World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 4121-PAN

STAFF APPRAISAL REPORT Public Disclosure Authorized PANAMA

SECOND WATER SUPPLY AND SEWERAGEPROJECT Public Disclosure Authorized

November 12, 1982 Public Disclosure Authorized Projects Department Latin America and the Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. UNITS AND MEASURES

1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 square meter (m2) = 10.8 square feet (sq. ft.) 1 cubic meter (m3) = 35.3 cubic feet (cu. ft.) 1 US gallon (gal) = 3.785 liters (1) 1 million US gallons per day (mgd) = 43.9 liters per second (1/sec) 1 gallon per capita per day (gcd) = 3.785 liters per capita per day (lcd) 1 millimeter (mm) = 0.0394 inch

GLOSSARY OF ACRONYMS

ICB International Competitive Bidding IDAAN Instituto de Acueductos y Alcantarillados Nacionales National Water and Sewerage Institute IDB Inter-American Development Bank MH Ministerio de Salud Publica Ministry of Public Health MIPPE Ministerio de Planificacion y Politica Economica Ministry of Planning and Economic Policy MIVI Ministerio de Vivienda Ministry of Housing MOP Ministerio de Obras Publicas Ministry of Public Works PAHO Pan American Health Organization PCC Panama Canal Commission USAID United States Agency for International Development

GOVERNMENT OF PANAMA FISCAL YEAR

January 1 - December 31

CURRENCY EQUIVALENTS

Currency Unit = Balboa - B/. US$1 = B/.1 FOR OFFICIAL USE ONLY

PANAMA

STAFF APPRAISAL REPORT

SECOND WATER SUPPLY AND SEWERAGE PROJECT

TABLE OF CONTENTS

Page No. I. INTRODUCTION...... 1

II. COUNTRY AND SECTOR BACKGROUND. 1

Climate and Water Resources. 1 Population and Income. 2 Public Health. 3 Institutional Framework. 3 Present Service Level and Quality. 4 Past Sector Investments. 5 Sector Objectives. 5 Limitations and Constraints...... 6 Experience with Previous Loan. 6

III. PROJECT INSTITUTIONS. 7

General. 7 IDAAN. 7 MOP. 8

IV. POPULATION, SERVICE AND DEMAND. 8

V. THE PROJECT ...... 9

Objectives ...... 10 Project Description.10 Status of Project Preparation .12 Least-Cost Solution .12 Cost Estimates ...... 12 Project Financing .15 Project Implementation - IDAAN .16 Project Implementation - MOP .16 Environmental and Health Aspects .17 Procurement .18 Disbursement .18 Retroactive Financing .19

This report is based on findings of an appraisal mission which visited Panama during March 15 - April 2, 1982. This mission was comprised of Messrs. A. Guzman, Financial Analyst and W. Stottmann, Engineer.

This documewt hasa estricd isuiand rnay be used by recipients only4n-the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -2-

Table of Contents (continued)

Page No.

VI. FINANCIAL ANALYSIS ...... 19

Past Performance and Present Financial Position ...... 19 IDAAN's Internal Sources of Funds ...... 20 Investment Program and Financing Plan ...... 21 Financial Forecast ...... 22 Revenue Covenant ...... 24 Monitoring and Evaluation ...... 24

VII. ECONOMIC AND SOCIAL ANALYSIS ...... 24

Introduction ...... 24 Return on Investments and Project Justification ...... 25 Long-Run Marginal Cost and Tariffs ...... 26 Beneficiaries and Urban Poverty Impact ...... 27 Affordability of Services to the Urban Poor ...... 27 Risk ...... 28

VIII. AGREEMENTS REACHED AND RECOMMENDATIONS ...... 29 -3-

Table of Contents (continued)

LIST OF ANNEXES

1. Institutional Assessment of IDAAN 2. MOP's Organizational Structure 3. Population, Service and Demand in the Project Areas 4. Project -reparation and Bidding Schedule 5. Detailed Project Cost Estimates 6. Project Implementation Schedule 7. Consultant Services, Technical Assistance and Training 8. Allocation of Loan Proceeds 9. Loan Disbursement Schedule 10. Past, Present and Forecasted Financial Performance of IDAAN 11. IDAAN's Current Tariff Structure 12. Revenue Covenant Computation 13. Monitoring Indicators 14. Draft Outline of Terms of Reference for Tariff Study 15. Revolving Fund for Financing In-House Sanitary Installations 16. Selected Documents and Data Available in Project Files

LIST OF TABLES

2.1 Projected Mid-Year Populations and Decade Growth Rates 2.2 Water Supply and Sanitation Service Levels 5.1 Summary of Project Cost 5.2 Financing Plan of the Project 6.1 Selected Financial Data and Key Indicators for 1976-82 6.2 IDAAN's Financing Plan 1983-88 6.3 Selected Financial Data and Key Financial Indicators 1983-88 7.1 Long-Run Average Incremental Cost 7.2 Direct Beneficiaries for Selected Project Components by 1990

LIST OF MAPS

Map No. 1 - Location of Project Areas Map No. 2 - Water Transmission Main Arraijan District

PANAMA

SECOND PANAMA WATER SUPPLY AND SEWERAGE PROJECT

STAFF APPRAISAL REPORT

I. INTRODUCTION

1.01 The Government of Panama has requested Bank financial assistance for the expansion and improvement of sewerage and water supply services in Panama. The proposed project would be the Bank's second operation in the sector and a continuation of the first Bank-financed project (Loan 1280- PAN), which was essentially completed in August 1982. It would improve health and living conditions by rehabilitating and extending water supply and sewerage systems in Panama City, Santiago, La Chorrera, Arraijan Dis- trict and Colon. In Colon, a part of the storm drainage system would be repaired and replaced. The total cost of the proposed project, including capitalized front-end fee but excluding interest during construction, is estimated at US$39.6 million equivalent. A Bank Loan of US$21.6 million is recommended to finance the foreign exchange component of the project and the front-end fee on the Bank Loan.

II. COUNTRY AND SECTOR BACKGROUND

Climate and Water Resources 2.01 Located between latitudes 70 and 90 North, the country has a tropical climate with average annual rainfall of around 1,800 mm in Panama City and 3,000 mm in Colon. Rainfall is concentrated during the April- December period in most of Panama. Because of the seasonal pattern of rainfall, pronounced variations in streamflow limit the firm yield that can be drawn from natural water courses. The two largest bodies of fresh water are Lake Gatun and Lake Madden. Both were constructed to provide water for the operation of the Panama Canal, but also serve as water sources for nearby Panama City and Colon. In recent decades, watershed destruction has led to increased sedimentation and has affected adversely natural stream flow patterns. Efforts are underway to initiate a watershed protection program to decrease the sedimentation rate of Lake Gatun, whose storage volume is vital to the canal's operation.

2.02 Exploration of groundwater sources has been limited in the past, because of the abundant supply of surface water. Groundwater is currently used mainly to supply small urban communities and rural areas, while large communities depend on surface water sources. With the prospect of increased surface water shortages, efforts to explore and exploit groundwater sources are being intensified. In the recent past, several attempts to locate aquifers suitable for large-scale exploitation have not been successful (Arraijan-Vista Alegre Area and Tocumen). -2-

Population and Income 2.03 Based on preliminary results of the 1980 census, Panama's total population in mid-1980 was about 1.83 million. About half the population is considered urban.1 / In mid-1980, there were 46 urban communities with total population of about 900,000. The rural population lives in some 300 communities of between 500 and 1,500 inhabitants and some 1,000 villages with populations of less than 500. The Panama City Metropolitan Area alone had about 660,000 inhabitants, or 36% of the country's total and 73% of the urban population.

2.04 Panama's total population increased by 3.1% per year between 1960 and 1970, and by 2.5% per year between 1970 and 1980. Growth rates were higher in urban areas (2.8%) than in rural areas (2.2%) because of migration of people seeking employment opportunities. The Panama City Metro- politan Area, with an average annual growth rate of 3.7% between 1970-80, was one of the main targets of this migration. Population growth in most urban regional centers was also high (Santiago 4.1%; David, 3.7%; and Chitre, 3.3%). The population of the economically depressed Colon Metro- politan Area grew at only 0.4% per year.

2.05 In the future, the trend to slower population growth rates is expected to continue. Table 2.1 presents mid-year populations recorded for 1970 and 1980 and projections for 1990 and 2000.

TABLE 2.1: Projected Mid-Year Populations and Decade Growth Rates a!

Popula. Growth Popula. Growth Popula. Growth Popula. 1970 Rate(%) 1980 Rate(%) 1990 Rate(%) 2000

Urban 0.68 2.8 0.90 2.7 1.19 2.5 1.52 Rural 0.75 2.2 0.93 2.1 1.16 1.9 1.40 Total 1.43 2.5 1.83 2.4 2.35 2.2 2.92

a/ Population in millions; average annual growth rate.

The Government intends to divert some of the migration from Panama City by declaring medium-size regional centers (Santiago, David, and La Chorrera) poles of development and providing them with increased infrastructure investments. Population growth rates in these centers, therefore, are projected to be substantially higher than the urban rates presented in Table 2.1.

2.06 Average annual per capita income in Panama was US$1,730 in 1980. The median monthly salary at that time was about US$350 for both public and private sector employees. In mid-1982, the monthly minimum wage was US$185/month. There are significant differences among income levels in the Metropolitan Region, regional centers and rural areas. The per capita income in regional centers is about 70-90% of that found in Panama City and

I/ Communities with more than 1,500 inhabitants. in rural areas it is even lower. The absolute poverty income level in 1982 is estimated at around US$550 per capita/year in the Panama City Metropoli- tan Area, US$450 per capita/year in regional urban centers, and US$250 per capita/year in rural areas. About 25% of the urban and 30% of the rural population fall into the absolute poor category. Most of the absolute poor live in Panama City (20% of total population) and Colon (30% of total population) where they inhabit congested, decaying tenements and squatter settlements. In the regional centers, the portion of absolute poor is estimated to be around 25%.

Public Health 2.07 The Government has made strong efforts to improve the provision for basic services to all its citizens. Under the motto health for all by the year 2000," it has spent in recent years about 5% of gross domestic product on health and related services, among them water supply and sanitation. As a result, basic public health indicators for 1979 2/ were generally better than those found in most middle income developing countries. Most pronounced is the decrease in the death rate per 100,000 inhabitants attributed to enteritis and diarrheic diseases from 38.8 in 1971 to 7.7 in 1979, a 500% drop. The generally bright outlook in public health is taint- ed somewhat by the apparent increase in the incidence of diarrheic diseases in recent years (36,000 cases reported in 1976 vs. 50,400 in 1980). There are marked differences in the public health situation among various regions and public health standards are better in urban than in rural areas. Re- gional centers closer to Panama City appear to be somewhat better off than those farther away, except for Colon where poor public health conditions reflect the town's low socio-economic level. Although many factors determine the status of a population's health, the Government's efforts to increase water supply and sanitation service levels have contributed significantly to the recent improvement.

Institutional Framework 2.08 In Panama, sector responsibilities are shared primarily by the Ministry of Health (MH) and IDAAN. The Ministry of Planning and Economic Policy (MIPPE), responsible for inter-sectoral planning, reviews and ap- proves the investment programs of both IDAAN and MR. MR is formally responsible for the orientation and determination of public health policies. Its operational arm, the Department of Environmental Health, is responsible for carrying out water supply and public health programs in rural communities with 500 or less inhabitants (about 33% of Panama's total population). The Department plans and constructs rural systems which, after completion, are maintained and operated by local committees. IDAAN is responsible for the planning, design, construction, operation and maintenance of water supply and sanitation systems in all communities with more than 500 inhabitants (about 67% of Panama's total population). The Ministry of Pub- lic Works (MOP) is responsible for the planning, construction, operation and maintenance of all urban storm drainage facilities. Several other Gov- ernment organizations are active in sector development. The Ministry of Housing (MIVI), as developer of low-cost housing schemes, depends on water and sewerage infrastructures provided by IDAAN. Another important

2/ Deaths/1000: 4.4; infant mortality/1000 live births: 24.9. -4-

provided by IDAAN. Another important institution is the Panama Canal Com- mission (PCC), which sells water in bulk to IDAAN from its Miraflores and Mount Hope Water Treatment Plants to supply water to Panama City and Colon.

Present Service Level and Quality 2.09 Water supply and sanitation service levels in anama are high in comparison with those in South American countries. During the last decade, much progress has been made in improving service levels (Table 2.2). Ac- cording to 1980 census figures, 84.6% of Panama's total population has access to public water supply systems, either through private house connections (more than 60%), public standpipes (about 13%) or protected wells (11%). In urban areas almost all people are served by public systems and about 95% receive water through house connections. In rural areas, a service level of 69.8% is reported. People in rural areas are served in almost equal parts by house connections (27%), standpipes (20%) and protected wells (22%). Most of the population without access to safe water supply lives in small, isolated rural communities where dwellings are dispersed, making the provision for public water services expensive.

