Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 53372-PA
PROJECT APPRAISAL DOCUMENT
Public Disclosure Authorized ON A PROPOSED LOAN
IN THE AMOUNT OF US$40 MILLION
TO THE
REPUBLIC OF PANAMA
FOR A
METRO WATER AND SANITATION IMPROVEMENT PROJECT Public Disclosure Authorized April 15,2010
Sustainable Development Department Central America Country Management Unit Latin America and the Caribbean Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS
Currency Unit = Balboa US$ 1 = 1 Balboa
FISCAL YEAR January 1 - December 31
ABBREVIATIONS AND ACRONYMS
ACP Autoridad del Canal de Panama (Panama Canal Authority) ANAM Autoridad Nacional del Ambiente (National Environmental Authority) AP Aguas de Panama (private company selling bulk water to IDAAN) ASEP Autoridad Nacional de 10s Servicios Publicos (National Public Service Regulation Authority) CAF Corporacion Andina de Fomento (Andean Development Corporation) CONADES Consejo Nacionalpara el Desarrollo Sostenible (National Council for Sustainable Development) CQS Selection Based on the Consultant’s Qualifications DA Designated Account DGCP Direccidn General de Contrataciones Pliblicas (General Department of Public Contracting) DPL Development Policy Lending EA Environmental Assessment EMF Environmental Management Framework EPU External Project Unit FBS Selection Under Fixed Budget FM Financial Management FMA Financial Management Assessment GDP Gross Domestic Product GoP Government of Panama IBRD International Bank for Reconstruction and Development (World Bank) ICB International Competitive Bidding IDA International Development Association IDAAN Instituto de Acueductos y Alcantarillados Nacionales (National Water and Sewer Agency) IDB Inter-American Development Bank IFC International Finance Corporation IFR Interim Financial Report IPPF Indigenous Peoples Planning Framework IRF Involuntary Resettlement Framework IRP Involuntary Resettlement Plan ISA International Standards on Auditing ISDS Integrated Safeguards Datasheet ISR Implementation Status Report JICA Japanese International Cooperation Agency JMP Joint Monitoring Program (of the World Health Organization/UNICEF) LCS Least-Cost Selection LSMS Living Standards Measurement Survey M&E Monitoring and Evaluation MDGs Millennium Development Goals MEF Ministerio de Economica y Finanzas (Ministry of Economy and Finance) MlNSA Ministerio de Salud (Health Ministry) MIVI Ministerio de Viviendas (Housing Ministry) MOP Ministerios de Obras Publicus (Public Works Ministry) FOR OFFICIAL USE ONLY
NCB National Competitive Bidding OM Operations Manual PDO Project Development Objective PMR Panama Metropolitan Region PSCBP Proyecto de Saneamiento de la Ciudady Bahia de Panamd (Panama City and Bay Cleanup Project, financed by the IDB) QBS Quality-Based Selection QCBS Quality and Cost Based Selection SBDs Standard Bidding Documents SEPA Procurement Plan Execution System SIL Specific Investment Loan SOE Statement of Expenditures ss Sole Source wss Water Supply and Sanitation WSSLIC Water and Sanitation in Low Income Neighborhoods (on-going WB-financed project)
Vice President: Pamela Cox Country Director: Laura Frigenti Sector Director Laura Tuck Sector Manager: Guang Z. Chen Task Team Leaders: David Michaud & Lilian Pena Pereira
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.
PANAMA Panama Metro Water and Sanitation Improvement Project
CONTENTS
Page I . STRATEGIC CONTEXT AND RATIONALE ...... 1 A . Country and sector issues ...... 1 B . Higher Level Objectives ...... 5 C . Rationale for Bank involvement ...... 6 I1 . PROJECT DESCRIPTION ...... 6 A . Lending instrument ...... 6 B . Project development objective and key indicators ...... 6 C . Project components ...... 7 D . Lessons learned and reflected in the project design ...... 10 E . Alternatives considered and reasons for rejection ...... 1 1 I11 . IMPLEMENTATION ...... 1 1 A . Institutional and implementation arrangements...... 1 1 B . Monitoring and evaluation of outcomes/results...... 12 C . Sustainability ...... 12 D . Critical risks and possible controversial aspects ...... 13 E . Loadcredit conditions and covenants ...... 16 IV. APPRAISAL SUMMARY ...... 17 A . Economic and Financial Analysis ...... 17 B . Technical ...... 18 C . Fiduciary ...... 18 D . Social ...... 19 E . Environment ...... 20 F . Safeguard policies ...... 2 1 G . Policy Exceptions and Readiness ...... 2 1 Annex 1: Country and Sector or Program Background ...... 22 A . Country context ...... 22 B . Sectoral and Institutional Context ...... 22 C . Socio-Economic situation in the project Area. according to the LSMS 2008 ...... 23 D . IDAAN...... 24 E . The situation in the Col6n business unit ...... 26 F . The GoP Strategic Plan for 2010-2014 ...... 27 G . Tariffs and Subsidies...... 28 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 36 Annex 3: Results Framework and Monitoring ...... 38 Annex 4: Detailed Project Description ...... 42 Annex 5: Project Costs ...... 51 Annex 6: Implementation Arrangements ...... 52 Annex 7: Financial Management and Disbursement Arrangements ...... 57 Annex 8: Procurement Arrangements ...... 61 Annex 9: Economic and Financial Analysis ...... 68 Annex 10: Safeguard Policy Issues ...... 87 Annex 11: Project Preparation and Supervision ...... 91 Annex 12: Documents in the Project File ...... 96 Annex 13: Statement of Loans and Credits ...... 98 Annex 14: Country at a Glance ...... 99 Annex 15: Map IBRD No. 37726 ...... 102 PANAMA
METRO WATER AND SANITATION IMPROVEMENT PROJECT
PROJECT APPRAISAL DOCUMENT
LATIN AMERICA AND CARIBBEAN
LCSUW
Date: April 15, 2010 Team Leaders: David Michaud & Lilian Pena Pereira Country Director: Laura Frigenti Sectors: Water supply (60%); General water, Sector Manager: Guang Zhe Chen sanitation and flood protection sector (20%); Sewerage (20%) Themes: Access to urban services and housing (100%) Project ID: P119694 Environmental category: Partial Assessment Lending Instrument: Specific Investment Loan Joint IFC: Joint Level: Project Financing Data [XI Loan [ 3 Credit [ 3 Grant [ 3 Guarantee [ 3 Other:
Source Local Foreign Total Borrower 9.90 5.10 15.00 International Bank for Reconstruction and 28.10 11.90 40.00 Development Total: 38.00 17.00 55.00
Borrower: Republic of Panama Panama
Responsible Agency: Instituto de Acueducto y Alcantarillado Nacionales (IDAAN) Apartado Postal 0816 01535 Panama Tel: /Fax: (507) 523 85 37 or (507) 523 85 04 www.idaan.gob.pa Project implementation period: September 2010 to September 201 5 Expected effectiveness date: September 30, 201 0 Expected closing date: September 30,2015 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Ref: PAD I.C. Does the project require any exceptions from Bank policies? Ref: PAD IKG. [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [XIYes [ ]No Ref:a PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Ref:.I PAD IK G. Project development objective Ref: PAD II. C., Technical Annex 3 The objective is to assist the Republic of Panama in increasing the quality, coverage and efficiency of its water supply and sanitation services in the lower-income neighborhoods of selected areas of the Panama Metropolitan Region.
Project description [one-sentence summary of each component] Ref: PAD ILD., Technical Annex 4 Component I : Water Supply and Sanitation Service Improvements in Lower Income Neighborhoods will increase coverage of reliable’ water supply and sanitation services. Component 2: Modernization of Water Supply and Sanitation Systems in the Coldn Business Unit will improve the efficiency and quality of water supply and sanitation services in IDAAN’s Colon Business Unit. Component 3: Institutional Strengthening and Project Management, Monitoring and Evaluation will improve IDAAN’s capacity to implement, monitor and learn from the project’s activities.
Which safeguard policies are triggered, if any? Ref: PAD IK F., Technical Annex 10 The Project triggers the Environmental Assessment Policy (OP/BP 4.01) and has been qualified as “Category B.” The Project also triggers the Indigenous Peoples Policy (OP/BP 4.10) and the Involuntary Resettlement Policy (OP/BP 4.12).
Significant, non-standard conditions, if any, for: Ref: PAD III.F. Board presentation: None
’ Defined as piped potable water with adequate pressure and continuity of at least 16 hours per day, 7 days per week. Loan effectiveness conditions: (a) The Subsidiary Agreement has been executed on behalf of the Borrower and IDAAN. (b) The Borrower has caused IDAAN to adopt the Operational Manual, satisfactory in form and substance to the Bank (c) The Borrower shall have caused external project unit (“EPU”) to be established within IDAAN with key staff having qualifications, experience and terms of reference satisfactory to the Bank. Covenants applicable to project implementation: (a) The Borrower shall cause IDAAN to: 1. assign responsibility internally for the overall implementation, coordination, monitoring and reporting of the Project as described in the Operational Manual. 2. (a) maintain, throughout Project implementation, an external project unit (“EPU”). (b) not later than 6 months after the Effective Date, appoint under a renewable 2 year contract a Technical Advisor; at the end of such period carry out an assessment of the technical capacity of EPU for Project implementation, and if agreed with the Bank, transfer thenceforward exclusive responsibility for technical implementation of the Project to EPU. (c) establish not later than 6 months after the Effective date and maintain throughout Project implementation a Steering Committee and an Inter-Institutional Committee, all as specified in the Operational Manual. 3. adopt an operational manual for the Project, satisfactory in form and substance to the Bank. 4. ensure that: (a) EPU submits annual Project work plans and budget to MEF and the Bank for their respective review and approval; and (b) the implementation of the Project is subsequently carried out applying the views and recommendations of the Bank in that respect. (b) The Borrower shall: 1. make the proceeds of the Loan available to IDAAN under a subsidiary agreement entered into between the Borrower and IDAN under terms and conditions approved by the Bank. 2. under each budget proposal to its legislature for the corresponding year during Project implementation, make adequate arrangements to assume, for that year, the counterpart portion of the costs related to the implementation of Part 2 of the Project. (c) The Borrower shall, and shall cause IDAAN to comply with the provisions of the EMF, IPPF and the IRF, including through the carrying out of the specific plans derived from such frameworks.
I. STRATEGIC CONTEXT AND RATIONALE
A. Country and sector issues
1. With a world famous canal, a modern financial sector and a per capita GDP of US$5,500 that ranks it as an upper middle income nation, Panama is a country of stark contrasts, On the one hand, economic growth from the dynamic services and export sectors is among the highest in the region, with 11.5 percent growth in 2007, 9.2 percent in 2008 and an estimated 1.8 percent forecasted in 2009’, helping Panama weather the current global crisis better than most of its neighbors. On the other hand, Panama’s impressive economic achievements mask persisting inequalities, with approximately 32.4 percent of the population of 3.4 million living in poverty, 14.2 percent in extreme poverty (those with insufficient resources to meet basic nutritional needs) and virtually all of in the country’s indigenous peoples (10 percent of the population) classified as poora3About 75 percent of the population is urban, largely concentrated around the Panama Canal, where 17.4 percent of the population is poor and 3.2 percent are extremely poor (in contrast to 50.4 and 21.8 ercent, respectively in rural areas, and 95.2 and 82.9 percent, respectively in indigenous areas).i) 2. The Government of Panama (GoP) aims to reduce poverty and support economic growth through infrastructure investment. The recently elected Martinelli administration has adopted a Strategic Plan for 20 10-2014 which includes an investment program of US$13 -6 billion, of which US$3.8 billion is targeted towards expanding access to and the quality of basic services, including water supply and sanitation (WSS).’ Among others, the Government has committed - as part of a list of so-called metus imperdonables (“goals to be met with no excuses”) - to achieve the Millennium Development Goals and to increase to 90 percent access to water supply and 40 percent access to sewerage network connections in specific peri-urban areas of the Panama Metropolitan Region (PMR) where access is comparatively low6. To achieve these objectives, the GoP plans to invest about US$469 million in expanding and rehabilitating the WSS network in addition to the US$450 million currently invested under the Panama City and Bay Sanitation Project (PSCBP).
Coverage and Inequalities 3. Panamai’s inequalities are reflected in the poor’s unequal access to WSS services. In 2006, the UNICEF/WHO Joint Monitoring Program estimated that 92 percent of the country had access to improved water sources and 74 percent to improved sanitation. Using a more narrow definition of access, the GoP7 estimates that 84 percent of the population has access to potable water through house connections. However, this masks significant disparities, for example within peri-urban areas of the Panama Metro business unit of the National Water and Sewer Agency
* World Economic Outlook Database for 2010. 2008 Living Standards Measurement Survey (LSMS). 4 Program Document for the Panama: Protecting the Poor under Global Uncertainty DPL. ’ Figures in this paragraph were taken from the GoP’s Plan Estrategico de Gobierno 2010-2014. In the context of this Project, the Panama Metropolitan Region includes the Cities of Panama and Col6n and their surrounding metropolitan areas, including the following IDAAN business units: Panama Metro and Col6n. ’ Plan Estrategico de Gobierno 2010-2014.
1 (Znstituto de Acueductos y Alcantarillados Nacionales, IDAAN), 100,000 people (approximately 5 percent of the population) receive water only by tanker trucks, and only about 70 percent of the urban water users benefit from a continuous supply of water, while the rest has intermittent services. Access to sanitation is limited, as only 60 percent have access to sewerage services. Another important deficiency is the low share and quality of wastewater treatment. Less than 20 percent of collected wastewater receives treatment, and most treatment plants are not well maintained, leading to poor performance; thus virtually all of the PMR’s wastewater flows untreated or poorly treated into ditches along public roads and eventually into the nearby rivers directly into the Panama Bay, generating public health and environmental hazards.8
Institutions 4. The WSS sector’s legal framework is relatively well defined but it has not been effective in addressing difficult sector issues. Law No. 2 of January 7, 1997 created the regulatory and institutional framework for the sector and clearly assigned the policy role to the Ministry of Health (Ministerio de Salud, MINSA) and service provision to IDAAN. The law also assigned the role of executing budgets and of managing international loans in the sector to the Ministry of Economy and Finance (Ministerio de Economia y Finanzas, MEF) and regulatory responsibility to the National Public Service Regulation Authority (Autoridad Nacional de los Servicios Pziblicos, ASEP). In addition, Law No. 77 of December 28, 2001 re-organized IDAAN as a public entity with financial and management autonomy. In practice, this framework has not allowed the sector to effectively address the challenges of providing WSS services in an efficient manner; MINSA has been unable to exert leadership and develop a consistent vision for the sector; IDAAN’S financial autonomy has actually been limited; MEF has provided significant operational and investment subsidies to IDAAN and ASEP’s role has been far less of a regulatory one than in other public service sectors, such as electricity or telecommunications.
IDAAN 5. Although IDAAN provides reasonable service to the urban population, tariff revenue has been insufficient to cover its operational, maintenance and investment needs. IDAAN is responsible for providing WSS services to urban areas of Panama, which currently includes 2.5 million people (75 percent of the population), of which 2.3 million people receive water and 1.14 million people receive sanitation services through connections to the sewer networkagWater tariffs have not been revised since 1982, meaning that they have declined by approximately 50 percent in real terms. The tariff structure does not encourage water conservation as IDAAN charges a flat rate of US$6.40 for a high minimum consumption of 30 m3/month even in metered areas.’’ There is currently no tariff either for sewerage or for wastewater treatment services. In September 2008, the Inter-American Development Bank (IDB) financed a comprehensive tariff study, which developed the technical basis and pathway to adjust the current tariffs, including water, sewerage and wastewater treatment and also provided the
* The IBD-financed Panama PSCBP will build a wastewater treatment plant to serve approximately two-thirds of the needs of PanamB City. 9 IDAAN is responsible for providing water and sanitation services to areas with popkations of 1,500 people or more. Data from IDAAN annual Statistical Bulletin (2008). lo Compared to other countries in the region, Panama has one of the highest residential water consumptions (400 literdpersodday or 12.2 m3/persodmonth (ADERASA).
2 tools to facilitate IDAAN in the implementation and measurement of the financial impact of the changes. The new IDAAN administration has decided to initiate an effort to revise tariffs, first by pursuing a sewerage tariff, and second by implementing a wastewater treatment tariff in the next few years. In December 2009, IDAAN’s Board of Directors approved the new sewerage tariff and submitted it to ASEP for analysis and approval. ASEP is currently studying the proposal. As a result of frozen tariff levels, IDAAN’s rising costs have not been met by a corresponding increase in revenues, meaning that IDAAN’s operating costhevenues (working) ratio was 1.2 1 and its operational deficit was US$34.0 million in 2008 (part of a distressing upward trend from US$16.3 million in 2007 and US$15.7 million in 2006). Consequently, the GoP is forced to provide IDAAN with significant operational and investment subsidies that distort the price of water, romote an ine,quitable distribution of public resources and contribute to the public sector deficit.?I 6. Efficient service provision has been particularly challenging in lower-income areas. A recent1 completed study on measures to optimize IDAAN’s internal efficiency and service provision‘ concluded that the commercial and operational situation in lower-income areas is particularly critical. In some cases, IDAAN’s infrastructure is limited to main lines and part of the population has connected to the system through informal networks. Other people are only served through water tanker trucks, with a low service level and a high cost to IDAAN. Because of the limited service quality, IDAAN usually does not enforce billing practices and cost recovery levels are low. A typical example of this situation is the San Miguelito district and the Alcalde Diaz and Chilibre neighborhoods in the Panama Metro region. Even in areas where major investments have been undertaken in recent years, such as the City of Colon, service quality and billing and collection rates have lagged behind other IDAAN business units. 7. Alcalde Diaz, Chilibre and San Miguelito are examples of lower-income areas that suffer from relatively poor quality WSS services compared to the rest of Panama City. These extensive neighborhoods (corregirnientos), encompassing a total population of over 380,000’3 people, are top priorities for IDAAN. Emerging during the process of metropolitan expansion, they gradually expanded to areas with less favorable topography without following a regular urban pattern. The level of access to piped water supply is lower in these areas compared to Panama City standards, and about 24 ercent of the population does not benefit from a reliableI4 water supply. Around 16 percen? of the population in these areas lives in informal settlements, and as such, is not part of IDAAN’s commercial system. Moreover, 46 percent12 of the population does not regularly pay for their water serviceI5. IDAAN is seeking alternative approaches to provide services to these neighborhoods under a formal arrangement, including metering and billing. IDAAN also aims to provide more reliable and efficient service for existing connections. Moreover, as 38 percent12 of the population in these areas is not connected to the sewerage network, IDAAN is working to promote broader in-house connection to the systems. Under the current situation, the connection fee charged by IDAAN is reasonably low (US$6 for
‘I Detailed information about IDAAN’s performance, tariffs and subsidies are provided in Annex 1. 12 Louis Berger, Fortalecimiento Institucional del IDAAN con Acciones de Optimizacidn en la Ciudad de Panamci, 2009. l3 2008 Living Standards Measurement Survey (LSMS). l4 Defined as piped potable water with adequate pressure and continuity of at least 16 hours per day, 7 days per week. l5 More data on the situation in the Alcalde Dias, Chilibre and San Miguelito areas is provided in Annex 1,
3 water and US$20 sewerage networks), but intra-domiciliary installations up to the property line are the customer’s responsibility. As the cost of such installation might be a significant barrier for the poor, IDAAN is studying alternative solutions to foment connections. 8. The city of CoMn also has limited quality service provision and severe commercial challenges despite significant recent investments. As the second largest city of Panama with a seaport and 165,000 inhabitants, Colon is also part of the extended metropolitan region and inhabited predominantly by lower income residents. Although Colon is one of the oldest settlements in the region, service provision is lacking, especially in terms of efficiency. Approximately 30 percent16 of the population does not have access to reliable water supply, and IDAAN estimates that there are at least 5,000 illegal water connections. The non-revenue water level is almost 54 percent and the average water consumption of 1,730 liters per capita per day is ten times higher than average for water supply systems in similar socio-economic conditions. Less than 20 percent of all connections have meters that are read, and tariff collection rates are only about 40 percent of billing. As part of the institutional modernization sought by the current IDAAN administration, there are some initiatives to promote the strengthening of the regional business units, following the example of the four Central province^'^. Given the importance of Colon, IDAAN is interested in effectively reversing the situation by implementing innovative and effective measures to improve efficiency and quality of water supply services in this city, measures that could eventually be further replicated in other IDAAN units.’* 9. The recently appointed IDAAN management is seeking to improve the quality and efficiency of their services and to address some of their key institutional challenges. The management team has set the ambitious goal of making the utility sustainable (operating income higher than operating costs) within five years and reaching 95 percent coverage of household access to water supply by 2015 and 100 percent access to sewerage by 2025. They have taken some immediate measures in this direction, for example: (i) in the commercial area, they re- established the commercial database, improved billing procedures (timely delivery), re-started a policy of cutting service to connections with high unpaid balance and strongly promoted the introduction of a sewer tariff, which is subject to ASEP approval (IDAAN expects it to come into effect during the second half of 2010); (ii) as for internal measures, the new management is investing in a staff training program and a new hiring program based on transparent and technical hiring; (iii) on the operational side, they enhanced the field operation and maintenance teams, created a preventive maintenance program for water treatment plants and a energy saving program. In addition IDAAN has sought and obtained a technical cooperation grant in the amount of US$800,000 from the IDB which aims to enhance IDAAN’s planning capacity towards a better allocation and prioritization of funds for WSS investments. 10. The GoP will support IDAAN in these aforementioned goals through the Strategic Plan for 2010-2014. The five-year Strategic plan, which the Administration presented to Parliament in December 2009, foresees investments in service expansion and infrastructure rehabilitation in the WSS sector totaling US$469 million, focusing on WSS infrastructure and service improvements in low income neighborhoods, the Central Provinces and highly urban and rapidly growing cities, such as Colon. Despite the impressive amount and the willingness of the
l6 2008 Living Standards Measurement Survey (LSMS). ” In the Central Provinces, IDAAN is piloting an external technical assistance contract with IDB financing. Is Annex 1 contains a more complete description of the situation in Colon.
4 current IDAAN administration to improve the utility and the WSS situation in the country, IDAAN’s capacity to structure and implement this level of investments remains to be proven. Moreover, the Plan itself presents a long list of investment projects without a definite link to IDAAN’s operational and commercial priorities and lacks clear performance indicators or objectives. Additional information on the Strategic Plan can be found in Annex 1. 1 1. While complementing multilateral investments in Panama, the proposed Project would also build on and deepen the on-going Bank’s collaboration with the GoP in the urban WSS sector. The IDB has traditionally been the most active in the WSS sector, recently with the flagship PSCBP which, through a US$45 million loan, aims to expand access to sanitation in low-income districts and reduce pollution in urban rivers. The IDB is also preparing a supplemental US$30 million loan to complement this operation, and has several other operations in preparation or implementation with a focus on improving services in the western part of the country. The Japanese International Cooperation Agency (JICA) is co-financing the Bay’s cleanup through a Y19,371 million (approximately US$l50 million at signing) loan to build a wastewater treatment system in the capital. These projects are implemented by MINSA on behalf of IDAAN. In addition, the Corporacidn Andina de Fomento (CAF) is beginning to prepare a US$lOO million WSS project, the scope and focus of which are still undefined. The Bank’s only ongoing project in the sector is the Water Supply and Sanitation in Low Income Communities (WSSLIC) Project (PO824 19), which is also under implementation by MINSA and financed by a US$32 million loan to increase access to sustainable WSS services. The WSSLIC project includes a US$5 million component focused on expanding access in peri-urban services implemented in direct coordination with IDAAN. The proposed Project will build on preparatory work currently being undertaken as part of WSSLIC, such as service delivery models and engineering designs in lower income neighborhoods.
B. Higher Level Objectives 12. The proposed Project is aligned with the GoP’s strategy. The proposed Project aims to improve the living standards of the peri-urban population in the PMR through the expansion of access to more efficient WSS services. Although not anticipated in the World Bank Group’s Country Partnership Strategy (CPS) (report No. 39040-PA discussed by the Executive Directors on October 30, 2007), the proposed Project is closely aligned with the following pillars: (i) to reduce poverty and inequality; and (ii) to develop human capital, especially the latter pillar as the CPS notes that the provision of WSS services has direct and indirect impacts on improving the health conditions of the poor. It extends one of the selected programs of support identified in the CPS, namely “water and sanitation coverage for the rural poor” to also cover the poor living in peri-urban areas. The inclusion of this is consistent with the flexible, demand-driven nature of the CPS as it responds to the new priorities of a different admini~tration’~. 13. The proposed Project will provide a platform for the Bank to discuss IDAAN’s path towards becoming a modern public utility. The Strategic Plan outlines the GoP’s intention to expand WSS services to peri-urban neighborhoods in the PMR and promote the sustainability of these services by strengthening and modernizing IDAAN. The Project will support the GoP’s strategic vision on both fronts, through expanding water and sewer networks in lower-income
19 The Bank and the newly elected GoP administration agreed on some adjustments to the lending pipeline of the existing CPS as a bridge to a new CPS which is under preparation.
5 neighborhoods and piloting system modernization and institutional strengthening measures to enhance service quality and efficiency. As such, the Project could help define a possible path to transform IDAAN into a financially independent, efficient public utility.
C. Rationale for Bank involvement 14. The GoP has recognized the importance of efficient, equitable public services and sought support from several multilateral financing institutions for technical advice and financing. The Bank is well placed to work alongside the IDB and CAF in providing best practices in the improvement of public utilities, the provision of efficient services to lower income neighborhoods and the improvement of operational and commercial efficiency. The Bank currently finances similar activities in nearby and regional countries, such as Nicaragua, Brazil and Peru. It also has direct access to a group of international experts, both within and outside the Bank, who can provide support during the project's preparation and later implementation. 15. The Bank is already engaged in the sector and the proposed Project complements and builds on its portfolio. The Bank-financed WSSLIC (see Annex 2 for further details) has allowed the Bank to initiate a policy dialogue with the main sector institutions, including MINSA and IDAAN; allowing the Project to build on pilot activities in lower-income neighborhoods initiated during the ongoing WSSLIC project. Once the proposed operation has been approved, the Bank will be financing activities in the rural and urban sector, as well as supporting policy developments. As part of the new CPS currently under development, further WSS sector-related activities might be included for Bank support.
11. PROJECT DESCRIPTION
A. Lending instrument 16. The proposed loan in the amount of US$40 million is designed as a'specific Investment Loan (SIL), combining investments and technical assistance financing. As requested by the GoP, it will be the first Bank-financed project directly implemented by IDAAN. The GoP, through IDAAN's budget, will contribute US$15 million in counterpart funds.
B. Project development objective and key indicators 17. The proposed Project Development Objective is to assist the Republic of Panama in increasing the quality, coverage and efficiency of its water supply and sanitation services in the lower-income neighborhoods of selected areas of the PMR. 18. Progress towards meeting the PDO will be measured through the following indicators:
a. Number of beneficiaries in targeted lower income neighborhoods with access to reliable water services;20 b. Number of beneficiaries in targeted lower income neighborhoods with access to improved sanitation facilities;21
*' Reliable water is defined as piped potable water with adequate pressure and continuity of at least 16 hours per day, 7 days per week.
