Document of The World Bank Public Disclosure Authorized

ReportNo. 13028-PA

STAFF APPRAISAL REPORT Public Disclosure Authorized

PARAGUAY

ASUNCION SEWERAGE PROJECT Public Disclosure Authorized

JANUARY 17, 1995 Public Disclosure Authorized

Environmpnt and Urban Development Operations Division Country Department I Latin America and the Caribbean Regional Office CURRENCY EQUIVALENTS

C.-IC11cy U nit: Guarani (G$)

EXCTIANGE RATE as of December 1, 1994)

tiS$l.00 = G$1,915

WN'F,flIM VS AND MEASURES

Metric System

I ISCAL YEAR

Jain;nirv I to December 31

\ BBRREIV'ITONS AND ACRONYMS

BO)D Bio. henricl' (txxven Demand BOTiBOO Build Oipite- I ransfer'Build-Operate-Own CANC Cornniimttvcot I naccounted-for Water (Com,i t(dcd.4 !u oVoContabilizada) CGN Corrptirll clkrCeeral of the Nation Ina (;eueral de la Vaciin) CORPOSANA C'orpovn i"n I anitarv Works tfl)w;J,;t,l ,d ()brax .SSnritarias) DO Dissolked ()X\ ocui EIB TFurapeaC 1e\ttlnentIr\ Bank FC FKICcIl 1 11ftvs GNP Gruss N'ali l al Product ICB Intet lltwi I i('petitive Bidding IDB Inter-Americani l)evelopment Bank IDTA Institutiomal Development Technical Assistance IFRR Internal Financial Rate of Return IPS Institute of Social Security (In.stituto (le Prev'isi6n Social) LCB ILocai (2 mpentive Bidding MOF Millistp\ otri i'ice OED ()perat iars l; aluation Department OPACI Parauuavaji O)r,lmnization of InterTnunicipal Cooperation (Organi-cribn /araguaya de Cooperacion Intermunicipal) PAHO Pan-AmevifHa I lealti Organization PAU ProjULt Admll,li.4,trativeUnit PO Plannin (O)ficc PPF Project Pr.eparrinaiimFacility SENASA National I'nvirontmiental Sanitation Services (Sner tico l Sfaneamiento Ambientul) SOE StatemenE at ELxpenditures UFW Unac1cunurted h.lr Water UNICEF United N'atioris Children's Fund PARAGUAY

ASUNCION SEWERAGE PROJECT

STAFF APPRAISAL REPORT

Table of Contents Page No. LOAN AND PROJECT SUMMARY ...... i

THE WATER SECTOR The Economy and the Sector ...... 1 Population and Service Levels ...... 2 Water Resources and Water-Related Diseases ...... 3 Sector Organization and Performance ...... 3 Sector Investments and Financing ...... 7 Bank Involvement in the Sector ...... 8 Lessons from Past Experience ...... 9

2. THE PROJECT Project Origin ...... 10 Project Scope ...... 11 Project Objectives ...... 12 Project Description ...... 12 Status of Project Preparation ...... 13 Project Cost ...... 14 Financing Plan ...... 15 Project Implementation Arrangements ...... 15 Procurement ...... 17 Disbursement, Special Account and Auditing ...... 19 Monitoring and Supervision ...... 20 Project Implementation Agency - CORPOSANA ...... 21

3. PROJECT JUSTIFICATION Environmental Impact .30 International Waterways Issues .32 Project Benefits ...... 33 Economic Evaluation .34 Risks and Safeguards .34

4. AGREEMENTS REACHED & RECOMM:ENDATION . 35

This report is based on the findings of an appraisal mission that visited Paraguay in June 1994. The mission consisted of Messrs./Mmes. Luis Chang, (Senior Water Engineer and Task Manager), Carlos Moreno-Pineda (FinancialAnalyst), and MargaritaRam6n (Consultant). BemardoG6mez (SeniorFinancial Analyst) and Augusta Dianderas(Senior Municipal Engineer) served as Peer Reviewers. AlfonsoSanchez was the DivisionChief during projectpreparation. The sector DivisionChief, ProjectsAdviser and DepartmentDirector are respectivelyAsif Faiz, Orville Grimes and Gobind T. Nankani. Page No. ANNEXES

A. Water Supply and Sewerage Levels in Latin America . . 41 B. Comparative Social Indicators in Selected Countries ... . 42 C. Water and Sanitation Coverage by Communities ...... 43 D. Privatization and Regulation .. 44 E. Lessons Learned .. 51 F. Institutional Development Technical Assistance Program . 57 G. Description of Physical Works . .77 H. Project Cost Details .. 80 I. Paraguayan and Bank Procurement Practices . .81 J. Estimated Schedule of Loan Disbursement . .86 K. Implementation Schedule . .87 L. Monitoring Indicators .. 89 M. Organization of CORPOSANA . .90 N. CORPOSANA's Finances . .93 0. Environmental Assessment . .109 P. Financial Rate of Return . .116 Q. Documents and Data Available in the Project File .. 117

MAP

IBRD No. 26073 PARAGUAY

ASUNCION SEWERAGE PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Republic of Paraguay.

Implementing Agency: Corporation for Sanitary Works (CORPOSANA).

Beneficiaries: About 250,000 residents of Asunci6n and 3,000 residents of Encarnaci6n.

Poverty: Not applicable.

Loan Amount: US$46.5 million equivalent.

Terms: Repayment in 17 years, including 5 years of grace, at the Bank's standard variable interest rate.

Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing.

On-lending Terms: The proceeds of the loan will be on-lent by the Borrower to CORPOSANA on the same terms and conditions as those of the Loan. CORPOSANA will assume the foreign exchange risk.

Financing Plan: European Investment Bank US$20.0 million CORPOSANA US$5.7 million IBRD US$46.5 million Total US$72.2 million

Project Objectives: The objectives of the proposed project are to: (a) help the Borrower improve the provision of urban water and sewerage services in the country by decentralizing activities, facilitating private sector participation, and strengthening CORPOSANA's planning capacity; and (b) improve the health and quality of life of about 250,000 lower-income residents of Greater Asunci6n by increasing coverage of sewerage services and mitigating the environmental impact of sewage disposal in the Paraguay River. Project Description: The project consists of: (a) an Institutional Development Technical Assistance Program to: (i) develop proposals to decentralize sector activities and to establish a financial and regulatory agency for the sector; (ii) study the future role of CORPOSANA (iii) strengthening CORPOSANA's corporate planning capacity, as well as its commercial and financial activities; (iv) establish mechanisms for private sector participation; and (b) Asunci6n sewerage expansion and a small basic infrastructure component in Encarnacion by (i) provision of approximately 50,000 new house connections; (ii) construction of about 550 km of sewage collectors; (iii) installation of 24 km of sewage interceptors; (iv) construction of a 3.2 km tunnel; (v) construction of preliminary treatment facilities and a sewage outfall; (vi) rehabilitation of three sewage outfalls in the existing sewerage system of Asunci6n; (vii) establishment of a supervision and monitoring system for sewage disposal into the Paraguay River; (viii) water supply, sewerage and related infrastructure works in Encarnaci6n; and (ix) consulting services for sewerage works supervision.

Beneflts: The project would seek to achieve sound water and sewerage sector policies and institutional arrangements to improve services to the urban population. It would yield important economic, financial, environmental and health benefits. The proposed project will also improve the living and health conditions of the population in Greater Asunci6n by increasing sewerage service levels from 38 percent to about 60 percent of the city's population.

Economic Rate of Return: 11 percent, for 77 percent of total project cost.

Risks and Safeguards: The project faces the following risks: (a) a weakening in the Borrower's commitment to sector reform that could affect decentralization and the implementation of the regulatory framework for private sector participation. To reduce this risk, annual and mid-term project reviews for project implementation would be undertaken with sector authorities. Since the IDB is also financing other water and sewerage projects, the Bank is maintaining a close dialogue with the IDB to coordinate the reforms on sectoral policies; (b) Borrower's delays in approving tariff increases would limit CORPOSANA's generation of counterpart Hi - funds for project implementation. Moreover, low tariffs would further jeopardize private sector participation. To minimize this risk, agreement was reached that prior to loan effectiveness the Borrower will authorize and cause CORPOSANA to increase tariff rates by 5 percent over the official inflation rate of 1994 and follow-up, during the period of 1996 through 1999, with increases as per the recommendations of the tariff study. If these recommendations are not implemented, the Borrower agreed to cause CORPOSANA to increase the yearly water tariffs by 5 percent over the official inflation rate of the previous year; and (c) the capacity of CORPOSANA to carry out adequately and in a timely manner a sewerage project of this size along with other investment programs. Despite CORPOSANA's proven record of good performance in project implementation, the proposed project will be an important undertaking for CORPOSANA, which would require the strengthening of all the company's systems. This will be met by the comprehensive reorganization, already underway, and the proposed Institutional Development Technical Assistance Program to improve CORPOSANA's corporate planning, operational and administrative efficiency, and by hiring a project management firm to administer and supervise the physical execution of the project. - iv -

Financial Estimates:

EstimatedProject Costs (in US$ million as of June 1994) Component Local Foreign Total %

Technical Assistance Program 0.4 0.8 1.2 2 Asunci6n Sewerage System 20.0 36.3 56.3 96 Encarnaci6n Works 0.4 0.8 1.2 2 Base Cost 20.8 37.9 58.7 100

Physical Contingencies 2.3 4.1 6.4 Price Contingencies 2.5 4.6 7.1 TOTAL PROJECT COST 25.7 46.5 72.2 36% 64% 100%

Project Financing Plan (in US$ million) Source Total Percentage CORPOSANA 5.7 8 European Investment Bank 20.0 28 IBRD 46.5 64 TOTAL 72.2 100

EstimatedDisbursements (in US$ million) Bank FY 1995 1996 1997 18 1999 2000 2001 2002 Annual 1.2 6.9 5.9 6.5 7.4 6.7 6.4 5.5 Cumulative 1.2 8.1 14.0 20.5 27.9 34.6 41.0 46.5 Percentage 2.5 17.5 30.0 44.8 60.0 74.5 88.2 100 PARAGUAY

ASUNCION SEWERAGE PROJECT

STAFF APPRAISAL REPORT

1. THE WATER SECTOR

The Economy and the Sector

1.1 Paraguay achieved one of the best records of economic growth in Latin America between 1960 and 1992. During this period, annual increases in GDP averaged 5.9%. This performance was mainly attributable to: abundant land for agricultural expansion; the increased availability of hydroelectric power; economic openness and trade integration; and a small public sector which generated few distortions. While economic growth has been strong in the past, Paraguay's new administration, which took office in 1994, will need to address some critical issues that affect the country's longer-term growth prospects and social conditions. Expenditures for public services, including water supply and sanitation, are low in Paraguay when compared to other Latin American countries. The sanitation sector is characterized by poor service levels-with all the attendant risks to environmental health.

1.2 Since 1989, several events have taken place to facilitate future development of the water sector: (a) the new Constitution of Paraguay, approved in 1992, established a legal and institutional framework as well as new priorities, focusing on environment, health, and greater autonomy for the municipalities in the delivery and operation of urban services; (b) the relative political and economic stability of the country, which allows for long-term planning and private sector participation; and (c) the willingness of the Borrower to promote the improvement of water and sanitation in collaboration with international development institutions such as IDB, PAHO, and the World Bank in project financing and technical assistance.

1.3 In 1989, after the coup that ended the 35-year dictatorship of former President Stroessner, the Bank launched an intensive program of economic and sector work. Through a Country Economic Memorandum (Report No. 9147-PA), Public Expenditure Review (Report No. 10193-PA), and the Poverty Assessment Study (Report No. 12293-PA), conducted by the Bank between 1991 and 1993, an intensive policy dialogue with the Borrower took place which called attention to the low water and sanitation service levels. As a result, in 1992 the Bank financed a project (Loan 3519-PA) to increase water and sanitation services to the rural population, following the successful model of community participation used in two previous Bank loans. Also in 1992, the Bank approved a Project Preparation Facility (PPF) advance to finance preparation of a sewerage project to benefit the population of Asunci6n. The Country Assistance Strategy (CAS) approved by the Bank on December 21, 1993, included the need to implement the proposed project as an important intervention towards mitigating poverty and improving public health.

Population and Service Levels

1.4 The 1993 estimated population of Paraguay is 4.3 million people, with 40% of the population living in urban centers of more than 4,000 inhabitants. The country is divided administratively into 19 departments. Each department consists of a variable number of municipalities, which in turn are further divided into districts. The geographical distribution of the population is uneven, with 98% concentrated in the eastern region and 2% in the western region. The annual population growth rate between 1982 and 1992 averaged 3.1 % and is estimated at 2.4% for the rest of the decade.

1.5 Paraguay is characterized by low coverage in basic water and sewerage services, which have failed to keep pace with the country's development. Despite the low rate of urbanization, Paraguayan cities have poor access to urban services compared to other countries of the region. Levels of service vary greatly between urban and rural areas. Some 45.6% of the urban and 11.5% of the rural population have piped water supply services, one of the lowest levels in Latin America, where the average is 81 % in urban and 39% in rural areas. Sewerage service coverage is even lower: only about 26.8% of the urban population is connected to a sewerage system, compared to an average of 53% for the Latin America Region (see Annex A). Table 1. 1 summarizes the water and sewerage coverage in Paraguay as of December 1993.

Table 1.1: Water and SanitationCoverage as of December1993 (in millions) Total Population PopulationServed Water % Sewerage % Urban a/ 1.7 0.8 45.6 0.4 26.8 Rural b/ 2.6 0.4 11.5 n.a. n.a. TOTAL 4.3 1.2 25.3

Source: CORPOSANA n.a. not applicable a/ Includes population of Greater Asunci6n and cities of more than 4,000 inhabitants under CORPOSANA's management. bt In the rural areas, local and international organizations have financed several latrine construction programs, resulting in high coverage of on-site sanitation services in certain districts. -3 - Water Resourcesand Water-RelatedDiseases

1.6 Paraguay is located in the basins of the Parana, Paraguay and Pilcomayo rivers, whose stream flows provide abundant surface water. Paraguay also has extensive ground water resources in the eastern region, supplying water for domestic consumption to most communities. Apart from the Chaco Region (northern Paraguay), which has very limited water resources but where less than 2% of the population lives, Paraguay is generously endowed with rainfall and has ample water resources.

1.7 Limited surface water sources in the southern Departments necessitate shallow well extraction year round (typically 4 to 15 meters deep). However, unprotected wells are prone to salinity and surface contamination, especially from farm chemicals. Abundant and good quality ground water supplies exist at moderate depths (typically 80 to 150 meters) in sealed and often artesian aquifers. Boreholes are easily drilled in 2 to 5 days with rotary-percussion rigs. They remain stable and viable except in rare cases where massive basalt outcrops produce limited flow rates. The Itaipu hydroelectric project has permitted the installation of a widespread national electricity grid supply throughout the southern and central Departments of Paraguay. With a majority of rural communities having access to a reliable source of electricity, many Bank-assisted rural water supply schemes have used electric pumps for groundwater wells.

1.8 For the period 1980-90, average life expectancy was estimated at 66 years, and infant mortality at 35 per 1,000 live births. Infant mortality and life expectancy are generally better than in many Latin American countries (see Annex B). However, communicable diseases - associated with unsafe water and lack of adequate sanitation - continue to be a major cause of death. Furthermore, water related diseases such as diarrhea and parasitosis (caused as a result of a lack of clean drinking water) remain the main cause of mortality among children between ages 1 and 4. The mortality rate among this age group has remained unchanged from 1970 to 1989. In Paraguay about a quarter of all infant deaths are due to diarrhea. If the incidence of mortality and morbidity from water and sanitation- related diseases is to be reduced, the provision of safe water and adequate sanitation is essential to complement other efforts in the public health field.

Sector Organization and Performance

1.9 The Technical Planning Secretariat, attached to the Presidency, is responsible for formulating and coordinating national development plans and setting project priorities. However, the Secretariat has until now not been able to play any significant role in the water sector planning process. As a result, there are no clear policies and strategies to guide the development of water and sanitation services. The water and sanitation projects in the country are designed and carried out by the - 4 - following entities: (a) the Corporation for Sanitary Works (CORPOSANA), covering the urban population; and (b) the National Environmental Sanitation Service (SENASA) for the rural population through Local Sanitation Committees or Juntas. I

1.10 CORPOSANA was created in 1954 as an independent agency subordinated to the Ministry of Interior to provide exclusive service to the city of Asunci6n. However, its functions were expanded in 1965 to plan, implement and administer the provision of public water supply and sewerage systems in urban centers with populations greater than 4,000 inhabitants. CORPOSANA currently provides water and sewerage to the metropolitan area of Asunci6n and 17 interior cities. In 1993 CORPOSANA served about 800,000 people (45.6% of the urban population) with water services and 400,000 million (26.8%) with sewerage services.

1.11 SENASA, a decentralized agency under the Ministry of Public Health, was created in 1972 to execute rural water and sanitation projects. SENASA is headed by a Director General who reports to the Minister of Health. While SENASA is responsible with water supply and sanitation in rural areas, its other activities include solid wastes management, occupational hazards, industrial hygiene, vector control, food hygiene, water and air pollution control for the entire country.

1.12 The two water utilities have different institutional, organizational, legal, and managerial characteristics. While SENASA project implementation policies emphasize community participation, with partial capital cost recovery and full coverage of operation and maintenance costs by users, CORPOSANA has no local government or user involvement in the administration of the water systems, and tariffs charged to users cover only partially the costs of investments, operations and maintenance. As a result, the government has traditionally grant-financed most investments and has subsidized operation and maintenance costs.

1.13 Sector performance has improved under Bank and IDB loans. However, to achieve both higher coverage and efficiency, some constraints must be removed, particularly in the urban subsector, characterized by its very weak cost recovery, high unaccounted-for water, low sewerage coverage, and poor administration in most cities, including Asunci6n. The 1992 Bank report, Poverty and the Social Sectors in Paraguay: Poverty Assessment (Report No. 12293-PA), highlights the poor level of basic sanitation and the need for taking specific measures, such as increasing sewage collection, especially in urban areas, implementing CORPOSANA's reorganization, and reforming the tariff structure. 1.14 Decentralization of Sector Activities. CORPOSANA in accordance with its responsibilities must provide water and sewerage services to the interior cities. Limited financial resources and poor managerial capabilities have hindered accomplishment of these objectives. Out of 30 cities of the interior with more than 4,000 people, CORPOSANA serves only 17 with water and 3 with sewerage services. Annex C presents service coverage for the interior cities under CORPOSANA. All other cities are precariously served through shallow wells and water vendors. CORPOSANA is highly centralized and implements and administers the provision of these services from its main offices in Asunci6n without the participation of beneficiaries. This policy is inhibiting sector development and the Borrower is willing to change it.

1.15 One of the most important changes in Paraguay has been the transfer of political power to local governments for which mayors and councils of the country's 212 municipalities were elected for the first time in 1992. With few exceptions the provision of water and sewerage services does not transcend the geographical boundaries of the population served. The water source, treatment facilities, and distribution systems, as well as sewage collection and disposal, are generally confined within the urban area. Participation that is open to all individuals can only occur in the municipality, and public services such as the provision of water and sanitation is historically a municipal task. This issue has been discussed with sector authorities and coordinated with the IDB, which is planning to finance water systems in eight cities of the interior. Sector authorities have agreed to study the institutional arrangement to deal with the provision of water and sewerage in the cities of the interior in a decentralized fashion. Para. 2.33 details the conditions to be agreed upon for the decentralization of CORPOSANA's activities.

1.16 The administration of water services in the rural areas, as developed by SENASA, is an excellent model. SENASA plans its activities from Asunci6n, but execution is highly decentralized. The strategy is based on the formation of users' associations, Juntas de Saneamiento, following a well-established legal arrangement initiated since the first Bank operation in 1977 (Paraguay Rural Water Supply Project; Loan No. 1502-PA). Some cities, initially financed under the SENASA scheme, have grown in population to more than 10,000 people, and are now independent and financing the expansion of their systems with their own resources. Similar results have been obtained in other countries such as Argentina where successful arrangements of water cooperatives set up initially for rural populations now serve urban populations of 150,000 people or more.

1.17 Conununity Participation under SENASA. Rural water supply projects are implemented through the creation of Local Sanitation Committees (Juntas) within the communities. Communities constitute a district which in turn is a jurisdictional unit of a municipality. These Juntas actively participate in the - 6 - construction and financing of water supply and sanitation systems. They follow guidelines delineated by SENASA in the Rules and Regulations for the Juntas (Reglamento de las Juntas de Saneamiento). This document spells out the organization and obligations of each Junta and defines the relationship between the Junta and SENASA. SENASA requires rural communities to finance a total of 60% of the investments (30% during project execution and an additional 30% from the proceeds of a 10-year loan provided by SENASA). Once the systems are built, the Juntas fully administer, operate, and m,.intain them. SENASA provides technical assistance to the Juntas during the initial phase of the operation and supervises them during the life of the loan. The Juntas manage their own assets and funds and have Boards of Directors composed of six members, five selected through a vote by the community and one representing the municipality. Under the Board there is an administrative unit usually consisting of an administrator, an accountant, and one or more technicians, hired by the Board of the Juntas. Some of these administrators use computers to process billings and collection, and some Juntas meter water consumption, to ensure adequate cost recovery and water conservation. Some of the older Juntas, apart from servicing their debt, interact very little with SENASA. In practice, whenever these Juntas have a technical problem (repair of pumps, electrical problems or purchase of meters for example), they approach the private sector. As a result, projects are highly sustainable.

1.18 Private Sector Participation. In Greater Asunci6n the private sector is actively involved in water supply provision and sewer construction, largely because of the limited services provided by CORPOSANA. The 1992 census reports that 90% of Greater Asunci6n's population (0.9 million people) had access to piped water services. For that same year, CORPOSANA reports that about 0.5 million people were connected to its water system through house connections. This indicates that in 1992 about 0.4 million people in Greater Asunci6n had water services-not necessarily potable water-provided by sources other than CORPOSANA.

1.19 It is estimated that more than 200 independent water producers serve the population not covered by CORPOSANA. A limited study carried out on the nature of the services noted that these independent producers provide water services to a specific group of neighbors through private contracts between the producer and the consumers. A water producer, usually living in the area served, invests in the water supply system serving those with a contract. Some producers distribute water through metered house connections imposing tariffs that are generally 1.5 to 2 times higher than CORPOSANA's. One of the water producers in Asunci6n provides water to about 3,500 people. Services provided by these water producers are generally precarious, with limited amounts of water, rationed to a few hours a day, low water pressure, and no guarantee of safe drinking water provision. CORPOSANA's policy has been to allow independent producers to continue with the provision of water until its own system expands. The private sector is also - 7 - active in the construction of sewers, in which builders usually provide short-term financing (during the construction period) to users requiring these services. In this case, however, CORPOSANA approves the plans and supervises the construction of these works.

1.20 A main objective of the Borrower's program is the consolidation of a market-based environment in which the private sector can flourish, while the public sector divests itself of responsibilities more appropriate for private initiative. One of the Government's aims is to restructure public sector enterprises and promote privatization where appropriate. The public sector would be strengthened to play a supportive role in areas such as infrastructure and human resources. The participation of the private sector in the provision of water services in Paraguay would help reduce the size of the public sector and make it more "focused". Furthermore, if private sector participation is carried out in a clear manner (with transparency and the support of the community), it will help mitigate the political and economic cost of trimming the public sector's size.

1.21 The proposed project will help foster a supportive environment for private sector participation. A broad range of private participation options is available, varying in scope and extent of responsibilities and risks assumed by the firms and the contracting authorities. The main private participation options in the water sector are: service contracts, management contracts, lease arrangements, concessions, sale of shares, and build-operate-transfer/own (BOT/BOO) arrangements. Annex D describes options available for private sector participation and regulatory requirements. Under the Institutional Development Technical Assistance program, the project includes assistance for developing a strategy and modalities for private participation in the water and sanitation sector (see para. 2.8).

Sector Investments and Financing

1.22 Historically, the Borrower's annual sector investment levels have been around US$12 million. To expand water and sewerage services to 90% and 80% respectively of the urban population, annual investments in the order of US$35 million would be needed over the next 15 years. Financial needs are about three times past investment levels. Greater Asunci6n has benefitted from about 85% of CORPOSANA's sector investments. The remaining urban areas (about 30 cities) have received only 15% of CORPOSANA's investments-most of which were concentrated in 17 cities.

1.23 The sector depends largely on the Central Government budget for capital investments and to some extent operational costs. The IDB has financed water and sewerage programs for the urban population since the 1960s. In 1988, CORPOSANA received a US$47.8 million loan from the IDB and US$20.4 million - 8 - equivalent from the French Government to implement a US$75.8 million project. The project is part of the first stage of the Water Supply System for Greater Asunci6n and aims at increasing the present coverage of water services provided by CORPOSANA to 70% of the estimated 1997 population. The next IDB loan, scheduled for early 1995, is expected to finance two subprojects: (a) the second stage of the water supply system of Greater Asunci6n; and (b) water supply and sewerage for eight interior cities.

1.24 On the rural subsector, SENASA has limitations in expanding services to the rural population due to the low level of funding (SENASA's annual investments over the last 15 years were about US$1.5 million). Community water supply and sanitation systems have been financed mostly through the proceeds of Bank loans, complemented by SENASA's budget resources and community contribution. Government grants have financed 40% of the investment. The operation and maintenance costs are totally borne by the communities.

Bank Involvement in the Sector

1.25 The Bank's past participation in the sector has been in the rural subsector only. The Bank has been substantially involved in SENASA's development since 1977, through the three Rural Water Supply Projects financed under loans: 1502-PA for US$6.0 million in 1977, 2014-PA for US$11.8 million in 1981, which were completed in 1983 and 1990, respectively; and 3519-PA for US$23.0 million in 1992, which is under implementation and is expected to be completed by 1998. The most important outcomes of the projects were their impact on institutional development, community participation, and operational maintenance practices. Because of Bank Loans 1502-PA and 2014-PA, about 142,000 people in 98 rural communities enjoy safe water supply and on-site sanitation facilities.

1.26 Loan 3519-PA, approved in 1992, is the continuation of the two previous loans and was based on experience gained under those projects. Loan 3519-PA provides funds to help finance: (a) construction of water supply systems and provision of on-site sanitation for about 250,000 people, including 20,000 dispersed and indigenous people through low-cost, appropriate technologies; and (b) a technical assistance program to strengthen SENASA's capacity to implement the project. After a slow start this project, under the new government, is now progressing rapidly. The implementation strategy follows the same community participation model, which made the previous two water projects highly sustainable. Key lessons learned from all previous projects, include the need to: (a) maintain and increase the participation of the communities in project financing; (b) provide for the repayment of loans from the Juntas to SENASA in real terms to create a revolving fund for further sector expansion; and (c) strengthen - 9 -

SENASA for the provision of adequate and timely support and supervision to the Juntas.

Lessons from Past Experience

1.27 From the implementation of previous Bank projects in Paraguay, the Bank is aware of the need to: (a) deal with procurement issues early in project preparation and promptly resolve problems that arise during project execution; and (b) maintain adequate and timely supervision inputs throughout the project life, regardless of any interruptions in disbursements.

