GPOBA Commitment Paper: 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:

ƒ 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.

ƒ 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.

ƒ 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 comparisons between the performance of fully public utilities and PPPs. The case of RADEM, in , will be the first pilot to be implemented where GPOBA funds will be used to facilitate provision of improved services by a public utility and, in particular, to facilitate a public utility’s access to private financing.

3. Consistency with CAS

The proposed pilot is consistent with the WB CAS. The Bank and GOM selected water as an entry point towards the CAS goals of i) accelerated growth and job creation, and ii) reduction of poverty and exclusion, goals to be achieved, among other means through better governance. Strategic Objective no. 4 of the CAS (or “water pillar”) thus aims at “improving water management and access to water and sanitation services”, with three main outcome expectations, i.e. a) to improve the legal, financial, and institutional framework of the water sector; b) to improve access to service, and [wastewater] treatment coverage in targeted basins; and, c) to improve technical and financial performance of water sector operators.

B. PROJECT DESCRIPTION GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

1. Project objective:

Objective of the project is to provide sustainable access to combined water and sewerage services to peri-urban “quartiers” with high levels of “vulnerable” households, ie with household incomes falling under 295 US$/month (150% of the poverty line of Dh 1687) or about US$60/cap/month. The project will benefit about 11,300 households (56,000 inhabitants). The total amount of GPOBA subsidies requested is US$ 7,041,915.

2. Project design and institutional arrangements.

The project will be coordinated and administered by the Ministry of Interior, and implemented by the three incumbent providers of water supply and sewerage services in the three selected urban centers, namely Casablanca, Tangiers, and Meknes. All participating utilities would promote the “INDH-GPOBA connection program” to households in the selected “quartiers”, would receive applications from individual households, make connections and be reimbursed a pre-agreed amount upon evidence of a functional and used connection. The pilot project would make payments to service providers out of a common “OBA fund” that would form the basis for a later scale up into a national OBA program.

Investment costs and subsidy requirements have been carefully vetted and reviewed: Investment costs and subsidy needs have been proposed by all three incumbents based on indicative designs and implementation plans. The investment costs have been subject to an independent review and benchmarking for the purpose of ensuring prudency and efficiency by an engineering firm. The agreed capital expenditure, ranging from US$83/cap to US$123/cap for water supply and US$200/cap to US$280/cap for sewerage are well in line with various global assessments and estimates2 for water (US$50-200) and sewerage (US$120-300).

Casablanca Tanger Meknes

Ouislane/ Meknes / Dar oum sultan/ Sidi slimane moul kifane/

Capital expenditure per 523 417 425 750 water connection in US$ (before tax, financing, inflation adjustment)

Capital expenditure per 1,055 1,314 1,414 na sewerage connection in US$ (before tax, financing, inflation and uptake adjustment)

2 World Water Council: Costing MDG Target 10 on Water Supply and Sanitation: Comparative Analysis, Obstacles and Recommendations, March 2006 GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

Total adjusted capital 2,035 3,044 1,931 799 expenditure in US$ per water/sewerage connection

Total user contribution 840 841 810 148 for combined connection in US$ (NPV; net of taxes)

GPOBA subsidy 162 163 158 591 requirement for water connection in US$

GPOBA subsidy 401 537 869 na requirement per sewage connection in US$

Total GPOBA subsidy 563 (28%) 728 (24%) 1,027 (53%) 591 (74%) requirement (% of total adjusted capital expenditure)

Subsidies are carefully targeted. Absent any robust mechanisms to target individual households, the project follows a geographic targeting methodology based on recognized international good practice. Within each of the three service areas, areas (“quartiers”) with a high concentration of poverty and vulnerability to poverty have been identified through the INDH program, informed by an extensive poverty mapping exercise supported by the World Bank. Only household connections in these areas would be eligible for reimbursement through GPOBA. Poverty levels are differing across the selected areas, from the Meknes areas with the highest poverty incidence, followed by Casablanca and more moderate poverty levels in the Tangier areas.

