided With the Water Drought Total Years Initial Cost Project Benefit Impact Benefits Net Benefits 2010 $ 0.36 -$ -$ -$ -$ -$ 0.36 2011 $ 3.50 -$ -$ -$ -$ -$ 3.50 2012 $ 2.73 -$ -$ -$ -$ -$ 2.73 2013 $ 1.21 $ 0.15 0.20$ $ 0.50 $ 0.86 -$ 0.36 2014 $ 0.42 0.26$ $ 0.52 $ 1.19 $ 1.19 2015 $ 0.40 0.32$ $ 0.53 $ 1.26 $ 1.26 2016 $ 0.39 0.39$ $ 0.55 $ 1.33 $ 1.33 2017 $ 0.38 0.45$ $ 0.56 $ 1.40 $ 1.40 2018 $ 0.37 0.52$ $ 0.58 $ 1.47 $ 1.47 2019 $ 0.36 0.59$ $ 0.60 $ 1.54 $ 1.54 2020 $ 0.35 0.65$ $ 0.62 $ 1.62 $ 1.62 2021 $ 0.35 0.69$ $ 0.63 $ 1.67 $ 1.67 2022 $ 0.35 0.73$ $ 0.65 $ 1.73 $ 1.73 2023 $ 0.35 0.77$ $ 0.67 $ 1.79 $ 1.79 2024 $ 0.35 0.82$ $ 0.69 $ 1.86 $ 1.86 2025 $ 0.35 0.86$ $ 0.71 $ 1.92 $ 1.92 2026 $ 0.35 0.91$ $ 0.74 $ 1.99 $ 1.99 2027 $ 0.35 0.91$ $ 0.76 $ 2.01 $ 2.01 2028 $ 0.35 0.91$ $ 0.78 $ 2.03 $ 2.03 2029 $ 0.35 0.91$ $ 0.80 $ 2.06 $ 2.06 2030 $ 0.35 0.91$ $ 0.83 $ 2.08 $ 2.08 2031 $ 0.35 0.91$ $ 0.85 $ 2.10 $ 2.10 2032 $ 0.35 0.91$ $ 0.88 $ 2.13 $ 2.13 2033 $ 0.35 0.91$ $ 0.90 $ 2.16 $ 2.16 2034 $ 0.35 0.91$ $ 0.93 $ 2.18 $ 2.18 2035 $ 0.35 0.91$ $ 0.96 $ 2.21 $ 2.21 2036 $ 0.35 0.91$ $ 0.99 $ 2.24 $ 2.24 2037 $ 0.35 0.91$ $ 1.02 $ 2.27 $ 2.27

NPVs: $ 6.52 $ 2.16 3.44$ $3.89$ 9.49 $ 2.96 % NPVs: 100.00% 22.79% 36.23% 40.97% 100.00% EIRR: 16.81% EOCC = 12%

268. The EIRR calculation shows that about 41% of the total quantified benefit of the Project is attributable to avoidance of damage to tourism and national income from severe

54 droughts; 36% comes from the Project’s capacity to avoid future unserved water demand, and 23% from resource cost savings through efficiency improvements and loss reductions. The above economic analysis of the Project is conservative, as many of the key benefits, including avoidance of drought impact on households and small business and increasing health risks Without the Project are not quantified but are substantial. Further, the considerable benefit of achieving high standards of service reliability and consistently good delivery pressures to all consumers is not quantified.

9.6 Sensitivity Analysis

269. A sensitivity analysis was carried out on the base-case EIRR calculation and the Project was found to be robust to adverse changes in the major parameters: (i) Initial costs; (ii) The degree of resource cost savings; (iii) The volume of avoided unserved water demand; and (iv) The impact of droughts on tourism.

270. The results are summarised in Table 9.3. Sensitivity indicators (SI, an index applying to a tested parameter that quantifies the relative sensitivity of the NPV of the Project to changes in the parameter19) and switching values (SV, the implied value of the parameter if the NPV of the Project is zero, all other parameters held constant) for each parameter are also indicated.

Table 9.3: Summary Economic Sensitivity Test Results

Test Basecase Test Variation Sensitivity Value of Switching Case (+/- %) NPV EIRR Indicator Parameter Value Base (reference case) $ 2.96 16.81% Increases in Costs Initial Cost ($ million) 20% $ 1.66 14.34% 2.20 $ 7.80 $ 11.33 Decreases in Benefits Loss and waste reduction (index) -20% $ 2.53 16.13% 0.73 1.00 - Unserved water benefit (index) -20% $ 2.28 15.80% 1.16 1.00 0.12 Drought impact (% of GDP lost without the project) -20% $ 2.19 15.61% 1.31 1.00% 0.24% Drought frequency (years) 20% $ 2.32 15.81% 1.09 8.50 35.01 All Benefits Decreased -20% $ 0.55 12.95% 4.08 Initial Cost (+) and All Benefits (-) -20% -$ 0.76 10.85% 6.28

271. As shown, a 20% increase in the Project initial costs results in a fall of the EIRR to 14.3%; the NPV of the Project remains positive. The same is true of a reduction of each of the Project benefits, tested individually. A reduction in all benefit parameters simultaneously by 20% results in a marginal EIRR (12.9%); this combined with an increase in initial costs by 20% reduces EIRR to 10.9%. In view of the unquantified but considerable benefits of the Project as described above, these results underscore the economic viability of the Project.

272. The parameter of highest sensitivity in the EIRR calculation is the initial costs, with an SI of 2.2. The unserved water benefit and drought protection benefit are of lesser but still significant sensitivity (SIs between 1.0 and 2.0). Among the quantified benefits, the ability of the Project to save resource costs in meeting water demand was the least sensitive parameter (SI < 1.0).

19 An SI of 1.0, for example, indicates that a 10% change in the parameter results in a 10% reduction in the Project NPV; an SI of 2.0 indicates that a 10% change in the parameter results in a 20% reduction in the Project NPV, etc.

10 IMPLEMENTATION ARRANGEMENTS

10.1 Project Management

10.1.1 General Approach

273. Figure 10.1 shows the proposed organization structure for Project Implementation.

Figure 10.1 Project Organizational Structure

GOP ADB & other donors

Ministry of Public Infrastructure, Industry and Commerce

Project Steering Committee Project Project

Management Unit Implementation (PMU) Assistant Consultants

Consumers Contractors General Community

10.1.2 Executing Agency

274. The Ministry of Public Infrastructure, Industry and Commerce (MPIIC) will be the Executing and Implementing Agency for the Project. A Project Steering Committee (PSC) will be formed to oversee the Project, give overall direction and provide policy guidance. The PSC will be chaired by the Minister of Public Infrastructure, Industry and Commerce. The full PSC will include representatives from GOP, the States and the private sector including the PMU, the MOF, Koror and Airai States and others.

275. The full PSC will meet quarterly to review progress, discuss policy issues and resolve any issues arising.

10.1.3 Project Management Unit

276. A PMU will be established within the Ministry of Public Infrastructure, Industries and Commerce. It will be responsible for overall planning and coordination of project implementation, including programming, budgeting, financial planning, accounting and reporting. It will manage subproject preparation, detailed design, procurement of works and goods with the assistance of the Project Implementation Assistant (PIA) consultants. The

PMU will recruit and manage the PIA consultants, who will assist the PMU with project implementation and undertake capacity building activities.

277. A key decision will be the relationship between the PMU and the future Water and Sewerage Authority. We believe that the Project provides an outstanding opportunity for some of the future WASA staff to participate in a major project, receive training from the foreign and local consultants, and gain three years of invaluable on-the-job-training. There are some difficulties in this, however, if existing BPW staff are expected to actively participate in the Project through the PMU while at the same time remaining responsible for their existing roles within BPW, MOF etc.

278. It is extremely doubtful if the WASA can be established within the first two years of the Project implementation but it would be extremely useful if it could be operational before the Project concludes so that there could be some guidance from the consultants employed to assist the PMU.

279. There are other ways to establish the WASA, such as initially employing a company on a management contract for the early years of the WASA operation but we prefer the Project-training model and have based the following on that model.

Table 10.1 - Proposed Composition of PMU Function Qualifications and Experience Future possible Position Project Manager Professional engineer > 10 years. Experienced WASA Manager in WS engineering, project management. Trained in computer use, report writing, ADB procurement and project accounting Deputy Project Manager Diploma in accounting and finance. Experience WASA deputy Manager/ in project or company accounting, budgeting, accountant financial planning. Skilled in computer use. Trained in ADB procurement Water Supply & Sanitation Professional water supply engineer with about Head technical section of Engineer 5 years experience in design and construction WASA supervision and quality assurance to meet environmental management standards. Trained in computer skills and report writing. Previous experience in community Personnel/Public Relations participation and resettlement, high level of head WASA Community Actions Team interpersonal, communications and team Leader management skills. Trained in ADB safeguards procedures and requirements. Computer skills. Transition Committee Previous experience in Government of Palau Organiser administration and legal processes High school certificate with computer skills. Secretary WASA Secretary Some office administration experience Support staff As necessary

10.2 Equipment for Project Implementation

280. Table 10.2 lists the equipment that will be provided to the PMU to assist in subproject implementation. This equipment will be handed over to the National Water and Sewerage Agency following completion of Project construction.

Table 10.2 - Equipment for Project Implementation

Item No. Item Number 1.1 1 tonne pickup truck (1 PMU, 1 PIA consultant) 2 1.2 Motor bike 1 1.3 Set of office furniture for up to 10 people including desks, chairs, 1 meeting table and chairs, cabinets, shelves, reception furniture 1.4 Computers and printers (including 1 A3 printer) for management, 4 administration, accounting and engineering 1.5 Standard software programs such as MS office 4 1.6 Specialized software programs such as MS project, AUTOCAD, 1 standard accounting; 1.7 Photocopier 1 1.8 Fax and other office equipment, including binding machine 1 1.9 Set of equipment for capacity building and CAPP program, 1 including DVD player, television, LCD projector, loud speaker system, video camera, digital still camera

10.3 Implementation Period

281. The Project will be implemented over a four-year period from 2010 to 2013. The order in which subprojects are implemented will be determined by agreement between the GOP and ADB and appropriate targets set at the commencement of the Project. An indicative implementation schedule is shown in Appendix 4.

10.4 Procurement

282. Goods, works and services financed under the loan will be procured following the ADB’s Guidelines for Procurement.

283. International competitive bidding (ICB) procedures will be used for the main consulting services contract. Limited International Competitive Bidding (ICB) procedures will be used for any major civil works contracts estimated to cost over $1.0 million, and for supply contracts valued over $500,000. Procurement of civil works valued at less than $1.0 million equivalent will be undertaken through national competitive bidding (NCB) in accordance with procedures acceptable to ADB.

284. International shopping (IS) procedures will be followed for materials and equipment packages estimated to cost $100,000 equivalent or more but less than $500,000 equivalent. Equipment items that are locally available and cost less than $100,000 equivalent may be procured through local shopping (LS).

285. Table 10.3 shows the proposed procurement packages for the Project.

Table 10.3 - Proposed Procurement Packages Procured Description of Works Package Mode By Supply of office equipment and furniture for PMU, and consultants. One contract PMU LS One contract Supply of motor vehicles for PMU, and consultant's staff at Project PMU LS start-up Construction of new bores including casing and rehabilitation and One contract PMU NCB completion of existing bores Construction of new access roads to borefield One contract PMU NCB Supply of pumps, pipework, meters, generators etc, installation at bore field, fencing and connection to existing raw water mains and power One contract PMU NCB supplies. Rehabilitation works for the existing water supply system, including supply and installation of flow meters on system, work at intake and One contract PMU NCB reservoir, repair to Malakal tank roof Supply and install new pumps at intake, treatment plant, Malakal tank One contract PMU NCB and booster pump to Ngermid tank Supply and install 700 water meters to existing connections in Koror and Airai and to new connections as directed including supply of 300 One contract PMU NCB new meters to replace faulty meters. The conducting of a comprehensive leak detection investigation on the current water system in Koror and Airai through to the water meter One contract PMU NCB including supply of equipment for water and sewerage authority. Remove, test, recalibrate and reinstall 3000 meters from existing One contract PMU NCB connections. Supply of pipes and fittings and total construction of new transmission One contract PMU NCB line from the reservoir to treatment plant Supply of pipes and fittings and total construction of new water main to One contract PMU NCB Aimeliik. Supply of pipes and fittings and total construction of new supply main to One contract PMU NCB Malakal. Supply of 4, 6, 8, 10 and 12 inch HDPE pipes and fittings for repair and One contract PMU NCB replacement of line determined by leak detection testing Repair existing leaks and Install complete 4, 6, 8, 10, 12 inch HDPE One contract PMU NCB pipes where determined by leak detection testing. Supply of equipment and materials and payments for media events for One PMU LS Community Actions and Participation Program contract/year Consulting services for Project Implementation Assistance and Capacity Building Program, including assistance for project management, feasibility studies, design and supervision, capacity building and One contract PMU ICB training, social and land surveys. Also includes survey and investigations subcontracts, topographical surveys, water quality surveys ICB = international competitive bidding; LS = local shopping; NCB = national competitive bidding; PMU = project management unit.

10.5 Consulting Services

286. A total of 75 person-months of consulting services (45 person-months international, and 30 person-months domestic) will be required to support the implementation and capacity building initiatives of the Project, covering Components 1 to 5. Consulting services will be procured under a single consulting package, by associations of international consulting firms and domestic consultants. Engineering, financial, social, environmental, institutional, legal and management consultants will be required to provide the necessary expertise. International expertise is to be provided in overall project management, technical engineering areas, in drafting the new water law and regulations, training coordination, and in safeguard requirements of the ADB, O&M and monitoring and evaluation. Terms of Reference for the consultants will be developed by the ADB or by others engaged directly by the ADB.

287. The package will cover project implementation assistance and capacity building activities. The project implementation assistance will assist the PMU to undertake project management, engineering investigations and surveys, feasibility studies, design and construction supervision of the water supply system, contract administration, environmental management and monitoring, community participation and awareness program, and health awareness support program. The capacity building activities will strengthen the capacity of the new Water and Sewerage Authority to manage, operate and maintain the water supply and sanitation facilities.

288. Under the direction of the Transition Committee Organizer, the consultants will have responsibility to develop the framework and personnel of the new Water and Sewerage Authority so that it is ready to assume responsibility for water supply and sewerage towards the end of the Project. The consultants will also have the responsibility of preparing the necessary draft water supply law for Palau and associated regulations so that the Water and Sewerage Authority has the required legal basis for operating.

289. The consultant will engage specialist subcontractors for:

(i) Topographical surveys for design;

(ii) Water quality testing for design and monitoring during construction; and

(iii) Socio-economic surveys.

290. The subcontracts will be included in the main consultancy contract as provisional cost items and will be subject to competitive bidding during Project implementation.

291. The consultants will also manage the CAPP component activities (Component 3), to ensure integration of all CAPP activities with the infrastructure construction.

292. The consultants will be engaged in accordance with ADB’s Guidelines on the Use of Consultants and other arrangements agreed with other co-financiers and satisfactory to ADB.

10.6 Disbursement Arrangements

293. Payment of eligible expenditures from the proceeds of the loan will be made in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). Disbursements for contracts awarded under ICB and LCB procedures, as well as for contracts for consulting services, will be by ADB’s direct payment or reimbursement procedures.

294. To ensure the timely release of loan proceeds and counterpart funds and expedite Project implementation, the Government will, immediately upon loan effectiveness, open and maintain a project imprest account at a local bank acceptable to ADB for disbursement of eligible expenditure. The MOF will be responsible for establishing, managing, replenishing, and liquidating the account.

295. The initial amount to be allocated to the imprest account will be based on estimated expenditures for the first six months of Project implementation but not to exceed $500,000. The project imprest account will be established, managed, replenished, and liquidated in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time), and detailed arrangements agreed upon between the recipient and ADB.

296. Replenishment to the imprest account will be supported by appropriate withdrawal application and related documentation. ADB’s statement of expenditure (SOE) procedures may be used for reimbursing eligible expenditures and liquidating of advances to the imprest account. The maximum payment for any individual items using SOE is $50,000 equivalent.20 The direct payment process will be used for payment of single items in excess of $50,000. At the MOF’s request, ADB may pay directly to bank accounts of contractors or suppliers. This process is suitable for large civil works or consultants’ progress payment claims.

297. ADB will not provide funding for civil works unless consultants acceptable to ADB have been or were being recruited for construction supervision. ADB will not provide funding for consultants unless the work program, terms of reference, staffing and contract of the consultants are acceptable to ADB.

10.7 Accounting, Auditing, and Reporting

298. The PMU will prepare quarterly project progress reports in such form and detail satisfactory to ADB and other co-financiers. The MOF will prepare the annual financial statements of the water and sewerage operations, including the

(i) Balance sheet;

(ii) Income statement; and

(iii) Cash flow statement.

299. The PMU will also submit to ADB, within 3 months of the physical completion of the Project, a project completion report that will cover the details of project implementation, costs, and project evaluation activities at that time, and other information requested by ADB. The report will highlight the development impacts achieved by the Project.

300. The project accounts, including the imprest account, SOE, and the financial statements of the water supply and sewerage operations will be audited annually by auditors acceptable to ADB and other co-financiers. With assistance from the PMU, the MOF will prepare the required information for audit, including information on any resettlement implementation, in accordance with project auditing requirements of the Government, ADB, and other co-financiers. Audited statements of project accounts and water supply and sewerage operations’ financial statements, together with the report of the auditor, will be submitted to ADB within 6 months of the close of the fiscal year.

20 MOF will receive necessary training to administer disbursement arrangements.

10.8 Project Performance Monitoring and Evaluation

301. MPIIC will ensure that a comprehensive program for project performance monitoring and evaluation (PPME) acceptable to ADB and other co-financiers is carried out during implementation and subsequent operation to:

(i) Examine the Project’s technical performance;

(ii) Evaluate the delivery of the planned facilities;

(iii) Assess the achievement of the Project’s objectives; and

(iv) Measure the Project’s social, economic, financial, and institutional impacts.

302. A set of PPME indicators will be developed at the start of the Project based on the Project framework in Appendix 8 by the PMU with the consultants support. The Socioeconomic data will be disaggregated by gender and by ethnic group when possible. The PMU will be responsible for carrying out the PPME activities, including pre-project and post-project physical and socioeconomic surveys, data collection and analysis. The PMU will establish a PPME baseline based on the pre-project surveys and data. Annual PPME reports will be prepared by the PMU, and submitted to ADB. MPIIC will cause the PMU to submit a detailed PPME implementation plan for ADB’s review and concurrence within 6 months of loan effectiveness.

10.9 Project Review

303. Apart from regular reviews, ADB and the Government will undertake a comprehensive review within one year of loan effectiveness when detailed design for the subprojects is substantially completed. There may also be a mid-term review within 20 months from loan effectiveness. These reviews will include a comprehensive evaluation of project implementation arrangements, detailed evaluation of the project scope, the actual implementation progress, feedback from PPME program, performance of consultants, institutional development progress, and possible reallocation of loan proceeds. Remedial action will be instituted as needed.

11 PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, RISKS

11.1 Expected Benefits and Beneficiaries

304. The Project will benefit about 17,000 residents and many visitors in 2012 in Koror, Airai and parts of Aimaliik by providing safe and reliable piped water supplies that will have a direct impact on the health and living condition of the communities. If a new Water and Sewerage Authority is established with responsibility for the Koror sewerage system, additional benefits will be experienced by Koror residents and visitors.

305. The health benefits will derive through:

(i) A safe, more reliable and convenient water supply;

(ii) Better operations of the water and sewerage system due to increased expertise, facilities and responsibility; and

(iii) Increased knowledge and awareness of health and hygiene issues;

306. The health benefits associated with the physical investment of the Project will be enhanced by the hygiene awareness and promotion activities.

307. There will also be financial benefits for the GOP and all citizens. The current water production figures per person are high and any increase in demand in the future will force the GOP to develop new sources, increase storage, and increase the capacity of the treatment plant and other key components. This will be very expensive.

308. The CAPP (component 3) and the work on leak detection and repair in component 4 will reduce water production per person and hence delay the expenditure needed on new infrastructure. While tariff increases will impact directly on consumers, the reduced water production and consumption will mean that cost increases will not be as severe as would be the case without the Project works. The higher individual contributions to the cost of water will mean that GOP subsidies will reduce, allowing these funds to be diverted to other areas or to be used to improve and expand the existing or new systems.

11.2 Poverty Reduction

309. The Project interventions will have a positive impact on the poor directly or indirectly. About 10% or 1,700 urban and semi-rural poor are expected to benefit from the Project in 2012. Where the interventions do not directly target the poor, socially inclusive processes incorporated in the Project will ensure that the poor will benefit proportionately. Benefits for the poor will be realized through reduced drudgery in water collection, improved health, and reduced expenditure on health care while general benefits will arise from increased employment (mainly in the tourism industry) due to a more reliable water supply.

310. Under the Project, the construction contractor will install free household water connections, which will enable the poor to access piped water services. It is proposed that a stepped tariff be used by the WASA which will make the service more affordable to the poor. This tariff would have an initial ‘lifeline’ component at low cost for the first volume of water and this would then rise as consumption increased. By limiting their volume, the poor consumers will be able to access water at lower cost than other consumers.

11.3 Gender Impact

311. Both men and women will benefit from Project activities. About 50% of the total beneficiaries will be female. Women are usually responsible for family hygiene and sanitation and for the provision of care in the event of family sickness. Since women play strong roles in family hygiene and water-related activities, the CAPP gives particular attention to engagement of women in the decision-making, learning and training activities under the Project to enhance benefits from the piped water system and the value addition of the community health and awareness activities.

11.4 Environmental Impacts

312. The proposed Project components address key environmental issues of access to safe water (and sewerage) and provide for financial sustainability, institutional development, capacity building and public participation requirements both to sustain these improvements and to foster further improvements. The water supply improvements are expected to have a major positive impact on the public health and quality of life for residents within the supply area, particularly during times of drought.

313. There are, however, environmental impacts where some specific care is required. Areas of potential concern that arise include:

(i) The wellfield may prevent or disrupt other development of the land area;

(ii) Continuous pumping over a long period may deplete the safe yield of the aquifer;

(iii) Potential conflicts with other water users;

(iv) Construction impacts such as noise and dust generation, silt release, public and worker safety, and impedance to traffic; and

(v) Repair or removal of fibro-cement pipe which can cause workers to be exposed to asbestos fibres. The risk exists that local residents could also be subject to short-term exposure to asbestos fibres.

314. Principal mitigation measures to be adopted include:

(i) All bores, access tracks and pipelines will be located on State land where possible, in areas remote from present development but with consideration of future development;

(ii) Pumping of the wellfield for more than a few days will only be carried during drought periods. Observation wells will be installed around the wellfield perimeter to monitor drawdown during operation;

(iii) Public awareness raising over hygiene;

(iv) Capacity building for sound operation and maintenance of the infrastructure;

(v) Where practicable, fibro pipe should be abandoned in-place and replaced with new HDPE piping located in a parallel trench. Where fibro-cement pipes must be removed this should be carried out using special procedures to limit worker exposure. The work areas should be cordoned off from public access;

(vi) Binding requirements for contractors to exercise high safety standards during construction; and

(vii) Contractual obligations for adherence to principles of good construction practise.

11.5 Technical risks

315. Underestimation of resource allocation and improper employment of appropriate construction methods and equipment might cause delays and increase costs. As all manufactured goods are imported into Palau, supply of essential construction materials, could pose some difficulties.

316. The Project design will mitigate these risks by:

(i) Incorporating provisions in tender documents for evidence of satisfactory past performance in similar conditions;

(ii) Requiring a minimum level for provision of physical plant at mobilization, detailed quantification of engineering risks, and adequate contingencies for unforeseen items; and

(iii) Holding community consultations in advance, with Government support, on subproject programming and for access to resources.

11.6 Financial risks of Construction

317. Grant-financed budgetary allocations for the Project could be inadequate as a result of underestimated construction costs, inflation during implementation, and the potential cost of defending construction claims lodged by contractors.

318. To mitigate these risks, the PMU will:

(i) Estimate costs conservatively;

(ii) Use strict and effective contract conditions to mitigate slow contractor performance; and

(iii) Require a guarantee by the contractor for one year following civil works to ensure construction quality.

319. Government budgetary allocations for restructuring, maintenance, and counterpart staff could be inadequate due to poor national financial management. Ongoing programs are strengthening governance, structure and financial management systems, and will thus improve the environment for project implementation and institutional strengthening.

11.7 Institutional reforms and sector restructuring risks

320. Continued progress in restructuring the water and sewerage sector depends on successful ADB and adequate Government funding. The Government’s commitment to the reform process, and associated development and implementation of operational and management procedures, could wane.

321. Further risks include the Government not progressing with timely legal and institutional reforms, and resource shortages. The project design mitigates these risks through close collaboration and cooperation, which involves consultations between ADB,

Government and the public. ADB project review missions, as well as country consultation missions, will engage in regular dialogue to maintain support and commitment.

322. It is expected that there will be several covenants required by the ADB to ensure that tariff increases, the development of a new water law, and the GOP’s commitment to the timely establishment of a Water and Sewerage Authority will proceed as anticipated.

323. Figure 11.1 shows the desirable water and sewerage arrangement at the end of the Project.

Figure 11.1 Desirable water and sewerage sector arrangement

GOP

Regulating Authority

Water and Sewerage State Government Board of Directors Authority

Consumers General Public

Appendix 1 Page 1

APPENDIX 1 – DETAILED FINANCIAL ANALYSIS

Table of Contents ABBREVIATIONS AND EQUIVALENTS...... 3 1 Introduction ...... 4 2 Methodology and Approach ...... 4 2.1 Scope of Analyses ...... 4 2.2 Financial Internal Rate of Return and Weighted Average Cost of Capital ...... 4 2.3 Tariff and Average Incremental Financial Cost ...... 5 3 Bases for Financial Projections...... 5 3.1 General ...... 5 3.2 Project Capital Cost ...... 6 3.3 Financing Plan ...... 6 3.4 Financial Objectives...... 7 3.5 Demand Projections...... 7 3.6 Operating Revenues ...... 8 3.7 Operating Expenses...... 8 3.8 Operating Responsibility ...... 8 4 Past Financial Performance ...... 8 4.1 Water Tariff ...... 8 4.2 Water Connections...... 9 4.3 Prior Years’ Financial Results ...... 10 5 Projected Financial Performance ...... 11 5.1 Proposed Water Tariff...... 11 5.2 Affordability and Willingness to Pay...... 12 5.3 Financial Subsidy...... 12 5.4 FIRR and Sensitivity Analysis ...... 13 5.5 Projected Financial Results...... 13 6 Project Financial Sustainability and Implementation Risks ...... 14 List of Tables

Table 1 - Weighted Average Cost of Capital ...... 5 Table 2 – Project Capital Cost...... 6 Table 3 – Financing Plan...... 7 Table 4 - Koror-Airai Unmetered Water Rates ...... 9 Table 5 - Koror-Airai Water Connections...... 10 Table 6 - Water and Sewer Revenue and Expenses ...... 11

Appendix 1 Page 2

Table 7 - Proposed Water Tariff and Key Performance Indicators...... 11 Table 8 - Annual Average Household Income...... 12 Table 9 - Affordability Analysis ...... 12 Table 10 - Average Incremental Financial Cost ...... 13 Table 11 - FIRR and Sensitivity Analyses ...... 13 Table 12 - Summary of Financial Projections and Key Performance Indicators ...... 14 Annexes 1. Without Project - Data and Assumptions 2. With Project - Data and Assumptions 3. FIRR Calculation and Sensitivity Analysis 4. Basic Data and Assumptions Used in Financial Projections 5. Income Statement 6. Sources and Application of Funds Statement 7. Balance Sheet

Appendix 1 Page 3

ABBREVIATIONS AND EQUIVALENTS

ADB Asian Development Bank ADF Asian Development Fund AIFC Average Incremental Financial Cost BPW Bureau of Public Works DSCR Debt Service Coverage Ratio EIB European Investment Bank FIRR Financial Internal Rate of Return gal Gallons GDP Gross Domestic Product GOP Government of Palau gpcd Gallons per capita per day HH Households KPI Key Performance Indicator LIG Low Income Group MG Million gallons MOF Ministry of Finance NPV Net Present Value NRW Non-Revenue Water OCR Ordinary Capital Resources O&M Operation and Maintenance p.a. Per annum SI Sensitivity Indicator SV Switching Value UFW Unaccounted-for-water WACC Weighted Average Cost of Capital WASA Water and Sewerage Authority

Appendix 1 Page 4

1 Introduction 1. This Appendix presents the financial analyses for the project. The analyses were undertaken in accordance with the Asian Development Bank's (ADB) Framework for the Economic and Financial Appraisal of Urban Development Sector Projects (January 1994), Handbook for the Economic Analysis of Water Supply Projects and the Guidelines on the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank (January 2002).

2 Methodology and Approach

2.1 Scope of Analyses 2. The financial analyses include the following:

 Derivation of the Average Incremental Financial Cost (AIFC) to determine tariff levels necessary to achieve full cost recovery. Comparing the AIFC with the average tariff also provides a measure of the financial subsidy to users;

 Determination of appropriate water tariff for the proposed Water and Sewerage Authority (WASA), which will assume ownership and operating responsibility upon completion of the project, that meets the financial objectives of the Government of Palau (GOP) to ensure the entity’s (including the project) financial sustainability;

 Tariff affordability analysis to ensure that domestic consumers, particularly those in the low-income group (LIG), can afford the water tariffs;

 Determine whether the project’s financial internal rate of return (FIRR) exceeds the financial opportunity cost of capital (FOCC); only the incremental project costs and incremental revenues are considered in the calculation of the FIRR, which are determined by comparing the “without-project situation” against the “with-project situation”;

 Sensitivity analysis to determine the project’s sensitivity to adverse changes in conditions; and

 Preparation of a ten-year projected financial performance (income statement, sources and applications of funds statement, balance sheet) with key performance indicators after project becomes operational.

2.2 Financial Internal Rate of Return and Weighted Average Cost of Capital 3. Water supply project is considered financially viable if the project’s Financial Internal Rate of Return (FIRR) exceeds its Weighted Average Cost of Capital (WACC). 4. The FIRR is the discount rate at which the present value of incremental project costs equalizes the present value of incremental revenues in financial terms over the project life. The profitability of a project to the entity is also indicated by the project’s FIRR. 5. For water supply project, the WACC of the project in real terms is used as proxy for the Financial Opportunity Cost of Capital. The WACC represents the cost incurred by the proposed WASA in raising the capital necessary to implement the project. The WACC therefore is the benchmark to assess the financial viability of the project. 6. Under ADB’s guidelines, if the WACC of a project falls below 4% after adjusting the cost of capital from difference sources into real terms, the minimum rate test to be used for financial viability is 4%. Applying ADB’s guidelines, the WACC for the proposed water supply project is 4% as calculated below.

Appendix 1 Page 5

Table 1 - Weighted Average Cost of Capital

Sources of Funds Item ADB Loan EIB GOP Total OCR ADF Amount ($ million) 3.05 1.80 4.94 0.09 9.89 Weight (%) 31% 18% 50% 1% 100% Nominal cost of fund (%) 2.99% 1.5% 2.99% 5.0% Tax rate (%) 0% 0% 0% 0% Nominal cost of fund after tax (%) 3.0% 1.5% 3.0% 5.0% Inflation rate (%) 2.0% 2.0% 2.0% 2.0% Real cost of fund (%) 1.0% -0.5% 1.0% 2.9% Minimum rate test (%) 4.0% 4.0% 4.0% 4.0% Weighted component of WACC (%) 1.2% 0.7% 2.0% 0.0% Real WACC (%) 4.00% Source: Consultant’s Calculation 7. The FIRR is subjected to a sensitivity analysis in order to test the robustness of the results to adverse changes in conditions. The following adverse changes were analyzed:

 A capital cost overrun of 20%;

 An increase in the O&M cost by 20%;

 A reduction in revenues by 20%; and

 Project delayed by one year.

2.3 Tariff and Average Incremental Financial Cost 8. In setting the tariff, the appropriate target level to achieve project financial adequacy and sustainability is the long run marginal (LRM) cost, which includes both the incremental investment and O&M costs. The Average Incremental Financial Cost (AIFC) is regarded as an approximation of the LRM cost. 9. The AIFC is the minimum tariff required for full cost recovery. Full cost recovery is achieved when tariff revenues are sufficient to recover the full capital and O&M costs of the project over its economic life. If the AIFC is higher than the proposed average tariff, the difference represents a financial subsidy to the customers as full cost recovery is not achieved. 10. The AIFC is calculated by dividing the present value of the incremental project cost streams (capital and O&M) by the present value of the incremental quantity streams (volume of water consumed in the case of water supply). The costs and quantity streams would be discounted using a discount rate equivalent to the WACC.

3 Bases for Financial Projections

3.1 General 11. The following general assumptions were used in the analysis:

 The financial projections are presented in US Dollar on a current price basis;

 Revenues and costs are converted from a constant 2009 price basis to current prices using projected local inflation rates, which are 2.8% in 2009 and 2% each year thereafter;

 Foreign inflation rate is assumed at 0.70%, 1.40% and 0.40% from 2009-2011, respectively and 0.50% each year thereafter;

Appendix 1 Page 6

 The domestic and foreign portions of capital cost, including future plant replacement, are escalated using the above inflation rates; and

 Price contingencies and interest during construction (as a result of any debt financing) are excluded in the calculation of the FIRR.

3.2 Project Capital Cost 12. The project capital cost is based on the technical team’s estimate. The financial price estimate amounts to $ 9.89 million, inclusive of engineering base costs, physical and price contingencies, and interest during construction (IDC). The IDC is capitalized and amortized over the life of the project. The project capital cost breakdown by component is shown below. Table 2 – Project Capital Cost Amount No. Components % ($ '000) 1 Strengthening Sector Planning, Management and Regulation 750 8% 2 Development of Water Supply Wells and Associated Water Source Works 1,501 15% 3 Community Action and Participation Program 270 3% 4 Rehabilitation and Expansion of the Koror-Airai Water Supply Network 4,270 43% 5 Project Implementation Assistance and Administrative Support 1,450 15% Total Estimated Base Cost 8,241 83% 6 Contingencies Physical 824 8% Price 365 4% Total Contingencies 1,190 12% 7 Interest and Service Charges 463 5% Total Estimated Project Cost 9,894 100% a) In March 2009 prices. b) Includes taxes of $323,000. c) Physical contingencies at 10% of base cost. d) Price contingencies at 2% p.a. for local costs; 0.4% to 1.4% p.a. for foreign costs. e) Financing charges during construction: 1% p.a. for ADB’s ADF portion of loan, 2.99% p.a. for EIB loan and ADB’s OCR portion of loan; and 0.15% commitment fee for undisbursed amount of loan.

3.3 Financing Plan 13. The project capital cost is assumed to be funded by way of loan and government equity/grant. The European Investment Bank (EIB) is assumed to finance 50% of the total project cost while 49% will be funded by ADB and 1% by GOP. The ADB loan is assumed to come from 2 sources. The first $1.8 million of the ADB loan will be a soft-loan sourced from its Asian Development Fund (ADF) and the balance of $3.05 million will come from its Ordinary Capital Resources (OCR). The ADF portion is assumed to have a 32-year term including an 8- year grace period with an interest of 1.0% p.a. charged during the grace period and 1.5% p.a. thereafter. The OCR portion is assumed to have a 25-year term with a 5-year grace period. Interest rate1 for the OCR portion is assumed at 2.99% p.a.. Commitment fee of 0.15% p.a. of undisbursed balance of loan is also assumed. The EIB loan is assumed to have the same financing terms as the OCR portion of the ADB loan. It is assumed that the Ministry of Finance (MOF), on behalf of the GOP, will sign the main loan agreement with ADB and EIB. Then the proposed WASA, which will assume ownership and operating responsibility upon completion of the project, will in turn sign a subsidiary loan agreement (SLA) with the MOF under the same terms and conditions of the main loan agreement.

1 ADB Treasury Department indicative rate for LIBOR-based loan facility as at 15 July 2009 is +2.79% p.a. (5-year fixed swap rate) plus +0.20 p.a. as lending spread.

Appendix 1 Page 7

14. The assumed financing plan is outlined in the following table. Table 3 – Financing Plan

Amount Sources of Funds Percent ($ Million) Asian Development Bank: Asian Development Fund 1.80 18% Ordinary Capital Resources 3.05 31% Sub-total 4.86 49% European Investment Bank 4.94 50% Government of Palau 0.09 1% Total 9.89 100% Source: Consultant’s Calculation

3.4 Financial Objectives 15. We understand that the objective of the GOP is to move to a full recovery of costs. The ultimate aim is to make the supply of water a self-sustaining and efficient operation. If this aim is to be attained, full recovery of costs must be achieved gradually within the next five years. In addition to achieving full recovery of costs, the proposed WASA must also comply with the financial covenants in the loan agreement with the financing institutions like debt service coverage ratio (DSCR) and accounts receivable collection efficiency. WASA must always maintain each year a DSCR not lower than 1.2 times and accounts receivable balance must not be more than 60 days of annual water sales.

3.5 Demand Projections 16. Water demand projections for the Koror-Airai water supply service were derived from the current number of connections, current consumption levels and estimated equivalent population (residents and tourists). Estimated price and income elasticity were also incorporated in the forecasts as demand is also a function of changes in price and household income. Per capita consumption is expected to decrease with the proposed real price increases within the next five years to achieve full cost recovery. The assumptions used in the estimate of the water demand are as follows:

 Baseline (2009) average demand of 109 gallons/capita/day (gpcd) per metered household connection which is estimated to decline to 86 gpcd by 2013 resulting from changes in price and household income;

 An income elasticity of +0.50 is assumed based on the generally accepted level of income elasticity between +0.40 and +0.50;2

 Household income is assumed to grow equivalent to the assumed real GDP growth of 3% per annum;

 The willingness to pay survey was used as an indication of changes in demand as a result of price increases. The percentage of household was applied as proxy for the true dependent variable which is the quantity of water consumed.3 Based on the survey result, a price elasticity was calculated at -.40;

 Baseline (2009) average demand of 43 thousand gallons per month per non- domestic metered connection and is assumed to remain unchanged throughout the projection period;

2 ADB Handbook for the Economic Analysis of Water Supply Projects, page 47. 3 ADB Handbook for the Economic Analysis of Water Supply Projects, page 63.

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 Equivalent population of 17,000 in 2009, 18,000 in 2013 and 19,500 in 2020;

 Average household size of 4 persons;

 Baseline (2009) NRW of 42%, which is estimated to decline to 34% after rehabilitation of the existing system and installation of meters for all customers.

3.6 Operating Revenues 17. Operating revenues were derived from water sales and connection fees. Future water sales were calculated on the basis of water demand and projected water tariff levels. Connection fees were calculated at the current level of each new connection ($15 for domestic and $30 for non-domestic) and adjusted each year by the local inflation rate.

3.7 Operating Expenses 18. Annual O&M costs by major expense item (personnel, electricity and fuel, chemicals and supplies, maintenance and administration) were calculated on the basis of production volume, operating characteristic of the system and adjustments for operating efficiency after rehabilitation of the system. Bad debt was provided at 2% of outstanding accounts. Depreciation expense was calculated on an average asset life of 25 years on a straight-line basis. The proposed WASA is assumed to be income tax free like other government owned utilities.

3.8 Operating Responsibility 19. At present, there is no one government agency solely responsible for the Koror-Airai water supply service. The responsibility is shared between the Ministry of Resources and Development (MRD), through its Bureau of Public Works (BPW), and the MOF. The BPW is responsible for the design, development, operation and maintenance of the water infrastructure. The MOF’s Water Reading, Billing and Collection (WRBC) Section is responsible for the monthly reading of the Koror-Airai customers’ meters, keep up to date customers’ records, keep track of customers’ accounts, take necessary actions to receive payments and/or terminate services, and enforce the Utilities Rules and Regulations. In coordination with the BPW, the WRBC Section is also responsible for the installation, test, repair or replacement of any malfunctioning water meters. Customers pay their accounts directly to the MOF’s Division of Treasury. The maintenance of finance and accounting records of the BPW is the responsibility of MOF’s Division of Finance and Accounting under the national government’s centralized financial management system for its line ministries and bureaus. 20. The physical components of the proposed project are assumed to be completed at the end of 2012. It is assumed that the proposed WASA, the corporatized entity that will be solely responsible for the Koror-Airai water supply service upon completion of the project, will be operational at the start of 2014. During 2013, it is assumed that BPW and the different units of the MOF will continue to discharge their existing water supply related responsibilities while WASA is in the process of being organized and established.

4 Past Financial Performance

4.1 Water Tariff 21. The Koror-Airai water supply system has metered and unmetered customers. All metered domestic and non-domestic customers are charged uniformly at $0.85 per 1,000 gallons while unmetered customers are charged flat monthly rates as per table below. The tariffs have been unchanged since 1 February 1992.

Appendix 1 Page 9

Table 4 - Koror-Airai Unmetered Water Rates

Customer Category Description Monthly Rate ($) Residential Airai Residential Per House 5 Single Family Dwelling Per House 10 Multi-Family Dwelling Per Apartment 10 Employee Barracks Type I: 1-10 employees 10 Type II: 11-25 employees 25 Type III: 26-50 employees 50 Type IV: 51 or more employees 100 Commercial Restaurant/Dining Facilities Type I: 1-25 seats 10 Type II: 26-50 seats 15 Type III: 51 or more seats 30 Bars and Cocktail Lounges Type I: 1-50 seats 10 Type II: 51-100 seats 15 Type III: 101 or more seats 30 Laundry/Laundromat Type I: 1-5 washers 10 Type II: 6-10 washers 15 Type III: 11 or more washers 30 Hotel/ Motel Per Room 1.50 Other Non-Industrial Business Type I: 1-25 employees 10 (All Types) Type II: 26-50 employees 15 Type III: 51-100 employees 20 Type IV: 101 or more employees 40 Government / Institution General Government Facilties Type I: 1-25 employees 10 Type II: 26-50 employees 15 Type III: 51-100 employees 20 Type IV: 101 or more employees 40 Hospitals Per Bed 125 Schools (Non-boarding) Type I: 1-50 students 10 Type II: 51-100 students 15 Type III: 101-200 students 25 Type IV: 201 or more students 50 Boarding Schools and Colleges Type I: 1-50 students 35 Type II: 51-100 students 70 Type III: 101-200 students 140 Type IV: 201 or more students 250 Churches/Assembly Halls All 10 Industrial Manufacturing Plants Estimated Volume Varies Seafood Processing Estimated Volume Varies Petroleum/Mineral Refineries Estimated Volume Varies Source: Water Reading, Billing and Collection Section, MoF

4.2 Water Connections 22. The breakdown of the existing number of metered and unmetered water connections in Koror and Airai states is presented below.

Appendix 1 Page 10

Table 5 - Koror-Airai Water Connections Customer Category No. of Connections Domestic Metered 2,431 Flat rate 621 Total 3,052 Non-domestic Metered 578 Flat rate 113 Total 691 Overall Total Metered 3,009 Flat rate 734 Total 3,743 Source: Water Reading, Billing and Collection Section, MoF

4.3 Prior Years’ Financial Results 23. The GOP finances the operation, maintenance and capita costs of water supply and sewer systems, including those in the outlying states, through the BPW. The annual budget of the BPW’s Division of Utilities covers the Koror-Airai and outlying states water supply and sewer systems. Revenues of the Koror-Airai water supply system are collected by the MOF while the state governments handle collections for the systems in the outlying states. All water supply customers in the outlying states are not metered and are charged a flat monthly rate that varies from state to state (none to $5). There are no fees collected for the sewer service, which is provided in Koror and the capitol area. 24. The revenue and expenses, including depreciation, of the water supply and sewer systems in Koror-Airai and outlying states for the last three fiscal years are presented below. However, there are no data available as to how much revenues were collected for the outlying states water supply systems. Annual revenues, based on the existing tariff and number of connections in the outlying states, are estimated to be about $38 thousand. 25. The cost recovery results of the Koror-Airai water supply system operation for the last three years are summarized below:

 Water supply operations only - revenue earned was about 44% of water supply operating expenses and about 34% of water supply operating expenses plus water supply depreciation;

 Combined water supply and sewer operations - revenue earned was about 34% of water supply and sewer operating expenses and about 21% of water supply and sewer operating expenses plus water supply and sewer depreciation. 26. For the outlying states water supply systems, revenue earned based on estimate was about 10% of water supply operating expenses and about 3% of water supply operating expenses plus water supply depreciation for the last three years. 27. On a consolidated basis, the cost recovery results of the Koror-Airai and outlying states water supply systems operation are summarized below:

 Water supply operations only - revenue earned was about 37% of water supply operating expenses and about 23% of water supply operating expenses plus water supply depreciation for the last three years; and

 Combined water supply and sewer operations - revenue earned was about 30% of water supply and sewer operating expenses and about 17% of water supply and

Appendix 1 Page 11

sewer operating expenses plus water supply and sewer depreciation for the same period. Table 6 - Water and Sewer Revenue and Expenses

In Thousand $ FY 2005 FY 2006 FY 2007 Water Revenue Koror-Airai Water Sales 658 696 685 Other Income 9 14 12 Total Water Revenue 667 710 697 Operating Expenses Koror-Airai Water (see note below) 1,355 1,699 1,678 Outlying States Water 403 400 357 Sewer 450 384 547 Total Operating Expenses 2,208 2,483 2,582 Operating Loss (1,541) (1,773) (1,885) Depreciation Koror-Airai Water 452 452 462 Outlying States Water 694 706 726 Sewer 651 705 827 Total Depreciation 1,797 1,863 2,016 Total Loss (3,338) (3,636) (3,901) Note: includes expenses of MOF units related to water supply service Source: Ministry of Finance

5 Projected Financial Performance

5.1 Proposed Water Tariff 28. To meet the financial objectives as outlined in Section 3.4, the existing tariff shall be increased annually in real terms within the next 5 years. However, the proposed tariff shall have a structure which includes a lifeline block (first 2,000 gallons monthly consumption) for domestic consumers to ensure that the low-income group (LIG) can afford the projected water tariff levels that can meet the financial objectives. After 2013 when full recovery of costs is achieved, tariffs shall be adjusted annually at inflation rate to keep up with increases in O&M costs due to inflation. 29. The proposed tariffs and key performance indicators (KPI) for 2009 up to 2018 are presented below. Table 7 - Proposed Water Tariff and Key Performance Indicators

Item 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Proposed Tariff Domestic First 2,000 gal 0.85 1.02 1.22 1.47 1.76 1.80 1.83 1.87 1.91 1.95 > 2,000 gal 1.79 2.14 2.57 3.08 3.70 3.78 3.85 3.93 4.01 4.09 Non-domestic 1.79 2.14 2.57 3.08 3.70 3.78 3.85 3.93 4.01 4.09 Average Tariff 1.70 2.04 2.45 2.94 3.53 3.60 3.67 3.74 3.82 3.89 Tariff Increase (%) 100% 20% 20% 20% 20% 2% 2% 2% 2% 2% KPI Cost Recovery Ratio 0.53 0.62 0.72 0.82 1.03 1.06 1.07 1.12 1.16 1.24 DSCR (times) 0.0 0.0 0.0 0.0 0.0 4.8 2.0 2.1 2.3 2.2 Receivable (days) 70 65 60 55 50 50 50 50 50 50 Source: Consultant’s Calculation 30. The above projections indicate that the proposed tariffs will achieve the financial objectives for the delivery of water supply service in the Koror-Airai area.

Appendix 1 Page 12

5.2 Affordability and Willingness to Pay 31. An affordability analysis was undertaken to ensure that domestic consumers, particularly those in the LIG, can afford the proposed water tariff levels that meet the financial objectives. The average household (HH) incomes of Koror and Airai residents as contained in the 2006 Household Income & Expenditure Survey (MOF’s Office of Planning & Statistics) were used in the analysis. The survey results are shown in the table below. Table 8 - Annual Average Household Income

Quintile Koror ($) Airai ($)

1st quintile 5,723 6,482 2nd quintile 10,631 10,640 3rd quintile 15,699 15,283 4th quintile 22,057 22,869 5th quintile 44,585 47,089 Total Average 21,558 21,196 Source: 2006 Household Income & Expenditure Survey, Office of Planning & Statistics, MoF 32. The affordability analysis assumes that the LIG’s water consumption is an average of 60% of what an average household consumes. The analysis was done for years 2010-2014 when the proposed real price increases are implemented. The results of the analysis are shown below. Table 9 - Affordability Analysis 2010 2011 2012 2013 2014 Item Ave. Ave. Ave. Ave. Ave. LIG LIG LIG LIG LIG HH HH HH HH HH Ave. Usage (gpcd) 103 62 97 58 92 55 86 52 88 53 Ave. HH Size (person) 4 4 4 4 4 4 4 4 4 4 Monthly HH Usage (‘000 gal) 12 7 12 7 11 7 10 6 11 6 Ave. Monthly Bill, 2009 Real Price ($) 25 15 27 16 30 18 34 20 34 21 Ave. Monthly HH Income ($) 1,766 477 1,766 477 1,766 477 1,766 477 1,766 477 Income Spent on Water % 1.4% 3.1% 1.6% 3.4% 1.7% 3.8% 1.9% 4.2% 1.9% 4.3% Source: Consultant’s Calculation 33. The above table shows that the percentages of monthly household income spent on water are below 5%. Based on generally accepted principle on affordability that the expenditure on water should not exceed 5% of household income, the proposed water tariffs are considered affordable. 34. The results of the socio-economic survey conducted by the consultant last year revealed that 96% of respondents are willing to pay twice the existing tariff of $0.85 for their water. Residents presently pay an average of $17/month for their water bill.4 If residents are willing to pay twice the amount of what they are currently paying, the average monthly bills as determined in the above table are within the residents’ willingness to pay.

5.3 Financial Subsidy 35. The AIFC provides a measure of the costs per thousand gallons required to achieve full recovery of financial costs at a discount rate equating to the WACC. By comparing the AIFC with the average tariff, the financial subsidy to users is known. Below is the result of the AIFC calculation.

4 Source: MOF’s Water Reading, Billing and Collection Section.

Appendix 1 Page 13

Table 10 - Average Incremental Financial Cost

Item NPV / 1 Incremental Billed Usage (MG) 2,837 Incremental Project Costs ('000 $) 4,654 $/’000 gal AIFC 1.64 Average Tariff 2.86 Financial Subsidy None 1/ NPV = Net Present Value discounted at WACC of 4% Source: Consultant’s Calculation 36. Based on the above table, there is no financial subsidy. The average tariff can achieve the recovery of full project costs.

5.4 FIRR and Sensitivity Analysis 37. The project is expected to reduce NRW due to rehabilitation of the existing system and installation of meters for all customers. With lower NRW, it is projected that production level will decline while billed water will increase. Savings in O&M costs are anticipated with lower production level while the increased volume of water billed will result to increased revenues. Only the incremental project costs (net of O&M cost savings) and incremental revenues are considered in the calculation of the FIRR, which are determined by comparing the “without- project situation” against the “with-project situation”. The results of the FIRR calculation and sensitivity analysis are shown below. Details of the basic data and assumptions used in the analysis are outlined in the Annex of this report. Table 11 - FIRR and Sensitivity Analyses NPV / 1 % Scenario FIRR (%) SI / 2 SV / 3 (‘000 $) Change Base Case 2,272,487 6.38% 20% Increase in Capital Costs 409,943 4.38% 2.28 44% 20% 20% Decrease in O&M Costs Savings 1,340,703 5.44% 0.87 115% 20% 20% Decrease in Revenues 887,230 4.97% 1.42 71% 20% Project Delayed by One Year 1,833,127 5.87% 1/ NPV = Net Present Value discounted at WACC of 4% 2/ SI = Sensitivity Indicator (ratio of % change in FIRR above the cut-off rate of 4% to % change in a variable) 3/ SV = Switching Value (% change in a variable to reduce the FIRR to the cut-off rate of 4%) Source: Consultant’s Calculation 38. Based on the results above, it can be seen that the proposed project is financially viable under the base case and adverse scenarios with its FIRRs all above the WACC of 4%. The project is most sensitive to increase in capital costs.