6 c. Revenue collection over total population in the project area.
19. The relevant standard Water Sector Board indicators will be used to track outputs at component-level.
C. Project components 20. In coordination with other externally-funded projects, the proposed Project will expand coverage of WSS services, increase efficiency in the provision of these services and support IDAAN's modernization through targeted investments and institutional strengthening measures in selected areas of the PMR. IDAAN, the Bank and other multilateral financial institutions, notably the IDB and CAF, have agreed to focus their respective interventions based on geographical and institutional criteria. In geographical terms, the proposed Bank Project and the CAF projects will target the areas east of the Panama Canal (including the city of Col6n) while the IDB project will be mostly focused in the areas west of the Panama Canal. While the scope of the CAF-financed project is still under definition, this operation will be focused on specific lower-income areas of the PMR east of the Panama Canal. In terms of institutional strengthening, the IDB has been and will continue to be involved in high-level corporate strengthening actions, while the proposed Bank operation will focus on developing good practices for some of the most pressing operational issues facing IDAAN, targeting specific pilot areas where the interventions could have a significant and measurable impact and lead to valuable good practices relevant to the rest of the utility. Considering the above, the proposed Project will have the following components:
Component 1: Water Supply and Sanitation Service Improvements in Lower Income Neighborhoods - Cost US$30 million (IBRD US$27 million)
2 1. Following the design of WSS solutions based on a participatory approach, the provision of support, including therein civil works and technical services, in relation to:
The development of a WSS master plan for selected areas of PMR, including all pertinent studies and assessments needed in that respect; The underlying assessment for, researching about, and ensuing development oJ: a proposal for adapting IDAAN commercial practices and technical procedures to lower income areas and the carrying out of assessments and studies to determine constraints to lower income household sanitation connection rates; and The preparation of engineering designs and related bidding documents for the commissioning of works in accordance with the implementation strategy set forth in the WSS master plan.
2' According to the JMP the following are considered as "improved" sanitation: (i) connection to a public sewer; (ii) connection to a septic system; (iii) pour-flush latrine; (iv) simple pit latrine; and (v) ventilated improved pit latrine , Sanitation solutions that are not considered as "improved" are: (i) public or shared latrine; (ii) open pit latrine; and (iii) bucket latrines. The Project will accept the following sanitation solutions as improved under this project: (i) connection to a public sewer; and (ii) connection to a septic system.
7 22. The objective of this Component is to increase the coverage of reliable water supply and sanitation services, in selected areas of the PMR where living standards are lower and also the provision WSS services is of an inferior quality compared to the rest of Panama City. It will finance network extension and rehabilitation activities, initially focusing on the neighborhoods of Alcalde Diaz and Chilibre and parts of the district of San Miguelito in Panama Metro, where service is currently limited for a significant part of the residents and sewer connection rates are lower than in other parts of the PMR. In addition, IDAAN’s approach to working in lower- income, peri-urban settlements will be revisited in-depth on the basis of regional good practices and a strong social outreach program will be developed to ensure that new users actually connect to the networks being built and do not become a financial burden on the utility in terms of tariff payment. Planning and designs for works that will benefit about 70,000 people are currently being contracted under the Bank-financed WSSLIC Project, thus providing an opportunity to achieve relatively rapid results.
Component 2: Modernization of Water Supply and Sanitation Systems in IDAAN’s Colo’n Business Unit - Cost US$20 million (IBRD US$lO million)
23. Improving the eflciency and quality of WSS services in IDAAN’s business unit of Coldn through the provision of support in relation to: Increasing access to WSS infrastructure for about 7000 households in Coldn;
Improving existing WSS systems and urban drainage through, inter alia: (i) the rehabilitation of the Sabanitas water treatment plant; (ii) the carrying out of studies leading to the design of adequate hydraulic solutions that will subsequently allow the carrying out of works needed in respect of WSS system and urban drainage; (iii) the development of a comprehensive master plan for integral sanitation and drainage systems;
Enhancing commercial and operational eflciency, including through, inter alia: (i) the carrying out ofpertinent studies and the implementation of related works and acquisition of related goods to ensure a reduction in water losses: (ii) the strengthening of all of IDAAN’s commercial life cycle activities in order to increase revenue collection, including through inter alia, maintenance of an updated customer billing database, meter installation campaigns, billing process enhancement, development of strategies to secure customer payment and improvement in customer services and clientele satisfaction, including, in connection therewith, the modernization of selected IDAAN’sfacilities, workshops and customer service centers:
The management of water demand, through ,inter alia, the carrying out of (i) repair and retro-fitting of domiciliary installations; and (ii) communication activities linked with demand management: and
8 a The design and subsequent implementation of IDAAN’s Coldn unit business communication strategy to raise customer awareness of IDAAN’s social action policies.
24, The objective of this Component is to improve the efficiency and quality of water supply and sanitation services in one business unit of IDAAN. It will target the unit of Colon and finance a series of structural (coverage expansion, network optimization, leak reduct.ions and meter installation campaigns) and non-structural (capacity building and training, development of business tools and improvements to overall operating process) measures. This Component will benefit from recent major infrastructure investments undertaken by the Government in water and sewer networks, investments that did not result in significant service quality improvements mostly for management reasons. The component’s activities and costs were based on a rapid needs assessment.
Component 3: Institutional Strengthening and Project Management - Cost US$S million (IBRD US$3 million)
25. Provision of support pertinent to ensure, inter alia, the carrying out oj
a Institutional strengthening activities through, inter alia: (i) the establishment and operation of a Monitoring and Information System for Monitoring and Evaluation activities and sound data collection processes to feed information pertinent to IDAAN’s decision making; (ii) the building of capacity in sector operational best practices and management enhancement for selected IDAAN staff and management personnel.
0 Project management, monitoring, reporting, auditing and evaluation activities, including, inter alia, in respect of the implementation of IRE IPPF and EMF and the provision of training and capacity building in relation to said activities.
26. The objective of this Component is to strengthen the capacity of IDAAN to implement,
Components IBRD GoP TOTAL Component Water Supply and Sanitation Service I: US$27.OM US$3.0M US%30.0M Improvements in Lower Income Neighborhoods 1 1 1 I Component 2: Modernization of Water Supply and Sanitation Systems in the Colon Business Unit US$lO.OM US$lO.OM US%20.0M Component 3: Institutional Strengthening US1.OM US$l .OM US%Z.OM Project Management US$2.0M US$l .OM US%3.0M 1 Total I US$40.0M I US$lS.OM 1 US%55.0M I
9 D. Lessons learned and reflected in the project design 28. The Project will support IDAAN in the development and adoption of approaches that are innovative to the institution yet part of the Bank’s extensive sector knowledge and background. It will also incorporate valuable lessons from country experience, especially the WSSLIC project. Thus, the design incorporates lessons learned horizontally, from similar projects in Latin America, and vertically, from an ongoing Bank-financed project in Panama. 29. Importance of multi-institutional coordination for both planning and implementing activities. The Project will include major investments in WSS systems in lower-income neighborhoods, including the connection of new customers to the systems. Experience from other countries, such as Brazil and Honduras, demonstrates that greater improvements in the beneficiaries’ quality of life could be achieved with limited marginal costs if investments for different types of public services, such as public lighting and street coverage, were coordinated with the WSS network extensions. Although the Project will not directly finance such complementary activities, consultations with IDAAN and other relevant institutions, including the Ministry of Housing (Ministerio de Vivienda, MIVI) and MINSA have shown that there is a consensus behind the idea of planning and implementing activities in the targeted lower-income areas in a coordinated manner, under a multi-sector integrated approach, with the aim of lowering investment costs and maximizing impact. This is the main rationale for the envisioned Inter- institutional Committee22which will carry out these multi-institutional coordination activities. 30. Need to develop a specific approach for lower-income areas interventions. IDAAN possesses limited experience in working in low-income neighborhoods and lacks specific methodologies for these types of interventions. The Project will support the development of specific approaches tailored for those areas that will include effective coordination among several institutions and strategies for community involvement. The development of these approaches will be based the ongoing WSSLIC experience, and will also consider Bank experience in supporting projects in relatively similar neighborhoods in different countries throughout the region. 3 1. Involvement of beneficiaries. Early involvement of beneficiaries during project preparation and continuing social work during and after implementation have been essential for the sustainability of the interventions, and especially for ensuring the connection of new users to the sewerage system and the regular payment of bills. The social work will build on this premise and encourage beneficiary participation during the design, construction and maintenance of the facilities. 32. Affordability of the expansion of WSS systems in lower-income neighborhoods. As a significant part of the interventions will be targeted in lower-income areas, technical solutions that acclimate to the topographical and socio-economic reality of the areas, such as simplified sewers, will be explored the design of these new systems. 33. Commitment to implement efficiency improvement measures. The implementation of a comprehensive efficiency improvement program usually demands firm decisions and changes in the “business-as-usual” approach of the institution. Despite the method in which they are implemented, the undertaking of such measures in a sustainable way requires the prolonged and
’*For more information on the Inter-institutional Committee, please see Annex VI, par. 2.
10 effective commitment of the institution. The institution needs a clear set of objectives and goals and internally it must agree upon the most suitable implementation method, which could vary from alternatives beginning from an internal effort for institutional strengthening to an integral delegation contract to a third party (management contract). IDAAN has shown interest in implementing efficiency improvement initiatives and, with the support of the Bank, it is currently discussing the most appropriate implementation method.
E. Alternatives considered and reasons for rejection 34. Co-financing with the IDB or CAF. Both the IDB and CAF are currently preparing urban WSS projects with IDAAN with a total financing of US$140 million. The three teams have been in contact and joint missions were held; and there were discussions of formally merging two or all three projects through a co- or parallel financing mechanism. IDAAN rejected this option, as they wish to have separate projects funded by separate donors to have clearer and more specific foci for each of them. 35. Stronger focus on utility reform. The project team originally considered a project with a more ambitious reform agenda, including a stronger utility strengthening component, which would have complemented the ongoing efforts by the IDB in that regard. Instead, the team and IDAAN chose to focus Bank investments mainly on the development of good practice approaches as discussions on possible reform efforts are still in their early phase and subject to the collaboration of other Government institutions and political will. 36. Different geographical scope. Several options for the geographical scope of the Project were considered during project preparation. Originally, the team and IDAAN considered the possibility of including Eastern Panama province areas in Component 1, and the Panama Metro business unit in Component 2. However, following a decision by the GoP to dramatically reduce counterpart financing from US$60 million to US$15 million, and not to pursue co-financing mechanisms, it was decided to focus the available investment, which represents about 10 percent of IDAAN’s total investment program for the next 5 years, in areas where a significant impact could be achieved.
111. IMPLEMENTATION
A. Institutional and implementation arrangements 37. The Republic of Panama will be the Borrower of the proposed loan. The implementation agency for this Project is IDAAN. IDAAN has the legal mandate to build, operate and maintain water and sanitation systems in all urban agglomerations above 1,500 inhabitants throughout the country. IDAAN, which has been governed by Law 77 since 2001, is an autonomous State Entity with its own legal personality, patrimony and budget independent from the GoP. According to preliminary discussions, the proceeds of the loan will be passed on to IDAAN as a grant. 38. IDAAN has not implemented a multilaterally-funded operation in recent years as MINSA and other institutions have been doing this on its behalf. However, the new administration has decided that IDAAN should, from now on, implement its own investment program and that vision is shared by all multilateral institutions currently preparing new operations in the sector (CAF, IDB). To this purpose, IDAAN will create a new External Projects Unit (EPU) directly
11 under the Executive Director’s responsibility, which will be responsible and accountable for the implementation of all externally-funded projects implemented by IDAAN, in coordination with the various departments responsible for specific aspects of the Project. This unit will be initially supported by an external Technical Advisor company (Asesor Te‘cnico) to be hired from loan proceeds that will provide technical assistance on all aspects of project implementation. After two years a joint capacity assessment will determine whether the Technical Advisor continues to be needed. A Steering Committee consisting of all of the relevant IDAAN management will be created to oversee the performance of the Project and decide on corrective measures as needed. Finally, all units participating in the Project will identify dedicated staff (whether existing or to be contracted) that will be assigned to the Project, and will benefit from training and physical environment improvements as needed.
B. Monitoring and evaluation of outcomes/results 39. The project-level monitoring and evaluation framework will allow for the tracking of progress in implementation, measuring intermediate outcomes and evaluating project impacts including those related to environmental impacts. IDAAN and ASEP’s current monitoring systems will provide satisfactory data for establishing baselines and updating Component 2 indicators. For Components 1 and 3, the core information will be provided by the works and consultancy contracts and other supervision documents. Information from WSSLIC will also be useful for baseline information for Component 1. 40. Progress Reports will be produced by IDAAN’s monitoring and evaluation systems to describe the main achievements of the Project on a semi-annual basis. They will include complete information on contracts, procurements, disbursements, detailed information on the Project’s financial status, inputs, number of beneficiaries and other outputs, and a range of additional operational output and outcome indicators including those of environmental concern to track project status. The proposed EPU will be in charge of producing the reports, relying on data provided by the other IDAAN departments (commercial, engineering, operational, and also the Col6n business unit). These reports will be used by the utility and the Bank. Details are presented in Annex 3.
C. Sustainability 4 1. Financially and physically: IDAAN’s capacity to operate and maintain the improved water system. The focus of Component 2, as a pilot initiative on improvements to WSS systems, coupled with measures on water loss control and demand management for end users, will work toward increasing IDAAN’s collected revenues, reduce operational costs and improve the billing processes in the piloting areas. These savings, although they will at first be restricted to pilot areas, will serve as examples of how IDAAN could reduce expenses, increase its ability to pay current expenses and bring in revenues to support continued operation and maintenance of the systems. In addition, this Component will seek to improve IDAAN’s physical asset maintenance strategy. However, it should be noted that there is a need for IDAAN to mainstream good practice efficiency improvement, maintenance and revenue collection within the institution, going beyond the pilot areas. Thus far, IDAAN has demonstrated its commitment to implement improvement measures in the overall institution and it is also working on efficiency improvement and institutional strengthening measures with other multilateral institutions. Nevertheless, it
12 should be noted that the utility will not reach financial sustainability only through efficiency improvement measures, as tariffs also have an important influence as well as measures to rationalize the use of water. While IDAAN is doing background work on a potential tariff revision, the final decision and approval depend on other Government institutions and political will. 42. Environmentally: Improving efficiency and managing water demand. Currently, as a result of the distorted tariff structure, Panama presents one of the highest residential water consumption levels (400 liters/person/day or 12.2 m3/person/month)23 in the region. Moreover, IDAAN’s water losses are considerably high, reaching more than 40 percent in Panama Metro and around 60 percent in Col6n. Although Panama is a country well endowed with water resources, the current demand trend could result in supply shortages in the short term, while sound conservation practices and leak reductions could extend existing supply for more than 15 years, according to a recent service optimization study. This situation directly affects IDAAN’s financial sustainability, as about 35 percent of their water supply is bought from the Panama Canal Authority (Autoridad Canal de Panamci, ACP) and Waters of Panama (Aguas de Panamci, AP), at costs three times higher than its production costs, representing 28 percent of IDAAN’s operating costs. To reverse this trend, Component 2 will support IDAAN in several activities aimed at improving efficiency and managing water demand (with leak detection programs, reengineering of commercial systems, increased metering, etc), taking specific areas of the PMR (including Colon) as pilot experiences which could be replicated in other areas of Panama for a greater impact in terms of water and financial sustainability. 43. Socially: Community participation and multi institutional coordination in the Project. Focusing on specific lower-income areas, Component 1 calls for multi institutional coordination for specific planning and implementation of interventions, under a tailored methodology (developed by the WSSLIC Project) with effective community involvement as a crucial element. IDAAN will play a key role in the coordination and also lead the processes of involving users in the definition and approval on the design and implementation of the WSS interventions. The Project will include social activities focusing on community participation in the selection of service levels, design schemes, operation and maintenance of the systems (as needed) and hygiene education. These campaigns will emphasize the need to pay for WSS services based on actual usage, the importance of connecting to sewerage networks and aspects related to water conservation. These campaigns, along with improved access to services, will lead to greater customer satisfaction and participation in the sector.
D. Critical risks and possible controversial aspects
23 ADERASA.
13 44. Overall Risk Rating: S (Substantial)
Risks Risk Mitigation Measures Risk Rating w/Mitigation Management commitment. The success of the Project preparation has been undertaken M Project will require the commitment of in constant collaboration with IDAAN management. Once sensitive decisions and management, through several workshops, actions are taken during implementation, their and aide-memoires confirm all major commitment may waver, compromising decisions. Moreover, during implementation. However, it is important to note implementation, the Steering Committee that there will be no change in Government will involve the entire IDAAN during the life of the Project. management, Inconsistencies with other multilateral MEF has requested that IDAAN organize M financing programs. The IDB has a strong long- donor coordination, and the team has term presence in Panamti’s urban WSS sector, advocated for effective coordination via and it provides extensive policy advice and the creation of a joint coordination group technical assistance to IDAAN. CAF is also and cooperation on some activities, working with IDAAN on the preparation of a common implementation strategies and US$lOO million loan. These Projects may joint missions. contradict policies supported by this operation. Lack of experience with multilateral financing. IDAAN has prepared the Operational S IDAAN has not recently implemented externally- Manual, which reflects acceptable funded operations, and it needs to become policies, and two members of its senior accustomed to Bank processes and understand the management have experience working need to follow certain rules and principles during with multilateral financing institutions. implementation. Project management and technical capacity. The Project includes an institutional M IDAAN has weak internal planning, executing, strengthening component to improve this monitoring and evaluating capacity, and its key capacity, and the team will provide close staff is relatively new to the institution and, in technical support for sound preparation part, to the sector. and implementation.
Safeguard management capacity. IDAAN’s The Operating Manual of the project will M Environmental Unit comprises one experienced include a description of the minimal staff environmental specialist who is close to necessary for the Environmental Unit to retirement. This is insufficient to implement the assume its responsibility under the project Project’s environmental assessment not to in a satisfactory manner. It also mention the institution’s remaining portfolio. recommended that the institution work closely with the National Environmental Authority (Autoridad Nacional del Ambiente, ANAM) to provide training for technical staff to identify environmental issues in IDAANs projects, corresponding legislation and how to comply. The Bank will provide Safeguard training. Procurement Capacity. IDAAN has a weak The team has recommended that IDAAN S procurement planning culture and lacks contract a consultant with experience standardized procedures and recordkeeping working with the Bank to support the policies. It also has limited experience in procurement process. The Bank will biddings of high amounts and its personnel have provide training and work with IDAAN to no experience working with Bank procedures. create a procurement planning and recordkeeping culture.
14 Risks Risk Mitigation Measures Risk Rating w/Mitigation Financial Management Capacity. IDAAN has Auditors will be hired to ensure timely S experienced delays in the hiring of auditors and submission of the Project audit and material weaknesses in its internal control compliance with financial covenants. In framework. It also lacks a formal manual on addition, specific financial management financial management procedures, and it has no processes and procedures are under design experience working with the Bank. and will be reflected in the Operational Manual to ensure that funds are used economically and efficiently. The team has recommended that IDAAN identify or contract two dedicated staff for the Project, with appropriate skills and experience, to manage the accounting and disbursement, Environmental Assessment. The proposed The team is supporting IDAAN’s M activities mainly seek to expand existing WSS environmental counterparts in the networks, but should these increase in scope there preparation of an Environmental is potential for a greater impact which would Framework to describe and evaluate need to be addressed accordingly. environmental impacts generated by project activities and suggest mitigation measures. ~ ~~ Slow Initial Disbursement. IDAAN has limited The Project will build on studies from S budget for preparation, and the preparation of other projects, notably the WSSLIC designs before effectiveness would involve a Project, and these should provide a basis complex approval processes, thus this may slow for the first year of implementation. The implementation in terms of works and team will help IDAAN initiate disbursements during the first year as IDAAN procurement processes before will probably use the initial period to develop effectiveness so that contracting of studies and technical designs. designs can commence auicklv. Slow contract and payment processing Although this risk is likely to materialize, S through Contraloria. This Project will be one of its effect would be mostly to delay, rather the first not to use a financial agent and instead than affect the project outcome. It is rely on national review systems for procurement expected that there will be only a few and financial management activities. In the past, large procurement processes, thus the use of national systems and in particular the reducing the number of reviews needed review of all procurement and payment decisions from Contraloria. The team will by the Contraloria has led to significantly nevertheless monitor the situation closely. delayed processes. Intra-domiciliary connections. Beneficiaries of IDAAN is aware of this situation and is M the new and rehabilitated WSS systems are studying alternative solutions to foment responsible for connecting themselves to the connections. The Bank will also work systems and often they end up not connecting, with them on this subject by bringing in thus compromising the benefits of the international expertise investments. Sustainability of investments. IDAAN is Component 2, as a pilot initiative on S currently not financially viable and depends on improvements to WSS systems, coupled transfers from .the GoP for investments and some with efficiency measures, will work operational activities, meaning that project toward increasing IDAAN’s collected investments may not be effectively operated and revenues and reduce operational costs in maintained. the pilot areas. These savings, although they will at first be restricted to pilot areas, will serve as examples of how IDAAN could reduce expenses and bring
15 Risks Risk Mitigation Measures Risk Rating w/Mitigation in revenues to support continued operation and maintenance of the systems. Sustainability of reforms. The Project will As IDAAN will implement the reforms S support IDAAN in reforming its modus operandi itself, the institution will learn and regarding service provision in lower-income internalize these reforms to help them neighborhoods and efficient operational develop in other areas. management of assets. Such changes will only have long term benefits if reforms are maintained after the Project closes.
E. Loadcredit conditions and covenants
45. Loan effectiveness conditions: (a) The Subsidiary Agreement has been executed on behalf of the Borrower and IDAAN. (b) The Borrower has caused IDAAN to adopt the Operational Manual, satisfactory in form and substance to the Bank. (c) The Borrower shall have caused EPU to be established within IDAAN with key staff having qualifications, experience and terms of reference satisfactory to the Bank. 46. Covenants applicable to project implementation: (a) The Borrower shall cause IDAAN to: 1. assign responsibility internally for the overall implementation, coordination, monitoring and reporting of the Project as described in the Operational Manual. 2. (a) maintain, throughout Project implementation, an external project unit (“EPU”), (b) not later than 6 months after the Effective Date, appoint under a renewable 2 year contract a Technical Advisor; at the end of such period carry out an assessment of the technical capacity of EPU for Project implementation, and if agreed with the Bank, transfer thenceforward exclusive responsibility for technical implementation of the Project to EPU. (c) establish not later than 6 months after the Effective date and maintain throughout Project implementation a Steering Committee and an Inter- Institutional Committee, all as specified in the Operational Manual. 3. adopt an operational manual for the Project, satisfactory in form and substance to the Bank. 4. ensure that: (a) EPU submits annual Project work plans and budget to MEF and the Bank for their respective review and approval; and (b) the implementation of the Project is subsequently carried out applying the views and recommendations of the Bank in that respect.
16 (b) The Borrower shall: 1. make the proceeds of the Loan available to IDAAN under a subsidiary agreement entered into between the Borrower and IDAN under terms and conditions approved by the Bank. 2. under each budget proposal to its legislature for the corresponding year during Project implementation, make adequate arrangements to assume, for that year, the counterpart portion of the costs related to the implementation of Part 2 of the Project.
(c) The Borrower shall, and shall cause IDAAN to comply with the provisions of the EMF, IPPF and the IRF, including through the carrying out of the specific plans derived from such frameworks.
IV. APPRAISAL SUMMARY
A. Economic and Financial Analysis 47. The cost benefit analysis for each Component was carried out from financial and economic perspectives and complemented with distributive, sensitivity and risk analyses, and these are presented in detail in Annex 9. 48. The Project’s benefits are: (i) increased reliability of water supply by eliminating or reducing current intermittence; (ii) increased water supply and sanitation coverage; and (iii) improved efficiency for water usage, all of which were measured through the revealed preference technique using the avoided cost approach. 49. Results show that the Project is financially and economically viable with returns of US$ 53 million and US$102 million, respectively. The financial internal rate of return is 24 percent, and the economic return 32 percent. The high financial rate of return is mainly due to the improved revenue collection rate and the incorporation of illegal connections in the commercial database. The economic returns are explained mainly by the avoided costs when intermittence is reduced or eliminated. 50. According to the distributive analysis, the users will reap the biggest return of almost US53 million, even though they have to incur the costs of adjusting their in-house connections, and some will have to pay higher bills or will start paying IDAAN’s bills. Finally, the risk analysis shows very reassuring results, with a 71 percent likelihood of having financial positive returns, and 96 percent of having economic returns. 51. A comprehensive financial analysis was carried out to examine IDAAN’s financial viability. The analysis was based on the audited financial statement for the last three years,24 financial indicator, and financial projections to simulate the financial results for the next ten years, including efficiency gains expected to attain with the Project. The details of this analysis are presented in Annex 9.
~______~~~
24 The auditor, Deloitte Inc, has not given a favorable opinion to IDAAN’s financial statements on any of the financial statements used for this evaluation.
17 52. The analysis highlights IDAAN’s poor performance in recent years. The outcome is a utility that is not financially viable and totally dependent on GoP funds for operation, let alone investment and expansion of the services. Net losses have gone from 22 percent of revenues in 2006 to 43 percent in 2008. Operational costs were 20 percent higher than revenues in 2006 and in 2008 were 40 percent higher. The GoP has transferred an average of US$50 million annually, of which US$21 million were used to cover the operational deficit and US$29 million for annual investment. 53. Many factors help to explain this situation, including: (i) poor pricing policy; (ii) poor commercial management; (iii) poor operational indicators, such as low labor productivity and high levels of non-revenue water; (iv) irrational water usage; (v) long term contracts for bulk water, under which IDAAN is obliged to buy a minimum volume of water at high costs; and (vi) distribution system highly dependent on energy. 54. Results of the projected financial situation show that efficiency gains to be attained with the Project will positively impact IDAAN’s financial results by greatly reducing the deficit. However, the reforms will not be sufficient to make IDAAN financially autonomous. IDAAN will still be dependent on GoP funds to cover remaining operational deficits and investments. Sensitivity assessment complemented this analysis, which provided the GoP with an important tool for identifying some key variables which have a strong impact on financial results. It is recommended that the GoP revisit IDAAN’s Five Year Investment Plan designed to reallocate resources in activities that more aggressively impact perfoimance improvement, and it should consider how to address the long-term deficit imposed by the current tariff levels.
B. Technical 55. All technologies considered for water supply and sanitation improvements are well established. The type of works and technologies proposed include conventional and non- conventional water and sewerage network components and will not differ substantially from typical ones used in similar contexts (low-income neighborhoods) in other Bank-hnded projects. These will include traditional pipe laying, connections, storage tanks, leak detection and reduction and so forth. Condominia1 or other types of low-cost technologies are currently under consideration and may be used in situations where deemed appropriate. The Bank has already initiated technical support for the design of these systems under the ongoing WSSLIC Project. 56. Efficiency improvement programs will be based on data analysis and proven measures. As part of project preparation the Bank team has worked closely with the IDAAN, and will continue to do so throughout implementation to ensure a good understanding of the utility’s situation in terms of non-revenue water, which constitutes a pre-requisite to design a sound strategy. Relatively good water balance information is available from IDAAN’s commercial system, which shows that water availability is sufficient in both Panama City and Colon if reasonable conservation measures are put into place. Over the initial implementation, the Bank will continue closely supporting IDAAN in defining its efficiency investments priority.