Casablanca Tangier Meknes Community Larhaouynes Lamkensa Bni Charf- Boukhal Tanger Ouislane/ Dkhissa/ Makada Moghog ef Medina Meknes Dar oum a sultan/ Sidi slimane moul kifane/ Ait Ouallal

# HHs to be connected; 6,213 2,791 602 1689 (persons/HH) (4.8) (4.8) (4.7) (5.6) GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

Total number of ~30,000 ~13,400 ~2,800 ~9500 expected beneficiaries Share of households 45% 32% 20% 35% 15% 57% 83% with household income below vulnerability line of about US$ 295/month

Proposed subsidy levels vary among the schemes, but are carefully sized to reflect willingness and ability to pay:

Household expenditure levels for water consumption in Morocco are, on average, well below WHO’s generic guidelines for affordability (of 5 percent of total household income for water supply and sanitation). Recent surveys suggest that as of 2002, water supply represented 1 to 1.4 percent of household spending for households with individual household connections (average expense of Dh 66 to 98/person/year or Dh 30-45/hh/month). However, households without access to individual household connections (partially) that rely on alternate sources of water providers appear to pay more for their water consumption. While typically in the range of Dh 30-40/m3, cost of water deliveries can reach Dh 80/m3. Assuming usage of about 40 lcd and a household size of 5.6 persons, water consumption can represent a monthly household expenditure ranging from Dh350-500. As a result, based on practical experience gathered by all three utilities with previous social connection programs it appears that monthly household payments of up to 150Dh would indeed be affordable to a majority of households and reflect the willingness to pay for improved service for a sizeable portion of unconnected low income households.

Under the proposed project, all utilities would require significant user contributions, ranging from 27% to 60% of investment costs (for water) and 20% to 34% of investment costs (for sewerage). All utilities will offer financing facilities for user contributions over a tenor of 7-10 years. The proposed payment plans would require individual households to make monthly payments of Dh50/110 in Meknes (rural/urban) and uniform monthly payments of Dh130 in Casablanca and Dh100 in Tanger. Over and above the monthly payment towards one-off user contributions, households would pay applicable rates for consumption. Estimated monthly bills for water consumption would be in the order of Dh30-45 per household.

Upfront allocation of funds and streamlined disbursement arrangements. GPOBA subsidy funds have been pre-allocated to individual projects during project design. A need for reallocation of funds may arise if uptake of connections falls substantially behind projections for either of the utilities. Such reallocation would be decided by the Minister of Interior (MoI) and be subject to a no-objection of the World Bank. Disbursement would be made to the utilities through direct payments.

GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006 GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

C. IMPLEMENTATION

1. Milestones for project implementation.

Grant effectiveness: Sept. 2006 Project completion: Sept. 2009

2. Partnership arrangements

Development partners are not directly involved in the project implementation phase. Several other donors have been involved in the preparation phase of the project and may take a role in a scale up phase: AFD has early on been involved in reviewing options for OBA in Casablanca and has funded some of the preparatory studies for LYDEC. The Millennium Challenge Corporation (MCC) has been briefed repeatedly and may be in a position to assist in the scale up of the pilot program, if deemed successful. Progress update reports and findings by the independent auditor retained by the Ministry for Interior will be shared with the MCC and other donors.

3. Institutional and implementation arrangements.

The implementing agency and grant recipient for the project would be the Ministry of Interior, (“Direction des Regies et Services Concedes”). It’s responsibilities will include the

ƒ Coordination of agreeing with utilities on connection targets. All utilities have submitted proposals for specific connection targets for both water and sewerage services for INDH communities in their respective services areas. These targets have been verified in the course of project preparation and agreed upon by all parties. However, should deviations from these targets become necessary because of significant delays by either of the utilities to sign up customers for the INDH connections, revisions to these targets shall be coordinated by the MoI and submitted to the World Bank for no-objection.

ƒ Monitoring and verification of outputs: All utilities will retain metering and billing records as evidence for connections made and services rendered to target households. The final responsibility for authentication and verification of those records as well as the connections made and satisfactory quality for services rests with MoI who will contract monitoring obligations to a third party independent auditor and - at its discretion – rely on input from the contract administration units (“service permanente”) for the two private concessionaires.

ƒ Consolidation and Authorization for requests for disbursement of funds: The utilities will prepare independently quarterly requests for disbursement of funds based on progress made in achieving outputs. Requests for disbursement and quarterly submission of summary output reports will be authorized and consolidated by the MoI for submission to the World Bank Group. Payments to the utilities will subsequently be made by direct payment to the utilities.

The project would be implemented by three existing water utilities with a strong track record mitigating against implementation risks. A fiduciary assessment, including a procurement practice and financial management assessment of all three utilities is currently underway, and satisfactory outcome will be a condition precedent for the GPOBA grant agreement to be signed. The three sponsors of the pilots are subsidiaries of reputable international water firms and a public sector utility (“regie”): GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

ƒ Amendis: Amendis is a majority-owned (51%) subsidiary of Veolia Environment, which manages water, sewerage and electricity distribution services in Tangiers and Tetouan since 2002 under two 25-year contracts that were awarded after competitive tender. It supplies services to 220,000 water subscribers and 280,000 electricity subscribers, i.e. around 1.1 million people.