1.28 The lessons learned from the Bank's past activities in the water and sewerage sector and in other relevant infrastructure sectors are presented in Annex E. In designing the proposed project, due consideration has been given to these findings, and to those presented in a 1992 OED water sector report (Water Supply and Sanitation Projects - The Bank's Experience, 1967-89; Report No. 10789). One of the main recommendations of the OED report is the need to develop and implement sound sector policies (as provided under the proposed project) and to provide explicit guidance on how to reconcile the objectives of public sector management and private sector development with poverty alleviation and environmental protection. The main issues identified in other water sector projects are summarized below, along with an outline on how they are being addressed in the proposed project:

(a) Institutional Objectives. Inadequate linkages between physical and institutional objectives help explain some of the shortcomings in reaching the main objectives, particularly on the institutional front, in several of the projects reviewed. Thus, a strong linkage between physical and institutional objectives is the keystone of the proposed project. The overall objectives of the proposed project are to reform the sector by decentralizing activities so as to create the environment for private sector participation and to expand and improve sewerage services to the urban population. The sustainability of these improvements would be enhanced through the provision of technical assistance for corporate management and commercial and financial activities; and

(b) Cost Recovery and Cash Generation. Setting a sound cost recovery policy is critical to reducing Government participation in sector financing. Thus, special emphasis was placed on setting ambitious but realistic financial targets and seeking upfront actions before submitting the proposed project to the Bank's Board. With the recent and proposed tariff increases, - 10 -

the financial situation of CORPOSANA should improve to a satisfactory level, but future periodic adjustments would be necessary to counter the effects of inflation and to carry out the proposed investment program. Proposed loan conditionalities would ensure that timely tariff adjustments will be made (para. 2.49). The Institutional Development Technical Assistance Program of the proposed project also includes assistance for corporate planning to improve CORPOSANA's financial management.

1.29 In addition, there are several recent lessons that have been learned from the implementation of the Project Preparation Facility (PPF No. 188-PA). A well-known problem relates to the use of Bank Guidelines for Procurement and Selection of Consultants. Due to the application of the Paraguayan procurement laws, substantial delays took place in the selection of consultants under the PPF. To help address this, during negotiations the Borrower and the Bank discussed and agreed on special provisions which were included in the Loan Agreement on items exhibiting differences between Bank Guidelines and the Paraguayan Law.

1.30 Another lesson is the positive effect of having close coordination between the Bank and the IDB. Due to this coordination during project preparation, it was possible to convince the Borrower to increase CORPOSANA's water tariffs after more than four years of discussions. This arrangement is being intensified in the preparation of the projects to be financed by both institutions. The coordination would also prove helpful in addressing the program to strengthen CORPOSANA's capacity in the provision of services to the urban areas. In particular, through the reorganization of CORPOSANA, a planning unit reporting to the company's President has been established to initiate sectoral reforms and corporate planning as well as prepare medium- and long-term financial plans.

2. THE PROJECT

Project Origin

2.1 Bank participation in the project conforms with the Country Assistance Strategy (CAS), approved by the Board on December 21, 1993, stressing sectoral reforms, private sector participation, and poverty and human resource development. The proposed project will address the restructuring of the water sector by decentralizing activities to the cities of the interior and facilitating the participation of the private sector, and will support poverty alleviation objectives by expanding sewerage systems in lower-income areas to improve public health and welfare. - 11 -

2.2 Sewage collection and disposal for Greater Asunci6n has always been a matter of concern, since a large segment of the population uses rudimentary latrines with final disposal in nearby watercourses or existing storm drainage systems. Thus, inadequate human waste disposal results in harmful health conditions, pollution of surface and ground water, and general environmental degradation. This situation will worsen when the ongoing expansion of water services is completed. In mid-1992, the Borrower requested Bank assistance in the preparation of a sewerage expansion project for Asunci6n. In September 1992, the Bank provided a Project Preparation Facility (PPF) advance for US$750,000 to the Borrower to update the Asunci6n Sewerage Master Plan developed in 1986 by external consultants and to prepare detailed engineering designs for the priority area (the Itay catchment area) identified in the Plan.

Project Scope

2.3 The Bank's proposed project will complement IDB's financing of water supply services in Asunci6n. IDB's ongoing loan will expand Asunci6n's water coverage to about 0.9 million or 70% of the 1997 population. IDB is preparing another project to be financed in early 1995 to expand water services to 90% of the population of Asunci6n by the year 2010 and improve water and sewerage services in eight cities of the interior.

2.4 The Institutional Development Technical Assistance (IDTA) Program under the proposed project will address the reform of the sector and the improvement of services in the cities of the interior and the strengthening of CORPOSANA's planning capacity. The content of the IDTA Program has been coordinated and agreed upon by CORPOSANA, IDB and the Bank. The sewerage component will benefit the population of Greater Asunci6n which is situated at the confluence of several smaller rivers and the Paraguay River. These smaller rivers serve as collectors of solid and liquid wastes that are periodically flushed into the Paraguay River, especially during the rainy season. Greater Asunci6n is composed of the municipality of Asunci6n plus six surrounding municipalities. Annex C presents a list of urban communities with their total population as of 1993, as well as the population served by water and sewerage services from CORPOSANA.

2.5 The current population of Greater Asunci6n is about one million and growing at an annual rate of 4.0% compared to the national population growth rate of 3. 1%. In 1993, 50% of Greater Asunci6n population was served by CORPOSANA's water distribution system through house connections. The rest of the population receives its water from unsanitary wells operated by private water vendors (para. 1.19). The water system has its source at the Paraguay River, and water is treated at a treatment plant built in 1975 and recently expanded. - 12 -

2.6 Sewage collection and disposal is a matter of concern. Only 25% of Paraguay's urban population is linked to a sewerage system; the rest of the population uses near-by water streams, the stornwater system or on-site facilities for final sewage disposal. Further, the disposal of waste water into water streams crossing the Greater Asuncion region before entering the Paraguay River constitutes a significant public health risk. By 1997, when the ongoing expansion of water services is completed, sewerage services would cover only 40% of Greater Asuncion's population, leaving a deficit of more than 700,000 people without this service.

Project Objectives

2.7 The project objectives are to:

(a) help the Borrower to improve the provision of urban water and sewerage services in the country through: policy reform aimed at decentralization of activities and greater local level participation and the promotion of private sector participation; and institutional reform to strengthen CORPOSANA's corporate planning, management and finances and to define its future role in the sector; and

(b) improve health conditions and quality of life for about 250,000 inhabitants in Greater Asunci6n by increasing the current coverage of sewerage services by about 60 percent; and mitigate the environmental impact of sewage disposal in the Paraguay River. Additionally, the project aims at providing basic infrastructure works for 3,000 inhabitants in Encarnaci6n.

Project Description

2.8 The proposed project would be implemented over a seven and a half year period between 1995 and mid-2002, and would have two main components:

0 Institutional Development Technical Assistance (IDTA) Program. The IDTA program (2 % of the total project cost) will consist of three sub-components (see details in Attachment 1 of Annex F): (a) development of proposals for decentralization of sectoral activities (including transfer of responsibilities to local governments, establishment of the regulatory framework, technical assistance to local governments, financial intermediary, etc.); (b) promotion of private sector participation in sector activities; and (c) institutional strengthening and restructuring of CORPOSANA to operate as an efficient commercial enterprise - 13 -

(to include corporate planning, improved budgeting and accounting, commercial systems, and automation). The latter subcomponent will be financed by the IDB.

0 Asunci6n Sewerage Expansion and Infrastructure Works in Encarnaci6n. This component (98% of total project cost) comprises (see details in Annex G): (a) provision of approximately 50,000 house connections; (b) construction of about 550 km of secondary sewage collectors; (c) construction of 24 km of sewage interceptors of about 2 m diameter; (d) construction of a 3.2 km tunnel of about 2 m diameter; (e) installation of an automatic sewage screening device to separate coarse materials along with the construction of a new sewage outfall into the Paraguay River; (f) rehabilitation and extension of three existing sewage outfalls into the Paraguay River; (g) design of a control and monitoring program for sewage disposal into the Paraguay River as well as the design of a monitoring system to control hazardous and toxic chemicals from future industrial wastes (which does not exist today); (h) consulting services for supervision of execution of sewerage works; and (i) water supply, sewerage and related infrastructure works in the city of Encarnaci6n; this subcomponent will supplement the Borrower's resettlement program for about 3,000 people affected by the construction of the YacyretA reservoir (Loan No. 3520- AR). Investment needs for this subcomponent amount to about US$ 1.2 million.

Status of Project Preparation

2.9 CORPOSANA is preparing the terms of reference for selection of external consultants with international experience and with practical operational background to assist with the IDTA program for the decentralization process, and with development of a corporate planning approach (see para. 2.15). On the Asunci6n sewerage component, in 1986, CORPOSANA, with the assistance of the international consultants Halcrow International (United Kingdom), prepared a sewerage master plan for the city of Asunci6n. The Master Plan has prioritized implementation of the proposed project in the northeastern part of Asunci6n, also known as the Itay watershed, as the first stage of the overall expansion plan. It has also developed priority subprojects, detailed costs, and specific studies, such as special geological and soil studies for specific project components. In June 1994 this master plan and its costs were updated by CORPOSANA. Under the PPF advance, Halcrow was selected to undertake the final engineering designs, drawings, and bidding documents, as well as the design of the monitoring control - 14 - program for the environmental impact of sewage discharge into the Paraguay River (see para. 3.2).

Project Cost

2.10 The total project cost, including US$7. 1 million in price contingencies, amounts to US$72.2 million (see Table 2.1 and Annex H). This cost excludes interest during construction, estimated at US$12.6 million. The total foreign exchange component is US$46.5 million (64%). With the exception of a tunnel, all works to be built are similar to CORPOSANA's normal works (see para. 2.16). The expected cost of the tunnel amounts to less than 6% of the total physical works; price contingencies for the tunnel have been estimated at double that of other works. The cost of studies and technical assistance was estimated using specialist-month rates for foreign and local consultants comparable to those paid during project preparation.

Table 2.1: Estimated Project Costs (in US$ million) Component Local Foreign Total % TechnicalAssistance Program 0.4 0.8 1.2 2 Asunci6nSewerage System 20.0 36.3 56.3 96 Encarnaci6nWorks 0.4 0.8 1.2 2 Base Cost 20.8 37.9 58.7 100 Physical Contingencies 2.3 4.1 6.4 Price Contingencies 2.6 4.5 7.1 Total ProjectCost 25.7 46.5 72.2 36% 64% 100%

2.11 Base costs reflect June 1994 price levels. Physical contingencies are estimated at US$6.4 million or about 11.0% of base cost. Price contingencies, estimated at US$7.1 million or about 10.1% of base cost plus physical contingencies, are based on a 2% annual rate of foreign inflation for 1994 and thereafter. Cost estimates are based on engineering designs and similar works currently under execution by CORPOSANA in the area. - 15 -

Financing Plan

2.12 The proposed Bank loan of US$46.5 million would finance 64% of total project cost, or all of the foreign exchange requirement, excluding interest during construction which is to be financed locally. The loan would finance consultants, technical assistance services, civil works, and materials. The project financing plan is summarized in Table 2.2.

Table 2.2: Project FinancingPlan (in US$ million) Source Total Percentage CORPOSANA 5.7 8 EIB 20.0 28 IBRD 46.5 64 Total 72.2 100

2.13 The Borrower will be the Republic of Paraguay which will on-lend the proceeds to CORPOSANA on the same terms and conditions as those of the Bank loan. During negotiations, agreement was reached that, as a condition of effectiveness, a Subsidiary Loan Agreement between the Borrower and CORPOSANA would have been executed (para. 4.3(a)). The European Investment Bank (EIB) is expected to cofinance US$20.0 million or 28% of the project. The preparation of the EIB loan is underway and will substantially facilitate CORPOSANA's counterpart financing requirements. The terms of the proposed EIB loan would be similar to the terms of the Bank loan. During negotiations agreement was reached that if the EIB loan agreement has failed to become effective by December 31, 1995, the Bank may suspend the disbursements under its loan unless the Borrower establishes to the satisfaction of the Bank that adequate funds for the Project are available to the Borrower or CORPOSANA from other sources on terms and conditions consistent with the obligations of the Borrower under this Agreement.

Project Implementation Arrangements

2.14 To carry out the policy and institutional reforms under its IDTA Program, CORPOSANA is planning to use external consultants with international experience and practical operational backgrounds in water systems management. During project preparation agreement was reached with sector authorities on the need to obtain technical assistance from the private sector. Several private sector companies are presently managing city water systems in various countries, including United States, Mexico, France, Argentina, Spain, Italy and United Kingdom. Firms presently operating in the water and sewerage sector will be - 16 -

invited to participate in a selection process to provide these technical assistance services. Preliminary contacts with some of them have shown their willingness to provide these services. Outline terms of reference for the contracting of these services is provided in Annex F. CORPOSANA is preparing the final terms of reference necessary to select these consultants. During negotiations, agreement was reached that, as a condition of effectiveness, CORPOSANA should have initiated the selection process of consultants (i.e. received proposals from a short list of firms) to carry out the studies on sector reform and private sector involvement (para. 4.3(b)).

2.15 The CORPOSANA institutional strengthening component under the IDTA Program will help improve CORPOSANA's corporate planning, as well as its commercial activities, including a program for reduction of unaccounted-for water and improvement of accounting procedures and training (see paras. 2.37- 2.43). This component is being executed with the assistance of external consultants financed under the IDB loan or with CORPOSANA's own resources. During project preparation the Bank provided preliminary terms of reference (Annex F) for the selection of external consultants to carry out CORPOSANA's institutional strengthening program.

2.16 With regard to the Asunci6n sewerage component, the proposed civil works of the project are within CORPOSANA's scope of experience. They consist, inter alia, of the construction and installation of sewage collectors and interceptors made of vitrified clay and reinforced concrete. The larger interceptors have sizes of up to 2 m in diameter. CORPOSANA has constructed storm sewer pipes of up to 3.5 m in size. The construction of a 3.2-km tunnel is the only unusual component of the civil works for CORPOSANA. The tunnel is expected to be built in an area that has been well studied: external consultants have studied the geology and soil mechanics along the construction route. The construction method to build the tunnel is well specified and conventional in nature and no major risks are expected during construction. Construction of the civil works will be carried out by private contractors selected through international competitive bidding. Construction supervision would be provided by external consulting engineers hired by CORPOSANA. The consulting duties will include verification of compliance with specifications for works and goods, and supervision of construction, testing, and commissioning of completed works.

2.17 The project implementation period would be seven and a half years, which is in line with the standard project implementation period for projects in Paraguay. This is a realistic time period given the type of works to be executed. Excavating trenches, installing sewers, and connecting users in urban areas often introduce unexpected situations that might slow project implementation. In order to supervise the execution of the physical works, CORPOSANA will hire a project management firm to administer the expected civil works contracts and services - 17 - under the physical components of the project. In order to facilitate CORPOSANA's execution of projects under the Bank and the IDB, it has been agreed that CORPOSANA will hire a single project management firm to be financed under the IDB loan. During negotiations agreement was reached that, as a condition of effectiveness, CORPOSANA should have initiated the selection process (i.e. received proposals) to hire a project management firm to administer the civil works under the project (para. 4.3.(c)).

Procurement

2.18 All contracts for installation of sewage collectors, interceptors and treatment facilities would be procured through international competitive bidding (ICB) among pre-qualified bidders. Procurement will be carried out in accordance with the Bank's Guidelines for Procurement under IBRD and IDA Credits (May 1992). Consulting services to be financed by the Bank will be contracted in accordance with the Bank's Guidelines for the Use of Consultants (August 1981).

2.19 CORPOSANA has grouped the physical works into seven large contracts. These contracts include provision of pipes and installation, and are the following: one for US$18.0 million for the construction and installation of main collectors, a tunnel, a mechanical screen, and final sewage outfall; a second for US$14.0 million for the construction and installation of sewage collectors, as well as house connections in the areas of Fernando de la Mora Sur y Norte; a third for US$10.8 million for the construction and installation of sewage collectors in the areas of Santa Teresa and Laguna Grande; a fourth for US$10.7 million for the construction and installation of sewage collectors, as well as house connections in the areas of Cuenca Avai and the airport; a fifth contract for US$6.6 million for the construction and installation of sewage collectors, as well as house connections in the areas of Madame Lynch and Primer Presidente; a sixth for about US$6.0 million for the rehabilitation of the Tacumbu, Sajonia, and Lagerenza sewage outfalls; and a seventh contract for about US$1.2 million for the provision of water and sewerage services and other infrastructure works to the resettled population in Encarnaci6n, under the Yacyreta project. A breakdown of project costs and loan amounts by procurement method is given in Table 2.3.

2.20 The Loan Agreement will provide that all civil works packages valued at US$2 million or more, will be procured on the basis of international competitive bidding (ICB) following the Bank's Procurement Guidelines. Prequalification would be required for those works packages valued at US$5 million or more. Local competitive bidding (LCB), acceptable to the Bank will be used for miscellaneous works packages valued at below US$2 million up to an aggregate amount of US$2 million. Foreign firms will be allowed to participate in LCB procurement. ICB will be used for equipment and materials contracts valued at US$200,000 or more. Domestic manufacturers will be guaranteed a margin of - 18 - preference under ICB contracts for equipment and materials in accordance with Bank Guidelines. LCB will be used for those equipment and materials packages valued at US$50,000 or more but less than US$200,000 and not exceeding US$400,000 in aggregate. Miscellaneous items that cannot be grouped in packages of US$50,000 or more, up to an aggregate amount of US$200,000, will be procured through international shopping. Engineering, supervision, and technical studies will be procured according to Bank guidelines for consultants.

2.21 Paraguayan tendering procedures are governed by a 1909 law, frequently modified but not well codified. The law contains a number of provisions incompatible with Bank guidelines and procedures, particularly for ICB. The Comptroller General of the Nation (CGN) and the Ministry of Finance (MOF) agreed that for Bank procedures to prevail, specific reference to all the differences between Bank and Paraguayan procedures must be made in the Loan Agreement. Annex I lists those differences and indicates what specific provisions would be included in the loan documents.

2.22 The use of the Bank's Standard Bidding Documents for the procurement of civil works and goods, the use of the standard prequalification documents for contractors, and the standard form of contract for consultants, have been discussed and agreed with CORPOSANA during appraisal. During negotiations, agreement was reached that CORPOSANA will follow the principles and rules of procurement listed in Section C of Annex I (para. 4.1(a)).

Table 2.3: Project Cost by Procurement Method (in US$ million)a/ ICB LCB OTHER TOTAL Civil Works 61.6 2.0 63.6 (38.9) (1.0) (39.9) Equipment and Materials 1.2 0.4 0.2 1.8 (1.2) (0.4) (0.2) (1.8) Consulting Services 6.8 6.8 (4.8) (4.8) TOTAL 62.8 2.4 7.0 72.2 (40.1) (1.4) (5.0) (46.5) a/ Figures in parentheses are the respective amounts financed by the Bank Loan.

2.23 Prior review and the Bank's no-objection will be required for all bidding documents and proposal awards for civil works and equipment and materials contracts procured under ICB and LCB, as well as all consultant - 19 -

contracts. These arrangements will be confirmed at negotiations and would result in the prior review of almost 100% of Bank-financed contracts.

Disbursements, Special Account and Auditing

2.24 Loan proceeds would be disbursed over seven-and-a-half years (see Annex J). Loan disbursements will observe the percentages indicated as follows: Category I Civil Works 45% of total expenditures. (US$39.9 million) Category II Equipment and 100% of foreign expenditures of Materials imported goods and 100% of ex- (US$1.8 million) factory price for locally manufactured goods; and 45% of local expenditures for imported goods locally procured. Category III Consulting 100% of total expenditures excluding Services, technical taxes assistance (US$3.2 million) Category IV Training Services 100% of total expenditures excluding (US$0.85 million) taxes.

2.25 The Closing Date is December 31, 2002, six months after completion of project execution (June 30, 2002). The schedule of estimated disbursements is presented in Table 2.4.

2.26 An aggregate amount of up to US$750,000 has been included in the project costs to refinance the PPF. This is for expenditures incurred for engineering and technical assistance services devoted to project preparation.

Table 2.4: EstimatedDisbursements of World Bank Loan Bank FY 1995 1996 1997 1998 1999 2000 2001 2002 Annual 1.2 6.9 5.9 6.5 7.4 6.7 6.4 5.5 Cumulative 1.2 8.1 14.0 20.5 27.9 34.6 41.0 46.5 Percentage 2.5 17.5 30.0 44.8 60.0 74.5 88.2 100

2.27 Contracts for goods and civil works valued at less than US$200,000 and US$2,000,000 respectively would be made against statements of expenditures (SOEs). Additionally, all training expenditures would also be made against SOEs. - 20 -

Documentation of these expenditures would not be submitted to the Bank but instead retained by CORPOSANA for periodic inspection by Bank staff and for audit purposes. All other disbursements would be made against full documentation. To expedite disbursements, a Special Account would be opened in the Central Bank of Paraguay with an initial deposit of up to US$250,000 to cover four months of average disbursements.

Monitoring and Supervision

2.28 A set of operational and financial monitoring indicators, developed during appraisal, would constitute the basis for project reviews and supervision, including the Mid-term Review. Particular attention would be given during supervision and project reviews to the unaccounted-for water percentage, number of days lag in accounts receivable, rate of return on net revalued fixed assets in operation, number of water and sewerage connections, and number of employees. In addition, careful supervision of the monitoring of the river water quality will be undertaken to ensure compliance with quality standards and introduce remedial actions, if required (see para. 3.4). During negotiations, agreement was reached that CORPOSANA will submit not later than 60 days after June 30 and December 31 of each year during project execution, reports to the Bank on the progress of project implementation. The report will measure performance against the implementation schedule (see Annex K, and the monitoring indicators (Annex L)). The reports will also record contract award information, revised cost estimates for individual contracts, and the total project, revised implementation schedule, and compliance with loan covenants. Likewise, agreement was reached that CORPOSANA will prepare and present to the Bank by September 30 of each year starting in 1995 an action plan for the following year aimed at complying with the implementation schedule for the project and the agreed operational and financial targets. The Action Plan would include updated financial projections indicating any tariff increases needed to enable CORPOSANA to generate sufficient revenues to comply with the rate of return covenant (para. 4.1(b)). During negotiations, agreement was reached that CORPOSANA will submit an Implementation Completion Report to the Bank six months after the Closing Date of the Loan (para. 4.1(c)).

2.29 Close project supervision by the Bank would be essential, given the range of policy and institutional changes planned with project execution. During the first three years of project implementation, an allocation of 25 to 30 staff- weeks per year is planned. Supervision would involve a environmental engineer, a financial analyst and an institutional development specialist with experience in privatization and specialized consultants. By not later than October 31 of each year, starting in 1995, the Bank, together with the Borrower and CORPOSANA, would conduct formal reviews of progress made in implementing the proposed project. Should these reviews indicate that progress toward meeting the project - 21 - objectives is unsatisfactory, the Borrower would prepare remedial action plans, not later than one month after this review, to be carried out to the Bank's satisfaction. The annual and Mid-term reviews would provide an opportunity to assess project performance, which would be measured against agreed performance indicators.

2.30 After three years of project implementation, the Bank together with CORPOSANA and the Borrower would conduct a Mid-term Review of project execution. In addition to covering all areas included in the annual reviews, the Mid-term Review will assess the completion of all studies and the degree of implementation of proposed recommendations included in the IDTA program on decentralization of sectoral activities, institutional arrangements, the regulatory framework, private sector participation and the definition of CORPOSANA's role in the sector. During negotiations, agreement was reached that CORPOSANA, together with the Bank, will hold annual reviews not later than October 31 of each year and a Mid-term Review not later than October 31, 1998, (with Borrower participation), and to agree to the implementation, if necessary, of satisfactory remedial actions (para 4.1(d)).

Project Implementation Agency - CORPOSANA

2.31 CORPOSANA's Structure. The executing agency for the proposed project is CORPOSANA, an autonomous agency responsible for the provision of water and sewerage services to the Asunci6n Metropolitan area and to 30 other towns throughout the country. A detailed description of CORPOSANA's institutional and organizational scheme is presented in Annex M. CORPOSANA is headed by a Board of Directors, with its president appointed by the President of the country. The Board consists of a president (the Chairman of the Board and chief executive officer) and four advisors appointed by the Ministry of Finance, Organizaci6n Paraguaya de Cooperaci6n Intennunicipal (OPACI), Ministry of Public Health, and Instituto de Previsi6n Social (IPS). The Board of Directors is appointed for a period of five years. The Board approves the entity's operating policies and regulations, reviews and approves CORPOSANA's investment plans and operating budgets, procurement procedures, tariffs, borrowing, personnel policies and salary structure. With the exception of the operating policies and regulations, the aforementioned agencies are tightly regulated by other public entities, such as the Ministry of Finance and the Contralorfa General de la Republica, which oversee all activities of public entities for compliance with national legislation.

2.32 Management and Organization. CORPOSANA's president is supported by five senior managers responsible for: Engineering, Operations, Maintenance, Commercial Activities, and Finance and Administration. Historically, CORPOSANA's management has given priority to the physical provision of services and hence has tended to focus on engineering. - 22 -

CORPOSANA's key managerial personnel often lack adequate expertise in financial, commercial and other non-engineering matters. CORPOSANA suffers from unresolved problems in the commercial and accounting departments, a extremely weak financial department, and lack of corporate planning. The project proposes to strengthen these areas through technical assistance, including training.

2.33 Although CORPOSANA has four regional offices covering the northern, southern, eastern, and western regions of the country, responsible for operations in their respective areas of jurisdiction, there is almost no delegation of authority to the regional offices and operational decisions are centralized. This organizational structure is not conducive to an agile and responsive management of day-to-day operations outside Asunci6n, and is seriously impairing CORPOSANA's efficiency and the needed improvement of sector operations in the interior cities (see para. 1.14-1.16). The IDTA program includes technical assistance and studies to promote decentralization as a way to improve sector management. Private sector participation will also be sought with this same objective (see para. 1. 18-1.21). A decentralization program with its corresponding implementation plan will be developed, defining the role of the communities and local governments, as well as private sector participation. An outline of the terms of reference is presented in Attachment 2 of Annex F. At negotiations, agreement was reached that CORPOSANA will prepare through external consultants a decentralization program including: (a) proposals for transfer of water systems to local governments; (b) areas or functions with potential for contracting with the private sector; (c) the role of CORPOSANA as planning, financial and regulatory agency for the cities of the interior; and (d) a time-bound action plan for implementation of the program for decentralization, including subcontracting with the private sector in those systems identified in the program. The decentralization program would be presented to the Bank for its review and comment, by October 31, 1995, and would start the implementation of the agreed program not later than March 31, 1996 (para. 4.1(e)).

2.34 CORPOSANA is making efforts to define long-term objectives and targets, so as to develop a vision of its future that can provide a basis for proposed institutional and managerial reforms and a guide to its investments. The corporate planning function is extremely important, particularly at present, given the need to analyze the effects on CORPOSANA's organization and financing needed to implement necessary institutional reforms. A Planning Committee and a Planning Office (PO) have been recently created. The Planning Committee, which consists of senior managers, has primary responsibility for developing and overseeing the implementation of short, medium and long-term strategies for the utility. At present, the PO is adequately staffed by a coordinator and two planners, who coordinate and monitor the activities of all units within CORPOSANA. The overall coordination and execution of IDTA program would also be carried out by the PO. During negotiations, agreement was reached that CORPOSANA will - 23 - maintain at the PO, at all times at least three professionals with planning experience in the water and sanitation sector (para. 4.1(f)). The IDTA program of the proposed project includes specific assistance in corporate planning for: (a) the design and implementation of a medium-term strategic plan for CORPOSANA, which would be completed by December 31, 1995 and July 31, 1996, respectively, to be prepared under the outline terms of reference in Attachment 3 of Annex F; and (b) the design and implementation of a budgetary system with programmatic content, which would be completed by December 31, 1995 and July 31, 1996, respectively. Compliance with these plans would be monitored during project implementation.

2.35 Personnel and Training. Some 1,200 persons work in CORPOSANA, resulting in an average staff productivity of 7.5 workers per 1,000 water connections, compared to less than 5 per 1,000 water connections in efficient sector companies of similar size in the region. In 1992, personnel costs represented 53 % of operational costs (excluding depreciation), compared to 30% to 40 % in comparable sector utilities. Monitoring part of the operational indicators during project execution would help ensure that CORPOSANA would increase its productivity to 5.6 workers per 1,000 connections in 1998 and to 5.0 by the year 2000.