TABLE 2.2: Water Supply and Sanitation Service Levels

Service Levels (%) Total Country Urban Areas Rural Areas 1970 1980 1970 1980 1970 1980 Water Supply Population served 70.1 84.6 100 100 43.0 69.8 House connection 46.7 60.5 90.7 94.7 6.9 27.3 Standpipes 7.2 12.8 9.3 5.3 5.3 20.2 Sanitary wells 16.2 11.3 -- -- 30.8 22.3

Sanitation Population served 79.8 89.0 92.8 97.4 67.9 80.5 Sewerage 32.3 34.0 67.8 68.4 0.3 0.6 Septic tanks 3.5 6.2 7.5 7.3 -- 5.0 Latrines 43.9 48.8 17.5 21.7 67.6 74.9

2.10 The quality of water supply services provided by IDAAN is generally good. In urban systems, water service is available around the clock for the great majority of consumers. In some areas, particularly at the urban fringe, insufficient transmission capacity results in low pressures during peak hours or, in the extreme, intermittent service. The quality and quantity of water service in rural communities is generally less reliable, depending to a large degree on the community's commitment to and organization in maintaining and operating its water system.

2.11 About 97% of the urban population has access to sanitation facilities. Almost 70% of the people are connected to public sewer systems, 7% have individual septic tanks, and 22% use latrines. As the few existing treatment facilities are generally underdesigned and poorly maintained, they are in most cases ineffective. Consequently, receiving waters near densely populated areas are heavily polluted. Water quality in the Bay of Panama, for example, has deteriorated to the extent that fishing is prohi- bited within five miles of the coast. Pollution of water courses is a serious problem in almost all of Panama's urban centers and poses a health hazard in most areas. The statistics on rural sanitation (80% of the population has access to sanitary excreta disposal facilities) may overstate actual service levels. Although no exact figures are available, it appears that a large portion of latrines and septic tanks are in poor repair and do not give the protection which these systems can provide. In summary, Pan- ama's population enjoys generally adequate water supply services, but there is need for improvement and rehabilitation of urban and rural sanitation facilities and for reduction of environmental pollution.

Past Sector Investments 2.12 Sector investment since 1971, excluding contributions from developers, amounted to a total of about US$155 million in 1981 prices. More than 90% of this investment was made by IDAAN. Annual average sector investments made by IDAAN during the 1970s were about US$14 million in 1981 prices. External financing has supported all major investment programs. Major lenders have been the United States Agency for International Develop- ment (USAID) with 37% of total investment since 1961, the Inter-American Development Bank (IDB) with 11%, and most recently the Bank with 7% (Loan 1280-PAN). Internal funds, either from the Government through general budgetary allocations or from IDAAN itself accounted for 45% of total sector investment. Of the past sector investments, 68% were devoted to expanding urban water supply coverage, 22% to urban sewerage and about 10% was invested in rural areas for water supply and sanitation.

Sector Objectives 2.13 With the targets of the International Water and Sanitation Decade in mind, IDAAN and MH have formulated the following sector goals for 1990:

A. Urban Water Supply - Maintaining existing systems in good repair and expanding services to the incremental future urban population (about 40,000 additional people per year);

B. Urban Sanitation - Expanding sewerage to reach a 90% service level in Panama's 15 largest urban centers and providing at least primary sewage treatment (oxidation ponds) in those urban centers, where environmental pollution is most serious. In view of the enormous investments required, IDAAN has postponed plansfor providing sewage treatment in Panama City until other priority goals have been met;

C. Rural Water Supply - Providing adequate and safe water supply services through public systems to 85% of the rural population; and -6-

D. Rural Sanitation - Providing safe excreta disposal facilities by individual means of disposal (septic tanks, latrines) to 90% of the rural population.

Limitations and Constraints 2.14 It is estimated that investments on the order of US$300 million (1981 prices) would be required during the remainder of this decade to meet all sector goals. About US$220 million would have to be spent for water supply and sewerage in urban areas. IDAAN's 1983-88 investment program projects total investments of about US$110 million in 1981 prices. During the same time, MH's investment program is estimated to be about US$16 million (1981 prices), bringing total projected sector investments through the end of 1988 to a total of about USS126 million in 1981 Drices. Considering that the projected annual investments required to meet sector targets are more than twice as high as those made in the past, it is unlikely that all targets will be fully met. Insufficient financing and absorptive capacity of both IDAAN and MH would be the two major bottlenecks. It appears, however, that the objectives for urban and rural water supply could be met, but that the targets for rural and urban sanitation in all likelihood will not be reached.

Experience with Previous Loar 2.15 Loan 1280-PAN (US$12.0 million) was approved by the Bank's Board in June 1976 and became effective in July 1976. The works financed under the Loan were completed during August 1982, and all -funds should be disbursed by October 1982. Project completion was delayed by about two years in comparison with the appraisal estimate9 mainly because of difficulties in preparing designs and bidding documents on time. Once the initial delays were overcome, project execution and disbursements followed at essentially the pace projected at appraisal. IDAATN's record of compliance with the covenants stipulated under Loan 1280-PAN has been generally satisfactory with the exception of the revenue covenant in 1980-81 (para. 6.01). The tariff increase of April 1, 1982 would allow IDAAN to comply with the revenue covenant in 1982.

2.16 IDAAN's performance in rmeeting the operational targets projected at appraisal has been mixed. The total number of water house connections in 1982 was 30% higher than projected at appraisal. The percentage of water connections metered at the end of 1981 was somewhat lower. With the recent purchase of 12,000 water meters from the proceeds of Loan 1280-PAN and the proposed purchase of another 45,000 meters (20,000 under the pro-' posed Bank loan and 20,000 under the fourth IDB Project), IDAAN expects to increase the portion of metered connections to a satisfactory 70% by 1985. The percentage of unaccounted-for water is estimated at about 36% for all. of IDAAN's systems compared to the appraisal target of 28% for 1981. The metering and water system rehabilitation programs to be undertaken under the proposed project are expected to reduce unaccounted-for water to an acceptable 25% by the end of 1986. In summary, the objectives of the first project have been largely achieved. The proposed project would assist IDAAN in its efforts to further improve its financial and operating performances. - 7 -

III. PROJECT INSTITUTIONS

General 3.01 The Borrower of the proposed Loan and the executing agency for the water and sewerage components of the project (about 90% of total project cost) would be IDAAN. The storm drainage component in Colon would be executed by MOP under an onlending agreement with IDAAN. The following paragraphs highlight the institutional capabilities of IDAAN and MOP. A more detailed assessment of IDAAN is presented in Annex 1.

IDAAN 3.02 IDAAN is an autonomous tax exempt public entity headed by an Ex- ecutive Director. An eight-member Board of Directors, chaired by the Min- ister of Health, provides policy guidelines and makes major operational decisions. Any actions on tariffs and charges require Cabinet approval. IDAAN's budget is subject to approval by the National Controller's Office. With a total of 2,300 employees, IDAAN's employees/1000 water connections ratio is 15 which is high compared to comparable institutions in the Re- gion. Agreement was reached during negotiations that IDAAN would gradually improve this ratio to 9 employees/1000 connections by the end of 1988.

3.03 IDAAN's management systems are largely acceptable, but more improvements in accounting, budgeting, planning, information and especially in internal auditing practices and procedures are necessary. During the proposed project technical assistance would be financed to reduce deficiencies in these areas. The external audit of IDAAN's financial statements and revaluation of fixed assets would be continued during the proposed project. Assurances regarding the latter two items were obtained during negotiations.

3.04 Although much improved during the last 2-3 years, IDAAN's collections record needs to be improved further. In 1981, gross accounts receivable were equivalent to 5 months of billings for water charge and one year of billings for valorization charges. Assurances were obtained during negotiations that IDAAN would reduce accounts receivable to the equivalent of three months by the end of 1983 for water and by the end of 1985 for valorization charges.

3.05 IDAAN employs 20 engineers who carry out design work and supervise construction. Although most of the engineers have only limited experience, they perform satisfactorily on routine engineering tasks under the guidance of more experienced colleagues. Engineering consultants are hired for more sophisticated work. With few exceptions, operation and maintenance practices are poor and require substantial improvement. Technical assistance and the acquisition of equipment would be financed under the proposed Loan to strengthen IDAANt s capabilities in this area. MOP 3.06 MOP is responsible for the construction and maintenance of high- ways, urban streets, urban storm drainage systems, and the maintenance of national government buildings. MOP is executing two highway projects financed by the Bank (Loans 1565-PAN and 2020-PAN, with a combined Loan amount of US$31 million), and in recent years has acquired experience in the execution and administration of large projects under Bank policies. MOP has evolved through the merger of a number of different agencies. An improved organizational structure is being implemented (Annex 2). The main features of the new organization are: the creation of three in-line regional offices (Western, Metropolitan, and Central) to coordinate the work of the 11 provincial offices, and the establishment of eight specialized National Directorates. The National Directorate of Storm Drainage would be responsible for preparing and executing the proposed storm drainage component in Colon.

3.07 MOP had some 9,500 employees in 1981, including about 100 professionals and about 1,550 technical support staff. In early 1982, 138 employees, including 4 engineers, 22 technicians, 19 support staff and 93 la- borers, worked in the National Storm Drainage Directorate. The four engineers assigned to the unit appear to be experienced and capable, and would be able to direct the preparation of designs and execution of the Colon storm drainage project with the assistance of qualified consultants.

IV. POPULATION, SERVICE AND DEMAND

4.01 The following paragraphs summarize present and future populations, service levels for water supply and sewerage, and demands for all of IDAAN's systems. Condensed projections of population, service levels and demand and details for each of the project areas covered under the proposed project (Santiago, La Chorrera, Colon, District of Arraijan and Pan- ama City) are presented in Annex 3.

4.02 In mid-1982 IDAAN served a total of about 156,000 water connections. About 149,000 (95%) of these were residential connections serving about 1.16 million people (about 60% of the country's total and about 83% of IDAAN's target population). The remaining connections provided water to industrial and commercial enterprises and to Government institutions. About half the connections are concentrated in the Panama City Metropolitan Area. The other half serve some 42 regional urban centers and about 180 communities with populations of 500-1,500.

4.03 Residential water consumption is high, averaging currently about 56 gcd. It is highest in Panama City (65 gcd) and lowest in small communities where it may reach only 30 gcd. Total commercial, industrial and official consumption is around 30% of residential consumption. Unac- counted-for water is high at about 36% for all of IDAAN's systems combined. The total water production capacity at IDAAN's disposal in mid-1982 was about 152 mgd, close to the estimated demand of about 144 mgd. - 9 -

4.04 IDAAN will have to expand its systems considerably in order to fulfill its objective of providing adequate service to 95% of the population of all communities of 500 or more. Between 1982 and 1990, IDAAN must provide production and transmission capacity sufficient to meet the needs of an additional 400,000 people. Assuming that the recently introduced progressive tariff and improved meter coverage (70% by 1985) in the future will prevent further increases in per capita water consumption and that the level of unaccounted-for water will be reduced to 25% by 1986, IDAAN would have to increase its average daily water production capacity by about 14% between now and 1990. In addition to providing more production, transmission and distribution capacity, IDAAN will have to carry out considerable rehabilitation work (Panama City and Colon) and improve its operation and maintenance practices.

4.05 IDAAN's statistics on sewer connections are unreliable. The survey of sewer connections being carried out by IDAAN is expected to provide a reliable inventory of connections by mid-1983. It is estimated that in mid-1982 IDAAN operated around 95,000 sewer connections serving about 660,000 people. Close to 80% of all sewer connections are in the Panama City Metropolitan Area. The remaining connections are located in 13 regional centers. To meet the 1990 targets for urban sewerage service levels (90% of people to be connected in the 15 largest urban centers), IDAAN would have to serve an additional 400,000 people through about 50,000 new connections. As many of the existing sewer systems are old and deterio- rating, IDAAN must also make a significant effort to repair and rehabilitate existing systems.

4.06 The proposed project would contribute significantly to IDAAN's goals for 1990. Water transmission capacity would be increased in Panama City (Juan Diaz, Pedregal, Tocumen) and the Arraijan District. With com- plementary investments in storage and distribution, these two project components would serve an additional 190,000 people by 1990, including about 100,000 who now have access to water, but suffer from rationing. The sewerage components in Panama City, La Chorrera and Santiago would provide services to an additional 45,000 people by 1990. The proposed project would support IDAAN's efforts for system rehablitation and strengthen its operation and maintenance capabilities. The rehabilitation works in Colon in sewerage and storm drainage are of particular importance as they are essential to the urban renewal project on the Isla de Manzanillo, which is partly financed under Loan 1878-PAN.

V. THE PROJECT

5.01 The proposed project would be a follow-up of the first Bank supported water supply and sewerage project (Loan 1280-PAN). Preparation of the project has been under way for the last four years with the assistance of consultants and Bank staff. - 10 -

Objectives 5.02 The major objectives of the project would be to improve health and living conditions in several urban centers in Panama through the improvement and expansion of water supply, sewerage and storm drainage services. About 41% of the estimated 260,000 direct beneficiaries (Table 7.2) of the proposed project would belong to the lowest income population in the project areas. The gains achieved under the proposed project would be re- inforced through technical assistance and training to both ID4AN and MOP. Specific objectives are:

Sewerage: to expand sewer coverage in Panama, Santiago, La Chorrera and Colon to allow about 65,000 additional people to connect by 1990; and reduce environmental pollution in the first three cities;

Water Supply: to eliminate water shortages in Panama City and improve service quality to benefit some 170,000 people by 1990; rehabilitate parts of the water supply systems in Panama City and Colon; and provide a water supply infrastructure (pumping, transmission) for the Arraijan District and the Vacamonte Fishing Port benefitting a total of about 22,000 people by 1990;

Storm Drainage: to improve storm drainage facilities in Colon benefitting some 5,000 mostly low-income people;

Technical Assistance and Training: to improve maintenance and operating practices of IDAAN and MOP and further strengthen IDAAN's financial, commercial and administrative functions.