ƒ Lyonnaise des Eaux de Casablanca (LYDEC): Lydec (Lyonnaise des Eaux de Casablanca), responsible for water, sewerage and electricity distribution services for Greater Casablanca since 1997 through a negotiated agreement that paved the way for broader PSP involvement in the sector, was partially floated on the Casablanca stock exchange in July 2005. Parent company Suez now holds a 51% stake in the company’s capital with institutional investors and the Moroccan public accounting for the other 49%.

ƒ Regie Autonome de Distribution d’Eau et d’Electricite de Meknes (RADEM): RADEM has been consistently one of the better performing regies in Morocco, has been able to access the commercial credit market in the past and is the beneficiary of an ongoing donor funded program (EIB/AfD) to expand sewerage treatment facilities for Meknes, which has also served to reinforce its institutional capacity.

The three participating utilities will bear responsibility for the following components of the project:

ƒ Assessment of demand for connections and marketing/ outreach efforts to sign up households for the subsidized social connection plan: All utilities have undertaken market surveys and provided GPOBA with demand projections (Table 1). Under the project, all utilities will undertake marketing activities in order to inform households of the existence and terms of the subsidized connection program and will sign up households to their respective programs. All utilities will provide GPOBA with semi- annual updates on these projections, eventual discrepancies of actual customer sign-up with projections and, where so required, proposed additional actions to mobilize lagging customer demand.

ƒ Management and implementation of works as required for establishing functioning household connections: The participating utilities have a proven track record in planning, overseeing and executing extension of water and sewerage networks and provision of water and sewerage services. All participating utilities will bear sole responsibilities for arranging for pre-financing of works and the pre-financing of household connection fees and the design and construction of facilities necessary to allow access to services for households that have signed up for social connections. All participating utilities have procurement policies in place that have been found acceptable to the World Bank and will bear sole responsibility for abiding by these policies.

ƒ Primary monitoring and household certification of outputs (active social connection accounts): The participating distribution utilities will then proceed to connect residential users to the network and, for each connected household, collect connection certificates signed by beneficiary households confirming that households have indeed been connected in accordance with applicable rules and regulations and at the terms for social connections. The participating utilities will furthermore retain for inspection billing and collection documentation for at least two billing periods. The participating utilities will provide semi annual summary output reports, including the number of households GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

connected per reporting period, the location of households within INDH communities, billing and payment records as stipulated, and will bear responsibilities for retaining original documents for audits at the discretion of the Ministry of Interior and the World Bank.

ƒ Provision of ongoing services: All participating utilities have a proven track record for the provision of water and sewerage services and do so under a well-established regulatory framework. After having made the connection to a household, participating distribution utilities will provide services to connected households as per the applicable regulatory provisions. Households will be responsible for paying tariffs for consumption and will enjoy customer rights and obligations as per the applicable regulations with regard to quality of service and tariffs.

ƒ Request for disbursements: All participating utilities will submit requests for disbursement for the endorsement by the Ministry of Interior. GPOBA will subsequently make direct payments to the participating distribution utilities.

4. Monitoring and evaluation of outcomes/results, including initial base-line data in relation to the applicable parameters.

The MoI will have primary responsibility for the monitoring and certification of outputs achieved under the project. To ensure that monitoring would be aligned with the current regulatory arrangements (but reinforced through the involvement of the national government and independent auditors), the MoI may delegate part of its responsibilities to the local contract administration units for the private sector concessions (“service permanente”) in Casablanca and Tangier at its discretion. This includes:

ƒ Upon quarterly submission of summary output reports by the participating utilities, the MoI will review these reports within ten days of submission, and certify the eligibility of the connected households for reimbursement by GPOBA based on submitted documentation relating to number of connections having been made and on the location of the connected households. For the respective private concessions, Ministry of Interior may do so based in part on prior certification/verification by the respective contract administration unit (“Service Permanente”)

ƒ The MoI will also confirm that services provided by the respective utility during the time period in question has substantially met the quality-of-service standards stipulated by applicable legal and contract provisions subject to prior confirmation by the respective contract administration unit (“Service Permanente”) for the two private concessions.

ƒ To provide for an independent verification of outputs, MoI will be responsible for the contracting of an independent audit firm that would conduct annual ex-post reviews of the completeness, accuracy and authenticity of documentation provided by the participating distribution utilities as well as undertake ex-post physical spot checks for a meaningful and random sample of connections.