2.36 CORPOSANA is staffing its Human Resources Development Unit attached to its Administrative and Financial Directorate. This Unit will have responsibility for establishing the overall policy of human resources, including recruitment, selection, promotions, and human resource development. Training programs would be designed and implemented under the project, as part of the IDTA program, for the planning, financial, commercial, and operational areas (Attachment 7 in Annex F).

2.37 Operations and Maintenance. The main operational problem is the high level of unaccounted-for water (40% in 1993 compared to less than 20% in well-run sector utilities). Failure to meter consumption, repair meters and leaks, replace old pipes, and maintain the commercial system and keep the users' census up-to-date are among the factors that help explain these high losses. Deficiencies in the estimates of water produced, together with commercial losses, account for a greater part of total losses. Commercial losses are mainly related to consumer registration deficits and to inadequate meter reading and billing. Only 60% of CORPOSANA's users are metered, yet due mainly to lack of maintenance most of these meters are not functioning. Also, because of inadequate controls, meters are often not read and the user is billed according to historical consumption averages. As a result of this neglect, water waste by the consumer is increasing as users are charged a flat rate and the price signals to conserve water are removed. With IDB financing, CORPOSANA purchased 100,000 meters and expects to complete their installation by July 1995. This would increase metering levels to 65%. - 24 -

2.38 In addition, the information routinely provided by the meter readers on the condition of the meters is not being used to guide maintenance programs. Moreover, this water wastage is depriving CORPOSANA of significant revenues and increasing its operational costs unnecessarily. The lack of adequate data on consumption deprives CORPOSANA of valuable information to guide day-to-day operations of the distribution system and to properly plan the expansion of the different systems. All these issues would be addressed under the project when designing and implementing the commercial system.

2.39 In 1994, CORPOSANA initiated a study to analyze the main causes of UFW. An ambitious and focused program for the reduction of these losses has been designed with Bank assistance during project preparation and will be implemented through the proposed IDB project. The program implementation will be closely monitored during supervision. The UFW program assigns priority to actions in the following areas: metering; commercial systems; the consumer and pipes cadastre; and distribution network improvements. The proposed goal is to reduce the level of UFW from 40% in 1993 to 28% in 1998. Details of the program are shown in Attachment 4 of Annex F.

2.40 Commercial and Infornation Systems. Even though CORPOSANA has made substantial improvement in its billing and collection systems, these systems still have several limitations. Among them are the lack of integration with the financial system, the inability to produce managerial monthly reports needed for follow-up and decision-making, the lenient treatment to customers with bills overdue, and the poor customer service. Attachment 5 in Annex F outlines the terms of reference provided to CORPOSANA to develop the study on Accounting, Budgetary, Commercial and Management Information System. These issues would be addressed under the proposed project as part of the IDTA program, which assigns priority to the commercial area. The proposed technical assistance would be provided by external consultants. At negotiations, agreement was reached that on completion of the design of the commercial system, not later than March 31, 1996, CORPOSANA will give the Bank the opportunity to comment on this design and will furnish to the Bank a satisfactory follow-up action plan by July 31, 1996 and carry out the plan immediately thereafter (para. 4.1(g)).

2.41 Another aspect of commercial operations that needs to be addressed is collection efficiency. To improve this, CORPOSANA is taking corrective actions to clean up its accounts receivable and has signed two external services contracts to implement its service disconnection policy when payments are not received promptly. CORPOSANA has also agreed to establish by the end of 1994 a surcharge for late payment, which is expected to encourage customers to pay their bills on time. In 1993, CORPOSANA's accounts receivable were equivalent to 6.8 months of billing. Out of the total accounts receivable, Government entities are responsible for about 25 % of them. With Bank assistance, agreement was reached - 25 - between the Borrower and CORPOSANA on payment of their current bills. The operational indicators include provisions to limit the accounts receivable to not more than three months of billing.

2.42 CORPOSANA does not have adequate management information and cost accounting systems that provide relevant, timely, and accurate information to all levels of management. Basic information on billings, unit costs per cost center, cash flow and maintenance needs, for instance, are not routinely produced, and monitoring indicators to assess performance of different units or departments do not exist. In other areas, the reports are not managerial and results-oriented, and therefore of little or no relevance for decision-making. These management information system issues would also be addressed as part of the commercial and accounting systems to be implemented under the proposed project (Attachment 5 of Annex F).

2.43 Accounting and Auditing. CORPOSANA's accounting system (financial, costs, and budgetary systems) is not fully integrated and needs to be strengthened. There are problems with the reconciliation of revenues and expenditures, and the accounting informationis not produced rapidly for timely managementdecisions. In addition, the budgetingand cost accountingsystems in place are too weak to help management with its decision making. To address these issues, the proposed IDTA program includes the design and implementation of a comprehensivecomputerized accounting system that would integratethe financial, budgetary and cost systems. This wouldpermit CORPOSANAto have a budgeting system not just geared to the needs of the government, but with management objectives in mind, together with a cost accounting system that would increase awareness and responsibilityfor costs at the different managementlevels. This new system would also be integratedwith the commercialsystem to be developed under the project. This integratedaccounting management system will be the basis for medium- and long-rangecorporate planning. At negotiations,agreement was reached that, on completionof the design of the accountingsystem, not later than March 31, 1996, CORPOSANA will give the Bank the opportunity to make commentsand will implementthis plan accordingto a timetablesatisfactory to the Bank (para. 4.1(h)).

2.44 Between1979 and 1993, financialstatements were auditedby a private auditing firm and generally issued on a timely basis with unqualified opinions. It has been agreed with CORPOSANA that it will engage a different auditing firm for the 1994 audit. During negotiations,agreement was reached that CORPOSANA will use qualified private independentauditors acceptable to the Bank, to review yearly its financial statements, project expenditures, Special Account and Statements of Expenditures, and that the Auditor's Reports, including a management letter reviewing the adequacy of accounting procedures, internal - 26 - controls and management practices, will be sent to the Bank not later than six months after the end of each financial year (para. 4.1(i)).

2.45 Water and Sewerage Tariffs. As of December 1993, the average water tariff was G388 (US$0.21) per m3 , which was too low to cover operational costs and debt service requirements. On January 1, 1994, four years after the previous tariff increase, the Borrower (after discussions with the Bank and the IDB) increased tariffs by 40% to about G544 (US$0.29) per in3 . This tariff improved CORPOSANA's financial situation but further tariff increases will be necessary. Water tariffs in Paraguay are low when compared to other Latin American countries. CORPOSANA has also a complex water tariff structure, which makes its application a difficult task. During project preparation, the Bank provided CORPOSANA with Terms of Reference to carry out a study to determine the marginal cost of water and the recommended structure of its rates. External consultants hired by CORPOSANA and financed by the IDB are carrying out the tariff study. The study will, in all likelihood show a large gap between the economic cost and the present water tariff, especially for the interior cities. To cover the financial requirements, the financial projections (para. 2.49 and Annex N), assume an annual increase in the average tariff of 5% in real terms. This would permit CORPOSANA to move gradually to the economic cost of the service that will be determined by the tariff study. During negotiations agreement was reached that CORPOSANA will (a) carry out the study on the marginal cost of water services, not later than July 31, 1995, (b) review with the Bank and the Borrower the recommendations of the study not later than September 30, 1995, (c) prepare and furnish to the Bank an action plan (including an implementation timetable), not later than October 31, 1995, and (d) immediately thereafter carry out such action plan (para. 4. 1(j)). During negotiations agreement was also reached that, if the recommendations of the tariff study are not adopted, the Borrower will (a) authorize yearly tariff increases by not less than 5 % in real terms (above inflation) during the years 1996 through 1999 (para. 4.2(a)); and (b) provide for necessary funds for project execution in case tariffs are not increased sufficiently to generate counterpart financing (para. 4.2(b)).

2.46 By law, sewerage tariffs are related to water tariffs. Prior to April 1992, sewerage tariffs were set at 5% of water tariffs. After this date, the ratio was increased by law to 50%. Sewerage tariffs are still low considering that sewerage facilities including sewage treatment are often more expensive than water facilities. The level and restructuring of sewerage tariffs are part of the tariff study being carried out by CORPOSANA's external consultant; moreover, the study will analyze the current procedures for tariff increase approval and make recommendations for improved procedures to establish a transparent and prompt system of approval. During negotiations, agreement was reached that if one of the recommendations of the tariff study is to increase sewerage tariffs CORPOSANA will have to take all necessary actions to implement such measure (para. 4. 1(k)). - 27 -

2.47 To improve CORPOSANA's financial situation, the Bank, in coordination with the IDB, has requested an immediate tariff increase. By January 1995, the tariff increase of January 1993 would have deteriorated by about 20% due to inflation. During negotiations, agreement was reached that as a condition of loan effectiveness, the Borrower would have increased water tariffs by at least 5 percent over the official inflation rate of 1994, as published by the Central Bank of Paraguay (para. 4.3(d)).

2.48 Past Financial Performance and Prospects. CORPOSANA's past financial performance has been unsatisfactory. It has depended on Government contributions for investments and, in recent years, to even cover a large part of CORPOSANA's debts. Several reasons have contributed to CORPOSANA's poor performance: (a) tariffs were low and did not reflect real costs, and tariff values deteriorated due to a lack of adjustments to keep up with inflation during four years (from 1990 to 1993); (b) increased operational expenses and weak commercial practices in billing and collection; (c) excessive payroll costs; (d) high unaccounted-for water levels; and (e) unsound past investments. CORPOSANA operates 17 water systems in cities of the interior and has little cost recovery. The Borrower renegotiated CORPOSANA's debt with commercial banks and the Paris Club, and as a result, CORPOSANA owes the Borrower approximately US$10 million.

2.49 The financial forecast for the period 1994-2002 (Annex N) is based on a strategy to achieve and maintain financial self-sufficiency so as to permit CORPOSANA to operate and adequately maintain its water and sewerage systems, pay debt service, and make a reasonable contribution to its investment program. CORPOSANA's financial performance is expected to be satisfactory, assuming that the basic indicators specified in Annex L, are achieved and that: (a) tariffs are increased annually by 5 % in real terms during project implementation; (b) outstanding debt of approximately US$10 million with the Borrower will be transformed into a long-term debt to the Borrower after deducting the Borrower's accounts receivable (about US$ 2 million); and (c) the Borrower and CORPOSANA will present a plan to cover arrears in debt service. During negotiations agreement was reached that, as conditions of effectiveness, the Borrower should have: (a) converted an amount of approximately US$8 million equivalent of CORPOSANA's outstanding debt with the Borrower into a long-term loan from the Borrower to CORPOSANA under terms and conditions satisfactory to the Bank, and (b) offset any remaining debt balance of CORPOSANA's outstanding debt to the Borrower against an equal amount of the Borrower's outstanding debt to CORPOSANA (para. 4.3(e)). Moreover, agreement was reached that, as a condition of effectiveness, the Borrower and CORPOSANA should have agreed to a plan of action, satisfactory to the Bank, which will result in the settlement of the arrears incurred by CORPOSANA in connection with its external debt (para. 4.3(f)). All these assumptions have been incorporated in the - 28 - financial projections, which show that CORPOSANA will be able to carry out its investments for the period 1994-2002.

2.50 CORPOSANA's investment program for the period 1994-2002, excluding interest during construction and requirements for working capital, amounts to US$190.5 million of which US$72.2 million correspond to the proposed Project. Ongoing works amounting to US$12.9 million constitute the final stage of Master Plan I (expansion of the Asunci6n treatment plant and expansion of the distribution system). Other future projects amount to US$105.4 million and include: Master Plan II, new systems/expansion of water supply and sewerage facilities in provincial cities, and other routine small provincial projects.

2.51 Under these assumptions, the annual rate of return would range from -0.7% in 1993 to 8% in 2002, the debt/equity ratio would reach a maximum of 56%, and the debt service coverage ratio would be a minimum of 1.4 times (except in 1994 and 1995). A detailed financial analysis of CORPOSANA's operations and a summary of the total construction program and of the financing plan for the period 1994-2002 is presented in Table 2.5.

2.52 A sensitivity analysis was carried out to estimate the impact of possible changes in variables on CORPOSANA's cash position and tariff requirements. The main variables on which sensitivity analysis was conducted were: (a) increases in accounts receivable, (b) increases in investment costs, (c) reduction in the number of water and sewerage connections and (d) a higher ratio of unaccounted-for water. A summary of the results is included in Annex N. This analysis shows that the financial forecasts are reasonable, since the least favorable scenario would represent an additional increase in water tariffs of 5% in 1995 and 1996 over the base case, which still is feasible.

2.53 To support the timely implementation of the investment program and the achievement of the operational improvements supported by the proposed program, the Borrower and CORPOSANA agreed during negotiations to comply with operational and financial indicators which will be incorporated in its Corporate Plan. During negotiations, agreement was reached that CORPOSANA will comply with the following covenants: (a) set tariffs of water and sewerage services to assure rates of return on average fixed revalued assets in operation, to reach not less that 7% starting in 1999 fiscal year and thereafter; (b) not to contract new long-term loans unless the value of the debt-service coverage ratio is equal or greater than 1.4 times; and (c) not to undertake any major expansion projects (defined as in excess of 3 % of current net fixed assets in operation), other than the projects included in the investment plan reviewed during appraisal, unless the Bank has been furnished with satisfactory evidence that such projects are economically and financially justified (para. 4. 1(1)). Additionally, agreement was also reached that CORPOSANA will initiate, not later than December 31, 1996, collection - 29 - procedures with respect to all its account receivables related to water and sewerage services which are more than 90 days overdue (para. 4.1(m)). Moreover, agreement was reached that the Borrower will, not later than September 30, 1995, enter into an agreement with CORPOSANA, satisfactory to the Bank, with respect to the procedures to be followed by the Borrower in connection with the payment of water and sewage services provided by CORPOSANA to the Borrower's agencies (para. 4.2 (c)).

Table 2.5. ConstructionProgram and FinancingPlan for 1994-2002 Descriptionof Item Cost Percentage (US$ mnillion) Construction Program Proposed Project 72.2 30.4 Other Projects 118.3 49.6 Interest During Construction 32.0 13.5 Total Construction Program 222.5 93.5 Increase in Working Capital and other uses (net) 15.4 6.5 Total Requirements 237.9 100.0

Sources Gross Internal Cash Generation 169.9 71.4 Less: Debt Service 98.1 41.2 Net Internal Cash Generation 71.8 30.2 Borrowing 162.7 68.4 Customers' Contributions 1.1 0.4 Government Contributions 2.3 1.0 Total Sources 237.9 100.0 - 30 -

3. PROJECT JUSTIFICATION

Environmental Impact

3.1 The project is classified environmentally as an "A" category project. An Environmental Assessment Report has been prepared by CORPOSANA and was distributed to the Bank Executive Directors (SecM94-453) on May 5, 1994. The project will have a positive environmental impact in an area of high population density. The only environmental concern is the discharge of sewage into the Paraguay River. To address this, during preparation of the Sewerage Master Plan in 1985-86, the consultants studied the impact of the various outfalls discharging raw sewage from the existing population of Asunci6n into the River. The environmental assessment of the project is described in more detail in Annex 0. The study concluded that:

(a) the Paraguay River has a great capacity for assimilation of wastes. If all the sewage of the projected 2010 population were to be discharged into the river without prior treatment, the river Biochemical Oxygen Demand (BOD) during the critical period of low river levels would be increased by less than 1.0 milligram per liter, provided dispersion is good;

(b) the river quality survey indicated that the waste discharges (from about 300,000 people) were not seriously affecting the general water quality. The study also indicated that at that time (1986), the majority of outfalls (a total of 11) were causing serious localized pollution and represented a health hazard. These problems were caused by the discharge of sewage above the shore line. The outfalls failed to utilize efficiently the river's capacity for dilution of wastes and initial dispersion was poor. Through IDB financing, from 1987 through 1990, eight of these eleven sewage outfalls were rehabilitated and are now working properly. Through the proposed Bank loan, the remaining three sewage outfalls would be rehabilitated; and

(c) the study recommended that untreated domestic sewage may be discharged into the Paraguay River without seriously affecting water quality. However, care must be taken in the design and placement of outfalls to ensure that: (i) there is good initial dispersion and dilution: (ii) no health risk is posed to areas of recreational importance; (iii) the discharge level is below the normal minimum river level of +54m; (iv) the sewage flow velocity in the outfalls is sufficient to prevent settling of sediment; (v) the pipe capacity is adequate to carry maximum design flow at the normal maximum river level of +61 m; and (vi) coarse solids are removed by screening. - 31 -

3.2 Through a mechanical screen process, coarse materials will be separated from sewage before final discharge into the river. This preliminary treatment will take place in an area reserved by CORPOSANA, which has enough surface area to build full treatment facilities if required in the future. A Water Quality Study, financed by the PPF, has been undertaken by specialized consultants from which additional information on river water quality has been gathered. This study will complement those of the Sewerage Master Plan and will be carried out during both project execution and operation of the sewerage system. This study will later be converted into the final program to permanently monitor the effluent quality of CORPOSANA's sewerage system and manage its impact on the receiving waters. The program will define any necessary corrective measures, including additional levels of treatment if required. During negotiations, agreement was reached that CORPOSANA will present to the Bank a water quality monitoring program not later than December 31, 1995 and implement this program thereafter (para. 4.1(n)).

3.3 CORPOSANA has specific regulations on disposal of industrial sewage to protect its sewerage system. Although at present there are no known hazardous liquid wastes discharging into the sewerage system, during negotiations, agreement was reached that CORPOSANA will: (i) present to the Bank by December 31, 1996, a study on industrial wastes including identification of industrial toxic wastes and design of industrial effluent standards as well as updating and implementation of industrial pollution control and licensing programs; (ii) not later than March 31, 1997, furnish to the Bank for its review and comments the recommendations of such study; (iii) present an action plan satisfactory to the Bank and a timetable for such action plan, not later than June 30, 1997, and (iv) carry out the plan immediately thereafter (para. 4.1(o)).

3.4 As a result of the Environmental Assessment, several actions have been identified as measures necessary to mitigate the environmental impact of the project (para. 15, 16 and 17 of Annex 0). During negotiations, agreement was reached that CORPOSANA will observe the mitigatory measures included in the Environmental Report. These are, inter alia: (a) during project design: (i) extension of the outfall to the center of the Paraguay River, (ii) design effluent pipe outfall layout to maximize dispersion, (iii) removal of solids, (iv) use of appropriate construction practices, (v) revegetation plans, (vi) a water quality monitoring system; and (vii) provision of sufficient land next to sewage treatment facilities for eventual treatment requirements; (b) during project construction: (i) landscape protection to minimize soil erosion and improve the urban environment along the route of the proposed system, especially near the airport and the Trans- Chaco Highway, (ii) the rehabilitation of the three sewage outfalls should include an extension to the middle and bottom of the river, (iii) a construction practice manual will be designed and approved by the Ministry of Works and CORPOSANA on mitigation measures for - 32 - dust and noise control, (iv) solids will be removed from the collected sewage at a facility located far from urban centers in order to avoid emanating odors, (v) requirement of installation of pretreatment facilities for all non-compliant discharges to the sewer system, and (vi) participation of the community will continue through the willingness to pay survey; and (c) during operation of the installed system: (i) all solids removed from the sewage treatment facility will be landfilled, (ii) sewage disposal into the Paraguay River will be monitored and signs posted to restrict washing, fishing and bathing, (iii) all industries connected to the sewerage system will be required to bring their waste water effluents in compliance with sewage discharge regulations, and (iv) the monitoring program of the water quality of the Paraguay River will be permanently observed and necessary corrective measures undertaken (para. 4.1(p)).

International Waterways Issues

3.5 The works to be carried out under the Asunci6n sewerage expansion component of the proposed Project constitute a minor addition to an ongoing scheme and do not adversely change the quality or quantity of water flows to any of the riparians of the Paraguay River (Argentina, Bolivia and Brazil). In addition, such works will not be adversely affected by the use of water that the mentioned riparians might make. Therefore, a notification to such riparians is not required as provided in paragraph 8 (a) of Operational Directive 7.50.

3.6 Presently, about 40% of sewage from Asunci6n is collected and disposed of into the Paraguay River through outfalls (about 1 cubic meter per second). The uncollected sewage is disposed untreated into nearby streams or into septic tanks or cesspools whose effluents seep into the ground before ultimately reaching the Paraguay River. The proposed project will replace the present unacceptable individual disposal systems with sewage collection for an additional 20% of the population of the city of Asunci6n. The sewage would be collected at a single point before its final disposal into the Paraguay River (at about 0.5 cubic meters per second in the year 2010). The IBRD map No. 26073 shows the receiving waterway (Paraguay River) and the location of the proposed project components. The addition to the system will not then exceed the original scheme. Sewage in the city of Asunci6n originates from the use of water provided to the population through a water supply system whose source is the Paraguay River. In this respect, there is no material quantitative alteration of water, since the disposal of sewage is the return of used water, previously extracted from the same source.

Project Benefits

3.7 The proposed project is expected to yield significant environmental and public health benefits by eliminating sewage contamination from watercourses - 33 - throughout the area. It will also protect the quality of aquatic species for human consumptionas well as the aesthetic value of the area.

3.8 The present system of sewage disposalconsists of private septic tanks and absorption pits for domestic sewage, complementedby septic tank desludging and sludge disposal into nearby watercoursesby the use of tankers. Such a system is clearly inadequate. In densely developed sections of the city, the situation is acute. The present arrangementproduces noxious odors and constitutesa health hazard. The only permanentsolution to this problem is to install a central sewage collectionand disposalsystem. The main evidenceof sewagecontamination is the high concentration of fecal coliforms that originates from domestic sewage discharging into the stormwater system, indicating the possible presence of pathogenicmicroorganisms that could constitute a direct or indirect public health hazard. The direct benefits of the project would derive from removing domestic sewage from properties, stormwatersystems, and urban streams, as well as from improvingthe living standardsof Asunci6n'spopulation, especially those livingand working in close proximity to waterwaysnow polluted by a considerablevolume of raw sewage. The interceptorsto be constructedunder the project would ensure that an increasedvolume of wastewaterwould be containedwithin the system and not be allowedto contaminateurban waterways. This would reduce the health risk from contact with water from nearby watercourses,and improve the city visually and aesthetically.

3.9 Some of the major benefits of the project are not quantifiable. Health improvements, decreases in infant mortality and environmental improvements cannot be meaningfullyestimated through the willingness to pay approach for sewage collectionand treatment, for the followingreasons: (a) the sewerage bill will be charged as a percentage of the water bill; what people actually pay for seweragemay reflect the consumer surplusfor water supplybut not necessarilythe willingnessto pay for sewerage; and (b) benefits for appropriate sewage disposal accrue to a large portion of the population and not necessarily to the waste discharger, who would be unwilling to pay for benefits accruing to others.

3.10 The sewerage component of the proposed project will result in a decrease in the incidence of waterborne and water-related diseases, which are currently both estimated to be high (para. 1.8). This would be expected to have a further impact on the community as a whole, reducing infant mortality and increasing life expectancyand labor productivity.

3.11 During the seven and half years of the constructionperiod, the project would provide a significantamount of local employment. The project will bring about an increase in the population served by house connections, totalling about 7,000 households per year in Asunci6n. A large proportion of these new connections will serve poor urban beneficiaries. Improvements in the sanitary - 34 - conditions of the area resulting from the sewage disposal system to be constructed would benefit the whole population by reducing both pollution and health risks.

Economic Evaluation

3.12 Least Cost Solution. The proposed sewerage scheme for the north- eastern part of Asunci6n, known as the "Itay Watershed" was selected as the least- cost solution after a feasibility study was carried out involving a technical and economic comparison of alternatives. The sewerage system has been designed following the general topographic gradient of the city and taking into consideration the most appropriate locations for sewage disposal. Final sewage disposal has been decided following the results of the Sewerage Master Plan, which establishes that the Paraguay River has enough absorptive capacity to assimilate present and future disposal of untreated sewage from the population through the year 2010, provided certain conditions are met. In this respect, coarse solids will be removed from the sewage and a sufficiently long outfall will be built for an adequate initial dilution at the point of discharge into the river.

3.13 Internal Financial Rate of Return (IFRR). The IFRR, which in constant prices relates the sewerage revenues to the capital and operating costs of sewerage facilities, was computed as proxy for the minimum economic return. The life of the project was estimated at 30 years. Revenues attributable to the project were used as a measure of consumers' willingness to pay in quantifying the estimated rate of return for the proposed project. The costs stream includes the cost of land, civil works, equipment, studies, supervision and operation and maintenance. The IFRR amounts to about 11 %, which is considered adequate given the social nature of the project and the intangible health and environmental project benefits cited above. The computation of the IFRR is shown in Annex P.

Risks and Safeguards

3.14 The project faces the following risks: (a) weakening of the Borrower's commitment to reform the sector by decentralization or to implement a regulatory framework to allow private sector participation. To reduce this risk, annual and mid-term project reviews for project implementation would be undertaken with the responsible authorities. Since the IDB is a major financial actor in the sector, the Bank is maintaining a close dialogue with the IDB to coordinate positions on sectoral policies and reforms; (b) delays from the Borrower in adequate tariff increases would limit CORPOSANA's internal cash generation and provision of counterpart funds for project implementation. CORPOSANA requires yearly tariffs increases of 5 % in real terms during project implementation. The Borrower is fully aware that tariffs are low and need to be increased to cover service costs. To minimize this risk agreement was reached that prior to loan effectiveness the Borrower will authorize and cause CORPOSANA to increase its yearly tariff rates - 35 - by 5 percent over the inflation rate of 1994 and follow-up with similar increases in the period 1996 through 1999; and (c) the capacity of CORPOSANA to carry out adequately and in a timely manner a sewerage project of this size together with the rest of their investment program. Despite CORPOSANA's known record of good performance as the water agency in Paraguay, the proposed project will be an important undertaking for CORPOSANA, which would require the strengthening of all the company's systems. This will be met by the comprehensive reorganization, already underway, and the proposed IDTA program to improve CORPOSANA's operational and administrative efficiency.