5.03 The Government has given high priority to all project components, The sewerage works would improve sanitation standards in some of the poorest districts of Panama City. The components in La Chorrera, San- tiago, and the Arraijan District are viewed as important measures towards making these regional centers more attractive to migrants from rural areas, thereby reducing the migration pressure on Panama City. The project components in Colon are essential to the success of the Government's efforts to revive this economically depressed city and support the urban renewal project financed under Loan 1878-PAN. The project's objectives are consistent with the Bank's sector and country policy.

Project Description 5.04 The scope of the project is summarized below:

A. Expansion and Improvement of Sewerage Services (IDAAN)

(a) In Panama City: construction of sewer networks in seven neighborhoods (about 32 km total length); six sewage collectors (about 15 km total pipe length); and rehabilitation of the sewage pumping station at Ave. Brazil. - 11 -

(b) In Santiago: construction of about 40 km of sewer laterals and collectors; 2 sewage pumping stations; and 2 oxidation ponds.

(d) In Colon: rehabilitation of four sewage pumping stations and replacement of about 6 km of sewer pipe.

(e) Provision for credit to finance in-house sanitary installations for low-income people in the project areas.

B. Expansion and Improvement of Water Supply Services (IDAAN)

(a) In Panama City: construction of a 5 km transmission main between Los Andes No. 2 and La Pulida and implementation of a rehabilitation and operations improvement program, including installation of pressure regulators, rehabilitation of storage tanks, replacement or repair of about 600 valves, leak-detection, and the improvement of about 20 pumping stations.

(b) In Arraijan District: construction of a 8.6 mgd treated- water pumping station at the Miraflores Water Treatment plant and water transmission mains between the Miraflores Pumping Station and Cocoli (including crossing of the Panama Canal) and Arraijan and Vista Alegre (about 9 km total length).

(c) In Colon: implementation of a rehabilitation and operations improvement program, including the replacement or repair of about 200 valves and about 100 hydrants.

C. Metering Program (IDAAN) Purchase and installation of 20,000 house water meters in Colon and Panama City; 60 source water meters throughout the country; and equipment for meter repair shop.

D. Purchase of Equipment (IDAAN) Purchase of sewer maintenance and radio communication equipment and vehicles.

E. Technical Assistance and Training (IDAAN) Provision for assistance and training concentrating on maintenance and operation; system rehabilitation; tariff structure review; metering; and commercial and administrative systems and procedures. - 12

F. Consultants' Services (IDAAN) Provision of services for the supervision of construction and the preparation of a sewerage master plan for Colon.

G. Colon Storm Drainage Component (MOP) Rehabilitation of two pumping stations; repair or replacement of storm drains; purchase of maintenance equipment; consultants' services for the preparation of final designs and supervision of construction; provision of technical assistance for the organization of a storm drainage system operation unit in Colon and training of engineers and operators in maintenance techniques.

Status of Project Preparation 5.05 Feasibility studies for the major project components, prepared by IDAAN and its consultants, were reviewed during appraisal and are available in the project file. Final designs, including bidding documents, representing about 50% of total project costs requiring such designs are complete (Annex 4). Consultants are preparing final designs for the Mira- flores pumping station, the Canal crossing, and the sewerage works in San- tiago. Consultants for the final designs of sewerage works in La Chorrera are being selected. IDAAN is financing these consulting services with loans from Panama's Preinvestment Fund. IDAAN's engineers are working on the final designs for the Los Andes No. 2-La Pulida transmission main. Bidding documents for the purchase of meters, valves and pressure regulators are almost complete. It is expected that 70-80% of all designs will be ready by the time the proposed loan is submitted for approval to the Bank's Board. The final scope of the storm drainage component in Colon is still being prepared by MOP (para. 5.15).

Least-Cost Solution 5.06 All project components correspond to the least-cost solution to reach project objectives and are technically feasible. For the sanitation components, a comparison between individual solutions and traditional waterborne sewerage taking into account technical, economical and social con- siderations showed that sewerage is the appropriate solution. Water supply and sewerage projects are being designed in conformity with satisfactory engineering standards and at reasonable per capita consumption levels.

Cost Estimates 5.07 The total cost of the project is estimated at US$28 million, in June 1982 prices, and at US$39.3 million, including physical and price contingencies (Table 5.1). The project would be exempted from taxes and duties. The IDAAN project accounts for US$36.2 million, or 92% of the total cost. The total foreign exchange cost is US$21.3 million (54.3% of the total project cost). Interest during construction is estimated to be US$6.65 million (US$6.35 for IDAAN and US$0.3 million for MOP). The front-end fee of US$0.32 million would be included in the proposed Bank Loan of US$21.6 million. Detailed cost estimates are provided in Annex 5. - 13 -

5.08 The base cost estimates were prepared by IDAMN and MOP, and reviewed by the Bank. Cost estimates for civil works and equipment are based on recent bids for similar works in Panama. The cost estimate for the rehabilitation of storm drainage pipes in Colon assumes that about 50% of the pipes in the project area need to be replaced and that the remaining pipes require only repairs. The average allowance for physical contingencies is 12% and varies from 5% to 15% of a component's base cost, depending on the status of design and the nature of the component. Price contingencies are based on a 5.5 year construction schedule (Annex 6). International inflation rates of 8% in 1982 and 1983, 7.5% in 1984, 7% in 1985, and 6% thereafter were applied to both the foreign and local exchange components. This assumption is justified since, historically, domestic inflation rates have been close to international inflation rates.

5.09 Costs for consultants' and engineering services, excluding contributions from IDAAN's and MOP's own personnel are estimated at US$1.85 million (US$1.53 million for the IDAAN portion and US$0.32 million for the MOP portion of the project) for a total of 275 man-months (107 man-months for expatriate and 62 man-months for local technical staff, and 106 man- months for local support staff). The average man-month costs, including salaries, overhead, travel and subsistence are estimated as follows: US$11,000 for expatriate technical staff, US$4,000 for local technical staff and US$2,000 for local support staff. Annex 7 presents details on consultants' costs and manpower estimates. The supervision of construction which would be carried out by IDAAN's Department of Supervision of Works (para. 5.13) is estimated to cost about US$1.3 million equivalent to 9.3% of the construction costs of the works to be supervised. - 14 -

TABLE 5.1: Summary of Project Cost

Foreign as Local Foreign Total % of Total

---- US$ Million 1/ …______

IDAAN

Sewerage 7.32 5.62 12.94 43.4 Water Supply 1.86 5.38 7.24 74.3 Metering 0.14 1.38 1.52 90.8 Equipment 0.08 0.78 0.86 90.7 Consulting Services/Training 0.57 1.10 1.67 65.9 Construction Supervision 1.32 -- 1.32 -- Base Cost (6/82 prices) 11.29 14.26 25.55 55.8

Physical Contingencies 1.18 1.37 2.55 53.7 Price Contingencies 3.98 4.11 8.09 50.8 Total Project Cost - IDAAN 16.45 19.74 36.19 54.5 Interest During Construction -- 6.35 6.35 100.0 Front-end Fee on Bank Loan 2/ -- 0.30 0.30 100.0 Total Financing Required-IDTAN 16.45 26.3W 42.8Z6.

MOP

Storm Drainage/Pump. Station 0.86 0.96 1.82 52.7 Equipment 0.01 0.15 0.16 93.8 Design/Supervision/Training Technical Assistance 0.29 0.16 0.45 35.6 Base Cost (6/82 prices) 1.16 1.27 2.43 52.3

Physical Contingencies 0.17 0.15 0.32 46.9 Price Contingencies 0.18 0.18 0.36 48.6 Total Project Cost-MOP 1.51 1.60 3.11 51.3

Interest During Construction - 0.30 0.30 100.0 Front-end Fee on Bank Loan 3/ - 0.02 0.02 100.0 Total Financing Required-MOP 1.51 1.92 3.43 55.7

TOTAL PROJECT

Base Cost (6/82 prices) 12.45 15.53 27.98 55.5 Physical Contingencies 1.35 1.52 2.87 53.0 Price Contingencies 4.16 4.29 8.45 50.7 Total Project Cost 17.96 21.34 39.30 54.3

Interest During Const. -- 6.65 6.65 100.0 Front-end Fee on Bank Loan -- 0.32 0.32 100.0 Total Financing Required 17.96 28.31 46.27 61.2

1/ 1 US$ = 1 Balboa 2/ Assuming loan amount of US$20.0 million for IDAAN's portion. 3/ Assuming loan amount of US$1.6 million for MOP's portion. - 15 -

Project Financing 5.10 Total financing required for the project, including interest during construction and the front-end fee on the proposed Bank Loan, would be US$46.3 million, US$42.8 million (92.6%) for the IDAAN portion and US$3.4 million for the MOP portion. The proposed Loan would finance the estimated foreign exchange component of the proposed project, including the capitalized front-end fee. The total Loan amount would be US$21.6 million, of which US$20.0 million would be allocated to the IDAAN component and US$1.6 million to the MOP component. For the IDAAN portion, the difference between total financing required and the financing provided by the Bank would be financed from IDAAN's internal cash generation (US$14.1 million), covering 33% of the investment and interest during construction, and from the Central Government in the form of an equity contribution of US$8.7 million. For the MOP portion of the project, the Central Government would provide US$1.8 million from its budget to meet the difference between the Bank Loan and the total financing required. A breakdown of project costs and financing is presented in Table 5.2.

TABLE 5.2: Financing Plan of the Project

IDAAN Portion MOP Portion Total Project US$ % of US$ Million US$ Million Million Total Requirements Project Cost: Foreign Exchange 19.7 1.6 21.3 46.0 Local Currency 16.5 1.5 18.0 38.9

Subtotal 36.2 3.1 39.3 84.9

Front-end Fee on Bank Loan 0.3 - 0.3 0.6 Interest During Construction 6.3 0.3 6.7 14.5

Total Cost 42.8 3.4 46.3 100.0

Sources Bank Loan 20.0 1.6 21.6 46.7 Internal Cash Generation 14.1 - 14.1 30.4 Government Contribution 8.7 1.8 10.6 22.9

Total Sources 42.8 3.4 46.3 100.0

Note: Figures are rounded. - 16 -

Project Implementation - IDAAN 5.11 IDAAN's portion of the project would be executed between January 1983 and June 1988 in accordance with the bidding and construction schedules shown in Annexes 4 and 6. As project preparation is well advanced and bidding for several major works would begin soon after negotiations, an execution period of 5-1/2 years is judged to be reasonable, considering that IDAAN executed the first project (Loan 1280-PAN) in six years and its implementation capacity has improved. As under the first Bank-financed project, IDAAN would designate a capable project manager who would be directly responsible to the General Manager. Assurances were obtained during negotiations that IDAAN would continue to employ a qualified project manager for the duration of the project.

5.12 Urban development in some areas of the Rio Caimito sewer district of La Chorrera must proceed as forecasted to justify the provision of sewerage services to most of this area. The works proposed in this area amount to about 30% of the La Chorrera sewerage component. IDAAN agreed during negotiations that it will present to the Bank for review the final scope and justification of this component based on a review of population density patterns before undertaking any sewerage works in the Rio Caimito sewer district of La Chorrera.

5.13 Qualified consultants would provide technical assistance to IDAAN in maintenance and operation, administrative procedures and the preparation of a tariff study (para. 7.09) under terms of reference satisfactory to the Bank (Annex 14). IDAAN would present terms of reference for the Technical Assistance Program satisfactory to the Bank by no later than January 31, 1983, and would hire the technical assistance consultants by no later than July 31, 1983. These consultants would also assist IDAAN in the formulation and organization of a training program for operation and maintenance personnel which would be presented to the Bank by not later than March 31, 1984. The sewerage master plan for Colon would be prepared by engineering consultants who would be assisted by engineers and support staff assigned by IDAAN. IDAAN would present terms of reference for the master plan satisfactory to the Bank by not later than January 31, 1984 and would hire qualified consultants by July 31, 1984. IDAAN's Department of Engineering would supervise the construction of the less complex project components. Qualified engineering consultants would be engaged for the supervision of construction of the Miraflores Pumping Station, the canal crossing and the five sewerage pumping stations. IDAAN would present to the Bank terms of reference for the supervision of construction consultancies by not later than January 31, 1983. Assurances were obtained during negotiations from IDAAN that it would carry out the tasks outlined above.

Project Implementation - MOP 5.14 MOP would carry out the Colon storm drainage component as a sub- borrower of IDAAN under on-lending arrangements satisfactory to the Bank. The construction of this project component would be carried out between mid-1983 and mid-1985. The on-lending terms would be identical to those agreed by IDAAN and the Bank. IDAAN's involvement with MOP would - 17 -

essentially be limited to the passing on of funds from the Bank. MOP and the Bank would communicate directly on such project-related matters as procurement, supervision, reporting, etc. In view of its experience with other Bank-financed projects, MOP is expected to carry out these tasks satisfactorily. MOP and IDAAN have presented a draft on-lending agreement satisfactory to the Bank during loan negotiations. Disbursements for the MOP component would be contingent on MOP signing the on-lending agreement with IDAAN.

