World Bank Document

GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006 49289 Public Disclosure Authorized PROJECT APPRAISAL-COMMITMENT DOCUMENT MOROCCO - IMPROVED ACCESS TO WATER AND SEWERAGE SERVICES PROJECT (P102527) A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues. Solid sector performance: Access to potable water and improved sanitation in Morocco Public Disclosure Authorized increased significantly in the past decade and reached 98 and 95 percent respectively in urban areas, as per official statistics. Most urban utilities provide 24 hr continuous supply. However, statistics do not reflect the fact that slums and illegal settlements scattered in metropolitan areas are deprived of access, particularly to individual household connections and connection to sewerage networks. These poor neighborhoods can occupy a substantial portion of metropolitan areas, for example, in Casablanca, as the extreme case, 1.2 million, or 30 percent of the population in the greater Casablanca area, live in such illegal settlements. A sector in transition: Improving access to basic infrastructure services and addressing housing shortages have attained new and high priority for the Government. In the current delicate geopolitical situation in the Middle East and North Africa, and following a strong showing of the Islamist parties in the September 2002 parliamentary elections, the Government’s priorities are to reduce unemployment and raise living standards through accelerated economic growth. The Public Disclosure Authorized shock of the Casablanca suicide bombings in May 2003 further strengthened the determination of Moroccan policymakers to improve essential services to the urban poor, not limited to water supply and sanitation, but also health care, education, housing, and other basic infrastructure--in order to eliminate some of the conditions in which radicalism has thrived in Morocco. The government, through the leadership by the King, has acknowledged the dire living conditions of urban and peri-urban slums and rural communities, and launched the National Initiative for Human Development (INHD) in May 2005. The Initiative aims to promote systematic and sustainable development, and has provided a strong momentum for municipalities and utilities to explore mechanisms to expand access to basic infrastructure among the poorest. The initiative is broadly supported by the various development partners, including the World Bank. Sector reform program supported by Development Policy Loan (DPL) by the World Bank: the Government, in recognition of the current constraints faced by the sector, has approached the World Bank for technical assistance in the reform of the sector, in particular funding of social Public Disclosure Authorized mandates, the regulatory framework for utilities, and the market structure in the sector. Extensive analysis is ongoing that the government has taken on board in structuring a reform program which the Bank will support through a DPL loan. 2. Rationale for GPOBA involvement GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006 Various barriers to access to water supply and sanitation services have been readily identified in analytic studies covering the sector in Morocco1, most prominently: Weak financial incentives for utilities to connect and high cost of connections to users: Financial incentives for utilities to connect marginalized households are weakened by current tariff structures: retail tariffs are designed as increasing block tariffs, with monthly consumption below 8m3 typically below OM costs and commonly even below bulk water purchase costs. Therefore, new users typically cause financial losses to utilities. This situation is in particular affecting the financial viability of public utilities: while private concessions have been able to obtain contractually agreed tariff increases that compensate for deterioration in average tariff revenues by adding lower consumption households, public utilities have not been able to increase average tariff levels to reflect the changing composition of their customer base or to pass through increases in input costs. Moreover, average water tariffs remain low and do not allow financing of major expansion. Nevertheless, under the INDH initiative, all participating utilities have specifically committed to the government to connect households located in INDH communities within a prescribed timeframe. Funding of expansion has been by connection fees for new customers. Financial assessments show that revenues from various connection fees payable by new users (rather than tariff revenues) cover up to 90% of total investments undertaken by (public) utilities, the ratio is lower but still significant (at about 60% for private concessions). While this approach has worked very well in the past with upper and middle income households and enabled utilities to reduce their long-term financing needs, connection costs have become prohibitive for lower income households despite payment plans for up to five years offered by most utilities. The government is fully aware of these constraints, and, as part of the dialogue surrounding the DPL, has committed to reviewing the financing of the sector, including a review of tariff structures and levels as well as increasing government funding to the sector for “public good” investments. Property titling, location of premises close to existing infrastructure, housing standards and provision of sanitation: Until recently, slum settlements were deemed illegal, and were not included in formal urban planning, nor were eligible for allocation of funds to finance expansion of services to these areas. A number of formal requirements were to be met by households wishing to get connected. As part of GoM’s “National Initiative for Human Development” (INDH), these preconditions for entitlement for social connection programs have been waived, eligibility is now solely based on the location of premises within assigned “INDH” zones. These “INDH” zones have been refined with the assistance of the World Bank based on poverty maps, which allow, through a statistical correlation of household survey and census data, a highly accurate targeting of low income neighborhoods. The primary rationale for GPOBA involvement is that the proposed pilot provides an opportunity to a) develop a new approach for funding enhanced access to infrastructure services that provides financial incentives for utilities to connect households in impoverished areas (over and above the political will for doing so), b) relaxes the constraints faced by the users, ie unaffordable connection fees and procedural barriers and c), to test the novel and innovative targeting approach for public funds represented by the use of “poverty maps”. 1 REDI GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006 Secondly, the proposed project will have direct positive impact for the beneficiaries of GPOBA funds who will be provided access to network water services and sewerage services. Beyond the initial set of beneficiaries, and given the momentum provided by the INDH, there is a significant potential for scaling up an OBA approach in Casablanca and Tanger as well as replication/ adaptation for other Moroccan public utilities. Initial discussions with government authorities and other donors have confirmed a significant interest to scale up an OBA subsidy program for the sector that could complement broader reforms in the financing of the sector. Thirdly, the proposal is innovative and provides a unique learning opportunity for GPOBA: the proposal (for Casablanca and Tanger) is tailored to a form of Public-Private-Partnership common in the water sector in Africa, commonly called “affermage”, whereby private operators take on commercial risks related to the delivery of services but do not take on, or only to a limited and well circumscribed extent, obligations for investment and the risks associated with financing of investment. In the cases of Tanger and Casablanca, investments other than those clearly assigned to the operator by contract (which the extensions of networks in question for the purpose of this project are not included in) are financed from a “Works Fund” that derives revenues from contributions to the Works Fund by newly connected households (a surcharge waived under the INDH and this GPOBA pilot) and public contributions. Investments are managed by the private firms in accordance with Moroccan regulations for public procurement subject to the control of municipal contract administration units. However, financing extension of networks is not a contractual obligation for the providers. So far, OBA approaches have been tested mostly with private contracts that allocate the full risks to the private sector, including the responsibility to bear financing risks. This approach has clear limitations in its applicability to frontier countries, in particular in Africa. The proposed pilot, a departure from the “pure” OBA model, would explore such approaches where performance risks are borne jointly between (local) government and private firms. The proposed pilot would test the viability of passing performance risks from development agencies and national governments to a Public Private Partnership between private firms and municipalities, with both parties bearing the risks for non-performance. The third sponsor would be a public utility, allowing GPOBA to compare how OBA approaches work in the context of purely public sector incumbents and drawing

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