C. Fiduciary 57. As part of project preparation, a Financial Management Assessment (FMA) was initiated in December 2009 and finalized in January 20 10. The FMA was carried out in accordance with
18 OB/BP 10.02 and the FM Manual “Financial Management Practices in World Bank Financed Investment Operations” approved by the Financial Management Sector Board and published on November 3, 2005. The FMA concluded that while IDAAN has a well-established institutional financial unit responsible for the financial implementation of an overall US$170 million budget in 2009, with the ability to manage the fiduciary aspects of the proposed Project, it also presents some weaknesses in financial management (FM). Therefore, the FMA has identified specific mitigation measures to ensure the effectiveness of FM implementation arrangements (presented in Annex 7). It is expected that satisfactory FM arrangements will be in place before loan effectiveness. 58. Procurement for the proposed Project will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 and revised October 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 and revised October 2006, and the provisions stipulated in the Legal Agreement. For each contract to be financed by the loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. A draft of the Procurement Plan for the first year of project implementation is presented in Annex 8. The Procurement Plan will be updated at least annually or as required to reflect actual project implementation needs and improvements in institutional capacity. 59. In addition, it should be pointed out that since this operation will be implemented by IDAAN without the intervention of a fiduciary agent, as had been the case in other multilaterally- funded projects in the past, all processes will have to go to the national Comptroller (Contraloria). This process has been known to be extremely slow and takes place both for procurement and for payment activities. The change was made at the request of GoP and is consistent with IDAAN’s current way of doing business; nevertheless, the team will monitor the situation carefully to ensure delays do not threaten sound project implementation.
D. Social 60. The Project will target lower-income communities in the neighborhoods of Alcalde Diaz and Chilibre, as well as parts of the district of San Miguelito in Panama Metro, and the city of Colon. The consultations conducted as part of the social assessment showed that some of the communities suffer from limited or no access to clean water and sanitation services. Service quality is often lagging behind other areas. Those fortunate enough to be connected to a water system may spend hours during the day collecting water often in non-hygienic utensils and tanks during the few hours (2-3) of service. Many areas are served by subsidized private or IDAAN water distribution tankers at no cost to users, but a high cost to the GoP. Fetching water is a time consuming activity usually delegated to women. General urban coverage with sewers and septic tanks is estimated at 74 percent, but only at 45 percent in the lowest quintile in urban areas. Less than 20 percent of wastewater collected receives any form of treatment, causing environmental health problems for the population. Initial visits to neighborhoods confirmed that there is a latent culture of non-payment for water and irrational use of the available resources. 61. A social assessment including consultations with local authorities, Communal and Local Water Boards, community leaders, NGOs, Regional IDAAN staff and contractors, water users
19 and other stakeholders was carried out in the beginning of 2010 by a team of IDAAN staff from the Planning, Engineering, Commercial and Social Departments of IDAAN, with technical assistance of the Bank. Focus groups, structured interviews, and household visits took place in six lower-income areas: Alcalde Diaz, Chilibre, Pacora, Pedregal, Tocumen and the District of Col6n. The objective of the consultations was to assess the social, technical and financial aspects of IDAAN’s interventions in lower-income neighborhoods and the stakeholders and beneficiaries’ perceptions of how to improve and maintain equitable service delivery. In addition, the consultations sought to increase awareness of rational use of water and how to improve the culture of payment for water and sewer services. The objective of the assessment was for IDAAN to assess its own interventions, and together with service users, to propose strategies to improve efficiency in the production, provision and recovery of real cost of WSS services. The recommendations of the assessment will be taken into account for the Social and Technical Intervention Plan that will be prepared by a consulting firm. The Plan will be used by both Bank- financed projects, the WSSLIC project currently under implementation by MINSA and the proposed Project. As a result, IDAAN’s assessment team will propose a Social and Technical Community Participation Plan to be consolidated with the one proposed by the WSSLIC project. 62. The proposed Project triggers OP 4.12 on Involuntary Resettlement and an Involuntary Resettlement Framework (IRF) was prepared by the Borrower and disclosed in-country and published in Infoshop on March 16, 2010. The Framework option was preferred because the exact location of the interventions will only be decided during implementation. As agreed with the Borrower, involuntary resettlement will be avoided whenever feasible and land acquisition is expected to be minimal. Much of the impact is expected to be in the form of easement during construction. For more details, see Annex 10. 63, The proposed Project triggers OP 4.10 on Indigenous Peoples. Secondary information (studies and assessments) conducted by the University of Panama in 2009, points to the likely presence of Indigenous communities in the project area. An Indigenous People’s Planning Framework (IPPF) was prepared by the Borrower and disclosed in-country and published in Infoshop on February 24, 2010. For more details, see Annex 10.
E. Environment 64. A preliminary assessment concluded that the Project will have mostly positive and some potentially adverse environmental impacts. On the positive side, the Project will enhance wastewater management in peri-urban areas (Alcalde Diaz and Chilibre areas) though improving existing wastewater systems. The Project will not undertake the construction of new systems. This will have the immediate positive effect of improving environmental health quality by eliminating wastewater in public spaces such as streets. Negative issues range from minor inconveniences from construction, such as dust and noise, to larger ones associated with final disposal of wastewater (capacity of existing facilities to receive the extra volume). It has initially been decided that the Project will not tackle the issue of wastewater treatment in Col6n given that the investment needed for such an enterprise is beyond the financial scope of the Project. However, should it later be decided that the Project will embark on wastewater treatment, a full Environmental Impact Assessment (EIA) will be undertaken in compliance with Panamanian legislation, which satisfies Bank Environmental Safeguards requirements given the potentially serious environmental issues.
20 65. Appropriate mitigation measures have been identified and presented in the Environmental Management Framework (EMF), which was disclosed in-country and published in Infoshop on March 3,2010. 66. OP 4.1 1 on Physical Cultural Resources will not be triggered given that the Project will be implemented entirely in existing urban areas. However, the EMF will provide clear guidance on what procedures should be followed should there be an unlikely chance find of a physical or cultural resource of import. These will also be reflected in the Operational Manual.
F. Safeguard policies
Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.0 1) [XI [I Natural Habitats (OPBP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Indigenous Peoples (OP/BP 4.10) [XI [I Physical Cultural Resources (OP/BP 4.1 1) [I [XI Involuntary Resettlement (OPBP 4.12) [XI [I Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects on International Watenvays (OJ/BP 7.50) [I [XI Projects in Disputed Areas (OP/BP 7.60)*- [I [XI
G. Policy Exceptions and Readiness
67. There are no policy exceptions. 68. Readiness of the operation. The operation has been prepared under a framework approach in recognition of the GoP’s request for rapid and flexible support to address the urgent challenges of Panama’s urban water sector. As part of the ongoing WSSLIC project, designs for most of the activities under Component 1 are currently being contracted and should be ready shortly after the project effectiveness. During preparation, an initial set of activities to be financed under Component 2 was also analyzed and the Bank team will support IDAAN in finalizing this list and starting the preparation of the related terms of reference and bidding documents while the Technical Advisor company that will support project implementation is being contracted. 69. Effectiveness Conditions. An advanced draft of the Operating Manual has been reviewed by the Bank prior to negotiations and is currently being finalized; a draft decree by IDAAN’s executive director creating the EPU has been drafted and is being reviewed. The subsidiary agreement’s text is under preparation by the GoP.
* By supporting the proposedproject, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas
21 Annex 1: Country and Sector or Program Background PANAMA: Metro Water and Sanitation Improvement Project
A. Country context 1. With a world famous canal, a modern financial sector and a per capita GDP of US%5,500that ranks it as an upper middle income nation, Panama is a country of stark contrasts. On the one hand, economic growth from the dynamic services and export sectors is among the highest in the region, with 11.5 percent growth in 2007, 9.2 percent in 2008 and an estimated 1.8 percent forecasted in 200925, helping Panama weather the current global crisis better than most of its neighbors. On the other hand, Panama’s impressive economic achievements mask persisting inequalities, with approximately 32.4 percent of the population of 3.4 million living in poverty, 14.2 percent in extreme poverty (those with insufficient resources to meet basic nutritional needs) and virtually all of in the country’s indigenous peoples (10 percent of the population) classified as poor.26 About 75 percent of the population is urban, largely concentrated around the Panama Canal, where 17.4 percent of the population is poor and 3.2 percent are extremely poor (in contrast to 50.4 and 21 -8 percent, respectively in rural areas, and 95.2 and 82.9 percent, respectively in indigenous areas).27 2. The Government of Panama (GoP) aims to reduce poverty and support economic growth through infrastructure investment. The recently elected Martinelli administration has adopted a Strategic Plan for 2010-2014 which includes an investment program of US$l3.6 billion, of which US$3.8 billion is targeted towards ex anding access to and the quality of basic services, including water supply and sanitation (WSS).8 Among others, the GoP has committed - as part of a list of so-called metas imperdonables (“goals to be met with no excuses”) - to achieve the Millennium Development Goals and to increase to 90 percent access to water supply and 40 percent access to sewerage network connections in specific peri-urban areas of the Panama Metropolitan Region (PMR) where access is comparatively To achieve these objectives, the GoP plans to invest about US$469 million in expanding and rehabilitating WSS network in addition to the US$450 million currently invested under the Panama City and Bay Sanitation Project (PSCBP).
B. Sectoral and Institutional Context
Coverage and Inequalities 3. Panama’s inequalities are reflected in the poor’s unequal access to WSS services. In 2006, the UNICEF/WHO Joint Monitoring Program estimated that 92 percent of the country had access to improved water sources and 74 percent to improved sanitation. Using a more narrow definition of access, the GoP3’ estimates that only 84 percent of the population has access to potable water through house connections. Moreover, this masks significant disparities, for
25 World Economic Outlook Database for 2010. 26 2008 Living Standards Measurement Survey (LSMS). 27 Program Document for the Panama: Protecting the Poor under Global Uncertainty DPL. 28 Figures in this paragraph were taken from the GoP’s Plan Estrategico de Gobierno 2010-2014. 29 In the context of this Project, the Panama Metropolitan Region includes the Cities of Panama and Col6n and their surrounding metropolitan areas, including the following IDAAN business units: Panama Metro and Col6n. 30 Plan Estrategico de Gobierno 2010-2014.
22 example within peri-urban areas of the Panama Metro business unit of the National Water and Sewer Agency (Instituto de Acueductos y Alcantarillados Nacionales, IDAAN), 100,000 people (approximately 5 percent of the population) receive water only by tanker trucks, and only about 70 percent of the urban water users benefit from a continuous supply of water, while the rest has intermittent services. Access to sanitation is limited as only 60 percent have access to sewerage services. Another important deficiency is the low share and quality of wastewater treatment. Less than 20 percent of collected wastewater receives treatment, and most treatment plants are not well maintained, leading to poor performance; thus virtually all of the PMR’s wastewater flows untreated or poorly treated into ditches along public roads and eventually into the nearby rivers directly into the Panama Bay, generating public health and environmental hazard^.^
Institutions 4. The WSS sector’s legal framework is relatively well defined but it has not been effective in addressing difficult sector issues. Law No. 2 of January 7, 1997 created the regulatory and institutional framework for the sector and clearly assigned the policy role to the Ministry of Health (Ministerio de Salud, MINSA) and service provision to IDAAN. The law also assigned the role of executing budgets and of managing international loans in the sector to the Ministry of Economy and Finance (Ministerio de Econornia y Finanzas, MEF) and regulatory responsibility to the National Public Service Regulation Authority (Autoridad de Nacional de 10s Servicios Pziblicos, ASEP). In addition, Law No. 77 of December 28, 2001 re-organized IDAAN as a public entity with financial and management autonomy. In practice, this framework has not allowed the sector to effectively address the challenges of providing WSS services in an efficient manner; MINSA has been unable to exert leadership and develop a consistent vision for the sector; IDAAN’s financial autonomy has actually been limited; MEF has provided significant operational and investment subsidies to IDAAN and ASEP’s role has been far less of a regulatory one than in other public service sectors, such as electricity or telecommunications.
C. Socio-Economic situation in the project Area, according to the LSMS 2008 5. As the latest census was completed in 2000, the data is not recent enough to reflect the rapidly evolving situation in the project area. However, a Living Standard Measurement Survey (LSMS) was completed in 2008 (Encuesta de Niveles de Vida) with support from the Bank, and the data recently made available. On this basis the team undertook a rapid data analysis to extract the variables most relevant to the project areas, as presented in Table 1.1 below.
3’ The IDB-financed Panama PSCBP will build a wastewater treatment plant to serve approximately two-thirds of the needs of Panama City.
23 Variable Comp. 1 area Comp. 2 area Panama City Panama Metro
Total population 376,876 166,157 814,233 1,535,174 Proportion of population living in poverty non extreme 15% 16% 14% 14% extreme 1Yo 4% 3 yo 3% Land tenure situation “Escritura” (formal land title) 69% 5 7% 78% 77% “Derecho” (temporary title) No title 1 16%8% I 27%4% I 13%4% 1 13%6% 1 Population with access to piped water 94% 99% 97% 97% Water service continuity 16 hours every day 71% 70% 79% 75% Susuended 3 ?‘o 0 Yo 1Yo 2 Yo Population receiving water from water tankers Population that does not pay for water 46% 54% 30% 27%
Population with Connection to sewer 62% 90% 80% 76% On-site solution 3 7% 9 Yo 19% 23%
6. When analyzing this data one should bear in mind that the LSMS was not designed to ensure statistical significance on the project area level. However, given the sample size, with a 95 percent confidence level the confidence intervals on the numbers presented above are generally around 5 percent, with lower intervals for small percentages. In addition, one should bear in mind the usual caveats of such studies; for example some of the information related to water payment levels or service continuity does not match information provided by IDAAN, thus it should complement IDAAN’s statistics. Finally, it is worth mentioning that the area included under Component 1 is larger than the population that will eventually be targeted under the Project itself. Therefore, the indicators matching the target population would probably reveal some differences. A baseline will be completed as part of the studies currently being contracted under the WSSLIC Project.
D. IDAAN 7. IDAAN is responsible for WSS services in the urban areas of Panama, as defined by localities with more than 1,500 inhabitants. In some cases, it also provides technical assistance to other service providers, such as the water committees. IDAAN has a customer base of 2.5 million users (75 percent of the population), that are largely concentrated in the Metropolitan area of the capital (68 percent) and Colon (7 percent), which is Panama’s second largest city. It also includes almost 400,000 people in concentrated rural areas (defined as having between 1,500 and 5,000 inhabitants). IDAAN supplies 2.3 million people with water (90 percent of total urban
24 population) and 1.14 million people with sanitation services (46 percent of total urban population) through connections to the sewer network.32 8. As defined by Law 77, which governs IDAAN, the Board of Directors consists of seven members, including the Minister of Health, a representative of the Executive Branch as well as five representatives of civil society (mostly the private sector), all ratified by the Legislative Branch. In addition, IDAAN is divided into five directions (Planning, Engineering, Commercial, Operations, and Administrative) and 11 regional offices, with the capital Panama City managed directly from headquarters. In practice, the regional offices are given only limited autonomy in terms of budget and decision-making. 9. The quality of water supply services is mixed. Only about 70 percent of the urban water users benefit from continuous supply, while the rest receives intermittent service. There are substantial variations in pressure, including spouts of very high pressure, which increases leakage and water wastage. This level of service is below the standards that can be achieved by countries that have reached Panama’s per capita income level. In terms of sanitation, there is a low share of wastewater collection and poor quality of wastewater treatment. Only 20 percent of the collected wastewater is treated, meaning that most of it is discharged untreated into coastal areas and waterways. Wastewater treatment plants are not well maintained, leading to poor performance and poor quality of “treated” wastewater. In terms of distribution of access to services, there are significant differences in access to WSS services by income groups, particularly in sanitation. Access to water supply ranges from 65 percent for the lowest income quintiles to almost 100 percent for the highest quintile, and in sanitation, it ranges from a little over 10 percent for the population in the lowest quintile to 90 percent in the highest q~intile.~~ 10. Law No. 2 of January 7, 1997 assigned the role of providing WSS services in Panama to IDAAN. While Law No. 77 of December 28, 2001 re-organized IDAAN as a public entity with financial and management autonomy, in practice, IDAAN’s poor financial performance has limited its financial autonomy because it requires regular and ~ignificant~~subsidies from MEF merely to cover its operation, maintenance and investments costs. Increasing costs have not been met by a corresponding increase in revenues, which means that IDAAN’s operating costhevenues (working) ratio was 1.21 and its operational deficit was US$34.0 million in 2008 (part of a distressing upward trend from US$16.3 million in 2007 and US$15.7 million in 2006). Moreover, non-revenue water accounted for approximately 41.2 percent of total production in 200835 and the metered water connections accounted for 52 percent. Moreover, IDAAN presents account payables of more than US$l18 million as of October 200936, as there is little incentive for customers to pay their water bills because IDAAN rarely cuts off services. Table 1.2 below highlights some relevant operational information on IDAAN, focusing on the two main project
32 Data from IDAAN annual Statistical Bulletin (2008). 33 World Bank Public Expenditure Review (2008). 34 Direct subsidies from the Government to IDAAN for the operational deficit and required investment were about B/. 50 million annually, for the last three years. Please see specific tariffs and subsidies section. 35 According to the Louis Berger study Institutional Strengthening and Optimization ofIDAAN in Panamci Metro 40 percent of these losses were apparent and 60 percent real. 36 According to IDAAN, however, efforts to collect accounts payable and cut off customers who do not pay reduced this number by approximately US$525,000 between May and October, 2009, a relatively small reduction but an important step in the right direction towards a more sustainable operating strategy.
25 areas which are Panama Metro and Colon. Further information on the Colon business unit is provided later in this annex. Table 1.2: Operational Information for IDAAN
IDAAN Total Panama Metro Col6n Population with potable water coverage3’ 2,250,464 190 % 1,193,721 193 Yo 151,645 I91 % Population with sewerage coverage3* 1,143,581 146 Yo 714,500 156 Yo 131,576 179 % Number of water connections 490,418 243,226 26,276 Metered water connections 253,359 152 % 143,503 159 % 11,036 I42 % Metered water connections that are read 161,767 I 64 % 92,400 164 % 5,368 I 49 Yo Volume of distributed water 542 M m3 288 M m3 56 M m3 Volume of billed water 319 M m3 180 M m3 26 M m3 L Volume of non-revenue water 223 M m3 108 M m3 30 M m3 Non-revenue water 41.2 Yo 37.6 Yo 53.6 Yo Revenue collection US$82,061M US$64,759M US$2,566M Working ratio 1.21
E. The situation in the CoMn business unit 1 1. The case of IDAAN’s Colon business unit is typical of low-level equilibrium public water utilities where inadequate tariffs do not cover operational costs, resulting in low productivity and unnecessary high costs and deficient services, including intermittent water supply and surcharge of the sewer system. This cumulates in the loss of community and political support for collection revenue and higher tariffs. 12. The metropolitan area of Colon has two sources of water. One is the Mount Hope water treatment plant, owned by ACP, which supplies around 60 percent of total water consumption. The other is the Sabanitas water treatment plant, owned by IDAAN, which supplies the other 40 percent of consumption. The latter plant is 27 years old and requires rehabilitation as some pumps are not functioning, the filter material is lost, the filter valves are failing and the instrumentation is out of service, among other problems. 13. The level of water losses in the Colon business unit is almost 54 percent. The mains in the old part of the city date from 1935 and they are still in use as the recent renovation of the mains did not include service connections to these pipes. Moreover, this system, with more than 18 thousand service connections and 670 km of mains, has only two repair teams to attend to bursts in the mains and provide service connections. The network has no pressure management program or active leakage control or even there equipment or qualified personnel to perform these kinds of tasks. 14. The average water consumption is 1,730 liters per capita per day, ten times higher than average for water supply systems in similar socio-economic conditions. This means that Colon has more than enough water but essentially one quarter of its service area continually faces intermittent water supply.
37 Only includes population under IDAAN responsibility, thus residents of areas with more than 1,500 inhabitants. 38 Refers to the sewer system, and only includes population under IDAAN responsibility, thus residents of areas with more than 1,500 inhabitants.
26 15. In the year 2000 census, there were 42,883 occupied homes in the Colon metropolitan area but only 18,688 customers in the billing system. The coverage of water metering is only 40 percent, but the efficiency of meter reading is 45 percent of all installed water meters. The collection revenues are only 40 percent of billing, and sewage is not charged; so, the water sales are insufficient to cover the cost of water supplied by the ACP not including other operational costs. 16. The sewerage system has a couple of pumping stations that have some malfunctioning problems. In addition, the level of infiltration is so high that the capacity of these stations is essentially full. The sewerage system, with only 59.5 kilometers, experiences more than 150 overflows in sewer collectors and 200 in service connections per month, but Colon has only one repair team for sewerage service. Although, the city has five wastewater pumping stations none of them is working properly, causing a serious environmental damage. 17. The degradation of the urban environment in the old part of the city is severe, with more than 200’ buildings officially declared uninhabitable but currently inhabited by poor people with very limited access to WSS services. It is common in these areas for people to use small pumps connected to the network to obtain water, but in the interior of their houses water leaks are huge due to lack of money to pay for plumbing repairs.
F. The GoP Strategic Plan for 2010-2014 18. The GoP will support IDAAN by investing in service expansion and infrastructure rehabilitation and maintenance through the Five Year Strategic Plan (201 0-2014), according to which the GoP will invest about US$469 million in the WSS sector, averaging over US$90 million ann~ally.~’From this amount, some US$156.5 million has already been committed to continuing investments from the 2009-201 1 period, with the remaining US$388 million devoted to new projects. This amount is also complemented by US$450 million currently invested as part of the ongoing PSCBP project, co-financed by the IDB and JICA, which includes investments in wastewater collection and transport networks of approximately US$200 million across the PMR as well as the construction of a wastewater treatment plant for US$211 million. The objective of the Strategic Plan is to achieve the Millennium Development Goals (MDGs), and the so-called metas imperdonables (“goals to be met with no excuses”), by increasing the access to WSS services by 90 and 76 percent, respectively, by the end of the Martinelli administration. However, despite the considerable investments and ambitious targets, the Plan itself is essentially a spreadsheet with limited rationale for the choice of the investments and sense of prioritization or linking investments to specific outcomes. Moreover, IDAAN has limited capacity to structure and implement this level of investments and has a general absence of databases that would allow a systematic monitoring of sector input and outcome indicators and permit the sector authorities to track progress in achieving strategic goals and identify the need for corrective policy changes. 19. The GoP’s Strategic Plan also outlines the following challenges for the sector: (i) the consolidation of the sector’s legal and institutional framework, primarily by strengthening the leadership of MINSA and ASEP; (ii) the improvement in service quality provision through: (a) a comprehensive study to prioritize investments in the sector and to provide a portfolio of feasible
39 From 1995 to 2003 investment in urban WSS averaged approximately US$12 million annually which rose to slightly more than US$50 million annually from 2004 to 2009.
27 projects, (b) an increase in the efficiency of service providers, namely IDAAN, (c) the rationalization of the current tariff system, and (d) the compliance with requirements for wastewater treatment and disposal to reduce environmental impacts; (iii) the improvement in the operational efficiency and financial position of IDAAN by transforming it into a sustainable public company with a business vision and with decentralized, technically-competent management at all levels; (iv) the construction of aqueducts, latrines and tools for solid waste management in poor communities with the objective of improving water sources and reducing negative health impacts (this will be done through community capacity building in rural areas to operate and maintain WSS services and through technical support to MINSA to meet non-routine operation and replacement and upgrading of WSS systems); (v) the implementation of the investment program to meet the MDGs by 2015, with specific focus on the Central Provinces, highly urban and rapidly growing cities, such as Colon, as well as high-impact investments on system optimization and service coverage expansion in peri-urban neighborhoods of the capital.
G. Tariffs and Subsidies
Legal Framework 20. The directives for water and sewerage tariffs, as well as subsidies, were established, respectively, in 199740 and 20014'. These guidelines pursue the following principles: The tariff should provide incentives to comply with the following objectives: (i) ensure social and sanitary quality; (ii) provide efficient water usage; (iii) attain a balance of water supply and demand; (iv) reflect the costs of providing the service efficiently; (v) use no cross subsidies; and (vi) be sufficiently clear. Accordingly, the billed revenue should cover operating costs; rehabilitation, expansion, and modernization costs; debt services; and contingency reserve for unforeseen situations. There will be water, sewerage, and wastewater treatment tariffs, all of them approved by the Regulatory Entity, who will adjust them on regular basis. The sewerage tariff will correspond to the operating cost of sewage collection, and it will be equal to a percentage up to 50 percent of the water tariff. The bill will be based on metered consumption. The bill issued based on metering and real consumption will be mandatory. Other charges: The utility could set. additional charges as long as they are justifiable, such as property improvement charges, connection charges, bulk water charges, etc. The Regulatory Entity can modify and adjust the tariff on regular basis as long as the adjustment is reasonable. The regulator will also determine methodologies for setting the tariff, establishing monitoring indicators, calculating the economic costs and supervising compliance with the tariff system.
Subsidies 21. The principles established for IDAAN subsidies are as follows: IDAAN must charge for all the services it provides, with the exception of fire hydrants. e The tariffs for public offices should be equal to the real cost.
40 Law 2 1997. Section 111. 4' Law 77, 2001. Chapter VIII.
28 There will be a discount on monthly basic water consumption for low-income households, namely those who are poor or extremely poor. The discount will be from 20 to 85 percent of the water bill corresponding to the basic consumption; for higher consumption there will be no discount. IDAAN will make the discount on the bills and MINSA will compensate IDAAN through the Fondo de Subsidio para el Consumo de Agua Potable. A 25 percent discount will be applicable to the retirees as long as their monthly bill is lower than US$30 (Law 6 of 1987).