5.15 During negotiations, the Bank and MOP agreed on the scope of the storm drain rehabilitation program which was developed by MOP on the basis of the results of a recently completed survey of storm drains. The rehabilitation program includes the replacement of around 2 km of damaged pipes and about 100 street inlets. MOP would hire consulting engineers to prepare designs for the replacement of storm drains and the rehabilitation of the two storm drainage pumping stations (Annex 7) under terms of reference acceptable to the Bank. MOP personnel would supervise the storm drain replacement component and engineering consultants would supervise the rehabilitation of the pumping stations. Assurances were obtained during negotiations that MOP would hire qualified consultants satisfactory to the Bank for the design of the works and supervision of construction for the pumping station rehabilitation, according to the timetable agreed upon during negotiations.

5.16 As part of the Colon storm drainage project, MOP would establish and equip an adequate storm drainage maintenance and operation unit in Colon by no later than January 31, 1984. MOP would engage by no later than June 30, 1983 consultants under terms of reference satisfactory to the Bank to assist in organizing the unit. MOP would present to the Bank a plan for the organization and staffing of the unit, its equipment needs and a training program for the unit's key personnel by no later than November 30, 1983. Assurances were obtained during negotiations that MOP would act in accordance with the schedule outlined above.

Environmental and Health Aspects 5.17 The sewer projects in Panama City, Santiago, La Chorrera and Colon would substantially reduce environmental pollution in the project areas. In Panama City the reduction of pollution in the project area would result in an undetectable increase in the pollution load of the Bay of Pan- ama. In La Chorrera water pollution would increase in the Caimito and Mar- tin Sanchez Rivers downstream of the discharge points. Since there are very few people living in these areas, the incremental river pollution would not create major problems now. The provision of sewage treatment in La Chorrera is planned for the 1990s. Overall, the sewerage components would result in a marked improvement in environmental conditions in populated areas and are expected to reverse the trend of increased incidence of waterborne diseases in Panama (para. 2.07). In the Arraijan District, the anticipated future population growth and the availability of adequate water supply services via house connections would eventually require improved excreta and wastewater disposal. - 18 -

Procurement 5.18 It is estimated that about 45 contracts would be awarded to carry out the project (Annex 4). Following IDAAN's and MOP's policy, construction contracts (about 25 and totalling about US$29 million including contingencies) would combine supply of equipment and materials and installation. This would simplify project execution and supervision considerably. Under International Competitive Bidding (ICB), local contractors would pro- bably win most construction contracts, except those for the pumping station at the Miraflores Treatment Plant and the canal crossing. Construction contracts under US$300,000 and up to an aggregate amount of US$2.3 million (US$2 million for IDAAN and US$0.3 million for MOP) would be awarded on the basis of local competitive bidding procedures satisfactory to the Bank, with foreign bidders having the opportunity to participate. All other construction contracts would be awarded through ICB.

5.19 With the exception of sewerage pipes, all equipment, vehicles and pipes are likely to be supplied from abroad. Equipment and vehicles (pipes would be procured under combined lay and supply contracts) are estimated to cost US$4 million and require about 15 separate biddings. These items would be grouped into bid packages and procured under ICB with the exception of miscellaneous equipment items in lots of less than US$50,000 and up to an aggregate amount of US$0.4 million (US$0.3 million for IDAAN and US$0.1 million for MOP), which would be procured under local competitive procedures satisfactory to the Bank. Qualifying domestic manufac- turers would receive a preference of 15% of the CIF price or the prevail- ing import duty, whichever is lower.

5.20 Contracts for technical assistance and consulting services (US$0.3 million for IDAAN and US$0.1 million for MOP) would in all likelihood be awarded to foreign firms or joint ventures between local and foreign firms. These contracts (about 8) are estimated to cost about US$2 million and would be placed following the Bank's guidelines.

5.21 The procurement arrangements outlined above would assure that contracts accounting for more than 90% of project cost would be awarded, through ICB. For the IDAAN portion of the project all bidding packages for construction contracts (including supply and installation), estimated to cost more than US$500,000 equivalent and bidding packages for goods over US$100,000 equivalent, would be subject to the Bank's prior review of procurement documents. The balance of contracts would be subject to ex-post review. For the MOP portion of the project all procurement documents would be reviewed by the Bank. This review procedure would result in a coverage of about 80% of the total estimated value of works and goods contracts.

Disbursement 5.22 The proposed allocation of Loan proceeds and the disbursement percentages are shown in Annex 8. Proceeds allocated to the IDAAN portion of the project would not be transferable to the MOP portion and vice versa. Disbursements for the revolving fund established by IDAAN for in-- house sanitary facilities (para. 7.12) would be made under statement of expenditure procedures, documentation for which would be reviewed by - 19 -

supervision missions. IDAAN would initiate and maintain a separate account for the fund. IDAAN's accounting and internal control practices are satisfactory to prepare and maintain records for this purpose. Disbursements for all other items would be fully documented. The Loan closing date would be December 31, 1988. The disbursement period would thus be six years. Although significantly shorter than the average disbursement period for sector projects in the region (about eight years), this disbursement period is reasonable considering the advanced stage of project preparation and that Loan 1280-PAN was fully disbursed in six years. A schedule of expected disbursemet,ts by quarter is presented in Annex 9.

Retroactive Financing 5.23 In view of the urgency of the Colon storm drainage project in connection with the urban renewal project financed under Loan 1878-PAN, MOP plans to begin the preparation of final designs before Loan Signature (para. 5.15). Retroactive financing of up to US$50,000 for consultants' services is proposed.

VI. FINANCIAL ANALYSIS

Past Performance and Present Financial Position 6.01 Key financial data (Table 6.1) extracted from IDAAN's financial statements for the 1976-81 period (Annex 10) show that IDAAN's financial performance deteriorated in the recent past. Nevertheless, IDAAN maintained a satisfactory cash position which allowed the company to finance a reasonable part of its investment program, and has initiated corrective actions to improve its earnings.

TABLE 6.1: Selected Financial Data and Key Indicators for 1976-82 (In Current US$ Millions)

1982 1976 1977 1978 1979 1980 1981 (Projected)

Net income (loss) 1.2 4.1 4.2 2.4 (1.7) (3.8) 1.4 Working ratio (%) 68 59 58 66 75 85 69 Net internal cash generation (1.9) 0.3 2.3 0.2 7.0 2.1 8.3 Users contributions 1.4 1.2 1.5 1.6 1.2 1.5 1.9 Investments 5.2 10.3 16.1 9.6 16.3 16.3 17.7 Borrowings 4.1 0.7 4.8 5.6 5.3 5.2 5.4 Debt service ratio 1.7 1.9 2.3 2.0 1.4 0.8 2.65 Debt/equity + debt (%) 51.9 44.7 40.5 39.2 25.9 25.7 21.5 Revenue covenant (M) n/a n/a n/a 3.5 1.5 0.1 3.8 Rate of return (%) a/ ------6.5 3.2 0.6 4.9 a/ As defined in Table 6.3.

n/a - Not Applicable. - 20 -

IDAAN's net income declined in 1979 and net losses were incurred in 1980- 81, mainly because of its failure to raise tariffs after early 1978. The revenue covenant under Loan 1280-PAN required that, starting in 1979, funds from internal sources 3/ amount to at least 3.8% of the average current net value of IDAAN's fixed assets in service and under construction; IDAAN was close to compliance in 1979 (3.5%) but its performance deteriorated in 1980-81. Its net internal cash generation during those years, however, was satisfactory because of substantial reduction in its working capital resulting from improved collection of overdue receivables, and to some extent from an increase in short-term liabilities (legal guarantee witholdings from contractors).

6.02 During the 1976-81 period, IDAAN's investments (Annex 10) to- talled to about US$74 million (in current prices). About 25% of these investments were financed by IDAAN from two main sources: net internal cash generation (13.6%) and users contributions (11.4%). The remaining funds came from developers donations (26%), government equity contributions (14%) and about 35% from loans made by international lending agencies (Bank, IDB, AID).

6.03 The 30% tariff increase (para. 6.05) implemented in April 1982 is expected to improve IDAAN's financial position substantially in 1982. Net income is forecasted to rise to US$1.4 million, bringing the working ratio to below 70%. The net internal cash generation is expected to increase four times. The tariff increase is also expected to allow IDAAN to comply with the revenue covenant under Loan 1280-PAN.

IDAAN's Internal Sources of Funds 6.04 IDAAN's internal sources of funds originate most importantly from tariffs for water services and contributions from users through valorization payments. Other minor sources of income include penalties for late payment, connection fees and interest charges on deferred payments of valorization charges.

6.05 IDAAN's organizational law requires that tariffs and charges be set at levels sufficient to cover operating costs, depreciation, debt service payments, and to provide for system expansion. In April 1982 IDAAN introduced, for the first time, a more progressive tariff structure (Annex 11). The new tariff scheme has raised the average tariff by 30% to US$0.28/m3. There is no separate charge for sewerage services. IDAAN's current tariff structure needs further improvement (para. 7.09).

6.06 IDAAN has the authority to collect users' contributions (valorization) from property owners who benefit from water supply and sewerage works. IDAAN's current policy is to recover costs of constructing water distribution systems and sewage collection networks by apportioning the total cost, including financial costs to property owners, either on the

3/ Funds from internal sources are defined as the difference between gross revenues (operating income + users contributions (valorization) + net non-operating income) and the sum of all operating expenses (excluding depreciation), debt service and any other cash outflows other than capital expenditures. - 21 -

basis of lot frontage or property size. The system of apportionment and conditions for payment are decided for each project individually, and must be approved by the Panamanian Cabinet. Property owners may pay valorization charges in installments of up to 20 years. IDAAN bills its customers for valorization with the regular water bill. Up-to-date payment of the charges is a condition for real estate transactions.

Investment Program and Financing Plan 6.07 During the project execution period (1983-88), IDAAN plans total investments of US$139 million (Table 6.2, Annex 10). About US$43 million would be invested under the proposed Bank project, and US$42 million under the fourth IDB project, which has been signed recently. The remaining funds (US$54 million) would be used to expand water and sewerage services throughout Panama. IDAAN's contribution (including valorization) would be about 56% of the total investment. The remaining funds would come from borrowings (31%) and Government equity contributions (13%). The borrowing requirements would be met by the proposed Bank Loan (US$20 million) and the IDB loan (US$26 million). The Government's total equity contribution is estimated at US$18.0 million (US$6 million for the fourth IDB project, US$9 million for the proposed project, and US$3 million for other projects).

TABLE 6.2: IDAAN's Financing Plan 1983-88

US$ Current Million % Source of funds: Gross internal cash generation 110.0 -- Debt service -45.7 -- Working capital needs -1.2 -- Other liabilities or assets 0.1 --

Net internal cash generation 63.2 46 Users contributions (valorization) 14.1 10 Funds from internal sources 77.3 56

Equity contributions 18.0 13 Borrowings: IBRD 20.0 14 IDB 23.4 17 Funds from external sources 61.4 44 Total sources 138.7 100

Application of funds: Investment in project 36.5 26 Interest during construction 11.0 8 Other works 91.2 66 138.7 100 - 22 -

Financial Forecast 6.08 Selected data on IDAAN's projected income statements and key financial indicators for 1983-88 are shown in Table 6.3. Financial statements for 1982-90 including assumptions are presented in Annex 10. IDAAN's revenues are expected to grow from US$37 million in 1982 to US$63 million in 1988, an average annual increase of about 9%. Operating costs are projected to grow from US$26 million in 1982 to US$40 million in 1988, an average annual increase of about 7.5%. As a result, IDAAN's gross internal cash generation is forecasted to almost double from US$12 million in 1982 to US$23 million in 1988.

6.09 The projected financial performance depends on IDAAN taking a number of measures to improve its operations and generation of revenues. Specific measures already being implemented by IDAAN include increased metering, improvements in estimating consumption of unmetered connections, the introduction of a progressive tariff structure in April 1982, and the reduction in accounts receivable. Measures to be implemented during project execution include increasing meter coverage to 70% of all customers by 1985, reducing unaccounted-for water to 25% by 1986, and cost control. The successful implementation of these measures would allow IDAAN to comply with the proposed revenue covenant in 1983 and 1984 without additional tariff increases. The revenue increase projected to become necessary in 1985 would be accomplished through the revision of the tariff structure, which for the first time, would include a separate sewerage charge. At this time, a 20% sewerage surcharge over water bills appears to be sufficient to raise the additional revenues required. This surcharge has not been estimated on the basis of the real cost associated with providing sewerage services, which will be determined by the tariff study to be carried out under the proposed project (para. 7.09). No further tariff increases are expected for 1986. Thereafter, the average tariff should be raised periodically to maintain the 1986 levels in real terms. - 23 -

TABLE 6.3: Selected Financial Data and Key Financial Indicators 1983-88 (Current US$ million)

1983 1984 1985 1986 1987 1988

Revenues Water Sales 39.4 41.9 43.6 45.5 49.4 53.2 Sewerage charges - - 5.2 5.5 6.4 6.9 Other 2.2 2.5 2.4 2.8 2.7 2.8

Expenses Operating cost 27.9 30.3 32.8 35.2 37.7 40.4 Depreciation 2/ 9.4 10.4 11.5 12.5 13.5 14.5 Interest 2.8 2.6 2.6 3.2 3.5 4.7

Net income 1.7 1.4 4.6 3.2 4.2 3.8 Users' contributions3 / 1.6 2.0 2.1 2.2 3.0 3.2 Working ratio (%) 4/ 67 68 64 65 65 64 Debt service ratio (times) 2.1 2.1 2.3 1.7 1.9 1.9 Current ratio (times) 1.1 1.1 1.0 1.0 1.1 1.1 Debt/Debt + Equity ratio (%) 21.2 21.6 22.0 20.7 19.0 17.0 Internal Cash Ratio 5/ 3.8 3.5 4.7 3.5 3.6 3.7

Rate of return (%) 6/ 5.5 4.6 5.8 4.9 5.2 5.3

Contribution to investments (%) 7/ 50 38 44 60 73 91

Average tariff, including sewerage charge US$1000 US gal. 1.07 1.07 1.20 1.20 1.28 1.34 US$/m3 (equivalent) 0.28 0.28 0.32 0.32 0.34 0.35

1/ Includes interest on deferred valorization payments. 2/ On revalued fixed assets. 3/ Valorization charges (principal only) 4! Excluding depreciation. 5/ During negotiations, an internal cash ratio of at least 3.5% was agreed upon as revenue covenant. 6/ Excluding from the rate base, the net value of fixed assets donated by developers and of those being recovered through valorization, and from the income base, the annual depreciation corresponding to the previously described assets. 7/ Net internal generation plus valorization as a percentage of total investments. - 24 -

6.10 IDAAN's debt to total capitalization ratio would remain under 25% at all times during project execution, reflecting a good equity position. The debt service coverage ratio would not be less than 1.5. Any large borrowings in addition to those shown in the financing plan (para. 6.07) could endanger IDAAN's financial performance. Assurances were obtained from IDAAN during negotiations that it will not incur without the Bank's consent any additional long-term debt that would cause the debt service coverage ratio to drop below 1.5 during any twelve month period following such incurrance.