5.5 Projected Financial Results 39. The projected financial statements of the Koror-Airai water supply operations consisting of the income statement, sources and uses of funds statement and balance sheet for the period 2009 to 2018 are summarized and presented in the following table together with the key performance indicators. Details of the basic data and assumptions used in the projections are outlined in the Annex of this report. 40. The results of the financial projections indicate that after completing the proposed tariff increases, the Koror-Airai water supply operation is projected to earn positive net income each year over the forecast period. Annual O&M costs as well as depreciation and interest charges are recovered during the forecast period. The operation is also projected to generate positive net cash flow each year over the forecast period, which can be used to fund capital asset replacement, rehabilitation or expansion in the service area. The operation can likewise

Appendix 1 Page 14 subsidize the sewer service in the area. As a result, the Koror-Airai water supply operation will require no further subsidies from the GOP, be able to repay the debt service obligations, and generate an increasing cash surplus. The DSCR is projected to remain well above 1.2 times in all years. Table 12 - Summary of Financial Projections and Key Performance Indicators

In Thousand $ 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Income Statement Total Revenues 1,204 1,430 1,702 1,955 2,766 2,866 2,981 3,100 3,224 3,352 Expenses O&M 1,829 1,866 1,904 1,942 1,886 1,635 1,681 1,727 1,775 1,825 Depreciation 452 452 452 452 807 807 848 792 774 645 Interest 0 0 0 0 0 257 257 245 233 230 Total Expenses 2,281 2,318 2,356 2,394 2,693 2,699 2,786 2,764 2,783 2,700 Net Profit (1,078) (888) (655) (440) 73 166 195 336 441 652 Sources & Uses of Funds Sources Internal Sources (625) (436) (202) 13 881 1,231 1,300 1,373 1,448 1,528 External Sources 700 897 4,097 3,620 2,079 0 0 0 0 0 Total Sources 75 461 3,895 3,633 2,959 1,231 1,300 1,373 1,448 1,528 Uses Capital Expenditure 0 397 3,797 3,620 2,079 0 0 0 804 0 Debt Service 0 0 0 0 0 257 657 645 633 705 Other Uses 0 20 21 11 81 46 11 12 12 13 Total Uses 0 417 3,819 3,631 2,160 303 668 657 1,449 718 Cash Balance 75 119 195 197 996 1,924 2,556 3,272 3,271 4,081 Balance Sheet Assets Fixed Assets 3,760 3,705 7,050 10,218 11,489 10,682 9,834 9,042 9,072 8,427 Current Assets 420 491 594 613 1,484 2,416 3,067 3,802 3,821 4,652 Total Assets 4,180 4,195 7,645 10,831 12,974 13,098 12,901 12,844 12,893 13,079 Liabilities & Equity Total Liabilities 304 704 4,470 8,062 10,112 10,070 9,678 9,286 8,894 8,427 Total Equity 3,876 3,492 3,175 2,769 2,861 3,028 3,223 3,558 3,999 4,652 Total Liabilities & Equity 4,180 4,195 7,645 10,831 12,974 13,098 12,901 12,844 12,893 13,079 Performance Indicators Water Production (MG) 1,396 1,396 1,396 1,396 1,183 1,197 1,211 1,225 1,239 1,253 Water Billed (MG) 665 665 665 665 780 797 812 828 845 861 NRW % 42% 42% 42% 42% 34% 33% 33% 32% 32% 31% Cost Recovery Ratio 0.53 0.62 0.72 0.82 1.03 1.06 1.07 1.12 1.16 1.24 Working Ratio 1.5 1.3 1.1 1.0 0.7 0.6 0.6 0.6 0.6 0.5 Operating Ratio 1.9 1.6 1.4 1.2 1.0 0.9 0.8 0.8 0.8 0.7 Return on Assets % -29% -27% -23% -18% 5% 4% 5% 6% 7% 10% Debt Service Ratio 0.0 0.0 0.0 0.0 0.0 4.8 2.0 2.1 2.3 2.2 Current Ratio 1.4 1.6 1.9 1.9 4.7 3.6 4.5 5.5 5.0 6.0 % Debt on Debt plus Equity 0% 10% 57% 74% 77% 76% 74% 71% 67% 62% Days Receivable 70 65 60 55 50 50 50 50 50 50 Source: Consultant’s Calculation

6 Project Financial Sustainability and Implementation Risks 41. The projected financial performance of the Koror-Airai water supply operation has shown that the financial objectives of cost recovery and debt service for the project could be met. The attainment of the financial objectives, however, would require that tariffs are

Appendix 1 Page 15 periodically raised as proposed. The financial sustainability of the project and the proposed WASA largely depends therefore on GOP’s positive action on the proposed tariff increases. 42. The main risks associated with the project related to financial aspects are:

 Uncertainty regarding tariff increases necessary to ensure financial sustainability of the water supply project and the proposed WASA;

 Inadequate funding of the required subsidy for the right level of operations and maintenance of the system while full cost recovery tariff has not been attained; and

 Delay in establishing the proposed WASA which shall be solely responsible for the Koror-Airai water supply service upon completion of the project.

Appendix 1 Page 16

ANNEXES

1. Without Project - Data and Assumptions 2. With Project - Data and Assumptions 3. FIRR Calculation and Sensitivity Analysis 4. Basic Data and Assumptions Used in Financial Projections 5. Income Statement 6. Sources and Application of Funds Statement 7. Balance Sheet

Appendix 1 Page 17

KOROR-AIRAI WATER SUPPLY DATA AND ASSUMPTIONS

WITHOUT PROJECT 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Water Production & Consumption Population (persons) 17,000 17,250 17,500 17,750 18,000 18,214 18,429 18,643 18,857 19,071 19,286 19,500 19,500 19,500 19,500 Annual production (k gallons) 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 Number of metered customers 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 Domestic 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 Non-domestic 578 578 578 578 578 578 578 578 578 578 578 578 578 578 578 Number of flat rate customers 734 734 734 734 734 734 734 734 734 734 734 734 734 734 734 Domestic 621 621 621 621 621 621 621 621 621 621 621 621 621 621 621 Non-domestic 113 113 113 113 113 113 113 113 113 113 113 113 113 113 113 Total number of customers 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 Domestic 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 Non-domestic 691 691 691 691 691 691 691 691 691 691 691 691 691 691 691 Usage of metered customers billed (k gallons) 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 Domestic 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 Non-domestic 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 Assumed usage of flat rate customers (k gallons) 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 Total estimated usage (k gallons) 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 Non-revenue water (k gallons) 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 Non-revenue water (%) 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% Average use in metered HH connections (gpcd) 109 109 109 109 109 109 109 109 109 109 109 109 109 109 109 Ave. monthly use/metered connection (k gallons) Domestic 13 13 13 13 13 13 13 13 13 13 13 13 13 13 13 Non-domestic 43 43 43 43 43 43 43 43 43 43 43 43 43 43 43 Operation & Maintenance Costs ($) Personnel No. of staff 565656565656565656565656565656 Average annual cost/staff ($) 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 Total personnel cost 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 Electricity & fuel Average cost/k gallon produced ($) 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 Total electricity & fuel cost 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 Chemicals & supplies Average cost/k gallon produced ($) 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 Total chemicals & supplies cost 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 Maintenance 10,000 10,000 10,000 10,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 Administration & others 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Total Operation & Maintenance Costs ($) 1,824,470 1,824,470 1,824,470 1,824,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470

Appendix 1 Page 18

KOROR-AIRAI WATER SUPPLY DATA AND ASSUMPTIONS

WITHOUT PROJECT 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 Water Production & Consumption Population (persons) 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 Annual production (k gallons) 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 1,396,125 Number of metered customers 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 3,009 Domestic 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 2,431 Non-domestic 578 578 578 578 578 578 578 578 578 578 578 578 578 578 Number of flat rate customers 734 734 734 734 734 734 734 734 734 734 734 734 734 734 Domestic 621 621 621 621 621 621 621 621 621 621 621 621 621 621 Non-domestic 113 113 113 113 113 113 113 113 113 113 113 113 113 113 Total number of customers 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 3,743 Domestic 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 3,052 Non-domestic 691 691 691 691 691 691 691 691 691 691 691 691 691 691 Usage of metered customers billed (k gallons) 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 665,359 Domestic 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 387,534 Non-domestic 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 277,825 Assumed usage of flat rate customers (k gallons) 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 144,394 Total estimated usage (k gallons) 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 809,753 Non-revenue water (k gallons) 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 586,373 Non-revenue water (%) 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% 42% Average use in metered HH connections (gpcd) 109 109 109 109 109 109 109 109 109 109 109 109 109 109 Ave. monthly use/metered connection (k gallons) Domestic 13 13 13 13 13 13 13 13 13 13 13 13 13 13 Non-domestic 43 43 43 43 43 43 43 43 43 43 43 43 43 43 Operation & Maintenance Costs ($) Personnel No. of staff 5656565656565656565656565656 Average annual cost/staff ($) 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 Total personnel cost 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 728,000 Electricity & fuel Average cost/k gallon produced ($) 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 Total electricity & fuel cost 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 565,755 Chemicals & supplies Average cost/k gallon produced ($) 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 Total chemicals & supplies cost 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 470,714 Maintenance 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 Administration & others 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Total Operation & Maintenance Costs ($) 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470 1,889,470

Appendix 1 Page 19

KOROR-AIRAI WATER SUPPLY DATA AND ASSUMPTIONS

WITH PROJECT 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Water Production & Consumption Population (persons) 17,000 17,250 17,500 17,750 18,000 18,214 18,429 18,643 18,857 19,071 19,286 19,500 19,500 19,500 19,500 Production (gpcd) 225 222 219 215 180 180 180 180 180 180 180 180 180 180 180 Annual production (k gallons) 1,396,125 1,396,125 1,396,125 1,396,125 1,182,600 1,196,679 1,210,757 1,224,836 1,238,914 1,252,993 1,267,071 1,281,150 1,281,150 1,281,150 1,281,150 Number of metered customers 3,009 3,009 3,009 3,009 3,963 4,010 4,058 4,105 4,152 4,199 4,246 4,293 4,293 4,293 4,293 Domestic 2,431 2,431 2,431 2,431 3,232 3,270 3,308 3,347 3,385 3,424 3,462 3,501 3,501 3,501 3,501 Non-domestic 578 578 578 578 732 740 749 758 766 775 784 793 793 793 793 Number of flat rate customers 734 734 734 734 00000000000 Domestic 62162162162100000000000 Non-domestic 11311311311300000000000 Total number of customers 3,743 3,743 3,743 3,743 3,963 4,010 4,058 4,105 4,152 4,199 4,246 4,293 4,293 4,293 4,293 Domestic 3,052 3,052 3,052 3,052 3,232 3,270 3,308 3,347 3,385 3,424 3,462 3,501 3,501 3,501 3,501 Non-domestic 691 691 691 691 732 740 749 758 766 775 784 793 793 793 793 Usage of metered customers billed (k gallons) 665,359 665,359 665,359 665,359 779,644 796,715 812,438 828,404 844,620 861,089 877,817 859,948 859,948 859,948 859,948 Domestic 387,534 387,534 387,534 387,534 405,762 418,382 429,654 441,170 452,934 464,952 477,229 454,909 454,909 454,909 454,909 Non-domestic 277,825 277,825 277,825 277,825 373,882 378,333 382,784 387,235 391,686 396,137 400,588 405,039 405,039 405,039 405,039 Assumed usage of flat rate customers (k gallons) 144,394 144,394 144,394 144,394 00000000000 Total estimated usage (k gallons) 809,753 809,753 809,753 809,753 779,644 796,715 812,438 828,404 844,620 861,089 877,817 859,948 859,948 859,948 859,948 Non-revenue water (k gallons) 586,373 586,373 586,373 586,373 402,956 399,964 398,319 396,431 394,294 391,904 389,255 421,202 421,202 421,202 421,202 Non-revenue water (%) 42% 42% 42% 42% 34% 33% 33% 32% 32% 31% 31% 33% 33% 33% 33% Average use in metered HH connections (gpcd) 109 109 109 92 86 88 89 90 92 93 94 96 96 96 96 Ave. monthly use/metered connection (k gallons) Domestic 13 13 13 13 11 11 11 11 11 11 11 12 12 12 12 Non-domestic 43 43 43 43 43 43 43 43 43 43 43 43 43 43 43 New metered customers 0 0 0 0 954 47 47 47 47 47 47 47 0 0 0 Domestic 0 0 0 0801383838383838380 0 0 Non-domestic 0 0 0 01549999999000 Operation & Maintenance Costs ($) Personnel No. of staff 565656565635353535353535353535 Customer-staff ratio 67 67 67 67 71 115 116 117 119 120 121 123 123 123 123 Average annual cost/staff ($) 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 Total personnel cost 728,000 728,000 728,000 728,000 728,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 Electricity & fuel Average cost/k gallon produced ($) 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 Total electricity & fuel cost 565,755 565,755 565,755 565,755 479,228 484,933 490,638 496,343 502,048 507,753 513,459 519,164 519,164 519,164 519,164 Chemicals & supplies Average cost/k gallon produced ($) 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 Total chemicals & supplies cost 470,714 470,714 470,714 470,714 398,723 403,469 408,216 412,963 417,710 422,456 427,203 431,950 431,950 431,950 431,950 Maintenance 10,000 10,000 10,000 10,000 79,264 80,207 81,151 82,094 83,038 83,982 84,925 85,869 85,869 85,869 85,869 Administration & others 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Total Operation & Maintenance Costs ($) 1,824,470 1,824,470 1,824,470 1,824,470 1,735,214 1,473,610 1,485,005 1,496,400 1,507,796 1,519,191 1,530,587 1,541,982 1,541,982 1,541,982 1,541,982

Appendix 1 Page 20

KOROR-AIRAI WATER SUPPLY DATA AND ASSUMPTIONS

WITH PROJECT 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 Water Production & Consumption Population (persons) 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 19,500 Production (gpcd) 180 180 180 180 180 180 180 180 180 180 180 180 180 180 Annual production (k gallons) 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 1,281,150 Number of metered customers 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 Domestic 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 Non-domestic 793 793 793 793 793 793 793 793 793 793 793 793 793 793 Number of flat rate customers 00000000000000 Domestic 00000000000000 Non-domestic 00000000000000 Total number of customers 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 4,293 Domestic 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 3,501 Non-domestic 793 793 793 793 793 793 793 793 793 793 793 793 793 793 Usage of metered customers billed (k gallons) 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 Domestic 454,909 454,909 454,909 454,909 454,909 454,909 454,909 454,909 454,909 454,909 454,909 454,909 454,909 454,909 Non-domestic 405,039 405,039 405,039 405,039 405,039 405,039 405,039 405,039 405,039 405,039 405,039 405,039 405,039 405,039 Assumed usage of flat rate customers (k gallons)00000000000000 Total estimated usage (k gallons) 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 859,948 Non-revenue water (k gallons) 421,202 421,202 421,202 421,202 421,202 421,202 421,202 421,202 421,202 421,202 421,202 421,202 421,202 421,202 Non-revenue water (%) 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% Average use in metered HH connections (gpcd) 96 96 96 96 96 96 96 96 96 96 96 96 96 96 Ave. monthly use/metered connection (k gallons) Domestic 12 12 12 12 12 12 12 12 12 12 12 12 12 12 Non-domestic 43 43 43 43 43 43 43 43 43 43 43 43 43 43 New metered customers 00000000000000 Domestic 00000000000000 Non-domestic 00000000000000 Operation & Maintenance Costs ($) Personnel No. of staff 3535353535353535353535353535 Customer-staff ratio 123 123 123 123 123 123 123 123 123 123 123 123 123 123 Average annual cost/staff ($) 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 Total personnel cost 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 455,000 Electricity & fuel Average cost/k gallon produced ($) 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 0.41 Total electricity & fuel cost 519,164 519,164 519,164 519,164 519,164 519,164 519,164 519,164 519,164 519,164 519,164 519,164 519,164 519,164 Chemicals & supplies Average cost/k gallon produced ($) 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 Total chemicals & supplies cost 431,950 431,950 431,950 431,950 431,950 431,950 431,950 431,950 431,950 431,950 431,950 431,950 431,950 431,950 Maintenance 85,869 85,869 85,869 85,869 85,869 85,869 85,869 85,869 85,869 85,869 85,869 85,869 85,869 85,869 Administration & others 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Total Operation & Maintenance Costs ($) 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982 1,541,982

Appendix 1 Page 21

KOROR-AIRAI WATER SUPPLY FIRR CALCULATION At 2009 Constant Prices ($) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Incremental billed usage (k gallons) 114,285 131,356 147,079 163,045 179,261 195,730 212,458 194,589 194,589 194,589 194,589 Average tariff ($/k gallons) 1.70 2.00 2.35 2.77 3.26 3.26 3.26 3.26 3.26 3.26 3.26 3.26 3.26 3.26 3.26

Project capital costs 375,100 3,622,300 3,317,600 1,750,100 686,000 686,000 Incremental O&M costs (savings) (154,255) (415,860) (404,465) (393,069) (381,674) (370,278) (358,883) (347,487) (347,487) (347,487) (347,487) Total costs 0 375,100 3,622,300 3,317,600 1,595,845 (415,860) (404,465) (393,069) 304,326 (370,278) (358,883) (347,487) (347,487) 338,513 (347,487) Incremental revenue 299,468 355,063 406,266 458,265 511,073 564,708 619,185 560,992 560,992 560,992 560,992 Net cash flow (base case) 0 (375,100) (3,622,300) (3,317,600) (1,296,377) 770,923 810,731 851,334 206,747 934,986 978,068 908,480 908,480 222,480 908,480

Sensitivity Tests: Case 1 - 10% increase in capital costs 0 (450,120) (4,346,760) (3,981,120) (1,646,397) 770,923 810,731 851,334 69,547 934,986 978,068 908,480 908,480 85,280 908,480 Case 2 - 10% decrease in O&M costs savings 0 (375,100) (3,622,300) (3,317,600) (1,327,228) 687,751 729,838 772,720 130,412 860,930 906,291 838,982 838,982 152,982 838,982 Case 3 - 10% decrease in incremental revenues 0 (375,100) (3,622,300) (3,317,600) (1,356,270) 699,910 729,478 759,681 104,532 822,045 854,231 796,281 796,281 110,281 796,281 Case 4 - Benefits delay by one year 0 (375,100) (3,622,300) (3,317,600) (1,595,845) 715,328 759,527 799,336 153,938 881,351 923,591 966,672 908,480 222,480 908,480

FIRRs: NPV FIRR SI (FIRR) SV (FIRR) % Change SI (NPV) SV (NPV) Base Case 2,272,487 6.38% Case 1 - 10% increase in capital costs 409,943 4.38% 2.28 44% 20% 4.10 24% Case 2 - 10% decrease in O&M costs savings 1,340,703 5.44% 0.87 115% 20% 2.05 49% Case 3 - 10% decrease in incremental revenues 887,230 4.97% 1.42 71% 20% 3.05 33% Case 4 - Benefits delay by one year 1,833,127 5.87%

Appendix 1 Page 22 KOROR-AIRAI WATER SUPPLY FIRR CALCULATION At 2009 Constant Prices ($) 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 Incremental billed usage (k gallons) 194,589 194,589 194,589 194,589 194,589 194,589 194,589 194,589 194,589 194,589 194,589 194,589 194,589 194,589 Average tariff ($/k gallons) 3.263.263.263.263.263.263.263.263.263.263.263.263.263.26

Project capital costs 686,000 686,000 Incremental O&M costs (savings) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) (347,487) Total costs (347,487) (347,487) (347,487) 338,513 (347,487) (347,487) (347,487) (347,487) 338,513 (347,487) (347,487) (347,487) (347,487) (347,487) Incremental revenue 560,992 560,992 560,992 560,992 560,992 560,992 560,992 560,992 560,992 560,992 560,992 560,992 560,992 560,992 Net cash flow (base case) 908,480 908,480 908,480 222,480 908,480 908,480 908,480 908,480 222,480 908,480 908,480 908,480 908,480 908,480

Sensitivity Tests: Case 1 - 10% increase in capital costs 908,480 908,480 908,480 85,280 908,480 908,480 908,480 908,480 85,280 908,480 908,480 908,480 908,480 908,480 Case 2 - 10% decrease in O&M costs savings 838,982 838,982 838,982 152,982 838,982 838,982 838,982 838,982 152,982 838,982 838,982 838,982 838,982 838,982 Case 3 - 10% decrease in incremental revenues 796,281 796,281 796,281 110,281 796,281 796,281 796,281 796,281 110,281 796,281 796,281 796,281 796,281 796,281 Case 4 - Benefits delay by one year 908,480 908,480 908,480 222,480 908,480 908,480 908,480 908,480 222,480 908,480 908,480 908,480 908,480 908,480

Appendix 1 Page 23

Koror-Airai Water Supply Basic Data and Assumptions

Item 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Local Inflation Rate (%) 2.80% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Cumulative Local Inflation Factor 1.00 1.02 1.04 1.06 1.08 1.10 1.13 1.15 1.17 1.20 1.22 1.24 1.27 1.29 Water Production ('000 gallons) 1,396,125 1,396,125 1,396,125 1,396,125 1,182,600 1,196,679 1,210,757 1,224,836 1,238,914 1,252,993 1,267,071 1,281,150 1,281,150 1,281,150 Non-Revenue Water (%) 42% 42% 42% 42% 34% 33% 33% 32% 32% 31% 31% 33% 33% 33% Non-Revenue Water ('000 gallons) 586,373 586,373 586,373 586,373 402,956 399,964 398,319 396,431 394,294 391,904 389,255 421,202 421,202 421,202 Average Use in Metered HH Customers (gpcd) 109 109 109 92 86 88 89 90 92 93 94 96 96 96 No. of Metered Customers 3,009 3,009 3,009 3,009 3,963 4,010 4,058 4,105 4,152 4,199 4,246 4,293 4,293 4,293 Domestic 2,431 2,431 2,431 2,431 3,232 3,270 3,308 3,347 3,385 3,424 3,462 3,501 3,501 3,501 Non-domestic 578 578 578 578 732 740 749 758 766 775 784 793 793 793 No. of Flat Rate Customers 7347347347340000000000 Domestic 6216216216210000000000 Non-domestic 1131131131130000000000 Total Water Billed ('000 gallons) 665,359 665,359 665,359 665,359 779,644 796,715 812,438 828,404 844,620 861,089 877,817 859,948 859,948 859,948 Assumed Usage of Flat Rate Customers (k gallons) 144,394 144,394 144,394 144,394 0000000000 Total Estimated Usage (k gallons) 809,753 809,753 809,753 809,753 779,644 796,715 812,438 828,404 844,620 861,089 877,817 859,948 859,948 859,948 Average Water Tariff ($/'000 gallons) 1.70 2.04 2.45 2.94 3.53 3.60 3.67 3.74 3.82 3.89 3.97 4.05 4.13 4.21 Tariff Increase (%) 100%20%20%20%20%2%2%2%2%2%2%2%2%2% Connection Fee ($) Domestic 15 15 15 15 15 15 15 15 15 15 15 15 15 15 Non-domestic 3030303030303030303030303030

Appendix 1 Page 24

Koror-Airai Water Supply Income Statement At Current Prices ($)

Item 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Operating Income Water Sales 1,203,830 1,430,052 1,701,519 1,954,558 2,748,338 2,864,686 2,979,644 3,098,966 3,222,819 3,351,374 3,484,808 3,482,149 3,551,792 3,622,828 Other Income 0 0 0 0 17,987 926 944 963 982 1,002 1,022 1,042 0 0 Total Operating Income 1,203,830 1,430,052 1,701,519 1,954,558 2,766,325 2,865,612 2,980,588 3,099,929 3,223,801 3,352,376 3,485,830 3,483,192 3,551,792 3,622,828 Operating Expenses Personnel 728,000 742,560 757,411 772,559 788,011 502,357 512,404 522,652 533,105 543,767 554,642 565,735 577,050 588,591 Electricity & fuel 565,755 577,070 588,612 600,384 518,732 535,405 552,538 570,142 588,230 606,812 625,903 645,515 658,425 671,593 Chemicals & supplies 470,714 480,129 489,731 499,526 431,590 445,463 459,718 474,365 489,413 504,874 520,758 537,075 547,817 558,773 Maintenance 10,000 10,200 10,404 10,612 85,797 88,555 91,389 94,301 97,292 100,366 103,523 106,767 108,902 111,080 Administration & others 50,000 51,000 52,020 53,060 54,122 55,204 56,308 57,434 58,583 59,755 60,950 62,169 63,412 64,680 Bad debts 4,617 5,093 5,594 5,890 7,530 7,848 8,163 8,490 8,830 9,182 9,547 9,540 9,731 9,926 Total Operating Expenses 1,829,087 1,866,052 1,903,772 1,942,032 1,885,781 1,634,833 1,680,520 1,727,384 1,775,453 1,824,756 1,875,324 1,926,801 1,965,337 2,004,644 Income before Depreciation (625,257) (436,000) (202,254) 12,526 880,544 1,230,780 1,300,068 1,372,545 1,448,348 1,527,620 1,610,506 1,556,391 1,586,455 1,618,184 Depreciation 452,251 452,251 452,251 452,251 807,195 807,195 847,995 791,733 773,946 644,992 529,152 477,285 461,879 446,330 Net Operating Income (1,077,508) (888,251) (654,505) (439,725) 73,349 423,585 452,073 580,812 674,403 882,628 1,081,354 1,079,105 1,124,577 1,171,855 Interest Expense 0 0 0 0 0 257,165 257,165 245,207 233,249 230,294 217,211 204,128 191,044 177,961 Income before Tax (1,077,508) (888,251) (654,505) (439,725) 73,349 166,420 194,908 335,605 441,154 652,333 864,143 874,978 933,532 993,894 Income Tax Provision 00000000000000 Net Income (1,077,508) (888,251) (654,505) (439,725) 73,349 166,420 194,908 335,605 441,154 652,333 864,143 874,978 933,532 993,894

Key Performance Indicators Cost Recovery Ratio 0.53 0.62 0.72 0.82 1.03 1.06 1.07 1.12 1.16 1.24 1.33 1.34 1.36 1.38 Working Ratio 1.5 1.3 1.1 1.0 0.7 0.6 0.6 0.6 0.6 0.5 0.5 0.6 0.6 0.6 Operating Ratio 1.9 1.6 1.4 1.2 1.0 0.9 0.8 0.8 0.8 0.7 0.7 0.7 0.7 0.7 Increase in Tariff % 100% 20% 20% 20% 20% 2% 2% 2% 2% 2% 2% 2% 2% 2% Return on Assets % -29% -27% -23% -18% 5% 4% 5% 6% 7% 10% 14% 15% 16% 16%

Appendix 1 Page 25

Koror-Airai Water Supply Sources and Application of Funds Statement At Current Prices ($)

Item 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Sources of Funds: Net Income (1,077,508) (888,251) (654,505) (439,725) 73,349 166,420 194,908 335,605 441,154 652,333 864,143 874,978 933,532 993,894 Depreciation 452,251 452,251 452,251 452,251 807,195 807,195 847,995 791,733 773,946 644,992 529,152 477,285 461,879 446,330 Interest Expense 0 0 0 0 0 257,165 257,165 245,207 233,249 230,294 217,211 204,128 191,044 177,961 Internal Cash Generation (625,257) (436,000) (202,254) 12,526 880,544 1,230,780 1,300,068 1,372,545 1,448,348 1,527,620 1,610,506 1,556,391 1,586,455 1,618,184 Equity/Grant for Project Capital Expenditure 0 3,816 37,325 34,643 18,521 Government Equity/Grant 700,000 500,000 300,000 Subsidiary Loan for Project Capital Expenditure 0 393,524 3,760,139 3,585,393 2,060,224 Other Loans External Sources 700,000 897,340 4,097,464 3,620,036 2,078,744000000000 Total Sources of Funds 74,743 461,340 3,895,210 3,632,562 2,959,288 1,230,780 1,300,068 1,372,545 1,448,348 1,527,620 1,610,506 1,556,391 1,586,455 1,618,184

Application of Funds: Project Capital Expenditure 0 397,340 3,797,464 3,620,036 2,078,744 Non-Project Capital Expenditure 0 0 0 803,7580000887,414 Total Capital Expenditure 0 397,340 3,797,464 3,620,036 2,078,744000803,7580000887,414 Principal Payment 0 0 0 0 0 0 399,929 399,929 399,929 474,958 474,958 474,958 474,958 474,958 Interest Payment 0 0 0 0 0 257,165 257,165 245,207 233,249 230,294 217,211 204,128 191,044 177,961 Total Debt Service 0 0 0 0 0 257,165 657,094 645,136 633,178 705,253 692,169 679,086 666,003 652,919 Working Capital Needs excluding Cash 0 20,011 21,175 10,883 81,060 45,845 11,064 11,543 12,042 12,562 13,103 (5,671) 5,505 5,615 Other Assets/Liabilities Changes 0 0 0 0 0000000000 Total Application of Funds 0 417,351 3,818,639 3,630,919 2,159,805 303,010 668,157 656,679 1,448,978 717,814 705,272 673,415 671,508 1,545,949

Cash Increase or Decrease 74,743 43,989 76,572 1,643 799,483 927,770 631,910 715,866 (630) 809,805 905,234 882,976 914,947 72,236 Cash Balance, Start of Year 74,743 118,732 195,304 196,947 996,430 1,924,200 2,556,110 3,271,977 3,271,347 4,081,152 4,986,387 5,869,362 6,784,310 Cash Balance, End of Year 74,743 118,732 195,304 196,947 996,430 1,924,200 2,556,110 3,271,977 3,271,347 4,081,152 4,986,387 5,869,362 6,784,310 6,856,545

Key Performance Indicator Debt Service Coverage Ratio 0.0 0.0 0.0 0.0 0.0 4.8 2.0 2.1 2.3 2.2 2.3 2.3 2.4 2.5

Appendix 1 Page 26

Koror-Airai Water Supply Balance Sheet At Current Prices ($)

Item 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Fixed Assets Fixed Assets in Operation 9,237,123 9,237,123 9,237,123 9,237,123 9,237,123 19,130,708 19,130,708 19,130,708 19,130,708 19,130,708 19,130,708 19,130,708 19,130,708 19,130,708 Accumulated Depreciation 5,477,358 5,929,609 6,381,860 6,834,112 7,641,306 8,448,501 9,296,496 10,088,229 10,058,416 10,703,408 11,232,560 11,709,845 12,171,724 11,730,640 Net Fixed Assets 3,759,765 3,307,514 2,855,263 2,403,012 1,595,817 10,682,207 9,834,212 9,042,479 9,072,291 8,427,300 7,898,147 7,420,862 6,958,984 7,400,068 Work in Progress 0 397,340 4,194,804 7,814,840 9,893,585000000000 Total Fixed Assets 3,759,765 3,704,854 7,050,067 10,217,852 11,489,401 10,682,207 9,834,212 9,042,479 9,072,291 8,427,300 7,898,147 7,420,862 6,958,984 7,400,068

Current Assets Cash 74,743 118,732 195,304 196,947 996,430 1,924,200 2,556,110 3,271,977 3,271,347 4,081,152 4,986,387 5,869,362 6,784,310 6,856,545 Accounts Receivable 230,872 254,667 279,702 294,523 376,485 392,423 408,170 424,516 441,482 459,092 477,371 477,007 486,547 496,278 Inventories 78,452 80,021 81,622 83,254 71,932 74,244 76,620 79,061 81,569 84,146 86,793 89,513 91,303 93,129 Other Current Assets 36,400 37,128 37,871 38,628 39,401 25,118 25,620 26,133 26,655 27,188 27,732 28,287 28,853 29,430 Total Current Assets 420,467 490,549 594,498 613,352 1,484,247 2,415,984 3,066,520 3,801,686 3,821,053 4,651,579 5,578,283 6,464,168 7,391,012 7,475,381

Other Assets

Total Assets 4,180,233 4,195,403 7,644,565 10,831,203 12,973,649 13,098,191 12,900,732 12,844,165 12,893,345 13,078,879 13,476,430 13,885,030 14,349,995 14,875,449

Accounts Payable & Other Current Liabilities 304,078 310,160 316,363 322,690 313,042 271,164 278,726 286,482 294,437 302,596 310,963 319,543 325,934 332,453 Currently Maturing Long-Term Debt 0 0 0 0 0 399,929 399,929 399,929 474,958 474,958 474,958 474,958 474,958 474,958 Total Current Liabilities 304,078 310,160 316,363 322,690 313,042 671,093 678,655 686,411 769,395 777,554 785,921 794,502 800,892 807,411

Long-Term Debt 0 393,524 4,153,663 7,739,055 9,799,279 9,399,350 8,999,421 8,599,492 8,124,534 7,649,576 7,174,618 6,699,660 6,224,701 5,749,743 Total Liabilities 304,078 703,684 4,470,026 8,061,746 10,112,321 10,070,443 9,678,076 9,285,903 8,893,929 8,427,130 7,960,539 7,494,161 7,025,594 6,557,155

Capital 4,953,662 5,457,478 5,794,804 5,829,447 5,847,968 5,847,968 5,847,968 5,847,968 5,847,968 5,847,968 5,847,968 5,847,968 5,847,968 5,847,968 Retained Earnings (1,077,508) (1,965,760) (2,620,264) (3,059,989) (2,986,640) (2,820,220) (2,625,312) (2,289,706) (1,848,552) (1,196,219) (332,076) 542,901 1,476,433 2,470,327 Reserves Total Equity 3,876,154 3,491,719 3,174,539 2,769,458 2,861,328 3,027,748 3,222,656 3,558,262 3,999,415 4,651,749 5,515,892 6,390,869 7,324,401 8,318,295

Total Liabilities and Equity 4,180,233 4,195,403 7,644,565 10,831,203 12,973,649 13,098,191 12,900,732 12,844,165 12,893,345 13,078,879 13,476,430 13,885,030 14,349,995 14,875,449

Key Performance Indicators Current Ratio 1.4 1.6 1.9 1.9 4.7 3.6 4.5 5.5 5.0 6.0 7.1 8.1 9.2 9.3 Working Capital, excluding Cash 41,646 61,656 82,831 93,714 174,775 220,620 231,684 243,227 255,269 267,831 280,933 275,263 280,768 286,383 % Debt on Debt plus Equity 0% 10% 57% 74% 77% 76% 74% 71% 67% 62% 57% 51% 46% 41% Accounts Receivable (# of days sales) 70 65 60 55 50 50 50 50 50 50 50 50 50 50

Appendix 2 Page 1

APPENDIX 2 – ECONOMIC ANALYSIS

Table of Contents I. Background to the Analysis...... 2 II. Brief Overview of the Proposed Project by Component ...... 5 1. Strengthening Sector Planning, Management, and Regulation...... 5 2. Development of Water Supply Wells and Associated Water Source Works ...... 5 3. Community Action and Participation Program...... 5 4. Rehabilitation and expansion of the Koror/Airai water supply network...... 5 5. Project Implement Assistance and Administrative Support ...... 5 III. Benefits of the Project ...... 6 1. Reduction in economic costs of supply ...... 6 2. Elimination of potential unserved demand...... 6 3. Protection against droughts...... 7 4. Potential Health Benefits ...... 9 IV. Least Cost Analysis...... 11 V. Valuation of Economic Costs...... 11 VI. Results of the Economic Analysis ...... 12 VII. Sensitivity Analysis...... 13

Appendix 2 Page 2

I. Background to the Analysis

1. This appendix presents a discussion of the economic benefits and costs of the Project in the context of a comparison of the With Project and Without Project scenarios, including a calculation of the economic internal rate of return (EIRR) of the Project and associated sensitivity analyses. 2. As discussed elsewhere in the PPTA report, the current water supply system serving Koror and Airai is operating at or near its full capacity of 3.8 million gallons per day, or about 1.4 billion gallons per year. There is no capacity in the system to accommodate future growth due to population increase, nor can it sustain increases in water losses through leaks in the transmission/distribution system without decreasing the supply available to consumers. Further, as will be familiar to many Palauans, the current system cannot cope with temporary shortages due to droughts which, when they occur, cause massive disruption in the economy and the conditions of living. Options to increase raw water supplies to Koror/Airai economically are essentially nil, apart from limited development of groundwater. 3. However, the equivalent population1 will inevitably increase over the next twenty years and, if nothing is done to rehabilitate the system, the system will continue to deteriorate and losses will inevitably increase. The advancing deterioration of the system also raises risks to the public health, though these cannot at present be quantified. Further, the system left unimproved will result in lower diurnal reliability and decreasing delivery pressures, including increasingly frequent outages to certain areas at times of peak demand. Future droughts cannot be predicted with certainty but are highly likely to recur in the foreseeable future, perhaps, due to climate change, with increasing frequency and severity compared to past experience2. The result is that, without the proposed project, the ability of the system to meet future demand for water will steadily diminish, supply shortages become more frequent, and the quality of the water supply decline. 4. The difficulty with the present system is that, in addition to its deteriorating condition and rising losses, consumption per capita is extremely high by Pacific and world standards3, reflecting a high degree of wasteful usage. Many consumers are presently not metered but are charged low flat monthly rates, which provide no incentive to conserve (indeed they perversely encourage waste), and the tariff for metered consumers is heavily subsidised. This implies that the marginal benefit of consumption to users on the public system is well below its marginal cost. The Project is designed to ensure that the benefits of exploiting Palau’s water resources are better allocated to users in line with their costs, which in the long run is the sole means to ensure that the supply can be sustained. 5. The Project includes a number of components (discussed further below) to reduce wasteful consumption, reduce losses, strengthen the integrity of the system through better management and maintenance under an autonomous and commercially-oriented agency, and develop groundwater resources to help cover shortfalls during droughts. Wasteful consumption will be reduced by (i) metering all consumers and gradually imposing a cost- recovery tariff and (ii) mounting a community awareness program to ensure that consumers are cognizant of the costs of a sustainable water supply, accept the need for higher tariffs,

1 The growth in “equivalent” population arises mainly because of an increase in visitors to Koror/Airai. The natural increase of households in the area in the foreseeable future is not, according to government estimates, expected to be great: a slight decrease in the resident population is expected in Koror because of the new settlement possibilities in Babeldaob due to the Compact Road, and a slight increase is expected in Airai. However, growth in tourism is expected to remain strong in the long term, leading to an expected growth in “equivalent” population that needs to be considered in the demand for local services, such as road transport, electricity, sewerage services, and the water supply. 2 Climate models are uncertain on this point, but generally indicate a hotter, drier world. The ‘pessimistic’ scenarios of even five years ago have become the mainstream outlook today. 3 At about 110 gallons (more than 400 litres) per person per day, household consumption in Palau is about 200% of that of most other Pacific island countries.

Appendix 2 Page 3 and are aware of the national need to conserve water. These measures are designed to reduce demand pressure on the available supply while fully meeting the needs of the population and the economy for water. Further, the measures will reduce the cost of supply and place the sector in the care of a financially sustainable entity with adequate capacity in skills and equipment, thus reducing the draw on the core civil service and the need for explicit or hidden subsidies from government. 6. With the Project, the water production requirement that fully meets the needs of consumers will be held below the current capacity of the system by loss reduction and demand management including full metering; limited groundwater will be developed to help cope with droughts; and institutional capacity to manage the sector will be strengthened. Without the Project, the water production requirement will rise due to equivalent population growth and will inevitably exceed the current capacity of the system; there will be no protection from droughts; and the integrity of the system will continue to deteriorate with rising losses and diminished capacity to meet even static demand. Increasing volumes of unserved demand will result, with disruptions growing in severity to the economy (the mainstay of which is tourism, which crucially depends on a reliable water supply) and to the quality of life. The fundamental magnitudes that arise in a comparison of the With-Project and Without-Project scenarios are illustrated in Figure 1. A 4-year construction period is assumed.

Figure 1 – Future Water Production Requirements With vs Without the Project

Future Water Production Requirements With vs Without the Project 2.00

1.80 Additional Expected Losses as System Deteriorates, Without the Project 1.60 Additional Volume Required due to (billions) Population Growth, Without the Project 1.40 annum Volume Saved from per

Current Production, With the Project 1.20 Gallons Production Requirement With the Project

1.00

0.80

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 7. Water consumers are categorised as Residential, Commercial, or Government. A projection of customer numbers, consumption, and water losses is shown in Table 1. Projected water production, consumption, and losses are depicted in Figure 2.

Appendix 2 Page 4

Table 1 – Projected Production, Consumption, and Losses, 2009 – 2020 2009 2013 2020 Population in Koror/Airai 17,000 18,000 19,500 Total Water Production (m gallons) 1,396 1,183 1,281 Water Production/Capita/Day (gals) 225 180 180 Number of Consumers Metered Residential 2,431 3,232 3,501 Commerci al 546 629 681 Government 32 103 111 Total Metered 3,009 3,963 4,293 Flat Rate Residential 621 - - Commerci al 48 - - Government 65 - - Total Flat Rate 734 - - Consumption, m gallons Metered Residential 387.53 405.76 454.91 Commerci al 272.59 321.40 348.18 Government 5.23 52.48 56.86 Total Metered 665.36 779.64 859.95 Flat rate, est Residential 107.00 - - Commerci al 25.90 - - Government 11.49 - - Total Flat Rate 144.39 - - Total Metered Consumption as % Total Water Production 47.66% 65.93% 67.12% Total Flat Rate (est) Consumption as % Total Water Production 10.34% 0.00% 0.00% Total Losses (Non-Revenue Water) as % Total Water Production 42.00% 34.07% 32.88%

Figure 2 – Projected Water Production, Consumption, and Losses, Koror/Airai

Projected Water Production, Consumption, and Losses, Koror/Airai 1,600

1,400

1,200

1,000 Technical Losses (Non‐ Revenue Water) millions 800 Flat Rate Consumption

600 Gallons, Metered Consumption

400

200

‐ 2009 2013 2020

Appendix 2 Page 5

II. Brief Overview of the Proposed Project by Component

8. The project comprises five integrated components. Although these are described in detail elsewhere in the PPTA report, they are summarised here as a reference for the discussion that follows. 1. Strengthening Sector Planning, Management, and Regulation 9. A new Water and Sewerage Authority (WASA) will be established in Palau under new legislation to assume direct management responsibility for the sector, properly equipped and staffed to undertake planning, operations and maintenance, investment functions, and effective ownership of water supply and sewerage assets. Capacity in the existing Bureau of Public Works and the Environmental Quality Protection Board will be strengthened in their water supply and sanitation functions. A draft Water Law and amendments to existing water resources laws will be prepared. 10. This component provides an autonomous, commercially-oriented management capacity for the sector backed by appropriate authority through new legislation, which will relieve the government of its historically open-ended commitment to allocate scarce skills to manage the sector and to subsidise its costs. 2. Development of Water Supply Wells and Associated Water Source Works 11. Ten new boreholes and 3 existing ones in a field in Babeldaob will be brought into production and integrated with the Koror/Airai water supply system, with all necessary pipework and pumps, electrical hardware, fencing, etc., supplied. This will enable groundwater resources to be tapped to help cope with surface water shortages during extended dry periods and thus help to ‘drought-proof’ the system. 3. Community Action and Participation Program 12. A sustained community awareness and participation program will be undertaken to motivate consumers to eliminate wasteful consumption practices, accept universal metering and a gradual imposition of a cost recovery tariff, and to raise awareness of water and sanitation health issues and of the costs of sustaining a clean and reliable water resource. This component is a key element of the Project’s effectiveness in reducing the annual water production requirement to a sustainable level, and reducing the costs of supply. 4. Rehabilitation and expansion of the Koror/Airai water supply network 13. Work will be undertaken to rehabilitate and strengthen parts of the water treatment plant, transmission facilities, water storage facilities, and distribution facilities. Comprehensive metering will be undertaken with provision of new meters and recalibration of old meters as required. A leak detection survey is provided in this component, and a substantial allowance for purchase of new pipes and fittings to repair the transmission/distribution system and reduce leaks (non-revenue water). This component will ensure that (i) all consumers face accurate price signals through volume-based tariffs in making consumption decisions, (ii) the efficiency of supply operations is improved and costs are lowered and, (iii) that losses through leakages are substantially reduced. In conjunction with the previous component, these elements will reduce the water production requirement to a sustainable level and ensure that potential future unserved water demand is eliminated. 5. Project Implement Assistance and Administrative Support 14. Project management staff and facilities and consulting services required to implement the Project.

Appendix 2 Page 6

III. Benefits of the Project

15. The project benefits comprise:

(i) Reduction in economic costs of supply and improved sector management required to meet water demand;

(ii) Elimination of future potential unserved water demand;

(iii) Protection of the supply against droughts and avoidance of some key drought-related costs to consumers and the economy; and

(iv) A potential health benefit.

The first three of these are partially quantifiable and are included in the calculation of the economic internal rate of return (EIRR) below. The fourth is not quantifiable but, in view of evidence of rising risks (see below section III (4)) to the public health, is included in the analysis qualitatively. Further, the considerable benefit of achieving high standards of service reliability due to the proposed standby pumps throughout the system and consistently good delivery pressures to all consumers due to pipe replacement and reservoir improvements cannot be readily quantified. 1. Reduction in economic costs of supply 16. In a comparison of the Without Project and the With Project scenarios, taking into account the lesser volume of production required, loss reduction, and staffing and other efficiency improvements associated with the With Project scenario, annual savings in the economic cost of supplying water to meet projected demand are calculated and included as a benefit of the Project. (Under full operation, these savings amount to approximately $350,000 worth of labour, chemicals, energy input, etc., per year.) 2. Elimination of potential unserved demand 17. As discussed above and shown graphically in Figure 1, a comparison of the With Project and Without Project scenarios reveals a large gap between the respective treated water production requirements. The production requirement With the Project is below the requirement Without the Project due to (i) demand management and (ii) loss reduction. 18. The current Koror/Airai water supply system is entirely dependent on surface water sources, As discussed elsewhere in the PPTA report, other sources of surface water have been investigated as options to augment the current supply, but none has been found that would make a meaningful incremental contribution under dry conditions (all accessible surface water sources would be diminished equally in an extended dry). A large-scale storage scheme interconnecting a range of new surface water sources has been identified that would significantly augment supply and meet demand growth with reliability, but its cost is prohibitive (see below section IV). The only economically viable means to augment supply is to develop groundwater resources, and such development is included in the Project. However, sustainable extraction of groundwater is limited and will be utilised only to partially make up for dry period shortfalls. 19. The current Koror/Airai water supply system is subject to two sources of stress under the Without Project scenario: (i) as the equivalent population grows, water demand will exceed production capacity and (ii) as the system’s assets continue to deteriorate, capacity to produce treated water and especially to convey it to consumers will be reduced by higher losses through leaks, further undermining the system’s ability to meet demand. The combined effect of these two stresses is illustrated in Figure 3. 20. As mentioned, the current production of water in the Koror/Airai system is at or near its capacity of 3.8 million gallons per day or approximately 1.4 billion gallons per year.

Appendix 2 Page 7

Population growth and increasing losses can therefore not be absorbed without water supply shortages of increasing frequency and severity. Without the Project, the volume of unserved water demand will accordingly increase through time. 21. In estimating the volume of unserved water demand Without the Project, it is assumed that the water volume lost through leaks in the deteriorating system increases on average by 3% per year, and that the production requirement per capita, for reasons of sustained high consumption rates, remains at its current level of 225 gallons/person/day. Figure 3 – Volume of Unserved Water Without the Project

Volume of Unserved Water Without the Project 2.00

1.80

1.60 Volume of Unserved (billions)

Water

1.40 annum Effective Capacity per Without the Project (reflecting losses)

Gallons 1.20

1.00

0.80 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

22. The volume of unserved water demand is valued at the estimated willingness to pay for water (i.e., the unmet demand volume as valued by consumers), assessed by survey at $1.70 per 1000 gallons (as discussed elsewhere in the PPTA report). 3. Protection against droughts 23. A severe drought–a period of at least three months of substantially below-average seasonal rainfall–occurs in Palau with a frequency of 7-10 years. According to a recent ADB environmental overview report, severe drought events are usually associated with the El Nino Southern Oscillation (ENSO), an “...ocean-atmosphere circulation that affects Palau significantly on a regular basis. During an El Nino year, Palau generally experiences drought conditions that can last from weeks to months, and the country must ration fresh water use. Recent climate change studies have projected that ENSO extremes are likely to become more frequent with increasing greenhouse gas concentrations.” 4 24. The most severe drought in recent memory occurred in 1997/98, associated with a deep El Nino oscillation. The duration of the dry in 1997/98 was some nine months and a severe water Koror/Airai system were restricted to 4 hours/day of supply (2 hours in the

4 Draft Environmental Overview and Stock-Take Report, Facility for Economic and Infrastructure Management Project, Asian Development Bank, December 2007.

Appendix 2 Page 8 morning and 2 hours in the evening).5 The limited water that was supplied was highly turbid and contaminated as the raw water resource was muddy beyond the capability of the treatment plant’s filtration systems to cope, and as shown clearly in the EQPB’s water quality test results from the period, the transmission/distribution system was subject to ingress of contaminants. Uncontrolled bushfires were widespread across Babeldaob and destroyed a great deal of Palau’s natural vegetation and farmland. 25. The economic impacts of a severe drought in Palau are wide and varied. For households, severely restricted access to potable water drives up costs in terms of time and money expended on obtaining alternatives6, including increased purchases of commercial bottled water and at-home water treatment (e.g., boiling); normal water consumption patterns for washing and gardening are denied, and health risks and associated costs are greatly increased. For retail and wholesale businesses, manufacturers (e.g., breweries), and providers of social services (schools, hospitals), output capacity is directly reduced. Agricultural output is sharply reduced or destroyed. Of great significance in Palau, the service sector, especially tourism, is badly affected: tourist accommodations and other services (e.g., restaurants, attractions) cannot supply proper amenities to their guests or can do so only at increased cost. The attractiveness of Palau as a tourist destination declines as the countryside withers; sea surface temperatures rise during El Nino events causing coral bleaching, diminishing Palau as a dive destination. Tourist stays are cut short and tourist arrivals decline. In the face of all of these impacts, national income and the quality of life decline. 26. Though the Project includes a component—development of groundwater resources—to compensate for surface water shortages during dry periods and ease some of the impacts of droughts, it cannot address all of the impacts mentioned above. The drought- protection component will directly assist households to maintain access to potable water, social service providers to maintain operations, and it will assist businesses, manufacturers, and tourist facilities to remain operating with high standards of service. The drought- protection component will have little impact, however, on agricultural output or the degree to which droughts affect the land and marine environment. 27. For the present analysis, an attempt has been made to quantify the benefit of the Project for tourism, in the form of drought protection. The other drought impacts that would also be addressed by the Project, such as the costs and risks imposed on households and constraints on social services, are real but are not presently quantifiable. 28. Tourism accounts for 45% of Palau’s GDP. In the wake of the 1997/98 event, tourist arrivals fell from some 70,000 in 1997 to about 45,000 in 1999 and, importantly, remained relatively depressed until about 2003.7 The recovery of tourism after a severe event is a multi-year process, and this has been reflected in the analysis. (Tourist arrivals have since recovered to the current level of about 80,000, close to the maximum capacity of the country of 90,000.8) It has been estimated that the economic cost to the country of the 1997/98 drought event in terms of tourism losses was a 3.3% reduction in GDP.9 29. It is assumed that a drought event, comparable in severity to the one that occurred in 1997/98, will occur in Palau every 7-10 years (8.5 years is the specific return period selected). The economic impact of such a drought will be similar to that recorded in 1997/98 (i.e., a 3.3% reduction in GDP), but since not all of the drought’s impact is addressable by the Project, a 1.0% reduction in GDP has been assumed as the cost that will be avoided

5 Personal communication, Director, National Emergency Management Office. 6 Most households in Palau have rain-water tanks and these are normally an important source of augmented supply. However, during severe droughts, tank supplies are exhausted soon after the onset of shortages. 7 Tourism Action Plan, Facility for Economic and Infrastructure Management Project, Asian Development Bank, June 2008. 8 Personal communication, Managing Director, Palau Visitors Authority 9 Reference: footnote 3.