Current Tariffs 22. Although the legal framework for tariffs was established in 1997 and complemented in 2001, the current tariffs have been in effect since 1982. There has not been any request from IDAAN or the GoP to adapt them to the new regulatory system. There is no tariff for sewerage or wastewater treatment services. In September 2008, the IDB financed a comprehensive study that developed a sound technical basis and a pathway to tariff adjustment, including water, sewerage and wastewater treatment. The study also indicated what should be done to adapt tariffs to the legal framework and provided the tools to facilitate IDAAN in the implementation and measurement of the financial impact of the, proposed changes. The new IDAAN’s administration is conscientious of the importance of a comprehensive tariff restructuring and developed a strategy to pursue the revision in two steps, first beginning with the implementation of a sewerage tariff, followed by an introduction of a wastewater treatment tariff in the upcoming years. A water tariff revision may also be considered after that. The proposed new sewerage tariff was recently submitted to ASEP for analysis and approval; however, ASEP has not yet made their decision. 23. Table 1.3 presents a summary of the tariff charges, which are described in more detail below:
Table 1.3: Current Tarvfsfor Panamd and Coldn Non Residential Residential Commerce I Public I Industry I offices M3/hh/month us$/rn3 38 0.21 0.30 0.21 39 57 0.36 0.40 0.36 58 76 0.40 0.40 0.40 77 113 0.43 0.40 0.43 114 189 0.44 0.40 0.44 190 378 0.40 0.40 0.44 379 567 0.45 0.45 0.45 568 756 0.48 0.48 0.48
>756 0.48 0.43 0.43
(i) Volumetric tariff increases with consumption. It is defined for nine consumption blocks, as shown in the table. The first one goes from 0 to about 40 cubic meters/hh/month; and the last one for consumption higher than 750 cubic meters. The associated tariffs for the residential sector start at US$0.2/cubic meter and go to US$0.48/cubic meter. There is a
29 difference according to category of users, and service provided in the interior of the country, small towns and rural areas. For those in the interior, there is an 11 percent discount on the tariffs of the first block and 25 percent in the minimum consumption, but other than that the tariffs are the same.
(ii) Minimum consumption. If actual consumption is lower than the minimum, IDAAN charges the monthly minimum, which is 32 cubic meters for the residential sector and close to 40 cubic meters for non-residential customers, The minimum monthly bill for the residential sector is US$6.4/houshold.
(iii) Connection fee is a one-time charge, when IDAAN connects the new customer to the services, and the fee is US$8 for water and US$20 for sewerage connections.
(iv> Charges for improvements in the property (contribucibn especial de mejoras) apply when IDAAN implements some works in sites outside the regular service area.
(VI Water distributed by water trucks does not have any tariff. IDAAN assumes all the costs and population receives it for free.
(4 Sewerage tar8 At present there is no sewerage tariff. In December 2009, IDAAN’s Board of Directors approved a tariff, which will correspond to about 17 percent of the water tariff. This tariff is waiting for ASEP approval to be implemented.
Figure 1.1: ‘36 Share per type of user on consumption, revenues and customers
! 100% 4 90% 80% 70% 60% 50% 40% Clients 30% Consumpton 20% Revenues 10% 0%
(vii) Sewage treatment tar8 There is none.
(viii) Discounts on the bill for basic consumption. IDAAN applies a discount on the bills in the following cases: a. Low-income customers. Discounts of 20 percent to 85 percent are applied to low- income households on the bill for basic consumption.
30 b. Retirees. Discount of 25 percent apply to retirees.
24. The resulting average tariff according to the type of customer, based on the 2008 billing data, shows differences between users due to variations in the tariff applied, as well as the differences in consumption. Tariffs applied to industrial users and public offices are almost twice the ones applied to the residential sector. The residential tariff is 82 percent of IDAAN’s total tariff. This difference can also be seen in the share that Average tariff US$/^' each type of customer has in the consumption and US$/OOO allon revenues. The residential sector’s consumption is 73 Residential percent of the total, while its participation in the revenues Commercial is 60 percent. On the other hand the commercial and Industrial public sectors, which correspond to just 8 percent of the ~1 Public Offices 0.43 clients, account for 26 percent of the total billed by Total 0.27 “04 IDAAN and contribute with 38 percent of the revenues. Subsidies 25. This section estimates the subsidies received for IDAAN’s WSS services, as calculated from two perspectives: financial and economic. The first one estimates all forms of subsidies that are being offered, either to IDAAN or to the customers. The second one estimates the subsidies compared to the real cost of providing the service. Subsidies from a Financial Perspective 26. There are important financial subsidies, which are granted in two forms: direct subsidies and indirect subsidies. The direct subsidy consists of direct payments to pay for the service; this subsidy occurs in two forms: (i) direct payment from the GoP to IDAAN to partially cover the cost of providing the service; and (ii) direct payment to the customers to partially pay for their water and sanitation bill. On the other hand, the indirect subsidy consists of a lower tariff to some customers that fall into the categories assigned for lower prices. Both of these subsidy schemes are used in Panama as follows: Direct Subsidy
(i) Direct payment from the Government to IDAAN. As presented in the financial analysis, IDAAN cannot fully cover its operating costs or required investment needs. The GoP transfers all of the required funds to compensate for the deficit. In the last three years transfers from the GoP have averaged US$50 million per year (US$21 million to cover operating deficit and US$29 million to cover investment). For the next five years, about US$190 million annually will be required to pay for known investments, plus an unknown amount to cover the operational deficit. This investment corresponds to: (i) US$lOO million included in the Five Year Investment Plan; and (ii) US$90 million for works already under implementation for cleaning up the Bay of Panama (whose total cost is US$450 million42).
42 Gobierno de Panamti , Plan Estrategico del Gobieno 2010-2014. Gaceta Oficial 12 Enero 2010.
31 (ii) Direct Payment to the Customers
a. Low-income families (Casos sociales). IDAAN provides a discount from 20 percent to 80 percent on the bill of lower-income families. To receive the subsidy the families have to claim that they are poor and Table 1.4: Subsidies by Business Unit offer some additional information. The family is then awarded the December 2009 Panama Col6n Total subsidy only when IDAAN personnel Clients 246,002 26,248 272,250 verify on-site the request and then Revenue (000 USD) 4,42 1 635 5,056 assign the appropriate discount. MINSA fully reimburses IDAAN for Direct Subsidies this subsidy. In December 2009, 28 (1) Low Income: percent of residential customers in Customers 68,864 16,45 1 85315 Panama Metro and 63 percent in Discount 000 US$ (438) (125) (563) Col6n were beneficiaries of this Customers discount, which corresponded to 11 (%I 28% 63% 3 1% percent of total billed revenue. It is (2) Retirees estimated that on annual basis the Customers 4 1,488 2,950 44,438 subsidy is around US$6.7 million. Discount 000 b. Low -income families with no service US$ (85) (3 1 (88) connections. IDAAN supplies water Customers (%) 17% 18% 16% in trucks to those families with no water connection. While there is no cost to the beneficiaries, it cost IDAAN about US$6 million in 2009. c. Retirees. IDAAN gives 25 percent discount to retirees, which in December 2009 accounted for 44,000 customers receiving US$88,000 in subsidies. It is estimated that the annual discount could be around US$1 million.
27. The advantages of direct subsidy schemes are that they are transparent, explicit and minimize distortions in the water bill. However, there are some drawbacks, such as the difficulty of defining suitable eligibility criteria as well as the administrative costs entailed in identifying beneficiaries and maintaining an updated database. IDAAN’s personnel is not aware of any update to the subsidy system in recent years, if there even was one. Indirect Subsidy Table 1.5: Cross Subsidies (000 USD) This subsidy is applied in the tariff system, through tariff differentiation among customers according to consumption Residential and type of user (residential or non residential). The subsidy is given to some customers through lower tariffs, which are Industrial (439) 41Public Offices paid by other categories of customers through an overcharge. (5,727) This is known as a cross-subsidy. In IDAAN’s business units Total the residential sector has lower tariffs than the non-residential sector, with the former receiving a subsidy of about US$11 million per year, which is paid off by the official (52 percent) and the commercial (44 percent) sectors as well as by industrial customers (4 percent). The main advantage of this scheme is the simplicity for its application and management. However it has some disadvantages, including: (i) the subsidy applies to all
32 residential customers, many of whom not need of it; and (ii) the subsidy distorts the efficient use of water services; and (iii) the subsidy has been established without understanding its magnitude or its the impact on the rest of the customers.
Subsidies from an Economic Perspective 28. These subsidies are calculated comparing the average tariff charged for water service and the real cost of providing it. 29. According to a recent tariff the real cost for IDAAN of providing WSS services is US$2.66 per thousand gallons44 (US$0.70/m3), while the current tariff is US$1.04 per thousand gallons (US$0.27/m3)45.Tariffs cover just 37 percent of total cost. When IDAAN implements the new sewerage tariff, cost recovery will increase to approximately 46 percent. The current tariff does not even cover the cost of water provision, which is US$1.51 per thousand gallons (US$0.40/m3). If on top of this commercial inefficiencies are added, this gap between cost and tariffs widens, with the revenue collection rate about 85 percent and account receivable turnover over 5 months of billing. Figure 1.2 illustrates the difference between the actual cost of providing WSS services and the amount actually received by IDAAN through tariffs, and Figure 1.3 presents the economic costs of providing the subsidies.
Figure 1.2: Actual Cost versus Actual Tarqfs
Figure 1.3: Economic Costs of Providing Subsidies
(1 (I I, < ='"~"""~~~c+ i PUl)ilL VIlKCl 1 Itdi
r iri riilii ~iI
43 INECON, Ingenieros y Economistas Consultores S.A. Estudio sobre La Definicrdn de Politrcas Tarfarias del IDAAN Study financed by Inter-American Development Bank and Ministry of Health Panama . Panama . September 2008. 44 The distribution between water and sewerage is as follows: water: US$l,5 1 per thousand gallons; sewerage: US$ 0.36 per thousand gallons; and treatment of sewage US$0.79 per thousand gallons 45 This amount only covers water tariff, since currently no sewer tariff is being charged.
33 3 1. The annual financial subsidies are estimated at (000 USD) % US$134 when the ongoing investment works (for Residential 107,137 81% example, the clean-up of the Panama Bay and sewer Commercial 13,223 10% Industrial 82 1 1Yo pipes) are not included, and US$224 when they are Official 10,400 8 Yo included. When compared with the economic cost, the Total 13 1,580 100%
32. Subsidies targeted specifically to poor customers are about US$13 million, corresponding to 10 percent of the total subsidy scheme. The remaining 90 percent benefit all customers and evidently do not target low-income families.
Table 1.7: Summary of IDAAN Subsidies for Water Consumption
I 2010 I Final Remarks on TarQ% (US% million), I Subsidies Alt 1 Alt 2 0 Current tariffs do not follow the Financial Subsidies legal framework. All the principles are Direct Subsidies missing in the current tariff system and IDAAN neither ASEP, the GoP nor IDAAN Operating costs 20 20 have taken initiatives to correct the Investment costs 100 100 distortions. Ongoing works 90 0 The current tariff levels and Total IDAAN 120 210 structure lack incentives to promote 0 Customers Low-Income 7 7 efficient water usage, for customers as Water Trucks 6 6 well as the utility. The present tariff Retirees 1 1 allows for the irrational use of water, as: Total Customers 14 14 (i) the tariff structure establishes a 134 224 minimum consumption charge of 8 thousand gallons/hh/month (30 cubic Residential Customers 11 11 meters)46, which is higher than the basic Non residential customers (1 1) (1 1) consumption needed; and the same goes for the first block of consumption where I Economic Subsidies 132 132 the lowest tariff is for consumption up
46 In areas with predominantly lower-income population, the minimum consumption charge is 6000 gallons/hh/month or 24 cubic meters.
34 average tariff is just 37 percent of the cost of providing the service (operation and investment); (iii) the tariffs have remained constant since 1982, and they have not even been adjusted with inflation, so there is no perception among the public or within IDAAN of the real cost of providing water services; (iv) the low tariff level does not allow IDAAN to cover its operating cost, which is compensated on regular basis by transfers from the GoP. The tariff structure does not follow consumption patterns, as most of the residential customers are located in the first block of consumption. 0 ASEP regulates the water tariff for customers, as well as the bulk water tariff; however, while water tariffs have been kept constant, ASEP has approved bulk water tariffs with automatic updates.
35 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies PANAMA: Metro Water and Sanitation Improvement Project
1. The World Bank approved a Water and Sanitation in Low-Income Communities (WSSLIC) Project in Panama in 2008 which set the basis for the proposed operation. In addition, the IDB has several on-going operations in the sector and is preparing a new US$40 million one. CAF is also preparing a new US$lOO million operation. Both will also be with IDAAN, although no details are known at this early stage. 2. The WSSLIC Project (US$32 million, approved in July 2007) seeks to increase access to sustainable WSS services in participating communities. This project, implemented by MINSA, is mainly focused on rural areas, its activities targeting peri-urban areas provided the basis for the proposed operation. The project has four components. Component 1 (Rural Water Supply, Sanitation and Hygiene) addresses the problem of low coverage levels by combining hardware activities to extend coverage and software activities to improve impact and sustainability. Component 2 (Urban Water Supply and Sanitation, implemented jointly with IDAAN) focuses on the provision of services in smaller towns and marginal peri-urban areas. This Component will also support alternative models of service provision in areas where IDAAN is not currently operating. Component 3 (Policy Development) aims at initiating a policy dialogue under the leadership of MINSA, with the long-term goal of developing sector policies. The latest ISR rating for project implementation Progress is Moderately Unsatisfactory. 3. The IDB’s Panama City and Bay of Panama Sanitation Project (USW0.2 million, approved in March 2006, US$30.0 million additional financing under preparation) seeks to improve sanitary conditions in low-income neighborhoods and reduce pollution levels in urban streams and rivers within the City of Panama’s metropolitan area. To this end, the project is financing the expansion of the sanitary sewerage system and wastewater treatment. It will also promote the efficiency and financial sustainability of IDAAN. The project is divided into four components: (a) the construction of sewer networks; (b) construction and rehabilitation of collectors and main trunks; (c) a wastewater interception system, and (d) a wastewater treatment plant. The project is being executed by MINSA through a Project Coordination Unit (Unidad de Coordinacibn de Proyecto, PCU) established specifically for the project and different from the PCU currently executing the WSSLIC project. 4. The IDB’s second phase of a sustainable development program in the province of Bocas del Tor0 (US$29 million, approved in December 2007) invests in infrastructure and in improving access to and the quality, efficiency and sustainability of basic public services such as potable water and sanitation in Bocas del Tor0 province, which has high levels of poverty and extraordinary biodiversity. The program finances income-generation projects for small-scale farmers and fishermen. It also supports training in ecotourism for micro- entrepreneurs. Pilot projects are financed to promote conservation of protected areas, sustainable use of natural resources and mitigation of natural disaster risks, such as an early warning system for flooding in the Sixaola River. In addition, the program helps strengthen municipal governments and provincial agencies, as well as local community participation in the planning and monitoring of sustainable development programs. Panama’s National Council for Sustainable Development (CONADES) is the program’s executing agency, in coordination with other government agencies.
36 5. The IDB’s Sustainable Development Program for the Central Provinces (US43 million, approved in October 2008) aims to promote sustainable development in the Central Provinces. The project will help the mostly rural central provinces participate in Panama’s accelerated growth by improving competitiveness, especially in the context of implementing free trade agreements, while at the same time enhancing social and environmental conditions. The central region includes the provinces of Cocle, Herrera, Los Santos and Veraguas. The GoP has developed a sustainable development strategy for each of the provinces. The program will help increase the productivity and income of small agricultural producers through technological innovation and improve access to efficient WSS services. In addition, the program will provide environmental protection for critical watersheds and coastal areas and strengthen coordination mechanisms and institutional capacities at the local level. Of particular interest is the inclusion of a substantial technical assistance contract to the Central Provinces IDAAN business units. CONADES is the program’s executing agency, in coordination with other government agencies.
37 Annex 3: Results Framework and Monitoring PANAMA: Panama Metro Water and Sanitation Improvement Project
Results Framework
6. The project-level monitoring and evaluation framework will allow for the tracking of progress in implementation, measuring intermediate outcomes and evaluating project impacts including those related to environmental impacts. IDAAN and ASEP’ s currently monitoring systems will provide satisfactory data for the baselines and for the updating of Component 2 indicators. For Components 1 and 3, core information will be provided by the works and consultancy contracts and other supervision documents. WSSLIC information will also be useful for baseline information for Component 1. 7. Progress Reports will be produced by IDAAN’s monitoring and evaluation systems to describe the main achievements of the Project on a quarterly basis. They will include complete information on contracts, procurements, disbursements, detailed information on the Project’s financial status, inputs, number of beneficiaries and other outputs, and a range of additional operational output and outcome indicators including those of environmental concern. The proposed External Projects Unit will be in charge of producing the reports, relying on data provided by the other divisions of IDAAN (commercial, engineering and operational and also the Colon business unit). These reports will be used by the utility and the Bank. 8. The matrix that follows provides a results framework for measuring project outcomes.
PDO Project Outcome Indicators Use of Project Outcome Information
The Project Development Objective 0 Number of beneficiaries in To inform ex-post decisions is to assist the Republic of Panamh lower income neighborhoods regarding preparation of possible in increasing the quality, coverage with access to reliable water follow-up projects. and efficiency of its water supply supply and sanitation services in the lower- 0 Number of beneficiaries in income neighborhoods of selected To track progress towards Project lower income neighborhoods areas of the Panamh Metropolitan outcomes and GoP’s own goals with access to improved sanitation facilities
Intermediate Outcomes Intermediate Outcome I Use of Intermediate I Indicators Outcome Monitoring Component I: Water Supply and To monitor progress towards Sanitation Service Improvements in achieving the project’s objectives. Lower Income Neighborhoods To take corrective actions during the mid-term review should it be necessary.
38 connections affected by rehabilitation works undertaken under the project [standard Water Sector Board indicator] # of new sewer connections that are resulting from the project intervention # of sewer connections affected by rehabilitation works undertaken under the proiect
Component 2: Modernization of Increased # of active accounts in To monitor progress towards Water Supply and Sanitation commercial system in the achieving the project’s objectives. Systems in IDAAN’s Coldn Colon business unit Business Unit e Total number of water meters To take corrective actions during the read as a percentage of the total mid-term review should it be number of connections necessary. 0 Percentage of connections with access to reliable water supply as a percentage of the total number of connections in the project area e Revenue collected per cubic meter produced in the business unit Wm3)
Component 3: Institutional ’ e Management Information To monitor the impact of the I Strengthening and Project System established and activities carried out and iteratively Management operational improve the content of the Number of water utilities that components. the project is supporting [standard Water Sector Board To monitor project implementation indicator] and provide an early warning about implementation capacity.
39 93 93
-
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0 0 m"Q 0 0 0 W W 2m 10 .-u R 8a .-c 0 0 0 0 U rs V QW a, m '7 * m B ci?€ sC Da, S g 2 c m 0
ms m - g d
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m 8
m 8 Annex 4: Detailed Project Description PANAMA: Metro Water and Sanitation Improvement Project
Component I: Water Supply and Sanitation Service Improvements in Lower Income Neighborhoods - Cost US$30 million (IBRD US$27 million)
1. Following the design of WSS solutions based on a participatory approach, the provision of support, including therein civil works and technical services, in relation to:
The development of a WSS master plan for selected areas of PMR, including all pertinent studies and assessments needed in that respect; The underlying assessment for, researching about, and ensuing development ox a proposal for adapting IDAAN commercial practices and technical procedures to lower income areas and the carrying out of assessments and studies to determine constraints to lower income household sanitation connection rates; and The preparation of engineering designs and related bidding documents for the commissioning of works in accordance with the implementation strategy set forth in the WSS master plan.
2. The objective of this Component is to increase the coverage of reliable water supply and sanitation (WSS) services, in lower income areas of the PMR. To this end, it will finance the expansion and rehabilitation of water and sanitation systems, including household connections, in selected areas of the PMR, where living standards are lower and also the WSS service provision have an inferior quality when compared to the rest of Panama City. The targeted areas are located in the neighborhoods of Alcalde Diaz and Chilibre in the district of Panama and also specific neighborhoods in the district of San Miguelito, with a total population of approximately 380,000 people. These neighborhoods are predominantly poor peri-urban areas, in which coverage and quality of WSS services is lower than PMR standards. In some sections of these neighborhoods, water is provided on an irregular basis only a few hours per day, severely hurting the quality of life and causing strong community discontent. The expansion and rehabilitation of water and sanitation systems will be achieved by undertaking a comprehensive participatory planning phase and, subsequently, the execution of works. The planning phase has been initiated through an ongoing Bank-financed project (WSSLIC project). This proposed Project will finance the works and complementary activities recommended by the planning phase financed by the WSSLIC project.
3. The participatory planning activities, currently being contracted and financed by the WSSLIC project, encompass a comprehensive approach aimed at designing appropriate WSS solutions from a technical, economic, environmental and social point of view. The themes covered are:
(i) Development of a WSS master plan for the targeted areas to assess the technical, socio-economic and environmental issues in the targeted areas and propose the appropriate WSS solution. In addition, this plan also provides an investment program
42 and implementation strategy for guiding service improvement. The targeted areas mostly require the rehabilitation of water systems and the expansion of sanitation systems. To enhance investment coordination, an Inter-institutional Committee for Low-Income Neighborhood Service Improvements will be created at the level of the PMR. The Inter-institutional Committee will comprise several governmental agencies currently undertaking activities aimed at improving the living standards in these areas. The information for developing the master plan will also be instrumental for the Inter- institutional Committee. To maximize contributions, a communication plan will be developed to ensure that the Inter-institutional Committee will participate and receive the information as appropriate.
(ii) Development of a proposal to adapt commercial practices to lower-income areas requires an assessment of IDAAN’s current commercial and technical procedures for lower-income areas and the development of a proposal for modified procedures that are better acclimated to the social, economic, technical and environmental reality of these areas. This activity will identify commercial procedures better suited to household revenues and also undertake information-campaigns on the cost of services and clarification of the payment of bills In addition, it will assess the constraints that influence low household sanitation connections rates and, if needed, propose incentives to mitigate this trend.
(iii)Development and implementation of a community participation plan and communication-campaigns to ensure that appropriate consultation, information and decision making processes take place. Relevant topics for discussion include alternatives to make services more affordable for the community as well as the importance of paying water bills for insuring the good quality of services.
(iv)An assessment of the land tenure situation in each project area will be carried out by IDAAN early on in the process. This assessment will look both at the number of people affected in the project area and at possible mechanisms to provide those without land titles with water services. Data from the LSMS 2008 indicate that around 16 percent of the population in targeted areas does not have regular land titles, and a cross-check with IDAAN’s own commercial system shows a very similar 17 percent of the total number of households does not appear in the system as registered customers. A preliminary review of the legal framework shows that IDAAN’s Board of Directors has the mandate to change company policy and practices to connect households without land tenure, and the Project will support the development of such a policy, particularly considering a regional good practices example from Colombia.
(v) Preparation of the engineering designs and bidding documents for the water and sanitation systems following the implementation strategy proposed in the master plan. The WSSLIC-contracted study will finance the preparation of designs for about 70,000 inhabitants; further designs, depending on the availability of resources, will be financed following similar principles and terms of reference.
4. WSS expansion and rehabilitation works, and complementary activities, will be financed through the proposed Project. The specific interventions are being identified, discussed
43 and agreed through the planning activities initiated through the WSSLIC Project. Preliminary assessments indicate that a majority of the works needed on the water supply side will consist of rehabilitation, given that a significant share of the population is already connected to the water system (but with limited service quality). In addition, specific improvements to the primary network will be included as needed to improve service in the project area. On the sewer side, the connection rate in the project area lags substantially behind other parts of Panama Metro (62 percent versus 76 percent, according to the LSMS 2008) and significant investments will be made in expanding the number of new connections. Although on-site sanitation solutions will be considered as part of the planning phase, it is expected that sewers will be the main technical solution in the project area. No mechanized, complex water or wastewater treatment plant will be financed. IDAAN has recognized the potential challenge of incentivizing connections to the sewer system. Although connection charges are low (around US$20) the fact that a sewer tariff is being introduced, and in some cases significant updating of intra-domiciliary installations will be needed, could be a connection disincentive. Therefore, the planning phase of this Component will also include a strong social and community outreach, as well as consider alternative technologies, to contribute to increased connections. IDAAN is also considering other measures, such as possible micro-credit schemes or direct assistance to households in updating their installations. The Bank team will continue to provide technical assistance on this issue.
5. Works supervision will be undertaken initially by the same consultant contracted under the WSSLIC Project, with further works supervised by a specialized consultant financed by this component.
Component 2: Modernization of Water Supply and Sanitation Systems in IDAAN’s Colo’n Business Unit - Cost US$20 (IBRD US$lO million)
6. Improving the eficiency and quality of WSS services in IDAAN’s business unit of Coldn through the provision of support in relation to:
Increasing access to WSS infrastructure for about 7000 households in Coldn;
Improving existing WSS systems and urban drainage through, inter alia: (i) the rehabilitation of the Sabanitas water treatment plant; (ii) the carrying out of studies leading to the design of adequate hydraulic solutions that will subsequently allow the carrying out of works needed in respect of WSS system and urban drainage;(iii) the development of a comprehensive master plan for integral sanitation and drainage systems;
0 Enhancing commercial and operational eficiency, including through, inter alia: (i) the carrying out ofpertinent studies and the implementation of related works and acquisition of related goods to ensure a reduction in water losses; (ii) the strengthening of all of IDAANS commercial life cycle activities in order to increase revenue collection, including through inter alia, maintenance of an updated customer billing database, meter installation campaigns, billing process enhancement, development of strategies to secure customer payment and improvement in customer services and clientele satisfaction, including, in connection therewith, the modernization of selected IDAANS facilities, workshops and customer service centers;
44 The management of water demand, through, inter alia, the carrying out oJ (9 repair and retro-fitting of domiciliary installations; and (ii) communication activities linked with demand management; and
The design and subsequent implementation of IDAAN’s Coldn unit business communication strategy to raise customer awareness of IDAANS social action policies,
‘- 7. The objective of this Component is to improve the efficiency and quality of water supply services in the business unit of Colon, the country’s second largest city, by financing a series of structural (network optimization, leak reductions and meter installation campaigns) and non- structural (capacity building and training, development of business tools and improvements to overall commercial and operating process) measures.
8. The case of Col6n is typical of low-level equilibrium public water utilities where inadequate tariffs do not cover operational costs, resulting in low productivity and hence unnecessary high costs and deficient services, including intermittent water supply and surcharge of the sewer system. This cumulates in the loss of community and political support for collection revenue and higher tariffs. Among the most pressing issues are:
The Sabanitas water treatment plant is not operating in a satisfying way. Owned by IDAAN, Sabanitas supplies 40 percent of the city’s water, but it is 27 years old and requires refurbishment as some pumps are not functioning, the filter material is lost, the valves to filters are failing and the instrumentation is out of service, among other problems. Water losses in the Col6n business unit are almost 54 percent. The mains in the old part of the city date from 1935 and are still in use, as the recent renovation of these mains did not include the 7,000 service connections needed to connect users to the new network. 0 The average water consumption is 1,730 liters per capita per day, ten times higher than average for water supply systems in similar socio-economic conditions. This means that Colon has more than enough water but essentially one quarter of its service area is exposed to continuous intermittent water supply. The coverage of water metering is only 40 percent, and the efficiency of meter reading is 45 percent of all installed water meters. The collection rate is only 40 percent of billing, and no sewage tariff is charged”; so, the water sales are not enough to cover even the cost of bulk water supplied by the ACP. The situation in terms of wastewater, rainwater and seawater management is complex. Although the city has a functioning sewer system, seawater and rainwater infiltration dramatically increase the flow. The city has a submarine emissary that does not appear to work properly.
9. Considering the broad context of these problems, during project preparation the Bank team worked with IDAAN to establish a rapid water balance and assess the commercial and operational situation of the Col6n business unit to define, in a participative manner, the cost and
5’ Although IDAAN has requested ASEP’s approval of a sewerage tariff, the latter has not yet made a decision.