4. AGREEMENTS REACHED AND RECOMMENDATION

Agreements Reached

4.1 During loan negotiations, the Borrower agreed to cause CORPOSANA to:

(a) follow the principles and rules of procurement listed in Section C of Annex I (para. 2.22);

(b) submit a progress report not later than 60 days after June 30 and December 31 of each year during project execution. The report will measure performance against the implementation schedule (see Annex K, and the monitoring indicators (Annex L)). The reports will also record contract award information, revised cost estimates for individual contracts, and the total project, revised implementation schedule, and compliance with loan covenants, including progress in the execution of mitigatory measures specified in para. 3.4. Likewise, the Borrower agreed to cause CORPOSANA to prepare and present to the Bank by September 30 of each year an Action Plan for the following year aimed at complying with the implementation schedule for the project and the agreed operational and financial targets. The Action Plan would include, inter alia, updated financial projections indicating any tariff increases needed to enable CORPOSANA to generate sufficient revenues to comply with the rate of return covenant (para. 2.28);

(c) submit to the Bank an Implementation Completion Report to the Bank six months after the closing date of the Loan (para. 2.28); - 36 -

(d) hold annual reviews not later than October 31 of each year and a Mid-term Review not later than October 31, 1998, and to commit to the implementation, if necessary, of satisfactory remedial actions (para. 2.30);

(e) prepare through external consultants a decentralization program including: (i) proposals for transfer of water systems to local governments; (ii) areas or functions with potential for contracting with the private sector; (iii) the role of CORPOSANA as planning, financial and regulatory agency for the cities of the interior; and (iv) a time-bound action plan for implementation of the program for decentralization, including subcontracting with the private sector in those systems identified in the program. The decentralization program would be presented to the Bank for its review and comment, by October 31, 1995, and the implementation of the agreed program would start not later than March 31, 1996 (para. 2.33);

(f) maintain at the PO, at all times, at least three professionals with planning experience in the water and sanitation sector (para. 2.34);

(g) complete the design of the commercial system including billing, collection and client information, not later than March 31, 1996, and give the Bank the opportunity to comment on this design and furnish to the Bank a satisfactory follow-up action plan by July 31, 1996 and carry out the plan immediately thereafter (para. 2.40);

(h) present the design of the accounting system to the Bank, for its comments, not later than March 31, 1996, and implement this plan according to a timetable satisfactory to the Bank (para. 2.43);

(i) use qualified private independent auditors acceptable to the Bank, to review yearly its financial statements, project expenditures, Special Account and Statements of Expenditures. The Auditor's Reports, including a management letter reviewing the adequacy of accounting procedures, internal controls and management practices, will be sent to the Bank not later than six months after the end of each financial year (para. 2.44);

(j) (i) carry out the study on the marginal cost of water services not later than July 31, 1995; (ii) review with the Bank and the - 37 -

Borrower the recommendations of the study not later than September 30, 1995; (iii) prepare and furnish to the Bank an action plan (including an implementation timetable), not later than October 31, 1995; and (iv) immediately thereafter carry out such action plan (para. 2.45);

(k) take all necessary actions to implement the recommendations of the tariff study on sewerage rates and tariff approval mechanisms (para. 2.46);

(I) comply with the following covenants: (i) set tariffs of water and sewerage services to assure rates of return on average fixed revalued assets in operation, of not less that 7 % starting in fiscal year 1999 and thereafter; (ii) not to contract new long-term loans unless the value of the debt-service coverage ratio is equal or greater than 1.4 times; and (iii) not to undertake any major expansion projects (defined as in excess of 3% of current net fixed assets in operation), other than the projects included in the investment plan reviewed during appraisal, unless the Bank has been furnished with satisfactory evidence that such projects are economically and financially justified (para. 2.53 and Annex N);

(m) initiate, not later than December 31, 1996, collection procedures with respect to all its account receivables related to water and sewerage services which are more than 90 days overdue (para. 2.53);

(n) present to the Bank a water quality monitoring program not later than December 31, 1995 and implement this program thereafter (para. 3.2);

(o) (i) by December 31, 1996, carry out a study on industrial wastes, including identification of industrial toxic wastes and design of industrial effluent standards as well as updating and implementing industrial pollution control and licensing programs; (ii) not later than March 31, 1997 furnish to the Bank for its review and comments the recommendations of such study; (iii) present an action plan and a timetable for such action plan satisfactory to the Bank, not later than June 30, 1997, and (iv) carry out the plan immediately thereafter (para. 3.3); and

(p) observe the following mitigatory measures: (i) during project design: (A) extension of the outfall to the center of the Paraguay River, (B) design effluent pipe outfall layout to maximize - 38 -

dispersion, (C) removal of solids, (D) use of appropriate construction practices, (E) revegetation plans, (F) a water quality monitoring system; and (G) provision of sufficient land next to sewage treatment facilities for eventual treatment requirements; (ii) during project construction: (A) landscape protection to minimize soil erosion and improve the urban environment along the route of the propose system, especially near the airport and the Trans-Chaco Highway, (B) the rehabilitation of the three sewage outfalls should include an extension to the middle and bottom of the river, (C) a construction practice manual will be designed and approved by the Ministry of Works and CORPOSANA on mitigation measures for dust and noise control, (D) solids will be removed from the collected sewage at a facility located far from urban centers in order to avoid emanating odors, (E) requirement of installation of pretreatment facilities for all non-compliant discharges to the sewer system, and (F) participation of the community will continue through the willingness to pay survey; (iii) during operation of the installed system: (A) all solids removed from the sewage treatment facility will be landfilled, (B) sewage disposal into the Paraguay River will be monitored and signs posted to restrict washing, fishing and bathing, (C) all industries connected to the sewerage system will be required to bring their waste water effluents in compliance with sewage discharge regulations, and (D) the monitoring program of the water quality of the Paraguay River will be permanently observed and necessary corrective measures undertaken (para. 3.4).

4.2 During negotiations, the Borrower agreed to:

(a) authorize yearly tariff increases of no less than 5 % in real terms (above inflation), during the years 1996 through 1999, in the event that the recommendations of the tariff study are not implemented (para. 2.45);

(b) provide for necessary funds for project execution in case tariffs are not sufficient to generate counterpart financing (para. 2.45);

(c) enter into an agreement with CORPOSANA, satisfactory to the Bank, not later than September 30, 1995, with respect to the procedures to be followed by the Borrower in connection with the payment of water and sewage services provided by CORPOSANA to the Borrower's agencies (para. 2.53). - 39 -

4.3 Prior to Loan effectiveness:

(a) the Subsidiary Loan Agreement should have been executed on behalf of the Borrower and CORPOSANA (para. 2.13);

(b) CORPOSANA should have initiated the selection process of consultants (i.e. received proposals from a short list of firms) to carry out the studies on sector reform and private sector involvement (para. 2.14);

(c) CORPOSANA should have initiated the selection process (i.e. received proposals) to hire a project management firm to administer the civil works under the project (para. 2.17);

(d) CORPOSANA should have increased water tariffs by at least 5% over the official inflation rate of 1994, as published by the Central Bank of Paraguay at the end of such year (para. 2.47);

(e) the Borrower should have: (i) converted an amount of approximately US$ 8 million equivalent of CORPOSANA's outstanding debt with the Borrower into a long-term loan from the Borrower to CORPOSANA under terms and conditions satisfactory to the Bank, and (ii) offset any remaining debt balance of CORPOSANA's outstanding debt to the Borrower against an equal amount of the Borrower's outstanding debt to CORPOSANA (para. 2.49); and

(f) the Borrower and CORPOSANA should have agreed to a plan of action, satisfactory to the Bank, which will result in the settlement of the arrears incurred by CORPOSANA in connection with its external debt (para. 2.49). - 40 -

Recommendation

4.3 Provided the above conditionsare met, the project would be suitable for a Bank loan of US$46.5 million. The loan would be for a period of 17 years, including 5 years of grace, at the Bank's standard variable interest rate. PARAGUAY ASUNCIONSEWERAGE PROJECT

Water Supply and Sewerage Service Levels in Latin America, 1990-1992

Urban Population Rural Population Total Population Piped Water With With Safe Piped Water With Per Capita GNP Country Millions Inside Dwelling Sewerage Millions Water Mitions Inside Dwelling Sewerage 1991 Dollars Argentina 28.30 72% 38% 4.27 17% 32.60 65% 33% 3,965c" Bolivia 3.45 58% 37% 3.45 44% 6.90 44% 19% 650 Brazil 114.76 86% 46% 36.24 61% 151.00 79% 34% 2,940 Chile 10.67 98% 81% 2.03 75% 12.70 94% 68% 2,160 Colombia 21.42 87% 72% 9.18 24% 30.60 66% 51% 1,260 Costa Rica 1.50 100% 92% 1.50 84% 3.00 98% 97% 1,850 Dominican Republic 4.35 46% 40% 2.82 45% 7.17 46% 24% 940 Ecuador 5.08 65% 44% 5.72 44% 10.80 54% 21% 1,000 El Salvador 2.43 88% 60% 2.97 11% 5.40 46% 27% 1,080 Guatemala a 3.50 78% 60% 5.70 43% 9.20 56% 23% 930 Haiti 1.30 70% 0% 4.00 5% 5.30 20% 0% 370 Honduras ] 2.11 80% 54% 2.77 48% 4.88 62% 23% 580 Jamaica 1.32 95% 44% 1.08 46% 2.40 73% 24% 1,380 Mexico 55.50 80% 63% 24.10 20% 79.60 70% 49% 3,030 Nicaragua 2.21 78% 54% 1.48 18% 3.69 54% 32% 460 Paraguay 1.65 42% 25% 2.47 10% 4.12 23% 10% 1,270 Peru 15.40 73% 60% 6.60 22% 22.00 58% 44% 1,070 Trinidad and Tobago 0.76 100% 33% 0.54 95% 1.30 98% 19% 3,670 Uruguay 2.64 95% 14% 0.46 65% 3.10 91% 54% 2,840 Venezuela 17.03 67% 55% 3.22 66% 20.25 62% 46% 2,730

Total 295.38 81% 53% 120.60 40% 415.98 70% 39% ource: World Bank Reports a/ Data taken from "The International Drinking Water Supply and Sanitation Decade' World Health Organization, 1992. b/ 1993 World Development Report c/ New adjusted figure. - 42 - Annex B

PARAGUAY

ASUNCION SEWERAGE PROJECT

Comparative Social Indicators in Selected Countries, 1990, Country Total Literacy Infant Life Population Rate Mortality Expectancy (million) (percent) Rate (per (years) a/ 1,000)

Argentina 32.3 95 32 71 Bolivia 7.3 77 110 53 Chile 13.2 93 20 72 Colombia 32.9 87 40 68 Dominican Rep. 7.2 83 65 66 Ecuador 10.6 86 63 65 El Salvador 5.3 73 64 62 Guatemala 9.2 55 59 62 Honduras 5.3 73 69 64 Mexico 88.6 87 43 69 Peru 21.6 85 88 61 Paraguay 4.3 90 42 67

SOURCE: World Bank. Poverty and the Social Sectors in Paraguay. A Poverty Assessment, 1994 (Report 12293-PA). a/ Literacy rates are from 1994 World Development Report (World Bank); data are from 1989. - 43 - Annex C

Water and Sanitation Coverage by Communitiesas of September 1993 Population PopulationServed x 1,000 Coverage% COMMUNITIES x 1,000 Water Sewerage Water Sewerage 1 Asunci6n 602.1 434.0 358.2 72.1 59.5 2 F. de la Mora 95.3 43.6 0 45.7 0.0 3 Luque 83.6 22.7 19.6 27.1 23.5 4 M. RoqueAlonso 65.6 13.9 0.0 21.1 0.0 5 Nemby' 27.2 6.0 0.0 22.1 0.0 6 S. Lorenzo 133.3 23.2 13.2 17.4 9.9 7 Villa Elisa 29.9 0.0 0.0 TotalGreater Asunci6n 1,037.0 543.4 391.0 52.4 3 8 Alberdi 4.3 3.4 0.0 78.3 0.0 9 Ayolas 9.2 0.0 0.0 0.0 0.0 10 Bella Vista 6.0 3.1 0.0 62.7 0.0 11 Caacupe 12.3 7.7 0.0 62.6 0.0 12 Caaguazu 38.2 0.0 0.0 0.0 0.0 13 Ciudad del Este 133.9 7.6 3.6 5.7 2.7 14 Cnel. Bogado 7.2 1.9 0.0 26.8 0.0 15 Concepci6n 35.5 20.3 2.6 57.3 7.5 16 Cnel. Oviedo 38.2 18.1 0.0 47.2 0.0 17 Encarnaci6n 55.3 24.1 10.7 43.6 19.3 18 Eusebio Ayala 6.3 1.6 0.0 25.7 0.0 19 Hernandarias 28.4 0.0 0.0 0.0 0.0 20 Horqueta 8.3 0.0 0.0 0.0 0.0 21 Ita 14.2 0.0 0.0 0.0 0.0 22 J.A. Saldivar 2.0 0.0 0.0 0.0 0.0 23 Mcal. Estigarribia 1.6 0.0 0.0 0.0 0.0 24 Paraguari 7.3 5.1 0.0 70.4 0.0 25 P.J. Caballero 53.6 15.9 3.2 29.7 6.0 26 Pilar 19.1 11.6 0.0 60.4 0.0 27 Pte. Franco 32.1 0.0 0.0 0.0 0.0 28 Salto Guaira 4.5 2.7 0.0 59.4 0.0 29 S. Antonio 7.4 0.0 0.0 0.0 0.0 30 S. Bernardino 8.4 6.3 0.0 75.4 0.0 31 S. Estanislao 9.1 0.0 0.0 0.0 0.0 32 S. Ignacio 11.5 0.0 0.0 0.0 0.0 33 S.J. Bautista 8.1 6.2 0.0 75.8 0.0 34 Santa Rosa 5.6 0.0 0.0 0.0 0.0 35 Villa Hayes 11.8 8.6 0.0 72.6 0.0 36 Villarrica 27.7 13.8 0.0 50.1 0.0 37 Ypacarai 7.1 0.0 0.0 0.0 0.0 Total Interior 614.2 157.7 20.1 25.7 3.3 TotalCORPOSANA 1,651.1 [ 701.1 J 411.1 42.4 24.9 OURCE: CORPOSANA and D. G. de Estadisticas y Censos, Censo 1992. a/ Communities currently served by SENASA, to be transferred to CORPOSANA. - 44 - Annex D

PARAGUAY

ASUNCION SEWERAGE PROJECT

Privatizationand Regulation

1. There is now widespread interest in enhancing private sector participation around the world in view of public sector management's generally disappointing record. Public water utilities have performed poorly in service reliability, productivity, financial management, customer satisfaction, and the selection and implementation of investment projects. Studies on worldwide water and sewerage services have made it increasingly clear that these operations are rarely efficient when run by public sector entities. The tendencies of the government to interfere, the hidden subsidies, and institutional constraints are well documented. However, the creation of a satisfactory regulatory environment is one of the main prerequisites for successful private sector participation. Consideration of private participation schemes frequently raises concerns about the risks of private concessionaires exploiting their monopolistic positions; for example, they can charge excessive tariffs without improving service. There should be requirements for public disclosure and community participation in order to make sector entities more responsive to users and less subject to capture by interest groups. The local governments should own the assets and have the ultimate service responsibilities. As regulators, they must be free to hire and fire company managers, set the guiding policies, and retain power over such matters as tariffs.

2. A broad range of private participation options is available, varying in scope and the extent of responsibilities and risks assumed by the firms and the contracting authorities.

(a) Under a service contract, a utility hires a private firm to carry out specific tasks while retaining full responsibility and risk for service provision. This is especially advisable for large peak activities (e.g. studies, engineering designs, construction) or when the in-house level of work is too small to reach an efficient scale of operations. But this approach can also apply to relatively routine, recurrent activities, which often can be provided at lower cost under competitive contracts. Several water agencies (EMOS in Santiago, SEDAPAL in Lima, SABESP in Sao Paulo) contract with private firms to read meters, collect bills, and maintain private connections, distribution networks and treatment facilities. In Mexico City, four private groups engaged in a first phase in obtaining basic system information, are -45- Annex D

expected to expand into commercial activities, maintenance and rehabilitation. Care needs to be taken in separating functions to ensure that core activities, e.g., production, treatment and distribution, continue subject to effective coordination and supervision. Service contract compensation is similar to that for consulting services, i.e., time-based, lump sum, percentage, cost-plus, or fixed-fee. The risk to the contractor of full concession would be too high, and the private firm's responsibility is limited to the part of the system that it operates.

(b) A management contract is a service contract which a utility uses to employ a private firm to manage services, to cover, e.g., all operation and maintenance functions. The contract should specify whether the firm is responsible for large repairs and replacements of the system. The private firm is remunerated from customer charges which the utility fixes. The contracting authority retains most operational and commercial risks, a key disadvantage. These risks can be mitigated by having the contracted firm share in the risks under some form of performance incentives. Unfortunately however, this can leave the way clear for government interference in day-to-day decisions or actions that affect productivity or quality. The firm also faces other risks, e.g. getting paid on time. The insurance it can obtain usually covers only the foreign currency portion of scheduled payments. Another possible shortcoming of these arrangements is that, if fixed fee compensation is provided, the incentives to increase efficiency are reduced.

(c) A lease contract arrangement calls for a private firm to take over fuller responsibilities and to collect user charges, all in return for a portion of the revenues. The province or municipality is still the sole owner, and remains responsible for system expansion, asset replacement and all financial risk. Unlike a management contract, the financial risk for operation and maintenance is borne entirely by the firm, i.e., consumers are its clients. The contractor bears all the commercial risks and has to market the services effectively in order to earn a profit. The private firm receives existing facilities and must ensure only the management of the service. It must finance only the working capital and renewal of expenses for short economic life components. The private firm does not participate in financing the basic infrastructure - 46 - Annex D

and facilities. The firm's contract usually includes provisions for price revisions for inflation-type protection, as well as for compensation for injurious government actions. These contracts, generally for 20-30 years, are superior to other forms of divestiture of government assets. That is because usually no legislation is required for these transfers since the utility retains de jure ownership. This arrangement thus can yield many of the benefits of privatization without the common complexities of involving the financial markets or having to obtain legislative approval.

(d) Concession arrangements combine leasing provisions with added contractor responsibilities. Usually, a private enterprise assumes responsibility for operating, maintaining and investing in fixed assets, which remain public property and must be returned in good condition at the end of the contract period. Typically, a firm finances, builds (or rehabilitates) and runs a new facility. It usually then is responsible for operation and maintenance expenses as well as capital financing, thereby assuming full commercial and financial risks. The firm is directly paid for services by consumers. The cities of Paris and Cannes in France and Sydney in Australia are examples of typical concession agreements. The Buenos Aires and Corrientes examples, as well as most of the other privatization cases in Latin American (e.g., Valparaiso, Puerto Vallarta, Monterrey and Lima), are also typical concession arrangements. The agreement between the public agency and the concessionaire often sets out an investment program to meet certain service demands.

(e) "Build-Operate-Transfer (BOT)". Under an alternative concession arrangement, the new facility which the contractor built subsequently reverts to public authority ownership (called the BOT scheme). These have commonly been used for toll facilities and treatment plants, for example sewage treatment plants in Mexico. Generally, such contracts do not involve the concessionaire taking commercial risks. However, these arrangements are often more expensive to put into effect than other forms of concession because of the complexity of the contracts and payment schemes. Foreign firms may also desire risk premiums in order to participate. - 47 - Annex D

(f) "Reverse BOT". In view of these complications, another option calls for initial public sector financing, followed by private enterprise construction and operation, leading to ultimate full private enterprise acquisition of the plant through annual fee payments. This technique is called "reverse BOT." It has the advantages of lower risks, smaller construction and insurance costs, lower product price and more efficient operations.

(g) Full private ownership, resulting from the sale of all utility shares to private investors (the model in England and Wales), is also possible. It is very dependent though on rigorous conditions, including the absence of popular opposition to selling government assets. Potential purchasers might also be fearful of the lack of regulatory experience, uncertainty regarding sector institutional arrangements, the capital market's weaknesses and the limited prospects of joining with local companies with solid sector experience.

(h) Further, a province or municipality can enter into a joint venture company with a private firm. This approach may be attractive when it is not feasible to pass full responsibility for the operation onto a private firm, or when the private partner can readily raise bonds or issue notes. The joint company most often will have a service franchise in a leasing or other concession structure. Examples in Spain entail the creation of a "private agency" by a municipality and a private operator, granted a concession for day-to-day tasks. The municipality retains ownership and ultimate responsibility for the service. The leasing/concession approach, as now used in France and Spain, selects their private partner on the basis of public bidding. There is a risk that the local government may face conflict of interest problems if it is simultaneously regulator and owner, while also being a key shareholder. On these grounds, the benefits that municipalities might seek (e.g., revenue-sharing, retaining some controls) could be more clearly obtained under a concession/lease deal with a fully private operator.

Regulatory Requirements and Options

3. Consideration of private participation schemes frequently raises concerns about the risks of private concessionaires exploiting their monopolistic positions. The worry is that they might be tempted, for example, to charge - 48 - Annex D excessive tariffs without improving service. There is therefore the fear of exchanging a poorly-run public monopoly for an equally inefficient, rent-seeking private monopoly. These risks are increased, moreover, when the private consortium is dominated by construction interests, as frequently is true because of the inherent business opportunities. These concerns illustrate that water's special characteristics make it undesirable to rely on unregulated markets to deliver it efficiently or allocate it equitably.

4. Simultaneously, as noted above, the creation of a satisfactory regulatory enviromment is one of the main prerequisites for improvement of Paraguay's water and sewerage sector. It is fundamental for giving company owners/managers reasonable expectations about future ground rules. These are key to their decisions on investing and performing to standards. Bank research has indicated that the lack of appropriate regulatory and related institutional frameworks has been central to the absence of reliable sector operations in many parts of Latin America. Many governments have recognized the need for policy changes. But these alone are meaningless without the institutional changes to implement and sustain them.

5. In many countries, organizational structures have not separated responsibilities for providing services from regulating actions pertaining to the services. Water agencies are charged with enforcing water quality standards on their own services. Major water facilities are often the sole judges of the safety and adequacy of the maintenance of their facilities. And regulatory environmental protection activities are sometimes incorporated into the functions of water using agencies. Therefore, government entities should clearly separate service from regulatory functions. Operating agencies should be charged with compliance with requirements, but their enforcement should be discharged separately. This is one of the most important principles of effective management and quality assurance. It applies to water rights, safety of structures, water quality and use, business and financial integrity and customer participation. Regulatory units should report to senior govermnent levels independent of the entities which they regulate.

6. Another important regulatory principle is that local government should regulate - but not excessively manage - water and sewerage companies. As the latter enjoy natural monopoly positions, their autonomy of management naturally cannot be unrestricted. The local governments which own their assets have the ultimate service responsibilities. They must therefore be free to hire (and fire) company managers, set their policies and retain power over such matters as tariffs. But governments should exercise their controls in a restrained manner, while delegating to professional managers the responsibility for running their enterprises. - 49 - Annex D

7. It would be helpful if the relationship between elected officials and the water company was made formal and transparent, e.g., through a written contract. Sector agencies have relatively stable targets (service improvement and expansion, productivity, financial, etc.). Conversely, elected officials have much shorter time frames, which lend themselves to pressures for occasional expedient actions. Formalized relationships therefore can help maintain stable and a suitably "arms-length" distance in the oversight of the water companies.

8. Similarly, there should be requirements for public disclosure and community participation in order to make sector entities more responsive to users and less subject to capture by interest groups. It is recommended that consumer representatives sit on company boards. In the US, public utilities are required to open their books to the public and to defend major decisions at public hearings. It might also be useful for the Borrower's monitoring system to publish annually key indicators of utility performance (which consumers can compare).

9. However, there may be concern that too open a receptivity towards community involvement will prove costly when tariff increases are needed. Municipal bodies around the world often reject such requests and thereby jeopardize utilities' finances. Therefore, safeguards need to be put in place that can help "depoliticize" the approval process somewhat. One might be to provide for automatic inflation indexing of tariffs. Another approach would be to approve performance contracts based on multi-year business plans, within which sector companies are fully authorized to take financial decisions. There is already a model of this technique in concession arrangements for the greater Buenos Aires area. The concession contract stipulates rate-making provisions, specifically the use of 14 operating cost components to calculate a cost index by which tariffs can be raised. Every five years, the regulatory agency adjusts the index to account for new investment and its effects on operating costs. Local governments alternatively might delegate the authority to approve tariffs to utility commissions, composed of a few knowledgeable professionals employed for extended fixed terms. These commissions could also provide a forum for public hearings and rulings on customer complaints with the sector company.

10. Generally, before assuming commercial risk, prospective concessionaires must be confident that tariffs can be collected. They generally also worry about potential political risk to the tariff increases that might accompany privatization or other measures aimed at performance improvements. In the Greater Buenos Aires case, officials discussing possible concession and like arrangements were able to provide a reasonable historical record of tariff payment (with a collection rate of about 80% of those actually billed). This record, together with a clear authorization of the contractor to disconnect non- payers, gave prospective operators confidence that they would be protected. A - 50 - Annex D country's successful privatization programs in other sectors provide additional assurances.

11. The history of recent events in privatization processes is also quite pertinent. In Argentina, the Federal Government took impressive initiatives in restructuring, privatization and carrying out other activities to improve the state enterprises. However, some of these measures proved to be premature in the absence of institutions recognized to be needed for overseeing businesses with monopoly power. Consequently, the initial operations of the largest privatized companies occurred in a situation in which critical regulatory responsibilities were not in place or properly executed. Their absence was untimely when decisions were taken on licensing, pricing, technical and accounting standards, and performance monitoring. Thus, these new agencies remained at early stages of organizational development on regulatory matters for some time, and experienced major difficulties in implementing their procedures. The results showed that an earlier buildup of regulatory actions would have been beneficial for the effective functioning of the reformed enterprises. It likewise might have minimized the initial poor showing of the regulatory agencies themselves. At the same time though, waiting for the regulatory institutions to be in place might have jeopardized the privatization process, and deprived consumers of service improvements. - 51 - Annex E PARAGUAY

ASUNCIONSEWERAGE PROJECT

Lessons Learned from Past Projects

Introduction

1. This annex reviews the main lessons learned from a total of 25 Bank operations, 15 of them related to Bank-wide water and sewerage Project Completion Reports (PCRs) and 10 from other operations in Paraguay and other countries in the Latin American Region that could have lessons applicable to the water and sanitation sector. In addition, 4 water sector reports from the Bank's Transport, Water and Urban Department (TWU) and Operations Evaluation Department (OED) were reviewed. The relevant projects are summarized in Table E-1.

Lessons from the Projects

2. Most of the lessons derived from the analyzed reports can be summarized under the following subjects:

Country Conditions

3. Deteriorating macroeconomic conditions or changes in the political environment have a significant impact on project costs, implementation and in the achievement of objectives. Project objectives can also be adversely affected by changes in government. Major changes in country conditions are, of course, difficult to predict at the time of project preparation but nevertheless they can occur and often lead to a revision of institutional priorities which in turn affect project objectives. Execution of the Paraguay Second Rural Water Supply and Sanitation Project (Loan 2014-PA) was substantially delayed due to suspension of the Loan for two and a half years on country grounds (foreign exchange rate issues.) During the implementation of the Barranquilla Water Supply Project, (Loan 2637-CO), the political interference was much greater than anticipated and that extra-professional interests were given priority over project's objectives. Start up of the Paraguay Third Rural Water Supply and Sanitation Project (Loan 3519-PA) was delayed by one and a half years, due to sector authorities decision to slow down activities until new political administration could be appointed. Execution of the Paraguay Eje Norte Rural Development Project (Loan 2141-PA) was affected by a series of problems beyond the control of the coordinating and implementing agencies, and the Bank, which seriously delayed execution of project. - 52 - Annex E

4. The worsening of the economic situation in countries such as Brazil and Paraguay were factors that adversely affected, at least temporarily, Loans 1850-BR, 2140-PA and 2014-PA. The Central Government's periodic economic and political priorities were the sole determinants of permissible tariff increases, irrespective of the financial situation and investment program of the utility, such was the case in Loans 2637-CO and 1566-KE. Counterpart funds were often delayed, as in the case of Loans 1187-CR and 1845-CR.

Management Changes/Implementation Schedules

5. Weak institutions in the sector are characterized by frequently changing management and senior staff that results in loss of institutional memory, poor information flows, uncleared investment priorities, and discontinuity in policies. Execution of project 2014-PA was paralyzed because of the change of both government and water utility's management.

6. Delays for obtaining congressional approval have been a recurrent factor in many of the loans reviewed.

7. In most of the projects, delays in project execution due to different types of problems are common. These include delays by the Borrower in complying with the conditions for loan effectiveness and procurement requirements, and inadequate counterpart funding (Loan 2014-PA and 2141-PA). In the case of Loan 2140-PA successful implementation was seriously impaired by a weak assessment of the risks of undertaking a project for which inadequate financing was available. This caused delays in the execution of the civil works. Therefore, the limited success of the project's maintenance component was the result of an optimistic assessment of the ministry's management capacity.

Physical and Institutional Objectives

8. Inadequate linkages between physical and institutional objectives help explain some of the shortcomings in reaching the main objectives, particularly in the institutional front. A sound connection between physical and institutional objectives can also prevent a meaningful reformulation of project components in response to a change in priorities.

9. Weak institutions fail to exercise a firm and continuous control over operations which results in high percentages of unaccounted-for water (UFW). Such inefficient operations can hardly become financially viable, since the UFW also measures the percentage of water produced for which no revenue is earned. The already great difficulties of raising tariffs grow further when the institutions can neither justify them with administrative efficiency, nor with an effective supply of safe water and adequate sanitation. PCRs reviewed show that proper -53- Annex E design and implementation efforts are needed to be effective in the reduction of the UFW levels.