Appendix 2 Page 9

With the Project.10 Further, it is assumed that the drought’s economic impact will extend over more than one year; a gradually diminishing impact over a five-year period is assumed. The economic costs of recurring droughts, estimated as above, are included as a Project benefit. 4. Potential Health Benefits 30. Health statistics, particularly related to the incidence of water-borne diseases, are not readily available in Palau. There is not even much anecdotal evidence among the local population and visitors suggesting that the public water supply has caused a serious public health issue. However, the quality of the public water supply is tested regularly by the Environmental Quality Protection Board (EQPB). The tests, carried out monthly, measure the level of residual chlorine, the level of turbidity, and the presence or absence of total coliforms and fecal coliforms at the water treatment plant (WTP) and at the taps at 12 locations in Koror and Airai. The results indicate that there is a health risk in the present water supply that is likely to increase in the future Without the Project, notwithstanding greatly improved operational and chemical dosing practices implemented by the Bureau of Public Works (BPW) since 2003. 31. An important finding of a review of the EQPB’s test results from October 1998 to January 2009 is that, since 2003, water quality at the WTP has generally been within acceptable limits for a potable water supply. Since 2003, in only three tests has turbidity greatly exceeded an acceptable limit (NTU>1), whereas it substantially exceeded the limit in about half the tests prior to that. Similarly, residual chlorine was found to be below standard (< 0.2 parts per million) in only two tests since 2003 and in none since 2005, but in nine tests between 1999 and 2003. No coliforms have been found in the EQPB’s WTP samples since August 1999. 32. Water quality testing at geographically well distributed points of consumption in Koror and Airai, however, do indicate the presence of contaminants, suggesting that they enter the transmission and distribution network after the treated water leaves the WTP, perhaps during periods of supply interruptions or low pressure. Though the tests show a marked improvement in water quality at the taps since 2002, a health risk remains present. For example, excessive turbidity levels were found in over 500 tests in 1998-2001, and in 280 tests since 2002. Deficient chlorine was found in about 140 tests in 1998-2001, and in about 90 tests since 2002; coliforms were observed in 46 tests in 1998-2001, and in 17 tests since 2002. Test results on a few key parameters are shown in the following figures.

10 GDP impacts are measured in constant 2009 dollars.

Appendix 2 Page 10

Figure 4 – Instances of Inadequate Residual Chlorine at the Tap (<0.2 ppm)

Instances of Inadequate Residual Chlorine at the Tap (<0.2 ppm) 14

12 Sample

in 10 Detections

8 Number 6

0 Series1, 0 13‐Oct‐98 13‐Oct‐99 13‐Oct‐00 13‐Oct‐01 13‐Oct‐02 13‐Oct‐03 13‐Oct‐04 13‐Oct‐05 13‐Oct‐06 13‐Oct‐07

Figure 5 – Instances of High Turbidity at the Tap (NTU>1.0)

Instances of High Turbidity at the Tap (NTU>1.0) 14

10 Sample

in 8 Detections 6 of

Number 4

0 Series1, 0 13‐Oct‐98 13‐Oct‐99 13‐Oct‐00 13‐Oct‐01 13‐Oct‐02 13‐Oct‐03 13‐Oct‐04 13‐Oct‐05 13‐Oct‐06 13‐Oct‐07

Appendix 2 Page 11

Figure 6 – Instances of Coliform Detections at the Tap

Instances of Coliform Detections at the Tap 7

5 Sample

in 4 Detections

of 3

Number 2

0 Series1, 0 13‐Oct‐98 13‐Oct‐99 13‐Oct‐00 13‐Oct‐01 13‐Oct‐02 13‐Oct‐03 13‐Oct‐04 13‐Oct‐05 13‐Oct‐06 13‐Oct‐07

33. The observed incidences of contamination and dilution of residual chlorine have not been excessive in recent years but do indicate that the existing transmission and distribution network is subject to ingress of contamination through leaks, which can reasonably be expected to get gradually worse Without the Project. The Project will reduce such leaks and thus lower the risks to public health that they impose. 34. Apart from supporting an assertion of the existence of a potential health benefit of the project, the above test results do not permit the benefit to be quantified, as there are no data on human health impacts. Nevertheless, increased confidence in the integrity of the transmission/distribution system and an expectation of a beneficial impact on the public health will be justified With the Project.

IV. Least Cost Analysis

35. The PPTA has undertaken investigations of a wide range of possible options to meet future demand in the Koror/Airai system for delivery of high-quality water with high reliability, including integration of additional surface water sources, development of groundwater sources, and development of a large surface water storage scheme under a network of multiple sources. Groundwater development was found to have limited capacity but is suitable for supporting mitigation of drought-induced supply shortages, and has been included in the Project. Apart from the large integrated storage scheme, no other option was found capable to meeting the design criteria of high reliability during dry periods. The storage scheme was found to meet the design criteria—indeed is the only option found capable of doing so—but at an estimated cost of $15-$20 million, is prohibitively expensive. The recommended option (the Project), which focuses on reducing the annual requirement for treated water production to below the sustainable extraction rate from existing sources, is thus the least cost method of meeting water demand with acceptable reliability.

V. Valuation of Economic Costs

Appendix 2 Page 12 associated structural works associated with rehabilitation and expansion of the existing water supply system, and consulting services. 37. A pipeline to extend water supply services to Aimeliik in southern Babeldaob has been included in the Project at the request of the government for use at a later time, but as the pipeline is unlikely to be connected to any user by the Project, it will not in itself carry any economic benefit and its cost has been excluded from the economic costs. 38. The local currency in Palau is the United States dollar. There are no levies or duties on imported materials. Local labor is taxed at 6% on income up to $8,000 per year, and at 12% on income exceeding $8,000/year. Fuel is taxed at $0.05/gallon. Taxes are excluded from the economic costs. 39. As Palauans have free rights to migrate and work and claim social benefits in the United States, there is virtually no unemployment in Palau and wage rates are an accurate measure of the opportunity cost of labor. Under these circumstances, it is estimated that the shadow wage rate and exchange rate factors necessary to equilibrate the border and domestic price levels of traded and nontraded goods in Palau are not materially different from 1.0.

VI. Results of the Economic Analysis

40. The period of economic analysis comprises a four-year construction period followed by a 24-year operation and maintenance period. All economic costs and benefits are expressed in constant 2009 dollars. At a 12% economic opportunity cost of capital (EOCC, or discount rate), the water supply project is found to be economically viable. The net present value (NPV) is $3.0 million and the economic internal rate of return (EIRR) is approximately 16.8%. The basecase EIRR calculation is tabulated in Table 2.

Appendix 2 Page 13

Table 2 – Calculation of the EIRR (US$ million)

O&M Expected Savings Unserved Avoided With the Water Drought Total Years Initial Cost Project Benefit Impact Benefits Net Benefits 2010 $ 0.36 -$ -$ -$ -$ -$ 0.36 2011 $ 3.50 -$ -$ -$ -$ -$ 3.50 2012 $ 2.73 -$ -$ -$ -$ -$ 2.73 2013 $ 1.21 $ 0.15 0.20$ $ 0.50 $ 0.86 -$ 0.36 2014 $ 0.42 0.26$ $ 0.52 $ 1.19 $ 1.19 2015 $ 0.40 0.32$ $ 0.53 $ 1.26 $ 1.26 2016 $ 0.39 0.39$ $ 0.55 $ 1.33 $ 1.33 2017 $ 0.38 0.45$ $ 0.56 $ 1.40 $ 1.40 2018 $ 0.37 0.52$ $ 0.58 $ 1.47 $ 1.47 2019 $ 0.36 0.59$ $ 0.60 $ 1.54 $ 1.54 2020 $ 0.35 0.65$ $ 0.62 $ 1.62 $ 1.62 2021 $ 0.35 0.69$ $ 0.63 $ 1.67 $ 1.67 2022 $ 0.35 0.73$ $ 0.65 $ 1.73 $ 1.73 2023 $ 0.35 0.77$ $ 0.67 $ 1.79 $ 1.79 2024 $ 0.35 0.82$ $ 0.69 $ 1.86 $ 1.86 2025 $ 0.35 0.86$ $ 0.71 $ 1.92 $ 1.92 2026 $ 0.35 0.91$ $ 0.74 $ 1.99 $ 1.99 2027 $ 0.35 0.91$ $ 0.76 $ 2.01 $ 2.01 2028 $ 0.35 0.91$ $ 0.78 $ 2.03 $ 2.03 2029 $ 0.35 0.91$ $ 0.80 $ 2.06 $ 2.06 2030 $ 0.35 0.91$ $ 0.83 $ 2.08 $ 2.08 2031 $ 0.35 0.91$ $ 0.85 $ 2.10 $ 2.10 2032 $ 0.35 0.91$ $ 0.88 $ 2.13 $ 2.13 2033 $ 0.35 0.91$ $ 0.90 $ 2.16 $ 2.16 2034 $ 0.35 0.91$ $ 0.93 $ 2.18 $ 2.18 2035 $ 0.35 0.91$ $ 0.96 $ 2.21 $ 2.21 2036 $ 0.35 0.91$ $ 0.99 $ 2.24 $ 2.24 2037 $ 0.35 0.91$ $ 1.02 $ 2.27 $ 2.27

NPVs: $ 6.52 $ 2.16 3.44$ $3.89$ 9.49 $ 2.96 % NPVs: 100.00% 22.79% 36.23% 40.97% 100.00% EIRR: 16.81% EOCC = 12%

41. The EIRR calculation shows that about 41% of the total quantified benefit of the Project is attributable to avoidance of damage to tourism and national income from severe droughts; 36% comes from the Project’s capacity to avoid future unserved water demand, and 23% from resource cost savings through efficiency improvements and loss reductions. The above economic analysis of the Project is conservative, as many of the key benefits, including avoidance of drought impact on households and small business and increasing health risks Without the Project are not quantified but are substantial. Further, the considerable benefit of achieving high standards of service reliability and consistently good delivery pressures to all consumers is not quantified.

VII. Sensitivity Analysis

42. A sensitivity analysis was carried out on the basecase EIRR calculation and the Project was found to be robust to adverse changes in the major parameters (i) initial costs;

Appendix 2 Page 14

(ii) the degree of resource cost savings; (iii) the volume of avoided unserved water demand; and (iv) the impact of droughts on tourism. The results are summarised in Table 3. Sensitivity indicators (SI, an index applying to a tested parameter that quantifies the relative sensitivity of the NPV of the Project to changes in the parameter11) and switching values (SV, the implied value of the parameter if the NPV of the Project is zero, all other parameters held constant) for each parameter are also indicated.

Table 3 – Summary Sensitivity Test Results

43. As shown, a 20% increase in the Project initial costs results in a fall of the EIRR to 14.3%; the NPV of the Project remains positive. The same is true of a reduction of each of the Project benefits, tested individually. A reduction in all benefit parameters simultaneously by 20% results in a marginal EIRR (12.9%); this combined with an increase in initial costs by 20% reduces EIRR to 10.9%. In view of the unquantified but considerable benefits of the Project as described above, these results underscore the economic viability of the Project. 44. The parameter of highest sensitivity in the EIRR calculation is the initial costs, with an SI of 2.2. The unserved water benefit and drought protection benefit are of lesser but still significant sensitivity (SIs between 1.0 and 2.0). Among the quantified benefits, the ability of the Project to save resource costs in meeting water demand was the least sensitive parameter (SI < 1.0).

11 An SI of 1.0, for example, indicates that a 10% change in the parameter results in a 10% reduction in the Project NPV; an SI of 2.0 indicates that a 10% change in the parameter results in a 20% reduction in the Project NPV, etc.

Appendix 3 Page 1

APPENDIX 3 – PROJECT DEVELOPMENT

1. Interim Report Possible Project

1. The July 2008 Interim Report presented a range of options but also suggested a Possible Project. This was done before the groundwater testing results were available and before the completion of the institutional work and the draft Initial Environmental Examination. The suggested Possible Project consisted of the following:

Component 1: Strengthening Sector Planning, Management and Regulation

2. This component aims to strengthen the overall water supply sector and improve sector sustainability. It comprises three subcomponents: (i) Institutional strengthening of the water and sewerage section of the Bureau of Public Works, or a new water supply authority, and creating a new water regulator; (ii) Actions to improve the ability of the States to operate and manage their water supply systems: and, (iii) Preparing of a Draft Water Supply Law for Palau.

Component 2 – Water Supply Development or Rehabilitation Water Supply Development

3. This subcomponent aims to develop a way to augment the supply of the existing Koror – Airai water supply system. This will improve the reliability of supply during periods of drought. It will include the development of: (i) Surface, or groundwater sources; (ii) Raw water transmission; and, (iii) Access roads and electrical supply as appropriate.

Water Supply Rehabilitation

4. The subcomponent includes rehabilitation works to improve supply reliability, make operations more effective and allow for full metering of the Koror – Airai water supply system.

Component 3: Community Action and Participation Program

5. The Community Action and Participation Program (CAPP) is designed to enhance and sustain the benefits from investments in water supply systems.

6. The three subcomponents of the CAPP are: (i) Community Participation Plan (CPP) which will develop and implement a stakeholder participation plan that covers information dissemination, consultation and disclosure requirements for the new and rehabilitation works; (ii) Community Awareness Plan (CAP) which will develop and implement a plan to promote water conservation, make the community aware of the value of the water systems, and enhance an interest in water and sanitation issues; and Appendix 3 Page 2

(iii) Health Awareness Support (HAS) which will strengthen existing programs to promote behaviour change related to sanitation, hygiene, water use and health.

Component 4: Project Implementation Assistance and Capacity Building

7. Component 4 has two subcomponents: (i) Project implementation assistance (PIA); and (ii) Administration support (AS).

2. ADB Comments

8. Copies of the Interim Report were distributed to the ADB and GOP. The results of the bore testing and the Institutional and Environmental reports were submitted some time later.

9. Once all this information was available, the ADB considered the recommendations in each and then wrote to the GOP on 9th October 2008 outlining a range of alternatives, but making five recommendations based on the technical merits and capital cost estimates. The preliminary cost estimate for a Project based on this recommendation was $10 million.

3. GOP Response

10. The various reports and the ADB letter were considered by the Project Steering Committee. From these considerations it was agreed that the GOP would support the recommendations of the ADB and the TA would proceed to Phase 3 on this basis. This was transmitted to the ADB in a letter of 9th December 2008.

4. Further GOP discussions

11. Phase 3 of the TA started at the end of January 2009. There was a change of administration in the GOP at the end of 2008 so further discussions were had with the new Ministers and others to acquaint them with the Project proposals and discuss aspects of the work. The work proceeded as per the GOP response and a proposed Project was prepared in line with the ADB and GOP agreement. APPENDIX 4.1 Page 1

APPENDIX 4.1 - ESTIMATE OF CAPITAL COST FEBRUARY 2009 PRICE LEVEL

CURRENCY COSTS DISBURSEMENT SCHEDULE COST ITEM UNIT QUANTITY UNIT COST TOTAL FOREIGN LOCAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 1 .0 1.0 STRENGTHENING SECTOR PLANNING, MANAGEMENT AND REGULATION 1.1 Strengthening of BPW and EQPB and creation of new WASA ls 1 600,000 600,000 40,000 180,000 180,000 200,000 1.2 Preparing a draft Water Law and amendments to Water Resources Laws ls 1 150,000 150,000 20,000 130,000 Sub-Total 1 750,000 750,000 500,000 250,000 60,000 310,000 180,000 200,000

2 .0 2.0 DEVELOPMENT OF WATER SUPPLY WELLS & ASSOCIATED WATER SOURCE WORKS 2 .1 2.1 New bored wells (8 inch dia. depth 120 feet) no. 10 15,000 150,000 80,000 70,000 150,000 2 .2 2.2 Convert existing holes to production wells no 3 10,000 30,000 16,000 14,000 30,000 2 .3 2.3 Submersible pumps (10 HP) set 15 15,000 225,000 175,000 50,000 225,000 2 .4 2.4 Monitoring wells (6 inch x 120 feet) no 10 10,000 100,000 60,000 40,000 50,000 50,000 2 .5 2.5 Pump house (if required) no. 13 4,000 52,000 12,000 40,000 52,000 2 .6 2.6 Powerline extension and transformers ls 1 100,000 100,000 40,000 60,000 50,000 50,000 2 .7 2.7 Standby power station (20 KVA) set 5 10,000 50,000 30,000 20,000 50,000 2 .8 2.8 Standby pump for Ngerikiil (150 HP) set 1 75,000 75,000 40,000 35,000 75,000 2 .9 2.9 Access road mile 3 80,000 240,000 40,000 200,000 240,000 2 .10 2.10 Fencing ft 600 100 60,000 20,000 40,000 60,000 2 .11 2.11 Improvement of Ngerikiil intake ls 1 10,000 10,000 2,000 8,000 10,000 2 .12 2.12 Replacement of dam bridge ls 1 10,000 10,000 4,000 6,000 10,000 2 .13 2.13 Production meter on bore (4 inch) set 13 2,000 26,000 15,000 11,000 26,000 2 .14 2.14 By-pass line to dam from raw water pipeline (12 inch diameter) ft 600 80 48,000 20,000 28,000 24,000 24,000 2 .15 2.15 Transmission from wells to existing raw water line (4 inch) ft 15000 15 225,000 100,000 125,000 90,000 67,500 67,500 2 .16 2.16 Land acquisition ls 1 100,000 100,000 100,000 60,000 40,000 SUB - TOTAL 2 1,501,000 1,501,000 654,000 847,000 709,000 564,500 227,500

3.0 3.0 COMMUNITY ACTION AND PARTICIPATION PROGRAM 3.1 3.1 Community Participation Plan ls 1 60,000 60,000 6,000 30,000 18,000 6,000 3.2 3.2 Community Awareness Plan ls 1 180,000 180,000 45,000 63,000 72,000 3.3 3.3 Health Awareness Support ls 1 30,000 30,000 9,000 10,500 10,500 SUB - TOTAL 3.1 TO 3.3 270,000 270,000 270,000 6,000 84,000 91,500 88,500

4.0 4.0 REHABILITATION AND EXPANSION OF THE KOROR-AIRAI WATER SUPPLY NETWORK 4.1 4.1 WATER TREATMENT PLANT 4.1.1 Standby pump sets, electrical and pipe works set 2 80,000 160,000 80,000 80,000 130,000 30,000 4.1.2 Pump house with retractable roof ls 1 20,000 20,000 5,000 15,000 20,000 TOTAL 180,000 180,000 85,000 95,000 130,000 50,000 0 4.2 4.2 TRANSMISSION FACILITIES 4.2.1 Parallel line from Gimel Dam to WTP (12 inch) ft 4500 80 360,000 160,000 200,000 180,000 180,000 4.2.2 Pipe intake and interconnection works ls 1 40,000 40,000 10,000 30,000 40,000 TOTAL 4,500 400,000 400,000 170,000 230,000 220,000 180,000 0 4.3 4.3 STORAGE FACILITIES Repair and repainting of tanks; replace valves, etc 4.3.1 Airai ls 1 90,000 90,000 40,000 50,000 90,000 4.3.2 Ngermid ls 1 90,000 90,000 40,000 50,000 90,000 4.3.3 Booster Pump to Ngermid Tank (10 HP) ls 1 35,000 35,000 20,000 15,000 35,000 4.3.4 Ngerkesoal ls 1 90,000 90,000 40,000 50,000 90,000 4.3.5 Arakabesang ls 1 50,000 50,000 25,000 25,000 50,000 4.3.6 Malakal ls 1 50,000 50,000 25,000 25,000 50,000 APPENDIX 4.1 Page 2

APPENDIX 4.1 - ESTIMATE OF CAPITAL COST FEBRUARY 2009 PRICE LEVEL

CURRENCY COSTS DISBURSEMENT SCHEDULE COST ITEM UNIT QUANTITY UNIT COST TOTAL FOREIGN LOCAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 4.3.7 New booster pump for Malakal (15 HP) ls 2 50,000 100,000 50,000 50,000 100,000 4.3.8 Repair roof of intermediate tank in Malakal ls 1 10,000 10,000 2,000 8,000 10,000 4.3.9 Generator for Malakal booster pump (30 KVA) ls 1 15,000 15,000 10,000 5,000 15,000 TOTAL 530,000 530,000 252,000 278,000 175,000 175,000 180,000 4 .4 4.4 DISTRIBUTION FACILITIES 4.4.1 Distribution main along Compact Road (8 inch) m 18000 55 990,000 450,000 540,000 495,000 495,000 4.4.2 Supply line to Malakal tank (8 inch) ft 6500 60 390,000 190,000 200,000 195,000 195,000 4.4.3 Bridge crossings and extra works for Malakal line ls 1 50,000 50,000 50,000 50,000 4.4.4 Pavement demolition* and restoration** for Malakal line ls 1 50,000 50,000 50,000 25,000 25,000 TOTAL 1,480,000 1,480,000 640,000 840,000 270,000 715,000 495,000 4 .5 4.5 NON-REVENUE WATER REDUCTION 4.5.1 Metering of unmetered connections no 700 100 70,000 30,000 40,000 70,000 4.5.2 Provision of spare meters no 300 50 15,000 10,000 5,000 15,000 4.5.2 Recalibration of old meters including training and equipment no 3,000 50 150,000 10,000 140,000 50,000 50,000 50,000 4.5.3 Large meters replacement (Tanks) set 5 5,000 25,000 10,000 15,000 25,000 4.5.4 Zone metering set 10 5,000 50,000 15,000 35,000 50,000 4.5.5 Leak detection including training and supply of equipment ls 1 150,000 150,000 30,000 120,000 150,000 4.5.6 Repair and replacement of pipes*** 4 inch HDPE ft 10,000 20 200,000 80,000 120,000 100,000 100,000 6 inch ft 7,000 30 210,000 80,000 130,000 105,000 105,000 8 inch ft 5,000 60 300,000 120,000 180,000 150,000 150,000 10 inch ft 3,000 80 240,000 90,000 150,000 120,000 120,000 12 inch ft 3,000 90 270,000 100,000 170,000 135,000 135,000 TOTAL 4.5 1,680,000 1,680,000 575,000 1,105,000 970,000 660,000 50,000 SUB-TOTAL 4.1 TO 4.5 4,270,000 1,765,000 1,780,000 725,000

5 .0 5.0 PROJECT IMPLEMENTATION ASSISTANCE AND ADMINISTRATIVE SUPPORT 5 .1 5.1 Project Implementation Assistance ls 1 800,000 800,000 700,000 100,000 75,000 275,000 250,000 200,000 5 .2 5.2 Administrative Support ls 1 650,000 650,000 100,000 550,000 200,000 150,000 150,000 150,000 SUB-TOTAL 5.1 TO 5.2 1,450,000 1,450,000 800,000 650,000 275,000 425,000 400,000 350,000

TOTAL BASE COST 8,241,000 3,676,000 4,565,000 341,000 3,293,000 3,016,000 1,591,000 PHYSICAL CONTINGENCIES (10% of BASE COST) 824,100 367,600 456,500 34,100 329,300 301,600 159,100 PRICE CONTINGENCIES **** 365,450 TOTAL CONTINGENCIES 1,189,550 1,189,550 INTEREST AND SERVICE CHARGES DURING CONSTRUCTION ***** 463,034 TOTAL PROJECT COST 9,893,584 4,043,600 5,021,500 375,100 3,622,300 3,317,600 1,750,100 45% 55% 4% 40% 37% 19% NOTES: * Assumes that 50% of the total pipe length to Malakal has road/street pavement to be demolished Capital replacement 610,000 ** Assumes that 100% of the total length of the pavement demolished will be restored. *** Cost include pavement demolition and restoration **** 0.40 to 1.4% for international costs and 2% for local costs ***** ADB (OCR/ADF) and EIB current interest and service charges APPENDIX 4.2 Page 3

APPENDIX 4.2 - IMPLEMENTATION SCHEDULE

2010 2011 2012 2013 Activity Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 STRENGTHENING SECTOR PLANNING, MANAGEMENT AND REGULATION Strengthening of BPW and EQPB and creation of new WASA Preparing a draft Water Law and amendments to Water Resources Laws DEVELOPMENT OF WATER SUPPLY WELLS & ASSOCIATED WATER SOURCE WORKS

New bored wells (8 inch dia. depth 120 feet) Convert existing holes to production wells Submersible pumps (10 HP) Monitoring wells (6 inch x 120 feet) Pump house (if required) Powerline extension and transformers Standby power station (20 KVA) Standby pump for Ngerikiil (150 HP) Access road Fencing Improvement of Ngerikiil intake Replacement of dam bridge Production meter on bore (4 inch) By-pass line to dam from raw water pipeline (12 inch diameter) Transmission from wells to existing raw water line (4 inch) Land acquisition COMMUNITY ACTION AND PARTICIPATION PROGRAM Community Participation Plan Community Awareness Plan Health Awareness Support REHABILITATION AND EXPANSION OF THE KOROR-AIRAI WATER SUPPLY NETWORK

WATER TREATMENT PLANT Standby pump sets, electrical and pipe works Pump house with retractable roof TRANSMISSION FACILITIES Parallel line from Gimel Dam to WTP (12 inch) Pipe intake and interconnection works STORAGE FACILITIES Repair and repainting of tanks; replace valves, etc Airai Ngermid Booster Pump to Ngermid Tank (10 HP) Ngerkesoal Arakabesang Malakal New booster pump for Malakal (15 HP) Repair roof of intermediate tank in Malakal Generator for Malakal booster pump (30 KVA) DISTRIBUTION FACILITIES Distribution main along Compact Road (8 inch) Supply line to Malakal tank (8 inch) Bridge crossings and extra works for Malakal line Pavement demolition* and restoration** for Malakal line APPENDIX 4.2 Page 4

APPENDIX 4.2 - IMPLEMENTATION SCHEDULE

2010 2011 2012 2013 Activity Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 NON-REVENUE WATER REDUCTION Metering of unmetered connections Provision of spare meters Recalibration of old meters including training and equipment Large meters replacement (Tanks) Zone metering Leak detection including training and supply of equipment Repair and replacement of pipes*** 4 inch HDPE 6 inch 8 inch 10 inch 12 inch PROJECT IMPLEMENTATION ASSISTANCE AND ADMINISTRATIVE SUPPORT Project Implementation Assistance Administrative Support

Appendix 6 Page 1

APPENDIX 6 – PROPOSED TECHNICAL WORK AND BID DOCUMENTS

1. The proposed engineering improvements are contained in component 2 and 4 of the proposed Project:

 Component 2: Development of water supply wells and associated water source works

 Component 4: Rehabilitation and expansion of the Koror-Airai water supply network.

2. The following provides some additional details of the proposed works.

A. Development of Additional Source Facilities and Associated Works

3. The development of additional source facilities aims to provide consumers with a more reliable water supply during dry periods when the flow of the existing river sources declines. The identified new sources are groundwater aquifers within the Airai area. Water would be extracted from a series of wells located in the region between the two existing surface water sources - the pump station on the Ngirkiil River and the intake from the Gihmel Reservoir on the Ngerimel River.

4. Preliminary testing indicates that a short term (up to 2 months or so) supply of up to 1 Mgpd would be available from the groundwater source. It is proposed to fully establish an operating bore field that could be operated at any time. Although the groundwater source would only be required to operate for a short period every 5 to 10 years when surface stream flow is insufficient to meet demand, it is recommended that the system be operated regularly, say one day each month, to keep all the bores, pumping equipment and other facilities in good order.

5. Use of ground water may also have the operational advantage that the groundwater, which is free of sediment, could be used to supplement the supply during wet periods when the Ngirkiil River water has a significant sediment load. This would reduce the amount of sediment to be removed at the treatment works and improve the capacity of the drying beds during periods when evaporation is at a minimum. At present in wet periods, the drying beds can overflow causing environmental damage.

6. The following facilities are proposed to be developed:

(1) A groundwater extraction wellfield

7. A series of extraction wells will be drilled to depths of 100 to 120 feet at a spacing of 500-1000 feet along the lower lying area between the Ngirkiil and Ngerimal river systems. These bores are proposed as 8 inch diameter and fitted with 6 inch slotted casing in either stainless steel or PVC, with a gravel filter installed in the annulus between the casing and the bore. It is envisaged that some 10 to 15 wells will be required, however, the exact number and location of wells will be determined progressively as the wells are drilled and tested to determine the sustainable yield and zone of influence of each installation.

8. In addition to the extraction wells, a series of other bores will be drilled and installed with monitoring standpipes to enable the ‘drawdown’ of the aquifers to be monitored to ensure over extraction of the groundwater system does not occur. We see over-extraction as very unlikely, however, due to the very intermittent use of the groundwater resource.

9. There are already about 10 bores in this area and it is expected that many of these could be converted to operational extraction wells or monitoring installations. For budgeting purposes 10 new extraction bores and 10 new monitoring bores have been allowed. In addition, allowance has been made to convert 3 of the existing boreholes into production bores. Appendix 6 Page 2

(2) Pumping equipment

10. Each of the extraction wells will be equipped with an electric submersible pump capable of pumping at least 75-150 gpm discharge. A small pump house will be constructed at each extraction well location to protect the electrical controls and flow gauge and provide security. It is recommended that 2 spare pumps be available in a central store to cover equipment breakdown events. For budgeting purposes 15 electric submersible pumps (10 HP) have been allowed i.e. for 13 production bores and 2 spares.

(3) Powerline Extension and Transformers

11. Each of the extraction well sites will be provided with electric power from the grid. The exact layout of the supply lines will only be determined after the wells have been sited but it is envisaged that connection will be made with a few wells in series. The budget takes into consideration the provision of power poles, electrical wires, transformers and miscellaneous accessories necessary to energize the pumping stations.

(4) Stand-by Power

12. Generator sets will be provided in case of power outage when the wells are in operation. As these will only be needed infrequently mobile units are envisaged which can be installed at one well site in each series. For budgeting purposes 5 generator sets are planned, rated at 20 KVA each.

(5) Delivery pipeline

13. There are two alternatives which will depend upon the final locations of the production bores and the intended mode of operation of the field. The most suitable design will depend on the surplus capacity in the existing raw water main, whether the raw water from the Ngirkiil pump station and the supplementary wellfield supply will be required simultaneously, and the value of not having to fully treat the groundwater.

14. We have adopted alternative 2 for budgeting purposes.

15. Alt 1 - The groundwater source could have a separate dedicated pipeline to the treatment works as the groundwater will not require sedimentation, and possibly not even filtration, treatment. This main would require an easement about 8000 feet long to be created along an alignment closely following the tributary to the Ngirkiil River.

16. The pipeline would progressively increase from 3 inch to 6-inch diameter high-density polyethylene (HDPE) and join the existing raw water pipeline easement near the entrance to the access road to Gihmel reservoir. An additional 6-inch dia. HDPE pipeline would then be installed in a trench adjacent to the existing raw water line to the dam then to the treatment works.

17. The one or two wells located upstream of the junction of the tributary with Ngirkiil River would be fed directly to the existing raw water pipeline.

18. Alt 2 - Each series of extraction wells (3 or 4) could have a 4 inch dia. rising main installed up to the existing raw water pipeline which is located along the Compact Road. This would require establishment of several easements or it may be possible to run the pipes along the access road into each well.

19. For budgeting purposes 15,000 feet of 4 inch dia. HDPE trenched pipeline is allowed. In addition 13 production meters have been allowed for installation within the delivery pipe of each extraction well to accurately record the production.

Appendix 6 Page 3

(6) Access Roads

20. Access roads will be constructed to each extraction well site to enable the initial drilling and installation and periodic operation and maintenance of the equipment. The location of these roads will be determined in consultation with Airai State officials so that future development of the area is not impaired. Periodic maintenance of these roads will be required to ensure access when required bearing in mind that this system is mainly for use during extended ‘dry’ periods. For the budget, 3 miles of single lane light gravel access road has been allowed.

(7) Fencing and Security

21. All the extraction well sites and pump stations will be provided with security fencing and lockable gate to prevent entry of unauthorized persons as determined necessary. Allowance should be made for space for the portable generator at some sites. The monitoring wells will have a steel locked cap concreted into the ground.

(8) Land Acquisition

22. Funds for land acquisition has been provided in case some of the identified locations for the bored wells and pumping stations are not on State-owned lands. Likewise, right of way for some of the access roads and pipelines may have to be secured for smooth implementation of the Project. It would seem highly desirable to site facilities on land which is not privately owned or where there are no land claims. Land acquisition can be a lengthy and difficult process and could impinge on the timely development of the Project.

(9) Stand-by Pump for Ngerikill Pump Station

23. A new 150 HP vertical turbine pump and accessories will be provided for the Ngerikill pump station. The pump will be operated on a rotation basis together with the other three existing pumps to improve the efficiency of this facility and to provide additional security for water supply.

(10) Improvement of Ngerikill River Intake

24. The existing intake experiences difficulty with river debris during high flow and leaves and trash during low flow. A study should be undertaken to determine if moving the intake back towards the pumps and installing a permanent angled screen would substantially remove this problem. In the meantime we have allowed for additional wire net protection by extending the net above the usual flood level at the intake. This should prevent debris from entering the pump chamber and being carried all the way to the treatment plant.

(11) Improvement of Ngerimel Dam Bridge

25. The steel walkway over the dam crest, which has collapsed, must be removed and replaced to enhance safe access for operation and maintenance of the facilities in this area.

(12) By-pass pipeline to the Gihmel Reservoir (Dam)

26. During the rainy season the turbidity and dissolved solids of the water from the Ngerikill River is often very high. A by-pass pipeline should be installed so that the turbid water can be pumped to the reservoir where the sediment load can settle-out rather than straight to the treatment plant where it causes overload of the clarifiers, filters and drying beds.

27. When the water from the Ngerikill River is clear, the reservoir can be bypassed, if desired, and water pumped directly to the treatment plant. The construction of the proposed duplication of the transmission pipeline from the reservoir outlet to the treatment works will enable this bypass to be effective without reducing the overall flow to the treatment works. Appendix 6 Page 4

B. Rehabilitation and Expansion of the Water Supply Network

28. The works proposed under this component are aimed at improving the operation of the existing system, providing more storage within Koror town to cater for demand fluctuations during the day, extending a supply pipeline along Compact Road into Aimeliik, and reducing the present high amount of non-revenue water. We considered the installation of remote control and monitoring facilities but have not allowed for this as part of the Project.

(13) Duplication of raw water pipeline from the reservoir

29. A duplication of the pipeline from the dam outlet to the water treatment plant will be installed. This will allow up to 4 Mgpd to be supplied to the treatment plant by gravity from the reservoir using the existing and new pipeline. This new 12-inch line will be connected to a simple intake structure located to collect the clearer portion of water in the dam. The pipe will have to go past the existing dam wall so it needs to be laid in a way that it will not pose any hazard to the dam during construction. This new main will run parallel to the existing transmission all the way to the water treatment plant. Necessary valves and fittings will be provided. A length of 4500 feet of 12 inch HDPE buried pipeline has been allowed in the budget.

(14) Water Treatment Plant

30. Improvements to the water treatment plant will comprise the provision of two additional delivery pump sets which will be installed in the extension of the clear water tank. These will serve as stand-by pumps to be operated on a rotation basis with the other pumps. The necessary electrical work and flow meters will also be installed. In addition, a pump house with a retractable roof, or with a high-clearance roof and lifting apparatus, will be constructed to house and protect the pumps. This will make it easier for the pumps to be pulled out for maintenance.

31. It is acknowledged that at present during periods of high rainfall, the treatment plant experiences some operational difficulties with the high turbidity of the inflow water. We believe that this situation will improve in the future when the existing reservoir can be used as a sedimentation basin, when sediment-free ground water can be used and when the required production rate falls due to the conservation and non-revenue water reduction components of the Project taking effect.

(15) Storage Facilities

32. The necessary improvements to the existing storage tanks will include replacement and/or provision of new gate and butterfly valves, float valves, altitude valves and appurtenant fittings as determined by a detailed inspection and discussions with operators at the design stage. The tanks will have to be sand blasted and a new coating of paint applied. Level controls will be replaced or repaired and the perimeter of the tanks will be tidied up and fenced for added security.

33. A stand-by booster pump with 10 HP rating will be provided and installed at the existing pump station at the road junction near the Top Side tank. Some work is required on the pump station. The new pump will operate on a rotation basis with the existing booster pump to provide a higher level of security of supply for the Ngermid area.

34. We consider that it is very important that the Malakal tank be placed back in operation after a thorough structural analysis is made to confirm that it is suitable for reuse. This tank is necessary to provide storage on Malakal to cater for demand fluctuations during the day and increase the security of supply to this rapidly developing tourist and industrial area. At present water to this area is supplied from the Top Tank and any problems with this tank or the long Appendix 6 Page 5 supply lines to Malakal mean that consumers in Malakal are without water. Repair of the pipelines feeding to and from the tank will be made.

35. The intermediate tank at the foot of the hill in Malakal will be repaired, lined and provided with roofing. This tank will serve as a sump tank that will collect water from the new delivery main. This will then be pumped to the Malakal Tank.

36. A new booster pump rated at 15 HP will be provided to pump water from the intermediate tank to the Malakal storage tank. An additional stand-by unit will also be provided together with a 30 KVA generator set.

(16) Distribution Facilities

37. As agreed between the GOP and the ADB, a total of approximately18,000 feet of 8 inch diameter HDPE main will be installed along the Compact Road leading into Aimeliik State. This new pipeline will extend from the end of the existing 150mm pipe to serve future consumers along the road and this may eventually serve as the start of an extended water supply system which could serve other communities. This length of pipe can be supplied from the existing pumps at the water treatment plant. Further extension of this pipeline will require storage and additional pumping facilities and this is not considered justified at present when the likely water demand is extremely small.

38. About 6500 feet of 8-inch diameter HDPE pipes will be laid from the road junction near the Visitors Bureau to the Malakal sump tank. This will be a dedicated supply main to allow the filling of the Malakal tank. This will provide additional security of supply to consumers in Malakal district, which is, and will likely continue to be, the major growth area on Koror.

27. Necessary funds for valves, fittings, bridge crossings, pavement demolition and restoration have also been provided in the budget.

(17) Non-Revenue Water Reduction

39. The Interim Report concluded that about 50% of the water produced by the treatment plant does not generate revenue for the system. This is considered far too high and must be reduced. The non-revenue water reduction program envisaged for this Project will consist of the following:

a.) Metering of all connections – About 700 service connections in Airai and Koror, which are presently unmetered, will have new meters installed. Most will be on residential consumers in Airai. This will allow all consumers to be charged on the volume of water used. The contract should also make provision for an additional 300 meters which will replace existing unserviceable meters and be used on future service connections.

b.) Recalibration and re-installation of old meters – A program for recalibration and re- installation of all existing water meters will be instituted. Batches of water meters will be progressively removed and replaced with re-calibrated meters. This program will continue until all of the old water meters have been re-calibrated and re- installed. Unserviceable meters will be replaced with new ones.

The work will be carried out by contract and the contractor will be required to train water authority staff in the recalibration of meters and provide the necessary equipment for those trained so that this work can be on-going into the future.

c.) Large Meters Replacement – The water meters recording the outflow from the storage tanks will be replaced with new ones. Appendix 6 Page 6

d.) Zone Metering – Zone meters will be installed at strategic locations within the distribution system. The zone meters must be able to record the inflow into the system so that it can be compared with the consumption of the consumers as recorded by the individual meters. The difference will be considered as the non- revenue water (NRW) for the zone.

e.) Leak Detection – It is envisaged that two teams with accurate leak detection equipment will be able to pinpoint the location of major leaks in the Koror-Airai distribution system within a period of about one month. The teams must be equipped with portable leak correlators, leak detectors and ultrasonic flow meters and other equipment necessary to undertake the job. Handheld GPS will be employed to provide and record the location of identified leaks. Ground markers will also be employed to visually identify the leak location so that the repair crew when mobilized will be able to do their job as fast as possible.

Provision should be made in the contract for training of local operators and the supply of suitable equipment so that the leak detection can be on-going into the future after the contractors have left.

f.) Repair and replacement of pipes – minor leaks identified during the leak detection survey may be repaired using repair clamps, however, it is envisaged that substantial lengths of existing pipe will need to be completely replaced. Provision for replacement of damaged or leaking pipes has been made in the budget as follows:

1. 10,000 feet of 4 inch diameter pipes;

2. 7000 feet of 6 inch diameter pipes;

3. 5000 feet of 8 inch diameter pipes;

4. 3000 feet of 10 inch diameter pipes; and

5. 3000 feet of 12-inch diameter pipes.

The new pipes should be standardized as HDPE.

C. BID DOCUMENTS

40. As agreed with the ADB project officer, no bid documents are to be prepared under this PPTA. Actual bid documents will be produced as part of the design documentation during the Project. Appendix 7 Page 1

APPENDIX 7 – RESETTLEMENT AND LAND ACQUISITION REPORT

Acronyms and Abbreviations ADB Asian Development Bank APs Affected Persons BWSP Babeldaob Water Supply Project CAPP Community Action and Participatory Program CEF Compensation and Entitlement Form DMS Detailed Measurement Survey EA Executing Agency or MPIIC GOP Government of Palau GRCs Grievance and Redress Committees IMA Independent Monitoring Agent LAR Land Acquisition and Resettlement LARF Land Acquisition and Resettlement Framework LARP Land Acquisition and Resettlement Plan m² square meter MPIIC Ministry of Public Infrastructure, Industry and Commerce NGO Non Government Organization OM Operational Manual OP Operational Policy para. paragraph PIA Project Implementation Assistance PMU Project Management Unit PNC Palau National Code PPTA Project Preparatory Technical Assistance Project Babeldaob Water Supply Project RCS Replacement Cost Survey ROP Republic of Palau ROW Right-of-way SES Socioeconomic Survey SPRSS Summary Poverty Reduction and Social Strategy SSS Social Safeguards Specialist

Appendix 7 Page 2

Definition of Terms

Affected Persons (APs) – includes any person, entity or organization affected by the Project, who, on account of involuntary acquisition of assets in support of the implementation of the Project, would have their: (i) standard of living adversely affected; (ii) right, title or in all or any part of a house, buildings, land (use for residential, commercial, agricultural, and forest as well as for plantation and grazing), water resources, fish ponds, communal fishing grounds, annual or perennial crops and trees, or any movable or fixed assets acquired or possessed, in full or in part, permanently or temporarily; and (iii) business, profession, work or source of income and livelihood lost partly or totally, temporarily or permanently..

Compensation – refers to any payment in cash or in kind of the replacement cost of the acquired assets.

Cut-off Date – means the date prior to which the occupation or use of the Project area makes residents/users of the Project area eligible to be categorized as APs. The cutt-off date for the Project is the last day of the detailed measurement survey (DMS) in each subproject.

Displaced Persons – are people or entities directly affected by the Project through the loss of land and the resulting loss of residence, other structures, or other assets.

Entitlement – is a range of measures comprising compensation in cash or in kind, income restoration, transfer assistance, income substitution, and relocation which are due to APs, depending on the nature of their losses, to restore their economic and social base.

Grievance Procedures – is the process established under law, local regulations, or administrative decisions to enable property owners and other displaced persons to redress issues related to acquisition, compensation, or other aspects of resettlement.

Household – means all persons living together as a single social unit. They are identified in a census being an instrument of their recognition and legitimacy to receive compensation, rehabilitation and assistance under the Project.

Improvements - Structures constructed (dwelling unit, fence, waiting sheds, animal pens, utilities, community facilities, stores, warehouses, etc.) and crops/plants planted by the person, household, institution, or organization in the affected lands.

Income Restoration – is the reestablishment of income sources and livelihoods of APs to their pre-project levels.

Indigenous Peoples – belong to a certain group of people from cultural minorities, ethnic minorities, indigenous cultural communities, tribal people, natives and aboriginals.

Land Acquisition - the process whereby a person is compelled by the Government through the Project Executing Agency to alienate all or part of the land a person owns or possesses to the ownership and possession of the government agency for in the implementation of the Project or any of its components in return for fair compensation.

Land Acquisition and Resettlement Plan – is the planning document that describes what activities to be done in addressing the direct social and economic impacts associated with involuntary taking of land.

Appendix 7 Page 3

Rehabilitation – means assistance provided to severely affected APs losing 10% or more of productive assets (i.e. farmland, fishpond, vegetable garden, etc.), incomes, employment or sources of livelihood such as shops and place of work have to be reconstructed and/or relocated. The livelihood support may be given in cash or in kind or employment during Project construction to improve or at least achieve full restoration of living standards to pre-project levels.

Relocation – is the physical shifting of AP from his/her pre-Project place of residence and/or business.

Replacement Cost - The value determined to be fair compensation for land based on its productive potential, the replacement cost of houses and structures (current fair market price of building materials and labor without depreciation or deductions for salvaged building material), and the market value of residential land, crops, trees, and other commodities.

Resettlement - All measures taken to mitigate any and all adverse impacts of the Project on AP’s property and/or livelihood, including compensation, relocation (where relevant), and rehabilitation.

Severely Affected Person – is a person who will: (i) lose 10% or more of their productive assets, such as agriculture/aquaculture landholding, and/or (ii) physically displaced from housing; and/or (iii) lose 10% or more of total income sources due to the Project.

Vulnerable Group – are distinct group of people who might suffer disproportionately or faced the risk of being further marginalized by the effects of resettlement and specifically include: (i) households headed by women, the elderly or disabled; (ii) households living below the poverty line; (iii) the landless; (iv) children without means of support; and (iv) indigenous peoples and/or ethnic minorities.

Appendix 7 Page 4

Table of Contents

Page ACRONYMS AND ABBREVIATIONS 1 DEFINITION OF TERMS 2 I INTRODUCTION 5 A. Rationale 5 B. Project Description 5 C. Resettlement Framework 7 II LAND ACQUISITION AND PROCESSING REQUIREMENTS 7 III PROCEDURES AND MILESTONES IN LARP 8 A. Procedures in LARP Preparation 8 B. Activity Milestones for LARP and Civil Works Implementation 9 IV LEGAL AND POLICY FRAMEWORK 9 A. Laws on Land Acquisition and Compensation in the Republic of Palau 9 B. ADB Policy on Involuntary Resettlement 11 C. Bridging the Gaps Between ROP Legislation and ADB Policy 13 V PRINCIPLES AND COMPENSATION AND ENTITLEMENT POLICIES 13 A. Project Principles 13 B. Eligibility 15 C. Categories of APs 15 D. Types and Levels of Losses 16 E. Project Compensation and Entitlement Policy 16 F. Entitlement Matrix 18 VI GENDER IMPACTS AND MITIGATING MEASURES 20 VII INDIGENOUS PEOPLES AND VULNERABLE GROUPS 21 VIII PUBLIC PARTICIPATION AND DOCUMENTS DISCLOSURE 21 IX GRIEVANCE REDRESS MECHANISM 22 X MANAGEMENT OF LARP PREPARATION AND IMPLEMENTATION 22 A. Organizational and Institutional Arrangement 22 B. Training and Orientation 23 C. Database Management 24 D. Replacement Cost Survey 24 E. Review, Endorsement and Approval of LARP 24 XI RESETTLEMENT BUDGET AND FINANCING 24 XII MONITORING AND EVALUATION 24 A. Internal Monitoring 25 B. External Monitoring 25

TABLES Table 1 : Summary of Civil Works for Babeldaob Water Supply System 6 Table 2 : Entitlement Matrix 19 Table 3 : Grievance and Redress Procedures 22

ANNEXES Annex 1 : Outline of Short Resettlement Plan 27 Annex 2 : Land Acquisition and Involuntary Resettlement Categorization Form 29 Annex 3 : Summary of Consultation Meetings 31

Appendix 7 Page 5

I. INTRODUCTION

A. Rationale

1. The Babeldaob Water Supply Project (BWSP, or the Project) will be implemented by the Government of Palau (GOP) as a sector project. The Project has been formulated to overcome many of the existing legislative, institutional, environmental, financial constraints and technical problems which currently exist in the water sector of Palau. While the country’s physical water supply infrastructure is concentrated in the States of Koror and Airai, BWSP will create a sector that will be more effective and efficient that will encourage more investment in infrastructure in the future. The Project is designed to increase the reliability of supply, reduce water production by introducing water conservation concepts and tracking the high rate of non-revenue water, improve community awareness on water, sanitation and health and craft appropriate legislative and institutional arrangements for the future.

B. Project Description

2. The Project’s expected outcome is improved access, quality and reliability of water supply services in the State of Koror and improved water supply in the States of Airai and Aimeliik. By creating a new water and sewerage authority, it is expected that sewerage improvements will also occur. BSWP has five components, as follows: (i) Component 1: Strengthen sector planning, management and regulation. This component is aimed at institutional strengthening of the water and sewerage section of the Bureau of Public Works and others, so that a new water and sewerage authority with appropriate technical, financial and operational skills can be created. In addition, the preparation of a new Draft Water Supply Law, amendments to other laws and new water regulations will be undertaken. (ii) Component 2: Development of water supply wells and associated water sources works. This component aims to augment the existing surface water supply sources for the Koror – Airai system to improve the reliability of supply during periods of drought and to reduce current quality problems during periods of high rainfall. It also makes improvements at the Ngerikill intake and Ngerimel dam. This will be achieved by the following: (a) development of groundwater sources in Airai State through the drilling of 10 – 15 wells, 80 – 100 feet deep, along the shallow valley of the Ikoranges watercourse, north of the airport; (b) installation of pumps, meters and raw water transmission pipelines; (c) construction of access roads and electrical supply to bore sites, as appropriate; (d) work at the existing Ngerikiil intake and provision of additional pumping equipment at the pumping station; (e) replacement of the existing access bridge at the Ngerimel dam; and (f) work at the Ngerimel reservoir to allow either bypassing or delivery of water to storage. (iii) Component 3: Community action and participation program (CAPP). It is designed to enhance and sustain the benefits from investments in water supply systems by way of the following: (a) facilitate the implementation of the water supply system improvements and encourage water conservation to limit future demand; (b) enhance the sustainability of water supply benefits with activities that target improved household sanitation, environmental improvements and community health awareness; and (c) promote GOP objectives for a participatory and consultative process with equitable benefits shared by all residents of communities including women, all ethnic groups1 and poor households.

1 About one quarter of the population comprises foreign nationals.

Appendix 7 Page 6

(iv) Component 4: Rehabilitation and expansion of the Koror-Airai water supply network. This will include rehabilitation works to improve supply reliability, make operations more effective and allow full metering of the Koror – Airai water supply system. A full leak detection and repair operation will be conducted. Flow meters, additional pumps, a new pipeline to Malakal, and rehabilitation of storage tanks will be undertaken. System expansion to Aimelik is also included. (v) Component 5: Project implementation assistance and administrative support. This component has two subcomponents, i.e., project implementation assistance, and administrative support. The project implementation assistance will include the provision for consulting services to assist the Project Management Unit (PMU) to implement the Project. The administrative support will deal with the provisions of allowances, vehicles, and office and computer equipment for the PMU office for project implementation.

3. In Components 2 and 4 of the BWSP, there will be investments for civil works for the overall development of the water supply system which have bearings on land acquisition in the States of Koror, Airai and Aimeliik, as summarized in Table 1. While there are expected requirements for temporary and permanent land acquisitions, these have yet to be ascertained and the owners of lands have to be identified during Project implementation.

Table 1: Summary of Civil Works for Babeldaob Water Supply System

Proposed Civil Works Description and/or Purpose of Civil Works A Development of Water Supply Wells and Associated Water Source: 1. Groundwater Extraction Well Fields Drilling of 10 to 15 wells with depths of 100 – 120 feet. Temporary acquisition of land is expected Provision of electric submersible pump for extraction wells, each 2. Provision of Pumping Equipment with small pump house to protect the electrical controls and flow gauge to provide security. Permanent land acquisition is required. Provision of power poles, electrical wires, transformers and 3. Power line Extension and Transformers miscellaneous accessories for each extraction well. Land acquisition is unlikely to be required. Each series of extraction well (at 3 or 4 wells) will have 4 inch dia. 4. Provision of Delivery Pipeline rising main installed up to the existing raw water pipeline located along the Compact Road. Temporary and permanent acquisition of land is expected. Access road for each extraction well site will be constructed to 5. Construction of Access Roads. enable the initial drilling and installation and periodic operation and maintenance of the equipment, in consultation with Airai State officials. Temporary and permanent acquisitions of land for right-of-way (ROW) are necessary. All extraction well sites and pump stations will be provided with 6. Fencing and Security security fencing and lockable gate to prevent the entry of unauthorized persons. No land acquisition as this is fencing of the space already required for pumping equipment. A new 150 HP vertical turbine pump and accessories will be 7. Stand-by Pump for Ngerikill Pump Station provided, that will be operated on rotation basis. No acquisition of land is required. The improvement is aimed to prevent debris from entering the 8. Improvement of Ngerikill River Intake. pump chamber and being carried all the way to treatment plant. Temporary impact on land already associated with the intake is expected, as materials required for rehabilitation require for storage. The collapsed steel walkway over the dam crest will be removed 9. Improvement of Ngerimel Dam Bridge and replaced to enbhance safe access for operation and maintenance of facilities in the area. Temporary impact on land is expected, as materials required for rehabilitation require for storage. This is a small pipeline which would be inside the existing 10. Installation of Bypass Pipeline to the Gihmel reservoir reserve area. No acquisition of land would be Reservoir (Dam) necessary.