Outputs are clearly defined: Connections would be eligible for GPOBA subsidy payment provided

GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

i. the location of the connected household in the defined INDH zone ii. the connection is new, and made after the signing of the grant agreement with GPOBA; iii. the service has been used at the connection for a period of at least six months prior to the application for payment, as evidenced by metering, billing and collection records; iv. the connection is of the approved specification as per the applicable laws and regulations for the water sector in Morocco;

Institutional arrangements for monitoring are well defined and complement existing monitoring arrangements:

Under the existing contracts and the current regulatory framework for public utilities, performance of service providers is monitored at the local level (in the case of private providers through decentralized contract management units), an arrangement that has broadly worked to the satisfaction of the Moroccan authorities. However, under the proposed OBA arrangements, municipalities (through the pre-financing provided by the “Fonds de Travaux”) would share in the performance risks transferred by the OBA scheme, raising concerns about possible conflicts of interest should outputs not materialize as anticipated. Therefore, monitoring at the municipal level as per the current regulatory arrangements would be complemented by an independent audit/review of outputs administered at the national government level, specifically the Ministry of Interior.

Under the proposed pilot, the Ministry of Interior (“Direction des Regies et Services Concedes”), will retain an auditor for a technical audit and verification of outputs claimed by the providers, the selection of which would be subject to the no-objection of the World Bank. This verification would primarily include the completeness and accuracy of records to be retained by the utilities with regard to the location of the connected household in the defined INDH zone, the acceptance of the household of the condition as functional (triggering an advance of 60% of the agreed payment amount), and metering and billing records covering six months and evidencing consumption and bill payment (triggering disbursement of the remaining 40% and payment in full).

It is of great importance to GPOBA to monitor and document sustainability and impact of the project even beyond the disbursement period of the project. To this extent, each of the utilities will prepare semiannual reports in a format acceptable to GPOBA (and MoI will consolidate these reports and furnish to the World Bank) over the duration of the project, for use by GPOBA, including, but not limited to the following indicators:

- Level of defined "output" achieved, e.g. number of connections made - Total number of beneficiary households - Annual reports on service quality (as required under the applicable regulatory regime) - Average monthly consumption per beneficiary household - Average expenditure on service by beneficiary households as a percentage of total hh expenditure - Average household expenditure on alternative water sources prior to connection to water services as indicated by household - Average residential tariff for beneficiary households - Total project costs as per actual incurred expenditure (breakdown into components) - Actual project costs per household or connection and discrepancies with estimated project costs

GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

5. Project team.

Project implementation in compliance with World Bank procurement guidelines, financial and fiduciary management rules will be managed by a team, consisting of:

Pier Francesco Mantovani, Sr. Water and Sanitation Specialist MNSIF (TTL) Dirk Sommer, Sr. Infrastructure Specialist IEF Xavier Chauvot De Beauchene, ET Consultant MNSIF Alaleh Motamedi, Procurement Specialist World Bank Office Rabat - Morocco Hocine Chalal, Sr. Environmental Specialist MNSRE Siaka Bakayoko, Sr Financial Management Specialist MNAFM Tiguist Fisseha JPA MNSRE

GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

TECHNICAL ANNEXES

1. Project costs schedule of OBA payments to be required from GPOBA (Window 3)

Total GPOBA funding requirement for the project is US$7,041,915, including US$6,741,915 for subsidy payments, US$300,000 for an independent audit firm and US$120,000 for project supervision.

It is anticipated that the implementation of the project and disbursement of funds would be over a period of 30 months, from effectiveness of the Grant Agreement.

The water utilities have each provided to GPOBA a tentative breakdown and schedule of connections likely to be made as result of the project. Corresponding to the resulting demand, the actual breakdown of connections per utility and timing may differ from these indicative figures. Therefore, the Ministry of Interior, in coordination with participating utilities, would provide semi-annual update reports to GPOBA and propose to GPOBA, 18 months after the effectiveness of the Grant Agreement, a final reallocation of funds, to allow for the possibility of weaker than anticipated demand among some utilities) until committed GPOBA funds are exhausted.

2. Financial management (OP/BP 10.02).

The participating utilities will maintain an administrative unit responsible for financial and budget management, reporting and accounting. These units will utilize their respective financial management and reporting systems, and will manage their accounts in accordance with their internal procedures.

Annual financial statements of the participating distribution utilities will be audited by an independent auditor in accordance with International Standards on Auditing issued by the International Federation of Accountants (IFAC). The Ministry of Interior will submit the annual audit reports of the participating utilities to the World Bank for review, and will maintain project financial and auditing records for a minimum period of five years after completion of the project.