45 priority of proposed interventions. As the result of this work, this Component will encompass five broad activities that address the issues identified earlier:
10. Access to WSS infrastructure will finance the connection of more than 7,000 customers in the old part of the city to IDAAN’s WSS systems. These systems were built more than one century ago, and despite a recent extensive pipe renovation program implemented for both systems, poor financial planning meant that there was insufficient budget to build the service connections.
1 1. Improvements to existing WSS systems and urban drainage will finance three activities: (i) the rehabilitation of the Sabanitas water treatment plant that supplies 40 percent of the water to Colon; (ii) the studies and works designed to ensure adequate service standards, which will consider the system’s hydraulic modeling to design the new pipelines, storage tanks or pumping stations to reduce problems with low pressure and the update of the infrastructure and customer information database; and (iii) the development of a master plan for sanitation and drainage systems that will offer integral solutions to the ongoing problems. Given the level of complexity and uncertainty associated with finding sustainable solutions to address the problem of urban drainage, the Project would not finance works. However, once the outcome of the master plan becomes available, other financing sources may be interested in financing the works, or an additional financing operation could be discussed.
12. Improvement of operational and commercial business unit efficiency will finance the studies and works designed to reduce water losses and improve revenue. The Bank team and IDAAN agreed to work on two different programs: reduction in real water losses and improvement of collection revenue.
(i) The real water loss reduction program considers a leakage assessment, detection and repair subproject and a pressure management subproject. The leak detection subproject includes two elements: water audits and leak detection surveys. In the case of Colon, there are natural sectors that could be used initially to define the priority areas for leak detection. Later, this could be further developed in subsectors based on economic analyses. These subprojects will take into account difficult conditions encountered in detecting leakages that restrict the adequate techniques to be used: coralline (granular) ground and high level of underground water.
(ii) The collection revenue improvement program focuses on improving and strengthening all commercial life cycle activities, through the financing of activities such as: (i) updating and maintaining the customer billing data base, targeted specifically at including illegal connections and assessing lower-income customers who currently receiving government subsidies; (ii) meter installation campaigns which will replace inappropriately sized water meters, install new meters to better measure customer coverage and a special program for high consumption customers in the duty-free zone (Zona Libre); (iii) organizing activities to strengthen the billing process such as redefining tariff levels, controlling meter reading observations and assuring the delivery of the water bill; (iv) defining and implementing strategies to secure customer payment based on a framework of segmentation considering service quality and socio-economic characteristics of customers. The main purpose is to reach agreements to pay overdue bills, cut off services and employ legal collection
46 mechanisms; and (v) developing a program to improve customer services orland satisfaction, mainly through good client-service provider relationship.
13. This Component will consider too the repair and modernization of IDAAN Colon?s offices, workshops and Customer Service Center.
14. Demand management at end users will finance activities designed to reduce Colon?s very high level of water consumption. One of the most powerful methods to encourage demand management is to charge for water on a per unit basis, with payment tied to volumetric use. Thus, the Project will finance a meter installation campaign and billing program, as described above. Moreover, the parallel repair and retro-fitting of domestic house installations will provide an effective short-term option for reducing water demand. Additionally, this activity will support job opportunities for cooperatives to undertake repairs in the name and cost of IDAAN as well as a public awareness campaign consisting of two distinct elements, namely the transfer of knowledge and information and education to mobilize support and ensure the sustainability of the program.
15. Implementation of Coldn unit business communication program will finance technical assistance and the implementation of a broad communication program to define IDAAN?s social action policy during all project phases designed to bring IDAAN closer to its customers.
16. The Bank and IDAAN discussed the many options to improve the latter?s operational and commercial processes, considering lessons learned from past failures as well as sharing successful experiences from countries with similar conditions, especially in low-income areas. As a result, the Bank and IDAAN defined a proposal for component implementation based on the type of contract agreement in five groups:
1) Group One: studies for the rehabilitation of the Sabanitas water treatment plant and the development of a master plan for sanitation and drainage systems - Consulting services. 2) Group Two: new 7,000 WSS service connections in the old part of the city - Unit Price Works. 3) Group Three: Optimization of the water supply system and real water loss reduction - Performance based contract. 4) Group Four: Increased collection revenue program - Performance based contract. 5) Group Five: Social work and communication - Consulting services. 17. Finally, it should be noted that the Colon staff require training and capacity building to ensure they are able to effectively lead and supervise the Component?s activities.
Component 3: Institutional Strengthening and Project Management, Monitoring and Evaluation - Cost US$5 million (IBRD US$3 million)
18. Provision of support pertinent to ensure, inter alia, the carrying out oj
47 Institutional strengthening activities through, inter alia: (i) the establishment and operation of a Monitoring and Information System for Monitoring and Evaluation activities and sound data collection processes to feed information pertinent to IDAANS decision making; (ii) the building of capacity in sector operational best practices and management enhancement for selected IDAAN staff and management personnel.
0 Project management, monitoring, reporting, auditing and evaluation activities, including, inter alia, in respect of the implementation of IRF, IPPF and EMF and the provision of training and capacity building in relation to said activities.
19. The objective of this Component is to strengthen the capacity of IDAAN to implement, evaluate and learn from the Project’s activities. It will include two sub-components, one that seeks to strengthen the institution itself and another that encompasses project management and monitoring activities.
SubComponent 3A: Institutional Strengthening - Cost US$1 million (IBRD US$2 million)
20. The new management has clearly identified that the improvement of IDAAN’s current operational and financial position will require a combination of investment and institutional measures. While Components 1 and 2 (and other financing sources) focus on supporting improvements at local (Component 1) and regional (Component 2) levels, some institutional strengthening actions will also be need to be implemented at a national and utility level.
2 1. Several recent studies analyzed IDAAN’s operational and financial situation and proposed various changes, such as a system optimization contract by BIWATER (2003-2006); a study commissioned by MINSNIDAAN with IDB funding on IDAAN’s institutional strengthening, and undertaken HYTSA in 2005; a study financed by the Bank during the WSSLIC project preparation (2007) and undertaken by F. Frederick, a local individual consultant; and a recently completed optimization study by Louis Berger (2009). Most of these studies highlight the need for system optimization measures, ranging from leak reduction to demand side management and operational processes improvements. In addition, some studies recommend institutional strengthening measures, including: (i) the need to insulate IDAAN’s operational and commercial decisions from outside influence; (ii) the creation of a business-like culture in the company; and (iii) the necessity to re-think the operative, commercial and financial autonomy levels of IDAAN’s regional offices and establish them as true business units.
22. IDAAN’s new management is still deciding which policy it will pursue; in its review, the experience gained with the IDB’s “provincias centrales” (Central Provinces) project5*, as well as the experience with Col6n under this operation, will be important factors.
23. For IDAAN’s management to be able to monitor the performance of the various business units and make informed decisions, this sub-component will finance the purchase, installation and initial setup of a Management Information System to provide internal benchmarking and decision-making information. This system will build on several existing information systems and
52 Under this project, a foreign operator (SABESP from Sao Paulo / Brazil) was hired as a technical assistance entity to improve the business practices of 4 regional IDAAN business units. The project is just starting.
48 permit IDAAN’s management to obtain accurate, real-time information on the various business units’ operational and commercial performance. The installation of the software itself will be accompanied by in-depth technical assistance to ensure that the system is embedded in existing data collection processes, or that new processes are developed and actually used.
24. In addition, this sub-component will finance capacity building activities, such as the participation of IDAAN staff or management in trainings and study tours in countries with similar conditions, with the objective of establishing contacts and learning lessons from other public utilities that have managed a successful turn-around, as well as other activities as deemed necessary to continue successfully strengthening the utility during the course of the Project. This sub-component will also finance capacity-building activities linked with improved capacity for environmental management of WSS services and their implementation, supervision and mitigation.
25. It is worth mentioning that although a tariff revision is important to achieve efficient water usage and IDAAN’s financial sustainability, the Project is not going to tackle this issue given the following: (i) IDAAN already has the technical basiss3 for tariff restructuring; (ii) IDAAN has initiated the tariff revision process by submitting the sewerage tariff request to ASEP, with the final decision resting with ASEP and not with IDAAN; and (iii) a comprehensive tariff restructuring and implementation is ultimately related to political will. Therefore, the Project will focus on improving physical and commercial efficiency within the current tariff system. These efficiency gains are expected to show benefits to customers through service improvements, and to the GoP, through lower subsidies to finance IDAAN’s operational deficit. Finally, it is important to note that even though the Project is not directly supporting tariff reforms, the Bank team will continue to maintain awareness of this important issue during project implementation.
SubComponent 3B: Project Management and Monitoring - Cost US$2 million (IBRD US$2 million)
26. This subcomponent will finance the incremental costs of staff and non-staff salary, travel, training and the general operating costs of personnel working on project implementation within IDAAN, including the proposed External Projects Unit. It could also finance improvements for the surrounding environment, such as rehabilitation of offices, office and information technology equipment for the units involved in the Project. It will also finance the studies and administrative tasks and other activities resulting from the implementation of the Environmental Management Framework, Indigenous People’s Planning Framework and Involuntary Resettlement Framework.
27. In addition, this subcomponent will also finance monitoring and evaluation activities, including the collection of information and development of reports for continued evaluation throughout the project cycle by both project management and the Bank’s supervision team. It will also cover audits and other project management activities required for the proper implementation of the Project.
53 Study developed by Inecon, September, 2008.
49 28. Finally, this subcomponent will finance the contracting of a consulting company that will provide technical assistance to project implementation, including the preparation of terms of reference, Technical Specifications, the review of technical documents produced under the Project and other technical activities deemed necessary.
29. Estimates of Project Costs, by Component (US$ million)
Components IBRD GoP TOTAL Component I: Water Supply and Sanitation Service US$27.OM US$3.0M US$JO.OM Improvements in Lower Income Neighborhoods I I 1 I Component 2: Modernization of Water Supply and Sanitation Svstems in the Col6n Business Unit Component 3: Institutional Strengthening US$l.OM US$l .OM US$2.0M Project Management US$2.0M US$l .OM USS3.0M Total US$40.0M US15.OM USS55.0 M
50 Annex 5: Project Costs PANAMA: Metro Water and Sanitation Improvement Project
Local Foreign Total Project Cost By Component and/or Activity us us us $million $million $million Component 1: Water Supply and Sanitation Service 22.7 7.3 30.0 Improvements in Lower Income Neighborhoods Component 2: Modernization of Water Supply and Sanitation 11.6 8.4 20.0 Systems in the Col6n Business Unit Component 3: Institutional Strengthening and Project Management 3.7 1.3 5.0 Of which, 3A (Institutional Strengthening) 1.5 0.5 2.0 Of which, 3B (Project Management) 2.2 0.8 3.0
Total Baseline Cost 38.0 17.0 55.0 Physical Contingencies
Price ContingenciesY Total Project Costs 38.0 17.0 55.0 Interest during construction Front-end Fee 0.1 Total Financing Required 38.0 17.0 55.1
51 Annex 6: Implementation Arrangements PANAMA: Metro Water and Sanitation Improvement Project
1. The Republic of Panama will be the Borrower of the proposed loan. The implementation agency for this Project is IDAAN. IDAAN has the legal mandate to build, operate and maintain water and sanitation systems in all urban agglomerations above 1,500 inhabitants throughout the country, IDAAN, which is governed by Law 77 from 2001, is an autonomous State Entity with its own legal personality, patrimony and budget independent from the National Government. According to preliminary discussions, the proceeds of the loans will be passed on to IDAAN as a grant. 2. IDAAN has not implemented a multilaterally-funded operation in recent years as MINSA and other institutions have been doing this on its behalf. However, the new administration has decided that IDAAN should, from now on, implement its own investment program and that vision is shared by all multilateral institutions currently preparing new operations in the sector (CAF, IDB). To this purpose, IDAAN will create a new External Projects Unit directly under the Executive Director?s responsibility, which will be responsible and accountable for the implementation of all externally-funded projects implemented by IDAAN, in coordination with the various departments responsible for specific aspects of the Project. This unit will be supported by an external Technical Advisor company (Asesor Te?cnico) to be hired from loan proceeds that will provide technical assistance on all aspects of the project?s implementation. A Steering Committee consisting of all of the relevant IDAAN management will be created to oversee project performance and decide on corrective measures as needed. Finally, all units participating in the Project will identify dedicated staff (whether existing or to be contracted) that will be assigned with priority to the Project, and will benefit from training and physical environment improvements as needed. IDAAN, MEF and the Bank have agreed to the following detailed implementing arrangements. Within IDAAN, the following role distribution is envisioned:
0 Overall project coordination and planning will be handled by a proposed External Projects Unit headed by a senior management representative with direct link to the Executive Director of IDAAN. The unit will be supported by a dedicated team of technical staff. This unit and its head will have overall responsibility for project coordination and will be accountable for project performance. Overall technical support will be initially provided by an external Technical Advisor company to be hired from loan proceeds. The responsibility of this Technical Advisor, which will be a consulting company, will be to provide technical support to all departments involved in the Project, as well as other externally-funded projects (IDB, CAF) in areas such as elaborating terms of reference or technical specifications, reviewing consultant?s inputs and designs, etc. It will also provide the necessary training to the units involved, and more broadly to IDAAN, to help the staff acquire the necessary skills for effective contract and project management. After two years a joint capacity assessment will determine whether the Technical Advisor continues to be needed. Technical/operational aspects of Component I will be handled by the Engineering Department and commercialhocial aspects will be handled by the Commercial
52 Department. In addition, a coordination mechanism for investments in lower-income neighborhoods will be created, with an Inter-institutional Committee composed of IDAAN, MEF, MINSA, MIVI, and MOP. It should be noted that the scope of this Component overlaps almost entirely with the ongoing WSSLIC project’s urban component, and a company is currently being hired to conduct all technical and social work (including designs, supervision and consultations) in coordination with IDAAN. All technical and commercial aspects of Component 2 will be handled by the Colon Regional Unit (Gerencia Regional de Coldn), with the support from the Engineering and Commercial Departments, as well as the Technical Advisor to be hired under the Project. The implementation of Component 3 will be handled by the Planning Department and involve other departments in on a need-basis. The Technical Advisor will provide backstopping on this component as well. Environmental aspects will be handled by the Environmental Department (Departamento de Proteccidn y Control Ambiental). The Project’s Environmental Management Framework preliminarily identified the need to strengthen both the staff and the working environment. Social and communication aspects will be handled by the Sub-Division for Commercialization (Subdireccidn de Comercializacidn). IDAAN is currently considering the need create a new unit specifically in charge of working with lower- income neighborhoods, which would be under this Sub-Division. Strengthening of both staff and the working environment will be required, as this was identified as a priority during the social analysis conducted during project preparation. Possible Resettlement cases will be handled by the Legal Advice Office (Oficina de Asesoria Legal) in coordination with other relevant units. The Financial Management of the Project will be handled by the Finance Department (Departamento de Finanzas) within the Management and Administrative Services Directorate (Direccidn de Gestidn y Servicios Administrativos) of IDAAN. Strengthening of both staff and the working environment will be required. The following paragraph has more details on this aspect. The Procurement of the Project will be handled by the Procurement Department (Departamento de Compras) within the Management and Administrative Services Directorate. Strengthening of both staff and the working environment will be required. The following paragraph has more details on this aspect.
3. To facilitate the coordination and flow of information between the units and persons involved in project implementation, IDAAN will consider the implementation of an IT-based work-flow management system, which can be financed with loan proceeds.
4. The following organizational chart shows IDAAN’s current structure and the location of each of these units (the proposed External Projects Unit is not yet included).
53 Direcuon de Gestkjn y
____L___7 Oireccidn de Planifiwcion Direccion de lngeniwia -L. ____...... __. .-, L-. - - -..', -1 Depanamento de EstUdio y Depanomento de lmpeccidn Plandcacm Fisiw y 1 Dlseav Proyectvs AslgenciaTbica ,\ de --
Departamento de De~rrollo Depammenlo de Control de Departamento de Pmteccidn 1
I i Departamento de Prvyedos Especlales
- _.._ - - -.- - - -.-. - - - - - .------.. Nlvel Operativo I I ' Direccion de Comercializacion
5. A Steering Committee (Cumite' Directivu) will be created to coordinate the progress of the Project and make strategic decisions. This committee will include a high-level representative of each of the different divisions involved in the Project, and be chaired by the Director of Planning. Representatives from other key institutions (MEF, MINSA) will attend the meeting whenever possible. 6. A fiduciary assessment of this arrangement has been completed and the results are presented in the annex 7.
54 7. Under the proposed arrangement, the Bank loan or counterpart financing from MEF will finance various improvements of the physical environment of the participating units, some of which are either poorly equipped at the moment, or do not have sufficient resources to attend to the additional workload generated by the Project. Similarly, IDAAN also plans to use counterpart funding to finance the necessary additional staff in the respective units as a result of the Project.
Rationale for the proposed implementing arrangements
8. The ‘mainstreamed” arrangement will ensure better adoption of the Project’s outcomes. The proposed arrangements have been suggested by IDAAN and are supported by MEF. The Bank’s assessment is that they are feasible, although they might lead to a slower project implementation than a filly insulated Project Management Unit (PMU) doubled with the use of a fiduciary agent. The main rationale for using these arrangements is the need to ensure that good practices, policies and approaches developed under the Project permeate beyond the project scope and become institutional policies. While recent large multilateral operations in the sector finance large investment projects (for example the Panama Bay Cleanup Project financed by IDB and JICA), the proposed operation focuses on IDAAN’s core business, its relationship with its users. As such, it is ‘important that implementation be done in a way that is integrated into IDAAN’s current business processes.
9. IDAAN’s lack of prior experience in externally-funded projects is addressed without compromising their capacity to learn from the Project. The proposed arrangements reflect a balance between the GoP’s interest in rapid and straightforward project implementation and the need to use the Project as a learning experience for IDAAN. A number of measures have been taken to ensure that the Project is given sufficient managerial attention, including the formation of a high-level Steering Committee and the creation of a new External Project Unit with direct accountability to IDAAN’s Executive Director. In addition, participating units will be strengthened through additional staff, training and/or physical environment improvements as needed.
10. The absence of a fiduciary agent will strengthen IDAAN’s implementation capacity. The new administration has clearly indicated to the Bank that it intends to move away from the use of UNDP or other fiduciary agents as a way to circumvent the country’s own fiduciary control mechanisms and institutions, which in the past were deemed to significantly slow down the pace of implementation. As an immediate measure, the new administration is setting up a new unit within MEF that will take over the role of fiduciary agent from all UNDP-executed projects in a first phase, and eventually all projects with a fiduciary agent. The decision to not use a fiduciary agent means that the implementation capacity will remain within IDAAN and the Project will be an opportunity to improve its investment planning and management capacity.
11, The Project’s implementation pace will be monitored. The Bank team will monitor project implementation carefully and will raise issues of apparent bottlenecks stemming from the need to coordinate different units for project implementation. In addition, at mid-term review, those implementation arrangements will be re-examined and a decision will be made as to whether they should be maintained or changed to either a more PMU-like setting, or a fully institutionalized system.
55 Country, sector and project specific Governance and Corruption (GAC) issues
12. The overall country context is supportive of the GAC agenda. Overall, the GoP has made substantial progress in implementing good practices to improve transparency and combat corruption. In June 2008, a Social Responsibility and Fiscal Law was approved by the National Congress. An amendment to this law was made six months after its effectiveness, allowing the GoP a more flexible position to deviate a maximum fiscal deficit of 1 percent of GDP in the context of the global crisis. In compliance with this law, the new administration prepared a five year Government Strategic Plan (2010 - 2014), composed of a social and economic strategy and public investments of US$12 billion. Moreover, with the Bank’s support, the GoP has begun implementation of an M&E system, performance based budgeting and improving the public investment system.
13. Transparency is a legal mandate for all State institutions. Improvement in transparency has also been seen in civil society’s increased access to public information. For instance, Panarnu Compra has been a key instrument to strengthen trust in the public procurement system. The initiative of replacing small purchases through the introduction of Framework Contracts has enhanced the participation of the private sector in the procurement process. A new version, Panam6 Compra 11, will be launched in March 20 10, standardizing many processes and reducing discretionarily. In addition, all State institutions will be required to publish information such as financial statements, detailed payroll information etc.
14. IDAAN’s governance structure is legally well defined but provides only limited autonomy. Law No. 77 of December 28, 2001 re-organized IDAAN as a public, autonomous entity with financial and management autonomy regulated by the ASEP. As defined in the law, IDAAN’s Board of Directors consists of seven members, including the Minister of Health, a representative of the Executive Branch as well as five representatives of civil society (mostly the private sector) appointed by the Legislative Branch. However, the power of the Board of Directors is limited; for example, IDAAN’s general manager must be named by the Executive following a suggestion of three candidates by IDAAN’s board. IDAAN’s budget is submitted to approval by the Legislature; and the employees’ salary system is defined by the Executive as well. As a result, IDAAN cannot be considered a fully autonomous public company.
15. Further details on GAC measures under the Project are included in the Annexes on financial management (Annex 7) and procurement (Annex 8).
56 Annex 7: Financial Management and Disbursement Arrangements PANAMA: Metro Water and Sanitation Improvement Project
Summary Project FM arrangements
1. IDAAN, the state-owned water company, will be the implementing agency for the proposed Project and as such will be responsible for managing the fiduciary aspects through its institutional financial unit, including (i) budget formulation and monitoring; (ii) cash flow management (including processing payments and submitting loan withdrawal applications to the bank); (iii) maintenance of accounting records (including the administration and maintenance of an inventory of project assets); (iv) preparation and submission of in-year and year-end financial reports; (v) administration of underlying information systems; and (vi) arranging for the execution of financial audits. IDAAN, which follows the country’s financial regulations and utilizes a specially developed integrated administrative management system (OASIS), has a well- established institutional financial unit, responsible for the financial implementation of an overall US$170 million budget in 2009, with the ability to manage the fiduciary aspects of the proposed Project. However, since IDAAN presents some weaknesses in financial management (FM), such as no formalized operating policies and procedures in manuals, no experience in the fiduciary aspects of Bank-financed projects and a limited integrated system, mitigation measures were designed to ensure the effectiveness of FM implementation arrangements (presented in the section below). It is expected that satisfactory FM arrangements will be in place before loan effectiveness.
Detailed Project FM arrangements
2. Staflng: IDAAN has a well-established institutional financial unit with 17 staff, responsible for the financial implementation of an overall US$170 million budget in 2009. However, due to the current workload and lack of experience with multilaterally financed projects, it was agreed that two dedicated staff for the Project will be identified or contracted, with appropriate skills and experience, to manage the Accounting and Disbursement aspects of the proposed Project.
3. FM System: IDAAN will use its integrated FM system to record project transactions. As this system presents some limitations in terms of recording detailed information and producing project financial reporting, if necessary IDAAN will implement a set of subsidiary ledgers to prepare project financial reports.
4. Project Financial Reporting: On a semi-annual basis, for monitoring purposes only, IDAAN will prepare an unaudited interim financial report (IFR) containing at least: (i) a statement of sources and uses of finds and cash balances (with expenditures classified by subcomponent or categories of expenditures); (ii) a statement of budget execution per subcomponent (with expenditures classified by the major budgetary accounts); and (iii) a reconciliation of the advance to the Designated Account (DA). IDAAN will be responsible for submitting interim reports to the Bank not later than 45 days after the end of each semester.
57 5. On an annual basis, IDAAN will prepare project financial statements including cumulative figures, for the year and as of the end of that year, of the financial statements cited in the previous paragraph. The financial statements will also include explanatory notes in accordance with the Cash Basis International Public Sector Accounting Standard (IPSAS), and the entity’s assertion that loan funds were used in accordance with the intended purposes as specified in the Loan Agreement. These financial statements, once audited, will be submitted to the Bank not later than six months after the end of the GoP’s fiscal year (which equals the calendar year).
6. Working papers for the preparation of the semi-annual and annual financial statements will be maintained in the entity’s premises, and made easily accessible to Bank supervision missions and to external auditors.
7. Internal Control and Audit: In the course of its regular internal audit activities vis-a-vis the institutional budget, internal auditors from IDAAN may include project activities in their annual work plans. If such audits occur, the implementing entity will provide the Bank with copies of internal audit reports covering project activitiesmd financial transactions.
8. External Audit: IDAAN will prepare the annual project financial statements, which will be audited following International Standards on Auditing (ISA), by an independent firm and in accordance with terms of reference (TORS), both acceptable to the Bank. The audit opinion covering project financial statements will contain a reference to the eligibility of expenditures. Each audit report will also be required to include a section on the state of the internal control. IDAAN will submit its final annual audit report to the Bank no later than 6 months after the end of the fiscal year.
9. The audit work described above can be financed with loan proceeds. IDAAN will arrange for the contracting of the first external audit within 4 months after Loan Effectiveness. The first external audit contract will be expected to cover at least two years.
Audit Report Due Date 1) Project specific financial statements (including June 30 on the Designated Account statement) 2) Statement of Expenditure (SOE) June 30
10. Flow of Funds: Considering the results of the assessments, the following disbursement methods may be used by IDAAN to withdraw funds from the loan account: (a) reimbursement, (b) advance, and (c) direct payment.
11. Under the advance method and to facilitate project implementation, IDAAN will have access to a DA in US dollars which will be opened in the Banco Nacional de Panamci to be used exclusively for deposits and withdrawals of loan proceeds for eligible expenditure. Funds deposited into the DA as advances will follow Bank’s disbursement policies and procedures, as described in the Disbursement Letter and Disbursement Guidelines.
12. The ceiling for advances to be made into the IDAAN DA would be included in the Disbursement Letter. The reporting period to document eligible expenditures paid out of the DA is expected to be on a quarterly basis.
58 13, Supporting documentation for documenting project expenditures under advances and reimbursement methods will be records evidencing eligible expenditures (e.g. copies of receipts, invoices) for payments for consultant services against contracts valued at US$75,000 or more for firms, and US$25,000 or more for individuals; for payments for goods against contracts valued at US$lOO,OOO or more; for payments for works against contracts valued at US$250,000 or more; and for payment of training services against contracts valued at US$20,000. For all other expenditures below these thresholds, supporting documentation for documenting project expenditures will be SOEs.
14. All consolidated SOEs documentation will be maintained for post-review and audit purposes for up to one year after the final withdrawal from the loan account.
15. Direct Payments supporting documentation will consist of records (e.g.: copies of receipts, supplier/contractors invoices). The minimum value for applications for direct payments and reimbursements will be included in the Disbursement Letter.
16. The disbursement deadline date will be four months after the closing date specified in the Loan Agreement.
17. The Bank would finance up to a maximum of US$ 4,000,000 for eligible expenditures incurred after March 01,2010, but no more than one year from signing of the Loan Agreement.