Appendix 7 Page 7

Proposed Civil Works Description and/or Purpose of Civil Works B. Rehabilitation and Expansion of Water Supply Network: 1. Duplication of Raw Water Pipeline from the The new main 12-inch HDPE pipeline, with length of 4,500 ft., will Reservoir be connected to a simple intake structure that will collect the clearer portion of water in the dam. Permanent acquisition of land is required. Improvements will comprise the provision of two additional 2. Improvements of the Water Treatment Plant delivery pump sets that will be installed in the extension of the clear water tank. A pump house will be constructed for the protection of the pump. Land acquisition is not required. The Malakal tank will be placed back in operation to provide 3. Storage Facilities storage of water to cater for demand fluctuations during the day and ensure the adequacy of water supply. Land acquisition is not required. A new pipeline will extend from the end of the existing 150 mm pipe in Compact Road to serve future consumers along the road 4. Distribution Facilities in Airai and Aimeliik. About 6,500 feet of 8-inch diameter HDPE pipes will be laid from the road junction near the Visitors Bureau in Koror to the Malakal sump tank. Temporary land acquisition maybe required. Activities on non-revenue water reduction with temporary impacts on land cover the replacement of damaged or leaking pipes, such 5. Reduction of Non-Revenue Water as follows: (i) 10,000 feet of 4-inch diameter pipes; (ii) 7,000 feet of 6-inch diameter pipes; (iii) 5,000 feet of 8-inch diameter pipes; (iv) 3,000 feet of 10-inch diameter pipes; and (v) 3,000 feet of 12- inch diameter pipes.

C. Resettlement Framework

4. The Ministry of Public Infrastructure, Industry and Commerce (MPIIC), as the Executing Agency (EA), has prepared this Land Acquisition and Resettlement Framework (LARF), as an expression of its commitment to comply with the ADB requirements. It has been agreed with ADB that it will prepare a Land Acquisition and Resettlement Plan (LARP) in case there shall be land acquisition and resettlement that would arise from changes in the scope and detailed design of civil works. This LARF prescribes the approaches in LARP preparation and in addressing the compensation and resettlement issues resulting to: (a) loss of land; (b) loss of trees; (c) loss of house or structures; and (d) other losses of affected persons (APs). Likewise, the LARF outlines the information required for a satisfactory LARP (refer to Annex 1) that will spell out the mitigation of potential impoverishment risks and the equitable distribution of development opportunities to persons that will be displaced by the Project, in compliance with the relevant policies of ADB on involuntary resettlement and the applicable legal and policy framework in the Republic of Palau (ROP).

II. LAND ACQUISITION AND PROCESSING REQUIREMENTS

5. Based on ADB policy/practice on Land Acquisition and Resettlement (LAR) and Sector Loans, project appraisal requires the preparation of a LARF for the whole Project that will govern the preparation of LARPs for any component or subproject that will require land acquisition. All civil works designed for BWSP implementation will be screened according to their impacts on LAR. The screening criteria based on the degree of LAR impacts are: (i) Category A (Significant) - as a result of the required civil works, 200 or more people will experience major impacts, that is, being physically displaced from housing, or losing 10% or more of their productive (income-generating) assets. A full LARP is required. (ii) Category B (Not significant) - as a result of the civil works, fewer than 200 people will be physically displaced from housing or lose less than 10% of their productive (income-generating) assets. A short LARP is required.

Appendix 7 Page 8

(iii) Category C (No resettlement effect) - the subproject does not require temporary or permanent land acquisition, and there are no impacts involving the loss of land, structures, crops and trees, businesses or income. LARP is not required.

6. However, per selection criteria developed in the PPTA, only civil works with Category B and/or Category C will be funded under the Project. The categorization form for screening the involuntary resettlement impacts of civil works is shown in Annex 2.

III. PROCEDURES AND MILESTONES IN LARP

A. Procedures in LARP Preparation

7. If land acquisition is unavoidable and the preparation of a short LARP is therefore required, the following procedures will be undertaken: (i) Coordinate with the concerned state governments and village councils for public disclosure and consultations, and observe the cultural practices of the people prior to the official entry in the villages. (ii) Undertake a census of 100% APs. (iii) Undertake detailed measurement survey (DMS)2 of losses of all APs. At the same time, inform the potential APs (without discrimination) of the scope of civil works, its likely impacts, and principles and their entitlements, as stipulated in this LARF. (iv) Undertake a socioeconomic survey (SES)3 of at least 10% of all affected households and 20% of severely affected households. A gender analysis will be included in the LARP. (v) Simultaneous with SES, undertake a replacement cost survey (RCS) for various types of affected assets as a basis for establishing compensation rates at replacement cost. Determine the losses in accordance with the entitlement matrix.4 (vi) Prepare the Short LARP based on detailed design, with complete census and inventory of lost assets with time-bound implementation schedule, procedures for grievance mechanism and monitoring and evaluation, and a budget. (vii) Disseminate the information on land acquisition to all APs in a form and language they understand, and closely consult them on compensation and/or resettlement options, including relocation sites and economic rehabilitation where applicable. (viii) Finalize the Short LARP and translate into Palau language. (ix) Disclose the draft and final Short LARP in accordance with ADB’s policy on public communications to the affected villages, and on ADB’s website. The draft Short LARP will be disclosed to APs prior to submission to ADB for approval.

2 Data will be gender and ethnic minorities disaggregated. 3 It will include disaggregated data on gender. 4 If there are new categories of APs and/or losses identified during the DMS (other than those described in the entitlement matrix), the entitlements will be derived in accordance with ADB’s policy and guidelines.

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B. Activity Milestones for LARP and Civil Works Implementation

8. The EA will follow the prerequisites to comply with ADB’s involuntary resettlement policy requirements on sector project, like BWSP. Such prerequisites are defined in the following activity milestones:  At Loan Appraisal. The EA will submit an acceptable LARF and Short LARP where applicable, before ADB conduct the Project appraisal.  Award of Civil Works Contracts. The EA will first complete the implementation of LARP duly accepted and approved by ADB by paying the full compensation, entitlements and/or allowances as well as the completion of relocation of APs and clearance of civil works sites prior to the award of civil works contracts. In case of civil works with Resettlement Category C, the EA will request for “No Objection” from ADB for the award of civil works contract.  Initiation of Civil Works. The compliance on LARP implementation will be a condition for the EA to request ADB’s “No Objection” for the award of civil works contract. Construction contract will not be awarded for a specific civil work until all resettlement activities have been satisfactorily completed for that specific site, agreed rehabilitation assistance is in place, all compensation and assistance in cash and in kind have been paid and delivered to the APs, and the site is free of all encumbrances. Commencement of civil works may commence in subprojects without any resettlement impacts (Category C).

IV. LEGAL AND POLICY FRAMEWORK

9. The legal and policy framework formulated in this LARF are built upon the laws enforced in ROP and the relevant policies of ADB. This LARF will govern the LARPs that shall be prepared under the Project. From the laws of the GOP, these refer to: (a) the country’s 1981 Constitution; (b) the constitutions of the State of Aimeliik (1982), State of Airai (1990) and the State of Koror (1997)5; and (c) Title 35 of Palau National Code(PNC) that deals on Public Lands. From the relevant policies of ADB, this LARF is guided by: (i) Involuntary Resettlement Policy (1995); (ii) OM Section F2/BP, OM Section F2/OP (September 2006); and (iii) the related policies, such as, Policy on Indigenous Peoples (1998), Policy on Gender and Development (1998), Public Communications Policy (2005) and Accountability Mechanism (2003). The provisions and principles adopted in this LARF will supplement the provisions of relevant laws enforced in ROP (para. 11) wherever a gap exists.

A. Laws on Land Acquisition and Compensation in the Republic of Palau

1. The 1981 Constitution

10. The fundamental legal bases on ownership and management of land in ROP are found in the country’s 1981 Constitution. Those relevant to the requirements in LAR are found in the following constitutional provisions: a) Article IV: Fundamental Rights

Section 6: The government shall take no action to deprive any person of life, liberty, or property without due process of law nor shall private property be taken except for a recognized public use and for just compensation in money or in kind.

5 The 16 states of ROP have their own constitution. Reference to the constitutions of Aimeliik, Airai and Koror was made in this document as they are sites of the proposed civil works for BWSP.

Appendix 7 Page 10 b) Article XIII: General Provisions

Section 7: The national government shall have the power to take property for public use upon payment of just compensation. The state government shall have the power to take private property for public use upon payment of just compensation. No property shall be taken by the national government without prior consultation with the government of the state in which the property is located. This power shall not be used for the benefit of a foreign entity. This power shall be used sparingly and only as a final resort after all means of good faith negotiation with the land owner have been exhausted.

Section 10: The national government shall, within five (5) years of the effective date of this Constitution, provide for the return to the original owners or their heirs of any land which became part of the public lands as a result of the acquisition by previous occupying powers or their nationals through force, coercion, fraud, or without just compensation or adequate considerations.

2. The Constitution of the State of Aimeliik (1982)

Article XI: General Provisions; Section 4 – The Government of the State of Aimeliik shall have the power of eminent domain to meet the public needs of the State of Aimeliik pursuant to the applicable provisions of the Constitution of Palau.

3. The Constitution of the State of Airai (1990)

Article X: Lands; Section 2 – The State Government shall have the power to take property for public use upon payment of just compensation. No private property shall be undertaken by the State Government without prior consultation with the Council of Chiefs of each Hamlet in which the property is located. This power shall not be used for the benefit of a foreign entity and shall be used sparingly and only as a final resort after all means of good faith negotiations with the landowner have been exhausted.

4. The Constitution of the State of Koror (1997)

Article X: General Provisions; Section 2: Eminent Domain – No private property shall be taken for public use without proper consultation and payment of just compensation.

5. Palau National Code (PNC): General Provisions, Title 35 – Public Lands

11. With respect to the specific law in Palau, Title 35 of the PNC presents five chapters on Public Lands, such as: (a) Chapter 1 – General Provisions, (b) Chapter 2 – Palau Public Lands Authority, (c) Chapter 3 – Eminent Domain, (d) Chapter 4 – Land Acquisition, and (e) Chapter 5 – Relocation Assistance. Title 35 of the PNC has long been taken into effect long before the multilateral development institutions, like World Bank and ADB, have formulated their social safeguards policy on development projects they assist. In Chapter 4 of Title 35, it requires the national government to hire the services of an appraiser before the negotiation of compensation with the land owners. The appraisal should be based on fair market value, including improvements thereon, and which should not be less than the government’s appraisal of the fair market value of the property. In case of dispute on compensation, the court may appoint three assessors to assist in the proceedings. The national government is responsible for payment of expenses incidental to transfer of title. Chapter 5 defines the appropriate relocation assistance to displaced persons which covers the following: (i) payments for actual moving and related expenses; (ii) provide the displaced person the option to receive moving and dislocation allowance; (iii) payment on business or farm earnings; (iv)

Appendix 7 Page 11 payment for replacement housing; for homeowners; (v) payment for replacement housing for tenants; (vi) advisory program for displaced person; and (vii) assurance of availability of standard housing.

12. Land ownership in Palau is derived from the traditional clan system. The public lands are community lands belonging to a village or cluster of villages and controlled by the village or district council. These consist of the uninhabited, undeveloped lands used primarily for hunting and gathering, cutting of timber and other uses for the good of the community. However, only the residents of the village or nearby villages have access to it. The clan land is the land within the village assigned to clan members by the chief. These included lands for home sites, taro farming, wood lots and coconut plantations. The clan as a group holds title to the lands and individuals could not transfer ownership without clan approval. There are also kerong (village lands) which are used for meeting houses, men’s clubs and dock houses.

13. Chapters 4 and 5 of Title 35 of the PNC are the current legislative provisions that address the issues on land acquisition and compensation in Palau.

B. ADB Policy on Involuntary Resettlement

1. The Bank’s Main Policy Requirements

14. ADB’S policy requirements land acquisition and resettlement are established in ADB Policy on Involuntary Resettlement (1995), which are defined and provided for in OM Section F2/BP and OM Section F2/OP (September 2006). Emphasized in the Policy are the following key policy points: (i) avoid involuntary resettlement whenever feasible; (ii) minimize resettlement where population displacement is unavoidable; and (iii) ensure that displaced persons receive assistance so that they are at least as well-off as they would have been in the absence of the Project. Behind the Bank’s Policy on Involuntary Resettlement are the following main principles:

(i) Involuntary resettlement should be avoided where feasible.

(ii) Where population displacement is unavoidable, it should be minimized by providing viable livelihood options.

(iii) All compensation is based on replacement cost.

(iv) Each involuntary resettlement is conceived and executed as part of a development project or program.

(v) Affected people should be fully informed and consulted on compensation and/or resettlement options, including relocation sites, and socioeconomic rehabilitation.

(vi) Institutions of the affected people, and, where relevant, of their hosts, are to be protected and supported. Affected people are to be assisted to integrate economically and socially into host communities so that adverse impacts on the host communities are minimized and social harmony is promoted.

(vii) The absence of a formal legal title to land is not a bar to ADB policy entitlements.

(viii) Affected people are to be identified and recorded as early as possible in order to establish their eligibility through a population record or census that serves as an eligibility cut-off date, preferably at the Project identification stage, to prevent a

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subsequent influx of encroachers or others who wish to take advantage of such benefits. (ix) Particular attention must be paid to the needs of the poorest affected people and vulnerable groups that may be at high risk of impoverishments. This may include affected households without legal title to land or other assets, households headed by women, the elderly or disabled and other vulnerable groups, particularly indigenous peoples. Appropriate assistance must be provided to help them improve their socioeconomic status.

(x) The full cost of resettlement and compensation should be included in the presentation of project costs and benefits.

(xi) Relocation and rehabilitation may be considered for inclusion in ADB loan financing for the project, if requested, to assure timely availability of the required resources and ensure compliance with involuntary resettlement procedures during implementation.

2. Other ADB Involuntary Resettlement-Related Policies

15. Policy on Indigenous Peoples (1998). The Bank defines “indigenous peoples” as groups with social or cultural identities distinct from that of the dominant or mainstream society. “Indigenous peoples” is a generic concept that includes cultural minorities, ethnic minorities, indigenous cultural communities, tribal people, natives and aboriginals. ADB recognizes the potential vulnerability of indigenous peoples in the development process and development interventions that affect them. As such, the development programs and civil works interventions to be spelled out in LARP shall (i) be consistent with the needs and aspirations of affected indigenous peoples; (ii) be compatible in substance and structure with affected indigenous peoples’ cultures and social economic institutions; (iii) be conceived, planned, and implemented with the informed participation of affected communities; (iv) be equitable in terms of development efforts and impacts; and (v) not impose the negative effects of development on them.

16. Policy on Gender and Development (1998). The Bank’s Poverty Reduction Strategy (1999) recognized that improving the status of women is critical to any strategy to reduce poverty, and therefore highlights gender as an important cross-cutting theme in ADB’s poverty reduction work. Specific to land acquisition and involuntary resettlement, they are given equal opportunity in terms of participation in public consultation, decision-making for development activities, equal compensation and special assistance measures.

17. Public Communications Policy (2005). It seeks the active participation of affected people and other stakeholders during the development and review of safeguard policies on ADB-assisted programs and projects. With respect to land acquisition and involuntary resettlement, the EA shall make available the LARP to affected people in the following manner, consistent with ADB’s OM Section F2/OP (September 2006): (i) before Project appraisal, the draft LARP; (ii) after completion of the LARP, the final LARP; and (iii) following revisions to the LARP as a result of detailed technical design or change in scope in the program or project, the revised LARP. The information from LARP can be made available in the form of brochures, leaflets or booklets in the local language/s. When APs include non-literate people, other appropriate communication methods will be used. The draft LARP, final LARP and revised LARP shall be publicly disclosed at ADB website.

18. Accountability Mechanism (2003). The Mechanism is part of ADB’s continued efforts to enhance its capacity in responding to and/or resolving the problems associated

Appendix 7 Page 13 with the implementation of its policies in all programs or projects it assists. It consists of a consultation phase and a compliance review phase, by which the problems or issues raised by the affected people and/or stakeholders are investigated and resolved. The complaints can be written in any national language of the affected people and should be addressed to the concerned ADB operations department that has responsibility to the program or project. For the stakeholders and APs in Palau, the complaints shall be addressed to Pacific Regional Division at ADB Headquarters in Manila.

C. Bridging the Gaps between ROP Legislation and ADB Policy

19. Chapters 4 and 5 of Title 35 of the PNC and ADB’s policy on Involuntary Resettlement (1995) differ in many respects, such as on the following:

a) ADB’s OM Section F2/BP and OM Section F2/OP define the severely affected person if the impact of land acquisition to his/her affected productive income-generating assets is 10 % or more, while PNC has none;

b) The Bank prescribe for compensation at replacement cost while that of PNC for fair market value;

c) PNC has no specific policies on gender and development and on indigenous peoples;

d) PNC has no explicit provision for systematic information and consultation with APs about the Project, the rights and options available to them, the proposed mitigating measures, and the need for the preparation and disclosure of LARPs, as well as mechanism for grievance redress.

e) PNC does not provide that APs, community leaders, civil society organizations, non-government organizations (NGOs), and members of local peoples’ organizations and representatives of villages hosting the civil works will be included in the consultative process.

f) PNC does not prescribe for eligibility, proper identification and recording of APs

20. Given the foregoing gaps from the PNC and inconsistencies with ADB’s policy requirements, the above highlighted items will be adopted in this LARF as part of the Project’s resettlement policy and will be followed in any LARP that will be prepared under BWSP.

V. PRINCIPLES AND COMPENSATION AND ENTITLEMENT POLICIES

21. The overall objective of the EA in defining the compensation and entitlement policy for BWSP is to assure ADB of its commitment that it will ensure that all APs will be able to maintain and, preferably, improve their pre-project living standards and income- earning capacity through compensation for the loss of tangible and non-tangible assets and the provision of other assistance and rehabilitation measures.

A. Project Principles

22. To bridge the gaps between the ROP’s Chapters 4 and 5 of Title 35 of the PNC and ADB’s policy on Involuntary Resettlement (1995), the following principles will govern the LARP for subprojects and activities funded under the BWSP, by the EA and the

Appendix 7 Page 14

Project implementer, with due consideration to the peoples’ customs and traditions6 in the civil works sites: (a) Acquisition of community land and/or clan land shall be minimized and avoid the resettlement of people, as much as possible, therefore subprojects which require the physical displacement or undermine the livelihoods of 200 or more people are not eligible for funding under the Project: (b) Where population displacement is proven through option assessments to be unavoidable, it should be minimized by providing viable livelihood options; therefore, no subproject with resettlement impacts will be implemented before a LARP has been elaborated in line with this LARF; (c) All APs and heads of the clans as well as village peoples living or depending on clan lands or community lands will be systematically informed and consulted on the acquisition of their properties and possible impacts on their livelihoods. They will be informed of their rights and options and invited to participate actively in the elaboration of mitigating measures; (d) In the consultation process, MPIIC will also include representatives of the village councils, community leaders and civil society organizations like non-government organizations (NGOs) from the operational areas; (e) The customs and traditions as well as the religious practices of all APs will be respected and historical or cultural landmarks, reservation area, and trees of 50- years or more preserved and protected; (f) The APs are to be identified and their affected properties and livelihoods will be recorded and validated during a detailed measurement survey (DMS) in preparation of the LARPs for subprojects with resettlement impacts. The end of this survey will represent the cut-off date for eligibility. Eligible persons are entitled to compensation and livelihood rehabilitation measures sufficient to assist them to improve or at least maintain their pre-project living standards, income earning capacity and production levels. If the resettlement impacts are considered to be minor and do not undermine the livelihoods of the affected people, cash compensation at replacement costs will be offered. For severely affected people, sustainable livelihood restoration measures will be elaborated in the LARPs; (g) Lack of formal legal rights to assets lost will not deprive any APs from receiving compensation and entitlements. Distinctions should not be made between APs “with” and “without” formal legal title; (h) Compensation rates for physical assets, i.e. house, building and other structures, and non-physical assets like lost income from productive assets or jobs, will be calculated at replacement costs in the subproject area at the time of compensation; (i) APs that stand to lose only part of their physical assets will not be left with a proportion inadequate to sustain their current standard of living such a minimum size being identified and agreed upon during the resettlement planning process; (j) Particular attention will be given to the socially and economically vulnerable groups like female-headed households, children, the landless, the poor, elderly or

6 In Palau society, the traditional governing village council is male with a female chiefly counterpart council. Senior women are integrally involved in leadership who can select or remove the male titleholders. Senior women have strong voices in clan decisions on property, title and wealth which are controlled by the matrilines because these enter the clan through women. However, inheritance practices in the country are undertaking major transformations which are eroding women’s power.

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handicapped people without support structures and other people living in extreme hardships during the resettlement plan implementation process; (k) An independent grievance redress mechanism will be established to solve resettlement-related disputes and complaints from the APs; (l) Whenever necessary, MPIIC will arrange for the assistance of village councils and relevant institutions to ensure effective consultations and a comprehensive and timely implementation of LARPs; (m) The full cost of land acquisition and resettlement will be included in the project cost and adequate budgetary support shall be made available during implementation; (n) Appropriate reporting and monitoring and evaluation will be established by MPIIC as part of the resettlement management system; (o) Finally, MPIIC will ensure that all land acquisition, compensation, resettlement and rehabilitation activities will be satisfactorily completed and the subproject areas cleared of all obstructions before commence of civil works.

B. Eligibility

23. All persons and entities “with” or “without” land title, who are residing, using, working on the lands that shall be temporarily or permanently acquired, and identified during the DMS are eligible to receive compensation. Livelihood activities that may be affected by temporary land acquisition are also eligible for compensation. Eligibility for compensation will be limited by a cut-off date to be established for each site on the last day of the census and impact assessment. APs who have established their structures within the subproject sites after the cut-off date are not eligible for compensation. However, they will be given sufficient advance notice to dismantle their structures and vacate the affected premises prior to the initiation of civil works. The dismantled structures will not be confiscated and they will not pay any fine or sanction. But if all avenues for amicable resolution have been exhausted to vacate the premises, forced eviction will be enforced.

C. Categories of APs

24. The persons that are likely to be affected by land acquisition under the Project were determined through the assessment of the proposed and existing sites in the States of Koror, Airai and Aimeliik during consultations with people and MPIIC officials. Land acquisition in each site can only be ascertained after the completion of detailed design. But if there will be land acquisition, the categories of persons and/or households that may be affected were defined on the basis of relevant provisions of Title 35 of PNC and ADB policy on involuntary resettlement, such as the following: (i) Legal users7 of land that include village people and individuals and households of the clan with recognized ownership rights verifiable through the (a) title of the community lands; and (b) title of the clan lands. (ii) Owners of houses and/or structures. (iii) Agricultural and non-agricultural workers or employees that may be temporarily or permanently affected by land acquisition.

25. The above categories of APs, including their socioeconomic conditions, incomes to determine poverty levels and disaggregated by gender, will be validated during the

7 In the context of land ownership, there is no person, household or clan that can be categorized as non- legal user of land in Palau.

Appendix 7 Page 16 joint DMS and socioeconomic surveys. Information on socioeconomic status of the area and APs as well as losses of properties will be disclosed in the LARP.

D. Types and Levels of Losses

26. The following types and levels of Project-induced impacts are broadly envisaged upon implementation of civil works for BWSP: (i) permanent loss of residential lands; (ii) loss of houses and/or structures; and (Iii) loss of trees.

E. Project Compensation and Entitlement Policy

27. Given the categories of APs and based on the types and levels of losses on their properties and assets, the following compensation and entitlement policy will apply:

1. Temporary loss of land

a) For Right of Way (ROW) easements during the construction of access roads, development of water supply wells, and rehabilitation and expansion of water supply network, and temporary work stations and storage of project materials, no compensation will be paid, but MPIIC will negotiate with the landowners or head of the clan a lease for the affected land and pay this lease in accordance with the timeframe to be negotiated in the LARP. After the use, the land will be restored to its original condition or improved quality and returned to the landowner within the agreed timeframe.

2. Permanent loss of land

a) For construction sites and permanently used land, a cash compensation based on replacement value of the affected portion of land will be negotiated with the landowner or chief of village council; or, exchange land of similar quality in the operational area of the subproject and all legal and other transaction cost arising from the acquisition of land for subprojects will be borne by MPIIC.

b) If the remaining portion of the affected land is no longer viable for continuous use, MPIIC will negotiate compensation at replacement value for the entire land, and if the affected landowner requests this, assist the affected landowner to find a similar piece of land within the village. The EA will shoulder all transaction costs associated with the transfer of land ownership or the establishment of lease agreements.

c) For clan land, the compensation will be negotiated with and paid to the senior women or male head of the clan who should make it available to the affected households and individuals. In line with established customs, the LARP must document that the proposed compensation was accepted by the head of the clan and that the amount is equal or higher than the replacement value of the land.

d) MPIIC may assist the AP to find a similar piece of land within the village or, arrange with Bureau of Lands and Survey to grant public lands in

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exchange of the APs’ lands being expropriated8. MPIIC will shoulder all the transaction costs including the titling thereon.

3. Loss of crops and trees

a) For the loss of annual crops on temporarily or permanently acquired land, a cash compensation equivalent to the market values of each crops at the time of anticipated harvest will be paid to the owner of the crops (which does not need to be the owner of the land).

b) For the loss of other crops and trees cash compensation will be paid to the owner (which does not need to be the owner of the land). For affected trees on community land, compensation should be paid to village chief; for affected trees on clan land, payments should be made to the senior women or male head of the clan. During the elaboration of the LARP, MPIIC and the AP will fine-tune and negotiate the compensation rates for the different species, types, ages and productivity.

4. Loss of other income sources

a) In the unlikely event that one of the subprojects affects livelihoods, which are non-agricultural (fishing, hunting, handicraft etc.), MPIIC will ensure that the livelihoods of the APs are improved or at least restored. Details are going to be elaborated in the LARPs.

b) If the income losses are temporary, MPIIC will pay to AP the amount equal to their average monthly income (as determined in the DMS) for the entire period during which their livelihood is affected.

5. Loss of common properties, which are not land based

a) In the unlikely event that one of the subprojects affects non-land based common properties such as cultural heritages, secret caves, graves etc., MPIIC will provide funds for all ceremonies etc., which are associated with their resettlement. Details are going to be determined during the elaboration of LARPs.

6. Loss of access to common property

a) If the access to a common property (road, river, fishing ground, forest etc.) is temporarily affected, MPIIC will provide for alternative access (bypasses etc.) or if this is found to be impossible provide an easement fee for all APs; MPIIC will also restore the access up to a condition, which is equal or better then before the project.

b) If the access to common property (road, river, forest, fishing ground etc.) is permanently lost, MPIIC will provide for an alternative access and an easement fee for all APs. All impacts associated with this alternative access will be addressed accordingly.

8 In Section 103, Chapter 1 of Title 35 of Palau National Code, it provides that public lands not reserved for other purposes may be granted by the President in payment or exchange for the use and occupation of privately-owned lands within the Republic by the national government…

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7. Loss of structures

a) In the unlikely event that a BWSP subproject affects a structure (house, shade, water tank etc), MPIIC will provide: (i) a cash compensation amounting to the full replacement cost (material, labor, supervision etc), which will be paid to the owner of the structure; (ii) relocation assistance in cash and in kind (provision of labor and transport resources, advisory programs9); and (iii) assurance of availability of standard housing10 of equal or higher quality.

b) MPIIC will further provide all occupants, irrespective of their ownership status, with a moving allowance equal to two months income (as determined in the DMS).

c) Further, all materials salvaged from demolished structures remains the property of the owner of the structure.

8. Special Assistance for vulnerable affected persons

a) During the preparation and implementation of LARPs, MPIIC will pay particular attention to the needs of vulnerable groups especially those below the poverty line, the landless, the elderly, women and children, ethnic minority11, or persons without legal entitlements and ensure that their living standards are enhanced.

28. Given the limited availability of lands in Palau, MPIIC does not expect any voluntary donation of land from any private persons in the villages hosting the Project.

F. Entitlement Matrix

29. The Entitlement Matrix in Table 2 provides the main types of losses and the corresponding coverage of compensation and entitlements to eligible APs. However, it does not cover all resettlement impacts/losses. During the preparation of LARPs, the census and DMS will be the basis for determining the final compensation and entitlements based on actual impacts/losses including appropriate relocation and rehabilitation assistance and special assistance to poor and vulnerable groups. Replacement cost surveys (RCS) in subproject host villages in Koror, Airai and Aimeliik will be carried out to determine the actual replacement costs and current market rates of affected assets. Standards described will not be lowered but can be enhanced in the LARPs, as required.

9 Provision for relocation advisory programs is mandatory in Section 508 of Chapter 5 of PNC. 10 Assurance of availability of standard housing is provided for in Section 509 of Chapter 5 of PNC 11 There are no indigenous peoples in Palau but ethnic minority representing 25 percent of the population who are foreigners and working in the country.

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Table 2: Entitlement Matrix Eligible Persons Compensation and Affected Type of Loss Entitlement Expected Results Asset  No compensation for land but will pay lease to village council in accordance with the timeframe for the use of Restoration to the Temporary loss of land. original condition or Village people community land.  Restoration of land to its improved quality of original condition or community land improvement of quality and return to owner within the agreed timeframe.  No compensation for land but will pay lease to village council in accordance with the timeframe for the use of Restoration to the Individual and Temporary loss of land. original condition or household of the clan land improved quality of clan  Restoration of land to its original condition or the clan land improvement of quality and return to owner within the agreed timeframe.  Cash compensation based on the current market value payable to village council, or, exchange land of similar quality assigned to village Restoration of land 1. Land Permanent loss of council, with assistance from Village people ownership by the community land. the Bureau of Lands and community. survey.  Legal and other transaction cost arising from land acquisition will be borne by MPIIC.  Cash compensation based on the current market value payable to senior women or male head of the clan, or, exchange land of similar Individual and quality assigned to head of Restoration of land Permanent loss of household of the the clan, with assistance from ownership by the clan land clan the Bureau of Lands and clan. survey.  Legal and other transaction cost arising from land acquisition will be borne by MPIIC.  Cash compensation Livelihood Individual and/or equivalent to market values restoration of the household of the of each crop at the time of individual or clan anticipated harvest, payable household Annual crops directly to the owner  For trees, cash compensation equivalent to Replacement of Village people market values payable to the loss trees village chief 2. Crops and Trees  For crops, cash compensation equivalent to market values at the time of anticipated harvest, payable Livelihood Individual and Other crops and direct to the owner restoration of the household of the trees For trees on clan land, cash individual or clan  compensation equivalent to household market values, payable to the senior women or male head of the clan.

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Affected Eligible Persons Compensation and Assets Type of Loss Entitlement Expected Results  MPIIC will pay the amount Livelihood Agricultural equal to the average monthly restoration of the Temporary loss worker or income during which the individual or employee entire period their livelihood household 3. Other is affected income Livelihood sources  Details of livelihood Agricultural restoration will be elaborated restoration of the Permanent loss worker or in LARP, in which MPIIC will individual or employee ensure that loss livelihood is household at least restored or improved.  Provision of funds for 4. ceremonies. Restoration of Common Permanent loss Village people common properties properties  Details of restoration will be elaborated in LARP.  MPIIC will provide for alternative access; or 5. Access  Pay for easement fee for Restoration of to Temporary or Village people village people, or access to common common permanent loss property property  Restore the access equal to or better than the original one.  Cash compensation equivalent to replacement cost of affected structure, payable to the owner.  In case of house, relocation Replacement of Permanent loss of assistance in cash and in Individual and/or structure of equal or 6. structures (i.e. kind, and assurance of household of the better quality Structures house, shade, availability of standard clan water tank, etc.) housing of equal or higher Restoration of living quality. standard.  Moving allowance equivalent to two months income.  Salvaged materials remain the owner of the structure.  Particular attention will be given to the needs of Vulnerable Restoration of living 7. Special Assistance vulnerable groups and affected persons standard. ensure that their living standards are enhanced.

VI. GENDER IMPACTS AND MITIGATING MEASURES

30. In compliance with ADB Policy on Gender and Development (1998), the Project will pay particular attention to women to ensure that they are: (i) entitled to receive compensation for their affected land, structures, crops and trees; (ii) clearly listed as household heads to be provided with allowances for transition and subsistence, transportation, and supplementary allowance for being vulnerable as the result of land acquisition; (iii) given preference for employment of one of its household members in civil works (iv) extended other form of assistance during relocation, i.e. sending of medical personnel to see to it if there are: (a) pregnant women who are due to deliver their child, (b) elderly household members who are sick, and (c) physically disabled members who are unable to move. In order to ensure that the preceding forms of assistance will be extended to women, the following actions will be initiated:

(i) Inclusion of women in the impact enumerators; (ii) Use of census instrument where gender data can be disaggregated to determine how many women are likely to be affected by civil works and establish their pre-Project conditions;

Appendix 7 Page 21

(iii) Inclusion of women as major participants in the consultation processes; (iv) Highlight the effect of LAR impacts on women in monitoring and evaluation of LARP. Compensation payments should be made in the presence of both husband and wife; (v) Use of participation/consultation strategies that encourage women and poor households to get involve in resettlement planning and implementation; (vi) Complaints/grievances lodged by women or poor households will be given priority; (vii) Where possible, include women government officials in coordination committees to facilitate the LARP preparation and implementation.

31. Specific action plans for women will be incorporated in LARP.

VII. INDIGENOUS PEOPLES AND VULNERABLE GROUPS

32. There are no indigenous peoples in Palau. However, consistent with Project principle (j) in this LARF, the Project will identify certain social groups that may be less able to restore their living conditions, livelihoods and income levels that will be at greater risk of impoverishment. The EA will commit to provide special attention to vulnerable groups like the poor, and households headed by women, disabled, elderly or children without means of support, in addition to compensation. Such commitment will be written in a section in LARP detailing the specific action plans for vulnerable groups.

VIII. PUBLIC PARTICIPATION AND DOCUMENTS DISCLOSURE

33. The Project is designed to encourage participatory approaches that involve information exchange and decision-making during LARP preparation process. In compliance with ADB Public Communication Policy (2005), information exchange will cover information dissemination to and consultation with village councils about the Project; their assistance will also be solicited for the inventory of affected assets and the census of APs. Decision-making involves the collaboration of the EA with APs and the extension of choice to APs to decide on their preferences on compensation and/or other resettlement assistance, including compensation rates. The objective of information exchange is to allay the fears of APs about what may happen once the Project is implemented12. The objectives of consultation are to: (a) obtain some of the details that could be overlooked during LARP preparation; (b) formulate resettlement options that balance the APs’ needs and capabilities with technical requirements of the civil works; and (c) help avoid unnecessary and costly subproject development delay. The processes and mechanisms that ensure the active involvement of APs and other stakeholders will be described in the LARP applicable in the existing conditions in every civil works site. Every public consultation will be documented and summarized in the prescribed form in Annex 3 and will be appended to the LARP. The attendance sheets of participants will be provided in electronic files, when requested.

34. A primer on LARP will be prepared in Palau language for distribution to host villages, APs and the stakeholders. The MPIIC will endorse the full English version of LARP to ADB for approval and for posting at the ADB website.

12 The World Bank; Involuntary Resettlement Sourcebook; Planning and Implementation of Development Projects; published by World Bank in 2004; p. 125.

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IX. GRIEVANCE REDRESS MECHANISM

35. Grievance and redress mechanism in development projects is provided for in ADB Accountability Mechanism (2003). Under the Project, MPIIC will assign the communications with APs to the Project Management Unit (PMU) that will be set up for implementing the Project. The PMU will be supported by the Project Implementation Assistant (PIA) consultants, in which among the important functions is to ensure that the APs are aware of the procedures in filing complaints or grievances that may arise during LARP implementation so that unnecessary delays in civil works construction can be avoided. A primer on grievance and redress mechanism and appeals process will be disseminated to APs during the DMS. Upon mobilization, the PMU will assign a desk unit to receive complaints from the APs or stakeholders related to environment and social safeguards. Grievance and Redress Committees (GRCs) at the village levels will be established in which composition is described para. 41.

36. Grievances or complaints from APs will be solved in a timely and satisfactory manner. The APs can submit their grievances to GRCs either in verbal or written form, at no cost to them. The procedures for filing and resolution of grievance and complaints are described in Table 3 that will be followed in the villages hosting the subprojects in the States of Koror, Airai and Aimeliik.

Table 3: Grievance Redress Procedures

Stages Activities/Procedures The AP and head of the clan files a complaint/grievance verbally or in writing to Stage 1 GRC. If unwritten the GRC will assist to put it in writing and hear the complaint in public for transparency, and based on their traditional method of conciliation and mediation. Resolution is within 5 days after the complaint/grievance was received. If no solution or understanding is reached within 5 days, the AP and head of the Stage 2 clan can bring the complaint to the PMU, and resolve within 10 days after receiving the complaint. If the AP and the head of the clan are unsatisfied to the decision of the PMU, they Stage 3 can seek redress at the Office of the President through Bureau of Lands and Survey. The President will promulgate the regulations regarding payments and eligibility, Stage 4 which is final and executory. AP – affected person, GRC – Grievance and Redress Committee, PMU – Project Management Unit

X. MANAGEMENT OF LARP PREPARATION AND IMPLEMENTATION

A. Organizational and Institutional Arrangement

1. The MPIIC

37. As the project EA, the tasks of the MPIIC in implementing the LARP are: (i) endorsement of LARP for the review and approval by ADB; and (ii) approval and release of adequate budgetary support for payment of compensation and allowances to APs. The MPIIC will assign one Project Accountant to the PMU that will record, control and monitor the payments to APs. The MPIIC will request ADB for “No Objection” for the release of funds for civil works construction upon substantial compliance of LARP implementation. Substantial compliance means the complete payment of compensation to APs, in cash or in-kind, and allowances.

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2. The PMU

38. As the coordinating arm of MPIIC, the PMU will supervise the PIA consultants. The PMU will be assisted by a multidisciplinary team of consultants that include the safeguards specialists, such as in environment, social development and resettlement. One Project Accountant from the MPIIC will be assigned to PMU (para. 36)

3. The PIA Consultants

39. The PIA consultants comprised by the association of international and national consulting firms or individuals will be hired for the Project, in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). Related to LARP preparation and implementation, the PIA consultants will: (i) initiate public consultations and public participation; (ii) assist the PMU in preparing the LARPs in case of land acquisitions; (iii) request budget to and release of funds by MPIIC for payment of compensation and resettlement assistance to APs; (iv) design and implement internal monitoring, including LARP implementation; (v) coordinate with village councils for the organization of GRCs; (vi) submit quarterly monitoring report to ADB; and (vii) advise the EA through the PMU on when to request for “No Objection” for the release of loan to BWSP. One Social Safeguards Specialist (SSS) will join the PIA consultants whose tenure shall be determined upon commencement of Project implementation to assist the PMU in preparing, implementing and monitoring the LARP. The PIA Consultants will hire the services of an Independent Monitoring Agent (IMA) for the periodic monitoring and evaluation / 3rd party validation of LARP implementation.

4. Grievance and Redress Committees

40. The GRCs in each village hosting the BWSP subprojects will be composed of five (5) members; three from the village councils and two appointed representatives from the clans of APs. The SSS from the PIA consultants will discuss the grievance redress procedures during consultation meetings in preparation of the LARP. The APs will be given information booklet for their reference.

B. Training and Orientation

1. Preparation Stage

41. The SSS will coordinate with village councils to provide them the Poject background, discuss the procedures and their participation in LARP implementation. If relocation of APs shall be required, their confirmation on available lands will be obtained. They will be informed of their participation in the resolution of complaints and grievances.

2. Implementation Stage

42. The SSS will design the forms essential for the recording and control of and monitoring the payments of compensation, allowances and assistance extended to APs. The SSS will orient the Project Accountant assigned at the PMU on filling up the forms. The status of payment and implementation will be included in the periodic internal monitoring report by PIA consultants to ADB. The SSS will also appraise the IMA on the procedures applied in the preparation of LARP, the DMS, the implementation arrangements and the pertinent documents used as well as in the flow of funds for payment of compensation and assistance to APs.

Appendix 7 Page 24

C. Database Management

43. All data on APs recorded in the DMS will be maintained at the PMU. From the filled-up DMS forms, the SSS from the PIA consultants will produce three (3) sets of computerized data on APs; (i) list of APs and their affected properties; (ii) individual ledger of APs that will serve as their individual Compensation and Entitlement Form (CEF); and (iii) status of payment of compensation and entitlement of APs for internal monitoring purposes. The CEF will be prepared in two copies; one for PMU and one for the AP. Each CEF will have provision for the calculation of compensation of affected assets and will be finalized when compensation and entitlements shall have been agreed with the APs. The SSS will design the CEF each has numeric code specifically assigned to the APs.

D. Replacement Cost Survey

44. Information on replacement costs is a key element for budget preparation in LARP. So that reasonable budget should be established, the PIA consultants will conduct desk research and interviews with peoples in affected areas comprising the APs and the not affected ones. Information from desk research refer to the relevant issuances on land values in Palau, but only in support for the establishment of compensations rates at replacement cost. The PIA consultants will also consider the market studies of recognized individual or institutions involved in land valuation in Palau. As to prices of assets attached to the affected lands, the PIA consultants will conduct research on prices of construction materials for houses, trees and crops, in coordination with relevant government agencies in Palau. The replacement cost surveys (RCS) shall be parallel with the conduct of DMS. But in case of delay in civil works implementation, the costs will be validated and updated in LARP, where appropriate.

E. Review, Endorsement and Approval of LARP

45. The PIA consultants will submit the draft final LARP to PMU after incorporating the comments of APs. Following a review that the LARP complies with the Project policies and procedures, the LARP will then be disclosed to the affected villages. The PMU, in coordination with MPIIC, will then submit the LARP to ADB prior to Project loan appraisal for review and concurrence. The Bank will place it on ADB website for downloading by the public.

XI. RESETTLEMENT BUDGET AND FINANCING

46. The LARP will have a section that details the resettlement budget and financing arrangement. The budget will include the compensation to assets and land at replacement costs, other allowances and assistance to APs, cost of RCS, administration cost, monitoring and reporting and contingency allowance for unforeseen expenses and for cushioning the effect of inflation during LARP implementation. Assumptions on unit replacement costs in calculating the compensation of APs will be disclosed. The cost of LARP represents the counterpart fund of the GOP it being part of the overall Development Expenditures of the Project. The MPIIC will approve the budget and release the funds for implementing the LAR. The broad description of the flow of funds will be discussed in the LARP.

XII. MONITORING AND EVALUATION

47. The primary objective of monitoring is to identify as early as possible the activities achieved and the cause(s) of constraints so that arrangements in LARP implementation can be adjusted. Monitoring is important as LARP implementation is often the critical

Appendix 7 Page 25 path for the Project where civil works is involved, due to issues on land acquisition, compensation, rehabilitation and resettlement that may cause for construction delay. The early identification of causes for delay will enable the PIA consultants to prepare the mitigating measures during LARP implementation. In the context of project development, the PIA consultants will use two mechanisms: (i) internal monitoring by PIA consultants; and (ii) external monitoring by IMA.

A. Internal Monitoring

48. The PIA consultants will routinely perform internal monitoring of LAR with results will be reported to ADB on quarterly basis. Related information will be collected from the field and reported monthly to the PMU to assess the progress and results of implementation, and to adjust the work program. The monthly reports will be consolidated every quarter. Indicators for the internal monitoring will be those related to process and immediate outputs and results, such as the following: (i) information campaign and consultations with APs; (ii) status of land acquisition and payments of compensation or provisions for replacement lands; (iii) compensation of affected structures and other assets; (iv) relocation of APs; (v) payments of loss income; (vi) selection and distribution of replacement land areas; and (vii) income restoration activities.

49. The preceding indicators will be monitored monthly by applying the following approaches: (a) review of DMS on all APs; (b) consultation and informal interviews with APs; (c) in-depth case studies; (d) sample survey of APs; (e) key informant interviews; and (f) public meetings with people in the villages hosting the subprojects.

B. External Monitoring

50. The PMU will hire the services of IMA at the early stage of LARP implementation for external monitoring. The IMA will come from an independent organization, such as an academic or research institute, or consulting firm in Palau, with experience in resettlement monitoring. The IMA will perform the following activities13: (i) Verify internal reports with APs as to the payments of compensations and entitlements including the levels and timing of the compensation; readjustments of land; preparation and adequacy of resettlement sites; construction of houses; provision of employment and adequacy of income levels; training; special assistance for vulnerable groups; repair, relocation or replacement of house or infrastructure; and provision of transition allowances; (ii) Interview a random sample of APs in open-ended discussion to assess their knowledge and concerns about the resettlement process, their entitlements, and the rehabilitation measures; (iii) Observe the functioning of the resettlement operation at all levels to assess the effectiveness and compliance with LARP; (iv) Verify the nature of grievance issues and the functioning of grievance redress mechanism by reviewing the processing of appeals at all levels by interviewing the aggrieved APs; (v) Where feasible, survey the standards of living of APs and the people in unaffected portion nearest the civil works sites before and after the LAR, to assess the effects of resettlement in APs’ standard of living; and

13 Adopted from Involuntary Resettlement Sourcebook: Planning and Implementation of Development Projects; published by The World Bank (2004), p.220.

Appendix 7 Page 26

(vi) Advise the EA and the PMU regarding the possible improvements in the implementation of LARP.

51. The IMA will also appraise the recording of LARP transaction in the Project accounting system. The IMA will report on quarterly basis. Assessment by the IMA on the compliance in LARP implementation will justify MPIIC’s request to ADB for its “No Objection” for the award of civil works contract, and subsequently the release of funds for civil works.

Appendix 7 Page 27

Annex 1

Outline of a Short Land Acquisition and Resettlement Plan

Executive Summary

A. Introduction 1. Brief description of the Project scope (provide map of Project areas) 2. Types of impacts (summary description of acquisition and other assets) 3. Objectives and Policy

B. Description of Affected Persons and Social Impact Assessment 1. Description of APs including their spatial distribution 2. Gender-disaggregated socioeconomic characteristics of Project Affected Households  Total number of families affected by the Project  Employment type and major sources of income  Tenure status (land and house/structures)  Affected land and assets; areas, types of structures, and conditions 3. Categories and numbers of affected households by type and degree of impacts  Affected households with loss of entire holdings are required to relocate  Affected households with loss of partial holdings and not required to relocate  Tenants, landless laborers, informal settlers, etc. affected by the Project  Affected households with loss of incomes and employment

C. Compensation and Policy Entitlement Criteria 1. Elements of compensation policy: objectives and entitlement criteria 2. Compensation entitlements for each category of APs 3. Other assistance (transport allowance, rehabilitation assistance, etc.

D. Cost Estimates and Budget  Aggregate cost for each type of asset loss and implementation arrangements

E. Information Dissemination, Public Participation, Consultation, and Grievance Resolution 1. Consultation with stakeholders at the different stages of the Project 2. Existing and Project-specific mechanisms for grievance resolution

F. Organizational Set-up  Organizational structure of the unit/division within the institution that is responsible for management, supervision, and implementation of LARP

Appendix 7 Page 28

G. Implementation Schedule 1. Implementation schedule for land acquisition and compensation for each component of the Project, including description of different activities and their sequence 2. Timetable for implementation of different land/asset acquisition activities in relation to the Project

H. Monitoring and Evaluation 1. Internal Monitoring 2. External Monitoring

Appendix 7 Page 29

Annex 2 Babeldaob Water Supply Project

LAND ACQUISITION AND INVOLUNTARY RESETTLEMENT CATEGORIZATION FORM

A. BASIC INFORMATION

Please fill up the boxes below by providing brief description and/or information, or put a cross mark (X) where applicable.

1. Type of Water Supply Facility

Name of Water Facility: ______

2. Location Country State Village/Hamlet

3. Brief description of civil works construction involved.

4. Will there be expansion in the water supply facility area? [ ] Yes [ ] No

B. SCREENING QUESTIONS FOR RESETTLEMENT CATEGORIZATION Extent of Impacts and Involuntary Resettlement Effects Yes No Remarks Does the water facility include upgrading or rehabilitation of existing physical facilities? Will it include the construction of new physical facilities? Will it require permanent land acquisition/s? Is land acquisition likely to be necessary? Will land acquisition lead to loss of housing Will there be loss of business enterprise? Will there be loss of incomes and/or livelihoods? Will there be loss of trees? Is the ownership status and usage of land known? Are there any non-titled people who live or earn their livelihood on affected land/s? Will people lose access to facilities, services or natural resources? Will any social or economic activities be affected by land-use related changes?

C. INVOLUNTARY RESETTLEMENT CATEGORY

After filling up the columns that answer the questions in Section B, assess the involuntary resettlement category of the proposed civil works construction for the proposed health

Appendix 7 Page 30 facility. Put a cross mark (X) on the first box that matches to the involuntary resettlement category of the Water Facility being screened. Not Significant. Less than 200 people (or 40 households) will be [ ] Category B : physically displaced from housing, or lose 10% of their productive (income-generating) assets. A Short Land Acquisition and Resettlement Plan is required.

[ ] Category C : No land acquisition and resettlement impacts. Land Acquisition and Resettlement Plan is not required.

Please provide additional information on affected persons if the proposed civil works construction for water facility falls under Category B. Provide estimate and description of Affected Persons Yes No current situation if the answer is Yes Any estimate of the likely number of households that will be affected civil works? Are any of them are poor households? Are there any households that belong to ethnic minority groups? Are there any households headed by women, elderly or disabled persons?

Provide schedules if the proposed civil works construction is Category B.