Cost Recovery and Cash Generation: Project Sustainability

10. Without a solid financial and institutional base, sustainability of water supply and sewerage services is in danger. The major risks in this regard are: (a) delays in carrying out tariffs increases when needed. This is the case with CORPOSANA who was not allowed to raise tariffs during four years, despite an annual inflation rate of 30%. Such was the case of Credit 1566-KE, where the two significant tariff increases introduced in a period of three years were not followed by additional increases in the subsequent years; and (b) inefficient billing and collection. It was estimated that about 60% of the unpaid bills belong to ministries and government institutions.

11. The revised PCRs show that policies should aim at further improving cost recovery and thus reducing government subsidies. This can be accomplished by seeking a better matching of the level of services provided and the population's ability and willingness to pay.

Demand/ProductionForecasts

12. Failure to forecast demand, within reasonable limits, is a recurrent problem of most water supply and sewerage projects as documented in almost all PCRs, OED and TWU. An over-optimistic view on the forecasted increase of water demand has even produced modifications of the proposed project facilities generating delays in project execution. The increase in the number of connections and the unit consumption per connection (cubic meters per connection per month) were often over-estimated. Failure to recognize the elasticity of demand, as well as the full impact on aggregate demand of low income groups, when service coverage is being increased, seem to have been the main issues in the mentioned projects.

13. High demand projections translate into over-designed physical components, optimistic assessment of revenues and economic benefits from new facilities and corresponding financial problems which in turn adversely affect project implementation. High levels of UFW are symptomatic of inadequate responses to maintain physical facilities and commercial systems with a direct bearing on higher operating costs and lesser revenues. Project components to increase production capacity without a meaningful attempt to reduce high levels of UFW lower the pressure to find long lasting solutions to this problem.

14. Almost all PCRs reviewed had goals to reduce high levels of water losses (UFW). In general, it is reported that little improvement has been made. - 54 - Annex E

Failure of these UFW reduction programs are mostly related to deficiencies in the commercial system. Illegal connections and failure to meter all consumption and repair meters are among the other factors that contribute to high levels of commercial losses.

15. The lack of reliable information on production and consumption patterns clouds the analysis of the UFW problem and the formulation of effective plans to reduce it. Nevertheless, a more focused attention is needed to evaluate the capacity and reliability of commercial systems to account for all users and consumption and the effectiveness of maintenance programs,.

16. Productivity gains in the work force as a means to control operating costs was an important objective. A stable management group, a competitive salary structure, and the judicious use of the private sector in operations are the main factors that have contributed to sustainable productivity gains.

Simplicity of Design

17. Project complexity is closely related to implementation capacity and to the number of components and participating agencies. New agencies, unfamiliar with Bank procurement and disbursement procedures or with relatively large investment program, experience initial and significant delays in starting the project. The analysis of the implementation capacity of executing agencies did not seem to have received adequate attention at appraisal in the Guayaquil Water Supply Project (Loan 1030-EC). Cumbersome internal controls and procedures affecting all phases of project implementation and bidding decisions proved to be a formidable obstacle, as was the slow and awkward review of bidding documents by the executing agency and the general comptroller during project execution. Provisions have been made in the design of the proposed project to minimize the effects of the previous mentioned issues.

Specific Lessons Learned Incorporatedin the Design of Asunci6nSewerage project

18. The proposed project has been designed taking into account the findings set out in this Annex. Clearly, some problems cannot be completely safeguarded against, such as changes in the political environment. Nevertheless, the main features respond to the type of problems described in the previous paragraphs as follows:

19. Physical and InstitutionalObjectives. Full connectionbetween physical and institutionalobjectives in being proposed in the project. One of the main targets of the proposed project will be to improve CORPOSANA's operational efficiency, in order for the agency to achieve financial self- - 55 - Annex E sufficiency and thus sustainability. The concept of corporate planning through the strengthening of the planning department at CORPOSANA will be the one of the most important project components. This improvement in efficiency would be achieved through: (a) the implementation of an UFW program; (b) the design of an Institutional Action Plan; (c) the execution of a twinning arrangement on commercial aspects; and (d) the construction of works and equipment needed for the rehabilitation and improvement of the sewerage facilities in Asunci6n.

20. Demand/Production Forecasts. Special attention was given to demand calculations for CORPOSANA. Information available on consumption patterns and production has been carefully analyzed for the formulation of the UFW program, and since the commercial losses account for 42% of total losses, the program is assigning priority to the actions or proposals in the commercial system. The program clearly defines the projects or actions to be carried out, targets to be achieved, costs and resources required per project or action. The analysis of CORPOSANA's implementation capacity for this program received special attention, because of its effects on the overall implementation schedule of the project. Following recommendations of the internal Annual Sector review for FY90, the UFW Program was introduced as an explicit part of project appraisal. Productivity gains targets will also be established in the project, and an institutional strengthening component has been prepared to help achieve them.

21. Cost Recovery and Cash Generation. Since the financial situation of CORPOSANA is weak and the financial resources of the central government tend to ebb, special emphasis has been placed in the analysis of the financial targets to be considered in the proposed project. A 40% tariff increase, to help cover the financial gap and price of services at its average incremental cost, was approved by the government during preparation of the Project. CORPOSANA is presently conducting a study to determine the economic costs of providing water and sewerage services in Paraguay. The Institutional Strengthening Program also includes specific projects for the improvement of CORPOSANA's financial management. - 56 - Annex E

Table E-1. RetrospectiveReview Documentsincluded in the LiteratureSearch

Loan | Closing Report Project/Report Number I Date Date I. Water Supplyand Sewerage Bank Projects 1. Paraguay Rural Water SupplyProject 1502-PA Jun 1983 Dec 1986 2. Paraguay Second Rural Water SupplyProject 2014-PA Jun 1989 Jun 1991 3. Cote d'lvoire. Water Supplyand SanitationSector Project 3240-IVC Dec 1991 Dec 1993 4. Kenya. Nairobi Third Water Supply EngineeringProject 1566-KE Jun 1991 Oct 1993 5. Colombia. BarranquillaWater SupplyProject 2637-CO Nov 1991 Sep 1993 6. Morocco. Third Water Supply Project 2006-MOR Dec 1989 Jun 1993 8. China. Rural Water SupplyProject 1578-CHA Dec 1991 Sep 1992 9. Brazil. Northeast Water and SewerageProject 1656-BR Dec 1985 Jun 1992 10. Brazil. Third Minas Gerais Water Project 1850-BR Dec 1986 Jun 1992 11. Rwanda. First Water SupplyProject 1345-RW Jun 1988 Apr 1992 12. Niger. First Water Supply Project 1309-NIR Feb 1989 Feb 1992 13. Peru. Lima Water Supplyand SewerageProject 2139-PE Jun 1989 Dec 1991 14. Panama. SecondWater SupplyProject 2222-PAN Jun 1989 Dec 1991 15. Ecuador. Guayaquiland Guayas Water supply Project 1030-EC InfrastructureProjects - Paraguay 1. Fourth HighwayProject 1059-PA Jun 1981 Dec 1982 2. Fifth HighwayProject 1529-PA Jun 1983 Sep 1985 3. Sixth HighwayProject 1736-PA Jun 1985 Aug 1987 4. SeventhHighway Project 2140-PA Jun 1991 Oct 1993 5. SecondRural DevelopmentProject 1418-PA Dec 1984 Dec 1986 InfrastructureProjects 1. Mexico. SecondHighway Project 2428-ME Jun 1991 Feb 1994 2. Ecuador. EmergencyPetroleum Reconstruction Project 2803-EC Jun 1991 Dec 1993 3. Colombia. Port RehabilitationProject 2635-CO Feb 1992 Dec 1993 4. Honduras. MunicipalDevelopment Project 2583-CO Dec 1990 Dec 1993 5. Chile. Road Sector Project 2589-CH Jun 1990 Jun 1993 IV. SanitationSector - Other Bank Reports AnnualReview of PortfolioPerform FY93, TWU Apr 1994 FY92 Sector Review. Water Supplyand Sanitation Dec 1992 WaterSup. and San. Proj. The Bank Experience 1967-1989 Jun 1992 Latin America. Lessons in Urb/WaterSectors CY 90 PCRs May 1991 57- Annex F

PARAGUAY

ASUNCIONSEWERAGE PROJECT

Institutional DevelopmentTechnical AssistanceProgram

Objectives

1. CORPOSANA'smanagement agrees to take all measuresnecessary to reform the sectorby decentralizingactivities to the locallevel, facilitatingthe participationof the private sector and improving its managerial,operational, commercialand financialperformance, so as to:

(a) enhance the efficiency with which essential services are provided by addressing the decentralization of CORPOSANA'soperations together with cost reductionand private sector participation;

(b) assure CORPOSANA's longer term financial viability by addressingkey operational,human resources, financial and planningissues; and improvingthe qualityof the servicesby addressing operational, maintenance and commercial practices.

Targets

2. Detailed financial projections are shown in Annex N. CORPOSANA'sspecific operational and financialtargets to be achievedduring the next severalyears are presentedin Annex L.

Actions to be Taken

3. The specificareas with issues and actionsproposed to be taken to achieve the above targets are summarized in Attachment 1. These actions comprisethe following:

(a) a study and its implementation to decentralize CORPOSANA'soperations, based on the attached terms of reference (Attachment2), togetherwith a detailed analysis and evaluationof optionsfor the participationof the private sector; - 58 - Annex F

(b) a program for CORPOSANA's corporate planning, including the design and implementationof a budgetary system with programmatic content and a medium-term strategic plan, in accordance with the attachedterms of reference and timetable (Attachment 3);

(c) a program for the reduction of unaccounted-for-water (UFW), based on the attached terrns of reference and timetable (Attachment 4);

(d) a program for the implementation of accounting, budgetary and commercial systems together with a management information system based on the attached terms of reference and timetable (Attachment 5);

(e) a tariff study to determine the tariff structure for water and sewerage services to reflect as closely as possible the economic cost of the services (Attachrnent6);

(f) a human resources study to deternine personnel policies in all aspects: recruitment, employment conditions, remuneration, promotion, etc. (Attachment 7);

(g) program for training CORPOSANA's managementteam and staff in planning, financial, commercial and operational aspects, as part of the development of the programs under (b), (c), and (d).

Implementation Arrangements

4. The above Action Plan will be carried out by CORPOSANA with the assistance of external consultantswith internationalexperience. Action 3(a), the decentralization and private sector participation activities is expected to be carried out by consultantsfinanced by the Bank and selected from a short list of firms presently operating in the water and sewerage sector. Actions 3(b) through 3(g) would be carried out by consultants financed through the proposed IDB Loan.

5. The assistance under the Actions 3(b)-(g) would be carried out in two separate phases. First phase: Diagnosis. During this phase the consultant would review CORPOSANA's existing financial and commercial systems. It would end with an inception report summarizing the main findings of the evaluation, including: identification of deficiencies, proposals for changes in systems and procedures, comprehensivedescription of the proposed systems and - 59 - Annex F

procedures, details of the hardware and software needs for implementing the system, number and skill of the staff needed and proposed program for in-house and outside training, and detailed work program to complete the different tasks. It is expected that this diagnostic phase will be carried out over six months. During the second phase (Design and Implementation) CORPOSANA will give the Bank the opportunity to comment on the diagnostic phase, and after CORPOSANA and the Bank agree on this report, the recommendations will be implemented. It is expected that the second phase will be completed over a three-year period.

Facilities to be Provided by CORPOSANA to the Consultant

6. CORPOSANA will facilitate the work of the consultant by:

(a) appointing a high level official to act as project coordinator;

(b) appointing personnel to work full time with the consultant. The number of personnel and their qualifications would be agreed during the contract negotiations with the consultant;

(c) providing suitable office space and internal transportation to the consultant;

(d) providing secretarial assistance and office supplies as required by the work carried out on CORPOSANA's premises.

Monitoring of the Action Plan

7. Progress toward implementing the Action Plan and achieving the targets will be monitored annually, to evaluate progress achieved and discuss overall issues of Plan implementation. -60 - Annex F Attachment 1

PARAGUAY

ASUNCION SEWERAGE PROJECT

INSTITUTIONAL STRENGTHENING PROGRAM

Objectives: (1) To enhance the efficiency of CORPOSANA's provision of essential public services by addressing decentralization of CORPOSANA's operations together with cost reduction and private sector participation; (2) to assure CORPOSANA 's longer term financial viability by addressing key human resources, financial and planning issues; and (3) to improve the quality of the services by addressing operational, maintenance and commercial practices. AREA ISSUES T ACTIONS TARGETS/DATES

Human Resources . Lack of personnel policies . Collect data on present personnel . Agreed training program should continue is execution and procedures for adequate and estimate personnel requirements . Number of employees regular and temporal remain at human resources and skill mixed for 1996-2002 a total of 1202 during the life of the project management, training and . prepare training program for a . The number of employees per 1,000 connections development. three years program should be reduced from 7.5 in 1994 to 4.6 in 2002.

Corporate Planning . Lack of short and long term . A long term corporate plan will be . A preliminary budget model is being designed and objectives and targets that developed including a financial will be implemented for year 1995. A final model could guide projections system. will be adjusted by July 31, 1996. CORPOSANA's . A budgetary process with . Training and budgetary process totally implemented institutional reforms and programmatic content will be by December 31, 1996. investments. designed and implemented. . A preliminary Corporate plan designed and Several drawbacks in the . The tariff structure will be implemented by December 31, 1995. tariff structure. reviewed to simplify it and . Training and final Corporate plan designed and eliminate actual drawbacks. implemented by December 31, 1997. Tariff study to determine marginal cost to be completed by July 31, 1995. -61 - Annex F Attachment 1

AREA | ISSUES ACTIONS TARGETS/DATES

Financial Management . Several drawbacks in the . An integrated financial/budgetary . Integrated financial/budgetary and cost accounting accounting not integrated to and cost accounting system system designed by December 31, 1995. the commercial system. integrated to the commercial . Satisfactory action plan to be presented to the Bank Lack of budgetary and cost system will be developed. by March 31, 1996 and implemented thereafter. accounting for managerial decisions.

Decentralization and . Lack of responsive . A decentralization model with its . Decentralization model to be completed by October Private Sector management outside correspondent implementation plan, 31, 1995 and a follow-up action plan to be presented Participation Asuncion. taking into consideration the to the Bank by March 31, 1995 and implemented Personnel costs represent changes in CORPOSANA's thereafter. about 50% of operational organization, costs, personnel, etc.,. 100% subcontracting with the private sector in all costs. will be developed. The model will areas identified in the decentralization model by Minimum sub-contracting also define possibilities for private December 31, 1998. with private sector. sector participation.

Unaccounted for Water . Unmetered connections. . Installations and replacement of . Installation of 100,00 meters by July 1995 Program . Faulty meters. meters. . Complete installation of macrometering by December Lack of confidence in . Macrometers to control water 31, 1995. volumes of water produced . produced. . Reduce accounts receivable to the equivalent of 90 inefficient billing system. . Design and implementation of new days by December 31, 1996. illegal connections. commercial system. . Complete design of commercial and management . settlement of accounts receivable information system by March 31, 1996. from Government. . Incorporation of illegal connections. - 62 - Annex F Attachment 2

PARAGUAY

ASUNCION SEWERAGE PROJECT

Decentralization and Private Sector Participation

Outline Terms of Reference

Background

1. CORPOSANA's responsibility is to provide water and sewerage services to the urban population. Since these services need to be provided in different urban centers, the decentralization of management and participation of local representatives is mandatory, so as to have an agile and responsive management of day to day operations.

2. On the other hand, CORPOSANA is trying to improve its efficiency by attracting private sector participation, together with decentralization of operations as a way to improve productivity.

3. These terms of reference have two parts: (i) decentralization of sector activities and management and (ii) analysis of options for private sector participation (specific service contracts and concessions or leasing of certain urban centers).

General Objective

4. To improve CORPOSANA's efficiency through private sector participation and decentralization.

Specific Objectives

5. The specific objectives are: (i) to fornulate a legal and regulatory framework for sector activities, (ii) to analyze and evaluate options for private sector participation; (iii) to define, nationwide, the activities to be decentralized; (iv) to formulate a decentralization program with a well-defined action plan; (v) to formulate a training plan for the decentralization program; (vi) to prepare a well-defined action plan for private sector participation including the necessary legislation, creation of a regulatory body and specific privatization programs for the various decentralized units and CORPOSANA. - 63 - Annex F Attachment 2

Scope of Work

6. Decentralization Program. The activities to formalize the decentralization process will be identified and scheduled for their implementation. This Program has to consider the regional divisions in the country and also the systems that CORPOSANA has in operation in each region. It will also take into consideration the management setting to be applied in the regions. Specifically, the Consultant will:

i) Review and analyze activities and functions to be decentralized;

ii) define responsibilities of decentralized entities in function of central agencies;

iii) prepare a regulatory framework for decentralized activities and functions;

iv) prepare a training plan for activities that will permit the staff of the different regions to perform the new activities to be transferred from Headquarters; and

v) prepare a time-bound action plan for the implementation of the proposed recommendations.

7. Private Sector Participation Program. Activities to formalize contractual services with the private sector will be identified and scheduled for their implementation. The Program has to take into account any legal constraints and ways to address them, as well as the necessary resources for its execution. Specifically, the Consultant will:

i) review all relevant existing legislation and prepare new draft legislation to provide private sector participation;

ii) prepare regulatory framework for facilitating and regulating private sector participation;

iii) Analyze and evaluate the entire range of private sector participation options and their applicability to decentralized units and functions;

iv) define areas or functions that could be contracted with the private sector, and analyze the conditions for procurement; and - 64 - Annex F Attachment 2

v) Prepare a time-bound action plan to implement private sector participation.

Time Schedule

8. The decentralization model including activities or functions to be decentralized, as well as areas or functions to be contracted with the private sector, would be completed by the end of October 1995. The implementation of the action plan would start not later than March 31, 1996.

Organization

9. A working group will be established for each of the subcomponents, i.e. the Decentralization and Private Sector Participation Programs. These groups will receive technical assistance from firms with expertise both in decentralization and in contractual services processes. -65 - Annex F Attachment 3

PARAGUAY

ASUNCION SEWERAGE PROJECT

Outline of CORPOSANA's Corporate Plan

1. The corporate plan is the development or business plan of the Corporation, for the period of 1990-1993 (actual) and 1994-2003 (projected). It will include the different programs that the Corporation will carry out in order to achieve the agreed operational and financial targets (Attachment 1 of this Annex). The programs will be grouped into: (i) sales and external resources program; (ii) operational program; (iii) investment program; and (iv) debt service program. The contents of the plan will include: (i) background; (ii) objectives; (iii) goals; (iv) the abovementioned programs to be developed (the above mentioned); and (v) financial projections.

2. The contents of each of the chapters is described below:

(a) Background

This chapter will include CORPOSANA's background information.

(b) Objectives

This chapter will describe the principal objectives that the Corporation will pursue during the planning period. The objectives will be consistent with the goals and programs proposed in the next chapters.

(c) Goals

The financial and operational targets to be achieved during the planning period will be described in this chapter. In addition, CORPOSANA will determine its monitoring indicators through which it will evaluate the implementation of the programs.

(d) Programs

A description of the following programs will be included in this chapter:

Sales and External Resources Program . This will include all the actions to be developed by CORPOSANA to improve its billing and collection of - 66 - Annex F Attachment 3

revenues of the water and sewerage systems under its administration (UFW program, accounts receivable program, etc.). In addition, this program will include separately all the external financial resources (loans, grants, Government transfers, etc.).

Operational Program. This will include all the actions to be developed by CORPOSANA in order to operate and maintain the water and sewerage systems currently under its administration, to improve its efficiency (UFW program, customer relations program, water quality control program, etc.), and to achieve its financial self-sufficiency. This program should also include all actions related to the decentralization program, resource optimization, increase in private sector participation, etc.

Investment Program. Included will be all investment projects planned to be executed with various financial resources.

Debt Service Program. All the Corporation's debt obligations will be included.

(e) Financial Projections

Under this chapter, financial projections will be prepared showing the financial results of the execution of the abovementioned programs.

3. CORPOSANA will prepare its preliminary corporate plan by December 31, 1995. A final plan will be implemented by December 31, 1997 following the implementation of the integrated accounting system. Progress in the implementation of this plan will be submitted by CORPOSANA to the Bank through the semiannual reports. -67 - Annex F Attachment 4

PARAGUAY

ASUNCIONSEWERAGE PROJECT

CORPOSANA'sUnaccounted-for-Water Program

Objectives

1. The main objectives of the Unaccounted-for Water Program (UFW) are to: (a) reduce the losses in billing for the deficiencies in the commercial system, (b) reduce the losses for leakages in the network, and (c) optimize the use of the present installed capacity of the water treatment plant and distribution system. The target of the program is to reduce UFW gradually from 40% in 1993 to 28% in 1998. In order to determine the effects of the UFW program on the water demand, Tables F-1 and F-2 are attached.

Scope of Work

2. The program includes the following projects: macrometering, cadastre of customers and network, network rehabilitation and operation, micrometering, improvement in billing and regularization of illegal users.

Cost and Financing

3. The cost of the program has been estimated at US$16 million, to be financed by IDB and by CORPOSANA.

ImplementationPlan

4. The program will be implemented over five years (1994-1998). CORPOSANA is already advancing in the execution of the program with financial support from an IDB loan. With the proceeds of this loan CORPOSANA has acquired 100,000 micrometers. A large proportion of these have already been installed, and an emergency leakage repair program is also underway. The Bank has cooperated with CORPOSANA and is financing from the PPF the consultant that is assisting in preparation of the overall UFW program. For the bulk of the program execution, CORPOSANA will contract external consultants financed by the IDB.

Organization

5. For the implementation of the Program, CORPOSANA has created the Comite de Agua no Contabilizada (CANC), which includes high-level officials - 68 - AnnexF Attachment4 of the Directorate of Operations, Maintenance of Network, Commercial, Engineeringand the Officeof Planning. One of the membersof the CANChas been appointed Coordinatorof the program. - 69 - Annex F Attachment 4

Table F-1. Water Demand and Supply, CORPOSANA

Year Water Volume of Water Total Billing Production UFW Connections Consumed (Million (Million (9) (Thousands) (M3/Month/Conn.) M3/Year) M3/Year)

1993 150.2 33.2 58.8 98.1 40.1

1994 _ 159.7 33.1 61.6 99.3 38.0

1995 175.2 33.1 66.5 103.9 36.0

1996 190.7 33.1 72.7 110.1 34.0

1997 205.4 33.1 78.7 112.4 30.0

1998 216.4 33.1 83.8 116.4 28.0

1999 227.9 33.1 88.2 122.6 28.0

2000 239.8 33.1 92.9 129.0 28.0

2001 250.1 33.1 97.3 135.1 28.0

2002 260.7 33.1 101.5 140.9 28.0

Table F-2. UFW Program - Water Savings

Year Total Billing Unaccounted-for-Water(%) Savings in (Million M3/Year) Production Without Project With Project (Million M3/Year)

1993 58.8 40.1 40.1 0

1994 61.6 40.0 38.0 3.3

1995 66.5 39.0 36.0 5.1

1996 72.7 39.0 34.0 9.0

1997 78.7 38.0 30.0 14.5

1998 83.8 38.0 28.0 18.8

1999 88.2 38.0 28.0 19.8

2000 92.9 38.0 28.0 20.8

2001 97.3 38.0 28.0 21.8

2002 101.5 38.0 28.0 22.7

TOTAL 135.9 - 70 - Annex F Attachment 5 PARAGUAY

ASUNCIONSEWERAGE PROJECT

Accounting,Budgetary, Commercial and ManagementInformation Systems

Outline Terms of Reference

Objectives

1. The purpose of this study is to improve the accounting and budgetary systems of CORPOSANA so that they become vital instruments in the decision-making process of the institution. The accounting and budget systems should be fully integrated both internally and with the commercial system, which is the ultimate generator of cash. In addition, the study will include the design of reports, aimed at assisting CORPOSANA in establishing a management information system, which would facilitate managerial activities leading to the formulation and to the achievement of the company's long, medium and short-term goals established in the CORPOSANA's Corporate Plan, as well as to the efficient utilization of resources.

Scope of Work

2. The study will include the following:

Accounting

(a) revision of the chart of accounts and preparation of an accounting manual of procedures to operate the financial, budgetary and cost accounting system (the chart should contain a breakdown by cities);

(b) establishment of a system for the flows of documents and a timetable for their processing;

(c) establishment of a system of controls of the quality and timeliness of inputs to the accounting system;

(d) revision of the link between the accounting system and the budgetary system as well as with the subsystems that capture and generate financial and operational data. For example: customer billing and collection, materials and supplies, payroll personnel, accounts payable, fixed assets and work in progress; -71 - Annex F Attachment 5

(e) recommendations on the organization and staffing of the accounting department;

Budget

(f) improvement in the present programmatic budget system through design of priority responsibility centers (e,g. billing, collection, water treatment plants, water distribution systems, cities) and establishing monitoring targets for these centers;

(g) design of a system for budget preparation for various timeframes: monthly, annually and over several years;

(h) preparation of planning and cash management models integrated with the accounting and budgetary system. These models should permit CORPOSANA's staff, inter alia, to assess the viability of investment plans, determine tariff requirements, evaluate the impact of changes in costs, in financing plans, in exchange and inflation rates and cash requirements. The consultant should review the financial projections models that CORPOSANA uses at present and recommend the changes considered necessary. This financial model will be used to prepare the Corporate Plan;

(i) ensure the consistency of the budget with the accounting system. For Government budgeting purposes the comprehensive CORPOSANA budget should be adjusted to fulfill its financial management requirements;

Commercial

(j) updating of cadastre of customers, incorporation of illegal connections into the system and implementation of new customer promotion;

(k) improvement of reading and billing cycles including a special program for customers with high consumption levels;

(I) design of actions for encouraging customers to make timely payment of the bills, and the reduction of accumulated accounts receivable;

(m) customer relations, education and handling of complaints; - 72 - Annex F Attachment 5

Reports

The consultant will review and improve the reports presently issued by CORPOSANA, and design other reports that are deemed necessary. The information system should permit the issuance in a timely fashion, at a minimum, of the following reports:

(n) long, medium, and short-term budgets which include investments, operations and maintenance activities;

(o) long, medium and short-term financial projections which consolidate the above budgets and the proposed financing policies;

(p) management reports on the company's financial situation and on budget execution, including comparisons between budgeted and actual results (including physical targets) for the company as a whole and for the responsibility centers (including breakdown by cities); and

(q) financial statements to meet the needs of external parties, including governments, creditors and regulatory agencies. - 73 - Annex F Attachment6

PARAGUAY

ASUNCION SEWERAGE PROJECT

Tariff Study

Outline Terms of Reference

Objectives

1. The purpose of this ongoing study is to design a tariff structure for water and sewerage services to reflect as closely as possible the economic cost of the services. These tariffs will be compared with the current ones, and a plan will be prepared to gradually adjust the present tariffs to the structure and levels recommended. Tariff structure and levels will be designed taking into account social considerations.

Scope of Work

2. The study will include the following:

(a) estimation of the incremental costs of water supply taking into account the increase in new production capacity, rehabilitation and improvement of the existing facilities, investment to reduce the unaccounted-for water, and operating and maintenance expenses;

(b) estimation of the incremental costs of sewerage service taking into account the increase in new capacity, rehabilitation and improvement of the existing facilities, and operating and maintenance expenses;

(c) estimation of the incremental costs to provide water supply to different type of customers;

(d) estimation of the incremental costs to provide sewerage services to different type of customers, taking into account the quantity and quality of the sewage in such a way that costs can be distributed fairly among domestic and industrial customers;

(e) recommendations of the tariff structure and a plan to gradually adjust the present tariffs to the ones recommended; - 74 - Annex F Attachment 6

(f) analysis of the procedures presently in place to approve water and sewerage tariffs, and recommendations for the reorganization and procedures that would be required to establish a transparent and prompt system of approval.