Revenue Covenant 6.11 The proposed revenue covenant (Annex 12) would be an internal cash ratio requiring that net internal cash generation 4/ plus user contributions (valorization) be at least 3.5% of average net revalued operating fixed assets. The proposed revenue covenant is consistent with IDAAN's revenue policies and organizational law, but is slightly different from the one formulated under Loan 1280-PAN in that works in progress are excluded from the rate base. This adjustment has been introduced because revaluation of works in progress is not a generally accepted practice in Panama and, as experience has shown, has been cumbersome and difficult to mon- itor. Assurances were obtained during negotiations that IDAAN will annually review its tariffs and maintain charges at levels sufficient to generate the covenanted internal cash ratio.

Monitoring and Evaluation 6.12 IDAAN would submit to the Bank semi-annual reports (due on Febru- ary 28 and August 31) on the progress of project implementation and its operating and financial performance during the preceding semester ending on December 31 and June 30, respectively. Specific targets for IDAAN as a whole and for each of the project areas (Panama City, Colon, La Chorrera, Santiago and the District of Arraijan) would include, inter alia, a comparison of projected and actual project construction schedules, disbursements, and selected monitoring indicators. MOP would submit to the Bank semi-annual reports according to the schedule outlined above for IDAAN. These reports would compare progress in the execution of the Colon storm drainage works with the project implementation schedule. IDAAN and MOP would also prepare a project completion report within six months after the completion of the project according to the guidelines to be provided by the Bank. Assurances were obtained during negotiations that IDAAN and MOP would submit semi-annual progress reports and a project completion report acceptable to the Bank. Annex 13 presents the monitoring indicators for TDAAN agreed upon during negotiations.

VII. ECONOMIC AND SOCIAL ANALYSIS

Introduction 7.01 The proposed project has been conceived to meet the short- to medium-term water supply and sewerage needs of the population in the project areas. It comprises ten major components in three subsectors (water,

4/ Operating revenues + non-operating revenues - operating costs (excluding depreciation) - debt service payments - non-financed interest during construction - increase in working capital - any other cash outflows other than capital expenditures related to water and sewerage operations. - 25 -

sewerage, storm drainage) and five separate locations. None of the project components account for more than 18% of the total base cost. Some of the components were designed to rehabilitate existing facilities or to supple- ment larger investment programs already carried out or planned. The project's objectives are consistent with existing urban upgrading and development programs and with the broad objectives of the Panamanian Government regarding the provision of safe water supplies and adequate sanitation. The project would help to improve living conditions in extensive areas of the cities and towns to be served, where lack of safe water and adequate sanitation constitutes a health hazard. In the various project areas, most components are interrelated with existing facilities, and interact to provide services at the lowest possible cost. The project emphasizes rehabilitation and maintenance works in areas where aging systems are in need of repair.

Return on Investments and Project Justification 7.02 Benefits derived from sewerage and drainage systems are not meaningfully quantifiable. The absence of a cost-based sewerage tariff makes the calculation of the financial rate of return impossible for the sewerage components of the project. These components account for about 55%, and the storm drainage component for about 10% of the total cost.

7.03 There is, however, some quantitative evidence which can be presented for the sewer network components to judge their economic viability and to support qualitative analysis. The construction of sewer networks, representing about one-third of total project cost, would improve the economic value of properties located in the project area, which would be par- tially reflected in the increase of their market values. Based on actual market prices in similar areas with sewerage services, it is estimated that land values are likely to increase by about 30% in real terms as a conse- quence of the project investment. A comparison of the present value of the total benefits, accruing from land appreciation with those of investment and maintenance and operation costs, indicates that land appreciation benefits would exceed costs in real terms at a discount rate of 12% (the estimated opportunity cost of capital in Panama). Since land appreciation does not include expected public health benefits, socio-economic benefits taken together would clearly outweigh the cost of the project investment for sewer networks in Panama City, Santiago and La Chorrera.

7.04 Using expected revenues as a proxy for economic benefits, the combined incremental rate of return (IRR) was calculated for the two major water supply components: the transmission main in Panama City and the works in the District of Arraijan which account for about 20% of total project cost. The estimated IRR is 14.6%. Since positive externalities and consumer's surplus are not fully reflected in revenues, this rate under- estimates the economic rate of return of the two components. It exceeds the estimated opportunity cost of capital of 12% and establishes the economic viability of these two project components. - 26 -

7.05 No rates of return could be calculated for the various water supply system rehabilitation and improvement measures in Panama City and Colon since neither benefits nor incremental revenues can be meaningfully estimated considering the complexity of the rehabilitation measures proposed. and the data available. To generate a data base sufficiently detailed toc permit such an analysis would require an extraordinary effort, which would not be justified considering the magnitude of these project components in relation to total project cost.

7.06 Since a rate of return can be estimated meaningfully only for two water supply components accounting for 20% of total project cost, the cal-' culation of an aggregate rate of return for the project is not possible.

Long-Run Marginal Cost and Tariffs 7.07 Long-run average incremental cost (AIC), calculated at a 12% discount rate, was used to approximate long-run marginal costs (LMC) for water supply and sewerage in the project areas. The resulting AICs in June 1982 prices are shown in Table 7.1.

TABLE 7.1: Long-Run Average Incremental Cost (US$/m3) a/

Water Supply Sewerage Combined Networks Collectors

Panama City 0.21 0.20 0.02 0.43 Santiago 0.28 0.20 0.07 0.55 La Chorrera 0.20 0.24 0.07 0.51 Arraijan District 0.46 n.a n.a n.a

a/ Tables showing the AIC calculations are contained in the project file. US$ and m3 equivalents were used instead of B/. and US gallons to facilitate understanding.

Because of the lack of a basic water supply infrastructure (Annex 3), the AIC for water supply in the Arraijan District, is about twice as high as that calculated for the other three project areas which may be considered more representative for AIC of water supply and sewerage services in larger urban areas.

7.08 The substantial difference between IDAAN's current average tariff level (US$0.28/m3) and the combined average AIC for water supply and sewerage (around US$0.50/m3) is more apparent than real. It is estimated that IDAAN recovers in real terms about 30% of its investments in water and close to 60% of those in sewerage through valorization. Thus, under current tariff levels and cost recovery arrangements, IDAAN's customers payments in real terms come close to the combined AIC for water and sewerage. The problem with IDAAN's current tariff structure is therefore not its absolute magnitude, but its structure, mainly because of the absence of a separate sewer charge and insufficient progressivity. - 27 -

7.09 With the assistance of consultants under the technical assistance program, IDAAN would review its tariff system with the objective of intro- ducing a more equitable structure. This new structure would reflect as closely as possible the cost to the economy of meeting increasing water supply and sewerage collection needs, take into account valorization charges, and investigate the desirability of regional tariff differentia- tion. Draft terms of reference for the tariff study are presented in Annex 14. A prerequisite for the tariff study is a survey of sewerage connections in Panama City which would be completed by June 30, 1983. The tariff study would be presented to the Bank by March 31, 1984 along with recommendations and an implementation schedule. Assurances were obtained from IDAAN during negotiations that it will carry out the sewer connection survey and the tariff review, and implement the new tariff structure for water and a separate sewer charge in accordance with a timetable acceptable to the Bank.

Beneficiaries and Urban Poverty Impact 7.10 The project would benefit a total of about 260,000 people directly (Table 7.2). In addition, there would be many benefits which cannot be expressed in terms of numbers of beneficiares. These would include, for example, supply of water to the Vacamonte Fishing Port and the reduction of environmental pollution in Panama City through the construction of sewer collectors. About 41% of the identifiable direct beneficiaries would belong to the urban poor.

TABLE 7.2: Direct Beneficiaries from Selected Project Components by 1990

Beneficiaries Project Component Total Low Income % Low Income

Panama City sewer networks 12,400 7,440 60 Santiago sewer networks 15,200 5,320 35 La Chorrera sewer networks 24,700 7,410 30 Colon sewer networks 10,000 8,000 80 Transmission main Ojo de Agua-El Crisol 170,000 68,000 40 Water Supply Arraijan 22,300 6,690 30 Storm drainage Colon 5,000 4,000 80

TOTAL 259,600 106,860 41%

Affordability of Services to the Urban Poor 7.11 IDAAN charges low-income consumers a special tariff of US$4.26 for a base consumption of 6,000 US gal/month (22.7 m3/month). At present, this tariff represents 2.1% of a low-income family's income in Santiago and 1.7% of that in Panama City (para. 2.06). At these tariff levels, water and sewerage services are affordable to all segments of the population. - 28 -

7.12 In the future, the provision for sewerage services will create an additional financial burden to low-income families who want to connect to the sewer systems to be constructed under the proposed project. They would have to pay a valorization charge, the house connection and in-house sanitary facilities. As installing even rudimentary plumbing facilities may cost as much as US$600, many families may have to forego a sewer connection unless credit is provided to them. For this reason, IDAAN would establish a US$100,000 revolving fund to finance in-house sanitary installations for low-income families (Annex 15). The Bank would finance50% of the credit to be provided by the fund. IDAAN would present to the Bank for comments by not later than June 30, 1984 a detailed plan describing the funding and administration of the fund, including model contracts, eligibility criteria and onlending conditions for the provision of credit. The revolving fund would be established by IDAAN by no later than June 30, 1985 with an initial deposit of US$100,000 made by IDAAN. IDAAN would also carry out in each project area a campaign to motivate people to connect. As- surances were obtained during negotiations that IDAAN will comply with the above requirements.

7.13 Even with the benefit of the credit provided by IDAAN under the revolving fund, a family's total monthly obligation for water and sewerage may be as high as US$20/month during the repayment of the credit (5 years at 12%). This would amount to about 10% of a family's income of US$200/ month (absolute poverty level in Santiago). Based on field inquiries in the project areas, IDAAN feels that low-income potential beneficiaries would nevertheless be willing to undertake such an investment, as access to a sewerage connection would constitute a substantial improvement in a family's living conditions. To minimize the risk of people not being able to connect to the systems, IDAAN considers easing the repayment burden for the neediest families by providing grants or softer credit conditions. IDAAN would present details on these matters to the Bank in the proposal for the establishment of the revolving fund.

Risk 7.14 The proposed project is subject to little risk. No difficulties of technical nature are expected during the execution of the project, since with the exception of the canal crossing and the Miraflores Pumping Station components, all works are simple and straightforward. To ensure a successful and efficient completion of these two more sophisticated works, IDAAN will make a special effort to engage highly qualified contractors to carry out and experienced engineers to supervise the construction of these works. The likelihood for cost overruns is small, since all cost estimates are based on detailed bills of quantities and unit costs reflecting recent bid experience. Delays in project execution are unlikely, considering the advanced stage of project preparation and IDAAN's project execution capability, as evidenced during the execution of Loan 1280-PAN.

7.15 Because of the recent tariff increase, IDAAN's financial position through 1984 is expected to remain strong. With the timely implementation of tariff increases, no problems are expected regarding IDAAN's ability to - 29 -

generate internally the funds required for completing its investment program through 1988. The risk of low-income households not being able to connect to the sewer systems to be constructedunder the project because of insufficient funds to pay for in-house sanitary installations and house connectionsis minimized by the the provision of credit to eligible households (para. 7.12).

VIII. AGREEMENTSREACHED AND RECOMMENDATIONS

8.01 During loan negotiations,assurances were obtained as follows:

From the Government: (a) Regarding IDAAN, that it would approve a tariff structure satisfactoryto the Bank which would include separate water and sewerage charges and would allow IDAAN to generate funds from operations sufficient to meet a minimum internal cash ratio of 3.5% (para. 6.11). Such structure and its timetable of implementationwould be based on the recommendation of a tariff review to be carried out by IDAAN with the assistance of consultants (para. 7.09).