3. Procurement (OM, July 15, 2002).

Procurement for the acquisition of goods and small works for installation services, including shopping and direct contracting, will be carried out in accordance with the operational manuals, internal control procedures, standard bidding, and contract documents of each participating utility to the extent acceptable to the World Bank and with modifications as required by the World Bank. A review of procurement practices by all three utilities is currently underway. The timing and sequencing of procurement and contracting decisions, including procurement thresholds, payment schedules to contractors, and choice of contracts for making the household connections will be the discretion of the participating distribution utilities, and preparation of detailed procurement plans will not be required.

The bidding documents will include specifications for construction works as defined by Moroccan legislation and regulations as well as technical description of works (based on the technical specifications provided by the participating distribution utilities). The specifications, among others, will include requirements for the compliance of the installations services with Moroccan laws and regulations for the water sector governing environmental, technical, metrology and quality standards, and in accordance to highest ethical standards and professional integrity. GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

Procurement for the selection of the independent audit firm for services of ex post output verification, under terms of Reference acceptable to the World Bank, will be carried out by the Ministry for Interior in accordance to terms of reference and in compliance with World Bank procedures.

4. Disbursement (OP/BP 12.00).

GPOBA will advance funds to a Special or Escrow Account denominated in USD for project disbursement and held by the GoM.

Proceeds from the Special or Escrow Account will be transferred to the accounts held in commercial banks by the participating utilities on the basis of disbursement requests prepared by each utility and supported by output-based reports as indicated in the Operational Manual. The participating distribution utilities will be liable for payments of applicable duties and taxes on all goods and works for the project. All foreign exchange risks associated with the project will be borne by the participating water utilities.

5. Environment (OP/BP 4.01).

Implementation of all works will be in accordance with the environmental procedures by each participating utilities, as acceptable to the World Bank, and as annexed to the Operational Manual

GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

6. Economic cost benefit assessment

The project will generate total economic benefits in the amount of about US$5,100 per household (4.8 persons) afforded improved water supply and sewerage services via a network connection (US$830 per annum; discounted at 10%; over a period of ten years). The largest element is convenience time savings, at US$3,944. With convenience time savings discounted by 50%, total economic benefits drop to US$3,128 (US$507 per household, annum) and by 100%, to still US$1,143 (US$186 per household, per annum). The ERR for the entire project is 25% after discounting 50% of convenience savings and reducing by 50% the total benefits accruing to water-only connections (in rural areas of Meknes).

TABLE 1: ECONOMIC BENEFITS PER CAPITA SERVED BY WATER/SEWERAGE CONNECTION

Annual number of diarrhoeal cases averted 0.54

Annual productive days gained due to less diarrhoeal illness 1.65

Annual time gain due to more convenient WSS facilities (hrs saved) 159

Annual school days gained due to less diarroheal illness 0.24

Annual baby days gained due to less diarroheal illness 1.86

Annual health sector treatment costs saved per capita (US$) 7.44

Annual patient treatment costs saved per capita (US$) 0.37

Value of adult productive days* gained due to less diarroheal illness per capita (US$) per annum 1.1

Value of children school days gained due to less diarroheal illness (US$) per annum 0.02

Value of baby days gained due to less diarroheal illness per capita (US$) per annum 0.51

Annual value of time savings per capita (US$) 133.76

Annual value of averted deaths per capita (US$) 7.2

Total economic benefits of intervention per capita per annum (US$) 172.6

Total economic benefits of intervention per household per annum (US$) 828.3

Source: Hutton, G., and Haller, L., Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the Global Level. 2004, Water, Sanitation and Health Protection of the Human Environment, World Health Organization; data are for WHO EMR-D region, including Morocco; team calculations; GPOBA Commitment Paper: Morocco Urban WS&S Access Pilots August 21, 2006

*Benefits were converted into monetary amounts using assumptions about the value of identified benefits such as productive days gained, using the minimum wage as the measure of value. Infant days gained due to less diarroheal illness are valued at 50% of the minimum wage rate.

TABLE 2: ECONOMIC COSTS PER HOUSEHOLD SERVED BY WATER/SEWERAGE CONNECTION

Casablanca Tanger Meknes

Total adjusted capital expenditure in US$ per water/sewerage 1,750 2,618 1,661 687 connection before taxes (14%)

Total user contribution for combined connection in US$ (NPV; 840 841 810 148 before taxes)

Total subsidy per water/sewerage connection before taxes in US$ 910 1777 851 539