18. Risk assessment and mitigation measures to address FA4 issues. From the FM perspective, the following is a list of key risks and issues identified at this stage.
a. Even though IDAAN has been audited regularly for the past three years, the auditors are not hired in a timely manner which impacts the result of the audit work as the auditors are not able to apply certain audit procedures (the auditors were not able to express opinions on the financial statements in 2006, 2007 and 2008) and prevents IDAAN from implementing correcting actions in a timely manner. There is a risk that IDAAN may fail to comply with the financial loan covenant relating to the submission of the annual audit report. Auditors for the project audit will be hired 4 months after effectiveness to ensure timely submission of the audit and compliance with financial covenants.
b. In the 2007 and 2008 audit report, the auditors identified material weaknesses in the internal control of the organization, which have not been resolved partly due to the delays in contracting the auditors. The auditors identified particular weaknesses in the control over accounts receivable which should have no effect on the proposed Projec't and fixed assets and inventory. Fixed assets purchased with loan funds will be entered into the existing fixed asset system, identified as project assets and a process of periodic inventory will be implemented by IDAAN. External auditors will also be responsible for auditing fixed assets.
59 c. IDAAN has an established and adequately staffed financial unit, but the unit has no experience with the Bank’s policies and procedures. This will imply additional training and supervision from the Bank’s side. IDAAN will identify or contract two dedicated staff for the Project, with ’ appropriate skills and experience, to manage the Accounting and Disbursement aspects of the proposed Project.
d. IDAAN does not have a set of comprehensive written policies and procedures with regards to financial management which impact the efficiency and consistency of processes. Specific FM processed and procedures are being designed in order to guarantee that project funds are used economically and efficiently. These processes and procedures will be reflected in a Project Operational Manual.
e. IDAAN has in place an integrated administrative system which encompasses procurement and financial management. However, this system presents some limitations, as it does not currently have the ability to produce project financial reports and does not link the financial information to the physical progress. IDAAN will investigate if and how the existing system can be used to prepare project reports. Alternatively, a set of subsidiary ledgers will be implemented to enable the preparation of project reports.
f. As part of the internal processes in Panama, IDAAN has to submit every payment to Contraloria (CGR) for review which significantly delays the payment process (from 60 to 90 days on average) and has the potential to delay implementation of the project. This is a country issue which has the potential to affect the proposed project, as the FM arrangements contemplate the use of country systems. The Bank will continue to monitor and provide technical assistance to the GoP to reduce delays in payments to vendors.
19. FM supervision: A World Bank FM Specialist may perform a supervision mission prior to effectiveness to verify the implementation of FM arrangements. After effectiveness, the FM Specialist must review the annual audit reports, should review the financial sections of the semi- annual IFRs and should perform at least two supervision missions per year.
60 Annex 8: Procurement Arrangements PANAMA: Metro Water and Sanitation Improvement Project
General
1. Procurement for the proposed project would be carried out in accordance with the World Bank?s ?Guidelines: Procurement under IBRD Loans and IDA Credits? dated May 2004 and revised October 2006; and ?Guidelines: Selection and Employment of Consultants by World Bank Borrowers? dated May 2004 and revised October 2006, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category is described below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
2. Procurement of Works: The proposed operation is expected to finance medium and large packages of works for the rehabilitation and expansion of water and sewage networks. Procurement will be done using Bank?s Standard Bidding Documents (SBD) for all International Competitive Bidding (ICB) and National SBD agreed with (or satisfactory to) the Bank.
3. Procurement of Goods: The proposed Project will finance medium-size contracts for procurement of goods necessary for modernization of water and sewage networks in Panama and Colon, vehicles and office equipment. In addition, Component 3 will finance small-value goods as part of institutional strengthening activities. The procurement will be done using Bank?s SBD for all ICB and National SBD agreed with (or satisfactory to) the Bank.
4. Law 22 became effective in December 2006 and introduced major changes for procurement processing in Panama. In addition, law 22 was modified by a series of consecutive laws in 2008 and late 2009:
0 law 41 from July 2008,
0 law 69 from November 2009, and
0 law 80 from December 2009.
5. Law 69 introduced a new procurement met,,od named ?I icitacion Abreviada?, which can be used for any process above US$30,000 and requires only 5 business days for submission of bids after publication of an invitation for bids in Panamacompra and direct invitation to qualified bidders. The period for submission of bids for "licitation abreviada? may become a constraint for participation, particularly in large-value and complex processes. Consequently, a special provision is recommended to be included in the loan agreement to address this issue.
61 6. The procurement team in charge of operations in LC2 countries reviewed Law 22 comprehensively and found it generally consistent with Bank’s procurement policies. The following issues are the main discrepancies:
0 use of bracketing, which is minimum and maximum bid prices; rejection of bids that do not accompany a compliant bid security at the time of bid opening; open bidding for selection of consultants;
0 Impossibility for foreigners to register at Panamacompra to submit electronic bids, 7. In addition, since the application of Law 22 is recent in the country, the extent to which the following procedures might affect procurement decisions could not be assessed and should be monitored in the future, such as: The “contratacidnpor rnkrrito” might become quite an arbitrary selection method and evolution of its use should be carehlly monitored;
0 For bids above $175,000.00, a pre-bid meeting can be arranged and it is not clear if attendance will become a mandatory requirement to bid; Framework contracts signed by DCP are of mandatory use to all government agencies for goods and services.
8. Based on the review of the Panamanian procurement legal framework, the team suggests that the following special provisions be incorporated in the legal agreement.
Special Provisions for the legal agreement: A. In addition and without limitation to any other provisions set forth in the Procurement Schedule or the Guidelines, the following principles ofprocurement shall expressly govern all procurement of goods (International Competitive Bidding) 1. Foreign bidders shall not be required to be registered with local authorities as a prerequisite for bidding; and 2. No bids shall be rejected, and no provisional awards shall be made at the time of bid opening. 3. The invitation to bid shall not establish, for purposes of acceptance of bids, minimum or maximum amounts for the contract prices; and 4. The invitation to bid shall not require mandatory attendance to a pre-bid meeting as a condition to bid. B. In addition and without limitation to any other provisions set forth in the Procurement Schedule or the Guidelines, the following principles ofprocurement shall expressly govern all procurement of goods (National Competitive Bidding) 1. Foreign bidders shall not be required to be registered with local authorities as a prerequisite for bidding; and 2. No bids ofproposals shall be rejected, and no provisional awards shall be made at the time of bid opening. 3. The invitation to bid shall not establish, for purposes of acceptance of bids, minimum or maximum amounts for the contract prices; and 4. The invitation to bid shall not require mandatory attendance to a pre-bid meeting as a condition to bid.
62 5. The time allowed for preparation and submission of bids shall not be less than 4 weeks, unless otherwise agreed by the Bank.
C. In addition and without limitation to any other provisions set forth in the Procurement Schedule or the Guidelines, the following principles ofprocurement shall expressly govern all procurement shopping. 1. Foreign bidders shall not be required to be registered with local authorities as a prerequisite for bidding; and 2. No bids shall be rejected, and no provisional awards shall be made at the time of bid opening. 3. The invitation to bid shall not establish, for purposes of acceptance of bids, minimum or maximum amounts for the contract prices; and 4. The invitation to bid shall not require mandatory attendance to a pre-bid meeting as a condition to bid. 5. A minimum of three quotations shall be obtained as a condition to award the contract. D. In addition to and without limitation to any other provisions set forth in the Procurement Schedule or the Consultant Guidelines, the following principles of procurement shall expressly govern all procurement of consultants’ services: Foreign consultants shall not be required to: (1) furnish any certijkate issued by a local authority about their legal capacity or tax status for the purposes of submitting a proposal; and (2) submit their proposals in person.
9. Selection of Consultants: the proposed Project will finance consultant services to prepare engineering designs for water and sewage networks, supervision of works, several studies for modernization of IDAAN’s corporate processes and procedures. In addition, individual consultants will be hired to strengthen the team that will coordinate project implementation.
10. Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.
1 1. In addition to quality-cost based selection, small and non-complex contracts for consulting services may follow the procedures for selection under fixed budget and least cost selection as defined in the Guidelines. Such cases will be reflected in the updates to the procurement plan. Consulting services that meet the conditions defined in paragraph 3.2 of the Guidelines may follow the procedures for quality-based selection with prior approval by the Bank in the procurement plan.
12. Operational Costs: the Project is expected to finance operational costs that include salaries of IDAAN staff and maintenance of a project coordination unit. The project will also finance financial audits. These contracts will follow IDAAN’s procedures that are acceptable to the Bank.
Assessment of the agency’s capacity to implement procurement
13. Procurement activities will be carried out by IDAAN’s institutional procurement unit (Sector de Compras). IDAAN has a well-established procurement unit with 14 staff that carried
63 out 1,935 procurement processes in 2008. One staff of the team is dedicated to larger contracts. The unit follows the country’s procurement law (Ley 22) for all processes it carries out. All steps preceding advertisement of procurement processes are recorded at OASIS, the agency’s administrative management system. Procurement processes are done through PanamaCompra, a system owned and operated by DGCP, the country’s procurement regulatory body. After award of the contract, the process comes back to OASIS for generation of a purchase order and the ensuing accounting procedures. OASIS and PanamaCompra are not integrated and only data on the winning bid is available at OASIS. Reconciling information from OASIS with PanamaCompra can only be done manually.
14. PanamaCompra is a system for disclosure of information on government procurement. It discloses bidding opportunities as well as contract awards. All bidding documents and amendments as well as clarifications are available for download. The system is not transactional though, and consequently, agencies cannot receive bids electronically. Bidding processes are still implemented by sector agencies following procedures defined in the law. These agencies publish their invitation for bids, contract awards, bidding documents and amendments, and clarifications in PanamaCompra s website. A second version of PanamaCompra with a transactional feature was on the works when this project was being prepared. The Bank is supporting hrther development of PanamaCompra through the public sector technical assistance project, loan 7446- PA.
15. All invitation for bids and contract awards financed by this operation will be published in PanamaCompra and will be available at a dedicated webpage to World Bank-financed contracts. Bidding documents, amendments and clarifications will also be available for download. The Bank conducted assessment of the capacity of IDAAN to implement procurement actions for the project. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and IDAAN’s relevant central unit for administration and finance.
16. Most of the issueshisks concerning the procurement component for project implementation have been identified and would comprise the following two sets of risks. First, there is a set of risks associated with the institution as follows: Recordkeeping: IDAAN has no policy for recordkeeping of procurement documents. The procurement unit keeps all documentation produced for smaller contracts (up to US$ 30,000) for which a purchase order is issued; however, documentation is fragmented and at times unavailable for contracts estimated to cost more than the indicated figure as the contract is prepared by the legal department, which does not keep documentation about the procurement process. Procurement planning: IDAAN does not have a procurement planning process and operational planning is incipient overall. Information availability: IDAAN does not have a procurement management information system. The agency has all its processes available at PanamaCompra but reporting is limited. It might become an issue for post-reviews and audits. Unfamiliarity with Bank-financed procurement: the procurement team working at IDAAN has no previous experience with procurement financed by Multilateral Development Banks.
64 Limited experience with procurement of larger contracts: in 2008, IDAAN carried out 1,935 procurement processes, out of which only 18 cost more than US$30,000. Besides being an indication of weak procurement planning, it shows that IDAAN has limited experience with procurement of larger contracts, which are expected to be part of Component 1 of the proposed operation.
17. Secondly, regarding risks related to the country’s broad procurement operational framework, two main risks might impact implementation of the project: Lack of accountability of staff working on procurement; and Limited planning process, which causes unplanned procurement processes to arise during the course of the fiscal year.
Agreed action plan Action Timeframe Status 1 Development of internal guidelines for Before Appraisal Completed. recordkeeping of procurement documents for Bank-financed contracts and such guidelines to be part of the project’s operational manual. 2 Preparation of a procurement plan for at least the Before Negotiations Completed. first twelve months of project implementation. 3 The procurement team at IDAAN should update During Implementation Completed. SEPA on a regular basis to include data for signed contracts or else it should prepare a document to track all contracts financed by the Bank’s operation, including as a minimum: process identification, description, procurement method, review by the Bank, supplier, contract amount, date of contract signature. 4 The Bank will deliver training on Bank-financed Project Launch Completed. procurement to IDAAN’s staff during project launch. 5 Hire a part-time or short-term consultant to advise Before Implementation As of April 1 gth,20 10, IDAAN during the beginning of the project and IDAAN was also with large-value and complex procurement interviewing potential packages. candidates. The consultant should be onboard for
18. The overall project risk for procurement is high. Prior review thresholds will be set accordingly so as to ensure that the Bank will prior review contracts for which IDAAN has little experience with implementation. The thresholds for procurement methods that will be used for preparation of the procurement plan will be as follows:
Procurement Method Goods Works ICB $250,000 $3,000,000 NCB Up to $250,000 Up to $3,000,000 Shopping Up to $30,000 Up to $250,000
65 19. The thresholds for review by the Bank that will be used for preparation of the procurement plan will be as per the table below. These thresholds might be reviewed during project implementation provided that capacity to implement procurement increases.
Procurement Method Goods Works I Consultants
Post review Up to $30,000 1 Upto$500,000 I up to $100,000
Procurement Plan
20. A procurement plan for the first 18 months of project implementation was prepared and it provides the basis for the procurement methods and review by the Bank.
cost Bank revision Activity Method (%1,000) Type (prior or post) Component 1 -Water Supply and Sanil tion Service Ir irovements in Lower Income Neighborhoods Rehabilitation and improvements to water I I Works ICB Prior supply networks (primary network) 9.100 Construction of water and sewage networks Works ICB Prior in communities 16.650 Design, supervision and social monitoring Consulting 3.000 QCBS Prior included in the PASAP-MINSA study services Support to improve commercial practices Consulting QCBS Prior 1.000 services urage user connections to Consulting QCBS Prior 0.250 services
pply and Sani ition Systems i Consulting 0.150 QCBS Prior services I Consulting QCBS Prior 0.500 services 1 2.000 Works Prior Consulting Prior 0.300 services 1.500 Works NCB 1 Prior Supply and ICB Prior 6.500 installation 1 information, improve efficiency of meter reading, eliminate direct services, replace Supply and Prior nonworking meters, fraud control, service 6.000 installation cuts and reconnections, consumption Consulting I_ Prior 0.250 services 1.700 Works Prior 0.750 Goods Prior
66 cost Bank revision Activity Method ($1,000) Type (prior or post) Training Operating 0,350 costs I I I
~ Component 3 - Institutional Strengthening and Project Management Component 3A - Institutional Strengthening Design of Management Information System Consulting QCBS Prior 0.100 services Implementation of Management Information Consulting Qcss Prior System 0,100 services
2 1. The procurement plan will be available on the internet at SEPA, the regional procurement plan monitoring system. SEPA will allow IDAAN and the Bank to monitor implementation of the procurement plan remotely as well as follow-up on necessary updates to the plan. The procurement plan will be updated in agreement with the project team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
Frequency of Procurement Supervision
22. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of IDAAN has recommended a minimum of one supervision mission per year in the field to carry out post review of procurement actions.
67 Annex 9: Economic and Financial Analysis PANAMA: Metro Water and Sanitation Improvement Project
Summary
1. This annex consists of two sections: (a) financial analysis of IDAAN; and (b) economic and financial analysis of the Project.
2. The results of the financial analysis of IDAAN show that while the Project will result in efficiency gains, they will not be sufficient to achieve the financial viability of the utility as a whole. Further improvements are needed to reach financial autonomy for service operation and investment financing. The Five Year Investment Plan funded by the GoP should be revisited to reallocate resources to actions aimed at improving and achieving management efficiency.
3. This analysis was complemented by a detailed analysis on the current tariff system and the subsidies applied. Results show that the current tariffs do not follow the legal framework and that the subsidies amount to US$132 million annually, with only 10 percent of this targeted to the low income population.
4. Results of the economic and financial analysis show that the Panama Metro Water and Sanitation Improvement Project is economically and financially viable with returns for of US$53 million and US$l05 million, respectively. The financial internal rate of return is 24 percent and the economic return is 32 percent. These analyses are presented in detail in this annex and complemented with distributive, sensitivity, and risk assessments.
A. Financial Analysis of IDAAN
5. The financial analysis of IDAAN was based on the audited financial statements for the past three years, even though they did not have the approval of the external auditors, Deloitte Inc. The use of financial projections, built during preparation, helped to extract the potential financial results for the next ten years under different scenarios of operational efficiency.
6. The financial analysis for the past three years demonstrates IDAAN’s poor performance. Commercial, operational and financial indicators underline these results. The outcome is a utility that is not financially viable, whose operation greatly depends on GoP funds and its investments have to be totally funded by the GoP. Net losses have gone from 22 percent of billed revenues in 2006 to 43 percent in 2008. Operational costs with depreciation were 21 percent higher than billed revenues in 2006 and 40 percent higher in 2008. The GoP annually transfers about US$50 million , of which US$21 million was used to cover the operational deficit and US$29 million to cover annual investment.
To cover investment Total
68 7. Many factors concur to explain this situation:
A poor pricing policy. The current tariffs were established in 198254 and they have since remained constant, as the regulatory entity, ASEP, has not adjusted them with inflation. The tariff structure does not provide incentives for efficient water use and the price of water does not reflect the cost of providing this service. According to INECON a consulting firm hired by the IDB to carry out a tariff the cost of WSS services in IDAAN is US$0.70/m3, while the current tariff is US$ 0.27/m3. Cost recovery is just 37 percent. A tariff to pay for sewerage service does not exist. In December 2009, IDAAN’s Board of Directors approved a sewerage tariff, which is currently under evaluation by ASEP. If this tariff is implemented, the cost recovery level would increase to 46 percent, with the GoP subsidizing the remaining amount. 0 Poor commercial management. Most water consumption is not metered and billed water is based mostly on estimated consumption. About 50 percent of customers have micro- meters, but only 70 percent of these are used for billing purposes and they suffer from poor maintenance. There is no enforcement policy for the payment of bills, accounts receivables are higher than five months of billing and there is a high number of unregistered customers who receive the service but not the bill. Ineflcient operational indicators. Indicators such as labor productivity and non-revenue water show ample room for improvement to reduce operational costs. With 5.3 employees per thousand water connections, IDAAN’s staffing levels are higher than similarly-sized water utilities. Non-revenue water is 41 percent, but this level is somewhat uncertain given the deficient metering practices. Ineflcient water use. The lack of incentives for efficient water usage is reflected in the high use of water per person. According to IDAAN’s billing data, water billed is about 400 liters/person/day (lpd), and water produced is about 660 lpd, which is one of the highest compared to other countries in the region. High water use combined with low tariffs, and high water production result in high operating cost and lower revenues. 0 Expensive water supply. Water supply comes from: (i) water bought by IDAAN from the ACP and AP; and (ii) water produced by IDAAN in its own water treatment plants. About 35 percent of the water supplied by IDAAN comes from ACP and AP, at costs three times higher that IDAAN’s own production costs. The third part of operating cost corresponds to bulk water costs, which equal to 40 percent of billed revenues. High energy demand. The distribution system has a high energy needs due to the number of pumping stations. Panama is highly dependent on oil to generate energy, and as the price of oil has risen during the last several years, energy costs have also grown, reaching 39 percent of the operating costs and 52 percent of billed revenues in 2008.
8. Table 9.2 below summarizes IDAAN’s financial statements and financial indicators, with the results for 2009 estimated based on IDAAN’s preliminary financial statements.
54 Presidential Resolution on February 26, 1982 and published in the Gaceta Oficial of March 12, 1982. 55 INECON, Ingenieros y Economistas Consultores S.A. Estudio sobre La Definicidn de Politicas Tarifarias del IDAAN. Study financed by Inter-American Development Bank and Ministry of Health Panamh. Panama . September 2008.
69 Table 9.2: Financial: itements IDAAN 20l -2009 OOOUSD INCOME I 2006 2007 STATEMENT BILLED REVENUES 78,164 85,143 *86,999 89,036 OPERATING EXP 76,961 84,610 104,663 100,977 EBITDA 1,203 533 (17,664) (11,941) Depreciation €2 prov 16,893 16,846 16,379 18,404 EBIT (15,690) (16,3 13) (34,043) (30,346) Financial expenses 1,741 1,120 79 1 429 Non op reviexp 502 1,923 (2,543) 500 NET NCOME/(LOSS) (16,929) (1 5,510) BALANCE SHEET 2,006 2,007 ASSETS Current Assets 4 1,767 49,220 78,724 69,468 Long Term Assets 535,137 556,612 562,572 607,876 TOTAL ASSETS 576,904 605,832 64 1,296 677,344 LIABILITIES Current Liabilities 38,001 36,747 49,539 49,539 Long Term Liabilities 14,199 12,467 16,202 16,098 TOTAL LIABILITY 52,200 49,214 65,741 65,637 EQUITY 524,704 556,618 575,555 61 1,707 LIABILITY& EQUITY 576,904 I 605,832 64 1,296 677,344 Operating costs
9. Operating costs increased by 7 percent in real terms over the last three years while revenues decreased by 6 percent. The two most important components of the operating costs are bulk water and energy costs, which together correspond to slightly more than 60 percent of the total costs, and they have increased in real terms by 6 and 1 percent, respectively. ’- I Revenues -6.1% Operothg Cost by component (M) I Operating Costs Personnel -2.3% I Bulk Water (ACP&AP) 5.8% Water Tanks 85.8% Cammei ctateina Chemicals 20.0% Energy 0.9% Others 20.5% 2 ooi 2 057 ?am ‘W+ t
_-__I Total 7.1%
Bulk water costs
10. Approximately 24 percent of water supplied by IDAAN comes from the ACP and AP, with 81 percent of this total from ACP and 19 percent from AP in 2008. All existing contracts have 30
70 years duration, and the AP contract, with a termination date in 2028, is the earliest to expire. The tariffs established in the contracts have a cost index for periodic adjustment to cost increases. The tariffs have the approval of ASEP. The contracts establish a minimum volume of water that IDAAN is required to purchase. Table 9.4 below summarizes the conditions of the contracts.
Water Contract Contract Minimum Maximum Tariff Periodical Treatment Duration Expiration Volume Volume Adjustment Plant Date (MGD)' (MGD)' according to cost index Miraflores 30 yrs 2036 42 45 0.6941000 gal"' Every three years Mount 30 yrs 2036 24 30 0.694*/000 gal"' Every three years Hope Fixed chargeimonth: ACP US$lO,OOO/MGD Mendoza 30 yrs 2036 40 40 capacity. Each year plus US$ 0.255/000gal Every time that the Laguna 30 yrs 2028 20 20 1.601000gal variation is higher Alta than 3%
11, On average, IDAAN ays US$0.23/m3 for bulk water, corresponding to 90 percent of the current tariff of US$0.27/mP applied to customers, The bulk water tariff is about three times the production cost of IDAAN's own water treatment plants of US$0.07/m3 Figure 9.2: Bulk Water Costs Table 9.5: Bulk Water Relative to IDAAN Operating Cost and TarifJs
0 43 costs tariff ACP Tariff AP Tariff 6.4 Average bulk water tariff 3.4 0.7 0.9
Energy costs.
12. Due to the pumping required, water system is highly dependent on energy, with energy needs corresponding to 39 percent of total operating costs in 2008, thus requiring 52 percent of total revenues to pay for it.
71 Water Trucks Costs
13. IDAAN supplies water to neighborhoods without water connections, totaling some 355,000 people. The service is provided through private trunk owners contracted by IDAAN at an agreed transportation cost per gallon, which at present is in average US$O.O138/gallon. The agreed price is 16 times the current water tariff charged to IDAAN’s customers, and the cost is even higher when water costs and water losses are taken into account, Moreover, there is no associated revenue as IDAAN does not charge for this service. Investme Pzts
14. IDAAN’s annual investment level has declined by 35 percent in the past three years, going from US$41 million in 2006 to US$26.7 million in 2008. The budget implementation has also decreased from 96 percent in 2006 to 45 percent in 2008. The investment level corresponds to just twice the depreciation, Figure: 9.3 Annual Investment (000 US$)
”_ 70000 60000 50000 40000 Budget 30000 Implementation 20000
10000 * 0 2006 2007 2008
Financial Indicators.
15. IDAAN’s financial stress under has led to imbalances in its financial results, putting additional pressure on key financial ratios and on IDAAN’s ability to finance its operational and potential investments. Current liabilities are as high as 75 percent of total liabilities, and they correspond almost to 60 percent of annual revenue billed. The liquidity ratio level, which shows values higher than one, does not say much about the good cash-flow situation, but more about the way IDAAN finances the current liabilities with inefficient and unbearable accounts receivables.
72 Table 9.6: ‘nanclal A dicators 2006 2007 2008 2,009eS‘ Working ratio 0.99 1 .oo 1.21 1.14 Operating ratio 1.20 1.19 1.39 1.34 EBITDA margin 2 Yo 1Yo -20% -13% Net incomehev -22% -18% -43% -34% Average W&S tariff (US$/OOOgal) 1.02 0.99 0.98 0.99 Per m3 (US$/m3) 0.27 0.26 0.26 0..26 Debt Indicators: Total Debmevenues 0.67 0.58 0.76 0.74 Current liabilitiedtotal liabilities 0.73 0.75 0.75 0.75 Total liabilitiedassets 0.09 0.08 0.10 0.10 Commercial indicators Account receivables turnover (months) 3.47 4.69 5.71 5.71 Provision bad debtshevenues 1Yo 1Yo 1% 1Yo Revenue collection (%) 87% 94% 85% Operating indicators Labor productivity (emp/lOOO con) 5 .O 5.3 Unaccounted for water (YO) 42% 45% 41%
Financial Projections
16. The financial projections were built for a ten year period. Two scenarios were analyzed to evaluate IDAAN’s financial situation for the forthcoming years. The first scenario consisted of keeping the current operating status constant. Two variations were included for the calculation of billed revenues: with and without implementation of the sewerage tariff approved by IDAAN’s Board of Directors and awaiting ASEP authorization. The second scenario (base case scenario) included the efficiency improvements expected with project implementation, as well the targets of the Five Year Investment Plan.
17. The main focus of the analysis was the impact on operational and net margins. This evaluation was discussed in detail with IDAAN’s administration and with personnel from MEF, which helped them to revisit some of the actions needed to achieve the financial autonomy, one of the main objectives of the current administration.
18. This analysis is complemented with a sensitivity assessment of the financial results depending on changes in key variables.
Assumptions of the financial projection
19. Specific Assumption for First Scenario. Operating indicators remain at current levels: water coverage at 90 percent and sewerage coverage at 52 percent; water losses at 41.3 percent; operating unit costs at 2008 levels and adjusted with inflation; projection of volume of water needed based on current productiodpersodday of 660 lpd; water balance based on availability of IDAAN’s water sources; and bulk water; water tariffs at current levels. Sewerage tariffs are
73 included in one of the situations evaluated under this scenario. No loans were included, as it was assumed that the GoP would finance operational deficits and investment costs.
20. Specific Assumptions used for the Base Case Scenario. Operating indicators according to targets from project implementation: water losses decrease from 41.3 to 32 percent, with the 9 percent improvement coming from a 3 percent reduction of physical losses and 6 percent reduction of commercial losses; water productiodpersodday decrease from 660 lpd to 647 lpd due to a reduction in physical losses; micro-metering increased from 51 to 66 percent; and sewerage tariffs implemented in the second semester of 20 10.
21. Improvement from the Five Year Investment Plan included only coverage increase: water supply coverage increased to 95 percent and sewerage coverage increased to 76 percent. Additional improvements were not included given the GoP and IDAAN’s lack of clarity regarding actual targets to achieve with the Plan.