Start of Short LARP Preparation: ______

Schedule to finish the LARP: ______

Schedule of LARP submission to ADB: ______

For the Project Steering For the PIA Consultants For the PMU Committee Prepared by: Endorsed by: Approved by:

Signature Signature Signature

Name Name Name

Position Position Position

Date Date Date

Appendix 7 Page 31

Annex 3 SUMMARY OF CONSULTATIONS/MEETINGS

Issues Raised / Responses / Date and Organization/ Type of Number of 14 Outcomes / Follow –up Location Agency Participants Participants Actions with Responsibility

14 Indicate the number of women.

Appendix 8 Page 1

APPENDIX 8 – DRAFT DESIGN AND MONITORING FRAMEWORK

Design Performance Data Sources/Reporting Assumptions and Risks Summary Targets/Indicators Mechanisms Impact Assumptions The living conditions of  100% of Koror-Airai  National statistics and  Government continues residents within the Koror- residents will have census data to give development Airai water supply area access to improved  BPW then the water priority to health sector and the State’s role as safe piped water supply supply and sewerage including water supply. economic centers have by 2013. Authority (WASA)  Government continues been enhanced.  The Koror-Airai water technical performance to give development supply systems is self- indicators priority to Babeldaob sustaining States Outcome Assumptions The urban population in  24 hour-piped safe  BPW and WASA Annual  Project operating the Project area has water is supplied to Reports on water sector entities receive improved access to safe, about 18,000 residents performance adequate training under affordable, reliable, and visitors in Koror  Customer water bills and the Project, through in- sustainable piped water and Babeldaob on surveys house programs and supply services and Project commissioning. develop capacity and  Baseline and follow-up improved knowledge on  Household water bills budgets to operate and complementary sanitation. socioeconomic surveys maintain the water are no more than 5% of in the Project area household income. supply and sanitation  WASA technical facilities in the Project  Sanitation appreciation performance indicators area. in all communities is raised to 100% on  The GOP adopt BPW Project commissioning. tariff recommendations and provides WASA with the legal power to set tariffs  Budgets for O&M of water and sanitation are adequate  Communities are aware of links between health, hygiene, sanitation, and clean water use Outputs Assumptions 1. Urban water supply  GOP commits to  New Water Law and  A water supply 5-year sector planning, establishment of a modifications to Water action plan updated and policymaking, corporatized Water and Resources Laws approved by early 2010 management, and Sewerage Authority  Establishment of a  The importance of a regulation capacity (WASA) and formal water supply and new Water Law and and sector human commences to prepare sewerage regulating water sector regulation resource the necessary water entity is recognized by the development is law, plans and  BPW and WASA annual Government, WASA, strengthened and programs to achieve and consumers improved. this. water sector investment plan.  Funding mechanism for  Water sector  WASA Annual Plans on WASA operations is investment plan agreed updated by BPW then performance WASA on annual basis  BPW tariff review for  The Government 2011-2013 formally recognizes  Regulatory compliance WASA’s role and it monitoring undertaken  Human resource starts operating as and Annual Plans development strategy dedicated water sector prepared by BPW then and plan for urban water operator by July 2012. WASA on annual basis sector  Tariff review  Asset transfer and undertaken by BPW for acquisition plans 2011-2013  Public awareness  Human resource program development strategy,  State government asset transfer plans, Appendix 8 Page 2

Design Performance Data Sources/Reporting Assumptions and Risks Summary Targets/Indicators Mechanisms State Government cooperation plan cooperation plan etc.  Environmental, water for urban water sector and sewerage prepared by 2010 regulations

2. Water supply  New emergency water  Project records  Sufficient ground water reliability is improved supply sources are can be produced from during time of drought constructed and borefield. by development of a commissioned by 2013. borefield in Airai. 3. Community  Community  Project progress reports  GOP, BPW and WASA participation, actions participation plans  Construction records are committed to and awareness formulated with community participation complement piped stakeholders and  Baseline and follow-up and development water supply, successfully socioeconomic surveys improvements in the implemented in the Project area Project area.  Community, including  Community participation women and ethnic plans groups, actively participate in the project activities.  Community is aware of links between health, hygiene and sanitation, and clean water use.  20% reduction in water consumption by 2013 4. The Koror-Airai water  The existing Koror-Airai  Project progress reports  Project management supply system is water supply is  Construction records unit (PMU) with rehabilitated and rehabilitated by 2013 competent staff and extended.  Production and adequate resources are  A pipeline extension is consumption records constructed along established on time. Compact Road into  Government and PMU Aimaliik. ensure adequate and  A 20% reduction in timely counterpart non-revenue water funds, and prompt achieved by 2013 payment of contractors. 5. Capacity for project  PMU is established,  Project progress reports  GOP allocates implementation and trained, and operating  Construction records adequate staff and infrastructure with qualified staff and resources for PMU and management, adequate resources  Baseline and follow-up other project operating operation and within 3 months of the socioeconomic surveys entities. maintenance is Project in the project area improved. commencement.  Needs-based health and hygiene promotion and awareness program is designed and implemented in the project area.  O&M plans for water supply, are developed Activities with Milestones Inputs

1. Piped Water Supply Systems ADB - $4.95 mill Asian Development Fund - Mobilize and establish project implementation assistance (PIA) consultant by Q1 $1.18 mill. 2010. Ordinary Funds $3.15 Mill. - Establish and train PMU prior to project start. Other International - PMU and PIA consultants provide project orientation to stakeholders by Q2 2010 Agencies - $5.0mill and PIA consultants provide technical and management support to PMU European Investment Bank Appendix 8 Page 3

Design Performance Data Sources/Reporting Assumptions and Risks Summary Targets/Indicators Mechanisms throughout Project implementation $5.00 mill. - Prepare feasibility studies, subproject appraisal reports, subproject designs and Government - $0.09mill tender documents progressively throughout Project implementation - Conduct contract bidding, award and construction of water supply systems progressively throughout Project implementation 2. Sector Strengthening - Mobilize and establish sector-strengthening consultants by Q1 2010. - Build and strengthen capacities of WASA, and assist them to undertake their core functions for a period of two years from project start. - Raise awareness of ministries, state governors, and the public regarding the value of regulation. - Disseminate key urban water sector technical and management guidelines, policies and laws to the States. 3. State Sustainability - Undertake institutional assessments of project States and formulate specific action plans to improve performance and sustainability throughout Project implementation. Obtain government approval to the action plans. - Prepare 3-year rolling corporate plans throughout Project implementation. Obtain government approval to the action plans. - Implement the specific action plans and corporate plans for States. 4. Community Participation - Prepare and implement community participation plans in the Project area to mobilize community participation and raise awareness of the Project throughout Project implementation. - Raise community awareness on health, sanitation and links with water use throughout Project implementation. 5. Capacity Building for Project and Ongoing O&M - Build and strengthen the capacities of Project operating entities to manage, operate and maintain the Project infrastructure. ADB = Asian Development Bank; O&M = operation and maintenance; PMU = Project management unit; PIA = project implementation assistance; PM = person months; Q1 = 1st quarter; WASA = Water Supply Authority; Appendix 9 Page 1

APPENDIX 9 – INSTITUTIONAL ASSESSMENT OF WATER AND WASTEWATER SERVICES

Table of Contents

I. Executive Summary………………………………..……………………….………….....3 1.1. Water and Sewerage Performance………………………………………..………..3 1.2. Institutional Recommendations…………………………………………..………….4

II. Background………………………………………………………………………………...5 Objective…………………………………………………………..……………………. 5 Methodology……………………………………………………..……………………...6

III. Current System for Delivery of Water and Sewerage Services……..…………….7 Organizational Responsibility……………..…………………………………………..7 Operations and Performance………………………………….……………………...8 Coverage…………………………………………………...………………….9 Availability…………………………………………………...…………….…10 Consumption…………………………………………………………………10 Non-revenue Water……………………………………………...………….11 Metered Connections……………………………………...………………..12 Customer- Staff Ratio……………………………………………………….12 Cost Recovery……………………………………………………………….14 Tariff…………………………………………………………………………..16 Water and Sewerage Delivery Reform……………………………………..………17

IV. Corporatization Structures……………………………….………………….…………18 Corporatization Issues…………………………..……………………………………19 Legal Considerations………...……………………………………………..19 State and National Government Overlap……………………...………….21 Existing Institutions…………………………..……………………………..23 Capacity Building…………………………………...……………………….24 Asset Management………………………………………………………….25 Other Issues………………………………...……………………………….26 Cross Cutting Issues…………………………………………………….…………...26 Water Resources……………………………………………………...…….26 Tariffs…………………………………………………...…………………….27 Outlying System Tariff………………………………………..…………….29 Appendix 9 Page 2

Environmental Protection………………………………………...………...29

V. Road Map…………………………………………………..………………..……….……30 Corporatization Options ……………………………………...……….……………..39

VI. Summary and Recommendations…………………………..……….……………..…40

List of Tables

Table 1 - Corporatization Decision Matrix………………………………………………………..31

List of Graphs

Graph 1 – Percent of Population Covered 1995 – 1996………………………………………….9 Graph 2 – Percent of Population Covered 2005…………………………………………………..9 Graph 3 – Hours Per Day Water is Available 1995 – 1996…………………………………….10 Graph 4 – Hours Per Day Water is Available 2005……………………………………………...10 Graph 5 – Daily Per Capita Consumption 1995 – 1996………………………………………...10 Graph 6 – Daily Per Capita Consumption 2005………………………………………………….10 Graph 7 – Non-Revenue Water as a Percentage of Production 1995 – 1996……………….11 Graph 8 – Non-Revenue Water as a Percentage of Production 2005………………………...11 Graph 9 – Percentage of Connections Metered 1995 – 1996………………………………….12 Graph 10 – Percentage of Connection Metered 2005…………………………………………..12 Graph 11 – Customers Per Staff Ratio 1995 – 1996……………………………………………13 Graph 12 – Customers Per Staff Ratio 2005…………………………………………………….13

List of Figures

Figure 1 – Bureau of Public Works Organization Structure……………………………………...7 Figure 2 – Compendium of National vs. State Water Management Choices…………………22 Figure 3 – Uniform Rate Tariff Structure………………………………………………………….26 Figure 4 – Differentiated Uniform Rate……………………………………………………………26 Figure 5 – Inverted Block Rate………………………………………………………………….…26

Appendix 9 Page 3

I. Executive Summary

1. Preparing the Babeldoab Water Supply Project must, by necessity, look at new infrastructure and physical assets needed for a continuous and reliable supply of water and sewerage services. However, we should not overlook the need to ensure that current systems are in place to provide consumers of Palau with a clean reliable water supply and sewerage at a reasonable cost.

2. The purpose of this report is to examine the institutions engaged in water and sewerage supply. With a profile of operations we can determine institutional changes that would improve service and benefit all consumers.

3. The Terms of Reference required consultants to meet with Key Stakeholders including Government, non-government organizations and community service organizations and identify options for institutional reform of water and wastewater services. However, no expertise was provided initially to complete this review. Later the contract was amended to provide an Institutional Specialist to perform a review and identify options for institutional reform.

1.1 Water and Sewerage Performance

4. The report notes that generally, water utility performance provides clean water to almost all citizens of Palau. Water pressures are generally high, available 24 hours per day and relatively clean (although not necessarily potable). What is most disturbing, however, is either high levels of water usage or high levels of water losses (non-revenue water). Project experts are currently unable to determine the reasons for these losses since not all connections are metered and master meters at the treatment plant are either unavailable or unreliable. In fact, we understand that there is only one working flow meter situated in Koror and not where the plant is.

5. Furthermore, tariffs by world standards are exceptionally low. Not all water is metered and tariffs do not encourage conservation. It is our belief that these low tariffs further contribute to either the high level of use or the excessive water losses or both.

6. We also found that there is no one agency responsible for all water and sewerage services. CIP is responsible for design and development of water infrastructure. BPW is responsible for operating the plant, maintaining the assets and delivery of water and sewerage services. Ministry of Finance, Division of Utility Collections is responsible for metering, billing and collection of water bills. They are also responsible for customer service but have no way of tracking or analyzing complaints or system problems.

7. With this confusing array of institutions we can only deduce that there is no one institution or person responsible for water and sewerage services. We feel that by placing responsibility for water and sewerage services in one institution independent of political interference with an independent regulator would be in the best the interests of the people of Palau.

8. This report strongly recommends establishing one separate institution whose sole purpose is the delivery of clean water to the people of Palau at a reasonable price. Secondly, that new legislation needs to be introduced to increase water and sewerage tariffs periodically and tariffs set at levels that encourage conservation of this precious resource.

9. This report also details needed new water and sewerage legislation and environmental protections. However, new legislation must be achieved in conjunction with the legislative changes altering the institutions involved in water delivery.

Appendix 9 Page 4

1.2 Institutional Recommendations

10. The institutional analysis is aimed at determining institutional obstacles and actions that can address these obstacles. For the institutional analysis the key obstacles appear to be the absence of a single focused entity that is responsible for delivering all water and sewerage services efficiently and recovering all its costs of operations.

11. Under the present system, this does not seem likely. Instead, we have been asked to look at the option of corporatization of Water and Sewerage services. By corporatization we mean that water and sewerage operations, development, planning, financing, accounting, billing, customer service and human resources fall under a government owned corporation operating for the benefit of the community. Corporations by their nature are for-profit entities and require revenue to continue to operate.

12. By creating this new utility as a corporation, the Government, in fact or tacitly, has agreed to increase tariffs or specifically target subsidies to ensure the continued operation of the utility. Under the present structure, the government is directly paying for water and sewerage services without compiling specific details of operating costs.

13. The utility will be required to not only provide ongoing service but to report directly to government and the Corporation’s Board of Directors revenues, costs, profits and losses.

14. During our many discussions with the people of Palau, National Government officials, State officials it has become obvious that everyone expects a change in responsibility for delivery of water and sewerage services. The change in responsibility signifies a move toward greater efficiency, universal water metering and higher water tariffs. It does not appear that there are many attitudinal impediments to Corporatization.

15. Instead, the impediments appear to be more one of structure than of substance. By structure there is great concern over how the utility would be run, who would be owner and who would provide input to water and sewerage coverage and service. We believe that this report could offer a much clearer way forward to overcome objections and concerns.

16. We have suggested that all interested parties’ meet to determine the most beneficial form of corporate structure. The options are between National and State Government owned utilities. Further if a National utility is chosen creating a National Water and Power Utility can help Palauans enjoy possible economies of scale.

17. While there are many options that can be considered, we have offered a number of solutions and recommendations. We reiterate those recommendations as follows:  Create a National Water and Sewerage Utility – While having State input is necessary it is clear from the impediments to implementation we have examined that capacity at State level is insufficient to create 14 utilities serving many disparate and small communities. Legal precedents for establishing a National utility are readily available from Power and Telecom.  Encourage State Participation in Decision-making – While State Government would not be the right venue for a utility, having their input would be invaluable. Input is needed to ensure all Palauan citizens accept these changes and that they have a voice representing their interests.  Tariff increases are needed and should be regulated – Current regulation by an appointed Board of Directors for Power and Telecom is accepted by most citizens and appears to work well. However, we continue to encourage open public hearings to discuss not just tariffs but utility performance. Tariffs must encourage conservation but provide lifeline rates for the needy.

Appendix 9 Page 5

 A Combined Power and Water Utility can Fast Track Corporatization – While there are concerns over corporate cultural differences at least initially, combining the utilities as occurs in many European countries can avoid additional costs, time and effort in developing a stand-alone water utility.  Environmental/Watershed Protection is essential – We understand that in certain areas sewerage leaks are damaging the environment. Under a corporatized entity, the utility would be not only responsible for repair but subject to severe penalties for failure. Laws must place responsibility on all citizens including corporate citizens to be responsible for their actions or inactions.

II. Background

18. Historically, Palau’s National Government delivered all public services through various government departments responsible for telecommunications, power, water, Sewerage, etc. The government would provide services with the support of donor funded and provided infrastructure principally through US Government programmed funds under the Compact Arrangement. Development of resources and operation of these resources fell under the responsibility of the Ministry of Resources and Development and the Bureau of Public Works under the Ministry.

19. During the Trust Territory days, only Telecommunications was delivered by a separate corporate utility known as the Palau National Communications Corporation. The laws that covered this corporation went into effect on October 23, 1982.

20. Electrical Power remained a Government Department until February 16, 1994, after independence, when the Government decided that, in an effort to provide electricity connections for all citizens, an independent utility would be formed. The utility was given the right to raise revenue from an electricity use tariff for each customer.

21. Tariffs could be increased by an act of the Board of Directors and did not require, but encouraged, public disclosure and open meetings to discuss operating performance, new assets and tariff increases.

22. With this background it is surprising that Water and Sewerage service remain to this day as an operating unit under the BPW. In an effort to ensure the delivery of efficient and cost effective public services we have been requested to prepare an institutional analysis of water and sewerage services. The institutional analysis is intended to offer suggestions for improving the capacity of water and sewerage professionals and most importantly the delivery of water and sewerages services to all Palauans at an affordable price.

2.1 Objective

23. The Terms of Reference requires the consultant to meet with Key Stakeholders including Government, non-government organizations and community service organizations and identify options for institutional reform of water and wastewater services.

24. However, before we could meet with these organization and determine common attitudes and shared experiences that could lead to institutional reform, it was necessary to obtain a complete understanding of how BPW operated and how water and wastewater services were delivered. Further we needed to understand the financial and technical capacity of BPW in implementing their services, the quality of staff in all fields, attitudes to customer service and the perception of customers toward water supply service as delivered by BPW.

Appendix 9 Page 6

25. Available options for institutional reform were focused on reforming management networks and policies to encourage improved performance, engaging private sector services either through concessionary arrangements, BOT or out-sourcing and water and wastewater regulation to encourage a dialogue between the agency and the people they serve.

26. We would like to point out, however, that a recent report on BPW privatization1 concluded that there is only limited scope for privatization in water and wastewater services. However the report concludes that Corporatization of water and wastewater delivery services are likely to bare immediate fruit. The Report cautions that “imply changing to a corporatized status is probably not enough to achieve a significant improvement in performance. If the same people continue in their present positions, and simply report to a Board of Directors which is accountable to a Government Ministry, then there is a danger that change will, at best, be slow” 2

27. This report will examine this issue and see if there are ways to examine more beneficial approaches that can address the concerns of the privatization consultant and other issues affecting the institutional capacity of Palau to deliver water and sewerage services.

2.2 Methodology

28. This report relies heavily on other reports and analyses prepared under this TA. The Report uses data provided consultants in preparing the project to offer a perspective and options for reforming the institutions responsible for water and Sewerage service for the people of Palau. The analyses we consulted in preparing this Report include:  Tariff Analysis – including a review of current and needed tariffs to bring water and sewerage delivery to full cost recovery.  Financial Analysis – including the current revenue, operating costs, financial costs and non-cash outlays that make up current and future activities.  Legal Analysis – that articulates laws and regulations dealing with water and sewerage, other corporatized services in Palau and other regulations affecting public services, tariff, rights and interests of Palau citizens.  Social and Economic Survey – that examines and defines the many social issues associated with water and sewerage and the report also supports its conclusions with a detailed willingness to pay survey.  Poverty and Social Analysis – that details the social and cultural issues affecting water and sewerage attitudes in Palau.  Inception and Interim report data – that provides comparative data concerning water resources, treatment, distribution, usage, productivity, etc.

29. Other sources were also consulted such as ADB Benchmarking surveys in the Asia Pacific region, 1995 Palau Census and other data as needed.

30. We reviewed issues related to other corporatizations, in particular the corporatization of Electricity and the formulation of the Palau Public Utilities Corporation (PUC). We reviewed the laws and regulations directly attributable to the corporatization of power and

1 Asian Development Bank, TA-4929PAL, Facility for Economic and Infrastructure Management Project, Working Paper 3, Privatization and Corporatization Options for the Bureau of Public Works, April 2008, Laurence Slee, Privatization Specialist, PINZ 2 Ibid Pg 11.

Appendix 9 Page 7

telecommunications to determine applicability and specific application to water supply and sewerage.

31. Also, we contacted numerous government officials to determine their knowledge and understanding of water and sewerage issues, staff functions, financial assessments by government, current thinking regarding water service corporatization and a host of related issues.

32. Finally, we met with community representative such as the Governors of Airai and Aimeliik to hear their concerns, needs and perspective on water and sewerage in general and how to better serve their communities.

III. Current System for Delivery of Water and Sewerage Services

33. To determine the future institutional arrangements for water and sewerage services it is important to understand how services are currently delivered, how effective those services are, the burden or benefit on government resources and the appetite within the community for service improvements, organizational alterations and increases or decreases in costs.

3.1 Organizational Responsibility

34. We examined the organizational structure for water and sewerage delivery and in particular to determine responsibilities for optimal service. In the Tariff Report the organizational structure was defined. Delivery of public services is the responsibility of the Bureau of Public Works. Operating under the Division of Utilities water and sewerage physical services are delivered by this agency. They are responsible for all services from extraction of water to distribution and maintenance. Figure 1 - Bureau of Public Works Organization Structure

Bureau of Public Works

Division of Division of Roads Division of Design Facilities and and Equipment and Engineering Division of Utilities Maintenance

35. The Division of Utilities is responsible for all Water, Sewerage and Solid Waste Removal services, but is not responsible for construction of physical plant or finance. The Division of Design and Engineering (CIP) is responsible for the design, procurement and construction of any physical plant. However, procurement responsibility to ensure the process is open and transparent and follows government rules falls under the Ministry of Finance, Procurement division.

36. The Procurement Division relies on CIP to prepare the specifications and terms while Procurement sends out the notices, advertises and works closely with CIP to ensure that technical and financial evaluations follow government standards. Any procurement with a cost in excess of $10,000 must follow full procurement guidelines including prequalification of bidders, requests for proposal and open evaluation.

Appendix 9 Page 8

37. Procurements under $10,000 do not need to follow strict guidelines but must show that adequate quotations were received from at least three other parties and the lowest bidder was selected.

38. For ongoing maintenance, responsibility for procurement of supply and materials remain with the Division of Utilities, water supply. However, they must follow procurement rules noted above.

39. Since, BPW is a public bureau under the Ministry of Resource and Development, finance and budgeting must follow the format of Government accounting and follow rules under Government Accounting Standards or GAS. As such, water system maintenance requires an appropriation of funds to ensure adequate money is available for ongoing and continuing maintenance. In any one year if maintenance costs are high, it may be difficult to obtain emergency appropriations for such expenses until future fiscal periods or later. We will discuss this concern more in depth below.

40. The Ministry of Finance (MoF) is responsible for the final stage of water and sewerage delivery. The MoF is responsible for all metered and un-metered connection installation and maintenance, meter reading, billing and collection in Koror and Airai. This MoF department, working with but not reporting to the BPW has overall responsibility for all customer contact. However, it is uncertain who is directly responsible for customer complaints, service outages and disruptions.

41. The current organizational structure is not only cumbersome but it makes it unclear which agency, if any, has overall responsibility for results and more importantly, reliable and reasonably priced delivery of this public service.

42. One further complication to organizational responsibility is State Governments. In Palau there are 12 other systems that have water supply connections. This is in addition to the Koror-Airai system. System connections vary from a maximum of 191 (Peleliu) to a minimum of 47 (Ngardmau). It is interesting to note that these local systems are managed and maintained by BPW. BPW supervise local staff in the 12 state systems, the MoF pays their salaries, provides maintenance, supplies, chemicals, electricity through the National Government purse. However, billing and collection of water services is the responsibility of state government, which retains the money for their use. Despite numerous requests, we were unable to obtain any accounting for monies received by them. As a result we cannot determine how much money, if any, has been collected for services received by customers in these other states nor can we determine how each state government used the funds they collected for services provided.

3.2 Operations and Performance

43. To determine what course of action needs be taken to support the institutional capacity of Palau water and sewerage, examining operating performance is a good indicator of how well the system is performing.

44. To evaluate operating performance, it is beneficial to compare the Palau system to similar systems in the region. In addition, world standards and benchmarks should act as a guide to determining needed capacity improvements.

45. Benchmarks are derived from data received from utilities similar to Palau by the ADB in two distinct performance surveys conducted by them. The first survey is from the 2005

Appendix 9 Page 9

ADB Pacific Benchmarking for Power and Water report3 and the second draws data from the 1995/96 Asia and Pacific Water Utilities Data Book4.

46. The 1995/96 Survey was used because the 2005 Benchmarking Survey contained only a limited number of results. It was felt that the limited number of respondents might not be sufficient for adequate comparisons.

47. Comparative information is provided for seven different measures that would adequately portray Palau’s operating performance when compared to other Pacific Island water utilities. These measures include coverage, water availability, water consumption per capita, non-revenue water as a percentage of water produced, metering, average tariff per unit sold and connections per staff employed.

3.2.1 Coverage

Coverage (1995/96 data) Population Coverage (% of population)

Tonga 100 10 0 West Samoa 80 80 Solomon Kosrae 60 Vanuatu 60 PNG 40 Samoa Cook Isl 40 Palau 20 Palau 20 0 Series7 0 2005 Data

Graph 1. - Percent of Population Covered Graph 2. - Percent of Population Covered

48. Coverage is defined as the percentage of households with access to water services throughout the country. This measure determines the percentage of population with access to clean water. It is also a measure of the quality of life for residents in the country and is normally considered a key poverty indicator in developing economies.

49. From the data in both graphs we see that water supply coverage in Palau compares favorably with most systems in the region. Palau has some 4,721 connections providing 98% of its citizens with a piped supply of clean water. Only in the most rural districts is water not provided through the public water supply system. It can be seen that Palau provides an almost universal supply of water to its population. While other systems provide higher levels of coverage (Western Samoa, Cook Islands and Solomon Islands provide 100% coverage) it is clear from the data provided that Palau’s coverage is consistent with some of the best practices in the region. Assistance in providing new connections is clearly not needed. In particular, almost 100% of the citizens in the most populated area, Koror – Airai have access to a piped system of clean water.

3 Asian Development Bank, Performance Benchmarking for Pacific Power and Water Utilities, Final Report, December 2005 4 Asian Development Bank, The Second Water Utilities Data Book for the Asian and Pacific Region, 1997

Appendix 9 Page 10

3.2.2 Availability

Water Availability (hours/day) Water Availability (hours/day)

24 Tonga 24 23 West Samoa 23 Solomon Kosrae 22 V anuat u 22 PNG 21 Cook Isl Samoa 21 Fiji Palau 20 Palau 20 19 19 1995 – 1996 data 2005 data Graph 3. – Hours Per Day Water is Graph 4. – Hours Per Day Water is Available Available 50. Water availability is the measure of supply continuity. In other words, how many hours per day water is available through the piped network. This measure determines the reliability of the system and how well the utility is meeting the expectations of their community.

51. If any water system user were able to turn on the tap and be certain of receiving water, they would be considered among the most well off residents in the Asia/Pacific region.

52. Pacific island experience is generally good. Most systems appear to provide a continuous supply of water and Palau is no exception. Palau compares favorably with all of the best systems in the region. There appears to be little, if any, intervention needed in this area.

3.2.3 Consumption

53. Consumption is the measure of the amount of water the average consumer uses in a day. Consumption is measured in liters per capita per day. Liters are used in this analysis because most systems in the region and in Asia use metric measures for consumption and usage. We have converted Palau’s consumption from gallons per capita per day to liters. This conversion does not affect the overall results or the measurement.

Consumption (lt/cap/day) Water Comsumption (l/c/d)

700 700 600 Tonga 600 West S amoa 500 500 Solomon PNG 400 Vanuatu 400 Samoa 300 Cook Isl 300 Palau 200 Fiji 200 10 0 Palau 10 0

0 0 1995/96 Data 2005 Data Graph 6

Graph 5. – Daily Per Capita Consumption Graph 6. – Daily Per Capita Consumption

54. In both graphs it is evident that per capita consumption far exceeds consumption in similar systems around the region and also around the world. In this instance, Palau residents use more than double the highest per capita usage of the most wasteful country in

Appendix 9 Page 11 the 1999 survey (West Samoa) and more than three times the per capita usage in the 2005 survey.

55. The Inception Report and the Interim Report both discuss this concern. However, the reasons for the high water consumption levels are not clearly evident. Conjecture concerning usage includes the large number of un-metered connections, high levels of post meter leakage and the low tariff regime. None of these actions encourage conservation. However, we cannot state with certainty all the reasons for excessive usage without a complete survey targeting the water consumption and waste.

56. While this may or may not be necessary, it is clear from the statistics that water usage in Palau is a major concern. One of the benefits of high coverage and continuity is the ability of consumers to have access to water at will. The disadvantages include the need for a tariff regime that encourages conservation. Without this tariff regimen, wastage is not only possible but also likely.

3.2.4 Non-revenue Water

57. Non-revenue water is defined as water produced that does not generate revenue. This means that the Division of Utilities produces 3.8 million gallons every day but only approximately half of the water produced results in revenues to the treasury.5 Non-revenue water levels in most communities throughout the Asia Pacific are generally inaccurate. In the case of Palau, these figures are extremely difficult to estimate because only limited consumption information is captured in a manner that is easily measurable. However, we have used the assumed non-revenue water figure of 50% for comparative purposes.

Non-revenue Water (% of Non-revenue Water (% of water production) produced)

80 Tonga 50 West S amoa 60 Solomon 40 PNG 40 Vanuatu 30 Samoa Cook Isl 20 20 Palau Fiji

0 Palau 10

1995/96 Data Graph 7 0 2005 Data Graph 8 Graph 7. – Non-revenue water as a Percentage of production Graph 8. – Non-revenue water as a Percentage of production

58. The survey results indicate that Palau’s non-revenue water is among the highest in the region. Only the Cook Islands in the 1995/96 Survey had non-revenue water levels exceeding Palau’s.

59. However, we point out that non-revenue water measures for Palau are merely conjecture. We have been unable to compute with any accuracy the total amount of non- revenue water because the outtake into the distribution system is metering is unreliable and numerous connections are not metered including many businesses. These estimates are based only on concerns that high consumption levels are attributable to system losses either through leakage or administrative difficulties.

5 Water consumption is determined by the flow rate out of the treatment plant divided by the total number of consumers plus visitors staying in hotels at an assumed room rate per night of 375 gallons per room plus industrial consumption.

Appendix 9 Page 12

60. Clearly more accurate data is needed. However, this need for data cannot be addressed immediately as meters must be installed at each household and business along with continuously calibrated master meters for system outflows. Once this is done, greater accuracy in measuring non-revenue water can be achieved.

61. If non-revenue water is indeed found to be extremely high after installing reliable meters more active intervention is needed to determine the reasons for high levels of water losses. Losses can be attributable to physical losses, generally leaky pipes, connections and broken mains or administrative losses and water theft. Administrative losses are through misreporting of meter readings, errors in recording amounts and other calculation difficulties. Water theft is also possible even though costs are relatively minimal. We have been advised that meter readers have recently found some illegal connections. We have also learned that the meter readers removed the illegal connections and replaced these with legal connections with no sanctions, penalties or threaten prosecution for violators. There appears to be no legal penalties for this obvious theft.

3.2.5 Metered Connections

62. Metered connections are measured as the percentage of the total number of connections in the systems that have working meters. Metering is the responsibility of the MoF but cannot be considered a measure of efficiency. It is, however, consistent with the contribution un-metered connections have made to high consumption levels and possibly non-revenue water.

Metering (% of all connections) % Met ered Connect ions

10 0 Tonga 100 80 West S amoa 80 Kosr ae Solomon 60 60 PNG Vanuatu Samoa 40 Cook Isl 40 Palau Fiji 20 20 Palau 0 0 1995/96 Data 2005 Data

Graph 9. – Percentage of Connections Graph 10. – Percentage of Connections Metered

63. Details regarding metered connections in the region indicate by and large that most systems are almost entirely metered. Exceptions for the Cook Islands in the 1995/96 Survey and Kosrae in the 2005 Survey tell a very interesting story. Cook Islands had the highest levels of non-revenue water as noted above and Kosrae chose not to report non-revenue water in their system since they couldn’t reasonably estimate water losses without meters.

64. Most water supply management professionals will advise that the absence of meters leads to excessive consumption. Further, there is a direct correlation between societal water responsibility and metering. Here we see that Palau is only 62% metered. The result is limited understanding of water supply management, network disruptions and remedial actions to ensure adequacy and continuity of supply.

3.2.6 Customer – Staff Ratio

65. The Customer – Staff ratio measures efficiency and productivity. It is the product of the total number of connections divided by the total number of staff. Since the ratio indicates productivity and efficiency, the higher the ratio the better. By way of example, Singapore has a Customer – Staff ratio of 500, meaning there are 500 customers for each employee where

Appendix 9 Page 13

Bangkok has a ratio of 217. This is a relative measure but generally more than 100 customers per employee is considered adequate but in need of improvement. Well-managed systems should exceed 200 customers for every staff member (including administration and supervision).

Customer per Staff Ratio Customer/Staff Ratio

300 Tonga 14 0 250 West S amoa 12 0 Kosrae 200 Solomon 10 0 PNG 15 0 Vanuatu 80 Samoa Cook Isl 60 10 0 Palau Fiji 40 50 Palau 20 0 0 1995/96 Data 2005 Data Graph 12. – Customer Per Staff Graph 11. – Customer Per Staff Ratio Ratio

66. This is probably the most disturbing of all figures related to Palau. Operating efficiencies and productivity are significantly below both international and regional standards. To analyze this measure we had to determine how many employees were directly engaged in water production, administration and supervision. Computations were made on the total number of employees engaged in water production in Palau. First we eliminated the total employees who were listed in the organization structure from the 2005 Census6.

67. The total number of employees must be a sum of employees under BPW and MoF engaged in water production, billing and collection. To determine this number we reduced the number of employees of BPW under the Department of Utilities by the number of employees engaged in sewerage treatment activities, added the total number of meter readers and then added 10% for administration and supervision.

68. Administration and supervision normally includes activities like general management, accounting, treasury, payroll, human resources, MIS, customer service and other support activities. In for profit enterprises, support and general management normally runs at about 10% of production staff. In government run enterprises these support functions can be as high as 100% of production staff. We have opted for the lower number to remain as conservative as possible.

69. This addition is necessary because all support functions are provided by the Government at no charge directly to water supply. However, if water were provided by a separate entity as in most countries, then these support and supervision functions should be included. We have added these activities to ensure more accurate comparisons.

70. In addition, capital acquisitions and planning for meeting future demand is normal water related activity. Most water utilities have a design and planning staff to ensure replacement of old or obsolete assets and new assets needed for system expansion and meeting new demand as it occurs. Design and planning staff are also likely to be engaged in asset management; the process of determining the status and location of each asset owned by the utility and ensuring a maintenance and replacement or overhaul schedule. In this case, we did not provide any manpower related to this activity, as it is unclear whether CIP provides any services without being asked.

6 Office of Planning and Statistics, Republic of Palau, 2005 Census, Volume II, Census Monograph, Population and Housing Profile, May 2006, pg. 152.

Appendix 9 Page 14

71. The results were that the total number of water and sewerage employees in BPW is 98, of which 16 are engaged in sewerage.

72. The net BPW employees engaged in water supply is 82 to this we added 6 meter readers and 11 administration and supervisory staff for an estimated total number of employees of 99. When we compared the 99 total employees to the total connections of 4,721 we note that each employee was able to service only 47 connections. Compared to minimum industry standards of one employee per 100 connections, we note that Palau water supply productivity is exceptionally low.

73. However, we did note that this might be a consequence of having to service connections in outlying states where low connection numbers are likely to skew the result lower. To allow for this we eliminated all employees dedicated to outlying states. However, we did not reduce administration and supervision or meter readers because we understand that MoF meter readers in Koror were dedicated to the Koror – Airai System. Further, that supervision of BPW employees would be handled by each state administration.

74. From this we determined that the total number of employee engaged in the Koror – Airai system were 61. The total number of connections associated with these systems is only 3,633. The ratio of connections to staff in this case increases to 60 connection for every employee. Sadly, this is still significantly below the minimum standard noted above. In fact, in comparison to the Survey of 50 water utilities conducted by the ADB in 1995/96, Koror – Airai would fall within the bottom 10% of efficient water utilities. Palau as a whole would be categorized in the bottom 5% inefficient water utilities.

75. Our analysis indicates that improved efficiencies are needed. There are numerous examples throughout Asia and the world where improved efficiencies coupled with real incentives for efficient staff have dramatically reduced staffing ratios, increased operating efficiency and significantly lowered costs. In one example, employee salaries were able to double as efficiencies were introduced in Kabupaten Banjar in Indonesia. The water utility was able to offer higher salaries and bonuses only after reforms were introduced that significantly cut staffing ratios and the utility was able to generate a profit.7

76. It is also important to note that BPW staff members are generally older than the general population. A review of their staffing chart noted ages and salaries of BPW Division of Utilities staff. We found that more than two-thirds of the current staff members were older than 41 years of age, and almost 30% were greater than 51 years of age. With so many staff members approaching retirement there is a real need to look closely at revitalizing the organization.

77. Improving efficiency is absolutely necessary if Palau seeks to reform its efforts in water and sewerage. We will explore ideas and options for achieving productivity improvements as we examine institutional structures below.

3.2.7 Cost Recovery

78. Profitability is the measure of financial performance of the water utility. In all instances, a utility must recover all its costs in order to avoid either needing a cash subsidy from the Government and/or failing to provide sufficient funds to replace its assets at the end of its useful life. In the past, some donor organizations were recommending that tariffs needed to be set at levels that just covered a utilities cash outlays. In essence leaving it to the taxpayer to provide funds for repayment of loans and reserves for asset replacement.

7 USAID, Local Government Water Services, Final Report, September 2003

Appendix 9 Page 15

However, current understanding is that this old system is not beneficial to all consumers and ultimately all taxpayers.

79. Full cost recovery includes all costs associated with production, asset replacement and debt financing. It includes all direct cash outlays of ongoing operations including salaries, maintenance, customer service, connection installation, administration and other costs needed to keep the water flowing. This also included certain long-term costs such as fixed asset purchases, insurances, and accounts receivable financing. While funds can be borrowed for asset purchases, all financiers require a portion of the total purchase price paid for by the borrower.8 These funds are normally provided by the utility from its cash reserves for asset replacement.

80. The reserve is normally known as asset depreciation. There is a general misunderstanding that depreciation in untaxed cash available to the company. We caution that to view depreciation in this way can have a detrimental effect on funding future operations and providing for needed water supply assets.

81. In situations where revenues are insufficient to meet ongoing operating costs requires conscious support from the Government. Government and hence the taxpayers are required to make a direct contribution to the cash needs of the utility. As this continues those cash needs inevitably increase while the Government is required to borrow heavily to purchase new assets to either replace old assets or increase the quantity or quality of their asset base to better serve customers. Failure to do so normally results in deteriorating service and dissatisfied customers.

82. However, if a Government adopts a policy of full cost recovery, consumer tariffs must pay for the full cost of operations. Every consumer pays for what they use. Those who use a lot pay more, those who use little pay less. This would ensure both fairness and responsibility.

83. A further benefit for this is either lowering of taxes or diverting the subsidy toward other needed services such as health or education. Governments have many methods for using public funds that are far more effective than subsidies for water use.

84. Examining Palau’s water and sewerage financial performance indicated substantial losses attributable to water supply operations. Losses that were reconstructed by our financial analyst totaled more than $3.7 million in 2007 on revenues of just under $700,000. The bottom line is that costs are almost 5 times water revenues. If sewerage is added, sewerage costs are greater than two and a half times revenue for water alone9. Negative cash flows equal $1.7 million in 2007 and are likely to climb. The Government is heavily subsidizing water usage and worse yet, costs and revenues are accumulated only by the government accounting system. This system is difficult to adapt to commercial accounting that accumulates costs by profit center and not by departmental appropriation. As a result, the government is unaware of exactly what it costs annually to provide water and sewerage to its people.

85. By and large the people who work on water and sewerage are conscientious and diligent in performing their duties. However, as there is no one agency or individual who has responsibility for either the bottom line or the operations taken as a whole there is no accountability for good or bad performance.

8 Typically the borrower will support the loan with cash infusions of 20 – 50% of the total cost. The higher the contribution by the borrower the lower the risk to the lender and hence the lower the interest rate, excluding additional security. 9 See Financial Report and Interim Report

Appendix 9 Page 16

86. Without management, feedback, oversight and a strategy no business or service can ever hope to provide services to its customers in a beneficial manner without running out of funds. It is clear that a system for capturing revenue and expense data coupled with changes in organization will benefit not only the process of water and sewerage delivery but accountability to customers. In fact, most countries in the world have independently managed corporatized utilities managing water and sewerage for their communities. The independent utilities are normally regulated and encouraged to provide services responsibly and economically.

3.2.8 Tariffs

87. The Tariff Report develops an analysis of average tariffs needed to bring the Palauan water system to full cost recovery. The report only touches briefly on the process of tariff regulation and the need to manage tariff policy, price and adjustments to ensure service delivery is both reliable and economically priced.

88. Tariff regulation in Palau dates to 198610 when the first water service pricing came into effect. The pricing was set at $0.85 per 1,000 gallons for all metered connections and ranged from $5.00 to $10.00 for non-metered connections. Customers were required to place a security deposit with the MoF to secure payment of bills but all connections were free of charge except where disconnection occurred resulting from non-payment or other violation11.12

89. The regulations make no provision for tariff adjustments, operating costs increases, political status, open hearings or other processes to increase tariffs as costs rise. Instead, we understand that tariffs have remained the same since the issuance of these regulations in 1986.

90. We understand, and as noted in the Review of Water Related Laws13, that water and sewerage tariffs may only be changed by legislative action of the Olbiil Era Kelulau (OEK).

91. However, ready examples of tariff regulation already exist in laws that corporatized telecommunications and power. Under the Palau National Communications Corporation Act14 provisions exist for tariff rates and regulations15. The act states clearly:

“All rates and regulations pertinent to the use of telecommunications services by distributors and customers of the PNCC shall be adopted by the Board of PNCC only after public hearings following public notice published and posted as herein provided. The rates adopted by the Board of PNCC must be sufficient to enable the PNCC to pay and discharge all maintenance and operating expenses of its telecommunications system, as well as indebtedness of the PNCC…… In no event shall the rate increase be more than ten percent in any calendar year.”

92. The act was effective October 23, 1982. It provides a clear, non-political methodology for tariff increases based upon full cost recovery and providing sufficient funds for all cash

10 Utility Regulations 1986, effective June 6, 1986, Administered by the Bureau of Public Works of the Ministry of Resources and Development. 11 Utility Regulations 1986, Regulations 9 – 16. 12 These regulations are applicable by reason of section 161 of the Administrative Procedures Act, which saves rules and regulations adopted under the Trust Territory Code. 13 Graham Bruce Powell, Review of Water Related Laws in the Republic of Palau, ADB TA4977, Preparing the Babeldoab Water Supply Project 14 15 PNCA 15 15 PNCA, Subsection 320, Rates and Regulation

Appendix 9 Page 17 needs, with the only caveat that rates may not increase in excess of 10% in any calendar year.

93. The Public Utilities Act provides further precedent16. Under this act, Electrical Power is corporatized under the Palau Public Utilities Corporation (PUC). The act, among other measures, creates the corporation17, defines its management and supervision18 and provides a basis and a process for power tariff regulation19. This act, which went into effect on February 16, 1994, is the latest precedent for utility pricing regulation and places responsibility for tariff increases in the hands of its Board of Directors.

94. It is interesting to note that the Board is appointed by the President, thereby providing for the highest authority in the Country to have personal impact on service and rate changes.

95. It is interesting to note that subsection 413 includes provisions where the Board may adopt rates that differ between commercial, industrial and residential users, and may set preferential rates for low income and low demand customers.

96. The regulation provisions provided that tariff may be increased “commencing April 1, 1997, and at least annually thereafter, the Board shall set rates calculated to allow PUC to meet operating costs beginning with Fiscal Year 2001. Operating expenses includes depreciation of assets.

97. While adoption of the increased rates are at the sole discretion of the Board, they are required to post notice of rate increases and broadcast notice of the increase. Further they must provide for public hearings and “fully consider all written and oral submissions concerning the proposed actions”.

98. With this ready model for tariff regulation it seems perplexing as to why water tariff regulation lags so far behind. The Tariff Report20 indicates that water currently need a greater than five-fold increase in tariffs in order for water to achieve full cost recovery. This, evidently, is a result of having no tariff increases since the 1980s.

3.3 Water and Sewerage Delivery Reform

99. From the above analysis it is evident that water and sewerage services are loss making and the Government supports water service by providing subsidies. Worse still there are only limited ways to determine the full cost of the subsidy in any given year or project that subsidy for future periods.

100. Furthermore, there is confusion at the moment about who is in charge, what skills are needed and how best to manage the overall service to be provided. There are competing interests in BPW, CIP, MoF and State Government concerning control both of resources, assets, revenues and personnel. None of this can be beneficial to water and sewerage customers and potentially the environment.

101. One final and disturbing issue is the lack of responsibility by all parties, not just National Government or State Governments but by the public at large. It seems that when it comes to water and sewerage, everyone understands its value and the Government is keen to provide these services, both to protect the environment and ensure the health and welfare

16 37 PNCA 17 37 PNCA, ss 403. 18 37 PNCA, ss 404 – 407. 19 37 PNCA, ss 413. 20 Asian Development Bank, TA 4977 Preparing the Babeldoab Water Supply Project, Tariff Study.

Appendix 9 Page 18

of its citizens, there is a certain unwillingness to make one organization fully responsible for providing services, recovering its costs and meeting future needs.

102. We have wrestled with a number of possible solutions to this concern. One issue is to transfer responsibility for all service to BPW, including meter reading, development planning and procurement. We rejected this approach because government accounting systems are not geared to provide for the commercial activities of water and sewerage services. Also there is fear that implementing tariff regulation will be a political rather than a regulatory process.

103. A second possibility was introducing private sector. Private sector could bring with it both management and technical expertise needed to provide continuing operating services. Forms we examined included delegated management concessions, lease/affirmage, management contracts, and other forms of operating assistance. We unfortunately rejected these solutions. Not because they don’t have merit but for two important reasons.

104. First, getting private sector agreements require firms with a track record of water and sewerage management and proven expertise in service provision. There is only one local organization with such proven expertise and any competing supplier would be an overseas company. To attract such firms would require not just time and money but possibly changes to existing laws.

105. The second impediment to private sector participation is the time it takes to tender and select concessionaires. We have seen many private sector contracts where the development time exceeded more than five years to complete. This time consuming process does not address Palau’s immediate concerns and makes private sector participation a future possibility but not and immediate solution.

106. Finally, while private sector participation is a viable solution, there are many problems associated with this activity particularly with Delegated Management Concessions. These agreements delegate all water and sewerage management to private entities for a long-term period requiring not only operations and maintenance but also investment during that period to meet ongoing water and service demand. The history of this form of agreement in places like Manila, Jakarta and Buenos Aires has shown the vulnerability to both the investor and the public of this form of agreement. What has worked better has been utility deregulation, where production, transmission and distribution have been deregulated and private sector has been engaged to provide services in any one of these functions. However, this is not an immediate concern.

107. At the conclusion of this analysis, we were left with only one viable immediate solution; Corporatization of water supply and sewerage. Corporatization has the advantage of being able to bring in needed management and technical expertise but also being able to exert financial discipline on the organization so that it may provide public services at a reasonable price. As we explain below there are still a great number of immediate concerns to be addressed to achieve corporatization but there are also many options that can address these concerns.

IV. Corporatization Structures

108. In a recent report prepared for the Facility for Economic and Infrastructure Management Project21 the consultant argues:

21 Laurence Slee, Privatization Specialist, PINZ, Project No. TA 4929-PAL, Facility for Economic and Infrastructure Management Project, Working Paper 3, Privatization and Corporatization Options for the Bureau of Public Works, April 2008.

Appendix 9 Page 19

“Commercialization and corporatization of the water supply and sewer services can be considered. This would enable the services to operate in a similar structure to telecommunication and electricity supplies. A prerequisite for such a move is a decision on the level of cost recovery from tariffs and associated subsidies, since this will have a significant bearing on the financial performance targets for a corporatized institution. However, simply changing to a corporatized status is probably not enough to achieve a significant improvement in performance. If the same people continue in their present positions, and simply report to a Board of Directors, which is accountable to a Government Ministry, then there is a danger that change will, at best, be slow. “22

109. While the issues of tariff, cost recovery, personnel, management and capacity are clearly relevant, it should not be a reason for dismissing corporatization of water supply out of hand. It is clear from the reading of the National Communications Corporation Act and the Public Utilities Corporation Act that at the time these services were corporatized, neither was at full cost recovery and the government provided some level of subsidy. The institution of the acts allowed for the establishment of a single responsible company with both the resources and independence to provide communications and power professionally and at a reasonable cost.

110. Further, we would argue that at present the problem is more that water and sewerage services are not truly provided by only one Ministry that is the greater impediment than the issue of public service vs. private service.

111. The issue at hand is how to provide a Road Map for steering through the difficulties associated with Corporatization. In this section we will outline the many issues that need to be addressed and then follow on with a detailed analysis and decision tree that will make of the body of the Road Map.

112. Before we address these problems, let us first qualify this Road Map. When we drive a car we use a Road Map to determine where we are going and the roads we should take to get there. This Road Map is a bit less stationary. There will be options to consider, there will be decisions to be made and there will be public concerns that must be addressed. So while we can define our objective, our Road Map will not tell you to turn left or turn right but will try to outline what will happen when you do, and what decisions you will have to make as a consequence.

113. Suffice it to say that we hope that this Road Map toward our Corporatization Goal, examines as many options as possible and can offer attractive solutions. Ultimately the decision to corporatize or not is for the people of Palau to determine.

4.1 Corporatization Issues

114. Corporatization of water and sewerage depends on a great number of issues. Issues include the legal form of corporatization, state government input, utilizing existing institutions, personnel transfers, capacity building, asset management and other issues. Corporatization discussions much address each and offer the options necessary to form a consensus to address them.

4.1.1 Legal Considerations

115. In as much as the current organizational structure for water and sewerage is as a government department to effect a change to a corporate structure will require some form of

22 Ibid. para. 44 – 45.

Appendix 9 Page 20 legislation. Legislation will need the approval and consent of the OEK. Laws will need to be drafted to formulate both the structure and management of the Corporation.

116. However, as we indicated above there are ready precedents and drafting the law does not appear to be an insurmountable hurdle. There does of course need to be legislative consensus that such a move is both needed and warranted.

117. A second consideration can also be examined. There already exists a Public Utilities Corporation. PUC’s powers and responsibilities are limited “to establish and operate electrical power services with in the Republic”23. Therefore they are limited at present to providing electrical service and not water supply. It would be a simple matter to include water and sewerage services under their powers and responsibilities.

118. PUC could choose to operate water and sewerage as a division or subsidiary. In either case, the method for being able to do this is far less complex than creating a new and separate institution.

119. Further benefits of having a combined utility are obvious. First, management structures and reporting already exist within PUC and would not have to be created from scratch. Corporate accounting, reporting, meter reading and billing systems are already available and could be easily adapted for water. Electricity coverage already services the entire country so no additional locations need be added.

120. We also see a number of cost savings associated with a combined utility. Only one bill needs to be prepared. Payments can be made at the same place saving costs of multiple payment points. Planning and development under one department could assist in the economies of scale that will benefit the combined entity.

121. There are obvious disadvantages to a combined utility though. Will BPW staff fit within the corporate culture of PUC? Will current BPW staff be prepared to work along side PUC staff? Much of this can be addressed by creating Water and Sewerage as a separate cost center or creating a subsidiary corporation. This and other decisions should be made as the corporatization process moves forward.

122. One further complication involves state governments. Currently, as we have discussed above, state governments currently collect water revenues from local customers and do not remit these collections to National Government. Instead these revenues are used to support State budgets and operations while National Government pays all operating costs. Loss of these revenues may be politically difficult to achieve. However, one could argue that water and sewerage revenues are intended to provide revenue to pay for the full cost of operating and delivering water to the community. Would it not be best for National Government to turn over operating budgets to State Governments, with requisite controls than to allow each State to keep funds intended for water and sewerage?

123. We need to look more closely at the interests of State Governments and National Government in line with water and sewerage provision. However, we have had meetings with the Governors of Airai and Aimeliik and with the Board of PUC to hear about their concerns and examine attitudes toward water corporatization. In both cases, there was interest to the proposal with the caveat that a consistent and workable solution required collective action and agreement.

23 37 PNCA, ss 408.

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124. Other legal concerns are expressed in the Issues Paper24. This paper addresses the need for a new water supply law, determining areas and systems, responsibility, water and sewerage charges and responsibility among other matters.

4.1.2 State and National Government Overlap

125. Classically, in the United States water and sewerage coverage is a local responsibility. It is rare to find a state run utility let alone a Federal water utility. Normally city or county governments are responsible for water and sewerage provision. National and State environmental laws govern water and sewerage treatment, sludge disposal and other water and effluent qualities.

126. In Malaysia and the United Kingdom a small number of regional or State utilities serve the communities living in each region of the country. National Government sets environmental regulations that each region or State must abide and set standards for treated water and effluent. Tariffs are nationally regulated by a government regulator who has a set of rules for fair and impartial analysis of tariff requests and decision-making.

127. Many Pacific Islands have National Government run water utilities that service all customers on their islands and choose not to entertain multiple systems or multiple- ownership.

128. The point is that there is more than one way to provide for water and sewerage services. Who and how it is provided by is based on local preference and local custom. Currently, local custom here in Palau for water to be provided at the National level with certain interventions by State Government which we question as being unwarranted.

129. There is a decision that must be made – Should water and sewerage service be provided by National or State Government? The answer to this question will define ultimate responsibility. However, there are a number of choices along the way. This doesn’t need to be an either/or decision. Below in Figure 2 are the various options along the decision between State and National Government utility ownership.

24Asian Development Bank, TA 4977-PAL, Preparing the Babeldoab Water Supply Project, Issues Paper: Legislative Reform of Palau Water Related Laws, April 2008.

Appendix 9 Page 22

Figure 2 – Compendium of National vs. State Water Management Choices

Total National Tariff regul Shared water Nat'l support State - Nat'l Total State Mgt Associations Water Supply open hearings responsibility network Water Supply

State tariff Nat'l Water Nat'l - State Nat'l capacity regul. Nat'l Nat'l regul. - Forums water plans building Agency quality, tariff

130. The choices between National Government and State Government include:  Full National Government without State involvement.  Full National Government with periodic State water forums. The water forums are intended to provide feedback on the attitudes and concerns of local water users.  Full National Government with open water tariff and performance hearings where concerned citizens can voice their agreement or objections.  Full National Government with open hearings, forums, State Government participation in planning and development of new assets, supply and sources.  Shared responsibility for water service delivery with State Government collecting tariffs remitting operating costs to National Government with remainder in the State Treasury. State Government would be responsible for asset acquisition where demand and development planning would be shared.  Full State Government without National involvement.  Full State Government with a National Regulator and open public hearings.  Full State Government with National Government developing a water supply association to share experience between various states and develop technical expertise.  Full State Government with National Capacity building associated with the National Association plus Regulation.  Full State Government but a National Government support program where technical, managerial and accounting support could be available to prop up capacity needs at the State level.

131. While these choice appear extensive there can be many more as meets the needs of all parties. As discussions continue, the right choices can become clear to all parties. Indeed determining the best course of action requires the consensus of all concerned.