(b) regardingMOP that: (i) qualified consultantsacceptable to the Bank would be hired for the design of storm drains and storm water pumping stations and the supervisionof constructionof the pumping stations (para. 5.15);

(ii) an adequate maintenance and operation unit for Colon's storm drainage system would be established within MOP and that consultants acceptable to the Bank would be engaged to assist MOP in the organizationof this unit and training of its personnel (para. 5.16); and

(iii) semi-annual progress reports and a project completion report would be submitted to the Bank (para. 6.12).

From IDAAN, that it would: (a) revalue its fixed assets annually (para. 3.03);

(b) have its financial statements audited by independent auditors (para. 3.03);

(d) continue to employ a qualified project manager during the implementationof the project (para. 5.11); - 30 -

(e) engage the services of qualified consultants for technical assistance and training, the preparation of a sewerage master plan for Colon and the supervision of construction for the Miraflores Pumping Station, the canal crossing and sewage pumping stations (para. 5.13);

(f) present a training program for operation and maintenance personnel (para. 5.13);

(g) not incur any long-term debt without the Bank's consent which would cause the debt service coverage ratio to drop below 1.5 (para. 6.10);

(h) maintain tariff levels sufficient to generate funds from operations sufficient to reach a minimum internal cash ratio of 3.5% (para. 6.11);

(i) submit semi-annual progress reports and a project completion report (para. 6.12);

(j) carry out a survey of sewer connections, and review its tariff structure and implement the recommendations of the review, including the introduction of a separate sewerage charge (para. 7.09); and

(k) establish a revolving fund for the financing of in-house sanitary installations and house connection for low-income families (para. 7.12).

8.02 Disbursements for the MOP component of the project are contingent on MOP signing the on-lending agreement with IDAAN (para. 5.14).

8.03 Retroactive financing for consulting services to MOP of up to US$50,000 is recommended (para. 5.23).

8.04 With the above assurances and condition, the proposed project. would be suitable for a Bank Loan of US$21.6 million for a period of 15 years, including 3 years of grace. - 31 -

ANNEX I Page 1

PANAMA

SECOND WATER SUPPLY AND SEWERAGEPROJECT

Institutional Assessment of IDAAN

Organization and Management

1. IDAAN was created in 1961 as successor to the Comision de Aguas y Alcantarillados. It is an autonomous tax exempt public entity and enjoys wide administrative, but limited financial, autonomy. Its investment program requires the approval of MIPPE. Tariffs and charges to consumers are proposed by IDAAN, but are subject to approval by the Central Government Cabinet (Organo Ejecutivo). -

2. IDAAN is governed by an eight-member Board of Directors chaired by the Minister of Public Health. The Board includes representatives of the Ministries of Housing, Public Works, and Public Health, the Control- ler's Office, the Panamanian Association of Property Owners, the Colon Chamber of Urban Property Owners and the Panamanian Society of Engineers and Architects. IDAAN's Executive Director is appointed by the President for a period of six years. He has ministerial rank and participates in Cabinet meetings dealing with issues of interest to IDAAN.

3. IDAAN's current organizational structure (Attachment 1) was implemented in February 1981. Maintenance and operations are the responsi- bility of 10 regional offices. This delegation has not been fully implemented, since some regional managers still require considerable supervision. The regional managers report directly to the Executive Director. Four national directorates at IDAAN's headquarters in Panama City provide support and supervision in technical, operational, engineering, logistical, administrative, commercial and financial areas. These directorates also report directly to the Executive Director. The Executive Director is assisted by two advisory units: the Planning Unit, acting as liaison between IDAAN, other Government agencies and international lending organizations; and the Legal Unit.

Personnel

4. IDAAN has a total of about 2,300 employees (Attachment 2), 77% of them permanent and 23% temporary. The number of employees/1000 connections is 15, which is very high compared to other Latin American water utilities of similar size. The low degree of mechanization of most systems and the need to operate many small systems located throughout the country would justify a ratio of around 9/1000 connections. During negotiations, it was agreed that IDAAN will gradually improve the employees/1000 connection - 32 -

ANNEX I Page 2

ratio to 9/1000 by 1988 and that for the purpose of calculating such ratio, the staff of IDAAN, which is devoting all of its working time to the execution of a project and whose labor cost is capitalized into the construction cost, will not be included. In view of the expanding systems, this can largely be achieved through the expected growth in the number of connections and the reduction of personnel through attrition.

Planning and Budgeting

5. The Planning Unit was established recently and carries out physical, economic, financial, and management planning. The staff of the Planning Unit is dynamic but somewhat limited in experience; it was very helpful during preparation and appraisal of the proposed project.

6. Capital and operating expenditures are formally budgeted on an annual basis. The Planning Unit annually prepares a five-year investment plan, which is submitted to the Central Government and incorporated into a National Five-Year Development Program. Budgets must be approved by the National Controller's Office. Expenditures against budget allocations are monitored daily by officials of the Controller's Office. These officials are paid by IDAAN and stationed at its headquarters.

Accounting

7. All accounting is centralized at headquarters. An accrual-based accounting system is used and generally accepted accounting principles are followed. Two departments under the Financial Services Directorate carry out financial and budget control accounting functions. Insufficient co- ordination between these two departments makes IDAAN's accounting cumbersome and slow, especially at closing. Currently, only budget control is computerized. To improve IDAAN's accounting, the integration of the two accounting functions and computerization is necessary.

8. Accounting procedures have improved under Loan 1280-PAN. New cost and plant accounting systems were developed by consultants and are being implemented. These two systems are designed for manual use, but could be adapted to computer application. During the execution of the proposed project, IDAAN, assisted by consultants to be hired under the technical assistance program, would computerize its accounting system, and in- tegrate budget control and financial accounting systems.

Revaluation of Fixed Assets

9. IDAAN inventoried and revalued its assets in 1979, but has been slow in updating the revaluation. The revaluation of fixed assets as of December 31, 1981 was completed recently and approved by IDAAN's Board in August 1982. Assurances were obtained during negotiations that IDAAN will revalue its fixed assets annually in accordance with accounting guidelines established by the Panamanian Institute of Public Accountants and using appropriate indices for price increases issued by the Department of Statis- tics of the National Controller's Office. - 33 -

ANNEX 1 Page 3

Auditing

10. IDAAN's financial statements are audited annually by independent auditors, as required under Loan 1280-PAN. The 1976-81 financial statements were audited by Arthur Andersen Co., whose audit work was satisfactory. IDAAN's financial statements are also audited by the National Controller's Office. External auditing by independent auditors will continue during the execution of the proposed project and audited financial statements, including expenses financed under the proposed revolving fund (Annex 15), will be submitted to the Bank no later than four months after the end of each fiscal year.

11. IDAAN's internal auditing is inadequate. External auditors have pointed out many deficiencies in internal control, but few improvements have been made. It is essential that the Internal Auditing Unit improve its performance. IDAAN would present to the Bank no later than June 30, 1983 a proposal and implementation plan to improve the performance of the Internal Audit Unit to a satisfactory level.

Information System

12. The regional offices provide to national headquarters information on water production, quality control, commercial activities and operations in general. This information is condensed for presentation to the Execu- tive Director and the Planning Office. Much of the information lacks con- sistency, accuracy and conciseness. Delays in its preparation limit the usefulness of the information in the formulation of management decisions. The Planning Unit has committed itself to improving the information system with the assistance of consultants.

Operation and Maintenance

13. IDAAN's regional offices are responsible for operating and maintaining the water supply and sewerage systems under their jurisdictions. They follow quality control norms, guidelines and procedures developed by the National Logistics Directorate. Nevertheless, the operation and maintenance of water and sewerage systems requires substantial improvement. Technical assistance and equipment would be provided under the proposed Loan to improve IDAAN's operation and maintenance capabilities.

Engineering

14. Under its National Engineering Directorate, IDAAN maintains units responsible for studies and design, supervision of construction and groundwater development. The units employ a total of 20 engineers, most of whom have limited practical experience. Under the guidance of more experienced colleagues, the performance of IDAAN's engineers on simple projects is acceptable. The department responsible for supervision of construction has - 34 -

ANNEX 1 Page 4

demonstrated its capability by successfully supervising several large works carried out under Loan 1280-PAN. IDAAN relies on engineering consultants for more sophisticated tasks in studies, design and supervision of construction.

Billing and Collection

15. The regional offices are responsible for meter reading and estimating consumption from unmetered connections. A generally efficient billing system developed by consultants under Loan 1280-PAN is in use. Bills are prepared at headquarters monthly using the data processing facilities of the National Controller's Office, to which IDAAN has access at reasonable cost. The customer master file, however, needs to be updated. In particular, customers with sewerage connections must be identified. IDAAN is currently carrying out an inventory of sewerage connections which is expected to be completed by mid-1983.

16. Collections have improved considerably during the last 2-3 years as a result of improvement of facilities to deal with customers' complaints and a determined effort to collect overdue accounts receivable, particularly from Government institutions. Nevertheless, gross accounts receivable were equivalent to five months of billings at the end of 1981. Ac- counts receivable from water sales will be reduced to three months of billings by the end of 1983 and will not exceed this level thereafter.

17. IDAAN's record of collecting valorization charges has been poor. At the end of 1981, the amount of uncollected charges was US$3.0 million, equivalent to almost one year of billings. One of the main reasons for this poor record is that many property owners are reluctant to pay valorization charges for land that has not yet been developed. IDAAN is taking steps to remedy the situation by reviewing and updating contracts and iden- tifying delinquent property owners. IDAAN has already initiated legal action against some of the owners. IDAAN will present a plan of action satisfactory to the Bank by December 31, 1983 to improve the collection of valorization charges and reduce overdue charges to the equivalent of no more than three months of billings by the end of 1985 and thereafter.

Insurance

18. All of IDAAN's properties are adequately insured against fire, loss or damage. In compliance with the covenant under Loan 1280-PAN, equipment and materials for works under construction are insured against loss and damage in shipment, accidents, fire and property damage. This practice will be continued. - 35 -

ANNEX 1 Page 5

Technical Assistance and Training

19. IDAAN has received technical assistance under Loan 1280-PAN, mainly in engineering, administrative, commercial and financial areas. The funds for technical assistance under Loan 1280-PAN were not fully used because IDAAN was able to secure assistance from the Pan American Health Organization (PAHO) at no cost and to finance part of it with its own funds. The Bank funds were reallocated to other categories. Under the proposed project, technical assistance in operations and maintenance would have the highest priority.

20. IDAAN's permanent training program for staff at all levels, covering most areas relevant to IDAAN's operations, has improved the quality of IDAAN's staff. This internal training program would continue and be complemented under the proposed project by on-the-job training provided by consultants under the Technical Assistance Program and external training courses. This training would be primarily for personnel involved in the maintenance and operation of water supply and sewerage systems throughout the country. - 36 -

PANAMA SECOND WATER SUPPLY AND SEWERAGE PROJECT ANNEX1 INSTITUTO DE ACUEDUCTOS Y ALCANTARILLADOS NACIONALES (IDAAN) Atta::hment 1 ORGANIZATIONAL STRUCTURE

POLICY AND STRATEGY LEVEL BOARD.OFDIEECT (POLICY-MAKING)

l l AUDIT l l ~~~PHYSICAL EXECUTIVE _ PLANNING DIRECTOR

(ADVISORY UNITS) A N ECONOMIC AND LEGAL AN GNEA _C FINANCIAL

|~~~~~~~~~~~~~~1|l' OPEATINA A 2L MAAERA

AUDIT PANN NORMATIVE, SUPERVISORY, AND SUPPORT LEVEL (NAT ONAL DIRECTORATES! ENIERNG LOGISTIC ADMINISTRATIVE FINANCIAL AND DATA GIRECTORATESENGINEERING OPERATIONS SERVICES PROCESSING SERVICES

(DEPARTMENTSI) OMECA IDEPRTMPROGRAMMING ENTS) _ PROCJREMENT PERSONNEL CONTROL AND AND~~~~~~~~~~~~CORIATC CONTRO~

l l DESIGNSAND l | ELECTRO- 7TRANSPORTATIONCIAL I n ]ElSTUDIESMECHANICS COMMUNICATIONS| ACCOUNTING

SUPERFVISION WATER QUALITY PUBLAICOD ANDTAN

UNDERGROUND TECHNICALL WATER SOURCES ASSISTANCE

HEADGUARTER ELECTRONIC BUILDING _| DAT7 EXECUTIVE LEVEL MAINTENANCE PROCESSING (REGIONAL OFFICES

WESTIEAST MTRPLIA COLONCOC5 PANAMA PANAMA PAMA I AND)DARIEN

TECHNAL COM L MANAGER MANAGER

PRODUCTION | CUSTOMERSSD (CHILIBR El FILES | |FILE

DISTRIBUTION | CrLLECT-OS

SEWERAGE ||CDLLETO _0 eO| CSOESLIE

METERIN TO CSOMR .

GENERAL|| |SERVICES

PARTICULAR SET-UP OF THE PANAMA METROPOLITAN OFFICE Wor.ld 1ank-24007 - 37 -

ANNEX 1 Attachment 2

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

IDAAN'S Staff as of December 31, 1981

Professionals Technicians Support Labor Total %

Permanent Staff

Panama City 64 202 523 260 1049 46

Interior 13 102 189 416 720 31

Total 77 304 712 676 1769 77

Temporary Staff

Panama City 1 80 107 170 358 16

Interior 1 17 26 120 164 7

Total 2 97 133 290 522 23

Grand Total 79 401 845 966 2291 100

X 3 18 37 42 100 PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

MINISTRY OF PUBLIC WORKS (MOP) Organizational Structure*

Minister

Vice-Minister

|Public Reltin _or of^ Diecor

Community~ ~ ~ ~ Panning E atici ton Ilietorate |ainlGeographic < ring,'I lInstit te T. C. J a Cotrol Valorization L Dept _ DiVecrorate _ Technical Board _Iternl A.dit Eng. & Architect.