Basic Information

3. System costs will be prepared in market prices, and only when the prices are notoriously distorted shadow prices will be used. The rate of discount to be used will be the opportunity cost of capital in Paraguay, which is estimated at 10 percent. The data will be prepared for a minimum of five historical years and 10-year projection.

4. The information will be prepared for Greater Asunci6n, Ciudad del Este and for other typical provincial cities.

Time schedule

5. The tariff study is under preparation and will be completed by July 31, 1995. This study is being financed under a grant from IDB. - 75 - Annex F Attachment 7

PARAGUAY

ASUNCION SEWERAGE PROJECT

Human Resources Study

Outline Terms of Reference

Objectives

1. The purpose of this study is to improve personnel policies in all aspects: recruitment, employment conditions, remuneration (at such level that recruitment of new staff and maintenance of expertise with respect to quality and number of staff would be assured), performance-tied promotion and merit pay, termination and dismissals, social and direct benefits, and job description and qualification requirements.

Scope of Work

2. The study will include the following:

(a) collect data on the present number of personnel classified by units, skills and ages;

(b) estimate the number of staff and skills mix required during the period 1996-2000;

(c) prepare job description and qualification requirements and remuneration policy;

(d) recommend a recruitment policy. This should take into account that CORPOSANA is at present overstaffed in some units, and therefore a training program which will be prepared under the Project should encourage staff to new career paths;

(e) recommend a promotion system as well as termination and dismissals policies;

(f) prepare a training program for a three-year period, which will be updated every year. It is expected that about 50 % of CORPOSANA's personnel will participate in the program during - 76 - Annex F Attachment 7 the project implementation period. A large part of the training will be on-the-job. The other parts will be carried out through local universities or courses/seminars abroad. The consultant will recommend any strengthening in the reorganization of CORPOSANA to successfully undertake this training. -77- Annex G

PARAGUAY

ASUNCION SEWERAGE PROJECT

Description of Physical Works

1. The proposed project has two components: the Technical Assistance Program described in Annex F and the Improvements of the Asunci6n Sewerage System and Infrastructure Works for Encamaci6n which is described in this annex.

The Asunci6n Sewerage System

2. The sewage collection and disposal service in Asunci6n has not kept pace with the expansion of the city. The Greater Asunci6n area with a population of about one million has a sewerage coverage of only 40 percent; the rest of the area is served by latrines (33%), cesspools (27%), and septic tanks (2%). As expected, the service coverage is highest in the older sections of the city. Unfortunately, a large number of the on-site systems do not function properly, due either to inadequate maintenance or to poor soil permeability leading to serious health risks to the population.

3. The sewer system serving primarily the central area of Asunci6n has been built in phases since 1960. Major works were undertaken in the early 1970s resulting in new outfalls serving Bella Vista, Tacumbu and San Antonio catchments. The most recent system has been installed in the neighboring areas of the Universidad Cat6lica and the new Metropolitan Seminary. The diameter of the pipework used in the existing systems varies from 100 mm to 900 mm excluding the Bella Vista outfall (1350 mm). Vitrified clay pipes predominate in the system and are generally used in the smaller diameter ranges up to 400 mm in diameter; concrete pipes are used in larger diameters. In certain locations such as stream crossings, cast iron and steel pipes have also been used for the larger diameters, while PVC pipes were used for smaller diameters (e.g. 150 and 200 mm).

4. Although the system would be considered relatively new compared to systems in other countries in the Region, it is plagued by a number of typical problems: surcharges due to volumes of wastewater larger than design volumes, illegal stormwater connections, structural failures (sewers over 20 years old), and siltation in the pipes as a result of lack of maintenance.

5. To address the problem of wastewater collection and disposal in Greater Asunci6n, a master plan was prepared in 1986 to provide full coverage by the - 78 - Annex G year 2010; the plan also identified and developed a number of subprojects and studies which form the basis of the proposed project. The master plan was updated in 1994 by CORPOSANA in the preparation of the proposed project.

The Proposed Project Area

6. The Itay basin which is located to the east of the city limits has been identified in the 1986 master plan as the first priority area for expansion of the sewer system. The proposed project would cover about 4,500 ha. and would improve the health and quality of life for an estimated 250,000 people. The basis for this prioritization was a) rapid increase of population in the area; b) increase in the water quantity consumed; c) the low soil permeability (K < 5*10 4 cm/s); leading to constant flooding of the residential areas and discharge to the streams and d) the presence of some industrial waste producers (dairy, abattoirs, soap, bottling, etc.). The design of the sewer system in the basin was based on the least-cost solution: the selection of gravity system (including the tunnel) was found to provide the least-cost solution over the life of the system taking into consideration the operation and maintenance costs.

Project Components

7. The proposed project in the Itay basin would finance the following subcomponents:

- House connections. This subcomponent will include the expansion of the sewer system to 50,000 new house connections.

- Secondary network. This subcomponent will include the construction of 550 km of secondary collectors ranging in diameter from 150 mm to 600 mm, along with necessary appurtenances;

- Primary network. This subcomponent will involve the construction of 24 km of sewage interceptors of diameters up to 2 m and a tunnel of 3.2 km with a diameter of about 2 m;

- Preliminary treatment and disposal. Under this subcomponent, a preliminary treatment facility will be constructed to remove floating coarse materials from the sewage; an outfall to the center of the River Paraguay will also be constructed to maximize the rapid dilution of the sewage.

- Rehabilitation of existing outfalls. This subcomponent will include the rehabilitation of the Tacumbu, Sajonia and Lagerenza outfalls which are currently partially blocked and discharging on the shore line. -79- Annex G - Monitoringsystem. This subcomponentwill establisha monitoringand control system for the dischargeof wastewaterinto the ParaguayRiver; this will include the developmentof a program and the purchase of equipment for the necessary monitoring. In addition, this subcomponent will include the design of a monitoring system for the control of hazardous and toxic materials from future industrialwastes.

- Infrastructure works in Encarnaci6n. This subcomponentwill include the provision of works for water supply, sewage disposal and related works to supplementthe Government'sresettlement program for 3000 people affected by the constructionof the YacyretAreservoir. PARAGUAY ASUNCION SEWERAGE PROJECT

PROJECT COST (US$ million)

1994 1995 1996 1997 1998 1999 2000 2001 2002 TOTAL

IDTA Program Sector Reform 0.3 0.3 0.1 0.1 0.1 0.1 0.1 0.1 1.2 Sewerage System Works 5.2 6.2 7.8 9.4 8.3 6.8 5.7 2.6 52.0 Engineering and Administration 0.4 0.6 0.6 0.7 0.7 0.6 0.4 0.3 4.3 Encarnacion Works 0.8 0.4 1.2 TOTAL BASE 6.7 7.5 8.5 10.2 9.1 7.5 6.2 3.0 58.7 Physical Contingency 0.7 0.8 0.9 1.1 1.0 0.8 0.7 0.3 6.5 Base Cost (as of 1/1/1994) 7.4 8.3 9.4 11.3 10.1 8.3 6.9 3.3 65.2 Price Contingency 0.2 0.5 0.7 1.2 1.3 1.3 1.2 0.7 7.1 00 TOTAL COST 7.7 8.8 10.2 12.5 11.4 9.6 8.1 4.0 72.2

FINANCING (Thousand of current US$)

IBRD 5.3 5.8 6.5 7.9 7.4 6.1 5.0 2.5 46.5 EIB 2.1 2.7 3.4 3.7 2.8 2.5 2.5 0.3 20.0 CORPOSANA 0.3 0.3 0.3 0.9 1.2 1.0 0.6 1.2 5.7 TOTAL 7.7 8.8 10.2 12.5 11.4 9.6 8.1 4.0 72.2

x - 81 - Annex I

PARAGUAY

ASUNCION SEWERAGE PROJECT

Paraguayan and Bank Procurement Practices

Background

1. In May 1990, the Bank's legal staff surveyed Paraguay's procurementlegislation. A summary of their findings is given below (section A). In January 1992, a review was carried out of Paraguayan procurement practices. Many discrepancies between local and Bank procedures were identified. They are listed below (section B).

2. Project missions have discussed with CORPOSANA and the Comptroller General of the Nation (CGN) the need to adapt local bidding documents to Bank models because they are the result of many years of successful practice around the world. The mission was assured that this would be done and that the Bank's sample bidding documents would be used. According to the Comptroller General, using Bank-prepared sample documents did not present any problems provided that the Loan Agreement contained specific mention of each item - for the procurement of civil works, goods, and/or services - on which the Sample Bidding Documents differ from Paraguayan legislation, as was done in the SENASA project. The Loan Agreement, according to CGN, prevails over local legislation.

3. At appraisal the items listed in section B below have been reviewed again with CORPOSANA and CGN, and Spanish translations of the Bank's Sample Bidding Documents, sample consultant contract, and sample pre- qualification documents have been provided to CORPOSANA and the CGN. They have been advised that use of the Bank standard bidding documents has been made mandatory after May 1, 1993 and that corresponding and equivalent documents for use in Paraguay would have to be prepared prior to negotiations for the proposed loan.

A. Compendium of Paraguayan Procurement Legislation

4. Administrative Organization Law of June 22, 1909

(a) Art. 192. Regime for acquisitions and works. This article calls for public bidding for all purchases of goods and works - 82 - AnnexI

for the government administration. Minor items, deserted bids, and urgent purchases are exempted.

(b) Art. 204. Requiresas a conditionof eligibilitythat a bidder be "previouslyrecognized as eligible by the administration."

(c) the remaining articles contain procedural provisions.

5. Decree No. 14161 of December 13, 1921. Establishes proceduresfor the acquisitionof goods and for the executionof works by force- account ("administraci6n").

6. Decree No. 33789 of June 22, 1929. Establishes that the procurement of goods and works by the administrationrequires prior review of the Comptroller General (Contraloria).

7. Decree No. 3119 of July 23, 1936. Forbids governmental agencies ("reparticionespfiblicas") from purchasing directly from suppliers without the prior consent of the Ministry of Finance.

8. Decree 20203 of February7, 1940. Forbids public agencies from consideringbids submittedafter the bid closing date.

9. Decree 2973 of March 20, 1944. Authorizes ministers to approve bidding documents and contracting conditions for their respective Ministries.

10. Decree No. 35635 of September 20, 1982. Requires the central administration and decentralized agencies to use public bidding proceduresapproved by the executive, in order to procure goods and services financed from internal or external sources.

11. ResolutionNo. 117 of January 15, 1983. Requires:

(a) pre-qualificationof bidders; and

(b) that central government agencies, autonomous entities, autarchic entities and mixed enterprises utilizing either their own funds or domestic or international financing, contract feasibility studies, project designs, and works supervision in compliance with decree 28482 of September 22, 1972. The decree requires that all feasibility studies, engineering and architectural projects, works and works supervision of an - 83 - AnnexI

official and private nature, be carried out by local enterprises either on their own or in associationwith foreign partners.

12. DecreeNo. 9319 of October20, 1941. Creates a Registry of Bidders for Public Works.

B. Discrepanciesbetween the LocalLaw and Bank ICB Procedures

13. (a) foreign firms are forced to enter into joint ventures with local firms for carryingout civil works (40% minimumparticipation of local firms), supply and erection of electromechanical equipment (20% minimum participation), and consulting services (30% minimumparticipation);

(b) all consultingservices must be procured from local registered firms through a form of LCB;

(c) there are no bid evaluationcriteria, and the concept of "lowest evaluated bid" is not provided for. Law 1045 states that the lowest bidder should be awarded the contract as long as it is responsive. Yet, the law also allows awardingcontracts to the second lowest bidder as long as the price is within 3% of lowest bid;

(d) prior registrationof bidders is required;

(e) price adjustmentsfor materialsare allowed only when changes of more than 15% have occurred;

(f) hiring of consultantsis treated in exactly the same manner as that of contractors (i.e. by public bids). However, direct contractingof technical consultantsis allowed;

(g) three bids are required to award a contract; and

(h) the followingare usually treated in a manner unsatisfactoryto the Bank: (1) site visits are mandatory;(2) bids are submitted in two or three envelopes that separate out requirements and items; (3) bids, and payment currencies are not treated appropriately. - 84 - Annex I

14. LCB bidding documents lack specificity on evaluation criteria and do no use the concept of the "lowest evaluated bid," and they do not provide for the participation of foreign bidders.

15. Although approved previously by the Bank, ICB bidding documents used in Bank projects' contain unsatisfactory treatment of certain items. An effort to follow Bank requirements is evident; yet, the documents contain the following unacceptable items:

(a) only joint ventures of two or more firms are allowed to bid;

(b) two or three envelopes that are opened simultaneously are required;

(c) all bidders must be registered;

(d) documents submitted by foreign bidders must be first presented to the Paraguayan consul in the foreign country and the Ministry of Foreign Affairs;

(e) bid evaluation criteria are vague;

(f) all labor, excluding managers and some technical staff, has to be Paraguayan;

(g) bid and payment currency are inconsistently specified and not in agreement with Bank guidelines;

(h) the price adjustment formula for local costs was incorrect, and the price adjustment formula for foreign costs was left up to the bidder; and

(i) cement has to be of local origin.

C. Special Provisions to be Included in the Legal Documents

16. In view of the above discrepancies and the treatment of items in a manner contradictory to Bank practice, the following special provisions would be stated explicitly in the loan documents, that:

I For instance, thosefor works in MOPC's ICB No. 3 of September1991, Loan 2087-PA, for the Camino Troncalde Todo Tiempo, DesarrolloRural Caazaph. - 85 - Annex I

(a) foreign consultants or contractors should not be required to enter into joint venture agreements with local consultants or contractors as a condition of submitting proposals or bids, neither should they be required to register prior to bidding; except that in local bidding, foreign bidders may be required to be registered if the information requested is of such nature that it will not discourage their participation;

(b) foreign consultants or contractors should not be required to legalize their proposals or bidding documents and supporting documents either at Paraguayan consulates or the Ministry of Foreign Affairs as a condition for making proposals or bidding;

(c) no minimum number of bidders should be necessary for competitive bids to take place, and no minimum number of responsive bids should be required to award a contract;

(d) contracts should be awarded to the lowest evaluated bidder;

(e) contract prices should be adjustable according to the yearly change in prices during the life of the contract, regardless of the amount of the change;

(f) foreign contractors shall not be required to hire local personnel except for unskilled personnel;

(g) foreign bidders shall be allowed to participate on an equal footing in local competitive bids;

(h) Foreign consultants will be selected from those included in a short list on he basis of evaluation criteria and terms of reference, both satisfactory to the Bank; and

(i) the prices of contracts over one year duration may be adjusted. - 86 - AnnexJ

PARAGUAY

ASUNCIONSEWERAGE PROJECT

EstimatedSchedule of Loan Disbursement (US$ Million)

Bank Fiscal Year Semester Cumulative % of Total and Semester Ending Disbursement

FY 1995 June 30, 1995 1.2 1.2 2.5 FY 1996 December 1995 4.1 5.3 11.5 June 1996 2.8 8.1 17.5 FY 1997 December 1996 3.0 11.1 23.9 June 1997 2.9 14.0 30.0 FY 1998 December 1997 3.6 17.6 37.8 June 1998 2.9 20.5 44.0 FY 1999 December 1998 5.0 25.5 54.8 June 1999 2.4 27.9 60.0 FY 2000 December 1999 5.0 32.9 70.7 June 2000 1.7 34.6 74.5 FY 2001 December 2000 4.4 39.0 83.9 June 2001 2.0 41.0 88.2 FY 2002 December 2001 3.0 44.0 94.6 June 2002 2.5 46.5 100.0 PARAGUAY

ASUNCION SEWERAOE PROJECT

IMPLEMENTATION SCHEDULE

SubY-Projet Method Category 1996 1996 1997 lost 1t" 2000 2001 2002 0102 03 04 l 02 03 04 01 02 03 04 0102 03 04 0102 03 04102 03 04 01 02 03 04 0102 03 04 DTA Proum,

Sector Ielofm (Daoentrbzathon end Privats Sector ParticlpaUtonl Consuttant Studies

Aoelon SeweragetSrterne

Interceptos. Tutnnl. P"Irnnery Treatment and New Otjtf.l ICe Works Secondary Cottctore end l4ouse Connectione

Fernndo de More &Notis ICa Works

Sante Teresa& LegunwNorte ICa Works

Avel & Airport Area Ice Works

MadameLych & PrknerPrsldent. ICa Work.

RahAbiltation of the TacuLnbL Sajonia & Oetenas Outicle ICB Work. _t Engineering.Supervson end Proet Management Conaultant Studio*

hIlrotraeturmWore* InEneenmologt

nreetructuroWorsa In Enoanoelon Ice Worka

CD X PARAGUAY

ASUNCIONSEWERAGE PMOJECT

IDTA IAPLEMENTATIONSCHEDULE

IDTA ROOfAMiCOMPO#EF4 1999| lossn1 _ 1997 less ______a_ _ 01 02 030 4 01 i203 04 01 020324 0: 0304

Dacantfazatlon and Ptvatc Bect PortiatIon Wod Bnk _ L ' _ -

Carousle Plan*m Iou10

Cuposte Plan e .

Oudget Model- - - - -

l UbnFh nebl 108 _ ~~~~~~~~~~~~~~~~~DIr sa rI_ 00

Unaccoumned-. er wator NM

Macrotmetu EEE

CommnercialSystem

D - Designed; E - End kw4 nBaIONbm I - k*tlee k11lemenaIlan: WO - WOM Sa APProl PARAGUAY

ASUNCION SEWERAGEPROJECT

CORPOSANA MONITORING INDICATORS

ACTUAL PROJECTIONS Units 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

M-rket Coverage New water connections 000 4.8 6.8 5.4 4.8 9.6 15.5 156. 14.7 11.0 11.5 11.9 10.3 10.6 Total water connections year end 000 134.2 140.0 146.4 160.2 159.7 175.2 190.7 205.4 216.4 227.9 239.8 250.1 260.7 New sewerage connections 000 0.7 0.8 1.3 0.3 0.2 0.2 0.2 2.1 6 1 17.3 20.1 13.9 13.6 Total sewerage connections year end 000 89.2 90.0 91.3 91.6 91.8 92.0 92.2 94.3 100.4 117.7 137.8 151.7 165.3

Efficiency Indicator Unaccounted-for water % 23 29 37 40 38 36 34 30 28 28 28 28 28 00 Number of employees 1/ 1217 1228 1202 1202 1202 1202 1202 1202 1202 1202 1202 1202 1202 q0 Employee/1000 water connections 9.1 8.8 8.3 8.0 7.6 6.9 6.3 5.9 5.6 5.3 5.0 4.8 4.6

Financial Indicators Rate of return 2/ % 5.0 5.3 0.6 -0.7 0.3 1.0 2.4 4.1 6.0 7.0 6.9 7.9 8.4 Accounts receivable days 120 138 178 204 183 128 91 91 91 91 91 91 91 Debt service coverage ratio 3/ % 1.0 1.0 0.7 0.7 1.5 0.7 1.4 1.4 1.4 1.5 1.4 1.4 1.4 Self-financing ratio 4/ % 4 11 6 0 27 -13 22 24 28 38 41 47 97 Working ratio 5/ % 86 73 78 78 70 63 68 52 48 46 44 41 40 Operating ratio 6/ % 76 82 96 106 98 91 83 75 68 65 64 60 59

1/ Include regular and temporal employees 2/ Ratio of operating income to average revalued fixed assets in operation > 3/ Ratio of gross internal cash generation to total debt service x 4/ Ratio of net internal cash generation to construction program. 5/ Ratio of cash operating expenses to revenues. 6/ Ratio of operating expenses to revenues. - 90 - Annex M

PARAGUAY

ASUNCION SEWERAGE PROJECT

Organization of CORPOSANA

1. The Institutional Strengthening Program which was initiated in 1993 modifies CORPOSANA's former organizational structure by creating five main units called Direcciones (Directorates): Engineering, Operations, Commercial Activities, Administration & Finances, and Maintenance of Networks. Directorates are subdivided into Superintendencias (Superintendencies), composed of Divisiones (Divisions). Most of the subordinated areas have been eliminated to increase the levels of coordination and delegation, to reduce potential conflicts within units, and to reach a greater degree of autonomy within the hierarchical structure. The new organization implies greater responsibility and capacity delegated from higher (Directors) to intermediate level staff (Superintendents). The number of the current lowest level of organization (Section) has been decreased.

2. Two interdependent planning units have been incorporated into CORPOSANA's organizational structure by the Institutional Strengthening Program: the Planning Committee and the Planning Office. The Planning Committee, where all the Directorates are represented, has been designed to improve coordination. The Planning Committee will establish the goals for the administration, expansion and evolution of CORPOSANA, and it will be in charge of the planning, evaluation and control as well as monitoring the planning results. The necessary operational and methodological structure needed by the Planning Committee to carry out its decisions will be provided by the Planning Office. The Planning Office-not a Directorate but attached to the Presidency-has already been staffed. The office will have at least one technical assistant and one secretary who will both work with a designated sectoral area such as the Programming or Technical Units. The Planning Office will be responsible for the preparation of: (a) short- and long-term plans (including financial projections); (b) budgets to support the work plans; and (c) an updated data base for the whole enterprise. In addition, the Planning Office will prepare reports and review trends shown by the monitoring indicators, proposing solutions to be presented to the Planning Committee, as needed.

3. The optimum job placement of professionals and a clear differentiation between all those activities involving production and expansion ("targets") and administration and finance ("means") must exist to improve management and to a create well-defined organization structure. In this sense, the entire Program is based on this distinction. Since Engineering and Operations are "target" areas that effectively offer water and sewerage services, - 91 - Annex M they must be proprietary and deserve higher allocations of material and managerial resources. The Program goes deeper into details regarding the functions and development of these "target" areas, leaving to CORPOSANA's preferences the organization of the "means" areas (Administration & Finances and Commercial).

4. A new Commercial Directorate has been created to handle all the tasks involving direct contact with third parties (e.g., users, suppliers, contractors). Cadastre, Public Relations, Billing and Arrears, Metering and Analysis are under this Directorate. From the organizational point of view, this means a qualitative improvement since the Commercial Department, formerly attached to the Administrative Unit, has been upgraded to become a Directorate. It represents a significant and realistic organizational adjustment motivated by the present needs and size of CORPOSANA and has been supported by the Bank.

5. Participation of the private sector in specific areas of CORPOSANA is encouraged by the Institutional Strengthening Program which will increase the efficiency and autonomy of services. The activities which have been proposed for private sector operational management contracts are shown in the Table below.

Table M-1. Activities Proposed for Private Sector Contracts Area Activity Contract Technical Operation Operationand maintenanceof systems Expansion Elaborationof Projects Executionof works Project Management Administrative/Financial General Services Cleaning Security Transports EquipmentRepair BuildingsMaintenance Human Selectionof personnel Resources Evaluationof staff performance Financial Accountsreceivable Payment of salary Commercial Collection Meter Reading Delivery of bills Data processing Cadastre Updatingand Maintenance Others Connections Meter replacement - 92 - Annex M

6. Private participation would be carried out through two kinds of contracts according to the following criteria: the first, on a unit price basis, for general contracts of services; and the second, on a case-by-case basis, concerning contracts for services for specific purposes.

7. The former Department of Human Resources has been upgraded to become the Human Resources Development Office attached to the Administrative and Financial Directorate. This Office has been established and appropriately staffed, and is to play a critical role in the overall management of the project. The new Office will resolve existing personnel problems by: (a) establishing clear personnel policies such as salary increases, promotions and personnel selection based on objective criteria; (b) implementing a well- conceived training program; and (c) improving and formalizing communication between the management and staff.

8. Many significant changes provided by the Program are to be carried out by the Administrative/Financial Directorate and are related to Human Resources. The underlying objectives of the Program entail personnel reassignment at all levels according to objectively defined profiles, taking into consideration the qualifications and experience required for each position and the application of transparent selection procedures. The professional profiles to be applied to the staff have been defined by the Plan. Hiring of new staff is not a component of the Program. Nonetheless, to ensure selection of staff in the future according to a transparent administrative system, guidelines establishing a selection process have been included.

9. The Institutional Strengthening Program also entailed a review of the entire policy of human resources, focusing specifically on the hiring of new staff, promotions, and the maintenance and organizational development of human resources. Drafts on both the new salary policy and the new staff guidelines have been prepared by CORPOSANA. -93- Annex N

PARAGUAY

Asunci6n SEWERAGE PROJECT

CORPOSANA's Finances

Past Financial Performance

1. CORPOSANA's financial performance is unsatisfactory. It has depended on Government contributions for investments and, in recent years, to cover a large part of CORPOSANA's debts. Several factors have contributed to CORPOSANA's poor performance: (a) tariffs are low and do not reflect real costs, and tariff values have deteriorated due to a lack of tariff adjustments to keep up with inflation; (b) increased operational expenses and weak commercial practices in billing and collections; (c) excessive payroll costs; (d) high unaccounted-for water levels; and (e) unsound investments. CORPOSANA operates 17 water systems in cities of the interior and with little cost recovery. Although a relatively small net income was reported during the 1990-91 period, the continuous and high increase in its operating and financing costs caused net losses of about G340 million in 1992 (US$0.2 million) and G2,905 million in 1993 (US$1.7 million). Key financial and operational indicators such as the self-financing ratio, current ratio, level of accounts receivable, and unaccounted- for water were unsatisfactory. To cover part of its financial requirements for investment during this period, CORPOSANA received Government contributions amounting to US$9.2 million. In addition, the Government renegotiated the debt with commercial banks and the Paris Club. As a result of this operation, CORPOSANA owes the Government approximately US$10 million.

2. CORPOSANA's balance sheet as of December 31, 1993 is summarized in Table N-1 below: -94- Annex N

Table N-1. Summary of Balance Sheet as of December 31, 1993

Million of Percentage Guaranies Revalued Fixed Assets 397,405 93 Current Assets 24,519 6 Other Assets 2,482 1 Total Assets 424,406 100

Financed by. Equity (incl. Revaluation) 238,893 56 Long-Term Debt 147,020 35 Current Liabilities 38,493 9 Total Assets & Liabilities 424,406 100

3. CORPOSANA's financial position as of December 31, 1993 was weak, and showed serious liquidity problems. The debt/equity ratio was 38/62 and the current ratio was 0.6. Even though the level of indebtedness is relatively low, CORPOSANA has been unable to cover its debt service. As of December 31, 1993, it had accumulated arrears in interest and principal payments (para. 4). Details on all creditors with outstanding balances of principal and interest is included in the Project file.

4. CORPOSANA's total long-term debt, including its current portion, as of December 1993, amounted to about G171,736 million (US$91 million). This amount includes G18,290 million (US$10 million) it owes to the Government as a result of the debt renegotiation carried out during 1992. To settle this debt with the Government, agreement was reached during negotiations that the Government will offset US$2 million for its accounts receivable with CORPOSANA and transform the remainder (US$8 million) into a long-term loan (para. 5). Agreement was also reached that the Government and CORPOSANA will present a plan, satisfactory to the Bank, to cover CORPOSANA's arrears in debt service. At the end of 1994 the arrears in debt service from bilateral sources and commercial banks will amount to G15,416 million (US$7.1 million). - 95 - Annex N

5. Accounts receivable for water and sewerage services are very high, amounting to G15,554 million as of December 31, 1993. This amount represents about 56% of the revenues for that year, or 204 days of billings. Out of the total accounts receivable, Government entities owed CORPOSANA approximately G4,000 million for services provided between 1990 and 1994. With Bank assistance, an agreement has been reached between the Government and CORPOSANA that the Government will pay the current bills in a timely fashion, while canceling out overdue bills against outstanding debt of CORPOSANA to the Government. To improve the collection of private customers, CORPOSANA has recently intensified the suspension of water service to delinquent customers. It has also created a collection office (Oficina de Cobros) within the Commercial Department to deal exclusively with delinquent customers. Likewise, as some of these accounts are very old, CORPOSANA is carrying out a study by an external consultant to determine the bills likely to be collected and to propose writing off uncollectible accounts. It is expected that all these actions would help to reduce the high level of accounts receivable. Nonetheless, the review of the action plan that CORPOSANA will prepare by September 30 of each year will include actions and targets that reduce the level of accounts receivable in accordance with the schedule of Monitoring Indicators (Annex L). One of the key actions to improve collection will be the establishment of a surcharge for late payment.