132. At present, if we were to offer our best advice, it would be to maintain the National Water and Sewerage format. We feel at present it would be difficult to find and employ expertise for a State Water Utility and in most states it would be unwarranted. There is lack of capacity available at the National level and we feel that this capacity deficit would only be exacerbated if each state were to employ its own utility.

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133. Second, inconsistencies are certain to develop from State to State if each had its own service. Water quality may suffer with the lack of investment that will not be able to be provided by smaller less populated areas. The cross boundary financing that can be made available by National Government will best serve the needs of each community.

134. Finally the logistics of setting up 14 State utilities would be a nightmare. Getting assistance to any one State even now has logistical difficulties. All States attempting to corporatize at once will be extremely difficult.

135. Instead, we would encourage consideration for maintaining the National Water and Sewerage Utility. However, we feel that State input is vital to satisfying the needs of all communities. We would encourage water forums to draw feedback and opinion from each local community. Second, we encourage the use of open hearings in water supply tariff and performance regulation and the imposition of sanctions for failure to meet standards. Third, we feel that State input but not veto power, in asset and development planning is extremely beneficial. The planning exercise is not an open forum but an opportunity for State planning officials to be party to development plans and priorities.

4.1.3 Existing Institutions

136. Corporatization will make some people nervous. Understandably, most civil service employees will want to know how this will affect them. If the decision is made to combine resources with PUC for example, current PUC employees will wish to know how this affects them. It will be a very nervous time for all concerned.

137. It is our advice to approach this reorganization and reform as honestly as possible. Keep employees informed throughout the process but only when decisions are made. If general rumors and beliefs turn out different than imagined the level of disappointment with be even greater.

138. We would recommend that addressing the current institution is at least as important as addressing the new institution. Plans for the new utility should be tackled and decisions made quickly. Some of those decision must concern the transfer of staff from BPW and MoF, who and how many. Should Government seek to reduce staff ratios by limiting transfers to the utility to maintain ratios consistent with well-run utilities? There will be concerns over salary as well. Should salary levels be kept at government levels or is there a private sector equivalent that would be better.

139. Other institutional considerations concern management and finances. Are there currently managers who are capable of running a utility business sensibly? What salary is appropriate? If not currently in public service, where do we find candidates for CEO, COO and CFO, as well as other senior and mid-level managers? How will this affect the staffing ratios?

140. These “nuts and bolts” issues could prove to be quite daunting if not tackled early on. In fact, if not addressed early on and decisions are left to fester, opponents of corporatization could point to this as failure of any corporatization system.

141. In our opinion, looking internally for qualified individuals is absolutely necessary. We would recommend that the process look internally first for managers and employees. We would also recommend that the number of staff transferred to the new utility not exceed more optimal staff ratios.

142. Where managerial positions are unlikely to be filled by qualified managers within BPW or MoF, then a public advertisement should commence. People in BPW or MoF or any

Appendix 9 Page 24 other branch of government can apply. Salaries for this position must be set at market rates for upper management. In this manner everyone applying will feel as though they have an equal chance at the position.

143. Communication is important for any major change. Managers and Government officials must explain to transferred and non-transferred staff the reasons for decisions affecting them and attempt to keep spirits at both levels high. Redrafting organization charts and job descriptions quickly will reduce confusion and raise morale.

144. At the new corporate entity decision will need to be made on whether to maintain government salaries for transferred staff or alter salaries to private sector equivalents. If maintaining government salaries it will likely have an affect on recruiting and hiring practices.

145. We would also recommend that a personnel officer be available as soon as possible to articulate and analyze all these issues. His/her input will be vital to the successful reorganization.

4.1.4 Capacity Building

146. If State Government administration of water and sewerage service is chosen there will be a clear need for building local capacity. However, whatever course of action is chosen some level of capacity building will be needed. The intention here is not to define capacity building needs but to address institutional requirements for identifying capacity building required within current institutions and any new institutions to be developed.

147. Some institution is needed in either case to maintain a capacity building program. In many countries a Government-sponsored Water Association is maintained. The Water Association should be a member driven organization.

148. We would suggest that this institution would be the main repository of capacity building programs. Programs designed and delivered by donor organization such as the ADB, could be lodged here. Delivery can take two forms. First, University professors with expertise in environmental engineering, finance, marketing and other needs could give these courses to members of the utility. A second alternative, is for donor organizations to conduct training of trainer courses and these trainers would prepare learning plans and implement the training.

149. Training is needed in a variety of areas. First, building skills in planning and development appears to be needed. With only one engineer outside of upper management, designing and developing new water and sewerage systems to meet increasing demand and shifting demographics is sorely needed. In addition, upgrading operator skills would benefit not just the operators but also succession and personnel development.

150. In the financial area, initially there will be a dearth of financial staff. There will be needs in accounting, bookkeeping, financial analysis, payroll processing, MIS and most important of all financial management. We encourage the use of existing staff both from BPW and MoF. MoF staff while knowledgeable of Government Accounting will have a steep learning curve to prepare financial statements under GAAP or IAS. This knowledge needs to be improved before meaningful financial information can be available.

151. Other financial training areas can include financial planning and projections. Tariff decisions should normally be made on a minimum of three-year projection of financial data. This horizon can be expanded if demand forecasts indicate that new assets or asset replacement is needed over the medium term. This should also lead to money and banking

Appendix 9 Page 25 training to provide managers with information on choices for obtaining debt and alternative asset financing such as PPP, supplier credit and equipment financing.

152. Another crucial area for training is Customer Service. All too often, utilities focus on technical solutions for customer needs rather than listening to their customers. Systems need to be put in place to ensure that customer complaints are met promptly, meter reading and billing review mechanisms are in place and quickly followed up. Of course MIS must be able to develop systems to monitor and provide statistics to determine response times. All this needs to be incorporated in training development programs.

153. Other areas such as personnel management, recruiting, career development and other support function training can also be envisaged.

154. Finally, there is a current understanding in many countries that while training programs are important, ensuring competency is equally vital. Competency is often measured in a series of exams for water supply professionals to demonstrate their capacity and understanding of complex water and sewerage technical and financial issues. These competency measures lead to certification programs that indicate demonstrated understanding of production, supply, distribution and financial problems in the water industry. Issuance of the Competency Certificate would be under the responsibility of the newly formed Palauan Water Supply Association.

4.1.5 Asset Management

155. Asset Management is a process of determining the location and condition of each asset used in production by a water and sewerage utility.

156. Once the Asset is identified it is recorded in an electronic registry. The registry becomes both a physical verification of assets employed and a means for monitoring remedial actions, ongoing recurring maintenance, emergency maintenance and programming replacement.

157. This management tool allows the utility to program new investments, budget maintenance costs and determine when it is cheaper to replace an asset than maintain it.

158. The financial analysis conducted under this project noted that maintenance expenses were far less than required for a system of the current magnitude. In our discussions with BPW we were advised that budgeting was conducted not by examining ongoing needs and determining its costs but merely managing against prior years costs and projecting an acceptable increase that would be approved by government budget offices.

159. While we understand the political pressures as relates to maintenance budget and budgets overall, under a corporatized organization, these constraints would by and large be limited. Instead a process for capturing data and programming in an organized and systematic manner would provide improved data and clear evidence for system maintenance.

160. Furthermore, by having an Asset Management System tariff needs can be clearly determined but more importantly adequate support for tariff increases would be clearly evident. The financial projections prepared under this project do not take into account increases in maintenance but will review new investment and debt service. This cost increase is difficult to determine because records are currently unable to generate the quality of information to make these judgments.

Appendix 9 Page 26

161. We strongly recommend that thought be given to developing an Asset Management System to be implemented in conjunction with Corporatization. The benefits would far outweigh any costs associated with its development.

4.1.6 Other Issues

162. Other issues include ideas on how to make the corporatization process flow smoothly. This is likely to include assistance from PUC or PNCC on their experiences in corporatization. Further, issues to explore include having a combined water and power utility. Many utilities in Europe (Great Britain, France, Spain and others) and the United States do have combined utilities. Perhaps exploring these approaches can add to the benefits and define any disadvantages of this approach.

163. Suffice it to say, there are many ways to approach corporatization, however, it requires the ready acceptance and cooperation of all parties in an effort to ensure the result is a Palauan product.

4.2 Cross Cutting Issues

164. Cross cutting issues entail natural and political barriers that could offer impediments to corporatization and water and sewerage services overall. We note three key issues that we feel it important and necessary to address. The three issues are water resources location, tariff differentiation and environmental protection.

4.2.1 Water Resources

165. Water resources for Koror are currently located in Babeldoab, Airai State. Currently, Airai residents are not metered and also receive a highly subsidized rate for water and sewerage. Un-metered connections in Koror are billed at $10 per month but Airai residents pay only $5 per month.

166. We have recommended that all connections be metered. By metering connections all residents will be required to pay for water services exactly in the amounts they use. We have also recommended that sewerage surcharges be added to this cost to pay for the cost of treating effluent.

167. However, Airai residents complain that since water resources are located in their state, by virtue of the physical location, Koror residents must be prepared to pay them for the benefit they receive. While we cannot comment on the politics of this argument, the argument does have some merit in that Airai residents must protect the watershed and avoid farming and effluent runoff from fouling the rivers and streams used in water supply production. This is also for the benefit of Airai residents as well.

168. However, we fail to see how the current system of reduced tariffs actually protects catchment areas. The reduced tariff is remitted to State Government for implementation and enforcement and only serves to lower residential costs.

169. While we are aware of environmental regulations promulgated by the Environmental Quality Protection Board (EQPB) that governs permits for effluent discharge, setbacks from rivers and other protection measures, there are still only limited resources that have been expended by State Governments for catchment area protection. We understand that currently a mapping project known as Palaris is mapping watershed and are expected to provide data on watershed management in the near future. We understand that there were

Appendix 9 Page 27

Babeldoab State planning discussions to protect watersheds but we are unaware of the results, if any, of those discussions.

170. We must express our concern over statements by certain government officials that Koror must subsidize Airai’s residents. The concern can be easily demonstrated by water disputes between Singapore and Malaysia. Even though Malaysia appears to have abundant water resources that could be made available to Singapore if it wished, Malaysia and Singapore have been in disagreement over raw water availability and cost since Singapore’s independence. Singapore as a result has resorted to building reservoirs, treating wastewater to potable standard and is now considering its most expensive option, desalinization.

171. While we have no reason to believe that any disagreement between Koror and Airai would escalate to such a level, we would prefer to see a more reasonable and businesslike approach to water resources and water supply. Further we feel that subsidies encourage waste by those receiving subsidies since they are not paying the true cost of water. In fact, our tariff analysis below addresses tariff rates that encourage conservation.

172. While we recognize that water resources are located in Airai, the current system benefits neither the people of Koror nor the Government of Airai. Consideration should be given to establishing an extraction fee based upon the total metered distribution to Koror. This fee would be paid directly to Airai State Government who would be responsible for using these funds to maintain its watershed and funding enforcement programs.

173. As we will discuss below, we suggest that all water use must be metered and that tariffs should be universal no matter what the location.

4.2.2 Tariffs

174. Tariff rates are currently discussed in the tariff report issued under the project. The report does not necessarily define tariff regulation issues nor does it define the treatment of various customers. Its purpose was to determine the current financial condition, projected new investments from this to compute an average value of future water fees.

175. We cannot at this point ignore certain basic issues. Tariff setting is vital to both the future of any corporatized water supply company and to ensuring that all citizens in Palau have a basic lifeline of clean treated water for their needs. It is essential to discuss the basics and determine what could be best for both the people of Palau and a corporatized utility.

176. A present, water tariffs are fixed at a standard cost per 1,000 gallons. Rates for commercial and industrial customers are higher than residential customers for flat rates only. Every metered customer pays the same price of $0.85 per 1,000 gallons of water for any volume of water used or whether they are a residential user, a commercial user or industrial user.

177. To determine ways to treat tariffs it is important just to examine the basics.

178. Under present regulations, tariffs currently are regulated under a uniform rate structure as shown below in Figure 3.

Appendix 9 Page 28

179. The uniform tariff structure currently in Uniform Rate Structure place is represented as portrayed here as one rate for each and every gallon in use. The rate 1 of $0.85 per 1,000 gallons is proportional. Here we see that the rate does not vary with usage. 0.5 180. Other methods of tariff regulation 0

$ per 1,000 gal $ per 1,000 differentiate between purposes of use. For 1,000 2,000 3,000 4,000 5,000 example a commercial establishment would pay Gallons at a higher uniform rate than residential water users. This differentiation is not based on the Figure 3 – Uniform Rate Tariff Structure amount used but by who uses it. Below in Figure 4 is the representation of the Differentiated Uniform Rate differentiated uniform rate structure.

3 181. The purpose of this type of structure is to ensure businesses - commercial and industrial - 2 provide some cross subsidy to residential users 1 of water. It also may reflect the cost of providing 0 water to higher quantity users of water. More $ per 1,000 gal $ per 1,000 supply must be constantly available to industrial 1,000 2,000 3,000 4,000 5,000 users, for example, since the water is used in gallons water-intensive processes such as fish processing. This differentiation by class of Figure 4 - Differentiated Uniform Rate consumer is used in most industrial countries and in most countries in Asia. Asian governments use this differentiation to provide a cross subsidy to residential and poor households that rely on water provided by Government for their health and well-being.

182. The inverted block rate tariff structure as shown in Figure 5 is the tariff structure most often used for tariff regulation. The features of this tariff structure allow for providing a lifeline tariff for poor households but with increasing rates for greater usage, the rates encourage conservation. The rate is generally structured to ensure that overall usage is either equal to or greater than the revenue if the uniform rate was applied.

183. Assuming that Palau suffers from excessive water usage as noted in the Inception and Interim reports, applying this tariff structure has numerous advantages. On the one hand water users who are in need of financial assistance benefit from the lifeline rate but the rate structure encourages all users to conserve water. Wastefulness is punished through increasing rates.

184. One further benefit is that the Inverted Block Rate can be adjusted to accommodate the need for higher tariffs for different users. So an industrial tariff can be implemented on at a completely different rate and structure from Inverted Block Rate residential tariffs. Block 185. We strongly recommend that Palau’s rate corporatized water utility seek rate structures that follow Inverted Block Rate. Further Uniform industrial and commercial water users rates Rate should be structured for ease at the highest block rate on a uniform basis. This way

$ per 1,000 gallons commercial and industrial customers help cross subsidize needy residents. Caution should be gallons used however, to ensure that rates for industrial

Figure 5 – Inverted Block Rate

Appendix 9 Page 29 and commercial customers are not so high that they encourage these customers to seek alternatives, either ground water or surface water. The use of these alternatives can only serve to reduce available water for the general public, deplete ground and surface water sources or potentially damage the environment.

186. Sewerage rates should be closely linked to water use. Sewerage is a byproduct of water use. Sewerage treatment is generally costed in the same manner as water, cost per gallon of effluent treated. As such its cost is generally added on to the water charge, either as part of the block rate or a uniform surcharge per gallon of water consumed.

187. Currently there is no fee for sewerage treatment in the Palau rate structure. Immediate steps should be taken to include this cost in water charges.

4.2.3 Outlying System Tariffs

188. The cost of water in outlying systems is, at present, very inexpensive. Generally, where small systems provide water for a limited number of customers, cost per unit of water supplied exceed the cost of larger systems. The reasons concern economies of scale, distances between customers, water source differences and other factors.

189. While we have not prepared a comprehensive analysis of water expense for any individual outlying system, we believe that should individual states decide to corporatize their own systems, individual tariffs may far exceed current rates. This economic factor may be a further reason to elect a National Water Utility.

190. However, it must be realized that if there is a National Water Utility then customers in more densely populated areas, such as Koror, might be called upon to cross subsidize these smaller systems. Conversely, the newly corporatized utility might choose to create different rates for different locations based on cost. It is important to understand that in any case, greater transparency would not only inform the public of the cost of providing services but also improve public understanding of how rates are determined and what the true cost of this benefit is to them.

191. We must point out, however, that generally, variable rates by location is expensive to administer and can cause resentment among regions. We would encourage Government not to pursue this avenue.

4.2.4 Environmental Protection

192. While we understand the EQPB has overall responsibility for protecting the environment, implementing and enforcing environmental laws, water and sewerage service has an equal responsibility to provide clean and abundant services. With the possibility of State Government water utilities, there is a need for a working partnership at the State level with EQPB to ensure responsible services are provided.

193. We would encourage all parties to work in partnership on environmental preservation. This will mean that as decisions are being made to determine the course of developing water utilities either at the National or State levels, that observance of all environmental regulations is strictly adhered to.

Appendix 9 Page 30

V. Road Map

194. The Road Map to corporatization is presented to two formats. First we present a matrix of issues that must be resolved to corporatize water and sewerage service. The matrix defines the goals, the process, the expected result and the participants at each level.

195. The second format is a decision tree to help better define each level of intervention needed to conclude the corporatization.

196. The Road Map will analyze each of three initial decisions. First, we analyze what is needed if the National Government decides that it’s in its best interest to allow each State Government to maintain its own Water and Sewerage Utility. It defines the decisions they will have to make, the planning activities, capacity building needs and organizational nature for 14 utilities required for State Government Water and Sewerage.

197. The Second analysis details the decisions required if it is agreed by all parties that a National Water and Sewerage Utility makes the most sense. We analyze the decisions required and plans needed to transfer staff and assets to the National Utility. In addition we examine capacity concerns and needed financial, funding and information management systems needed.

198. The Third analysis examines the issue surrounding a National Water and Sewerage Utility that would be combined with PUC. While there would be obvious economies of scale, the planning needed to transfer staff and assets to ensure an smooth seamless transition could be daunting while at the same time benefit existing water and sewerage staff of continuity.

Appendix 9 Page 31

Table 1 – CORPORATIZATION DECISION MATRIX

Objective Process Participants Expected Results to be Achieved Obstacles to Overcome

Determine the Convene a meeting between BPW, MRD, MoF, Decisions need to be reached: Difficulties are likely to emerge regarding: Appetite and Process interested and affected State toward government parties to analyze Governments, PUC 1. Will corporatization benefit the community  Personnel and service delivery? Corporatization of the benefits and obstacles that  Tariffs Water and Sewerage need to be overcome if 2. If so, what form should it take? - National Services corporatization is to be Utility? – State run Utility?  State compensation for water use achieved or if to remain with  Accounting and MIS needed for new the status quo. 3. Can some business combination with existing public utilities be of benefit? – organizations what form? – responsibility? – ownership?  Adapting existing organizational 4. What legislation is needed to provide the structures. corporation with legal status, rights and To accommodate these concerns, the responsibility? parties should prepare a list of issues and 5. How will utility and tariff regulation be once legal authority is granted begin the accomplished? process of hammering out a mutually satisfactory agreement or MOU to tackle 6. What technical assistance would be these issues. needed to accomplish reform and how can this assure a seamless transition? ADB or other donors may be needed but not ready to provide assistance. Final results must determine State or National Government ownership and if Nationally owned, whether it is feasible and desirable to combine with PUC.

Prepare a National Laws will be prepared in MRD, MoF, EQPB, The draft laws will address legal concerns over Legislative delays and political infighting often Water and Sewerage tandem with NPQB, MRD and Office of the water as enumerated in the legal review. Our derail needed legislation. The Office of the Supply law that will MoF for water and sewerage. President and review recommended (1) preparing a President of other key champion is needed to provide for a Using existing PUC/PNCC OEK. comprehensive water and sewerage law codifying increase inertia and move the process forward. corporatized WS legislation draft laws providing existing provisions of disparate legislation and (2) With a change of government due in Utility a government owned utility to creating a single corporate responsible utility for November, this will present a key challenge to service the current and future water and Sewerage services get the government up to speed and spent its water needs of Palauans political capital on needed reforms.

Appendix 9 Page 32

Objective Process Participants Expected Results to be Achieved Obstacles to Overcome

STATE RUN UTILITY

Prepare State Utility Each State must determine State Government, Each State must draft a plan with details on: Local Capacity will be a grave concern. It is Plan how the utility will be BPW, MoF uncertain if there is local capacity and finances managed, how it will serve its  Employees needed to be able to accommodate establishing a community, water resources,  Organization structure utility. In addition it is uncertain whether funds treatment, distribution, are available to purchase administrative assets metering and billing, customer  Salary structure to run the utility. service  Accounting and finance  MIS  Tariff structure  Customer service  Metering and billing  Full cost recovery

Prepare an Asset Each state must determine the MoF, BPW, and Each State must determine the assets located in Detailed asset summaries and location may Transfer Plan assets already in place and State Government their State providing water and sewerage services. not be available. Some assets may cross determine how ownership will This includes: borders and access may require agreement be transferred to the new and payment from one State Government to utility.  Water resources another.  Transmission mains Assets currently owned by National  Treatment plants and ancillary plant Government must be distributed according to use and need. Compensation, if any must be  Distribution mains determined.  Meters and connections  Buildings, offices, office equipment

Prepare a New Asset Each state must determine BPW, State Each State must determine the assets needed by Will the States or any state be in a position to Acquisition Plan asset needs and acquire Governments, MoF their State to provide water and sewerage services acquire new facilities to meet expectations and needed assets to run the and determine funds needed and available to needs of each community. If there is no clear utility. These include path, it might be more beneficial for utilities to

Appendix 9 Page 33

Objective Process Participants Expected Results to be Achieved Obstacles to Overcome computers and software. acquire the assets. Asset analysis must include: be operated by National Government. Further inventory purchase agreements must be review  Water resources and maintained or voided.  Transmission mains  Treatment plants and ancillary plant  Distribution mains  Meters and connections  Buildings, offices, office equipment

Prepare Each State must determine its BPW, State State Government will need a full range of The biggest constraints to the new Staff/Organization staffing needs in all areas and Governments and technical, financial, HR, MIS, Customer Service, organization will be the willingness of existing Plan determine how to fill these MoF Metering and billing staff. They must determine staff to transfer to a new utility. Also there will positions with BPW and MoF, staff willing to be transferred, be concerns over current pension, service pay, function and capacity. Any gaps must be filled by seniority, promotions, benefits and a whole external hires. Utility management hires requires range of issues. Finding staff with the capacity locating utility specialists with skills in engineering, to fill gaps particularly at the management financial and general management. level may prove particularly problematic.

Prepare a Capacity While every effort will be made BPW, State State Utility staff improved capacity is the outcome Capacity building programs are not usually off Building Plan to find appropriate staff, Governments that is needed. Capacity development in all areas the shelf items. Determining individual needs capacity must be but most importantly in water supply technical and targeting capacity building development strengthened. Developing a abilities, metering and billing and accounting is vital program may be beyond the skills of the HR capacity building plan from the at the outset personnel employed by the new utility. outset will help in obtaining resources to strengthen capacity.

Develop a Public Prepare advertisements, State Government Public awareness of both the change in service Budgets for public awareness campaigns are Awareness program posters, information letters, and local provider and its effects will help the community to not notoriously hard to come by. Funding may to announce the new community forums, etc. to participants more easily accept the change in status and signal be limited and some alternative means of utility roll out advise the public of the roll out future community cooperation and consideration communicating with the community about the of the new utility and its transfer may be needed. benefits to the community

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Objective Process Participants Expected Results to be Achieved Obstacles to Overcome

Develop a Meter A plan to meter all current and All un-metered connections must be metered and Political interference is always a concern Installation and Tariff new connections is drafted tariff must be established to bring the utility to full where changes to the status quo are involved. Regime noting that time is of the cost recovery. Meters shall be the primary means While most consumers currently expect higher essence to install meters for determining bills and based upon per gallon charges, meters and institutional alterations, quickly and efficiency. New costs. Tariffs regulated through the Board of no one can envisage the type of political tariffs must be announced Directors, public hearings based on FCR principals. maneuvering that can derail tariff adjustment. based on meter readings and Establish meter tampering statutes, penalties and Further connection costs and fees are as yet per unit cost. criminal penalties. undetermined along with penalties and criminal sanctions.

Determine National Together with National BPW, MoF, State As noted in the discussion of assistance options BPW staff may be reduced to a level where Government Support Government agencies Governments National Government support will be a necessity support is not available, funds for support must determine a support program for State run utilities. While there are many options be provided and National budgets might be that could include engineering, at a minimum laboratory, finance and engineering limited. Help in establishing an accounting and procurement, laboratory, at least in the near term will be vital. There will be a billing system will be needed because MoF finance and other facilities. need to develop sunset clauses on assistance as accountants are not profit oriented and an capacity develops and perhaps develop a Water independent consultant may be needed. Association where professional water executive can share collective interests

Develop Following new laws MRD Regulations will follow and be consistent with If most State run utilities are unable to perform Environmental and promulgated by OEK, legislations governing environmental laws including in accordance with the rules promulgated by Water/Sewerage implementing regulations must raw water protection and quality, treated water MRD it could result in wholesale forfeiture. Regulations to be in place to ensure the new quality, sanctioned treatment processes, standard There needs to be a fail-safe provision to avoid govern quality, State run utilities follow these effluent discharge and other matters. Failure to this and there is high-risk of failure without any performance, rules or sanctions for failure meet standards result in sanctions both monetary track record of operations at the State level. governance, are applied and operational forms. Ultimate sanctions can sanctions, tariff and include forfeiture of rights and privileges of other factors autonomy.

NATIONAL RUN UTILITY

Prepare a National National Delegates define a National delegates draft a plan with details on: The large number of BPW staff engaged in Utility Plan plan to meet consumer needs water supply is a serious concern, i.e. and provide State Government  Employees needed government records show 55 plant operators. suggestions on how best to  Organization structure Reducing staff and improving productivity is manage the utility, how it will essential to service water supply properly.

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Objective Process Participants Expected Results to be Achieved Obstacles to Overcome serve all Palauan, water  Salary structure However, resistance is sure to be met if resources it will need, efficient operations are mandated. It is also treatment assets, distribution,  Accounting and finance uncertain if there is capacity in finance, metering and billing, customer  MIS customer service, MIS, personnel to be able to service. establish a utility. In addition it is uncertain  Tariff structure whether funds are available to purchase administrative assets to run the utility.  Customer service  Metering and billing  Full cost recovery

Prepare an Asset Government must determine MoF, BPW, and While there is currently an asset register, the new Obsolete and damaged assets may prove Transfer Plan the assets already in place and State Government utility must inventory all assets, determine their problematic if the inventory shows un- determine how ownership will condition and status in preparation for an asset depreciated assets are still on the be transferred to the new management plan. Assets to be verifies includes: Government’s books. Further analysis may utility. also indicate the need for remedial  Water resources maintenance or overhauls to bring the asset to  Transmission mains service. In this event funds will need to be identified to accomplish this. Existing BPW  Treatment plants and ancillary plant offices may prove to be inadequate for the Utility start-up.  Distribution mains  Meters and connections  Buildings, offices, office equipment

Prepare a New Asset The new utility must determine BPW, MoF, ADB The Utility must plan assets needed to provide Preparing the funding plan will be of Acquisition Plan asset needs and acquire water and sewerage services and compute the particularly difficult as existing BPW staff do needed assets to run the funds needed and available to acquire the assets. not possess financial expertise. ADB or other utility. These include Asset analysis must include: donors can assist in developing this assets computers and software, new assessment, however, the timing of these buildings and equipment.  Water resources interventions can be difficult to predict. Finally, Further inventory purchase  Transmission mains funding asset acquisition from internal funds agreements must be review may prove difficult. While donor input can be and maintained or voided.  Treatment plants and ancillary plant useful, approval processes for any donor are time consuming and must be consistent with  Distribution mains

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Objective Process Participants Expected Results to be Achieved Obstacles to Overcome  Meters and connections donor aims and policies.  Buildings, offices, office equipment

Prepare The new utility must determine BPW and MoF The new utility will need a full range of technical, The biggest constraints to the new utility Staff/Organization its staffing needs in all areas financial, HR, MIS, Customer Service, Metering organization will be large number of existing Plan and determine how to fill these and billing staff. BPW and MoF must determine staff currently and the need to reduce numbers positions staff willing to be transferred, functions and more in line with efficient utility requirements. capacity. Any gaps must be filled by external hires. Also there will likely be concerns over current Utility management hires require locating utility pension, service pay, seniority, promotions, specialists with skills in engineering, financial and benefits and a whole range of issues. Finding general management. staff with the capacity to fill gaps particularly at the management level may prove particularly problematic.

Prepare a Capacity While every effort will be made BPW and MoF, Improved management, operations and financial Capacity building programs are not usually off Building Plan to transfer all current staff, ADB capacity is the outcome that is needed. Capacity the shelf items. Determining individual needs capacity must be also be development in all areas but most importantly in and targeting capacity building development strengthened. Developing a water supply technical abilities, metering and billing program may be beyond the skills of the HR capacity building plan from the and accounting is vital at the outset. There is also a personnel employed by the new utility. Direct outset will help in obtaining need to develop a training center for continuing interventions through donor programs will resources and defining professional education and staff development. assist, however, a commitment by the Utility to ongoing needs. Funding and programs must be both internal and maintain and update training is essential as donor driven. well.

Develop a Public Prepare advertisements, Utility Managers Public awareness of both the change in service Budgets for public awareness campaigns are Awareness program posters, information letters, and local NGO, provider and its effects will help the community to not notoriously hard to come by. Funding may to announce the new community forums, etc. to CBD, public more easily accept the change in status and signal be limited and some alternative means of utility roll out advise the public of the roll out organizations, etc., future community cooperation and consideration. communicating with the community about the of the new utility and its ADB The move should also target greater ongoing transfer may be needed including donor benefits to the community communication and community consultation. assistance

Develop a Meter A plan to meter all current and Utility Mgrs, All un-metered connections must be metered and Political interference is always a concern Installation and Tariff new connections is drafted Regulators, State tariffs must be established to bring the utility to full where tariff increases are involved. While most Regime noting that time is of the Government, ADB cost recovery. Meters shall be the primary means consumers currently expect higher charges, essence to install meters for determining bills and based upon per gallon meters and institutional alterations, no one can quickly and efficiency. New costs. Tariffs regulated through the Board of envisage the type of political maneuvering that

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Objective Process Participants Expected Results to be Achieved Obstacles to Overcome tariffs must be announced Directors, public hearings based on FCR principals. can derail metering/tariff adjustment. Further based on meter readings and Establish meter tampering statutes, criminal and connection costs and fees are as yet per unit cost. civil penalties. undetermined, different tariffs by State, along with penalties and criminal sanctions.

Develop a State Meeting with New Managers, New Utility Mgrs., There needs to be a new dynamic with State State Governors may act unreasonably and Government outreach National Government and National Governors participating in National decision interfere in daily utility operations holding water and cooperation Plan Governors of each State to Government, State making. This outreach and cooperation plan will supply to ransom if their demands are not met. signal cooperation and dialog Governors aim at developing a continuing dialog to address This may be overcome with direct involvement to address both specific State concerns and address much needed of senior politicians but that would likely be a problems, tariff adjustments, solutions to local issues. It will also provide a voice waste of time and resources. new connections, un-served to Governors who currently feel that Koror receives communities, watershed all the attention while their State goes wanting. protection and other key issues.

Develop Following new laws MRD, OEK, EQPD Regulations will follow and be consistent with If the new utility is unable to perform in Environmental and promulgated by OEK, legislations governing environmental laws including accordance with the rules promulgated by Water/Sewerage implementing regulations must raw water protection and quality, treated water EQPD/MRD it could result in wholesale Regulations to be in place to ensure the new quality, sanctioned treatment processes, standard abandonment of the new utility or complete govern quality, utility follow these rules or effluent discharge and other matters. Failure to replacement of management. However, performance, sanctions for failure are meet standards result in sanctions both monetary environmental laws and regulations are governance, applied and operational forms. Ultimate sanctions can valuable to all Palauan and severe sanctions sanctions, tariff and include dismissal of management, privatization, or must apply. other factors even criminal charges for willful disregard.

NATIONAL POWER AND WATER UTILITY

With a combined National Power and Water Utility similar objectives and processes apply. However much less effort will be required in determining new computer equipment, customer service, HR, billing and meter reading efforts. Instead, the effort will more likely be focused on the business combination and resolving corporate cultures between existing BPW/MoF utility functions and PUC’s already rich culture of performance and meeting community needs.

Determine form of Discuss how the water utility PUC, BPW, MoF, Analyze all alternatives for a business combination All information is currently unknown and a Water Utility will be formed and determine if ADB and determine the pluses and minuses. Assess the business combination may not work as Combination a subsidiary, division, joint most beneficial form of combination and financial intended. If this happens the combination must venture or other combination reporting either re-thought or an alternative chosen. would work best

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Objective Process Participants Expected Results to be Achieved Obstacles to Overcome

Determine how best Staff transfer plans must be PUC, BPW, MoF, Staff transfers are going to be the most difficult This issue is the prime “deal-breaker” of this to transfer staff and consulted along with tariff ADB concern of this transition. With staffing ratios business combination. Inefficiencies within the how to reduce staff requests. Questions of salary currently far in excess of needs, staff reductions current set up require reform. However, there ratios levels of existing PUC staff are needed. Who goes to the new utility and who is likely to be much resistance. It is best if must be considered and stays in BPW will be subject of much discussion Government guarantees jobs for everyone but transferred staff brought in but ultimately must result in what is in the best transfers only the most productive workers to line. interest of the consumer the new combined utilities. Lower productivity workers are likely to remain on Government payroll in other positions.

Determine Salary Develop a salary, bonus and BPW, MoF, PUC A plan that rewards employees for reform minded Choosing the wrong workers or failing to structures, benefits benefits plan in line with performance would help achieve a seamless ensure higher compensation in return for and other current PUC plans but rewards transition. Workers perceiving that it is in their results could derail the process. compensation improved productivity and interest and pocketbook to help the process along reform will perform best and be motivated.

Develop a responsive Executive compensation, If compensation and promotion favors PUC over The need for reform and the business management mobility, rewards, training and WSS then eventually WSS executives will become combination is intended to fast track structure that interface will be designed to de-motivated. Care should be taken to ensure not corporatization but not stifle innovation. There provides incentives motivate all executives. just executive compensation and incentives are is always a danger that new entrants don’t fit for both PUC and similar but opportunity as well. The Parent or are not treated seriously. Avoiding this will WSS corporation must act as a meritocracy and favoring help motivate all staff not just executives. power over water.

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5.1 Corporatization Options

199. Our analysis was intended to provide a Road Map for each option for Corporatization. The options include deciding whether each State Government should own and operate their own Water and Sewerage Utility.

200. Examining the impediments to State ownership we find that this option is difficult to recommend. The major impediments include the need for office and operations accommodations in each State all of which would need to be supplied and paid for by State Governments before operations commence and the capacity of local staff to manage, operate and maintain the assets of a local government owned service. The learning curve would be far too steep and it seems likely that the best option is for National Government to own and operate the utility.

201. We recommend that a Water and Sewerage utility is best managed by one National Government corporation. However, we would strongly encourage National and State Government’s to work together to ensure the continuing input and assistance from Governors, local community representatives and other local coordinators to provide their support and input. A National Water and Sewer Utility will only work for the benefit of all citizens when they are provided an opportunity to voice their opinions.

202. We also recommend that consideration be given to establishing a combined Power and Water Utility. This business combination is not unusual and occurs in many countries. The benefit for the combined utility would be increased opportunity, economies of scale and a fast track start up for the water division. If combined there would be no need to develop an independent accounting and information management system and assistance from PUC management can help with management concerns and issues. However we caution that at least initially there are likely to be corporate culture issues that can cause some interface difficulties.

203. Capacity building is an important concern. Staff at all levels must learn new systems and operate in a new environment. We would encourage PUC to seek donor support for providing training and human development programs to upgrade capacity all around including management training. Further, capacity building of the Board of Directors is often overlooked. However, in many circumstances those persons appointed to the Board, while well-intended are uncertain of their responsibilities and how to operate in the best interest of the utility. It might be best to develop some training program that offers a general overview of the Board’s function but most particularly as it relates to regulation.

204. Metering all connections is absolutely necessary. It should be understood that almost every current customer is surprised this hasn’t happened already. We strongly recommend that every effort be made to meter every connection at the very least in the Koror-Airai corridor.

205. Tariff increases are another necessity. Not just to increase revenue but to encourage conservation. Further almost every person we have spoken to acknowledges its need and the Social Survey conducted by the project indicates that a doubling of the tariff, at least, is expected.

206. We have recommended that tariff regulation be targeted at providing lifeline tariff to ensure that the most needy in society receive sufficient water to live. However, we have also recommended that consumption past the lifeline tariff must target conservation. While Palau is blessed with abundant water, investment costs

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for storage, transmission, treatment and distribution can be avoided through simple conservation measures as well as conscientious water loss reduction programs. We have proposed inverted block tariff structures that accomplish both goals; providing water for the needy and encouraging conservation.

207. Further consideration should be given to different tariffs for different users. Business owners should provide some cross subsidy to household since their profits are a result of local purchases and use of services. It should be understood that commercial enterprises, industrial concerns, hotels and resorts should not take advantage of lifeline rates that are intended for citizens as a whole and the needy in general. Non-household rate should be different but not in a manner that is injurious to the overall intention nor should it encourage substitution for less expensive options.

VI. Summary and Recommendations

208. The Institutional Review has focused mainly on Institutional difficulties experienced in Palau in water and sewerage delivery, cost recovery and operations and maintenance. We have not addressed new assets needed or the water supply development. This is the primary object of the TA and will be determined by our team though other more specific detailed programs.

209. The institutional analysis is aimed at determining institutional obstacles and actions that can address these obstacles. For the institutional analysis the key obstacles appear to be the absence of a single focused entity that is responsible for delivering all water and sewerage services efficiently and recovering all its costs of operations.

210. Under the present system, this does not seem likely. Instead, we have been asked to look at the option of Corporatization of Water and Sewerage services. By corporatization we mean that water and sewerage operations, development, planning, financing, accounting, billing, customer service and human resources fall under a government owned corporation operating for the benefit of the community. Corporations by their nature are for-profit entities and required revenue to continue to operate.

211. By creating this new utility as a corporation the Government, in fact or tacitly, has agreed to increase tariffs or specifically target subsidies to ensure the continued operation of the utility. Under the present structure, the government is directly paying for water and sewerage services without compiling specific details of operating costs.

212. The utility will be required to not only provide ongoing service but to report directly to government and the Corporation’s Board of Directors revenues, costs, profits and losses.

213. During our many discussions with the people of Palau, Government officials, State officials it has become obvious that everyone expects a change in responsibility for delivery of water and sewerage services. The change in responsibility signifies a move toward greater efficiency, universal water metering and higher water tariffs. It does not appear that there are many attitudinal impediments to Corporatization.

214. Instead, the impediments appear to be more one of structure than of substance. By structure there is great concern over how the utility would be run, who would be owner and input to water and sewerage coverage and service. We believe

Appendix 9 Page 41 that this report could offer a much clearer way forward to overcome objections and concerns.

215. We have suggested that all interested parties’ meet to determine the most beneficial form of corporate structure. The options are between National and State Government owned utilities. Further if a National utility is chosen creating a National Water and Power Utility can help Palauans enjoy possible economies of scale.

216. While there are many options that can be considered, we have offered a number of solutions and recommendations. We reiterate those recommendations as follows:

 Create a National Water and Sewerage Utility – While having State input is necessary it is clear from the impediments to implementation we have examined that capacity at State level is insufficient to create 14 utilities serving many disparate and small communities. Legal precedents for establishing a National utility are readily available from Power and Telecom.  Encourage State Participation in Decision-making – While State Government would not be the right venue for a utility, having their input would be invaluable. Input is needed to ensure all Palauan citizens accept these changes and that they have a voice representing their interests.  Tariff increases are needed and should be regulated – Current regulation by an appointed Board of Directors for Power and Telecom is accepted by most citizens and appears to work well. However, we continue to encourage open public hearings to discuss not just tariffs but utility performance. Tariffs must encourage conservation but provide lifeline rates for the needy.  A Combined Power and Water Utility can Fast Track Corporatization – While there are concerns over cultural differences at least initially, combining the utilities as is done in many European countries can avoid additional costs, time and effort in developing a stand-alone water utility.  Environmental/Watershed Protection is essential – We understand that in certain areas sewerage leaks are damaging the environment. Under a corporatized entity, the utility would be not only responsible for repair but subject to severe penalties for failure. Laws must place responsibility on all citizens including corporate citizens to be responsible for their actions or inactions affecting the environment.

Appendix 10 Page 1

APPENDIX 10 – INITIAL ENVIRONMENTAL EXAMINATION

Table of Contents

I. INTRODUCTION ...... 4 A. General ...... 4 B. Identification of the Applicant, Agencies and Organizations...... 5 C. Project Area ...... 5 D. Regulatory Framework...... 5 II. Description of the Project ...... 8 A. Need for the Project: Economic and Social Characteristics...... 8 B. Project Alternatives ...... 8 C. Project Proposal: Technical and Environmental Characteristics...... 10 III. Description of the Environment...... 13 A. Physical Resources...... 13 B. Biological Resources...... 16 C. Human and Economic Development...... 17 D. Culture and Quality of Life Values...... 18 IV. Screening of Potential Environmental Impacts and Mitigation Measures...... 19 A. Potential Impacts and Mitigation Measures...... 19 B. Climate Change: Impacts and Adaptation Measures ...... 22 C. Poverty and Social Assessment...... 22 D. Land Acquisition...... 23 E. Mitigation Costs ...... 23 V. Institutional Requirements and Environmental Monitoring Plan ...... 25 A. Institutional Arrangements ...... 25 B. Capacity Building ...... 25 C. Environmental Monitoring Plan ...... 25 VI. Public Consultation and Information Disclosure ...... 29 A. Project Engagement with Communities...... 29 B. Public Consultation on Environmental Safeguards...... 29 C. Follow-up Public Consultation...... 29 VII. Findings and Recommendations...... 30 A. Findings ...... 30 B. Recommended Approach to Environmental Management ...... 31 VIII. Conclusions ...... 32

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List of Tables 1. List of Agencies and Organizations Consulted 5 2. Water Quality Results for Ngerikiil River 14 3. Summary of Environmental Impacts and Mitigation Measures 19 4. Detail of Impacts, Mitigation Measures and Costs 23 5. Recommended Water Quality Monitoring 26 6. Field Test Results 26 7. Laboratory Test Results 27 8. Environmental Management and Monitoring Plan 28 List of Figures 1. BWSP Project Area 7 2. Monthly Average Precipitation 13 3. Monthly Average of Minimum and Maximum Daily Temperatures 13 4. Monthly Average Number of Hours of Sunshine per Day 13

Annexes Annex 1: References Annex 2: Rapid Environmental Assessment (REA) Checklist: Water Supply Annex 3: Environmental Clauses for Inclusion in Construction Contract Tender Documents

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Abbreviations ADB Asian Development Bank BWSP Babeldaob Water Supply Project CC Construction Contractor CIP Capital Improvement Projects DOE Design Office Engineering DSC Design and Supervision Consultant EA Executing Agency ECC Environmental Clearance Certificate EA Environmental Assessment EIA Environmental Impact Assessment EIS Environmental Impact Statement EMP Environmental Monitoring Plan EQPB Environmental Quality Protection Board ES/C Environmental Specialist/Consultant ETP Effluent Treatment Plant GOP Government of Palau IA Implementation Agency IEE Initial Environmental Examination MASL meters above sea level MRD Ministry of Resources and Development NGO Non-Governmental Organization PIU Project Implementation Unit PMO Project Management Office PPTA Project Preparation Technical Assistance ROP Republic of Palau RPPL Republic of Palau Public Law UFW Unaccounted for water WHO World Health Organization dia diameter ft feet gpm gallons per minute in inch lpm liters per minute m meter m/sec meters per second mg/L milligram per liter

Appendix 10 Page 4

I. Introduction

A. General 1. The purpose of this Initial Environmental Examination (IEE) is to provide an environmental assessment of the proposed construction and operation of the Babeldaob Water Supply Project. The objective of the Project is to improve the security of water supply, in the face of occasional drought, for the communities of Koror and the state of Airai on the south end of Babeldaob Island. In addition the Project considers savings to be achieved by reduction of ‘unaccounted for water’ (UFW) and the potential for extending the Koror-Airai system to the nearby state of Aimeliik. 2. This project is classified under the Asian Development Bank (ABD) Guidelines (2003) as Category B which refers to “projects judged to have some adverse environmental impacts, but of lesser degree and/or significance than those for category A projects”. An IEE is required to determine whether or not significant potential environmental impacts exist which warrant a more comprehensive EIA. If an EIA is not needed, the IEE is regarded as the final environmental assessment report for the project. 3. This IEE has been prepared in accordance with the ADB guidelines to meet the ADB requirements for the Draft Final Report for the project and conforms to environmental assessment requirements defined in Palau’s Environmental Quality Protection Board (EQPB) Regulations (1996) and related guidelines. This report provides screening of various design alternatives at the Draft Final stage in project preparation. A previous IEE report, prepared at the interim stage of project preparation, dated July 2008 is superseded by this report. 4. This IEE is based upon analysis of the potential impacts of the proposed project works following research and inspection of the project area in general, and component sites in particular, by the project environmental study team members during visits in June-July 2008 and February-March 2009. During these visits the specialists had discussions with various MRD (now MPIIC), BPW, EQPB and Airai state representatives and obtained information relating to the physical and ecological resources. The results of the social survey and institutional framework evaluations by other team members were also incorporated into this assessment. Field investigation work involved the test pumping of three old groundwater wells followed by the drilling of one new well and a nearby observation bore and pump testing of these installations. In addition, sampling and analysis of water from the potential aquifer water supply was carried out. 5. This IEE has been prepared by the environmental study team from GHD Pty Ltd in association with GK2 Inc which comprised the following personnel:  Dr. Tim Whittington – Environmental Specialist who carried out the initial environmental assessment and prepared the Interim IEE reporting documents.  Mr. Jon Vogt – National Environmental Specialist who assisted in the preparation of the environmental assessment and IEE reports.  Mr. Howard Sullivan – Geotechnical and Groundwater Specialist who provided the geotechnical and groundwater aspects of the environmental assessment and prepared the Draft Final IEE report. He has acted as the environmental specialist on several previous ADB water supply and sanitation project TA’s.  Mr. Len Rutledge – Team Leader who provided overall direction and coordination of the project and reviewed the IEE reports.  Mrs. Frances Vogt – Community Awareness Specialist who carried out a poverty and social assessment and provided input regarding the human environment.

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Guidance on ADB reporting requirements was provided by an Environmental Specialist within the ADB, Mr. Eddie Brotoisworo.

B. Identification of the Applicant, Agencies and Organizations 6. This paragraph is included in accordance with Palau Government regulations. The Project Applicant is the Government of the Republic of Palau, the Ministry of Resources and Development, Bureau of Public Works. Some project activities may be undertaken by state governments aimed at improving small-scale independent water supply systems in which case the Bureau of Public Works acts as a sponsor for state agencies undertaking those activities. A list of agencies and organizations consulted is contained in Table 1. Table 1: List of Agencies and Organizations Consulted

Agency or Organization Person or Position

National Policy on Population and Sustainable Development Pro- Jean Williams, Environmental Specialist ject (ADB TA 4929-PAL)

Bureau of Public Works, Water Supply & Sanitation Division Head of State System Maintenance Unit

State of Ngermetengel, Water Supply Operations System operators

Bureau of Public Works Techur Rengulbai, Director

Ministry of Resources and Development Fritz Koshiba, Minister

Airai State Government Governor Vicky N. Kanai

C. Project Area 7. The project area encompasses the south end of Babeldaob Island, comprising the states of Airai and Aimeliik, as well as the Islands of Koror, Malakal and Ngerekebesang within the state of Koror that are connected to the centralized water supply system. The project area and the general location and alignment of the water infrastructure facilities are shown in Figure 1.

D. Regulatory Framework 8. The Environmental Quality Protection Board (EQPB) within the Ministry of Resources and Development (MRD), Republic of Palau (ROP) is the governing body for environmental protection in the Republic of Palau. Title 24 of the National Code provides the framework for protection of resources and environmentally sound development. Division 1 includes the En- vironmental Quality Protection Act (Chapter 1) and regulations which are, in part, applicable to the Project. In particular environmental planning regulations concerning Environmental Impact Statements (Chapter 2401-61) are set out to “insure that environmental concerns are given appropriate consideration in decision making” for projects. A two-step assessment process is used similar to the ADB environmental safeguard policy. 9. An Environmental Assessment (EA) is required for any use of national or state lands or funds and actions that “directly or indirectly impact coastal waters and wetlands”. Some important exemptions that are relevant to this project include “operations, repairs or maintenance of existing structures, facilities, equipment;” and “replacement or reconstruction of existing structures and facilities where the new structure will be located generally on the same site and will have substantially the same purpose.” The Palau regulation also exempts “water, sewage, electrical, gas, telephone and other essential public utility services extensions to serve [single family, multi-family and commercial space with occupancy less than 20 persons] structures or facilities.”

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10. Environmental Impact Statements (EIS) are recognized as a process of assessment typically done in a two-step process. An EA is required for any and all actions that propose: (A) use of national or state lands, or (B) “use of national or state funds, unless the funds are to be used for feasibility or planning studies for possible future programs or projects, which the applicant has not yet approved, adopted, or funded, provided however, that the applicant shall specifically consider environmental factors and available alternatives in its feasibility or planning studies.”(EQPB 1994, p. 126) This indicates that, while the EA process is a necessary component of the feasibility planning process, the submittal of the EA for EQPB consideration and approval during the feasibility stage is not required, though perhaps beneficial in order to speed the approval during the loan stage. 11. The EQPB, in its consideration of the findings of the EA, determines whether the action may have a significant effect on the environment, and if so will issue a notice of determination that will be considered an Environmental Impact Statement (EIS) notice. Preparation of the EIS is considered a process with specific contents and procedures that are in general consistent with those of an EIA as specified in the ADB Guidelines (2003). 12. Other Title 24 regulations potentially applicable to the project are as follows:  Chapter 2401-01 Earthmoving Regulations apply to all earthmoving activities, defined as “any construction or other activity which disturbs or alters the surface of the land”, requiring the preparation of an erosion and sedimentation control plan incorporating, among other means, diversion terraces, interceptor channels and solids separation facilities. A permit must be obtained prior to the start of activities to be submitted by the person undertaking the earthmoving activity.  Chapter 2401-11 Marine and Freshwater Quality Regulations establish a 60 ft buffer zone for protection of waters from introduction of sediment and nutrients, and provide classification of both surface water and groundwater quality criteria and standards.  Chapter 2401-51 Public Water Supply System Regulations is generally applicable to the project design and maintenance objectives. The regulation sets out design and performance criteria for water supply systems.  Chapter 2401-71 Air Pollution Control Regulations define complex sources as “any stationary source which affects air quality by indirect means, primarily by means of mobile source activity associated with them.” The regulation also defines fugitive dust as “any airborne solid matter emitted from any source other than a stack or chimney.” Complex sources are “stationary sources”. Practice has shown that permits are needed for point source emissions such as asphalt plants; however no such sources are anticipated during implementation of the loan for the BWSP. 13. The ADB Rapid Environmental Assessment Checklist for Water Supply found in the Environmental Assessment Guidelines (2003) was used to screen the Project for environmental impact and to assist development of the scope of the IEE investigations. The completed Checklist is provided in Appendix 2 of this IEE. It indicates the potential for slight to moderate environmental impact, as some environmentally sensitive areas may be en- croached upon (wetland and possibly mangroves) and some potential impacts are present during construction activities. The proposed well field development is only planned as a supplementary source of water for short-term ‘drought’ periods and a monitoring program will ensure that over pumping does not occur and does not result in salinization or ground subsidence. The Category B project environmental classification assigned during ADB fact-finding stage, is considered to be appropriate, however an Environmental Management Plan (EMP) will need to be prepared as part of project implementation to manage the potential issues during construction and also during operation and maintenance.