22. Assumptions used for both scenarios. Some of the assumptions were the same for both scenarios, such as:
Macroeconomic indicators: (a) inflation assumed at 2.50 percent for 2010, and 2.0 percent for 201 1, and on; (b) exchange rate difference of local currency (Balboa B/,) to US dollar remained at one to one; Population data based on information published by the Statistics Department in Panama (Direccidn de Estadistica y Censo), with an annual growth rate of 1.46 percent; For sanitation, all the targets and operating costs expected with the IDB-financed Panama City and Bay Cleanup Project included; Volume of bulk water will comply with the commitments signed in existing contracts; thus the volume of water bought by IDAAN will not be reduced under any of the scenarios. Bulk water tariffs were adjusted with annual inflation; Operational deficits and investments are financed by GoP funds with no financial cost for IDAAN; Unit operating costs are adjusted with annual inflation; Water truck costs consisted of the transportation cost charged per gallon, which is adjusted with inflation. The volume of water required for distribution on water trucks was estimated based on the water coverage over the years and a consumption of 20 gallons per person per day.
Results of Financial Projections.
First Scenario. IDAAN does not attain any improvement.
23. The results show that if IDAAN keeps working at its current operating levels, the GoP will need to invest US$41 million annually to cover its operational deficit over the 2010-2015 period. If depreciation is included, the need for funds increases by US$25 million per year. If the sewerage tariff is included from the second half of 2010, the deficit will be reduced by US$16 million per year, but the need for GoP funds will still be as high as US$25 million to cover operating expenses, with depreciation not included.
74 24. The indicators under this scenario show the poor financial situation. By 2015, the net financial loss will be 60 percent of billed revenue, and operating costs (without depreciation) will be 34 percent higher than revenues.
Figure 9.4: Projected IDAAN Net Losses Table 9.7: Deficit in US$ millions with sewerage tariff)
150,000 Deficit (million US$) (with 2010-2015 2016-2018 Billed sewera e tarif Revenues 100,000 BITDA (151) (127) Operating Cost 50,000 equired annual transfer 42 Operational +25 et Income I I income (50,000) NNNNN F Table 9.8: Financial Indicators ‘sumini lDAAN does not ach we perfor ance im rovement 2010 2013 Working ratio 1.14 1.29 Operating ratio 1.34 1.52 EBITDA Margin (YO) -13% -8% -27% -28% -29% -33% Net income to revenue -34% -52% -54% -59% Average operating cost Operating cost (US$/OOO gal) 1.27 1.55 1.56 LiabilitiedRevenues 0.67 0.58 0.59 0.59 0.58 0.58 Current liabilities/total liabilitv 0.76 0.74 0.75 0.75 0.76 0.76
Base Case Scenario. Improvements from the Proposed Project and others in the 5-year plan are attained.
25. Results show that the estimated efficiency gains attained with the Project and the other investments contemplated by the GoP in the Five Year Investment Plan will not be sufficient to eliminate IDAAN’s operational deficit. The GoP will still have to transfer about US$11 million to cover annual operational deficits plus all investment required. When depreciation is included an additional US$25 million will be required.
26. Although the Project will not ensure IDAAN’s financial viability, the financial impact will still be important. The deficit will be reduced by US$S5 million, and as a result GoP transfers to IDAAN will be concurrently reduced over the 20 10-20 15 period. All financial indicators will show improvement as presented in Tables 9.9,9.10 and 9.1 1 below.
75 Table 9.9: Final 2010 2011 2012 2013 2014 2015 Working ratio 1.14 1.07 1.15 1.10 1.07 1.09 Operating ratio 1.34 1.27 1.34 1.30 1.27 1.29 EBITDA Margin (%) -13% -6% -14% -9% -6% -8% Net income to revenue -34% -27% -34% -30% -27% -28% Average operating cost Operating cost (US$/OOO gal) 1.27 1.32 1.48 1.44 1.40 1.45 LiabilitiedRevenues 0.67 0.57 0.53 0.50 0.48 0.47
If none Only with Others WB and improvement WB different to others is attained Project WB project projects Operational Deficit (151) (1 12) (105) (66) Net Losses (303) (265) (257) (2 19) Deficit reduction 39 46 85
Income Statement Results 2010-201 5 2016-201 8 (million US$) EBITDA (66) (42) Required annual transfer I 11 I 14 Net Income (2 19) (133)
27. When project improvements are evaluated separately, without considering other projects in the Five Year Investment Plan, the results show that the deficit would be reduced by as much as US$39 million over the next five years. If only the other projects are included, the deficit would be reduced by another US$46 million. Adding the benefits from all the projects, the reduction of the deficit would be about US$S5 million.
28. It is important to notice that this deficit reduction is achieved when all the actions from the Project, and others, are implemented. These measures will reduce the production cost and increase revenues through reducing physical water losses and improving commercial performance. There is ample room for additional actions to boost revenues and significantly reduce operating cost. During project preparation, neither the GoP nor IDAAN had clarity about the targets to be obtained with the other projects, and they require further work to determine targets and their associated investments.
Sensitivitv Analvsis
29. A sensitivity analysis was carried out to measure the impact on financial results when changes on efficiency performance occur. This analysis measures the results by changing each variable while the others remain constant. The variation could imply achieving additional improvements or, on the contrary, missing some of the assumed targets.
30. The results show that for the 2010-2015 period: (i) a 1 percent additional improvement of water losses would imply a US$8 million reduction of the deficit, the contrary would happen if the assumed target were short in 1 percent; (ii) a 1 percent reduction of the number of employees
76 per 1,000 connection would decrease total deficit by US$2 million; (iii) a 1 percent increase in micro-metering will reduce by US$2 million the total deficit. As improvement increases so do the financial results.
3 1. These outcomes were discussed with IDAAN’s Directors and Government authorities, focusing on financial autonomy, which is one of the main objectives of this administration. Results show that this objective will only be achieved if additional and more aggressive measures are taken. Some simulations were run to show how this objective could be achieved.
0 To eliminate the operating deficit by only raising tariffs, the required increase for the next five years would be 52 percent. When depreciation is included, a 86 percent increase in tariffs would be needed. When real costs are to be covered, a 169 percent increase in tariffs would be required. All these increases are on top of the current water tariff plus the sewerage tariff that is still awaiting ASEP approval. If the deficit were to be eliminated by reducing operating costs, a 24 percent decrease is needed when depreciation is not included, or a 44 percent decrease when depreciation is included.
Table 9.12: Results of Sensitivity Analysis
To eliminate To eliminate net To cover total operating deficit losses cost ...... Increase required 52% 86% 169% Resulting tariff ...... US$/^^) 0.40 0.48 0.70 Decreasing on operating costs 24% 44%
0 If the deficit were to be eliminated with a set of actions to achieve different levels of efficiency gains, the alternatives are numerous, including incentivizing water use efficiency, reducing water losses or achieving cost efficiency, etc. The table below presents one set of actions as an example of eliminating the deficit over the 2010-201 5 period.
Table 9.13: Impro ’emenis Ne Current To eliminate To eliminate net Levels operating deficit losses Production per capita 1Pd 660 630 413 Water use per capita 1Pd 497 497 326 Water losses (%) 41% 30% 30% Labor Productivity (emp1/1000 con) 5.3 3.8 3.8 Micro-metering 5 1% 81% 90%
0 The et rgets are not easy to attain and therefore aggressive measures are needed. It is important to notice that IDAAN’s task ahead is a challenging one, The GoP and IDAAN face two main constraints to fully attain the benefits of efficiency improvements, namely: (i) the current tariff structure; and (ii) the current long term bulk water contracts.
77 Table 9.14: Efficiency Gains to be Made with Bulk Water Contracts 100%
80%
60% Water produced by 40% IDAAN 20% Bulk water 0% - 2008 2015 wfo 2016 with efficiency efficiency gains gains
(i) Current tariffstructure lacks incentives for the efficient use of water, as explained in more detail in the following section. Figure 9.5: Efficiency gains with bulk water contracts (ii) Current long term contracts of bulk _. water with ACP and AP. The conditions established in the contracts for bulk water concerning the **I % of minimum volume of water that 40% utilization of IDAAN is obliged to buy, and the ' IDAAN's long lifetime of the contracts, limit the production possibility of fully enjoying the 2.0" *\O*'. *p"' capacity benefits associated with efficiency %o+ gains, especially those related to e+ --- -- ~ decreased production requirements. In ~ 2008, 24 percent of the volume of water supplied by IDAAN came from bulk water bought from ACP and AP, and the remaining 76 percent was produced at IDAAN's own treatment plants. In 2015, if no improvement is attained, the share of bulk water will increase to 32 percent. On the other hand, if efficiency gains are attained at levels so that the required production per capita decreases to 326 lpd, the share of bulk water will increase to 64 percent, while the volume of water produced by IDAAN decrease to 36 percent.
32. It is also interesting to notice what this means in terms of IDAAN's water production capacity utilization percentage. While IDAAN produces at full capacity, the water supplied is not sufficient to meet demand. This will continue into 201 5 if no improvement is achieved, further increasing the water deficit. However, if efficiency gains are attained and the production per capita is reduced to 326 lpd, IDAAN's production capacity use will be reduced to just 30 percent. This has important repercussions on the operating costs, given that the bulk water cost is three times the production cost that IDAAN has at its own water treatment plants.
33. IDAAN's administration is aware of these constraints and has started planning to resolve the situation. At present, IDAAN is evaluating the cost of rescinding the contract signed with AP,
78 which is the costliest of all the bulk water purchases contracts. IDAAN has estimated the amount of the penalty and different options are currently under consideration.
34. IDAAN’s administration is also aware that more aggressive measures are needed to achieve financial viability, thus they are designing strategies to improve the commercial efficiency, and they expect to show important results this year.
B. Economic and Financial analyses of the Project
35. The Project is economically and financially viable with returns of US$53 million and US$102 million, respectively. The financial internal rate of return is 24 percent and the economic return is 32 percent. These analyses are presented in detail in this annex and complemented with distributive, sensitivity and risk assessments.
Methodology
36. The cost benefit analysis carried out for Components 1 and 2 was done from financial and economic perspectives. From a financial perspective, it was evaluated by estimating costs and benefits at market prices, in the same way IDAAN will be paying or receiving from each input. From an economic perspective, it was evaluated converting financial cash flows into economic cash flows to eliminate distortions caused by taxes, subsidies and other externalities. Based on the results of the economic and financial analyses, a distributive assessment was conducted to estimate the impact on the different stakeholders, such as, government, customers and suppliers. The impact on government corresponds to the fiscal impact, which measures the magnitude of taxes and subsidies that occur in the transactions. Finally the results of the economic and financial evaluation were tested against world uncertainties through sensitivity and risk analyses.
37. The expected Project benefits are: (i) increased reliability of water supply, reducing current water supply intermittence; (ii) increased coverage of WSS services; and (iii) more efficient water usage. The revealed preference technique was used to measure these benefits through the avoided cost approach.
38. The net benefit of the each Component was estimated as the incremental benefit of two scenarios: with and without project situations. The with project situation included the proposed investment program and its associated targets. The without project situation assumed the service would continue unchanged, Le., coverage remained constant, as well as intermittent water supply and current operational indicators.
39. All Components were appraised measuring of the expected costs and benefits for the Project’s lifetime, estimated at 30 years. Costs and benefits were expressed in constant prices of June 2009. The discount rate corresponded to Panama’s opportunity cost of capital, estimated at 10 percent.
79 Benefits identified with the Project
40. The Project aims: To improve service reliability reducing water supply intermittence, allowing beneficiaries to have continuity at least 16 hours per day, seven days a week; To expand water and sewerage coverage; 0 To reduce water losses, both real and apparent. Reduction of physical losses will bring: (a) savings in operating expenses; and (b) increased water supply, thus reducing intermittence and expanding service. Reduction of commercial losses will: (a) increase IDAAN’s revenues and incentivize a more efficient use of water in project areas; 0 To increase micro-meters and improve the use of them for billing purposes, which will improve IDAAN’s billing procedures and increase revenues only when metered consumption is higher than billed consumption, which is not the situation in Colon. To increase the revenue collection rate, thus increasing IDAAN’s revenue.
Table 9.15: Current Indicators and Expected Results from the Project Component 1 Component 2 Current Target Current Target Water losses 41% 33% 54% 3 7% Real losses 24% 21% 32% 25% Apparent losses 16% 12% 21% 12% Micrometers effectively used for billing 19% 65% 19% 65% Revenue collection rate 46% 71% 3 6% 71% Financial Benefits
41. The benefits of the Project were measured in financial terms as the increase of revenue and the reduction of operating costs:
(i) Revenues were measured as volume of water billed times the average tariff per cubic meter, and then affected by the collection revenue rate. The volume of water billed depends on the amount of meters installed and used. The metered consumption was based on data of users effectively metered for billing purposes. For non-metered customers, IDAAN’s estimated average consumption was used. The still unapproved sewerage tariff was used in both scenarios. The increase of revenues will come from: a. Increased number of customers registered in the commercial database b. Metered consumption c. Increased revenue collection d. Expansion of coverage, which will bring more customers to the system and increase revenues from connection charges, which are US$8 for water connection and US$20 for sewerage connection. This is a one-time charge at time of connection
(ii) Reduction of operating costs, which will occur when real water losses decrease, or when consumption per capita is effectively reduced. In both cases there will be lower production requirements and thus lower operating costs. Assumed per capita production was different for each component - in Component 1 it was assumed the same as in Panama City, while in
80 Colon it was based on actual production and population served. Costs will also be reduced when the operation becomes more efficient, as will be the case in Colon where a 35 percent reduction of energy consumption is expected.
Economic BeneJits
42. The economic benefits of the Project were estimated as follows:
(i) Elimination or reduction of intermittent water supply. This benefit was calculated, as the avoided cost households will have when rationing is eliminated or reduced. It is estimated that 25 percent of population in Component 1 and 30 percent in Component 2 receive water less than 16 hours a day. The rationing cost was estimated based on the solutions households use today to deal with water intermittence: a. The first solution consisted of installing and operating household storage tanks and pumping equipment. The cost of this solution is about of US$0.75/ m3 56 plus the cost of each cubic meter provided by IDAAN, about US$0.24/m3 for residential customers. The resulting rationing cost for this solution is US$0,98/m3. b. The second solution consisted of storing water in several containers with a capacity of 200 liters. The cost of this solution was estimated at US$1.04/ m3 57, plus the cost of each cubic meter provided by IDAAN, about US$0.24/m3 for residential customers. The resulting rationing cost for this solution is US$1 .27/m3. c. According to IDAAN personnel working in the area, about 60 percent of households have a reservoir at their dwelling and 40 percent use containers to storage water.
(ii) Increase of water coverage. About 6 percent of households in the project area of Component 1 and 1 percent in Component 2 do not have access to potable water in their homes via household connections. In each area they receive water from different sources: a. In Colon (Component 2), 99 percent of the households have access to piped water, yet about 15 percent of them do not have legalized the service. To receive water, these families install a pipe and small electric powered pumps to transport the water from IDAAN’s system to their houses. These connections are outside the houses or .buildings and most of the time they have more than one pump to ensure the water reaches apartments on the upper floors. Some buildings have so many outsides pipes that they resemble a web with many pumps alongside them. These connections cause important water leaks that are visible to everyone. The economic cost for this type of solution consists of the investment cost of the pipes and the umps, plus the energy cost required to operate the pump. This cost was estimated5f to be US$1.12/m3. In Colon this was the cost used given that there is no water trucks service.
56 The cost of installing and operating these reservoirs is estimated as follows: (i) investment cost of the reservoir US$160, plus investment cost of a pumping equipment US$ 150, both with 5-year lifetime, and (ii) operating costs equivalent to 5% of investment cost,. This results in a cost of US$ 0.75/m3 for a consumption of 10 m3 per month ’’ The cost of buying and cleaning the water containers is estimated as follows: (i) investment US$20 with a 2-year lifetime, and (ii) cleaning costs of about US$ 10 per month. This results in a cost of US$1.04/m3for a consumption of 10 m3 per month per container. 58 The cost of this type of connection is estimated as follows: (i) investment cost of the pumps and the pipes US$200, both with 5-year lifetime, and (ii) operating costs equivalent to 5 percent of investment cost,. This results in a cost of US$l. 12/m3 for a consumption of 4 m3per month
81 b. In Panama Metro, the water needed for those with no connection is provided through private water trucks contracted by IDAAN at an agreed transportation cost per gallon. Currently, the transportation price is US$O.O 138/gallon, which is equivalent to US$ 3.65/m3. With the Project, IDAAN will reduce water truck services and will benefit from this avoided cost. The population will benefit with the Project when having access to water inside their houses. However, they will have to pay the water bill to IDAAN, which corresponds to a minimum of US6.4/hh/monthYwhile currently they receive the water free of charge.
(iii)Improvement of sewerage service. Sewer pipes are currently in such poor conditions, especially in Colon, where sewage overflows regularly, especially when it rains. This situation brings bad odors, overflow of sewage on the streets and sometimes inside houses. Project interventions will help reduce these problems and improve the quality of life and health of the beneficiary population. (iv)Expansion of sewerage coverage. Households without sewerage service have on-site solutions, which vary from septic tanks, pit tank, latrines or nothing at all. The economic benefit was estimated as the avoided cost the beneficiaries have once the Project is implemented. The benefit varies according to the solution. For septic tanks, the benefit was estimated at US$11.2/household/month59.The cost of having a latrine and maintain it properly was estimated at about US$4/household/month60, According to the National Institute of Statistics and Census (Institutu Nacional de Estadistica y Censo, INEC), 62 percent of households without sewerage connection have latrines in Panama City and 34 percent have septic tanks; while in Colon, 31 percent of those without sewerage connection have latrines and 65 percent have septic tanks. The benefit is partially offset with the cost that some of the households will have to incur for adjusting the in-house connection and sanitary equipment to make possible the access to the service. The cost of in-house connections was estimated at US$250.
(v) Savings in operating costs associated with the reduction of water losses. The reduction of water losses and the incentives for an efficient water use will result in a lower production requirement.
(vi)Health benefits will likely occur when environmental conditions improve; however, they were not quantified in this evaluation. costs
43. Costs include investment and operating costs. Investment costs corresponding to project costs, including operating costs are: (i) production cost bulk water costs, estimated according to water purchase contracts and capacity of IDAAN’s own water treatment plants. The production was calculated based on water consumption, water losses and capacity of production; (ii)
59 The estimation was based on the following costs: (i) an investment cost of a typical septic tank of US$355 with a lifetime of 15 years; (ii) maintenance and repair cost of US$12O/year, incurred once every three years; and (iii) cleaning cost of US$46 per year. The total cost per year is US$ 1 1.2/household per month. 60 The cost of a latrine was assumed as: US$160, plus the cost of cleaning it up and maintain it properly at about US30 per month. With 5-years lifetime and 10 families sharing the latrine, the cost per family per month is approximately US$4.
82 personnel cost calculated based on current unit cost and labor productivity; (iii) energy cost based on the energy required per cubic meter produced and unit cost of energy; and (iv) others according to current costs and projection of connections.
44. The conversion factors below were used to convert the financial prices into economic prices: 0 Domestic inputs 0.95 Imported goods 0.92 0 Skilled labor 0.97 0 Unskilled labor 0.9 1 0 Standard 0.97
45. The resulting economic cost was about 95 percent of the financial costs.
46. Results show that both project components are financially and economically viable, with returns higher than 16 percent in all the cases. The entire Project shows net financial benefits of US$53 million and financial returns of 24 percent. The high financial benefits are explained mainly on improvement on revenue collection and incorporation of current illegal connections to the commercial database.
47. The economic benefits are US$l05 million, with an internal rate of return of 32 percent. Most of the benefits come from avoided costs caused by water intermittence, which pay off the additional costs incurred by customers as shown in the distributive analysis.
Components NPV of flows (000 US%) Benefits costs Net benefit IRR Financial Results Component 1 35,447 17,752 17,696 16% Component 2 32,564 (3,379) 35,943 3 9% Total Financial results 68,011 14,372 53,639 24% Economic Results Component 1 53,137 2 1,433 3 1,703 25% Component 2 7 1,928 (2,007) 73,936 43% Total Economic results 125,065 19,426 105,639 32%
Distributive Analysis
48. The difference between economic and financial flows represents rents or monetary flows that occur to someone other than IDAAN. Winners and losers were identified when decomposing inputs of all economic and financial costs.
49. The biggest winners are the customers who gain US$53 million, mostly from the avoided cost from rationing, which compensates for the higher bills they will pay to IDAAN as well as for the costs of adjusting the in-house connections. The GoP will receive taxes from the Project but they will be lower than earlier taxes on operating costs due to the efficiency gains. When investment subsidies are included the GoP will lose around US$40 million.
83 Table 9 7: Distributive Im zct Component 1 Component 2 Total Project Government Taxes On Investments 1,498 2,374 On O&M (652) (1,690) Total taxes 845 684 Customers W&S bills (3 5,447) (32,564) (68,011) Saving reducing rationing 36,560 69,82 1 106,381 Savings for having sewerage 16,577 1,737 18,684 Payment for in-house connections) (3,086) (379) (3,464) Total Customers 14,604 38,614 53,590 Others Suppliers (1,442) Total Others (1,442)
50. The sensitivity analysis measures the impact on the results when variations occur on the assumptions. The outcome is measured by changing one variable while all others remain constant. The variables selected are those believed to carry major risks, including: (i) investment cost overrun; (ii) operating cost overrun; (iii) project delays; (iv) reduction on rationing cost; (v) reduction in the micro-metering target; (vi) reduction of the revenue collection rate target; and (vii) no implementation of sewerage tariff.
51. Result show that the Project is not at risk regarding changes in only one variable. Investment cost overrun could almost double yet the Project would still show positive financial and economic returns. Operating and maintenance costs could be as high as 29 percent and the Project would still show positive returns. If the Project is delayed by four years it would still show project returns. Micro-metering could not improve and the Project would still show profits. Rationing cost could decrease as much as 90 percent and the Project would still show positive economic results. The same happens with revenue collection rate. If the sewerage tariff is not implemented, the financial results will still be positive, showing US$35 million profit and an internal rate of return of 19 percent (for component 1 the results will decrease to US$8 million and an internal rate of return of 13 percent; and for component 2 US$27 million and an internal rate of return of 32 percent IRR).
Component 1 Component 2
Investment costs overrun 96% I 131% I 195% 1 400% O&M costs overrun 29% 42% 3 7% 80% Missing micro-metering target by 90% 100% 100% Project Investment delays (# years) 7 9 >4 >4 Rationing costs decreases 76% 90% Missing revenue collection rate 22% 100%
84 F. 5 Risk Analysis
52. To enhance the accuracy of the financial and economic analysis, real world uncertainties are approximated using Monte Carlo simulation with the Crystal Ball software. This software measures the extent of various risks and their impact on the results of the Project by modeling a likely probability distribution that best describes the behavior of each of the selected variables, Based on a simulation of 1,000 trials the model recalculates the results of the financial and economic analyses by simultaneously changing each of the selected risk variables according to their probability distributions.
53. Table below presents the assumed probability distributions of each variable and their respective parameters.
Table 9.1 9: Probability Distributid of Assumptions
I IlLIUtNtl .~LILLP*WW& Triangular distribution with parameters: Minimum -30% Likeliest 0% Maximum 30%
Triangular distribution with parameters: Minimum -30% Likeliest 0% Maximum 30%
Custom distribution with parameters: Value Probability 0 0.50 Project delays (# of years) 1 0.30 I 2 0.10 3 0.05 4 0.05
Lognormal distribution with parameters
Location 0% Mean 30% Std dev 20%
Lognormal distribution with parameters
Micro-metering Location 0% target missedby 1 1 Mean 15% StdDev. 5% I 1
85 Financial Results Economic Results Mean expected Probability of Probability of Mean expected NPV Component positive NPV (oooNPV us$. positive NPV (000 US$) Component 1 50% (220) 67% 6,947 Component 2 89% 19,668 95% 37,600 Total project 71% 12,230 96% 43,023
86 Annex 10: Safeguard Policy Issues PANAMA: Metro Water and Sanitation Improvement Project
Social
1. OP 4.12 Involuntary Resettlement. The policy is triggered when occupied land is needed for construction of a common good and people or economic activities need to be relocated, or because of environmental risks faced by dwellings included as beneficiaries of project interventions to expand access to WSS services. Involuntary resettlement will be avoided where feasible, or minimized by exploring viable alternatives. The urban WSS works (Component 1 mostly) may trigger the need for land acquisition of sites currently inhabited by social units or economic activities for the construction of water tanks, water treatment plants and other related infrastructure. As the exact location of interventions is not known, an Involuntary Resettlement Framework (IRF) has been prepared by the Borrower and disclosed in-country and published in Infoshop on March 16, 2010. The framework describes processes and procedures for free prior and informed consultations, the screening of affected persons, the communication strategies needed, asset valuation, compensation mechanisms, financial and legal responsibilities of parties involved.
2. The policy framework clarifies resettlement principles, and organizational and financial arrangements. For every case of resettlement, an Involuntary Resettlement Plan (IRP) will be prepared and submitted to the Bank for its no objection, prior to initiating construction of the infrastructure. The policy covers direct economic and social impacts that result from Bank- assisted investment projects, and are caused by: Relocation or loss of shelter; Loss of assets or access to assets; or Loss of income sources or means of livelihood, whether or not the affected persons must move to another location; or The involuntary restriction of access to legally designated parks and protected areas resulting in adverse impacts on the livelihoods of the displaced persons. 3. Each IRP will include the following: A description of the subproject &d the area where it will be developed. Location of the properties required by the subproject. Results of the diagnosis (topographic information of the assets, land titles and socioeconomic studies). Identification and analysis of impacts for the displaced population. Alternatives of solutions based on the type of impacts and the characteristics of the population. Eligibility criteria. Description of the Disclosure and Information Program. Land Acquisition Program. Program for housing replacement. Program for the reestablishment of social and economic conditions. Institutional framework. Required human resources.
87 0 Budget. 0 Schedule. 0 Monitoring and evaluation mechanisms.
4. Regarding supervision and monitoring of the IRF, IDAAN’s Indemnification Department, under the Legal Department, carries out the supervision and monitoring of the legal processes for compensation of affected persons due to involuntary resettlement. Moreover, Bank supervision missions will include a social development specialist to follow up on cases of land acquisition and/or resettlement to ensure due diligence on the part of the Borrower. The OP4.12 applies to all components that result in involuntary resettlement, regardless of the source of financing.
5. OP 4.10 Indigenous Peoples. Although specific areas have not been yet been selected in the neighborhoods of Alcalde Diaz, Chilibre and the district of San Miguelito, the social assessment identified the presence of indigenous communities (Kuna, Ngabe-Bugle and Embera- Wounaan) living in these neighborhoods and others that may be covered by the Project. Therefore, the Borrower has prepared an Indigenous Peoples Planning Framework (IPPF) that sets out certain provisions to ensure that the collective identity of indigenous peoples does not constitute a barrier for accessing project benefits or contribute to any potential adverse impacts caused by the Project. The Framework has been disclosed in-country and published in Infoshop on February 24, 2010. The Framework includes mechanisms to screen for indigenous groups collective attachment to land, which must be taken into consideration in the event that said land is considered for acquisition or involuntary resettlement of its occupants. The Framework includes free prior and informed consultations with the indigenous communities as part of the Social and Technical Intervention Plan to ensure stakeholder participation before, during and after the public works are handed-over to the beneficiary neighborhoods.