National - t F tr qup.&* Directorates Sudies do. Fepair Shops, I ConstructionStF - ' Directorates _-- Administr. | k l DramageEDrngep FHAdmiinistr.& einM:ai~n =Inspe~ction rtenancea e e3 eprShndsra

Regional Central_o__a Offices t i Western pil.

Provincial Esten Mtro- ee rn Directorates Bctas de eg Darerience

Toro *anama popitn P

*Being implemented. - 39 -

ANNEX 3 Page 1

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Population,Service and Demand in the Project Areas

General

1. This Annex summarizes present and future populations,service levels for water supply and sewerage, and demands for each of the project areas covered under the proposed project (Santiago, La Chorrera, Colon, District of Arraijan and Panama City, see Map No. 1).

Santiago

2. Santiago, located about 150 km west of Panama City, is the capital of Veraguas Province. It had a population of about 29,000 in mid-1982. Santiago is attractive to migrants from surroundingrural areas. The average annual population growth rate was 5.3% in the 1960s and slightly more than 4% in the 1970s. Annual growth rates are predictedto stay at around 4% during the 1980s and then to fall to 3% by the year 2000. This pattern would give Santiago a populationof about 37,000 in 1990 and 47,000 in 2000 (Attachment2).

3. Almost all of Santiago's population has water service via house connections (about 5,000 in 1982). The present average water production capacity of 1.8 mgd is not sufficientto provide Santiago's current population with an adequate and continuous water supply. Unaccounted-forwater in 1981 was about 37%, down from over 50% in 1979. Under the fourth IDB water supply and sewerage project, Santiago's water supply system will be expanded and its production capacity will be increased to about 3.1 mgd by the end of 1985. This expansion is expected to satisfy Santiago's water production,transmission and storage needs until about 1993.

4. About 7,200 people living in the center of Santiago (about 25% of the total population)have access to a waterborne sewerage system covering 21% (113 ha) of the city's total area. The remainingpopulation depends on individual septic tanks (17%) and latrines (56%). The existing sewerage system comprises nine independent subsystems, each of which drains to a communal septic tank. All communal septic tanks are overloaded,and do not function properly because of the absence or insufficiencyof drainfields. As a result, the communal septic tanks release virtually untreated sewage into nearby water courses that run through populated areas on their way to a stream on the periphery of Santiago, creating a public health hazard. Outside the sewered area, people rely primarily on latrines or individual septic tanks. Most of the individual septic tanks do not function properly. As a result, the effluent from individual septic tanks and sullage - 40 -

ANNEX 3 Page 2

water run off via street gutters and storm drains, intensifying the public health hazards created by the sewage effluent from the communal septic tanks. IDAAN aims at eliminating the resulting pollution by expanding sewerage coverage to about 65% of the population by 1990 and by treating the sewage in an oxidation pond before it is discharged into a stream outside the city's boundaries. The works required to reach these goals would be financed under the proposed project.

La Chorrera

5. La Chorrera, a district capital in the Province of Panama, is located about 30 km west of the capital. Because of its proximity to Panama City, La Chorrera has experienced an extraordinary population growth of about 6% p.a. during the past two decades. By mid-1982, La Chorrera's urban population had risen to about 53,000 people. For the remainder of the 1980s, planners project an annual growth rate of about 3.9%. At this rate La Chorrera's population would increase to about 72,000 in 1990 and 105,000 in the year 2000 (Attachment 1).

6. In 1964, IDAAN built a conventional water treatment plant (maximum capacity of 3 mgd) to treat water drawn from the Caimito River. Under Loan 1280-PAN, the plant's capacity was expanded to 6 mgd. It now provides good quality water to about 95% of La Chorrera's population. With few exceptions, people are served by individual house connections. Unaccounted- for water was close to 50% in 1981. If IDAAN's efforts to reduce unaccounted-for water are successful, the plant's production capacity will be adequate until the early 1990s.

7. Sanitation problems in La Chorrera are very similar to those of Santiago. About 11,000 people (21% of the population) in an area of about 310 ha in the center of the town have access to sewerage systems with communal septic tanks. The remaining population uses individual septic tanks (15%) and latrines (64%). Untreated sewage from poorly functioning communal septic tanks and individual septic tanks and sullage water in un- served areas combine to cause heavy pollution of storm drains. Engineering consultants have developed a sewerage master plan that proposes a four- stage sewer system expansion program designed to meet La Chorrera's needs until the year 2010. The objective of the first phase of the program, which would be realized under the proposed Loan, would be to construct collectors between the communal septic tanks and the receiving waters (Rio Caimito and Rio Martin Sanchez) and to connect about 50% of the population by 1990.

Colon

8. The proposed project component in Colon would be limited to the city's center, the Isla de Manzanillo, a peninsula of about 2.3 km2. In - 41 -

ANNEX 3 Page 3

the past, Colon was a thriving industrial and commercial center. Popula- tion growth between 1940 and 1970 averaged an extraordinary 14% p.a. Colon's prosperity declined rapidly during the last 10-15 years. The peninsula's population dropped by 13% from an all-time high of almost 70,000 in the late 1960s to around 60,000 at present.. Urban deterioration on the peninsula prompted businesses and many people to leave the Colon area or move to newly established settlements outside the peninsula.

9. The Panamanian Government has declared the revitalization of the Colon area in general, and the Isla de Manzanillo in particular, one of its priority goals. During the next five years, the Government expects public and private investments in the area to exceed US$300 million. The Bank is assisting in this effort through an urban development project (Loa-h 1878-PAN, US$35 million). In addition to the development of the industrial and commercial free zone, this project includes the construction of 1,750 housing units for low-income people on the Isla de Manzanillo, replacing many of the deteriorated tenements. This and other measures, including improvements in the town's basic infrastructure, are expected to again make the peninsula an attractive place in which to live. Planners forecast that the population will increase gradually to a maximum of about 75,000 by 2010 (Attachment 2).

10. IDAAN provides the Isla de Manzanillo with water purchased from the Mount Hope water treatment plant (owned and operated by the Panama Canal Commission) through about 5,500 house connections. Unaccounted-for water in 1981 was around 32%. The total per capita daily average water consumption is about 100 gcd. About 40% of the water is used for commercial, industrial and official purposes, especially by the Port Authority which sells water to ships. The quality of the water supplied is good and the service is continuous. In the future, no shortage in production or transmission is anticipated, as population growth will be small and an adequate supply of water is available from the Mount Hope Treatment Plant. Most of the distribution and transmission network, however, was constructed in the early l90 0 s by the Panama Canal Commission (PCC) and substantial rehabilitation and replacement works must be undertaken in the near future. First steps towards the rehabilitation of Colon's water supply system would be financed under the proposed project.

11. Almost all houses on the peninsula are connected to the sewer system. Because the peninsula is below sea level, all sewage is pumped by four stations to a submarine outfall in the Bay of Manzanillo. All pumping stations and the sea outfall are seriously deteriorated, as is much of the collector system, which was built in the early 1900s by PCC. It is estimated that about 30% of the pipes are badly deteriorated. The vitrified clay sewer pipes have become brittle and are prone to breakage when repairs or new connections are made. Complete rehabilitation of the pumping stations and the eventual replacement of most sewer lines will be necessary in - 42 -

ANNEX 3 Page 4

the near future. As an immediate measure, sewer pipes in the areas ear- marked for urban renewal under Loan 1878-PAN must be replaced to guarantee the successful connection of the new housing units. The replacement of these pipes would be financed under the proposed project.

12. Stormwater in the Isla de Manzanillo is collected by subsurface drains and conveyed to two stations which pump it to the sea. It appears that the pipe network and pumping stations, although severely deteriorated in several areas and in dire need of cleaning and repair, are generally sufficient to evacuate stormwater from the peninsula. In some areas (about 30 blocks), however, street flooding is chronic because of the complete failure of the drainage system. In these areas, flooding precludes commercial activities, and poses a serious health hazard. In the long run, a complete rehabilitation of the peninsula's drainage system will be necessary. Works of highest priority, including the rehabilitation of both pumping stations and the pipes in the chronically flooded areas, would be carried out under the proposed project.

Arraijan District

13. The District of Arraijan is located adjacent to the western border of the old Canal Zone. The project area is roughly defined by the rectangle formed by the towns of Arraijan, Vista Alegre, Vera Cruz and the Vacamonte Fishing Port (Map No. 2). Because of its proximity to Panama City, the district has experienced rapid population growth during the last two decades and is developing into one of Panama City's most important satellite areas. In addition, the Vacamonte Fishing Port, completed in 1980 with Bank assistance (Loan 1114-PAN), has become one of the largest fishing ports and fish processing centers in Central America. Since 1960, the total population in the District has more than tripled and had reached about 37,000 by mid-1982. Because of the district's extraordinary development potential, population growth is expected to remain far above the national average for urban areas. Projected annual growth rates of 4.5% in the 1980s and 4.0% in the 1990s would translate into a total District population of 53,000 by 1990 and 78,000 by 2000 (Attachment 2).

14. Until recently, only the town of Vera Cruz had adequate public water supply because it was located at the end of a water transmission line owned by PCC and supplying water from the PCC-owned and -operated Miraflores treatment plant, located on the eastern bank of the Canal. The rest of the people in the area depended on wells with generally low yields or tank trucks. In 1977, engineering consultants studied long-term solutions to the area's water supply problems. Of the various alternatives investigated, supplying the District from the Miraflores Water Treatment Plant was found to be the least-cost solution. This scheme requires the construction of a pumping station at the Miraflores Plant and a new transmission main which, after crossing the Canal, would extend to the Vacamonte - 43 -

ANNEX 3 Page 5

Fishing Port and be routed through Arraijan and Vista Alegre (Map No. 2). The first stage of this scheme was completed in 1981 under Loan 1280-PAN. These works included a transmission main between Cocoli and Arraijan, a temporary package water treatment plant (0.5 mgd) at Vista Alegre and a transmission main connecting the plant with the Vacamonte Fishing Port. The volume of water sent to Arraijan from the Miraflores Plant via Cocoli is limited to 0.5 mgd because of the insufficient capacity of the transmission main crossing the Canal.

15. The capacity of the existing systems is barely sufficient to supply IDAAN's present customers (2,100 connections serving about 12,000 people, plus the Vacamonte Fishing Port) and is not adequate to meet the needs of several communities which are not adequately served or to satisfy future demand of the fast growing population in the District. The works under the proposed project would complete the Miraflores Scheme begun under Loan 1280-PAN and would provide the production and transmission capacity necessary to supply the entire District of Arraijan and the Vacamonte Fish- ing Port in the medium term (Annex 4). Substantial supplementary investment in secondary water transmission, storage and distribution would be required to make full use of the facilities provided under the project. Under its fourth operation, IDB has agreed to finance such works in the following communities: Caceres, Cerro Silvestre, El Llano, La Polvareda, Nuevo Arraijan, Nuevo Guarare y Chapala and San Vicente de Bigue. These communities, with a combined current population of about 8,500, would be the first to benefit from the proposed transmission facilities.

16. People living in the District of Arraijan depend on septic tanks and latrines for excreta and wastewater disposal. These modes of disposal do not appear to create any major problems now because of low population densities. With the anticipated population growth and the increased availability of adequate water supply through house connections, safe disposal of wastewater could become a problem.

Panama City Metropolitan Area

17. The total population of the Panama City Metropolitan Area, including San Miguelito, was about 700,000 in mid-1982. During the 1970s, the population grew at an average annual rate of 3.7%, far above the national average. Most of the population growth, caused mainly by migration from the interior, has taken place in neighborhoods located on the out- skirts of the city. These peripheral areas grew at rates of up to 9% p.a. during the last decade. The population in the Metropolitan Area is expected to continue to grow by above the national average, but at somewhat reduced, rates. Average growth rates of 3.2% during the 1980s and 2.9% for the 1990s are projected, and the total population in the Metropolitan Area is expected to grow to a total of about 0.9 million by 1990 and 1.2 million by 2000. Some peripheral neighborhoods will continue to attract - 44 -

ANNEX 3 Page 6

migrants from the countryside. In the neighborhoods of Juan Diaz, Pedregal and Tocumen, for example, population growth rates of 4-6% are projected for the next two decades.

18. Most of the people living in the Metropolitan Area have access to sufficient amounts of safe water. In mid-1982, about 81,000 house connections served -bout 95% of the area's population (Attachment 3). In the eastern part of Panama City (Pedregal, Tocumen, Juan Diaz), however, some 90,000 people are affected by water shortages and intermittent supply resulting from insufficient transmission capacity. Under the proposed project, transmission capacity to this part of the city would be expanded to eliminate current water shortages and assure a firm supply for the coming decade.

19. IDAAN supplies the Metropolitan Area with water from two treatment plants. The Miraflores Plant, owned and operated by PCC, can supply a maximum of 33 mgd; IDAAN's Chilibre Plant can deliver a maximum of about 70 mgd, which could be increased by another 10-15 mgd at a relatively low investment cost by boosting the plant's pumping capacity. The combined production capacity of the two plants, including the increased pumping capacity at Chilibre, will be sufficient to meet the Metropolitan Area's demand at least until the early 1990s.