Appendix 10 Page 7

Figure 1: BWSP Project Area

Appendix 10 Page 8

II. Description of the Project

A. Need for the Project: Economic and Social Characteristics 14. The need for the Project is dictated by a perceived need for capacity expansion, increase of system coverage and reduction of risk associated with shortages in water supply that may occur during periods of drought. Despite the perception of a shortfall in capacity, investigations have shown that the present water supply source for Koror and Airai States is sufficient to meet all future demand scenarios up to Year-2020 (the Project planning horizon). However, reliability of supply is only one in 10 years, ie. the supply can be expected to fall short of demand one year in 10, due to drought conditions that typically last a period of two to three months. For small-scale water supply systems owned by state governments on Ba- beldaub Island the situation is similar, with few exceptions; yet here reliability is more affected by the unreliability of aging equipment and lack of maintenance budgets. Many components of the water supply systems have reached the limit of their useful lives, having been in place some 20 – 25 years with only emergency repairs made to accommodate equipment failures; hence there is a need for rehabilitation of some systems but without any immediate need to increase availability of supply. 15. The project water resources report states that the Koror-Airai system reliability “is generally unsatisfactory for urban consumers, and the dependence of the Palauan economy on tourism is another factor to consider. Improving reliability of the water supply system yield so that shortages occur no more frequently than 1 in 25 years is regarded as acceptable.” Hence targets framed in terms of economic and social acceptability aim at achieving greater reliability by augmenting supply to the Koror-Airai system and by rehabilitating small-scale systems operated by state governments. 16. The perceived shortage of water is due to exceptionally high per capita consumption. The Koror – Airai waters supply system includes some 3,600 customer connections of which around 3,000 are located in Koror and the balance in Airai. Household connections in Airai are not metered; each household connection pays a flat monthly rate of $5.00 for water. Av- erage production of water metered at the treatment plant is 3.8 million gallons per day (MGD) and some 16,870 equivalent people live, work and/or visit and are temporarily resident in the service area. This consumer group is made up of the residents of Koror and Airai, the foreign workers that are present but not counted in the overall census, and tourists that visit Pa- lau an average of 4.6 days per visit and reside at hotels and resorts that are connected to the distribution system. The overall per capita consumption of around 225 gal/day is three to five times higher, and in some instances ten times higher, than consumption rates at other island nations in the Pacific and urban areas in the USA and Australia.1 Furthermore it is not clear where this quantity of water is being consumed. While only some 58% of water being produced at the Airai Water Treatment Plant is billed to customers, there is no obvious source of unaccounted for water through pipe leakage or losses through un-metered connections. The conclusion reached in the Inception Report is that the unaccounted for water is the result of legal and illegal un-metered consumption, leakage from the pipe network and possibly under- reading of existing service meters.

B. Project Alternatives 17. The investment program described in the ADB Technical Assistance Report (ADB 2007) envisioned an additional raw water source located in Aimeliik State comprising surface flows discharging from the Tabecheding River toward the western side of Babeldaob Island, an additional water treatment plant located near the source of supply, and a bulk supply main installed along the recently constructed Compact Road supplying the Koror-Airai system with

1 See further explanation in the Inception and Interim Reports for TA 4977-PAL.

Appendix 10 Page 9 an additional 1 Mg/d. However this system is unable to produce the required quantity of water when it is most needed due to the effect drought conditions have on the surface raw water source. Such a project does, however, accomplish other objectives to extend service into Aimeliik State and to assist development along the Compact Road, which is a goal of the ROP. It is, however, costly. 18. An alternative is to reduce necessary production and hence increase the reliability of present sources. The Community Action and Participation Program (CAPP) is being proposed as a part of the Water Supply Sector Development Plan to be implemented under the loan project. The key objectives of this program will heighten community awareness of water conservation which, along with other measures, will assist to bring per capita water use down by at least 20% and make the present sources of supply more sustainable over the project planning horizon. 19. Infrastructure improvements are proposed to the management of water and to introduce incentives for conservation at the user level. In-line metering is poor and it is not possible to isolate and identify system losses when they occur; hence the Project plans to install a series of in-line meters so that consumption by sub-groups among users defined by geo- graphical area can be determined and enable line losses to be isolated. Some of the transmission mains are old and, in all likelihood, contribute to unaccounted-for losses; these mains will be replaced. Finally, some 19% of connections are un-metered (23% of residential connections) leading to an excessive level of consumption as the cost of water is ignored; installing meters on all connections is a goal of the Project. Once unaccounted-for losses are brought under control and usage falls by 20%, the current sources of supply are capable of meeting consumption projections through the project-planning horizon, except for prolonged drought periods. 20. Improving reliability of supply during periods of drought may be achieved by increasing reservoir storage or tapping a groundwater source. The IEE prepared at the interim stage of project reporting considered the environmental impacts of these alternatives and related infrastructure improvements. The option to develop additional storage of water by impounding a river in one of several watersheds on Babeldaob Island is discussed in some detail in the Water Resources Report (Appendix to the Interim Report). The dam site considered prefer- able from the standpoint of access and capacity is referred to as the Edeng I site. The reservoir would need to cover some 8-11 ha, which is currently occupied by well-established secondary forest. The potential loss of biodiversity and the need to clear the reservoir area of vegetation prior to filling, in order to establish, protect and maintain water quality in the reservoir, are significant environmental considerations with high financial and economic costs. 21. Groundwater was previously used to supplement the Koror–Airai water supply system in the mid-late 1980’s when at least 6 wells were constructed and several of these were pumped for periods during the drought periods in 1988 and 1997/98. 22. For this TA the groundwater option was initially evaluated in July-August 2008 by short-term (24 hour) pumping of three previously installed wells to gain a preliminary estimate of their yield. The results of this initial work were encouraging as those wells tested were indicated to have a short-term yield of 25 -60 gpm. These wells are each over 20 years old and new wells drilled to slightly greater depth and of slightly larger diameter could be expected to have a significantly greater sustainable yield; up to 100 gpm. 23. A more comprehensive pump test program was planned to be carried out during Feb- ruary-April 2009, however due to the limited local availability of drilling equipment and operating expertise the additional work was limited to the construction of one new well and one nearby monitoring installation. In addition a PVC standpipe was installed in one the older bores to enable the monitoring of the response to pumping up to 200m away from the new well.

Appendix 10 Page 10

24. The results of the groundwater evaluation are considered to indicate that a viable source of supplementary supply of up to 1 mgpd is likely to be available from a wellfield, comprising 10 to 15 wells, located along the shallow valley of the Ikoranges watercourse between the Ngerikiil Pump station and the Ngerimel Reservoir. These wells would be connected via a new raw water pipeline to the existing water treatment plant. 25. There is also interest in expanding the service area to Aimeliik State via a water main located along the Compact Road to the north-west from its south junction. The feasibility assessment of this option indicates that cost considerations and limited demand may show the option to be unfeasible at present; however in the event that the Government elects to pursue the option, alongside other components of the Project, the IEE includes a preliminary evaluation of impacts and recommended mitigation measures to accommodate the work. 26. Environmental impacts and mitigation measures are described in Sec. IV that covers all alternatives. Further, the conclusions of the IEE (Sec. VIII) attempt to encompass all possible outcomes of the ongoing decision process aimed at formulating an investment program and feasibility level design for the BWSP.

C. Project Proposal: Technical and Environmental Characteristics The proposed Project has five components: 1. Strengthening Sector Planning, Management and Regulation 27. This component aims to strengthen the overall water supply sector and improve sector sustainability. It comprises two subcomponents aimed at institutional strengthening at the national level at the Bureau of Public Works, to enable a new water and sewerage authority to be created and a Draft Water Supply Law for Palau. The capacity building effort related to environmental management can be considered as a part of this component of the project proposal. 2. Development of Water Supply Wells and Associated Water Source Works 28. This component aims to develop a supplementary source to the existing Koror-Airai water supply system to improve its reliability to supply during occasional drought periods. 29. Investigation work carried out during this PPTA has established that a groundwater resource exists in the form of a confined aquifer within the fractured volcanic rock formation located at a depth of 50 to 120 ft below the ground surface, within the shallow valley of the Ikoranges watercourse. This resource is located between the two surface water storages servicing the existing water supply system. In the mid 1980’s several wells were developed in this area and pumping from some of these was utilized to supplement raw water to the supply system during drought periods in 1988 and 1997-98. This component is planned to comprise the following: 30. A well field comprising some 10 to 15 new wells which will be drilled at selected locations. An additional series of about 10 bores will be drilled which, together with several existing old bores, will have standpipes installed to enable monitoring of the groundwater drawdown to ensure that over-extraction of the well field does not occur. 31. Each well will have an electric submersible pump installed with a capacity of 75-150 gpm. A small pumphouse or security fencing will be constructed at each extraction well location to protect electrical controls and a flow meter. Two spare pumps will be provided to provide for breakdown and maintenance events. 32. Two alternatives exist for the pipeline to deliver the groundwater to the treatment works and the decision as to which is most suitable depends on the surplus capacity of the existing

Appendix 10 Page 11 raw water main from Ngerrikiil pump station, whether the groundwater and the Ngerikiil raw water are required simultaneously and the value of not having to fully treat the groundwater. 33. Alternative 1 - A new raw water pipeline would be constructed to join the line of wells and feed the raw water to the existing treatment works. The pipeline is expected to be mostly 6” HDPE, installed in a trench. About 7,500 ft of the pipeline route would be along existing easements and a length of some 4,500ft would require a new easement to be established. The benefit of a separate independent pipeline is that the groundwater is expected to be of significantly better quality than the other raw water and will not require as much treatment. 34. Alternative 2 - Each series of extraction wells (3 or 4) would have a 4” rising main installed to the existing Ngerikiil raw water pipeline, located along the Compact Road. This would require the establishment of several easements. It may be possible to run some of the pipelines along the access road to each well. 35. Access roads will be constructed to each extraction well site to enable initial drilling and installation and later, periodic operation and maintenance of the equipment. In some areas urban subdivision development is planned nearby and it is expected that permanent ‘all-weather’ roads will provide some proportion of the road requirements. 36. Electrical power will need to be provided to each extraction well site from the grid. It is expected that in most cases a few wells will be connected in series, thus reducing the number of main transmission lines required. A few mobile generator sets will be provided to cover mains power outages. 37. Land acquisition is expected to be minimal as well locations will be selected to be within State-owned land as much as is possible. 38. An additional vertical turbine pump will be provided and installed at the Ngerikiil Pump Station to be operated on a rotational basis with the three existing units to improve the efficiency of this facility. The existing intake for this pump station will also be improved to prevent debris entering the pump chamber thereby further improving reliability. 39. The existing damaged steel walkway over the dam spillway at Gihmel Reservoir will be removed and replaced to provide safe access for operation and maintenance work. An additional short pipeline will be installed to enable water pumped from the Ngerikiil River to be sent directly to the reservoir. This bypass will enable the turbid water, which occurs following heavy rainfall, to be directed to the reservoir where the sediment can settle out. 3. Community Action and Participation Program 40. This program is designed to enhance and sustain the benefits from investments in the water supply system. It comprises complementary activities that aim to: facilitate the implementation of the improved water supply system and encourage water conservation to limit future demand; enhance the sustainability of water supply benefits with activities targeting improved household sanitation, environmental improvements and health awareness, and; promote the GOP objectives for a participatory and consultative process with equitable benefits shared by all community groups, including women, ethnic and poor households. 4. Rehabilitation and Expansion of the Water Supply Network 41. This component includes rehabilitation works to improve supply reliability and make operations of the entire water supply system more effective. 42. Rehabilitation work will include the replacement of unserviceable pipes, refurbishment of storage tanks and full metering of the entire delivery system. It will also include a full leak detection survey and repair operation. Much of the existing pipework is fibro-cement which is most likely to contain asbestos. Leaking or damaged sections of this pipe will be replaced with HDPE pipe and the removal and disposal of waste fibro pipe will be carried out using appropriate health and safety procedures for handling such materials.

Appendix 10 Page 12

43. To address the high non-revenue water situation all connections, commercial and residential within Koror and Airai will be metered. This will involve the installation of about 700 new meters and recalibration of all existing meters. The major meters measuring outflow from storage tanks will be replaced and zone meters will be installed at strategic locations. 44. Duplication of the raw water pipeline from the Gihmel reservoir to the water treatment plant (WTP) is planned to be installed parallel to the existing main within the present easement. This additional 1500m long pipeline will enable the bypass system for the Ngerikiil water to be effective without reducing the overall flow to the treatment works. This pipeline wouldl be installed alongside the new raw water line (alternative A) servicing the wellfield system in the same trench. 45. The GOP has identified the expansion of the present service area to Aimeliik state as a high priority so a bulk supply line has been included along the Compact Road from the end of the present pipeline network for about 5.5km which is the maximum distance the water flow will reach without an additional pumping station. 5. Project Implementation Assistance and Capacity Building 46. The Project provides capacity building in water supply system planning, management and administration, and operations and maintenance. Capacity building will also be provided in project implementation, including environmental assessment and review. Implementation assistance will support the Project Management Unit (PMU) during loan implementation.

Appendix 10 Page 13

III. Description of the Environment

A. Physical Resources 1. Climate 47. Palau has a tropical monsoon climate characterized by seasonal variation in rainfall, moderately warm temperatures, and high humidity. Two seasons are generally recognized as a rainy season from May to December and a dry season. Average annual rainfall is some 148 in (3,760 mm) and occurs relatively uniformly throughout the year, with the wettest months being June, July and August (Figure 2). Records indicate there is little variation in annual rainfall throughout the Palau Islands. The monthly average temperature range is 24o to 32o C with March and April the warmest months (Figure 3) coinciding with maximum sunshine hours (Figure 4).

Figure 2: Monthly Average Precipitation

Figure 3: Monthly Average of Figure 4: Monthly Average Number of Minimum and Maximum Daily Tempera- Hours of Sunshine per Day tures

48. The northeastern trade winds prevail with a mean wind speed of 9.65 kph or about 15 knots. Maximum winds recorded were during typhoon events. Major typhoons include: Gelda in September 1959 with 140-knot winds; Louise in November 1964, with 100-knot winds; Opal in December 1964 with 140-knot winds; and Mike in November 1990 with 135 knot winds (NOAA National Weather Service reported in NCRS 2005).

Appendix 10 Page 14

2. Geology, Soils and Topography 49. The geology of the Palau Archipelago is quite variable and complex and a simplified review of the general geological conditions within the project area is described below. There are four main types of island landforms within the Palau Archipelago; volcanic, high limestone, low platform and atoll or reef islands. Some islands have a combination of landform. 50. Babeldaub Island is almost entirely volcanic and composed of andesitic and basaltic volcanic breccia bedrock generally overlain by 10 to 20 feet of residual clayey soil. Breccia is a course grained volcanic rock composed of angular broken rock fragments welded together in a fine grained mineral rock matrix. It is formed by volcanic explosions and/or debris flows of the super heated rock mass. The upper 100 feet or so of the bedrock is partially decomposed with essentially fresh bedrock below. Over much of the coastal fringe and within the major river valleys a surface layer of alluvium or colluvium overlays the weathered rock profile. A few high limestone ridge areas occur at the very southern extremity of this main island. Within the interior of the southern part of the island there are scattered patches of alluvial sediments known as the Airai Clay, a formation of interbedded silty clays with some lignite. The clays are commonly white, light brown or grey and readily distinguishable from the typically orange-brown residual clay soils derived from the decomposed volcanic rock. 51. Similar geological conditions exist on the smaller island of Koror, to the south, except for the eastern extremity, which together with the even smaller islands of Malakal and Ngerekbesang, comprise limestone as do most of the major islands to the south. 52. A more detailed description of the soils within the project area is provided in the Draft Final Report, Appendix M2 - Geotechnical and Groundwater Information. 3. Surface Water Inland Waters 53. The project area is blessed with ample surface water resources from generous rainfall distributed relatively evenly over the year. The rainfall runoff determined at four gauging stations on Babeldaub by USGS (1984) indicates about 70% of rainfall discharges to the ocean, amounting to some 275 billion gallons of water annually. The uniformity of rainfall and basin characteristics is shown by an excellent correlation between mean annual rainfall and streamflow measured at gauging stations. 54. The surface water resource of the Ngerikiil River is of special relevance. The Ngerikiil watershed covers over 2,850 ha and the river is fed by three main tributaries: the Edeng, the Kmekumel and the Ikoranges watercourses. 55. The EQPB carried out a water monitoring study (EQPB 2000) of the Ngerikiil River involving water sampling and analysis from 5 locations at monthly intervals over the period from October 1999 to June 2000. The results of these analyses are presented in Table 2. Table 2: Water Quality Results for Ngerikiil River

Temp Fecal coli- Turbidity DO Suspended NO Location pH 3 oC av. forms NTU mg/L solids mg/L mg/L

Adjacent pump station 25.6 110-2210 5.7-7.3 4.0-38 6.1 0.8-19.5 0

Below weir 25.6 220-2160 6.1-7.4 4.0-14 6.9 1.3-9.0 0

Adj Compact Road bridge 25.5 190-3000 6.3-7.5 4.0-24 4.7 2.5-13.0 0-0.04

Source: Ngerikiil and Ngermeskang Rivers Water Quality Monitoring Project Oct 1999 to June 2000 by EQPB.

Appendix 10 Page 15

56. The sampling locations were; close to the pumping station, about 500m downstream of the weir and adjacent to the Compact Road bridge a further 1500m or so downstream. The results are presented as an average value where the 10 results were in close proximity or as a range where significant variation occurred. 57. These results indicate the water in Ngerikiil River during this monitoring period was highly variable in turbidity, total suspended solids, fecal coliforms and pH, whereas temperature and dissolve oxygen (DO) were quite consistent. The fecal coliform results indicate a level of pollution with pathogenic organisms, which, together with the periodically high turbidity levels, confirms the need for treatment of this water prior to entry to the water supply system. The DO levels indicate a high ability to support aquatic biota. Nitrate was only detected at the most downstream location, most likely reflecting a low level of contamination from farm fertilizer. Coastal Waters 58. Palau has a coastline of over 1,500 km (SOPAC 2007) and a reef area that encompasses nearly all of the islands and supports a diverse and highly prized shallow reef ecosys- tem. Human influences on water temperatures, seawater chemistry (toxic substances and nutrients), the spread of diseases, removal of species, and food web alterations are presently changing reef ecology. The 2001 International Panel on Climate Change (IPCC) predicts a rise of between 0.2 and 0.9m in sea level by year 2100. 59. Temperature of the seawater is monitored regularly in keeping with the threat posed by the El Nino Southern Oscillation phenomenon, in which increases above a threshold of about 30o C lead to coral bleaching. Data for Year 2000 show that water temperatures were generally within the range associated with healthy coral reefs and there was not any large scale bleaching along the Palauan reef tract during the year (Colin 2000), however coral bleaching during the drought period in 1998 was particularly severe. Water temperature typically decreases with the occurrence of westerly monsoon winds and cloudy conditions. (Colin 2000) 4. Hydrogeology and Groundwater Resources 60. The unweathered parent volcanic bedrock underlying the islands involved in this project is most unlikely to contain significant aquifers. This is because the fresh rock is very dense, has low porosity and typically very few discontinuities (joints, fractures or defects) to store and transmit groundwater. However the zone of weathered material, overlying the fresh rock commonly has a greater primary porosity and significantly more discontinuities and therefore, has the potential to contain aquifers. 61. The overburden soil covering the sideslope and higher elevation areas, which is derived from complete decomposition of the volcanic rock, is typically clayey resulting in relatively high surface runoff and consequently minor infiltration. However in the lower elevation areas which occur along the coastal fringe and within the valley floor areas the surface soils comprise alluvial or colluvial soils which may contain sandy, more permeable layers or zones which may form localized aquifers and/or they may provide conduits to recharge potential aquifers within the underlying weathered bedrock. 62. Limestone formations are generally highly permeable, have high storage capability and commonly provide high yield aquifers. However there are only limited limestone zones within the project area on Koror and Malakal Islands. 63. During the mid 1980’s a groundwater study was carried out in the area between the surface water collection points on the Ngerimel and Ngrikiil River systems in Airai. This study was commissioned following a significant ‘dry’ period during 1983 as part of an evaluation of proposed water supply for various Palau rural water systems mostly on Babeldaub and Ko- ror. (Nance 1986) This study involved the drilling a series of exploration bores, some of

Appendix 10 Page 16 which were converted to wells and subsequent pump testing was carried out. The wells varied in pumping capacity from 25 to 85 gpm. 64. A Comprehensive Groundwater Protection Strategy report prepared in 1996 (Win- zlerKelly 1996) referred to the previous investigation work and concluded that “this groundwater development showed significant potential for future success and could supply an additional 0.48Mgpd (20 hr/day) of very high quality water” and “preliminary results also demonstrate that a substantially greater groundwater supply could be developed through further well development.” However a recommendation is made that further pumping tests are required to determine a safe yield.

B. Biological Resources 1. Habitats 65. Terrestrial habitat in Palau includes upland (volcanic, both primary and secondary), mangrove, swamp, high limestone (including the Rock Island forests), low limestone and atoll (strand) forests. Savannas and grasslands are also prevalent on Babeldaob and parts of Koror and are covered by a mixture of bare soil, ferns, grasses, and shrubs. Freshwater habitats are fou3nd in lakes (natural and manmade), streams, and rivers. Estuarine, brackish water habitats are found at the mouths of rivers and in embayments along shorelines. Coral reef habitats are found offshore. (Holm et. al. 2008) 66. Approximately 70% of Palau’s forest consists of upland forest, distributed throughout Babeldaob and Koror. Mangroves comprise 15% of Palau’s forests and cover 80% of Ba- beldaob’s coastline, mostly the west coast, parts of Koror and vicinity, and the island of Pe- leliu. Agroforest is often found along coasts and near villages, consisting of a mixture of native and introduced species. Upland and limestone forests are important for much of Palau’s vertebrate biodiversity. All of Palau’s endemic birds use forests during some or all of their lives. Deforested lands often become savannas, especially if the areas are subject to repeated burning. Streams and rivers support rich riparian habitats that are essential to many of Palau’s species. Erosion and sedimentation, in some areas, have inevitably made their way to the coral reefs, which can potentially impact the tourism industry. Palau’s network of protected areas covers over 40% of near-shore marine areas and 18% of terrestrial habitats. There are 36 protected areas, which have been established for a variety of different reasons. Whether the existing network fully protects the whole range of Palau’s biodiversity is unknown. (Holm et.al., 2008) 2. Floristic Diversity 67. Palau upland forest is the most diverse vegetative community in Micronesia. (SOPAC 2007) One survey recorded over 342 plant species of which 243 were native, 60 species were endemic to Palau and another 31 were introduced. A total of 36 important forest areas or individual rare trees were identified primarily in upland forests. Palau has approximately 203 species of endemic plants and 50 additional species that are candidate endemics. Of these, about 72 are endemic to Babeldaob Island. (Costion 2006) Another source estimates that a total of 165 of the total number of endemic plant species, or 82%, are recorded from Babeldaob. (Holm 2004)

3 Nance 1986 Results of Exploratory Drilling & Well development on Airai and Koror States by Tom Nance of Belt Collins & Associates May 1986 Winzler Kelly 1996 Comprehensive Groundwater Protection Strategy - for Palau Environmental Quality Protection Board by Winzler Kelly Consulting Engineers Dec 1996.

Appendix 10 Page 17

68. Some agroforest or plantation areas are found close to villages, which support a variety of tropical trees and crops, including bananas, papaya, tapioca, dryland taro and sweet potato vines. Medicinal plants are found in a variety of terrestrial ecosystems and weaving materials are gathered from the forest. Timber harvest involves small-scale operations that cut trees for housing supports, furniture and carved storyboards. (Holm et.al., 2008)

C. Human and Economic Development 69. Palau has a significant history of foreign occupation and administration (Otto 1998). Spain sent missionaries in the late 19th century, Germany then developed copra and mining operations, and later Japan used the islands first as a source for marine products and later as a strategic military base during World War II. 70. The Japanese administration had a great impact on Palau’s land management systems, as new land tenure systems were created, dryland farming was encouraged and supported, commercial mining operations were opened, and roads, buildings and settlements were built. The population during the peak of the Japanese administration consisted of 30,000 Japanese, Okinawans and Koreans and only 5,000 Palauans. In 1944, American forces bombed Japanese military and commercial sites in Palau. Peleliu was completely deforested as a result of the heavy bombing, and locations in southern Babeldaob, especially in Airai and Aimeliik, received considerable damage as well. After the war, Palau fell under the administration of the United States as part of the United Nations Trust Territory of the Pacific Islands. On October 1, 1994 the new nation of Palau was born. Under the Compact of Free Association, Palau receives trust funds plus fifteen years of budgetary support to decline at five year intervals over the fifteen years.(Otto 1998, p.16) Palau granted the US control of security and defense for 50 years, and exclusive access to limited land areas. 71. Per capita income in 2004 was $6,870. The Palauan economy has been dominated by the public sector for many decades, and public administration is currently estimated to account for 26–27% of GDP.(ADB 2005) The national economy in Palau is dependent on foreign aid. The largest and fastest growing industry in the country is tourism, which rose to 66,000 visitors in 1997 before declining to 54,000 in 2001. However tourism is diversifying with increased arrivals from Korea and Europe to balance the traditional arrivals from Japan and Taiwan. The Palauan economy is narrow and the services sector accounts for 83% of GDP. Agriculture, forestry, and fishing activity are low—the sector is estimated to represent only 4% of GDP. Although the agriculture and fisheries sector makes only a small contribution to GDP, it provides the main livelihood for about 20% of Palau’s population, which lives far from Koror. In addition to the cash economy in Palau, there is a strong subsistence economy. Fish, crops and other food items are collected or grown for subsistence. 72. ADB (2005) reports that most of the employment growth is among foreign workers, which in the years 1994—2003 grew at an average of 9.3% per year as compared to 1.6% per year for Palauans. In 1994, there were almost two Palauans working in the formal economy for every foreign worker; however by 2001, there were as many foreign workers as Pa- lauans in the formal economy. 1. Population 73. Arrival of humans is thought to have occurred between 3000 and 5000 years ago. The Palauan population through history has been estimated to range from 25,000-50,000 to just 4,000 people. The population of Palau was 19,200 in 2000, with an additional 6,500 Pa- lauans living abroad. The latest population estimate (2005) was 20,303. Average annual population growth was 2.4% (1990–1999), which slowed to 1.9% (2000–2003). The median age increased from 25.6 years (1990) to 30.8 years (2000), while the dependency ratio decreased from 57.0 (1990) to 51.0 (1995) to 41.4 (2000). (ADB 2005). Seventy-three percent of the population is ethnic Palauan and the remaining 27% comprises primarily people from the Philippines, Japan, China, United States and other Micronesian Islands. Some 24% of

Appendix 10 Page 18 the Palau population is younger than 24 years, with 70% between the age of 14 and 65, and 6% older than 65. The urban population is estimated at 78% of the total. 2. Urban Infrastructure 74. Ground transportation was limited until recently with the majority of paved roads cen- tered in Koror and Airai. The recent completion of the 85 km long Compact Road more than doubled the nation’s transportation network and made all 10 Babeldaob states accessible by car. Transportation to outlying islands is still by boat and access to the islands outside the main archipelago is severely limited by sea and weather conditions. (Holm et.al., 2008) 75. Government monopolies operate communication and electricity services, and supply water and sewerage services to Koror and its surroundings. The communications and electricity services are controlled by independent boards that set their own prices, and the steve- doring operation also enjoys price setting privileges. Water, sanitation and waste disposal services are supplied by government ministries which control price levels. (ADB 2005)

D. Culture and Quality of Life Values 76. Anthropological research has been carried out in Palau for the Trust Territory government by McKnight and previously by Endo, followed by Kramer, under the auspices of the Japanese and German administrations. Present work in historic preservation is conceived and directed by Palauans. Local people set priorities based on an indigenous understanding of what is valued and what has the potential to make the greatest contribution to preserving Palau’s traditional culture. The Historic Preservation Office (HPO) of the ROP currently leads that effort. The ethnography/oral history section of the HPO arranges regular sessions of the Society of Historians whose members are appointed in consultation with the president of the Republic and the state government. An Historian is appointed from each state. Members meet to discuss traditions long held within the community to ensure that younger people are exposed to traditional ideas. The survey and inventory section of the HPO assists in the preservation of important cultural sites. When a development project submits an application for historic clearance it is often the case that the survey section must inspect the site, and may assist the survey section in determining land ownership and use. (Holyoak 2001) 77. While Palau is subject to extensive acculturative forces, there is ample evidence that culture change in Palau is not monolithic. In contemporary Palau, the people are aware of the importance of their Palauan identity and of the role that their traditions play in creating and maintaining that identity. As development proceeds here, so does the consciousness of its potential effects on lifeways and values. (Holyoak 2001)

Appendix 10 Page 19

IV. Screening of Potential Environmental Impacts and Mitigation Measures

A. Potential Impacts and Mitigation Measures 78. The principal purpose of the BWSP is to provide significant improvement in the quality of life environment for the community of Palau, initially to those in the Koror-Airai region, although many aspects of the Project will progressively apply to the other states in Babeldaob and other islands communities. The proposed works may also benefit the physical and ecological environment. The proposed construction activities involved in the Project are detailed in Section II C Components 2 and 4. A summary of the potential negative environmental impacts associated with various aspects of the Project and the proposed mitigation measures to neutralize or minimize the impact is presented in Table 3. Table 3: Summary of Environmental Impacts and Mitigation Measures

PROJECT ACTIVITY ENVIRONMENTAL IMPACTS MITIGATION MEASURES

DESIGN /PRECONSTRUCTION PHASE

Siting of the wellfield and The wellfield may prevent or disrupt oth- All bores, access tracks and pipelines will alignment of delivery er development of the land area. be located on state land where possible, in pipeline. areas remote from present development.

CONSTRUCTION Environmental Clauses for Incorporation in the Construction Contract tender documents PHASE (Appendix 2) are used to mitigate potential negative impacts, together with the ROP EQPB Regulations.

Airai wellfield - drilling, Disturbance to vegetation, use of small Drilling activities will generally be located on pump well & monitoring earthmoving equipment to provide ac- relatively flat areas, removal of vegetation well installation, building cess, discharge of drilling cuttings, ero- will be minimal and where essential silt access roads and power- sion during heavy rainfall and stream traps will be installed to prevent erosion and lines. sedimentation. sedimentation.

Noise, dust and air pollution generated Activities will be remote from residential by drilling and associated activities. areas and work will be restricted to daylight hours

Trenching, installation of Disturbance of vegetation, erosion and Where necessary silt traps will be installed HDPE pipes and backfill- sedimentation. to prevent erosion and sedimentation. ing for delivery pipeline from wellfield to WTP. Noise, dust and air pollution generated Most activities will be remote from residen- by earthmoving activities tial areas and work will be restricted to daylight hours.

Stand-by pump for Ngeri- No significant impacts are expected Not applicable kiil Pump Station

Improvement of Ngerikiil Pump station may need to be closed The work will be scheduled to ensure mini- Pump Station Intake. down for a short time. Possibility of mal inconvenience to the operation of the some increase in turbidity immediately water supply. after construction.

Replacement of Ngerimel No significant impacts are expected Not applicable dam bridge

Bypass pipeline to Gih- Sediment contamination of the water The pipeline alignment will be chosen to mel Reservoir stored in the reservoir. ensure that no significant sedimentation is possible.

Rehabilitation of the following parts of the existing water supply infrastructure

Appendix 10 Page 20

PROJECT ACTIVITY ENVIRONMENTAL IMPACTS MITIGATION MEASURES

Duplication of raw water Disturbance of vegetation, erosion and Silt traps will be installed to prevent erosion pipeline from reservoir to sedimentation. and sedimentation. the water treatment plant Noise, dust and air pollution generated Most activities will be remote from residen- by earthmoving activities tial areas and work will be restricted to daylight hours.

Installation of additional No significant impacts are expected Not applicable pump equipment and building alterations.

Refurbishment of water Noise dust and air pollution generated Most sites are remote from residential ar- storage tanks servicing by sand blasting activities. eas and work will be restricted to daylight the reticulation areas. hours. If necessary the work sites will be shrouded to prevent escape of air pollutants

Replacement of dam- Repair or removal of fibro-cement pipe Where practicable fibro pipe should be aged or unserviceable which can cause workers to be exposed abandoned in-place and replaced with new distribution pipes in resi- to asbestos fibres. The risk exists that plastic piping located in a parallel trench. dential areas. local residents could also be subject to Where fibro-cement pipes must be removed short-term exposure to asbestos fibres. this would be carried out using special procedures to limit worker exposure. The work areas would be cordoned off from public access.

Excavation for pipe repairs can cause Ensure there is sufficient budget to rein- damage to roadways, footpaths and state all surfaces to original or better condi- paved areas. tion.

Noise, dust and air pollution generated Work will be restricted to daylight hours and by trenching activities maybe further restricted to avoid peak traffic periods.

Leak detection and meter No significant impacts are expected Not applicable replacement activities

Installation of 8” dia Excavation of trenches adjacent to Corridor adjacent roadway needs to be HDPE pipeline for 18,300 roadways, stockpiling of spoil, laying of cordoned off to provide safe workplace. ft along the Compact pipe, and backfilling of trenches can Silt traps and temporary drainage will be Road towards Aimeliik result in disruption to traffic and sedi- installed to prevent sedimentation. State, and 6,600 ft along mentation. Malakal Road to the Ma- lakal sump tank. Excavation for pipe installation can Ensure there is sufficient budget to rein- Also extension of existing cause damage to roadways, shoulders state all surfaces to original or better condi- smaller size pipelines in and other paved areas. tion. distribution area to provide new service connec- Noise, dust and air pollution generated Work hours restricted to avoid peak traffic tions. by trenching activities periods.

OPERATIONAL PHASE

Airai wellfield pumping for Continuous pumping over long period Pumping for more than a few days will only periods of greater than a may deplete the safe yield of the aquifer. be carried during drought periods. Obser- few days per month. vation wells will be installed around the wellfield perimeter to monitor drawdown during operation.

79. Those activities which are considered to have the potential for significant negative environmental impact occur during the construction phase of the Project. They are included in Table 3 above and are discussed in greater detail as follows:

Appendix 10 Page 21

80. The construction of the Airai Wellfield has the potential to cause adverse impact to the nearby natural watercourse resulting from the earthworks associated with the well drilling activities, which will be at about 20 discrete locations, and the delivery pipeline which will be along a route up to 8,000 feet long. The amount of earth stockpiled for the pipeline route will be much greater than for the drilling locations. Should heavy rainfall occur during these earthworks then there is a risk that some of the stockpiled spoil would be carried down-slope towards the watercourse. Mitigation: Inspection of these areas during this TA indicates that the watercourse is surrounded by intense low vegetation which would effectively filter the sediment laden runoff. It is therefore expected that very little sediment would contaminate the watercourse. How- ever the EMP should allow for more detailed assessment of this risk. Mitigation measures should include procedures to install silt traps as necessary to prevent any significant contamination. 81. The duplication of the existing 12” dia pipeline, along a 5,000 ft route from Gehmel Reservoir to the Water Treatment Plant (WTP) has a similar risk to the wellfield pipeline discussed above and the same mitigation measures are proposed. 82. The construction of the 8” dia pipeline to Aimeliik, which will run about 18,000 ft alongside the Compact Road, has the potential to cause adverse impact. The trench excavation, which will occur in the road shoulder, will result in a long spoil pile which, if not managed cor- rectly, has the potential to impact the road drainage system. Mitigation: It will be necessary to construct silt traps to prevent sediment-laden runoff from entering the road drainage system. In addition parts of the adjacent roadway may need to be cordoned off to provide a safe workplace. 83. The replacement of some 20,000 feet of damaged or unserviceable distribution pipes in residential areas, which involves trenching mostly alongside the existing roadway system within Koror and Airai area has some high-risk aspects. Much of the old pipe which is expected to need to be replaced is of fibro-cement material which is from the era when this material contained asbestos fibre, a known carcinogenic substance. Mitigation: The EMP should provide work procedures to ensure that all asbestos con- taining materials are appropriately handled and disposed. Wherever possible unserviceable sections of fibro-cement pipeline should be left in-place and replaced by HDPE pipeline placed in a separate parallel trench to avoid contact with the fibro-cement material. The presence and location of the old pipeline should be well documented to minimize the risk of it being inadvertently dug-up during maintenance of other services. 84. During the operational phase of the Project, the up-graded water supply system is considered to have an overall positive environmental impact, compared to the previous system, which resulted in a high proportion of treated water loss through leaks in the system and wastage by consumers. The previous leakage areas are considered to have periodically (particularly during drought periods) allowed ‘dirty’ water into the delivery lines, thus contaminating water supply system. The risk of this happening will have been significantly reduced by the Project. 85. The operational phase of the Airai wellfield is intended to supplement the present surface water supply during periods of drought, although it is recommended that pumping be carried out for one or two days each month, just to keep the pumping equipment working and the well screens clear so that it will be fully operational when needed. There is a potential risk that longer term pumping (for greater than about 1 month) could deplete the safe yield of the aquifer. Mitigation: In order to manage this risk, a series of 10 to 15 observation wells will be installed around the wellfield perimeter to monitor drawdown during operation. The EMP will present a recommended monitoring regime to be implemented during longer term pumping

Appendix 10 Page 22 to ensure the water table is not lowered beyond stated limits to ensure the safe yield of the aquifer is not exceeded. This will prevent the possibility of any salt water intrusion occurring. 86. Chapter 2401-01 Earthmoving Regulations of the EQPB are incorporated by reference into the construction mitigation measures. In addition, Environmental Clauses for incorporation into the Construction Contract Tender Documents provide further means for inaugurating a mitigation and management program for dealing with construction impacts. These clauses (see Appendix 2) can be used to control the activities of the construction contractor in ways that limit the severity of impacts. Environmental Clauses deal with maintenance of the construction site; selection of borrow pits and haul routes for borrow and spoil, periods of time that excavations can be left open; requirements for providing access for homes and businesses; limits on amounts of land that can be taken temporarily or permanently; site maintenance activities such as watering of haul routes and covering earth piles to reduce dust emissions and provision of permanent or temporary coverage of embankment surfaces to reduce sediment loss; requirements for worker health and safety and provision of sanitary facilities at the workplace; requirements for construction site closure, removal of waste materials; and fair practices in hiring workers.

B. Climate Change: Impacts and Adaptation Measures 87. According to the US Government’s Global Climate Change Research Program, (USGRP) the average annual air temperature in the Pacific Islands has increased by about 0.2oC. Globally, sea level has risen by 4 to 8 inches in the past 100 years, with important local differences. In the Pacific region, absolute sea level is rising, but because some islands are naturally rising a regional long-term average trend in relative sea level is difficult to determine. Further complicating the situation is the fact that there are extreme tides and changes in sea levels associated with storms, lunar tides, and the El Niño-Southern Oscilla- tion phenomenon (ENSO). 88. Possible impacts of climate change on the Palau Islands include: seawater warming and the consequent bleaching of coral formations; potential changes in rainfall that could alter fresh water flow of streams; increased temperatures and their effect on water quality; the potential for more intense and frequent storm events, and sea level rise. 89. Key interactions of these effects with the Project and its aim for increased security of water resources include: the potential long term changes in the amount and variability of rainfall; the potential for deteriorating water quality in reservoirs and the vulnerability of low- lying infrastructure to storm surge and inundation. 90. The adaptation is to improve the reliability of supply and introduce both physical and social means for water conservation, so the Project mitigates impacts related to variability of supply. The Project’s use of the groundwater as the supplementary water resource is appropriate in the face of climate change impacts. The aim of the Project to significantly reduce both the per-capita usage of water, and the leakage from the system is also considered appropriate to the needs dictated by climate change.

C. Poverty and Social Assessment 91. A Poverty and Social Assessment (PSA) was conducted to determine whether the Pro- ject will benefit primarily poor consumers or if poor groups will remain excluded, based on the criteria presented in ADB’s Handbook on Poverty and Social Analysis. The PSA included a gender analysis of the project to identify project elements which have the potential for women to participate and benefit and those that could potentially exclude women from participating or benefiting. Likewise an assessment of whether vulnerable groups will suffer was undertaken. Measures to ensure that the Project complies with national labor legislation have also been prepared.

Appendix 10 Page 23

92. The results of the PSA indicate that at present the impoverished and vulnerable households in the Koror-Airia area have access to the water supply. However this TA has also confirmed that water use relative to cost paid has become excessive and may have been abused. The Project will result in a significantly increased tariff for water and the poor and vulnerable will be affected. Although the principal mitigating measure will be a reduced and more responsible water usage other measures to ensure affordability will be required and these will be established during the Project. These will include a ‘lifeline’ tariff for the first quantity of water at a significantly lower cost than the normal tariff. The Project will also identify practical ways to ensure equitable gender participation and benefits.

D. Land Acquisition 93. Only minor, if any, land acquisition will be needed for the Project and no resettlement will be required. The only component of the Project involved would be the wellfield area; located in the low lying land along the valley of the Ikoranges tributary of the Ngerikiil River, immediately north of the airport. Once the extent and layout of the wellfield required has been established and designed then the extent of any land acquisition will be determined.

E. Mitigation Costs 94. The overall cost of environmental mitigation includes: the costs associated with mitigation measures related to the proposed project activities; the costs for technical support during implementation of the loan; costs for government personnel and operations expense related to support the environmental measures; and special studies that may be necessary to support the detailed design of the project. These are described in greater detail in the following sections. 1. Mitigation Measures 95. Table 4 contains a summary of potential environmental impacts associated with the construction stage proposed mitigation measures and costs. These apply only to those activities expected to have significant impacts, as discussed in Section IV A above.

Table 4: Detail of Impacts, Mitigation Measures and Costs

Potential Negative Impacts Mitigation Activities and Method Cost US$ Disturbance of vegetation, erosion and Where necessary silt traps will be installed to prevent $5,000 sedimentation associated with the trench- erosion and sedimentation. ing for all new delivery pipelines. Noise, dust and air pollution generated by Measures for control of dust and noise emissions, $2,000 earthmoving activities adjoining residential dampening soil surfaces, assurance equipment is in areas within Koror and Airai. good working order and similar controls Oil, fuel and chemical spillage into the Measures for control of fuel transfer operations and $2,000 local environment solvents used in equipment repair and parts cleaning. Replacement of old fibro-cement pipes Mostly abandon in-place the F-C pipes and install new will expose workers to asbestos fibres. piping in a parallel location. Part removal and dis- $6,000 posal of pipework using appropriate health & safety procedures. Damage to roadway surfaces Budget for repair and reinstatement of roadway sur- $8,000 faces and other paved areas. Traffic congestion along roadways where Working hours to minimize disruption in peak traffic work is being undertaken time. Flagmen required periodically where traffic con- $2,000 gestion is expected. Sandblasting and epoxy coating elevated Standard health & safety procedures to enclose the tanks will cause air pollution and noise in $5,000 work area for sandblasting and spray painting. neighborhoods

Appendix 10 Page 24

96. The cost of all these mitigation measures, estimated at US$30,000 will be the responsibility of the Contractor and be considered part of normal construction costs. The requirements for the performance of these mitigation measures will have to be detailed in the Ten- der documents. The cost of acquiring land and other forms of compensation are provided for elsewhere in the Project cost estimate. 2. Technical Support 97. A national environmental specialist (the Environmental Consultant) is proposed to work as part of the project implementation assistance team and provide the technical inputs needed to implement the environmental work on the Project. The work will involve updating the IEE and monitoring the implementation of mitigation measures. It is expected that a series of small component activities will be undertaken during the course of the loan. Other tasks include training, capacity building, preparation of guidelines and other tasks described in the consultants terms of reference. It is proposed that 8-12 months of input from a local environmental consultant be provided to support the Project, which is about 25-30% involvement over a loan duration of 36 months. 3. Government Counterpart Support 98. Bureau of Public Works should provide a single individual to serve as Environmental Coordinator to provide support for environmental management within the PMU alongside the Environmental Consultant. The duties of this post are inspection of ongoing works and monitoring of mitigation measures specified in the IEE. 4. EQPB monitoring costs 99. There is no application fee associated with the filing of an environmental assessment with the EQPB. However, the Board requires that the applicant reimburse the EQPB for monitoring, inspection and miscellaneous expenses incurred by the Board. This would include the periodic cost of water analysis of the groundwater being pumped from the wellfield to ensure its compliance with the Palauan Standards. An allowance of US$10,000 is recommended to cover these costs.

Appendix 10 Page 25

V. Institutional Requirements and Environmental Monitoring Plan

A. Institutional Arrangements 100. The loan will be implemented by the Ministry of Public Infrastructure, Industries and Commerce which is the Executing Agency for the Project. A Project Management Unit (PMU) will be established to oversee implementation, under the supervision of a Project Di- rector (PD). The PMU may be located within the BPW Department of Engineering, also known as the Capital Improvement Projects (CIP) Division. This group is generally responsible for technical aspects; whereas the Ministry of Finance is responsible for tendering for equipment procurement in excess of $10,000. Further information concerning implementation arrangements and organization of the PMU can be found in the general Project documents. According to the organizational proposal, tasks associated with project preparation are the responsibility of the PMU supported by the project consultants, provided under Com- ponent 5 of the Project. Tasks include preparation of project proposals, updating the IEE document and implementation (through award of construction contracts) and monitoring of construction and rehabilitation works. The work will be supported by a project consultant hired under the loan, which will include the environmental specialist (the Environmental Con- sultant).

B. Capacity Building 101. Capacity building will be provided by the Environmental Consultant to staff assigned to the project by the BPW. Capacity building will consist of both classroom and on-the-job training in a close fit with needs dictated by project implementation. Some familiarity with the environmental assessment process is needed to understand the mechanisms and responsibilities therein. Implementation and monitoring of mitigation measures constitutes the bulk of environmental work during the project loan phase. Implementation is mostly the responsibility of the construction contractors. Monitoring involves inspection of activities, to assure that environmental requirements imposed on the construction activity are being carried out. Some familiarity with water quality sampling and analysis may also be needed, however it is expected that water quality analysis will mostly be undertaken by staff of the EQPB in conjunction with its normally recognized line of duties.

C. Environmental Monitoring Plan 1. Monitoring the Implementation of Mitigation Measures 102. A program of monitoring will be conducted to ensure that all parties take the specified action to provide the required mitigation, to assess whether the action has adequately protected the environment, and to determine whether any additional measures may be necessary. This will be conducted by the Environmental Coordinator and the Environmental Con- sultant. These individuals will be responsible for monitoring implementation of mitigation measures and reporting to the PMU, and will recommend remedial action if measures are not being provided or are not protecting the environment effectively. 103. Most of the mitigation measures undertaken during construction are meant to minimize disturbance from the construction in urban areas by maintaining access, planning work to avoid sensitive times and reducing dust and noise pollution. The Earthmoving Regulations provide a background in executing these tasks, and experienced contractors should be familiar with the requirements. Monitoring of such measures normally involves making observations in the course of site visits, although some require review of records and surveys of residents.

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2. Water Quality Monitoring 104. It is proposed to monitor both fresh water and coastal surface water quality, depending on the locations of specific works. Monitoring should be undertaken to detect changes due to construction activity within local drainage areas. Turbidity, dissolved oxygen, pH, salinity, total dissolved solids and temperature should be measured in the field. Sampling should be conducted monthly at locations near to ongoing work, so long as field determinations can be made in flowing streams of coastal waters. To the extent possible, sampling locations should coincide with current locations used by EQPB so that baseline values can be benchmarked using existing data. Otherwise baseline values should be established at the outset of the project for at or nearby construction sites. A tentative plan, quantity and cost for sampling and analysis are provided in Table 5. The proposal needs to be updated at the time the project commences work. The tentative plan based on four baseline samples, followed by five samples taken during the construction activity period; ie nine events at 15 locations, - 135 samples. 105. During the development of the wellfield each new extraction well will be pump tested on completion of drilling to determine the likely yield. A sample of the groundwater will be collected after about 12 hours pumping and a comprehensive chemical analysis will be carried out. Additional sampling of the groundwater from the delivery line will be carried out during the first heavy usage of the groundwater system. A total of about 20 samples are planned. Analyses will include principal cations (sodium, magnesium, calcium and potassium), and anions (sulfate, chloride, and carbonate / bicarbonate) for general water charac- terization. In addition analysis for a suite of potential contaminant metals including iron, magnesium, aluminum and arsenic will also be carried out. Other analyses may also require quantification such as fluoride and cyanide. These analyses will require samples to be sent to Philippines or elsewhere, as there is no facility for such testing in Palau. The cost of these analyses is estimated to be US$7,100 as detailed in Table 5. Table 5: Recommended Water Quality Monitoring

Parameter No Rate Cost

Turbidity, pH / temp, salinity, DO, TDS 135 20 $2,700

Principal anions & cations 20 100 $2,000

Potential contaminant metals 20 120 2,400

Total $7,100 106. Results of these analyses are detailed as follows – towards the end of the pump test a sample of the water being pumped was collected. Well head tests were carried out on site by a technician from EQPB and a 2 litre sample was stored in two clean glass containers, kept chilled and transported to Manila by air, under appropriate chain-of–custody documentation for more detailed analysis. 107. The results of the chemical analysis are as follows: Table 6 – Field Test results - determined using a YSI 6920 multiparameter meter

Electrical conduc- Salinity Dissolved Date pH tivity mS/cm mg/L Oxygen mg/L

9 Apr 09 8.1 1.189 590 8.3

Appendix 10 Page 27

Table 7 – Laboratory Test Results - provided by Fast Laboratories, Manila, Philippines

Carbonate / Calcium Sodium Magnesium Potassium Sulfate Chloride Nitrate Bicarbonate (Ca) (Na) (Mg) (K) (SO4) (Cl) (NO3) (CO3) / (HCO3)

Sample 1 20.7 31.1 3.2 <0.02 2 1 50 <0.05

Criteria Principal Cations & Anions - all results in mg/L

Iron (Fe) Manganese (Mn) Fluoride (F) Arsenic (As)

Sample <0.06 0.03 0.20 0.03

Criteria <0.3 < 0.05 <1.5 <0.007 Metals all results in mg/L Drinking water criteria are in the Palau standards. 108. Testing carried out by FAST Laboratories in Quezon City Manila, Philippines indicates the main cations to be sodium and calcium, with minor magnesium, and the principal anion to be carbonate / bicarbonate. The other commonly present anions; chloride and sulfate were found to be of particularly low concentration. The charge balance error for anions-cations is quite high; indicating either another anion is present in significant concentration, or there is an error in the sulfate or chloride results. Hardness which is a function of calcium and magnesium concentrations is calculated to be 65 mg/L (as CaCO3) which is relatively low. 109. Four potential contaminants were analysed; iron, manganese, fluoride and arsenic were all found to be well below commonly adopted health standards for drinking water. The level of 0.2 mg/L is considered beneficial for dental health. 110. Table 8 shows proposed environmental monitoring of mitigation measures for impacts occurring during construction and operation phases. Most measures will be assessed by simple observation, by checking of records, or by interviews with residents or workers. 111. Most of the Project activities requiring impact management and monitoring occur during the construction phase and will be undertaken by the Environmental Consultant or Envi- ronmental Coordinator who will form part of the PMU. In some cases the EQPB may be requested to carry out some testing or analysis in areas in which they have expertise. 112. The only Project activity which will require management and monitoring during the operational phase of the Project is the operation of the Airai wellfield during periods of drought when it will be utilized continuously for an extended period; up to a few months. The proposed wellfield development includes the provision of a series of 10 to 15 bore installations around the perimeter of the wellfield to allow water levels to be monitored. If this monitoring program indicates the groundwater aquifer is at risk of being over pumped, which could result in saline intrusion, then the production from the wellfield will be adjusted accordingly.

Appendix 10 Page 28

Table 8: Environmental Management and Monitoring Plan

IMPACT MITIGATION IMPACT MONITORING

Project Activity Potential Environ- Proposed Mitigation Measure Implementing Mitigation Monitoring Frequency Monitoring Re- Monitoring mental Impact Responsibility Cost Parameter sponsibility Cost

CONSTRUCTION PHASE

Earthworks ac- Erosion and sedi- Limit the amount of trench excavation Contractor Included Inspection, Weekly or as PMU C C tivities for pipe- mentation of nearby underway at any time. Installation of silt in contract water required line installation watercourses. traps as required. rates quality EQPB C C

Replacement of Occupational health Wherever possible old pipe will be left in- Contractor Included Inspection Weekly or as PMU C C old distribution & safety of the work- situ and a new pipeline installed in paral- in contract required pipes which may ers and general pub- lel. Where asbestos materials need to be rates EQPB include asbes- lic removed special precautions will be taken tos fibres. to minimize risk of handling and disposal

Trenching and Traffic congestion Limit stockpiling of spoil in road reserve. Contractor Included Inspection Weekly or as PMU C C pipeline installa- during peak hour Modify working hours to avoid peak peri- in contract required tion along roads periods. ods. Use of flagmen to manage traffic. rates BPW/WSA

Refurbishment Noise, dust and Use of appropriate health & safety proce- Contractor Included Inspection Weekly or as PMU C C of water storage other airborne emis- dures for workers. Where work sites in contract required tanks. sions from sand close to residential areas, some shrouding rates EQPB blasting activities of work areas may be necessary.