6. The IPPF includes provisions for supervision and monitoring of the agreements set forth in the Framework to ensure that the Community Participation Unit (presently under the Commercial Directorate) supervises the social interventions of IDAAN and the contracted firms in the indigenous areas. Moreover, the Bank team will follow up on social and indigenous issues during supervision.
7. There are no other social risks foreseen beyond the coverage of the social safeguards policies triggered under this Project.
8. The Social and Technical Intervention Plan. The Plan - which is part of the project’s operating manual - includes an inclusive strategy to ensure stakeholder and beneficiary participation before, during and after the public works. Communities will participate in the planning stages, convey views and preferences on the designs, participate in the implementation (community contracting) and share responsibilities for maintenance of the installed systems including payment for services. Thus, the Plan seeks to instill ownership of the systems, governance and accountability in service administration and equity in benefit distribution. The basic scheme includes four parts: (a) Planning; (b) Designs; (c) Implementation; and (d) Operation. The Plan will be carried out by a Consulting Firm, currently being contracted as part of the WSSLIC project under the supervision of a working group including IDAAN and MINSA. Screening for the need of land acquisition and/or involuntary resettlement, or for the presence of indigenous communities is done early on (first four months) during the planning stage of the
88 Plan. The consultation process and screening procedures will be inserted in the terms of reference of the Consulting Firm.
Table 10.1: SOC '1 and Technical Inter rtion Plan Phase Planning Project Designs Implementation Operation Duration 4 months 10 months 8 months 2 months Technical Data collection Final designs of Supervision of Activities priority areas construction of Organization and analysis of public works data Preparation of final designs Diagnosis of water and sewer systems Bidding of priority projects Collection of Baseline
Selection of technical options based on financial
Preparation of Master Plan
Social and Analysis of legal framework Discussion of designs Community Implementation of Institutional with communities training on water management model Activities Proposal of intervention system models Promotion and community training Support for Consultations on Master Plan adjustment of Development of legal tertiary connections Screening for land acquisition instruments for in each household. or involuntary resettlement. implementation of Elaboration of IR Plans, if Master Plan needed.
Screening for Indigenous communities in the project area. Elaboration of Plan to include Indigenous peoples as project beneficiaries In preparation and implementation.
Conformation of the Local Committee with representatives of Corregimiento, IDAAN, MINSA, MEF, MIVI, MOP.
Environment
9. The environmental assessment identified potential environmental impacts, some positive and others negative, with the latter of a reduced nature. On the positive side, one can include improved waste water management in peri-urban areas (Panama Metro and Eastern Panama City). The Project will not tackle the issue of wastewater treatment in Coldn as the investment needed for such an enterprise is beyond the financial scope of the Project and there is the
89 potential of another donor embracing this challenge. However, should it later be decided that the Project will embark on building wastewater treatment plants in Colon, or elsewhere, a full Environmental Impact Assessment will be undertaken in compliance with national legislation. A first assessment indicates that the requirements as specified in the national legislation adequately satisfy Bank Environmental Safeguards requirements.
10. The Project will improve existing wastewater systems and not embark on the construction of new systems. This will have the immediate positive effect of improving environmental health quality by eliminating wastewater in public spaces such as streets, which is currently a common sight. Increasing the coverage of wastewater collection also has the added environmental benefit of eliminating the potential contamination of ground water through mismanaged residential disposal systems. Once the specific intervention areas have been defined, the environmental assessment will verify that the existing treatment stations serving the newly connected homes have the capacity to deal with the added volume of wastewater.
1 1. Other negative environmental impacts include minor inconveniences resulting from construction such as dust and noise and disruption of traffic due to the installation of the network of pipes. Appropriate mitigation measures have been identified and are presented in the Environmental Management Framework (EMF), which forms part of the project’s Operating Manual. The EMF has been disclosed in-country and published in Infoshop on March 3,2010.
12. OP 4.1 1 on Physical and Cultural Resources will not be triggered given that the Project will be implemented entirely in existing urban areas. According to local experts, it is highly unlikely that project interventions would unearth an artifact or other physical or cultural resource that is of national import. Nevertheless, the EMF provides clear guidance on what procedures should be followed should there be an unlikely chance find. These are correspondingly reflected in the OM.
90 Annex 11: Project Preparation and Supervision PANAMA: Metro Water and Sanitation Improvement Project
Planned Actual PCN review 12/16/2009 Initial PID to PIC 0 1/Ow20 10 Initial ISDS to PIC 0 1/Ow20 10 Appraisal 03/17/2010 Negotiations 04/06/20 10 Board/RVP approval 05/18/2010 Planned date of effectiveness 09/3 0/20 10 Planned date of mid-term review 03/3 0/20 1 3 Planned closing date 09/3 0/20 15
Key Institutions Responsible for the Preparation of the Project:
IDAAN- Instituto de Acueductos y Alcantarillados Nacionales (National Water and Sewer Agency 1 World Bank staff and consultants who worked on the Project:
Bank funds expended to date on project preparation: 1. Bank resources: us$212,000 2. Trust funds: US$ 0 3. Total: us$212,000
91 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$15,000 2. Estimated annual supervision cost: See below
I Year I Resource Estimate I 1 1 150% of normal supervision budget 2 I 120% of normal suDervision budget I 3 I Normal suDervision budget I 4 I Normal supervision budget 5 I Normal supervision budget (+ ICR budget) Strategy and Approach for the Implementation Support
15. The Implementation Support Strategy design is built on the following key considerations: a. The Project was prepared rapidly, under a framework approach in response to a request from the GoP for immediate and flexible support. b. All of the project implementation activities will take place in or around the PMR. The number and dispersion of implementation sites will be limited. c. IDAAN has no prior experience in implementing multilaterally-funded projects. d. The Project involves significant policy reform aspects at IDAAN’s level but limited sector-level policy discussions. e. The IDB and CAF are currently preparing new financing operations with IDAAN. The IDB has a Panama-based water and sanitation specialist, while the Bank has no sector specialist based in Panama and only very limited Country Office with no fiduciary staff.
16. As a result the proposed Implementation Support Strategy is a. The Project will be supervised by a HQ-based team which will coordinate with the local Country Office as necessary. In addition to the usual sector, safeguard and fiduciary staff, the team will also include a small number of high-level international consultants who have been involved in project preparation and will continue to assist the Borrower during project implementation, in particular with the more delicate reform aspects of the Project. b. Supervision will start immediately after Board Approval to finalize and initiate the procurement of the Project’s key activities. Frequency of supervision missions is expected to be higher at the beginning (possibly 4 per year) and decrease to the usual 2-3 missions per year after the Project reaches a good implementation pace. c. Fiduciary and safeguards trainings will be offered early on to IDAAN’s implementation staff and the team’s fiduciary and safeguards staff will initially be providing support and advice to their counterparts in addition to their supervision function. d. Continuous coordination will be sought with other multilaterals (mostly IDB at this juncture) and whenever possible joint supervision missions will be organized. Mission aide-memoires will be shared with partners when joint missions are not feasible.
92 17. The Implementation Plan will be revised regularly during implementation on the basis of project progress and continuous risk assessment.
Implementation Support Plan
18, Technical Support. Most of the investments contemplated under the Project are not technically highly complex. Rather, the complexity lies in the integration between the investment (structural measures) activities and the surrounding business tools and processes (non-structural measures). This integration represents an innovation for IDAAN, and the risks to the PDO of not achieving it warrant the strengthening of the team on the most complex technical issues. Specifically: a. Component 1 requires strong social outreach activities on the part of the utility’s operational and commercial departments. The team has been and seeks to continue supporting this part of the Project with an international consultant with practical experience in utilities work in lower-income neighborhoods. b. Component 2 requires similar skills and will require support from the same consultant; in addition, the successful implementation and long-term sustainability of efficiency improvement measures has proven a challenging issue for IDAAN in the past (as for many other utilities) and the team will also be complemented with an experienced international consultant on that topic. c. Component 3 will be mostly led by the team’s sectoral experts but specific support from high-level consultants might be needed.
19. Fiduciary support. IDAAN has not implemented a multilaterally-funded project in recent years. As a result the fiduciary assessment has suggested an action plan on both FM and procurement, in addition to closer initial supervision needs. Specifically: a. Procurement; The overall project risk for procurement is high. Prior review thresholds will be set accordingly so as to ensure that the Bank will prior review contracts for which IDAAN has little experience with implementation, which will entail higher-than-usual workload for the procurement function. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of IDAAN has recommended a minimum of one supervision mission per year in the field to carry out post review of procurement actions. b. Financial Management. Given the risks identified and the design of the Project, FM requirements will include annual financial audits, semi-annual FMRs, FM training and supervision. In addition, as part of the FM arrangements, the entity will prepare an OM and identify or contract dedicated FM staff for the proposed Project, which will be reviewed during the annual supervision missions. FM supervision will consist of a possible mission at the time of effectiveness (to ensure successful implementation of FM arrangements), review of annual audit reports (to provide assurance regarding the proper use of funds), review of semi- annual financial reports (to monitor the implementation of the Project) and at least two FM supervision missions, at least at the beginning of project implementation (to review the continuing acceptability of FM arrangements).
20. Safeguards support. Given the institutional weaknesses identified in IDAAN for implementation of environmental and social safeguards, the Project will work closely with
93 IDAAN’s technical staff on project implementation. The Bank team will work closely with senior management to identify appropriate staff to receive safeguards training. If necessary the project team will facilitate the inter-institutional dialogue with the Environmental Agency, ANAM and the Ministries of Health and Housing on environmental issues that pertain to all. Moreover, IDAAN will count on the EMF, the IRF, the IPPF and the OM for the sound implementation of social and environmental mitigation measures and safeguards compliance.
21. Thematic support. Besides the supervision of the Project itself, the team expects that there will be a need to continue policy dialogue on a range of topics, in close consultation with the team leading the Bank-funded WSSLIC project and other financing institutions. These topics include the overall sector’s institutional structure, IDAAN’s governance and the relationship between operational and investment subsidies and results achieved by the institution. It is expected that most of this dialogue can be led by the Project’s sector specialist together with representatives from the country team. Specific support from other sector specialists or specialists from other fields (results-based budgeting, public companies governance etc.) may be needed at certain times of project implementation.
22. Implementation main focus. The following table summarized the main focus of implementation during the life of the Project.
Time Focus Resource Estimate Partner Role First twelve months Getting the Project 150% of supervision underway and generating budget goodwill with early results 12-48 months Developing good Normal supervision budget practices, initiating policy dialogue on IDAAN’s situation Closing Drawing lessons learned Normal supervision budget and mainstreaming good practices, implementing policy recommendations
Skills Mix Required
23. The following table summarizes the proposed skill mix and number of staff weeks in the initial phase of project implementation. It is expected that demand will decrease and change with time. Skills Needed 1 Numberofstaff I NumberofTrips I Comments
94 Skills Needed Number of Staff Number of Trips Comments Weeks Consultant on Commercial Aspects 4 2-4 Communication Specialist 4 2-4 Other specific consultants 4 4
95 Annex 12: Documents in the Project File PANAMA: Metro Water and Sanitation Improvement Project
Project Preparation Documents Project Concept Note. Project Information Document (Concept Stage), Report No. AB5288,2009. Project’s Integrated Safeguards Datasheet “Documento Marco Ambiental Metro.Agua.” IDAAN, 20 10. (Environmental Management Framework for Metro.Agua) e “Documento Marco de Reasentamiento Metro.Agua” IDAAN, 20 10. (Involuntary Resettlement Framework for Metro.Agua) e “Documento Marco de Pueblos Indigenas.” IDAAN, 20 10 (Indigenous People’s Framework for Metro-Agua)
2. Other Bank Documents
e World Bank’s Group Country Partnership Strategy for the Republic of Panama, Report NO. 39040-PAY2007. e World Bank Group’s Country Partnership Strategy Progress Report, Report No. 47725, 2009 e Program Document on a Proposed Loan in the Amount of US$SO million to the Republic of Panama for a Protecting the Poor Under Global Uncertainty Development Policy Loan, 2009. e Project Appraisal Document on a Proposed Loan in the Amount of US$32.0 million to the Republic of Panama for a Water and Sanitation in Low-Income Communities Project, Report No. 39865-PAY2007.
3. Studies
e Louis Berger, Fortalecimiento Institucional del IDAAN con Acciones de Optimizacibn en la Ciudad de Panamd, 2009. (Institutional Strengthening of IDAAN together with optimization activities for the City of Panama). e HYTSA, Fortalecimiento Institucional del IDAAN en sus Aspectos Administrativos Comerciales y Financieros, 2005. (Administrative, commercial and financial institutional strengthening for IDAAN). Felipe F. Frederick, Consultoria en Fortalecimiento Institucional del IDAAN, 2007. (Consultancy for institutional strengthening of IDAAN). INECON, Estudio Sobre la Definicibn de Politicas Tarifarias del IDAAN, 2008. (Study on the definition of tariff policies for IDAAN).
4. Government Documents
e IDAAN Five Year Investment Plan e Panamd Plan Estratkgico del Gobierno 2010-2014. (Panama / Government’s strategic plan for 2010-2014) e IDAAN Boletin Estadistico 2006-2008 (IDAAN’s statistical bulletin, 2006-2008).
96 Living Standards Measurement Survey, 2008
5. Laws and Regulations Law 77 of December 28,2001 Law 2 of January 7,1997
97 Annex 13: Statement of Loans and Credits PANAMA: Metro Water and Sanitation Improvement Project
Difference between expected and actual Original Amount in US$ Millions disbursements Proiect ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Oria. Frm. Rev’d PI06445 2009 PA Hlth Equity & Performance 40.00 0.00 0.00 0.00 0.00 33.09 12.41 0.00 Improvement PO82419 2008 PA-Water&Sanitation in Low-Income 32.00 0.00 0.00 0.00 0.00 28.18 8.18 0.00 Comm. PO98328 2008 PA Social Protection project 24.00 0.00 0.00 0.00 0.00 17.47 6.54 0.00 PO64918 2007 PA Rural Productivity (former 2nd Rur Po 39.40 0.00 0.00 0.00 0.00 33.71 10.57 0.00 PO55844 2002 PA Public Policy Reform TA Project 16.50 0.00 0.00 0.00 1.28 3.72 I .o 5.0 PO50595 2001 PA LAND ADMINISTRATION 47.90 0.00 0.00 0.00 0.00 3.38 3.38 3.38 Total: 199.80 0.00 0.00 0.00 1.28 119.55 42.08 8.38
PANAMA STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars Corn mitted Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2003 Aguas Panama 4.63 0.00 0.00 7.29 4.63 0.00 0.00 7.29 1999 BANISTMO 9.41 0.00 0.00 0.00 9.41 0.00 0.00 0.00 1997 Banco General S. 4.12 0.00 0.00 0.00 4.12 0.00 0.00 0.00 2000 Banco General S. 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00 Banco Uno - Pan 20.00 0.00 0.00 36.56 20.00 0.00 0.00 36.56 2006 Banco Uno - Pan 0.50 0.00 0.00 0.00 0.30 0.00 0.00 0.00 2007 Banco Uno - Pan 1 .oo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 Continental-PAN 35.00 0.00 0.00 0.00 35.00 0.00 0.00 0.00 2005 Copa Airlines 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 Manzanillo 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2005 Manzanillo 50.00 0.00 0.00 0.00 40.91 0.00 0.00 0.00 1999 PCRC 11.05 0.00 0.00 18.86 11.05 0.00 0.00 18.86 2006 PCRC 0.60 0.00 0.00 0.00 0.39 0.00 0.00 0.00 2003 UBCl 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2004 UBCI 0.00 0.33 0.00 0.00 0.00 0.33 0.00 0.00 Total portfolio: 188.31 10.33 0.00 62.71 162.81 10.33 0.00 62.71
ADDrOValS Pending Commitment FY Approval Company Loan Equity Quasi Partic.
Total pending commitment: 0.00 0.00 0.00 0.00 Annex 14: Country at a Glance PANAMA: Metro Water and Sanitation Improvement Project Latin upper Key Development Indicators America middle Panama &Carib. income (ZOOS)
Population mid-year (millions) 34 565 948 Surface area (thousand sq km) 76 20,421 47 176 Population growth (%) 16 1.1 08 Urban population (% of total population) 73 79 75
GNI (Atlas method, US$ billions) 22 7 3,833 7,472 GNI per capita (Atlas method, US$) 6,700 6,780 7,878 GNI per capita (PPP, international $) 11,650 10,309 12,297
GDP growth (%) 63036 92 4.4 47 percent of population GDP per capita growth (%) 74 3.2 38 I tolal (most recent estimate, 2003-2008)
Poverty headcount ratio at $1 25 a day (PPP %) 9 8 Poverty headcount ratio at $2 00 a day (PPP %) 18 17 Life expectancy at birth (years) 76 73 71 Infant mortality (per 1 000 live births) 18 22 21 60 Child malnutrition (% of children under 5) 5
40 Adult literacy male (% of ages 15 and older) 94 92 95 Adult literacy female (% of ages 15 and older) 93 90 93 Gross primary enrollment, male (% of age group) 114 119 112 20 Gross primary enrollment, female (% of age group) 111 115 106
Access to an improved water source (% of population) 92 91 94 0 Access to improved sanitation facilities (% of population) 74 78 82 1930 1995 2000 2007
UPanama ULatin America 8 theCaribbean
Net Aid Flows 1980 1990 2000 2008 a (US$millions) Net ODA and official aid 45 99 16 -1 35 Top 3 donors (in 2007) Spain 6 13 11 United States 15 97 -9 7 European Commission 0 0 3 3 115,
Aid (%of GNl) 13 20 01 -07 Aid per capita (US$) 23 41 5 -40
Long-Term Economic Trends 95 05 Consumer prices (annual % change) 13 8 -5 1 15 12 1 GDP implicit deflator (annual % change) 33 7 06 -1 2 85 -+- GOP -GDP per capita Exchange rate (annual average, local per US$) 10 10 10 10 Terms of trade index (2000 = 100) 90 94 100 103 1980-90 1990-2000 2000-08 (average annual growth %) Population, mid-year (millions) 19 24 29 34 21 20 18 GDP (US$millions) 3,810 5,313 11,621 23,088 05 47 66 (% of GDP) Agriculture 89 98 72 64 25 31 41 Industry 19 5 15 1 19 1 17 2 -1 3 60 52 Manufacturing 11 0 97 10 1 67 04 27 12 Services 71 5 75 1 73 6 76 3 07 45 71
Householdfinal consumption expenditure 449 569 59 9 65 0 38 64 70 General gov t final consumption expenditure 17 6 18 1 132 10 9 12 17 44 Gross capital formation 28 1 16 8 24 1 23 2 -9 2 104 63
Exports of goods and services 98 2 86 8 72 6 74 9 04 04 68 Imports of goods and services 68 8 78 6 69 8 74 0 10 12 72 Gross savings 24 2 23 1 26 2
Note Figures in italics are for years other than those specified 2008 data are preliminary indicates data are not available a Aid data are for 2007
99 Balance of Payments and Trade 2000 2008 I (US$ ml//lonsj Total merchandise exports (fob) 5 838 10 360 Total merchandise imports (ct) 7,655 14 930 Voice and accounlabillty Net trade in goods and sewices -279 -1 452 Poldical?.lability Current account balance -715 -2 792 as a % of GDP -62 -12 1 Regulatoriquality Rule of law Workers' remittances and compensation of employees (receipts) 16 196 Control of corruption
Reserves including gold 707 2,077 0 25 50 75 100 Central Government Finance U2008 Country s percentile rank (0-100) 02000 higher vslues imply bBife1mllngs (% of GDPJ Current revenue (including grants) 18 2 28 2 Tax revenue 96 10 5 Current expenditure 16 9 186 Technology and Infrastructure 2000 2008 Overall surplusldeficit -1 1 25 Paved roads (% of total) 34.6 Highest marginal tax rate (Oh) Fixed line and mobile phone Individual 30 27 subscribers (per 100 people) 28 127 Corporate 30 30 High technology exports (Oh of manufactured exports) 01 01 External Debt and Resource Flows Environment (US$ mi/lions) Total debt outstanding and disbursed 6,573 10,722 Agricultural land (% of land area) 29 30 Total debt service 887 1681 Forest area (% of land area) 579 577 Debt relief (HIPC MDRI) - - Nationally protected areas (% of land area) 10 2
Total debt (Oh of GDP) 566 464 Freshwater resources per capita (cu meters) 48,732 44,130 Total debt service (Oh of exports) 94 93 Freshwater withdrawal (billion cubic meters) 08 Foreign direct investment (net inflows) 624 2,402 C02 emissions per capita (mt) 20 7s Portfolio equity (net inflows) 0 0 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 93 176
Energy use per capita (kg of oil equivalent) 875 845
(US$mfionsj
IBRD Total debt outstanding and disbursed 283 271 Disbursements 22 99 Principal repayments 24 45 Interest payments 21 13
IDA Total debt outstanding and disbursed 0 0 Disbursements 0 0 Private Sector Development 2000 2008 Total debt service 0 0
Time required to start a business (days) - 12 IFC (fiscal year) Cost to start a business (% of GNI per capita) - 11 5 Total disbursed and outstanding portfolio 226 96 Time required to register properly (days) -44 of which IFC own account 117 91 Disbursements for IFC own account 84 32 Ranked as a major constraint to business 2000 2008 Portfolio sales prepayments and (% of managers Surveyed who agreed) repayments for IFC own account 2 97 Electricity 30 6 Tax rates 74 6 MlGA Grass exposure - 3 Stock market capitalization (Oh of GDP) 240 284 New guarantees 0 0 Bank capital to asset ratio (%I 96 737
Note Figures in italics are for years other than those specified 2008 data are preliminary 2/25/10 indicates data are not available -indicates Observation is not applicable
100 With selected targets to achieve between 7990 and 2015 (estimate closest to date shown, +/- 2 years)
__Goal 1: halve the rates for extremepoverty and malnutrition 1990 1995 2000 2008 Poverty headcount ratio at $1.25 a day (PPP, Oh of population) 16.9 7.2 11.5 9.5 Poverty headcount ratio at national poverty line (% of population) 37,3 Share of income or consumption to the poorest qunitile (Oh) 2.1 2.3 2.4 2.5 Prevalence of malnutrition (% of children under 5) 63
Goal 2: ensure that children are able to complete prlmary schooling - _-._____ Primary school enrollment (net, %) 92 98 96 Primary completion rate (Oh of relevant age group) 94 99 Secondary school enrollment (gross, Oh) 61 66 67 70 Youth literacy rate (Oh of people ages 15-24) 95 96 96
Goal 3: eliminate~ _____._____ gender disparity in education____.______~____ and empower women Ratio of girls to boys in primary and secondary education (Oh) 100 101 Women employed in the nonagricultural sector (Oh of nonagricultural employment) 45 43 43 43 Proportion of seats held by women in national parliament (Oh) 8 10 10 17
.-Goal 4: reduce under4 mortality by two-thirds - ____ Under-5 mortality rate (per 1,000) 34 30 26 23 Infant mortality rate (per 1,000 iive births) 27 23 20 18 Measles immunization (proportion of one-year olds immunized, %) 73 84 97 69
Goal 5:_____~____ reduce maternal mortality by three-fourths ____-.-.-~ Maternai mortality ratio (modeied estimate, per 100,WOiive births) 130 Births attended by skilled health staff (% of total) 66 90 91 Contraceptive prevalence (% of women ages 1549)
Goal 6: halt and begin to reverse the spread of HlVlAiDS and other major diseases . Prevalence of HIV (% of population ages 1549) 0.4 08 0.9 1.0 Incidence of tuberculosis (per 100,000 people) 47 47 47 47 Tuberculosis cases detected under DOTS (Oh) 32 96
Goal- 7: halve__ the proportion of people wlthout rustalnable access to basic needs Access to an improved water source (Oh of population) 92 92 92 Access to improved sanitation facilities (% of population) 63 69 74 Forest area (% of total land area) 58.9 58.3 57.9 57.7 Nationally protected areas (% of total land area) 10.2 CO2 emissions (metric tons per capita) 1.3 1.3 2.0 1.8 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 9.8 9.6 9.3 11.6
Goal ?Ae!?Pa3Ec!E!!!eY%?@ ..~ -. ~ ~ ___ ~ Telephone mainiines (per 100 DeoDle) 9.0 11.4 14.5 146 Mobile phone subscribers (per'l00 people) 00 00 13 9 112 1 Internet users (per 100 people) 00 01 66 22 9 Personal computers (per 100 peopie) 36 46
100 140 120 n 75 100
80 50 60
25 40 20
2000 2W2 2004 2WE 2008 0 0 1990 1995 2000 2W7 2000 2002 2004 2005 2008 -0- Primary net enrollment ratio
-0- Ratio of girls lo boys in primary 8 secondary DPanama DLatin Amenca 8 the Canbbean oFixed + mobile subscribers Uinternet USB(S education
Note Figures in italics are for years other than those specified indicates data are not available 212511 0
101
MAP SECTION
IBRD 37726
GUAT. This map was produced by the Map Design Unit of The World Bank. HONDURAS The boundaries, colors, denominations and any other information Caribbean Sea shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any EL PANAMA CARIBBEAN SEA endorsement or acceptance of such boundaries. SALVADOR NICARAGUA METRO WATER AND SANITATION Area of Map COSTA R.B. de IMPROVEMENTS PROJECT RICA VENEZUELA COMPONENT 1 - PROJECT TOWNSHIPS PANAMA COMPONENT 2 COLOMBIA PROVINCE CAPITALS PACIFIC OCEAN PANAMÁ NATIONAL CAPITAL SANTAS A N T A IISABELS A B E L TOWNSHIP BOUNDARIES PORTOBELOPORTOBELO MUNICIPALITY BOUNDARIES PROVINCE BOUNDARIES
010 20 KILOMETERS
L A Y A ColónColón N A K U
CHILIBRECHILIBRE
COLÓNCOLÓN Madden Gatun DISTRICTDISTRICT Lake PANAMÁP A N A M Á N Lake MUNICIPALITYM U N I C I P A L I T Y Ó L O COLÓNC CHEPOC H E P O PANAMÁP A N A M Á CHAGRESCHAGRES BELISARIOBELISARIO FRÍASFRÍAS ANCÓNANCÓN LASLAS CUMBRESCUMBRES
AMELIAAMELIA DENISDENIS DDEE IICAZACAZA SANSAN MMIGUELITOIGUELITO ARNULFOARNULFO MUNICIPALITYMUNICIPALITY BELISARIOBELISARIO ARIASARIAS PANAMÁP A N A M Á PORRASPORRAS ARRAIJÁNARRAIJÁN LALA CCHORRERAHORRERA PANAMÁPANAMÁ Gulf of Panama COCLÉCOCLÉ CAPIRAC A P I R A
APRIL 2010