6. Unaccounted-for water in 1993 was estimated at 40%. CORPOSANA is at the present time implementing some actions, such as the installation of new meters and repair of leakages, to reduce this ratio. During Project implementation the unaccounted-for water percentage will be closely monitored in accordance with the Monitoring Indicators (Annex L).

Future Financing

7. The financial forecast for the period 1994-2002 reflects CORPOSANA's strategy to achieve and maintain financial self-sufficiency. Under such strategy, CORPOSANA would satisfactorily operate and maintain its water and sewerage systems, pay debt service, and make a reasonable contribution to its investment program from its internal cash generation. The financial projections assume the following: (a) the implementing of an annual water tariff increase of 5% per annum during project implementation (1995 through 1999) over the inflation rate of the previous year and the earning of 7% rate of return over average fixed revalued assets in operation beginning in calendar year 1999 and thereafter; (b) reduction of unaccounted-for water levels to 38% by 1994; 36% by 1995; 34% by 1996; 30% by 1997; and 28% by 1998; (c) the number of employees will remain at the present level (1,202), which will result in an improvement in the employees per 1000 water connections ratio; (d) the level of accounts receivable will decrease from 204 - 96 - Annex N billing days in 1993 to 90 days from 1996 onward; (e) that the US$8 million of the outstanding debt of approximately US$10 million with the Ministry of Finance will be transforned into a long-term loan, and the remainder canceled with accounts that the Government owes to CORPOSANA for water services provided to Government entities from 1990 to 1994; and (f) CORPOSANA will obtain a loan of US$6 million during 1994 to cover arrears in debt service (see para. 9). Under these assumptions, the rate of return would range from -0.7% in 1993 to 8% in 2002, the debt/equity ratio would reach a maximum of 56% and the minimum debt service coverage ratio would be 1.4 (except in 1994 and 1995). Other financial and operational indicators are shown in Annex L, and will be used to monitor the entity's performance. The proposed project will provide funds to help CORPOSANA to improve its managerial, financial and technical areas.

8. CORPOSANA's investment program, including interest during construction and requirements for working capital amounts to US$237.9 million of which US$72.2 million or 30.4% corresponds to the proposed Project. The ongoing works amount to US$12.9 million in the final stage of the Plan Director I (expansion of the Asunci6n treatment plant and expansion of the distribution system). Other future projects amount to US$105.4 million and include: Plan Director II, new systems/expansion of water supply and sewerage facilities in provincial cities as well as other routine small provincial projects. Interest during construction is estimated at US$32.0 million, and the increase in working capital requirements as well as other uses (net) amounts to US$15.4 million.

9. CORPOSANA's net internal cash generation would finance US$71.8 million or 30.2% of the total requirements of the 1994-2002 program. The Government capital contribution would fund only US$2.3 million at the beginning of the period, as the corporation would become self-financing. Customers' contributions are estimated at US$1.1 million. The remaining funds would be covered by loans amounting to US$162.7 million. Of this figure, US$9.4 million would come from undisbursed proceeds of existing loans, US$46.5 million from the proposed Bank loan, US$80.8 million from future IDB loans, US$20 million from the European Investment Bank and US$6.0 from unidentified sources. This last loan will be used in 1995, to cover arrears in debt service accumulated with bilateral sources and commercial banks. It is expected that this loan would be part of the plan of action that the Government and CORPOSANA will present as a condition of effectiveness. The investment program and financing plan are summarized in Table N-2 below. - 97 - Annex N

Table N-2. Financing Plan for 1994-2002 Construction Program Million US$ Percentage Ongoing Works 12.9 5.4 Proposed Project 72.2 30.4 Other Future Projects 105.4 44.3 Subtotal 190.5 80.1 Interest During Construction 32.0 13.4 Total Construction Program 222.5 93.5 Increase in Working Capital and other uses (net) 15.4 6.5 Total Requirements 237.9 100.0

SOURCES Gross Internal Cash Generation 169.9 71.4 Less: Debt Service 98.1 41.2 Net Internal Cash Generation 71.8 30.2 Borrowing: Existing Loans 9.4 4.0 Proposed IBRD Loan 46.5 19.5 Proposed EIB Loan 20.0 8.4 Future IDB Loans 80.8 34.0 Other (Government) 6.0 2.5 Subtotal 162.7 68.4 Customers' Contributions 1.1 0.4 Government Contributions 2.3 1.0 Total Sources 237.9 100.0

10. To ensure an orderly financing process, and that only technically, economically, and financially sound projects will be undertaken, an agreement was reached during appraisal that CORPOSANA will not undertake any major expansion project (defined as in excess of 3% of current net fixed assets in operation) other than those reviewed by the Bank during appraisal, unless it - 98 - Annex N furnishes to the Bank with satisfactory evidence that such projects are economically justified and that adequate financial, technical and managerial resources exist to carry them out.

11. To provide the Bank with the opportunity to review the terms of any future borrowing, agreement will be sought during loan negotiations that CORPOSANA will not incur any long-term debt without the Bank's agreement, unless its gross internal cash generation covers its maximum future debt service by at least 1.4 times.

Sensitivity Analysis

12. A sensitivity analysis was carried out to estimate the impact of possible changes in main variables on CORPOSANA's cash position and tariff requirements. The main variables on which sensitivity analysis was conducted were: (a) increase in accounts receivable; (b) investment costs; (c) reduction in number of water and sewerage connections; and (d) a higher ratio of un- accounted-for water. The results of this sensitivity analysis are summarized in Table N-3.

13. According to the sensitivity analysis, if the accounts receivable increase 10%, the cash balance at end of the implementation period would be reduced by 19%, requiring a 6% increase in tariffs in 2002 to compensate this decrease in cash. As can be seen, CORPOSANA's cash position is very sensitive to the increases in construction costs and to a decrease in the number of water and sewerage connections. Increases in construction cost of 10% will require an additional tariff increase of 5% (10% total) in 1995 and 1996, and a 10% reduction in connections will require an additional tariff increase of 5% (10% total) in 1998. In conclusion, the financial forecasts are reasonable as the worst-case scenario would represent an additional tariff increase of 5 % in 1995 and 1996 over the base case, which still is feasible. However, as in past years, there is a risk that the Government would delay the approval of tariff increases in accordance with the base case (5% per annum in real terms). During negotiations agreement will be sought that if this occurred, the Government will provide CORPOSANA sufficient counterpart funds to continue normal project implementation. Support tables for the sensitivity analysis are included in the Project File. - 99 - Annex N

Table N-3. Results of the Sensitivity Analysis

Required Additional Real Tariff increase to Compensate Reduction in Cash Balance at the End of Implementation Period (a) 10% increase in Accounts 6% (in 2002) Receivable (b) 10% reduction in 5% (in 1998) connections (c) 10% increase in 5% (in 1995 and 1996) construction costs (d) The present unaccounted- 3% (in 1998) for water is maintained (e) Simultaneous occurrence 5% (in 1995 and 1996) of (b) and (c) CORPOSANA FINANCIAL PROJECTIONS Table N4. BASIC DATA

UNITS HISTORFC PROJECTIONS 13901 1391 1 1992 1 1393 1934 19951 199 1 1337 1333 13931 2000 1 2001 2002 Local inflaton rte, year-end % 44.1 11.8 17.8 20.4 18.0 11.0 9.0 9.0 9.0 9.0 9.0 9,0 9.0 Local Inflation rate, year average % 380 25.3 15.1 18.9 19 2 14.6 10 0 9 0 9.0 9 0 9.0 9 0 9 0 International inflation rare, year-end % 2.1 4 3 2 2 2.2 2.2 2.2 2 2 2.2 2 2 2.2 2 2 2 2 Price deflotor,. lease 19931 % 1 0 11 1.2 1.3 14 1.6 1.7 1.9 2 0 2.2 Exchange rate, year-end G/USS 12620 1382.0 1636.0 1S800 21706 2357.8 2614.4 2681.7 2980.1 30604 3263.4 34699 37008 Exchange rate. averge G/AtS 1230.2 1328.3 1610 0 1767.5 2026.3 2264.1 2430.0 2598.1 2770.9 2966.3 3151.9 3361.6 3686.3 People. Average per wter connect8o, Person/conn 66.0 560 5000 5.0 5.0 5.0 6.0 6.0 5.0 .0 6 0 60 People. avg. per aewerage connect;orn Personlconn. 6 0 6.0 6.0 60 650 5.0 6.0 6.0 6.0 6.0 6.0 6 0 6 0 Populationare CORPOSANA Ha/10 3 1861.1 17106 1764.2 1799.0 18460 1892.2 1940.6 1990.2 2041.0 2093.2 21487 Water connectonr, new Comn/10-3 48 68 64 4. 9.6 166 16.6 147 11.0 11.6 11.9 103 108 Water connec;ionra,year-end Conn.1/03 134.2 140.0 146.4 160.2 169.7 176.2 190.7 206.4 218.4 227.9 239.8 260 1 260 7 Water connections, average Conn./10 3 131.8 137.1 142.7 147.8 166.0 187.6 183.0 188 1 210.9 222.2 233.9 245.0 266 4 Sewerage connections. new Conn./l10-3 0 7 0.8 1.3 0.3 0.2 0.2 0.2 2.1 6.1 17.3 201 13 9 13.8 Sewerage connections, Yeared Conn./10 3 89.2 90.0 91.3 R1.S 91.8 92.0 92.2 94 3 100.4 117.7 137.8 161 7 165 3 Sewerageconnection. verage Conn./103 88.9 89.6 90.7 91.4 91.7 91.9 92.1 93.2 97.3 109.0 127.7 1447 18 6 Water consumption. per conn & month -3/conn/mont 31 4 31.0 30.2 33 2 33.1 33.1 33.1 33 1 33.1 33.1 33.1 33.1 33 1 Volume of water billing, block m 3/10 6 Volume of Wate billing, retail m'3110-6 49 7 61.0 61 7 688 61 's 665 72.7 78 7 83 8 8 2 92.9 973 101 b Volume of water billing, total mr3/10-B 49.7 61.0 61.7 688 61 a 866 72.7 78.7 83.8 88 2 92.9 97 3 101 6 Volumeotoewe age billing m'3/10- 6 Unaccountod-for water % 22,8 28.7 370 40 1 38.0 36.0 34.0 30 0 28.0 28.0 28.0 28 0 28.0 Volume of water produced, plants m 3/10 6 826 89.7 79.8 9650 97.1 101.7 107.9 110.2 114.2 120.4 120.8 1329 138.7 Volume of water produced, wells m 3/10-6 1.8 1.8 2.2 3.1 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 Volume of water produced, total m'3/10-8 644 71 . 82.0 98.1 99.3 103.9 110.1 112.4 116.4 122.6 129.0 135.1 140.9 Water Tariff., annual increase % 40 20 16 14 14 14 14 14 14 Employee.i. Asuncion number 963 963 963 963 983 983 963 963 963 963 Employees. other cities, number 239 239 239 239 239 239 239 239 239 239 Employees, total number 1217 1228 1202 1202 1202 1202 1202 1202 1202 1202 1202 1202 1202 Salary increases, rel term. % 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Averag ewatertariff G/m3 285.7 399.3 376.0 388.4 543.6 653.6 764.8 863.9 988.7 1131.8 1296.1 1482.3 1696.5 Sewerage tariff of water trif 4.8 5 1 18 0 29M6 30.0 36.0 40.0 46.0 60.0 5.0 60.0 60.0 50.0 Uncollectible accounts/toal rvwenues % 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2,0 200 Connection charge USS/conn 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0,0 Income ta % 26% 26% 26% 26% 26% 26% 26% 26% 26% Deprecistion rare % 2 1% 2.1% 2.6% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

z CORPOSANA RNANCIAL PROJECTIONS Tbaill -. INCOME STATEMENTS IMillona of Gu,ar.iel

HISTORIC PROJECTIONS TOTAL 1990 1001 1992 110093 1094 106S 10s" 1007 1000m l0" 2000 2001 2002 1994-2002 OPERATING REVENUES W-ter Revenw 14199 20382 19390 22840.7 33458 43471 64867 0796S 82833 99869 120307 144227 172109 819087 Sever,aeRe, eniuee 4b0 684 2217 4177 6938 8346 11041 14394 19109 24600 32850 42801 53390 212168 Storm Sew r seRevenues 116 743 904 836 998 1140 1264 1387 1490 1624 1770 1930 2103 13876 Other 173 269 322 269 631 1180 1298 1341 1094 1247 1406 1327 1488 11012 Total Operatmn Reven.,ea 14943 22048 22833 28121 41024 64137 68460 86067 104626 127230 166334 190086 229090 1065943

OPERATING EXPENSES PereonnldCosts 5144 7781 9371 10430 12433 14621 16292 18114 20139 22390 24893 27678 30771 187228 ChamicalCoat. 877 16S9 1732 2003 2416 2990 3376 3766 4238 4865 6683 6374 7244 40746 PowerCosts 1126 1439 1330 2111 2647 3062 3736 4363 6170 6233 7609 9002 10742 52364 Operationand Maintenance 1584 3447 3083 4293 0881 6206 9049 9686 10801 13288 17619 19126 24426 119168 Fud and Lubricants 364 362 688 698 744 921 1107 1306 1616 1740 1997 2280 2691 14201 General and Ad-ninerativeExpens 726 1602 1674 2402 3002 3714 4484 6267 0114 7019 8064 9186 10461 57282 Depreci.tion 1610 1780 4158 7822 11223 15169 17361 19063 20916 24239 31000 36874 43823 219649 Bad Debt Expenaes 62 808 1069 1343 1076 2069 2620 3099 3776 4552 20899 Total0Op-atingExpenses 11430 17970 21934 29719 40034 49628 66728 63419 70862 82296 99663 114303 134598 711417

INCOME BEFOREDEPRECIATION 3513 4078 899 1958 980 4810 11724 21848 33860 44835 50681 75782 94492 344626 Net non-operating Income lexrpense. 329 1404 882 407 1000 1000 1000 1000 1000 1000 1000 1000 1000 9000 F,nancial Experses on Oistatnding loans 1898 3039 2121 1714 3848 7246 7064 7016 6927 6797 6934 6723 8454 59008 FinancialExpenaea on Goverrnent loan 0 643 1169 1196 1164 1123 1072 1008 932 8207 FinancialExpena new loans 0 0 0 0 0 0 3578 13264 16449 18603 61884 Total non-operating Incomaeexpeisel -1389 -1835 -1239 -1307 -2848 8788 -7234 -7210 -7091 -10498 -20260 -23181 -24989 -110099 _

INCOME BEFORETAXES 2144 2443 -340 -2906 -1868 -2179 4490 14438 28574 34437 36421 52801 69803 234427 IncomerTax 0 0 1123 3010 6043 800s 9106 13150 17376 58610 Other Taxes

Net Inome 2144 2443 -340 -2906 -1858 -2179 3368 10829 19930 25828 27316 39451 52127 174811

WorkingRatio 88 73 78 78 70 63 68 52 48 48 44 41 40 OperatiN Ratio 78 82 90 108 98 91 63 75 68 6S 04 80 59 Rateof Retwn 6 6 1 -1 0 1 2 4 6 7 7 8 8

X CORPOSANA FtNAhtCIAL PrOJECTIONS Teba N4 SOLURCESAND APPUCATIONS OF FUNDS (Millo,. of G---nel

______HISTORIC PROJECTIONS __ -og 1990 I 1Wl 1992 1993 19W4 1995 13S0 1397 1le9 1999 I 2000 I 2001 I 2002 1994-2002

IncomB Oslo, Dp-ecition 3b613 0 4,078 0 B99 0 11.6981 990 40810 1 1,724 21,848 33.666 44,936 68881 76, 782 94 492 344626 Dprep-ation 18610 0 1.780 0 4.168 0 7,822 11 223 15,.69 17.381 19,063 20,816 24,239 31,000 36,874 43 823 219649 Ne nonaop rarpI, ,nco, leopensel 329 0 1,404 0 882 0 407 1,000 1,000 1.000 1.000 1.000 1.000 1,000 1,000 1,000 8000 lanes 00 00 00 0 0 0 1,123 3,610 6.643 8.809 9.106 13,160 17.378 b9618 Gros. Internal Cash Gneralto b 462 0 7 262 0 6,939 0 6,632 13,214 20,789 28,982 38.092 48,838 61,686 79,675 1O0,606 121.939 613460

tes Amorti-ation 2,370 6 1,873 2 2.161 7 4,921 3,241 18,113 8.334 8,064 10.807 13,299 27,028 39.987 60S248 177109 F,na,rcal Charge. 1,8980 3,039.0 2,121.0 1.714 3,848 7,788 8,234 8.210 8.091 11.498 21,280 24,181 26.989 119099 Net Internal Csh Generation 1,3834 2,549.9 1,868.3 141 S,126 (6,1321 14,396 21,828 29,940 38,768 31,287 36,338 46.702 217261

Diiib-r-ere, IBRD Loan 0 12,000 14,129 18,887 21,890 21.869 19,227 16.808 8.963 131774 Government Loan, Debt Renegot,ation 19,167 0 Dislob-srment. other loans 22,393 9 17,271.3 19,3886 16,856 16,190 31,897 38,199 60,818 S6,031 44,211 33.800 36.836 14.843 317424 Total Loans 22,393 9 17,271.3 19,3S8 6 38,013 15,190 43,897 60.327 87,708 78,921 88,080 62,826 62.843 23.807 449198

C.atomr Cont,,bit.ons 2,963.8 6,102.8 6.981 5 4,913 2,200 0 0 0 0 0 0 0 0 2200 Government Contributionsr 2.416 9 3,300.3 6,009 3 2,34 2,500 2,600 6000 Donation (Debt Rernegovtionrl 00 0.0 00 8.823 0 0 Total Contibrtions 6.369 6 8,402.9 10,970 8 14,270 4,700 2,00 0 0 0 0 0 0 0 7200

Total So.-ces 29,146 8 28,224.0 31,996 8 50,279 28,016 41.068 84,723 89,33 106,881 102,849 84,114 88.981 69,508 673649

APPLICATION OF FUNDS

Ir-csrtment Cost, IBRD Project 0 17.397 21.413 28.463 34,800 33,847 30.227 27,236 14,366 206338 Irvctment Cost, IDS Futwre Pro,act. 0 11,320 37,027 52,481 66,973 44.920 32,160 34,289 17,210 286370 Inveatmnt Cost. Other Projects 406 463 974 1,669 1,883 1,773 1.891 2,017 2,161 12888 f, Invetmet Cost, Prolect Under Conatretion 26.404 3 16,0442 26.606 3 24.390 20,668 8,113 26771 Other In-rrment in Fixed Assets 3,1168 5,685.2 4,346 8 0 Interes Durwin Conatr,.on 1,S86 1 2,3324 4.200,3 2,623 1,620 3,788 6,290 10,274 16,414 17.398 12.605 13.035 13,339 93643 Total Investment Cost 31,106 0 24,041 8 34,061.4 27,013 22,8S4 39,061 86,706 90,766 107,849 97,739 76.772 78,677 47,085 624008

Debt Amortization (Reneot.ation) 14,060 0 0 Vr-iation inWorking Capital 2,109 1 (2,314 7) t3,067 4) 10,070.6 4615 4008 4360 1270 855 2888 8382 4792 7019 26744 Variation In Other Assets 1.339 41 1,0l1 93S 376 0 0 0 0 0 0 0 0 0 0 Total Applications 31,876 7 22,806.6 31,929.6 61619 27299 43080 61349 92037 106794 100627 83136 81389 64084 849762

Scrplis Ideficirl of F-nda 12.728 91 5.415,6 66 1 (1.2401 t1.2841 11,9961 3,374 12.5031 67 2,222 979 7,813 15,424 23897

Cash, begnning ye 4,030.4 1,301 4 6,716.8 6,783 6,643 4.269 2,284 5,838 3,136 3,202 6,424 6,403 14,016 Cash, year-end 1 301.6 6,716.9 0,782.9 6,543 4.259 2,284 6,38 3,136 3,202 6,424 6.403 14,018 29,440 29440

Dobt S-rvie Coverage Ratio 1 0 1 0 07 0,7 1.6 0 7 1 4 1,4 1.4 1 5 1.4 1 4 1 4 Conttib.tiona to Itws,tmeet 4.4 10.8 4 9 00 27 0 113.11 21 9 24 0 27.8 37 8 40 8 47 5 97 1

zCD CORPOSANA RtNAfCIAL PROJECTIONS Tdd. N-7. BALANCESHEETS (Mfilona,of Guaranteef HISTOPIC PROJECTIONS As of December 31 1990 | 11| 1992 1993 1"94 | 1995 186 1|9117 19| 19| 2000 2001 2002 ASSETS FIXED ASSETS Gross Plant in Surice 79,091 1 88,628.2 237.376 b 287,992 460,236 660.391 607,013 683,203 724,664 891.400 1,176,239 1,283.027 1,638,603 Accumulated Depreciation 8,086.4 8,426.9 13,000 1 31,057 47,871 8S.296 91,804 119,119 160,866 188,466 236.416 294.687 384,901 Net Plnt n Service 72,426 7 80,099.3 224,376 4 2668,934 412,384 482,095 615.210 544.084 573.898 702,948 938,824 988.461 1.273.803 Land 273 8 287.7 1,784 1 2,110 2,110 2,110 2,110 2,110 2,110 2,110 2,110 2,110 2,110 Works in Prooreas 42.702,5 84,335.9 98,810 5 138.361 40,639 40.161 98,778 187.985 293.972 290,074 183,234 237.794 44,858 Total F,.gd Assets 116.4020 144,722.9 324.760.0 397406 455113 524385 816097 734179 886990 99b130 1104188 1228384 1320b68

CURRENT ASSETS Cash and Banks 1.301 4 6,718.8 6,782 9 5.643 4.269 2.284 b6.38 3.136 3.202 6,424 t,403 14.016 29,440 Short-Turm In,estments Accourrtv Rceivable 4,863 9 8,284.9 10,861 6 15,.64 20.198 18,536 18,788 20.931 26,858 31,498 38,732 47,189 66.901 Allo-ance for Bed Debt (148 41 (144.21 1144 21 11441 19621 (2,0111 (3,3641 (6,0291 (7,0971 (9,6171 t12,7101 i18,4011 (21.0431 Inventory 1,373 8 1,804.0 2.383 8 2,105 3,951 5,196 5.830 6.235 8.649 7,801 9.804 11,230 13,121 Other 1,886 7 2,228.3 1.502 9 1.481 1,534 1.811 1,691 1,778 1.866 1,968 2,066 2,169 2,267 Total Curr.nt Assets 9,269 4 18,867.8 21,380.7 24,619 28,988 25,695 26,594 27.049 30.477 36.861 44.080 68.103 80.686

OTHER ASSETS 21 2,873 8 2.930 3 2,780 7 2,482 2,482 2,482 2,482 2,482 2,482 2,482 2,482 2,482 2,482

TOTAL ASSETS 127.646 2 166,621.0 348,897 4 424406 486683 662442 646173 763710 902938 1034473 1160729 1288960 1403736

LIABILITIES AND EQUITY Capital 2,000.0 2,000.0 2,000 0 2,000 2.000 2.000 2,000 2.000 2,000 2.000 2.000 2.000 2.000 Revaluation Surplus 4 2 4.2 132.821.3 186,890 185,731 211,868 238,803 260,070 280,221 297,189 320,778 381,689 404,676 Othw Rogerve 3/ 34,823 9 46,911.5 67,561.0 70,003 72,845 73,166 76,534 87,363 107.293 133,121 180.436 199,887 262.014 Total Equity 36,828 1 48,915.7 192,372.3 238,893 260,576 287.026 315.337 349,433 389.514 432.289 483,214 b63.b72 668,690

LONG-TERM LIABIUTIES Long-term Debt 64,818 8 86,726 6 118,918.0 146.843 186,699 249.576 310,293 390.294 482.732 668.488 808,983 654.966 679.843 Other Long-Trnm Laballtegs 3.961 3 2,936.4 1,861.3 1,177 1.177 1.177 1,177 1,177 1,177 1,177 1,177 1,177 1,177 Total Long-Trm Liabilities 68.780 1 89,682.0 120,787 3 147,020 186.777 260,753 311,470 391,471 483,910 567.666 610,161 b65.143 681,021

CURRENT LIABILITIES Account, Payable 1.268 8 2.001 6 2.990 4 6,111 2,452 3,499 6.066 8,469 7,374 7,164 6,910 7,313 8,469 Current Port,on of Long-Tmrn Debt 16,646 2 15,164.9 17,478.8 25,993 26,493 6,334 8,064 10,807 13,299 27.028 39,987 50,248 46,000 Short-Term Loan, 490 9 2,282.0 2,5265. 1,671 1,992 2.281 2,609 2,734 6,981 6.619 4,106 4,475 4,878 Other Current Liabilities 4,631 2 8,506.0 12,762 5 5,818 9,294 2,562 2,737 2,807 2,862 3,807 6,352 7,198 7.779 Total Current Liabilitie 21,937 1 27,943 6 35,767 6 38,492 39,231 14,665 18,386 22,807 29,515 44,518 67,354 69,236 64,126 0 TOTAL LIABILITIESAND EQUITY 127,b46 3 166,521.2 348.897.2 424.406 486,683 652,443 845,173 763,711 902.939 1,034.473 1.160,730 1,288,960 1,403,737 D.bt/(Debt + Equty) Ratio % 68 1 84.7 38.6 38.1 41.8 46.8 49.7 628 66.4 66.3 66.8 53 8 60.8 Current Ratio 04 0.7 06 0.6 0.7 1.7 1.4 1.2 1.0 0.8 0.8 0. 1.3 Current Ratio Nw/o current portionl 1 b 1.6 1 2 1 9 2.1 3.1 2.6 2.3 1.9 2.1 2.6 3.1 4 2 1/ Includes mtperditwe for studies, In reorganization and n the library. 2/ Include long-term account, recelvable. . 3/ Include Government contributions for specific projects, custornerg ContribuIons, and 0 accumulated earmnings.

lO 11 O 21 0.2 0 0 0 0 0 0 0 0 0 0 CORPO SANA FINANCIAL POJIECTIONS Tir. N-. INVESTiMENT PLAN AND FiNANCING

HISTORi-C iOJECTIONS ,______19S0o 1391 1392 1i3tt3 199b4 1 1995 1 1996 1 39@@71 §9991 1e93 2000 1 2001 1 2002 1994 2002 invesment Plan DB. PRt.r D.rector 11 2 4 73 9 7 97 73 49 4 9 23 48 6 IDl. Povincial iOties 00 2,8 7 9 106 10,6 79 6.3 6 3 2 6 62.6 lAPD, Proposed Plrolect 00 7.7 8.8 10.2 12.6 11.4 98 a 1 4 0 72 2 0D8, Plan Direltor I 12.0 10.2 2.7 12 9 Unidentilid Project. 0.0 0 0 00 00 Ftoutina Pro-icts 02 0.2 0.4 0.8 0.6 0.4 0.e 0 6 0.8 4 4

Totalin1eatment Plan 26 3 19.1 22.8 16 4 10.4 1.68 24 4 31.0 33.3 27.2 20.4 18 9 9 4 190 6

Loan Di.bursemnt. IDB, Plan Director If 0.0 1 9 6.8 7.8 7.8 658 3.9 3 9 18 39 8 ID.8 Pto,,lncI-lW Citie 0.0 2.1 6.3 8.4 9.4 6.3 4.2 4.2 2 0 42 0 18FD, Propo.ed ProIet 0.0 6.3 6.8 86. 7.9 7.4 6.1 60 2 6 4816 108, Plan Director l 10.3 7.6 1 9 9.4 EIB 2.1 2.7 3.4 3.7 2.8 2.5 2 6 03 20 0 Go-ernment 0.0 6.0 8s0