OPERATIONAL PHASE

Operation of the Excessive drawdown Monitoring bores will be installed around BPW or WSA Inspection, As BPW / WSA BPW /WSA Airai wellfield of the groundwater the wellfield and during prolonged usage water level required during drought aquifer of the groundwater the water level will be monitoring EQPB periods. regularly monitored

Abbreviations: PMU – Project Management Unit; EQPB – Environmental Quality Control Board; BPW – Bureau of Public Works; WSA – Water Supply Authority; CC – Included in Construction Costs

Appendix 10 Page 29

VI. Public Consultation and Information Disclosure A. Project Engagement with Communities 113. The BWSP Project has developed around a participatory approach involving parallel activities: stakeholder consultations and socioeconomic surveys that facilitated water supply sector planning, which are documented in the Project Social and Poverty Assessment. Hence a wide range of formal and informal stakeholders had the opportunity to provide substantive contributions concerning existing conditions and preferences. B. Public Consultation on Environmental Safeguards 114. A public consultation to review the findings of the initial draft IEE was held on 23 July 2008, following advertisements in one newspaper six days, and another two newspapers two days, in advance of the meeting. NGOs and representatives of local government agencies received individual invitations to the meeting. TA staff presented prepared materials that addressed environmental issues for all project components, described the Project alternatives, provided an overview of the potential environmental impacts, and explained proposed mitigation measures. The meeting was attended by three persons in addition to the TA staff, allowing for informal discussion of the issues. 115. Issues raised by participants at the meeting are described in the following paragraphs, along with an opinion on whether, or to what extent, the issue should be factored into the IEE analysis. 116. Issue 1: Sewage collection systems, including pipes and lift stations, are inadequate in many parts of Koror and Airai, causing leakage of sewage into mangrove and coastal areas, in some cases near locations where surface water use for contact recreation is encouraged. A hotel in one instance has been sued over wastewater discharges, and allowed to replace piping rather than pay fines; however replacement is overdue and stalled. Ageing sewer mains have settled, and are cracked and broken, the main source of the problem, as the treatment plant is adequately sized. Response: The Project is not specifically aimed at an increase in the quantity of water being supplied to urban areas. Reduction of leaks will reduce the burden on the overtaxed collection system. The Project supports expansion of water supply into new areas; however these are areas of low population density where sewage collection and transfer is not viable. Due to these factors, the Project does not have an impact on the ongoing problem regarding sewage collection. 117. Issue 2: The national water supply, utilizing water from Airai, may need to determine a method for payment to Airai for its continued protection of the watersheds where raw water supply is extracted. Response: These watersheds are currently forested and do not support human settlements; hence there is no immediate threat. There are ongoing efforts to arrive at a common policy and plan concerning watershed management on Babeldaob Island. 118. Issue 3: A national statute regulating the clearance of land for development is needed to mitigate impacts surrounding growth on Babeldaob Island. Response: While extension of water supply on Babedaob Island may hasten development, the Project is not in a position to influence passage of a regulation regarding the clearing of land. C. Follow-up Public Consultation 119. Additional public consultation should be held at the start of the project loan, and review Project proposals. A means should be established for public redress of impacts during the construction phase of the Project.

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VII. Findings and Recommendations A. Findings 120. The IEE for this Category B Project has proceeded through description of the proposed infrastructure works and the existing environment in which the infrastructure improvements will take place, and analysis of impacts that might arise as a result of all project activities with consideration for timing, scale and intensity of impact. 121. At the time the Interim IEE was prepared various alternative means of providing a supplementary water supply to cover drought periods were being evaluated and these were incorporated into the environmental evaluation. Under some alternatives involving the development of a dam and reservoir, the impacts were significant and would require a full-scale environmental impact assessment (EIA). These alternatives have been dismissed on economic as well as environmental grounds and are no longer being considered. 122. The supplementary water source is now planned to be provided by a wellfield located in Airai and connected via the WTP to the distribution system. During drought periods groundwater would be pumped from a confined fractured rock aquifer located at a depth of 30 - 100 ft below ground surface. This has overcome the need for, and the adverse environmental impacts of, additional surface water storage. 123. One of the results of The Community Action and Participation Program component of the Project will be educate the consumers regarding the ‘value’ of the water supply and a significant reduction in the per-capita consumption is expected to be achieved. 124. Rehabilitation of existing facilities, including equipment and piping replacement, metering of mains and service connections, and refurbishment of storage tanks, have remained key parts of the Project to reduce water losses. A new delivery pipeline will be extended some 5.5km towards Aimeliik. 125. The screening of the potential environmental impacts of the revised Project demonstrate minor or moderate impacts that can be readily mitigated using available means. The total mitigation costs for these impacts is estimated at about US$30,000. The implementation of mitigation measures can be readily enforced and monitored using the means described in the IEE. 126. Parties responsible for implementation of mitigation measures and for monitoring implementation have been identified and a general institutional mechanism has been described. Features include; assignment of tasks and responsibilities for environmental review within the PMU, provision of a Domestic Environmental Specialist to support the environmental function, and a capacity building plan to be undertaken during loan implementation. The GOP Earthmoving Regulations are effective in controlling many impacts associated with construction and the EQPB is typically assigned the task of enforcement of those regulations. 127. Public consultation concerning environmental issues was undertaken during project preparation. Project needs and constraints were identified through social screening in a participatory setting involving a cross-section of stakeholders. Public consultation on environmental issues was conducted during the Interim stage to identify potential environmental issues associated with the design alternatives. No significant issues were raised during the public consultation that have not been addressed in the IEE, nor were there issues that pose a significant constraint on implementation. A proposal has been described for continuing the process of public consultation during construction. 128. Costs associated with mitigation and monitoring have been estimated, and provision of technical assistance and government staffing needs have been described. Cost estimates should be updated during the early stage of loan implementation.

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B. Recommended Approach to Environmental Management 129. Planning and Design: The selection of groundwater to provide the supplementary source to cover drought periods has overcome the need for, and the adverse environmental impacts of, additional surface water storage. 130. Construction: Construction impacts are mitigated through application of the Earthmov- ing Regulations, environmental clauses for incorporation into construction contract tender documents, and mitigation measures described in the IEE. These include means for controlling the production of noise and dust in the vicinity of construction, preventing spillage of oil and fuel from construction equipment, and managing occupational health and safety issues for construction workers in some particular work areas. 131. Operations: Impacts during operations are limited to the possibility of over-pumping of the groundwater aquifer during drought periods and a program of water level monitoring is recommended to ensure that his does not occur.

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VIII. Conclusions 132. Technical analyses conducted during the PPTA determined that supply is not a constraining factor; however high per capita consumption is a key issue. Within a 2020 design horizon, achieving reasonable conservation targets that bring per capita consumption in line with other countries would not necessitate an increase in supply. However reliability in the face of occasional drought seems to justify additional sources, for which various alternatives were considered. These alternatives have varying levels of environmental impact. 133. The alternatives comprising an additional surface water resource involve construction of a dam and reservoir and this poses the most severe environmental impact and greatest overall and environmental cost. This is the least desirable alternative and has now been eliminated from further consideration. 134. The other alternative of utilizing the groundwater resource, in the vicinity of the two existing surface water sources, causes only minor or moderate potential impacts, principally related to construction, for which well established environmental management techniques and existing local regulations provide sufficient means for mitigating impacts. 135. The rehabilitation of some of the existing pipelines, and minor additional equipment for pump stations and the treatment works will provide a significant improvement to the reliability of these facilities and the extension of the pipeline network will provide the water supply to additional consumers. The provision of new or recalibrated water meters to all consumers will enable greatly improved management of the ‘unaccounted for water’ situation. 136. The Community Action and Consultation program will aim to educate the consumers regarding the ‘value’ of the water supply and a significant reduction in the per-capita consumption is expected to be achieved. 137. Under this project definition, overall capacity is not increased, though reliability is improved both by provision of added supply and equipment replacement. Extension of the system is possible into areas of low population density where sanitation and waste management are best handled at the household level and governed by the existing septic tank ordinance. 138. No irreplaceable resources are threatened by the proposed Project. Any land acquisition will be minimal and no resettlement will be needed. A poverty and social assessment assures the benefits of the Project are distributed among all members of the community, that there is involvement of women during execution of the Project, and project interventions assist in the livelihoods of women. 139. The Project is being prepared in conformance with the Asian Development Bank’s social and environmental safeguard policies. The BWSP Project does not require preparation of any more comprehensive Environmental Impact Assessment than this IEE.

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Annex 1 – References

ADB, 2005; Country Economic Report: The Republic of Palau; Asian Development Bank; CER: PAL 2005-07; October 2005.

ADB, 2007; Technical Assistance Report, Republic of Palau: Preparing the Babeldaob Water Supply Project; Project Number: 40122; October 2007.

Colin, 2000; Water Temperatures on the Palauan Reef Tract Year 2000; Coral Reef Re- search Foundation; Koror, Palau; 2000.

Costion, 2006; Floristic Diversity and Protected Area; Prioritization in Palau, Micronesia; Submitted in Partial Fulfillment of MSc in Taxonomy and Biodiversity of Plants, Royal Botanic Garden Edinburgh/University of Edinburgh; 2006.

EQPB, 1994; Regulations; Environmental Quality Protection Board; ROP; May 1994.

EQPB, 2000; Ngerikiil and Ngermeskang Rivers Water Quality Monitoring Project; July 2000.

EQPB, 2007: Water Quality and Stream Health of Ngerikiil Watershed; October 2007

Holm, 2004; Forest Habitat Assessment Project; Environment Inc. and T Holm; Oct 2004.

Holm et.al., 2008; Important Bird Areas in Palau: Protecting Palau’s Natural Heritage; Com- piled and edited by: Tiare T. Holm, Adelle Lukes Isechal, Elizabeth Matthews and Anuradha Gupta; Bird Life International and Palau Conservation Society 2008.

Holyoak, Lorne Todd, 2001; Ethnography and Historic Preservation: Palauan Challenges; CRM No 5—2001.

Nance 1986; Results of Exploratory Drilling and Well Development on Airai and Koror States, Republic of Palau; for Office of Planning and Statistics, Trust Territory of the Pacific Islands; Belt, Collins and Associates; May 1986.

SOPAC, 2007; National Integrated Water Resource Management Diagnostic Report: SOPAC Misc Report 642; Secretariat of Pacific islands Applied Science Commission; Nov 2007.

NRCS, 2005; Ngerikiil Watershed Resource Assessment; United States Department of Agri- culture, Natural Resources Conservation Service Pacific Basin Area; February 2005.

OERC, 2002; First National Communication to the United Nations Framework Convention on Climate Change; Office of Environmental Response and Coordination; 2002.

USAID, 2007; Adapting To Climate Variability and Change: A Guidance Manual for Devel- opment Planning; August 2007.

USGCRP 2003; US National Assessment of Potential Consequences of Climate Variability and Change. US Global Change Research Program.: http://www.usgcrp.gov/usgcrp/nacc/education/islands/default.htm

USGS, 1984; Water Resources of the Palau Islands; Report 83-4140; Honolulu, March 1984.

Winzler and Kelly, 1996; Comprehensive Groundwater Protection Strategy; for the Environ- mental Quality Protection Board, Republic of Palau; Winzler and Kelly Consulting Engineers, December 1996.

Appendix 10 Page 34

Annex 2 – Rapid Environmental Assessment (REA) Checklist Water Supply

Country/Project Title: Palau/Babeldaob Water Supply Project

Sector: Water Supply, Sanitation & Waste Management

Division: Pacific Area SCREENING QUESTIONS Yes No REMARKS

A. Project Siting Is the project area…  Densely populated? ●  Heavy with development activities? ●  Adjacent to or within any environmentally sensitive areas? o Cultural heritage site ● o Protected Area ● o Wetland ● Addressed in IEE o Mangrove ● Addressed in IEE o Estuarine ● o Buffer zone of protected area ● o Special area for protecting biodiversity ● o Bay ● ●

B. Potential Environmental Impacts Will the Project cause…  Pollution of raw water supply from upstream wastewater discharge from communities, industries, agriculture and soil erosion runoff? ●  Impairment of historical / cultural monuments / areas and loss/damage to these sites? ●

Appendix 10 Page 35

SCREENING QUESTIONS Yes No REMARKS  Hazard of land and subsidence caused by excessive ground water ● pumping?  Social conflicts from displacement of communities? ●  Conflicts in abstraction of raw water for water supply with other benefi- ● cial water uses for surface and ground waters?  Unsatisfactory raw water supply (e.g. excessive pathogens or mineral ● constituents?)  Delivery of unsafe water to distribution system? ●  Inadequate protection of intake works or wells, leading to pollution of ● water supply?  Over pumping of ground water, leading to salinization and ground sub- ● Addressed in sidence? IEE  Excessive algal growth in storage reservoir? ●  Increase in production of sewage beyond capabilities of community fa- ● cilities?  Inadequate disposal of sludge from water treatment plants? ●  Inadequate buffer zone around pumping and treatment plants to allevi- ● ate noise and other possible nuisances and protect facilities?  Impairments associated with transmission lines and access roads? ● Addressed in IEE  Health hazards arising from inadequate design of facilities for receiv- ● ing, storing, and handling of chlorine and other hazardous chemicals?  Health and safety hazards to workers from the management of chlo- ● rine used for disinfection and other contaminants?  Dislocation of involuntary resettlement of people? ●  Social conflicts between construction workers from other areas and ● community workers?  Noise and dust from construction activities? ● Addressed in IEE  Increased road traffic due to interference of construction activities? ● Addressed in IEE  Continuing soil erosion / silt runoff from construction operations? ● Addressed in IEE  Delivery of unsafe water due to poor O&M treatment processes (espe- ● cially mud accumulations in filters) and inadequate chlorination due to lack of adequate monitoring of chlorine residuals in distribution systems?  Delivery of water to distribution system, which is corrosive due to in- ● adequate attention to feeding of corrective chemicals?  Accidental leakage of chlorine gas? ●  Excessive abstraction of water affecting downstream water users? ●  Competing uses of water? ●  Increased sewage flow due to increased water supply? ●  Increased volume of sullage (wastewater from cooking and washing) ● and sludge from wastewater treatment plant?

Appendix 10 Page 36

Annex 3 – Environmental Clauses for Inclusion in Construction Contract Tender Documents

For inclusion in: General Conditions

Preamble: The Contractor must include sufficient allowance in its bid price to fulfill the following conditions in the course of its work. The Contractor is responsible for assuring that subcontractors working at the project area also abide by these conditions.

Hiring

1. Hiring of project-affected persons, residents of project-affected administrative units, dis- advantaged groups such as minorities or women, and other local inhabitants, are preferred.

2. Contractor is forbidden to engage in rumor, political intervention, or extortion by middle- men and gate keepers to affect a lowering of wage rates or benefits during hiring.

Use of Land for Construction Purposes

3. The contractor will obtain prior approval from landowners for temporary use of land for labor camp and construction yard, and before occupation agree on price, intended use and duration, amount of clearing and excavation, and final waste disposal and reclamation.

4. The contractor will not encroach upon or damage forests, wildlife or fisheries in the project area, and will provide a plan for preventing fires and possession of instruments or poisonous substances for killing or capturing fish or wildlife.

5. All affected areas within the general project boundary shall be graded to their original elevation or to a gently sloping grade following completion. Machinery, equipment, structures, contaminated earth and waste or unused materials shall be removed and disposed of properly.

6. No fuel, oil, or parts cleaning fluids shall be spilled, wasted or disposed of at the project site.

Site Conditions, Quarries and Haul Routes

7. The contractor will provide a plan for development of haul roads that minimize interference with ongoing activity in the area. Haul routes shall be approved by the State Gov- ernment where the work is taking place. Haul roads for unclassified fill in the project area shall be kept as close as possible to areas to be excavated.

8. Selection of quarry sites and haul routes shall minimize noise and air pollution in the quarry vicinity; visual impacts in inhabited areas; impacts on land use, air and noise emissions along haul routes; and congestion in populated areas. Quarry locations and haul routes will be approved in advance by the Site Engineer and State Government.

9. Dust, noise and odors produced from nearby construction will be suppressed with various measures including watering haul roads regularly and operation of vehicles during restricted hours in village limits and other congested, or residential, areas.

Appendix 10 Page 37

10. The Contractor is required to post flagmen at intersections of transit paths for ongoing work in right-of-ways, construction vehicles and local traffic.

11. Forms of interference that would disadvantage women and children in daily activity need to be avoided and specific safeguards put into place.

Archeological and Cultural Relics

12. The Contractor must halt construction upon discovery of foreign objects of non-recent origin on the ground or below grade. Contractor must notify the Site Engineer, who will contact the Department of Antiquities to investigate and undertake recovery. Work must remain halted at the specific location until recovery is complete.

Excavation, De-watering and Disposal

13. All excavations will be conducted in conformance with the Earthmoving Regulations of the EQPB. The Contractor will be responsible for preparation of an erosion and sedimentation control plan incorporating, among other means, diversion terraces, interceptor channels and solids separation facilities. A permit must be obtained prior to the start of activities to be submitted by the person undertaking the earthmoving activity.

14. Some excavation areas may need to be de-watered. The contractor is responsible for developing a plan to minimize any sediment load in local drainage courses due to the discharge of water from excavations. The Site Engineer must approve the plan prior to start of excavation. Final discharges to local streams should contain TSS no greater than 300 mg/L.

For inclusion in: Special Conditions

The Contractor will provide in its proposal the following items along with a stated bid price:

Item Unit Price 1. Plan for environmental management at the construc- LS tion site 2. Erosion and Sedimentation Control Plan LS 3. Safety plan for accident prevention and response LS 4. Housing for the construction labor force living onsite No. 5. Drinking water supply at labor camp and construction No. site 6. Washing, bathing and toilet facilities for labor camp No. 7. Solid waste handling and disposal LS

[Note, for a particular project the number of units must be estimated beforehand and included in the bill of quantities.]

Appendix 11 Page 1

APPENDIX 11 – ESTABLISHMENT OF A PUBLIC WATER AND SEWERAGE AUTHORITY

1. The following is based on information researched from the establishment of the Palau National Communications Corporation and the Palau Public Utilities Corporation. Both of these organizations were created as corporate identities within recent years from Government agencies. We indicate the costs that have been allowed in the Project estimate for the various components.

2. It is planned to establish a Water and Sewerage Authority as part of the proposed Project. The intention is that the Authority be operational by 2013 at the end of the Project. While there are various ways of establishing the Authority we are providing for training for personnel to be provided under the Project through the Project Management Unit (PMU). This is different from the method used for previous cases but the general principle will still apply and the costs will be part of the Project.

3. It is envisaged that the Transitional Committee be attached to the PMU with a full- time staff member permanently attached to the PMU for the life of the Project. The Committee and this staff member will be specifically responsible for ensuring the training and entire overseeing and monitoring of the three-year transition process.

4. The following details the traditional process and the specific costs involved. We believe that the costs and process can be adapted to incorporating the process within the PMU.

1. Traditional Process

5. First, a transition committee is established through law passed by the OEK (Palau’s legislature) or by Executive Order. This committee would oversee and monitor the transition process (specific details described below). Second, a management team is hired by the committee and trained prior to the actual creation of the authority or corporation. The management team could be made up of locals recruited specifically for individual tasks or it could be a company experienced in the management of water and sewerage organisations. Hence, under this plan, the management team would focus on the training and preparation for the launch of the Water Authority and the Committee would focus on implementing and making sure the goals of the transition process is met.

2. Proposed Process using the Project

I. TRANSITION COMMITTEE

6. In this model, the use of a Transition Committee is the most significant element. The Transition Committee is the entity which will oversee and monitor the entire three year transition process. Its tasks will include but are not limited to: . Accounting for the priorities and needs of the water/sewer users; . Providing a clear roadmap, with milestones and deliverables; . Develop a complete list of transition tasks that need to take place in each area and with each entity, creating a single timeline; . To allow task leaders to work together to determine the details and priority of each task and the time line for completion of that task; . To develop a clear understanding among those involved in the transition as to what responsibilities are held by each member and each team; Appendix 11 Page 2

. Considering budget guidelines and constraints; . To develop a means to effectively monitory the transition process; . Dissemination to the public about the transition, the progress of the transition and the final product; . Oversight and coordination of all legal requirements; . Coordinate hiring; and . To identify the risks and potential obstacles to the successful completion of the transition process and proposed transition tasks.

7. The estimated cost of the Transition Committee over a three year period is as follows, presuming private sector purchase of goods and services. 1 Full Time Staff for three years $45,000 Part-time assistance $20,000 Office Equipment & Supplies 5,000 Compensation for Committee Members 25,000 Incidentals 5,000 Total: $100,000

II. MANAGEMENT TRAINING

8. Coordinating the training would fall under the Transition Committee’s tasks but much of the training would be undertaken by the Implementation Assistance Consultants. This would include the cost of bringing trainers to Palau in areas such as technical development and administrative and management development. It would also cover the costs of sending management and developing management off-island for relevant training. Training would be provided to the PMU, Bureau of Public Works and Environmental Quality Protection Board staff (EQPB).

9. The cost of this training is estimated at $400,000.

III. LAWS AND REGULATIONS

10. This is the cost associated with a private firm’s drafting of comprehensive laws and regulations related to all aspects from the technical to the administrative of sewer and water development and a water and sewerage authority. It would also include the drafting of administrative procedures and a personnel policy. Finally, it would include the review of all proposed documents to be utilized by the water and sewerage authority internally and with clients regarding accounts, billing and collecting.

11. It is envisaged that this would include drafting a new Water Law, making amendments to other laws and defining the role and powers of a water and sanitation regulator. An allowance of $100,000 has been made for this work.

IV. IV. LEGAL ASSISTANCE

12. This is the cost associated with a private firm’s actions to ensure that all required legal work needed to allow the water and sewerage authority the ability to management the water and sewerage systems are completed properly. These would include negotiating, drafting and recording easements; negotiating, drafting and recording contracts between Appendix 11 Page 3

States and/or private landowners and the water authority regarding the use and cost of water.

13. An allowance of $50,000 has been made for this work.

Appendix 12 Page 1

APPENDIX 12 – CAPP PROGRAM AND EXPENDITURE

1. The Community Action and Participation Program (CAPP) is designed to enhance and sustain the benefits from investments in water supply systems. The three subcomponents of the CAPP are:

(iii) Health Awareness Support (HAS) which will strengthen existing programs to promote behaviour change related to sanitation, hygiene, water use and health.

2. The CPP covers information dissemination specific to the Project works and the new corporatized National Water and Sewerage Authority. The other two components of CAPP, CAP and HAS, do not have to be programs implemented from the beginning, but can link to, and strengthen, currently existing programs under various ministries.

1. Community Participation Plan

3. Experience elsewhere demonstrates that public participation in Projects helps increase public acceptance and ownership of the works and leads to better long-term outcomes with operation and maintenance issues.

4. This process begins with public information dissemination on the aims and objectives of the Project and continues with public consultation and participation with the various elements of the Project. Specific Project components will be discussed including the need for universal metering and the advantages of a corporatized water and sewerage authority. It is envisaged that media advertising, media editorial, public meetings and specific discussions with individuals and stakeholder groups will be undertaken as part of this process. This work will commence at the very start of the Project and will continue until all construction is complete.

2. Community Awareness Plan

5. This sub-component will have media advertising and editorial activities, a schools campaign to educate children in conservation practices and the value of good water and sewerage systems, public meetings with community leaders, women’s groups and others, and possibly public inspections of water facilities (intake, dam, treatment plant, bore field, reservoirs etc).

6. Some of these activities will be ‘stand-alone’ initiatives of the PMU but others will tap into existing GOP programs and support and supplement them.

7. One particular program which we believe is worth supporting is the “Water Education for Teachers” program operating under the Ministry of Finance. This is done through the Bureau of Revenue, Customs & Tax - Water Billing & Collection (WBC) office. Appendix 12 Page 2

8. This office participates in a global water education delivery network called Project WET “Water Education for Teachers”, which Palau is an official country sponsor of the program. The goal of Project WET is to facilitate and promote the awareness, appreciation, knowledge and stewardship of water resources through the development and dissemination of classroom-ready teaching aids, grades K through 12, and through the establishment of internationally sponsored Project WET programs. WBC employees facilitate workshops for teachers and distribute WET materials and lesson plans for teachers and for children.

9. We would expect that the program could be extended to show that a piped water supply is an important resource and considerable cost and expertise is involved in constructing, operating and maintaining such a system and that the cost of treating water is significant and wastage of water adversely affects all consumers.

3. Health Awareness Support

10. The relationship between water, sewerage and health is well known in some countries and less known in others. We suspect that in Palau there is a wide range in knowledge and attitude. An assessment will be made of these attitudes and programs tailored by the survey results.

11. In addition we believe there is an opportunity to work with the Ministry of Health and others to support existing initiatives. One such program is operated by the Ministry of Health, Bureau of Public Health - Division of Environmental Health (DEH).

12. This division provides guidelines and assistance for testing and maintaining clean and safe drinking water out of rainwater catchment tanks. During extended dry periods, the public is urged to use rainwater catchment tanks to conserve water. There also exists the perception amongst some members of the public that rainwater is cleaner than tap water and most households have rainwater tanks for their drinking water. DEH also makes available testing kits to the public to test their own water tanks as well as providing information on treatment and control measures.

13. In collaboration with Palau Community College and EQPB, this division also put together the 2nd edition of “A Guide for Rainwater Catchment Tanks” (funded by SOPAQ), in March 2008. This guide manual serves as the basis for workshop trainings held with various contingents such as elementary school principals (schools prefer the taste of rainwater to tap water) and water operators (of BPW) so that water operators could disseminate information to their respective hamlets or states.

14. Due to funding constraints, DEH has been unable to take these trainings to the next level which is that of the public community and this is where the HAS component can augment the program to promote objectives of sanitation, hygiene, water use and health behavioral change.

4. Public Meetings

15. With respect to the specific component of CAPP involving public meetings, it is important to take advantage of the traditional women’s groups (as well as men) and their significant influence within the community. In every State, there is a traditional men’s group and a counterpart women’s group usually from each major hamlet. (In Airai, there are seven women’s groups and seven men’s groups.)

16. Project activities, education on the adverse costs associated with lack of conservation, and an increased awareness and interest in water and sanitation matters Appendix 12 Page 3 would be objectives at these meetings. Representatives of not only women but men’s groups as advisors to CAT would be relevant, where the most meaningful exchange of information would be practical ways to reduce costs and health aspects associated with water and sewerage. This knowledge could then be passed on to other members during their regular meetings.

5. Costs

17. The sub-component costs will be spread between the various activities. For instance, it is envisaged that CPP costs will be mainly in years 1 and 2 of the Project while CAP media and editorial activities will commence slowly and peak in year 3. We have not attempted to break the activity costs up into years but believe an expenditure of $90,000 per year is achievable.

18. Table 12.1 gives a preliminary estimate of costs on an annual basis.

Table 12.1 – Estimated Cost per Activity

Activity Estimated Cost Media Advertising/Editorial Activities $40,000 (compare to STUN) Schools campaign (Project WET) & other activities $30,000 Public and Group Meetings $10,000 per meeting estimate of $200 each Support for DEH community trainings & other $10,000 activities Subtotal $90,000 Annually X 3 years TOTAL $270,000

19. STUN – Stop Tobacco Use Now – This is a well-developed media campaign against tobacco use with a focus on education (what chemicals in cigarettes), disease generation, etc.

20. Project WET estimate is for classroom materials.

Appendix 13 Page 1

APPENDIX 13 – GEOTECHNICAL & GROUNDWATER INFORMATION

I. Geology

1. The geology of the Palau Archipelago is quite variable and complex. The following provides a simplified review of the general geological conditions within the project area.

2. There are four main types of island landforms within the Palau Archipelago; volcanic, high limestone, low platform and atoll or reef islands. Some islands have a combination of landform.

3. Babeldaub Island is almost entirely volcanic and composed of andesitic and basaltic volcanic breccia bedrock generally overlain by 10 to 20 feet of residual clayey soil. Breccia is a course grained volcanic rock composed of angular broken rock fragments welded together in a fine-grained mineral rock matrix. It is formed by volcanic explosions and/or debris flows of the super heated rock mass. The upper 50 feet or so of the bedrock is partially decomposed with essentially fresh bedrock below.

4. Over much of the coastal fringe and within the major river valleys a surface layer of alluvium or colluvium overlays the weathered rock profile. A few high limestone ridge areas occur at the very southern extremity of this main island.

5. Within the interior of the southern part of the island there are scattered patches of alluvial sediments known as the Airai Clay, a formation of interbedded silty clays with some lignite. The clays are commonly white, light brown or grey and readily distinguishable from the typically orange-brown residual clay soils.

6. Similar geological conditions exist on the smaller islands of Koror, Malakal and Ngerekbesang, although most of the eastern portion of Koror and Malakal comprises limestone as do most of the major islands to the south.

II. Soils

7. A Soil Survey of the Islands of Palau published by the U S Department of Agriculture, Soil Conservation Service in March 1983 provides a general soil map of the area of interest for this project. This map shows the 11 map units which have been grouped into 5 general types of landscape. The document also provides detailed mapping of this entire area into 41 different detailed soil map units at a scale of 1:10,000.

8. In addition to detailed descriptions of each soil unit there are tables providing suitability and constraints of the various soil units for woodland management, recreational activity, regional development, building site development, sanitary facilities, construction materials and water management. There are also tables providing typical engineering index properties, physical and chemical properties.

9. Of particular interest to understanding the geotechnical conditions within the project area are:

 Table 9 - Engineering Index Properties which includes soil particle size analysis, Atterberg limits and classification in accordance with the Unified Soil Classification System, and Appendix 13 Page 2

 Table 10 - Physical and Chemical Properties of the soils which include density, indicative permeability, reactivity (pH value), salinity, shrink-swell potential, erosion factors and organic content.

10. This survey provides useful information for planning purposes and for preliminary design of major engineering structures. For instance the existing Airai Water Treatment Plant is located within map unit 402 and adjacent to 408 which are the Aimeliik-Palau complex, 30 to 50 percent slopes and the Dechel-Mesei complex, 0 to 2 percent units respectively. As indicated by the unit name 402 is located on sloping more elevated land, whereas 408 is a flatter lower lying landform.

11. Unit 402 comprises silty loam and silty clay loam (MH-K) down to 150 cm depth. The proportion of silt & clay is 75–95%, the liquid limit is 75 to 85% and the plasticity index is 10– 30%, indicating a very high proportion of silt. The bulk density is 0.90–1.10 G/cm3, permeability is 5–15 cm/hr, pH is 4.5-5.5 (acidic), salinity <2Mmhos/cm, shrink-swell potential is low and organic matter is 5-12%.

12. In contrast Unit 408 comprises a silty clay loam with gravelly layers (MH, some GM) to the 168cm depth analysed. The proportion of silt and clay is 85-100% (with gravelly layers 25- 55%), the liquid limit is 65-75% and plasticity index 15 -20%. The bulk density is 0.90-1.10 G/cm3, permeability 0.2- 5 cm/hr, pH is 5.1-7.3 (acidic–neutral), salinity <2Mmhos/cm, shrink- swell potential is low and organic matter is 12-18%.

III. Hydrogeology

13. The unweathered parent volcanic bedrock underlying the islands involved in this project is most unlikely to contain significant aquifers. This is because the fresh rock is very dense, has low porosity and typically very few discontinuities (joints, fractures or defects) to store and transmit groundwater. However the zone of weathered material, overlying the fresh rock commonly has a greater primary porosity and significantly more discontinuities and therefore, it may contain potential aquifers.

14. The overburden soil covering the sideslope and higher elevation areas, which is derived from complete decomposition of the volcanic rock, is typically clayey resulting in relatively high surface runoff and consequently relatively minor infiltration. However in the lower elevation areas which occur along the coastal fringe and within the valley floor areas the surface soils comprise alluvial or colluvial soils which may contain sandy, more permeable layers or zones. These layers may form significant aquifers and/or they may provide conduits to recharge potential aquifers within the underlying weathered bedrock.

15. Limestone formations are generally highly permeable, have high storage capability and commonly provide high yield aquifers. However there are only limited limestone zones within the project area on Koror and Malakal Islands.

16. Based upon the above discussion potential shallow aquifers may exist within 10 to 30 feet depth in some lower elevation areas and in addition some deeper aquifers in the 40 to 100 feet depth range may also exist in these areas. It appears most unlikely that significant groundwater resources exist in the sideslope and upper elevation areas.

17. A limited drilling program was carried out during the mid to late 1980’s in the vicinity of the existing surface water collection facilities, just to the north of the airport and the results of this investigation work is summarised in the Groundwater section of this report Appendix 13 Page 3

GEOTECHNICAL INFORMATION

I. Previous Geotechnical Investigations

18. The most recent major engineering project constructed in Palau is the Compact Road and a geotechnical investigation was carried out for this project and reported by consultants Geolab-Hawaii in July 1998. Review of the report for Package B which covers the area from the airport north to the new capital of Melekok indicates that 3 boreholes were drilled in the vicinity of the Ebeng / Ngerikil River and the existing pump station.

19. The logs of these bores indicate the weathered volcanic breccia to be 11 to 13m (35 to 40’) below ground level at the bridge site at Ngerikil River with the overlying residual soil being stiff/compact clayey silt. Soft alluvial clays were encountered over the upper 6m (20’) at one of these bores which was bored from the floodplain at about 2m elevation.

20. The bore located near the turn-off to the pump station revealed 6m (20’) of residual clayey soil over extremely weathered volcanic bedrock.

II. Geotechnical Aspects of Possible Dam Sites

1. During the initial visit by the geotechnical Specialist for this TA in June-July 2008, field visits were conducted to two of the possible dam sites selected for evaluation; Ngerimel 1 and Edeng 1. These were chosen as those most likely to be suitable if additional surface water storage was to become part of the Project. Preliminary surveys of the topography upstream of these two dam sites were also conducted to enable a preliminary assessment of potential storage capacity.

A. Ngerimel 1 Site

2. This site was inspected by the geotechnical engineer on 21 June. The site was accessed via the route of the original access road to Gihmel Reservoir which is now overgrown. This is also the route of the pipeline from the reservoir to the WTP. The possible dam site location is within a broad flat valley such that any dam structure would need to be in excess of 100m long. The water course at this location was flowing at a very slow rate indicating a very low gradient down this stream. This dam location would collect the water discharging over the weir of Gihmel reservoir and also from the catchment of two small tributaries. The inundated area would cover part of the existing pipeline which would therefore need to be relocated if this dam option were selected.

3. The soils in the proposed dam area are mapped as Unit 408 in the flat base of the valley and Unit 402 on the sideslopes with minor areas of additional units 400, 421, 422 included within the area to be indundated.

4. Unit 408 is designated as the Dechel-Mesai complex, 0 to 2% slopes and is typified by freshwater marshy vegetation and the soils are described as ‘mucky loam’. The soil profile is typically 10cm (4”) of mucky silty loam underlain by silty clay loam with some gravelly bands. These are recent alluvial soils laid down during flood periods. Typical liquid limit and plasticity index values are 65-75% and 15-25% respectively, indicating high plasticity silts. Such materials have relatively low permeability but are sensitive to changes in water content and are highly erodible and therefore considered generally very poor construction materials.

5. Unit 402 is designated as the Aimeliik-Palau complex, 30 to 50% slopes and typified by tropical forest vegetation. Soils are described as silty and silty clay loams. These are residual Appendix 13 Page 4 soils and at depth may contain ‘floaters’ of weathered rock. Although differently formed from the Unit 408 soils they have much the same general composition and virtually the same engineering properties as the Unit 408 soils, except the water content would normally be somewhat less.

6. During the field investigation the Unit 402 soils were observed in the cutting along the access road to the site. No Unit 408 soils were exposed in the flat valley floor. It is expected that at least 3 and up to 10m (30’) of these soils would overlay the weathered volcanic breccia bedrock with unweathered bedrock at a depth generally exceeding 20m (65’).

7. In summary the natural soils located at this possible dam site are generally unsuitable as construction materials and are highly erodible.

B. Edeng 1 Site

8. This site was inspected by the Geotechnical Engineer and the National Environmental Specialist, initially by walking on 23 June and later by kayaking up the watercourse on 30 June 2008.

9. When walking in the site was accessed by a compass traverse west from the Compact road to the watercourse junction south of the dam location then traversing along the north bound ridge between the main river and this tributary. When kayaking we started at the concrete weir and paddled up, past the pump station inlet, again to the watercourse junction, then up the main stream 1 -1.5km until the presence of fallen tree debris prevented further progress.

10. This watercourse is deeply incised into the landform, typically with banks 2 – 3m high with the bed width ranging from 5m to 10m. The depth of water ranged from several metres at the pump station, generally less than 2m at the possible dam site and progressively reducing upstream to generally less than 0.5m, 1 – 1.5km upstream. The watercourse takes a meandering route and there are several small tributaries which are very narrow and quite deeply incised entering the main stream. At the time of our survey these tributaries only contributed a very small flow and their very narrow nature indicates this to be the normal situation.

11. The steep river banks revealed residual soil with numerous exposures of weathered rock (volcanic breccia) floaters. The only exposure of likely solid bedrock material occurred at a waterfall area located up a tributary located a few hundred metres downstream of the possible dam site.

12. The soils in the proposed dam area are mapped as Unit 426 in the flat base of the valley and Units 400, 401, 402 or 403 on the sideslopes and within the area which would be inundated.

13. Unit 426 is designated as the Ngersuul silt loam, 0 to 2% slopes and is typified by poorly drained soils on alluvial floodplains with tropical forest vegetation. Typically the surface layer is red-brown silty loam underlain by yellow-brown silty clays. These are recent alluvial soils laid down during flood periods. Typical liquid limit and plasticity index values of the underlying silty clays are 65-75% and 25-35% respectively, indicating their high plasticity. Such materials have quite low permeability and are generally poor construction materials.

14. Units 400 to 403 are designated as the Aimeliik-Palau complex with increasing slope ranging from 6 to 12% to 50 to 75% slopes and typified by tropical forest vegetation. Soils are described as silty and silty clay loams. Typical liquid limit and plasticity index values of the underlying silty clays are 75-85% and 10-30% respectively, indicating their high plasticity. Appendix 13 Page 5

15. In summary the natural soils located at this possible dam site are moderately erodable and generally considered unsuitable as construction materials, unless very close control is placed on water content to ensure adequate compaction. Such close control in such a high rainfall environment as on Babeldaub is extremely difficult.

III. Construction Materials

1. The above discussion indicates that the onsite materials, together with the tropical weather environment would render construction of an earthfill dam structure very difficult. A more appropriate type of dam would be constructed of concrete.

2. The raw materials for concrete construction are readily available close to or within Airai, however the local concrete aggregate is understood not to meet stringent specification for high strength structural applications. In particular the aggregate generally does not pass the accelerated weathering test, in that it breaks down more than allowed under repeated wet/dry cycles.

3. In the case of a mass concrete dam this is not considered to be of major consequence, however should a structural concrete structure be considered this factor would need to be considered.

4. For the recent Compact Road construction contract high quality aggregate was imported from the Philippines to meet the specification required for ‘structural concrete’ used in bridges and also for the bituminous concrete wearing surface of the road.

IV. Investigation variations

1. As the TA progressed it became apparent that the use of increased surface water storage was not cost effective for the required supplementary supply and that a groundwater source was preferred. No additional geotechnical investigation work was therefore carried out at the potential dam sites and the geotechnical specialist concentrated on gaining an understanding of the groundwater regime within the project area.

GROUNDWATER INFORMATION

I. Previous Groundwater Investigations

2. During the mid 1980’s a groundwater study was carried out in the area around the existing surface water collection points on the Ngerimel and Ngrikil River systems in Airai. This study was commissioned following a significant ‘dry’ period during 1983 as part of an evaluation of proposed water supply for various Palau rural water systems mostly on Babeldaub and Koror by Tom Nance of Belt Collins & Associates.1

3. This study involved the drilling of 8 exploration bores and 6 of these were converted to wells by reaming to a larger diameter and installation of well casing which was screened over the zones of groundwater inflow. The logs of these wells are provided in the factual report (Ref 1) available and it appears that subsequent pump testing was carried out to provide a more comprehensive evaluation of the groundwater resource, however this information could not be found in BPW records.

1 Results of Exploratory Drilling & Well development on Airai and Koror States by Tom Nance of Belt Collins & Associates May 1986 Appendix 13 Page 6

4. A 1996 report2 to provide a Comprehensive Groundwater Protection Strategy for Palau refers to this 1984-86 program of drilling as comprising 14 bores, 8 of which were completed as wells 4 in Koror & 4 in Airai. It was noted that “these wells could begin operation in the near future and are anticipated to greatly help the system meet demand.” The wells vary in pumping capacity from 25 to 85 gpm.

5. The conclusion is drawn that “this groundwater development showed significant potential for future success and could supply an additional 0.48Mgpd (20 hr/day) of very high quality water” and “preliminary results also demonstrate that a substantially greater groundwater supply could be developed through further well development.” However a recommendation is made that further pumping tests are required to determine a safe yield.

6. Discussions with the BPW personnel (Director Mr Techur Rengulbai, and Mr Joe Reklai) have indicated that following the initial 4 well program in Airai (Nos 1, 3, 5, and 7) an additional drilling program was carried out. The initial 4 wells were drilled by a drilling contractor from Guam and the driller was Mr Joe Reklai who is now in charge of Roads & Equipment in the BPW. The further drilling program which was commenced 1988 was carried out by a local drilling contractor (Mr Daryl Lund) and this comprised an additional 4 wells in this area.

7. Much of the factual information from these two drilling programs was apparently sent to Guam and is no longer available, however we were able to locate the following information in the BPW files:  Bore logs & well installation details for Well Nos 1, 3, 5, 6, 7 & 8  Bore log, well installation details & pump test data for Well #1447-03, on west side of dam

8. The pump test data for Well #1447-03 indicates that in July/Aug 1988 it had a short term yield of >60 gpm. The other investigation bores were reported (pers com Daryl Lund) to generally have low yield or to not have reached target depth and were not converted to wells.

9. Anecdotal information (pers com. Joe Reklai) indicates the yield from the pump testing for Well #7 was about 100gpm and for Well # 1 much lower, 30 to 50 gpm.

10. Well # 3 and #1447-03 located on the eastern and western sides of the dam at Gihmel Reservoir were connected up to the pipework system feeding the treatment works and pumped for a period of about 3 months in 1988 with Well #3 having a yield exceeding 100 gpm (pers com Techur Rengulbai), then pumping was terminated as the supplementary supply was no longer needed. These wells were again pumped during the water shortage in 1997-98, however the yield had reduced significantly and the water had an increased iron content (pers com Techur Rengulbai). No further use appears to have been made of these wells.

II. Stage 1 Groundwater Investigation

11. Field visits by the geotechnical and groundwater specialist during late June established that Well Nos 1, 3, 5 & 7 and 1447-03 still exist. Well No 6 was destroyed during the construction of the water treatment plant. In order to gain more information regarding the potential yield of these old well installations a short field investigation program was planned involving the test pumping of three of these wells; Nos 3, 5 & 7. Although the condition of the wells is unknown and there is a risk of significant blockage of the well screen due to biological

2 Comprehensive Groundwater Protection Strategy - for Palau Environmental Quality Protection Board by Winzler Kelly Consulting Engineers Dec 1996. Appendix 13 Page 7 growth, chemical decomposition of the well screens and casing, or both these tests were considered to provide some indication of the lower bound potential yield of each installation.

12. The testing was carried out during the period late July to mid October 2008 and involved pumping each well for a period of 24 hours whist monitoring the drawdown within the well at regular time intervals. The work was carried out by Daryl Lund, a local water well driller experienced in such testing procedures. The results of this Stage 1 testing program are as follows:

13. Well #3, located adjacent to the eastern abutment of the dam (at Gihmel Reservoir).

 Test carried out on 31 July-01 Aug 2008  The well is 100 to 110 ft deep, cased to 40 ft then open hole below.  The standing water level was 4.3 ft.  Pumping was carried out continuously for 24 hours at a rate of 45-55gpm.  Initial drawdown was rapid to 40 ft in 15 mins, then slowly increased to 62 ft, where it stabilised for the remaining 20 hrs.

 When pumping ceased, the water level rose back up to about 13 ft in 5 mins, then back to 6 ft in a further 45 mins.

 This data indicates that this well has a short-term yield of about 50 gpm.

14. Well #5, located adjacent to Ngirgil Pump station Grid Ref 0450904E, 0816329 N

 Test carried out on 8-9 Aug 2008  The well is 78 ft deep, and was initially drilled to about 90ft but the lower 12 ft was cemented up erroneously.

 The standing water level was 5.7 ft  Pumping was carried out continuously for 24 hours at a rate of 25 gpm (varied 20- 30gpm).

 Initial drawdown was rapid to 55 ft in half hour, then stabilised at about 60 ft for the remaining 23.5 hrs.

 When pumping ceased the water level rose back up to about 15 ft in 2.5 hrs and when checked next day the well was overflowing at about 2 gpm; ie an artesian condition.

 This data indicates that the pumping cleared some blockages in the well and a short- term yield of about 25 gpm.

15. Well #7, located between Ngirikil PS and Gihmel Reservoir. Grid Ref 0449965E, 0815151N.

 Test carried out on 7-8Oct 2008.  The well is 70-80 ft deep, and taps the underlying rock aquifer  The standing water level was 15 ft down.  Pumping was carried out continuously for 24 hours at a rate of 60 gpm (max for pump)  Initial drawdown was rapid to 59 ft in the first 3 hours, then stabilised at about 65 ft for the remainder of the 24hrs. Appendix 13 Page 8

 The water level rose back to the initial level in less than 1 hour.  This data indicates a short-term yield of 50 to 60 gpm.

16. The pump testing of these 3 wells indicated likely sustainable yields of 25 to 60 gpm. These wells are each over 20 years old and new wells drilled a little deeper into the bedrock formation and /or of slightly greater diameter would be expected to have sustainable yields of up to 50% greater; ie about 100gpm.

III. Stage 2 Groundwater Investigation

56. In view of the encouraging yield values obtained from the pump testing of the three old wells a more comprehensive pump test program was planned. This program involved the drilling of two new wells, together with the drilling of (one or two) monitoring bores located (about 30 ft) away from each well. In addition (one or two) of the old wells was converted to a monitoring bore. The purpose of the monitoring bores is to enable the ‘drawdown cone’ surrounding each well to be defined and thus to determine the hydrogeological parameters; transmissivity and storage coefficient which can be used to model the longer term performance (yield and drawdown) of a pumping well.

IV. Drilling Work

57. This program was commenced during the field visit by the geotechnical and groundwater specialist in February and completed in mid April 2009. The scheduled program was curtailed to only one location, due to very slow drilling progress and numerous equipment break-downs, and limited to:  Drilling of one well (GHD#2) in 15cm (6”) diameter to 24 m (80 ft) deep; the upper 11.6m was clayey overburden soil, underlain by slightly weathered basalt bedrock.  Drilling of one observation (GHD#1) bore in 15cm dia. to 24 m deep and installation of 5cm (2”) dia. slotted PVC standpipe sealed within the weathered fractured basaltic rock. This bore was located 10m from the well;  Installation of 5cm dia. slotted PVC standpipe within the existing Well No 5, sealed within the fractured rock; and  Pump testing.

58. The water level in the three bores was monitored several times over a few days, to ensure the groundwater regime had stabilized, then pump testing commenced. Analysis of the pump test data was carried out by an experienced hydrogeologist.

59. As the drawdown level in the pump well remained constant during the test period and the drawdown level in the monitoring bore was increasing quite slowly an initial analysis was made assuming steady state conditions. After making a few assumptions regarding ‘well losses’ the indicated transmissivity (T) was able to be estimated.

60. The data for the drawdown of the monitoring well was then analysed for unsteady state flow conditions for a confined aquifer, using 2 methods3. There is considered to be quite good

3 Ref 3 Analysis & Evaluation of Pumping test Data by G P Kruseman & N A DeRidder, International Institute for Land Reclamation and Improvement, The Netherlands 1979

Appendix 13 Page 9 agreement in the results of the three methods of analysis used. The storage coefficient values determined are quite high for a fractured rock aquifer and indicate a quite high degree of fracturing and connectivity.

61. As there was no response to pumping at the monitoring point 250m away the ‘zone of influence of pumping is not known, other than that it is less that 250m.

V. Preliminary Design of a Wellfield

62. Firstly, it is considered that the drilling equipment and expertise presently available in Palau is not adequate to construct good quality water wells. In this geological formation a large rotary percussion drill rig using compressed air to lift the cuttings would be appropriate. Such a rig would be able to drill a 25 to 30cm dia. bore down to 30 to 40m depth in a few hours and the entire well installation would take a day or two. This equipment and the operating expertise would need to be imported from Guam, Philippines or Hawaii.

63. Such a larger diameter deeper well penetrating at least 20 to 30m into the confined fractured rock aquifer would be expected to have a sustainable yield of at least 300 m3/day and up to 500 m3/day, compared to the 150 m3/day of the test well.

64. At a yield per well of 300 m3/day 13 wells would be required, whereas if the average yield was 500 m3/day then 8 wells would be required. It is therefore considered that a wellfield comprising about 10 wells would be required to meet the periodic requirement of 1 Mgpd during drought periods. It may be prudent to install one or two additional wells whilst the drilling equipment is present in Palau.

65. As the length of the Ikoranges and lower part of the Nkerikiil valley is about 3000m it would be possible to space 10 wells up to 300m apart, however this may mean that the ‘zone of influence’ of the wells overlap, although the drawdown beyond 200m is not expected to be very large.

66. In addition to the drilling of the wells it is recommended that a series of 6” diameter observation bores be drilled and fitted with PVC standpipes to enable monitoring of drawdown during pumping operations. A series of about 10 new monitoring bores, plus retrofitting of 3 or 4 existing bores is considered appropriate.

67. Although the wellfield will only be required for operation reasons for a few months every 10 years or so, it is recommended that the system be used for a few days up to a week every few months to ensure that it is working properly and will do so when absolutely needed. The most appropriate time may be following heavy rainfall periods when the surface water being pumped from the Nkerikiil River is quite turbid. This would ease the pressure on the treatment works in terms of sediment management and chemical dosing and may even result in some economy in the operations.

VI. Water Quality Analysis

68. Towards the end of the pump test a sample of the water being pumped was collected. Well head tests were carried out on site by a technician from EQPB and a 2 litre sample was stored in two clean glass containers, kept chilled and transported to Manila by air, under appropriate chain-of–custody documentation for more detailed analysis.

69. The results of the chemical analysis are as follows: Appendix 13 Page 10

Field Test results - determined using a YSI 6920 multiparameter meter

Electrical Salinity Dissolved Date pH conductivity mg/L Oxygen mg/L mS/cm 9 Apr 09 8.1 1.189 590 8.3

Laboratory Test Results - provided by Fast Laboratories, Manila, Philippines Carbonate / Calcium Sodium Magnesium Potassium Sulfate Chloride Nitrate Bicarbonate (Ca) (Na) (Mg) (K) (SO4) (Cl) (NO3) (CO3) / (HCO3) Sample 1 20.7 31.1 3.2 <0.02 2 1 50 <0.05 Criteria X X X X 250 250 X 10 Principal Cations & Anions - all results in mg/L

Iron (Fe) Manganese (Mn) Fluoride (F) Arsenic (As) Sample <0.06 0.03 0.20 0.03 Criteria .3 0.05 2.0 <0.05 Metals all results in mg/L Drinking water criteria are in the Palau standards.

70. Testing carried out by FAST Laboratories in Quezon City Manila, Philippines indicates the main cations to be sodium and calcium, with minor magnesium, and the principal anion to be carbonate / bicarbonate. The other commonly present anions; chloride and sulfate were found to be of particularly low concentration. The charge balance error for anions-cations is quite high, indicating either another anion is present in significant concentration, or there is an error in the sulfate or chloride results. Hardness which is a function of calcium and magnesium concentrations is calculated to be 65 mg/L (as CaCO3) which is relatively low.

71. Four potential contaminants were analysed, three; iron, manganese and fluoride were all found to be well below commonly adopted health standards for drinking water. The concentration of arsenic is above the WHO criteria, however several countries have higher criteria (eg VietNam is 0.05 mg/L). It is recommended that more comprehensive analyses be carried out the for two forms of arsenic: arsenite (As3+) and arsenate (As5+). The fluoride level of 0.2 mg/L is considered beneficial for dental health.