Total Disbursenents 10.3 7.6 19.3 20.7 26.1 27.9 22.4 16.8 16 7 6 . 182 7

Debt Seri,ce

IBAD Bal;ne., beginning yer 0.0 0.0 6.3 11.1 17.8 26.6 32.9 36.1 36.3 Dvbbjreemerata 0.0 5.3 6.8 6.6 7.9 7.4 0.1 6b0 2.6 46.6 Amortization 3.8 3.9 3.9 116t Balnce. yerm end 0.0 6.3 11.1 17.6 26.5 32.9 36.1 30,3 349 9 Interat 0.0 0.2 0.6 1.0 1.5 2.1 2.4 2.5 2.5 12 9 Commiment Charge 0.0 0.3 0.3 0.2 0.2 0.1 0.1 0.0 0.0 I 1 Total Flnainci:al Ctrrge 0.0 0.5 0.9 1.2 1.7 2.2 2.6 2 6 2.6 14.0 interest Expene 0.0 0.0 0.0 0.0 0.0 0.9 1.0 1.3 1 8 4 9 Interest DurIna Conatrction 00 0.5 0.8 1.2 1.7 1.3 1.6 1.3 08 9.1

ID8, Plan Director lI and ProInciral Citi Balance, bglnisrrg year 00 0.0 4.0 16.2 32.3 48.6 60.8 688. 74,9 Dlab-reem,ent 0.0 4.0 12.2 16.2 18.2 12.2 8.2 8.2 3.8 s080 Amortization 0.0 2.0 4.0 6.1 Blianca, year end 0.0 4.0 18.2 32.3 486 6068 89.8 74 9 74.7 Interet 0.0 0.1 0.7 1.7 2.8 3.8 45 6.0 6.2 24 0 Commitment Charge 00 1.0 0.8 06 0.4 0.3 0.2 00 0.0 3.2 Total Financit Crrgee 0.0 1.1 1.6 2.3 3 2 4.1 4.7 51 6.2 27 2 tnteremt Expee 0.0 0.0 0.0 0.0 0.0 0.0 2.8 30 2 9 .6 Intere-t During Conru,ction 0.0 1.1 1.6 2.3 3.2 4.1 1.9 2.0 2.6 19.7

EIB Balance. beginning of year 0.0 2.1 4.8 8.2 11 9 14.7 17 2 18.41 Dilburwemente 0.0 2.1 2.7 3.4 3.7 2.6 2.6 2.6 03 200 0 Amortization 1.3 1.3 268 >C ialnce, year-end 2.1 4.8 8.2 11.9 14.7 17.2 18.4 17.4 Intereet 0.1 0.2 0.4 0.6 0.5 1.0 1.1 1.1 6.6 Commitment Charge 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Financial Charge 0.1 0.2 0.4 0.6 0.9 1.0 1.1 1.1 6.5 Inlere l Expae 0.0 0.0 0.0 0.0 0.3 0.4 0.6 0.8 2.1 nteret During Construcilon 0.1 0.2 0.4 0.8 0.6 0.6 0.0 0.3 3 4

Debt rneigoatitl-n Balance, beginning of yer 0.0 0.0 8.0 6.o 6.6 6.0 4.6 4.0 3 6 Diabrsen,ents 0.0 6.0 6 0 Amortization 0.0 0.0 0.0 0.5 06 0.6 0.6 06 0.6 3.0 ailance, yearer-ir 00 8.0 8.0 6 6 650 4.6 4.0 3.6 3 0 CORPOSANA FINANCIAL PROJECTIONS Table N41 INVESTMENT PLAN AND FNANCING lin USlmhillonul HISTORIC PROJECTIONS TOTAL 1900 1i9O 1932 1993 '191O4 1995 1996 1997 le 1999 2000 2001 2002 1904-2002

lm-telews O 0 0.2 0.6 0 6 0.4 0 4 0.3 0 3 0 3 2.9 Comm-tment C..,Q. 0 O 0 O 0 0 00 0 0 0.0 0 0 0 0 0 0 0 0 Tox.1fl.namia Ch.0- 00 0 2 0 6 0 5 0 4 0 4 0.3 0 3 0 3 2 9 lw-ie,1 Epnee 0 0 0.2 0 6 0 6 0 4 0.4 0.3 0 3 0 3 2 9 l,,t-et D.oo,v Con,stuctlon 0 0 0.0 0.0 0 0 0 0 0.0 0 0 0.0 00 00

S...... ry of Debt A,nortimfon IBhO. P-oposed Loan 0.0 0.0 0.0 0.0 0 0 0.0 3.9 3 9 3.9 11.6 JOB, P1w D9eclo- I and P*lo-inral Cut. 0.0 0.0 0.0 0 0 0.0 0.0 0.0 2.0 4.0 a1 Outwt*n; Loa,,. 2.0 1.6 80 2 6 2.8 3.4 4.0 4.2 4.2 4.3 34 9 EIB 0.0 0.0 0.0 0 0 0 0 0.0 0.0 1.3 1 3 2.6 Govwrnent Loan 0.0 00 0.0 0 0 0 6 0.6 0.6 056 0 6 0 6 3 0

Total Amorteiztiono 2 9 1.8 a 0 2.d 3.1 3.9 456 6.6 11.9 14 0 68 2

Finnclel Charge. feepeneel IFORD,Proposed Low,n 0.0 0.0 0 0 0.0 0 0 0.9 1.0 1 3 1 8 4 9 IDHB.Pn D-leor lI end Pro,dncaleCIti. 00 0.0 0.0 00 0.0 0.0 208 3.0 2 6 6 Ouw.twrd.n Lon. 2 6 1.9 3.2 2 9 2.7 2 6 2.3 2.2 2.0 1 8 21.5 O EIB 00 0.0 0.0 00 0.0 0.3 0.4 0 a 0 6 2.1 Govrnmnt loan 0 0 0.0 0.2 0. 0 6 0.4 0.4 0.3 0 3 0 3 2 9

Total 2.9 1.9 3 4 3 4 3.2 2.9 3 9 8.7 7 2 7.2 39 9

FI'm-lale Charges liaoptltzedl IBHD, PuoposedLown O0O 0.0 0.6 0.8 1.2 1.7 1.3 1.6 1 3 0.8 9.1 JOBf.Plm DOectol fiend ProvincalaClties 0.0 00 1.1 1.6 2.3 3.2 4.1 1.9 2.0 2 8 18 7 Outaandint L.oe. 0.8 0.8 EfB 00 0 1 0.2 0.4 0 6 0.5 0.6 0 6 0.3 3 4 Gove,nmont Loan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0.0 0.0 Total 0.0 0 a 1.7 2.6 4 0 6.6 6.9 4.0 3.9 3.7 32 0

LongTeam Debt B-lce. bgfinning year 91.3 97.2 109.6 129.6 149.8 173 4 191.3 199 6 203 2 DIeb..esment. 7.6 19 3 20.7 26.1 27.8 22.4 16.6 16 7 6.6 Annortizeton 1.6 8.0 2.6 3.1 3.9 4.6 6.6 11.9 14.0 Governentm Loan Ier-oglti.toni 0.0 H .vetueUon Bal-z., ye r d 97.2 108.5 129.8 149.6 173.4 191 3 199.6 203 2 19b z - 106 - Annex N Attachment

CORPOSANA

ASUNCION SEWERAGE PROJECT

Notes and Main Assumptions for Financial Projections

Introduction

1. The financial projections include on historical data for the period 1990-1993, and are based on audited financial statements for 1990-93. The forecast for the period 1994-2002 was prepared with the collaboration of technical and financial staff at CORPOSANA and based on the assumptions described below. The financial projections were prepared in current guaranis. For information purposes, the main statements were converted into current US dollars, using the year-end rate of exchange for the balance sheets and average rate of exchange for the income and sources and applications of funds statements.

General Assumptions

2. The general assumptions are the following:

(a) Local and international inflation (see Basic Data, Annex N, Table 4).

(b) Average and year-end exchange rates (see Basic Data, Annex N, Table 4).

(c) Unaccounted-for water (see Basic Data, Annex N, Table 4).

Income Statement

3. The assumptions use in the income statements are the following:

(a) Number of water and sewerage connections (see Basic Data Table, Annex N, Table 4).

(b) Average tariff (see Basic Data, Annex N, Table 4).

(c) Salaries: increase at 2% per annum in real terms.

(d) Chemicals: increase as a function of water production of the year and the ratio of chemical expenses to production in previous year, plus annual inflation.

(e) Energy: same as chemicals, plus 5% increase in real terms from 1996 to 2002. - 107 - Annex N Attachment

(f) Maintenance: increase as a function of the gross fixed assets in operation.

(g) Fuel and lubricants: increase as a function of average connections plus local inflation.

(h) General and administrative expenses: same as fuel and lubricants.

(i) Depreciation rates: see Basic Data, Annex N, Table 1).

(j) Bad debt: see Basic Data, Annex N, Table 1).

Sources and Applications of Funds

4. The assumptions used in the sources and applications of funds are the following:

(a) Interest: on outstanding loans (see debt service calculations in the Project File).

(b) Amortization: on outstanding loans (see debt service calculations in the Project File).

(c) Terms of Bank Loan: 17 years including 5 years of grace, at 7.1% interest and 0.75 % commitment charge.

(d) Terms of IDB loans: 25 years including 6 years of grace, at 7% interest and 1.25 % inspection fee.

(e) Terms of EIB loan: 20 years including 5 years of grace, at 6.4% interest.

(f) Terms of Government loan: 20 years including 10 years of grace period, at 6% of interest.

Balance Sheet

5. The assumptions used in the balance sheets are the following:

(a) Accounts receivable: projected as the number of days of sales outstanding according to the target established in the Basic Data, Annex N, Table 4.

(b) Inventory: projected as 1 % of net fixed assets in operation plus three months of chemicals expenses. -108 - Annex N Attachment

(c) Accounts Payable: projected as one month of operating expenses (other than salaries, depreciation and bad debt expenses), plus 20 days of capital expenditures.

(d) Other liabilities: projected as 15 days of salaries plus 25% of accrued interest. - 109 - Annex O

PARAGUAY

ASUNCION SEWERAGE PROJECT

ENVIRONMENTAL ASSESSMENT

Introduction

1. This Annex presents a summary description of the environmental impact study of the Project prepared by CORPOSANA. The complete study is in the Project File. Besides an institutional development technical assistance component, the proposed Project consists of sewerage works in the Itay catchment area in Asunci6n and would include the installation of primary and secondary collectors to serve about 250,000 residents, a preliminary treatment facility and new outfall into the Paraguay river; in addition, three existing sewage outfalls would be rehabilitated.

2. Sewage collection and disposal in Asunci6n is a matter of concern. Less than 40% of Asunci6n's one million inhabitants are connected to a sewerage system. A large segment of the population uses rudimentary latrines, nearby watercourses, existing storm drainage systems, inadequate on-site sanitation, or has no service at all. Thus, the low level of service for human and other waste disposal results in harmful health conditions, pollution of surface and ground water, unsafe levels of nitrates in water, water-related diseases, and general environmental deterioration. This situation will become more critical when the ongoing expansion of water services is completed.

3. The Project will have a significant positive impact on public health and the environment. Direct benefits include abatement of nuisances and public health hazards in the serviced area, improvement in water quality in the streams that flow throughout the city, and increases in the beneficial uses of the tributaries that presently receive the untreated sewage. In addition, the installation of the proposed wastewater collection system will provide an opportunity for more effective control of industrial wastewater through pretreatment and connection to public sewers as required by law.

4. The major environmental issue in the Project is related to the discharge of sewage into the Paraguay River. An environmental water quality program to evaluate the impact of existing sewage disposal into the river was carried out in 1986-87 and repeated in 1994 which also included analysis of heavy metals contamination. Results of the study show that there is no significant reduction in dissolved oxygen (DO), nor increase in ammonia concentration, and very - 110 - Annex O small increases in fecal coliform counts. This is indicative of the capacity of the river for assimilation of wastes even during low river flows.

The Paraguay River: Environmental Baseline Data

5. The Paraguay River originates in Brazil and Bolivia, and flows generally south for approximately 1200 km before reaching Asunci6n. The river has excellent waste assimilation capacities, with flow rates varying from 1,000 to 5,000 m3/s (Table 0-1). The river and its tributaries constitute important ecosystems with spawning and maturing sites for numerous aquatic species and freshwater fisheries, that represent the main livelihood for approximately 200 local low-income fishermen. The river is also used for recreational fishing and water sports.

Table 1. ParaguayRiver - HydrometricData River Level Discharge Mean Velocity (m) (m3/sec) (mn/sec) Normal Max. 61 5000 0.83 Normal Min. 54 1000 0.45

6. The Paraguay River constitutes the main water supply source for Asunci6n. At present, no sewage treatment is undertaken at Asunci6n. All collected sewage is discharged into the Paraguay River from eleven outfalls (Table 0-2). Three outfalls are in bad condition and will be rehabilitated and extended as part of the project. Upstream of present and proposed sewage outfalls is the intake pumping station and treatment works, the main source of water supply for Asunci6n.

7. Due to the lack of sewage collection, tributaries to the Paraguay River in the Asunci6n metropolitan area receive untreated domestic sewage and wastewater from the alcohol, leather tanning, meatpacking, vegetable oil, detergent, and soap industries. Most effluents are laden with high levels of biological oxygen demand (BOD), give off unpleasant odors, and alter the aquatic flora and fauna. Pollution by heavy metals (e.g., chromium from the leather industry) are discharged into some tributaries. Dissolved oxygen (DO) and faecal coliform concentrations reach critical levels (for sports, swimming and other recreational uses) in the lower portions of all tributaries before they reach the main water column of the Paraguay River. Thus, these tributaries, as such, constitute a threat to public health. - 111 - Annex O

Table 0-2. Sewage Disposal - Outfalls to River Paraguay Location Diam. Drainage OperationalStatus (mm) Area (ha) Bella Vista 1350 2373 Working Varadero 900 515 Lower length blocked Lagerenza 200 13 Pipe broken; lower length broken San Antonio 1 200 36 Unknown,presumed blocked San Antonio 2 250 60 Lower length blocked Grau 300 19 Working Gamarra 200 4 Working Alferez Silva 200 19 Working Sajonia 500 146 Lower length blocked Mallorquin 500 335 Lower length blocked Tacumbu 525 670 Lower length blocked

8. The water quality analysis indicates that the water quality improves to international World Health Organization standards within a few hundred meters of the effluent entering the Paraguay River (Table 0-3). The immediate area of the riverbank is very sparsely populated for 5 km downstream from the proposed outfall since it is a floodplain. Water quality conditions will remain very good in the center of the river. There are no predicted negative water quality impacts on the river ecosystem or the human population downstream.

Analysis of Alternatives

9. An analysis of four alternatives was conducted to evaluate the project's impacts during construction and implementation phases. The four alternatives are summarized below.

Alternative 0. This alternative considers no project. The situation remains whereby wastewater disposal is in open watercourses and septic/soakaway sludge is taken away by trucks.

Alternative I. Sewage and pretreated industrial wastewater would be collected through a gravity-fed collector/interceptor pipe system, and conveyed through a tunnel that crosses a watershed. The wastewater would be discharged through an outfall into the Paraguay River after separation of coarse materials. - 112 - Annex O

Alternative II. Sewage and pretreated industrial wastewater collected from the drainage area would be pumped and biologically treated in two sewage plants. The treated effluent would be discharged into the existing Itay watercourse which discharges upstream of Asunci6n's water treatment intake.

Alternative III. This alternative is similar to Alternative I with the exception that it would involve pumping of the collected wastewater through the hills of the botanical garden instead of a tunnel. The final discharge is to the Paraguay River.

TABLE 0-3. River Paraguay - DispersionSurvey HighRiver Level Low River Level (mean values) (mean values) Sampling DO Temp. NH4 FCI DO Temp. NH4 FCI Location % C mg/I looml % C mg/l 1OOmW 50 m 62 20 0.08 938 85 30 0.06 7600 downstrearn Bella Vista

200 m 69 20 0.05 1 79 30 4.41 155000 downstream Bella Vista

Mallorquin 69 20 0.07 670 83 30 6.29 303500

Downstream 63 20 0.05 9 87 30 0.05 6910 Mallorquin

10. Alternative I was selected as the most favorable alternative based on environmental and economic criteria. Summary information on the evaluation of alternatives is presented below.

Alternative 0. This alternative has a strong negative environmental impact owing to the odors that emanate from untreated sewage and industrial effluents entering the tributaries that run through the city. This alternative also poses health risks.

Alternative I. Alternative I would bring a positive impact and a more pleasing and hygienic environment. An ecologically healthy riverbed would emerge once the maintenance of the Avda. Madame Lynch highway and rehabilitation of the stormwater drainage system are completed. Construction inconveniences and traffic disruptions (which can be monitored) are considered short-term. Construction of a tunnel would avoid a pumping station. The - 113 - Annex O

geology and soil mechanics would not adversely impact upon tunnel construction.

Alternative II. Negative impacts for Alternative II would be high maintenance costs and intermittent breakdown of the treatment plants and the potential risk of contamination of the waters entering the Asuncion's water treatment plant.

Alternative III. Alternative III would require deeper excavation for the whole system of sewage collectors and interceptors to reach the pumping stations. Use of a pumping system would intensify construction efforts and consume electricity, requiring substantially more excavation and increased capital costs, as well as additional operation and maintenance costs.

Environmentaland Social Impacts

11. The project will benefit the Asunci6n residents by having a positive impact on their health, providing a better environment for recreational activities, promoting aesthetic improvements, and increasing tourism and commerce. Human health benefits would include avoided health care expenditures and fewer lost workdays for sanitation-related diseases. Up to 60% of the 250,000 lower- income beneficiaries of the project would significantly decrease their exposure to intestinal diseases that are chronic among Asunci6n residents, a city that is growing at 3.5% per year. At present, 40% of the population suffers from gastro-intestinal diseases, and the infant mortality rate is 5% in the first year.

12. Aquatic life in the urban streams will recover as a result of the proposed project. Improved water quality conditions in the tributaries that flow through the city will benefit aquatic fauna. Moreover, the rodent population that plagues many low-income settlements in the area should diminish as a result of the landscaping and development of parks along the shoreline. As the monitoring data indicates, the river water quality is mildly affected and overall quality is fully restored within a few hundred meters downstream of the discharges. Although some interference with commercial fishing and recreational activities will occur in the immediate area of the outfall, no regional impact to fisheries or terrestrial wildlife is predicted for the proposed project. Spawning and maturing sites will present better conditions for fish species, thus increasing their population.

13. During construction, social and economic impacts of minor importance and magnitude are expected. These impacts which are temporary will include disruption of traffic patterns, interference with other urban infrastructure, noise, and dust. - 114 - Annex O

14. The project does not require any involuntary resettlement in any of its components. The project will serve the lower-income neighborhoods whose living environment is already impaired. The comprehensive "willingness to pay" survey indicated a strong desire on the part of residents to have the sewerage system improved.

Mitigatory Measures

15. Mitigatory measures to minimize impacts on water quality and aquatic and terrestrial ecosystems include: (a) extending the outfall to the center of the of the Paraguay River where currents are strongest and waste assimilation capacity is highest; (b) designing effluent pipe outfall layout to maximize dispersion; (c) removal of solids; (d) use of appropriate construction practices; (e) revegetation plans and vegetation barriers after construction is completed; (f) a water quality monitoring program; and (g) provision to reserve sufficient land, next to the proposed preliminary sewage treatment facilities, for eventual additional sewage treatment requirements.

16. The following mitigatory measures will be used during project construction:

(a) Landscape Protection: The project design includes a landscape recovery plan, planting along the Itay stream for stream bank stabilization, flood and drainage control, and storage for all construction materials. A program of park development and recreational areas is proposed to beautify the route of the proposed system. After construction a landscaping plan will be implemented to minimize soil erosion and improve the urban environment. Landscaping is considered important, as the project area includes two major access roads (Asunci6n to the airport and the Trans-Chaco Highway).

(b) Outfalls to the Paraguay River: Three existing sewage outfalls will be rehabilitated. The outfall from this project will extend to the middle and bottom of the river to ensure maximum dispersion of the wastewater.

(c) Noise and Dust Control: Noise and dust pollution during the construction phase will be typical of heavy machinery used for excavation in urban areas. A construction practice manual will be produced and approved by the Ministry of Works and CORPOSANA on mitigation measures for dust and noise control.

(d) Odor Control: Solids will be removed from the collected wastewater at a facility located far from urban centers. This facility site will also - 115 - Annex 0

accommodate further treatmucintof wastewater, if deemed necessary in the future. Odors emanating from this site will not impact on the nearby population because of its distance and prevalence of southerly winds.

(e) Solid Waste Removal: Coarse solids removed at the preliminary treatment plant will be landfilled.

(t) Toxic W'aste Removal: The project design requires installation of pretreatmnent facilities for all non-compliant dischargers to the sewer system.

(g) Community Participation: Community participation in this project has been initiated through the "willingness to pay" survey, and is expected to continue through a public information campaign organized by CORPOSANA.

17. The following mitigatory measures will be used during operation of the installed system:

(a) Solid Waste Disposal: Solids removed from the wastewater at the pre-- treatment facility will be landfilled.

(b) Discharge Surveillance: Disclharge to the Paraguay River will be monitored and signs will be posted to restrict washing, fishing, and bathing. Warning signs will be posted in the vicinity of all outfalls.

(c) Industrial Discharge Monitoring: CORPOSANA will ensure that all industries connected to the sewerage system will have their wastewater effluents in compliance with sewage discharge regulations.

(d) Water Quality Monitoring: Changes in the physical, chemical, and biological characteristics of the Paraguay River will be observed through a monitoring program. The results will be systematically filed and analyzed. All necessary enforcement measures will be undertaken.

Conclusions

18. The environmental impact assessment study concludes that the project, with its mitigation meatsur-es, does not present negative environmental consequences. Based on the large flow of the river and waste assimilation capacity, there are no residual negative impacts to the disposal of the estimated effluents. A monitoring program will continue to evaluate water quality changes over time and the effect of the mitigation measures. PARAGUAY

ASUNCION SEWERAGE PtROJECT

FINANCIAL RATE OF RETURN

Year Sewerage Incremental Total Now CLinluldtive Annual Water Sewerage Sewerage Net Investments Operating Costs Connections Connections Water Tariffs Tariffs Revenues B.nell; US$ million Costs USS million (thousands) (thousands) Consumption US$/m3 US$/nm3 USS milliorn USS milllol, US$ iiill li) million m3 (a) ibl (c)

1995 5.4 5.4 0.35 0.17 5.4 1996 6.4 6.4 0 36 0.19 6.4 1997 7.9 7.9 0.38 0.21 7.9 1998 9.7 0.3 10.0 5.0 5.0 2.0 0.40 0.24 0.5 -9 5 1999 8.6 0.4 9.0 7.0 12.0 4.8 0.42 0.27 1.3 7.7 2000 7.0 0 5 7.5 10.0 22.0 8.7 0 44 0.32 2.8 4.7 2001 5.9 0.5 6.4 10.0 32.0 12.7 0.47 0.37 4.7 -1 7 2002 4.5 0.8 5.3 10.0 42.0 16.6 0.49 0.42 7.0 1.7 2003 0.8 0.8 2.9 44.9 17.8 0.49 0.49 8.7 7.9 2004 0.8 0.8 I 2.0 46.9 18.6 0.49 0.49 9.1 8.3 2005 0.8 0.8 1.2 48.1 19.0 0.49 0.49 9.3 , 85 2006 0 8 0.8 0.5 48.6 19.2 0.49 0.49 9.4 8 6 2007 0.8 0.8 0.5 49.1 19 4 0.49 0.49 9.5 8 7 2008 0,8 0.8 0.5 49.6 19.6 0.49 0.49 9.6 8.8 2009 0.8 0.8 0.3 49.9 19 8 0.49 0.49 9.7 8 9 2010 0,8 0.8 0.1 50.0 19.8 0.49 0.49 9.7 8 9 2011 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2012 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2013 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2014 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2015 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2016 0.8 0.8 50.0 19.8 0 49 0.49 9.7 8.9 2017 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2018 0.8 0 8 50.0 19.8 0.49 0.49 9.7 89 2019 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2020 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8 9 2021 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2022 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9 2023 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8 9 2024 0.8 0.8 50.0 19.8 0.49 0.49 9.7 8.9

Internal Rate of Return 1 11%

(a) Investments costs are related to the expansion of sewerage only X (b) incremental operation and maintenance costs are 1 percent of total cumulative investments until 2001 and 1.5 percent therafter. r (c) Sewerage tariffs are 50 percent of the water tariffs in 1995 and increase to 100 percent after 2002; the proposed tariff study under the project will provide a detailed sewerage tariff schedule which is expected to achieve parity with water tariff rates by the end of the project implementation period. For the purposes of this analysis, it is assumed that the sewerage tariff as a percentage of the water tariff will increase at a uniform rate per annum over this period.

11,18/94 - 117 - Annex Q

PARAGUAY

ASUNCION SEWERAGE PROJECT

Documents and Data Available in the Project File

A. General reports and studies of the water and sanitation sector:

Al. Ing. Estrada E., Alejandro. "Informe Final de la Asesoria sobre Agua no Contabilizada". Asunci6n. July 1992.

A2. Republica del Paraguay. Ley No. 836/80. "Codigo Sanitario". 1980.

A3. Repuiblica del Paraguay. Ley No. 244. "Por la que se Crea la Corporaci6n de Obras Sanitarias de Asunci6n". 26 October 1954.

A4. Republica del Paraguay. Decrctc No. 29.516. "Por el cual se Modifica la Carta Organica de la Corporaci6n de obras Sanitarias". 13 October 1967.

A5. Repiublica del Paraguay. Ley No. 405. "Reestructuraci6n de CORPOSANA". 21 September 1973.

A6. CORPOSANA. "Estudio de Factibilidad para la Applicaci6n de una Tasa de Alcantarillado". July 1990.

A7. World Bank. "Poverty and the Social Sectors in Paraguay: A Poverty Assessment". Report No. 12293-PA. June 1994.

A8. World Bank. "Water Supply and Sanitation Projects: The Bank's Experience -- 1967-1989". Report No. 10789. Operations Evaluation Department. June 1992.

A9. World Bank. "Paraguay. Public Expenditure Review: The Social Sectors". Report No. 10193-PA. June 1992

B. General reports and studies relating to the project:

B1. CORPOSANA. "Memoria y Balance: 1993". - 118 - Annex Q

B2. CORPOSANA. "Analisis y Evaluaci6n de la Politica Econ6mica y Financiera de CORPOSANA. Gesti6n Ahio 1992". Plan Director 1993. Feb. 1993.

B3. CORPOSANA. Programa de Desarrollo Institucional de CORPOSANA. 1992

- "Area Comercial - Propuestas para Mejorias en los Sistemas de Medici6n, Catastro y Facturaci6n". - "Area Comercial - Conceptos y Directrices para Establicimiento de Politica Tarifaria". - "Area de Macroinstituci6n- Etapa de Disefho".

B4. CORPOSANA. "Estudio Preliminar de Impacto Ambiental del Proyecto de Alcantarillado Sanitario de la Cuenca del Itay". Asunci6n. January 1994.

B5. CORPOSANA. "Programa de Entrenamiento dentro de la Empresa". 1992

B6. Sir William Halcrow & Partners. "Asunci6n: Alcantarillado Sanitario y Tratamiento de Aguas Residuales". Estudio de Factibilidad. Volumen VI. Estudios e Investigaciones del Sistema Existente. August 1986.

C. Working Papers

Cl. CORPOSANA's Financial Projections for the Period 1994-2002 (with Supporting Tables), 1994.

C2. Sensitivity Analysis on CORPOSANA's Cash Position, 1994.

C3. Summary Table of CORPOSANA's Water Tariffs as of January 1, 1994. .'7

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