20. The water supply distribution system in the Panama City Metropo- litan Area needs repair and improvement. The most urgent measures include: (a) pressure regulation; (b) replacement of valves; (c) rehabilitation and improvement of pumping stations and storage tanks; and (d) leak detection and repair. IDAAN began a rehabilitation and operational improvement program with the assistance of consultants under Loan 1280-PAN. This program would be intensified during the proposed project and, together with the metering program also included under the proposed Loan, is expected to decrease unaccounted-for water from the current high level of around 36% to 25% by 1986.

21. The central part of Panama City has a sewer collector capacity sufficiently large to meet the needs of the Metropolitan Area until at least the year 2000. Records of the number of connections to the system are not accurately kept, but IDAAN estimates that about 65% of the people in the Metropolitan Area are connected. Several housing developments on the periphery of the city have no sewerage services at all. Other developments have sewerage systems connected to communal septic tanks, most of which are not working properly and discharge raw sewage into adjacent water courses. As a result, environmental pollution is heavy in several neighborhoods and in streams flowing through Panama City to the Bay of Panama. To reduce this pollution, it is IDAAN's policy to connect to the extent - 45 -

ANNEX 3 Page 7

possible all people living in the Metropolitan Area to the existing collector system. The sewerage works in Panama City under the proposed project would support this policy. The sewerage system is poorly maintained. Malfunctioning of pumping stations and clogged sewers are not uncommon. One of the objectives of the proposed project is, therefore, to improve IDAAN's sewer system maintenance capability. PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Present and Projected Population, Demand and Service Levels in Project Areas

Santiago La Chorrera

1982 1985 1988 1990 1995 2000 1982 1985 1988 1990 1995 2000

Population 28820 31850 34880 36900 41950 47000 52900 59350 66570 71870 87000 105400

Water service level (%) 95 95 95 95 population served 27380 30260 33140 35060 39850 44650 50225 56380 63240 68280 82650 100130 number of connections 4980 5500 6020 6370 7250 8120 9130 10250 11500 12410 15030 18200 unaccounted-for water (%) 35 29 25 25 25 25 45 36 26 25 25 25 water consumption (mgd) 1.18 1.69 1.92 2.10 2.59 2.90 2.76 3.27 3.79 4.23 5.45 7.0 water production (mgd) a/ 1.80 2.39 2.56 2.80 3.45 3.87 5.01 5,11 5.13 5.64 7.27 9.34 average per capita consumption (gcd) 43 56 58 60 65 65 55 58 60 62 66 70

Sewerage b/ service level (%) 24.9 24.5 50 66 76.5 78.2 20.8 19.4 38.2 50.8 51.1 51.2 population served 7200 7800 17440 24520 33560 37600 11000 11500 2546b 36500 44500 54000 number of connections 1310 1420 3170 4460 6100 6840 2000 2090 4630 6640 8090 9820

a/ water production available: Santiago: 1.8 MGD being expanded to 3.1 MGD under fourth IDB loan. La Chorrera: 6 MGD b/ For more details see Attachments 1 and 2.

a Fm> 0 PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

,,resentand Projected Population, Demand and Service Levels in Pro-lectAreas

Colon, Isla de Manzanilla Arraijan District

1982 1985 1988 1990 1995 2000 1982 1985 1988 1990 1995 2000

42.3 48.3 52.8 64.2 78.1 population (000) 60.0 62.0 63.0 64.0 67.0 70.0 37.1

Water 24.2 36.9 54.6 66.4 population served (000) 58.8 60.8 61.7 62.7 65.7 68.6 12.2 14.0 50 70 85 85 service level (%) 98 98 98 98 98 98 33 33 4025 6260 9250 11650 number of connections 5500 5960 6170 6400 7140 7800 2040 2330 25 50 37 30 25 25 25 unaccounted-for water (7/) 32 25 25 , 25 25 water consunmption (mgd) 1.85 3.11 3.98 * residential 3.5 3.5 3.6 3.6 3.7 3.9 0.38 0.60 1.13 0.55 0.61 0.75 1.00 I comnercial/industrial/official - 2.3 2.5 2.5 2.7 2.9 3.1 0.50 0.50 0.88 1.10 1.68 2.46 3.86 4.98 Total 5.8 6.0 6.1 6.3 6.6 7.0 1.75 2.40 3.21 5.15 6.64 water production b/ 8.5 8.0 8.1 8.4 8.8 9.3 1.75 43 47 50 57 60 average per capita residential consumption (ged) 59 58 58 57 57 57 31 69 67 71 75 average per capita total consumption (gcd) 99 99 98 100 101 102 72 79

Sewerage n.a. populationiserved (000) 57.0 58.9 59.8 60.8 63.7 66.5 service level (%) 95 95 95 95 95 95 number of connections 5330 5780 5980 6200 6900 7550

Port. a/ In Colon, the main customer is the Port Authority; in the Arraijan District, the main customer is the Vacamonte Fishing

b/ Water production available: in Colon, about 10 mgd from Mount-Hope treatment plant. in the Arraijan District, about 1.75 mgd.

D5lrt- a E PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Present and Projected PopulaLiou, Demand and Service Levels in Project Areas

Panama City Metropolitan Area IBAAN - All Systems

1982 1985 1988 1990 1995 2000 1982 1985 1988 1990 1995 2000

Total Population (000) a! 705 784 868 927 1053 1179 1924 2075 2236 2349 2619 2920 Target Population IDAAN (000) - 705 784 868 927 1053 1179 1299 1400 1534 1624 1839 2066

Water population served (000) 657 755 834 859 1000 1120 1157 1324 1467 1546 1747 1863 service level (%) b/ 93.2 96.3 96.1 94.3 95 95 89.1 94.6 95.6 95.2 95 95 connections (000) residential 77.8 92.4 106.3 111.1 130.1 147.4 149.1 179.4 203.3 214.0 242.6 272.6 6 coimmercial/industrial/official 3.0 3.3 3.6 3.8 4.2 4.6 7.2 7.9 8.7 9.5 10.7 12.0 Total 80.8 95.7 109.9 114.9 134.3 152.0 156.3 187.3 212.0 223.5 253.3 284.6 Water production (mgd) residential 67.0 68.5 70.3 71.7 81.3 91.1 102.7 110.0 116.8 120.3 132.8 149.2 commercial/industrial/official 27.5 26.9 26.9 28.7 34.7 38.8 41.1 40.4 41.2 44.7 55.9 65,5 Total 94.5 95.4 97.2 100.4 116.0 129.9 143.8 150.4 158.0 164.2 168.7 214.7

Water consumption (mgd) residential 42.9 49.3 52.7 53.8 61.0 68.3 65.7 79.8 87.6 90.2 99.6 111.9 comsercial/inidustrial/official 17.6 19.4 20.2 21.5 26.0 29.1 26.3 29.1. 30.9 33.5 41.9 49.1 Total 60.5 68.7 72.9 75.3 87.0 97.4 92.0 108.9 118.5 123.7 141.5 161.0

Average per capita residential consuimption (gcd) 65 65 63 62 61 61 56 60 60 58 57 57 Average per capita total consumption (gcd) 92 91 87 87 87 87 80 82 81 80 81 82

Unaccounted-for water (%) 36 28 25 25 25 25 36 28 25 25 25 25

Sewerage c/ population served 528.8 627 711 788 821 1002 658 787 964 1017 1195 1343 r service level (%) b/ 75 80 82 85 85 85 51 56 63 63 65 65 connections (000) 63.0 76.5 91.2 102.3 106.6 131.8 94.1 112.4 137.7 145.3 170.7 191.8 0

a/ Urban population and rural population living in communities of more than 500 people. b/ In relation to IDAAN's target population. c/ Estimated; reliable data on sewer connections is not available. - 49 -

PANAMA ANNEX 4 SECOND WATER SUPPLY AND SEWERAGEPROJECT

Status of Project PrepArRtion anl ProcureMent Sehesule

Target Dates 2/ Contract Estimated Value 1/ Number of Status Preparat. of Docs. Ready Bid Contract Project Component US$ million Contracts Bidding Documents for Review Invitation Award

Panama Sewerage

Networks 1.8 5 Completed 10/83 12/83 6/84 Collectors 2.6 5 Completed 10/84 12/84 6/85 Pump. Station Av. Brazil 0.2 1 Completed 6/83 8/83 3/84

La Chorrera Sewerage 3.3 2 Consultants 9/84 12/84 5/85 being selected

Santiago Sewerage 2.5 1 In progress 9/84 12/84 5/85

Colon Sewerage

Network replacement 0.9 1 Completed 12/82 2/83 6/83 Pumping stations 0.6 1 Cnmpleted 12/82 2/83 6/83

Arraiian Water

Transm. main Arraijan-V.Alegre 1.0 1 Completed 7/83 9/83 3/84 Pumping station Miraflores 1.3 1 In progress 12/82 3/83 9/83

Canal crossing 2.0 1 In progress i'/e29 R/,3 OQ/3

Panama City Water

Trans.main Los Andes No.2 1.5 1 In progress 4/83 6/83 12/83 La Pulida Rehabilitation Progr. 1.0 4 In progress 12/82 3/82 7/83

Colon Water System Rehab. 0.5 3 0 3/83 5/83 11/83

meterinae(house connec.) 1.3 3 Completed 12/82 2/83 7/83

Technical Assistance 0.6 3 0 1/83 2/83 7/83

Purchase of Equipment 0.9 3 0 1/83 3/83 9/83

Engineering Cons. Services

Colon Sewerage Masterplan 0.2 1 0 1/84 2/84 7/84

Supervision Construction Miraflores pumping station, 0.6 2 0 1/83 2/83 7/83 Canal crossing Supervision Sewerage Pump. Stations Colon 0.1 1 0 1/83 2/83 7/83

Colon storm drainage

Pipe replacement 1.3 1 Pipe survey 7/83 8/83 12/83 underway Pumping stations 0.6 1 0 7/83 8/83 12/83

Final designs 0.2 1 In progress 11/82 12/82 4/83

Technical Assistance 0.03 1 0 1/83 2/83 6/83

Purchase of Equipment 0.2 2 0 11/83 1/84 6/84 Supervision construction pumping stations 0.1 1 0 2/84 3/84 6/84

1/ In 6/82 prices without contingencies. 2/ In case of more than one oontract1 target dates refer to first contract. PANAMA SECOND WATER SUPPLY AND SEWERAGE PROJECT Project Cost Estimate - IDAAN Portion (USs Millions or B/Millions)

TOTAL 1983 1984 1985 1986 1987 1988 PROJECT COMPONENT TOTAL FOR. LOCAL FOR. LOC. FOR. LOC. FOR. LOC. FOR. LOC. FOR. LOC. FOR. LOC. SEWERAGE Panama City Collectors 2.61 1.10 1.51 -- -- 0.14 0.19 0.48 0.64 0.35 0.49 0.13 0.19 Networks 1.83 0.70 1.13 -- -- 0.03 0.06 0.12 0.20 0.23 0.36 0.21 0.34 0.11 0.17 Pumping station 0.22 0.18 0.04 -- -- 0.02 -- 0.16 0.04 ------Santiago 2.45 1.00 1.45 __ __ -- __ 0.08 0.13 0.32 0.49 0.45 0.62 0.15 0.21

La Chorrera 3.34 1.27 2.07 ------0.12 0.21 0.45 0.73 0.51 0.83 0.19 0.30

Colon Network replacement 0.91 0.40 0.51 0.25 0.33 0.15 0.18 ------Pumping stations 0.58 0.47 0.11 -- -- 0.47 0.11 ------

WATER Arraijan District Pipeline Arr.-V.A. 0.97 0.68 0.29 -- -- 0.14 0.06 0.40 0.18 0.14 0.05 ------Pumping station 1.30 1.04 0.26 -- 0.38 0.10 0.66 0.16 -- -- ______Canal crossing 2.02 1.58 0.44 __ __ 0.36 0.11 0.92 0.26 0.30 0.07 -- _

Panama City Transmission 1.49 1.04 0.45 -- -- 0.62 0.27 0.42 0.18 -- -- ______Rehabilitation 0.99 0.74 0.25 0.08 0.02 0.29 0.10 0.29 0.10 0.08 0.03 ------t

Colon 0.47 0.30 0.17 -- -- 0.15 0.08 0.15 0.09 ------0

Metering House meters 1.30 1.19 0.11 0.31 0.02 0.52 0.04 0.36 0.05 -- -______Meter shop 0.10 0.10 ------0.10 ------Source meters 0.12 0.09 0.03 0.03 -- 0.06 0.03 ------

Equipment 0.86 0.78 0.08 0.12 0.02 0.36 0.03 0.30 0.03 ------

Technical Assistance 0.62 0.55 0.07 0.07 0.01 0.18 0.02 0.17 0.02 0.13 0.02 ------

Training 0.07 0.07 ------0.03 -- 0.04 ------_

Consultant Services Supervision const. 1/ 0.73 0.33 0.40 -- -- 0.09 0.14 0.21 0.23 0.03 0.03 ------Colon sewerage study 0.25 0.15 0.10 -- -- 0.03 0.02 0.12 0.08 ------

Revolving Fund 1.0 0.5 0.5 ------0.05 0.05 0.12 0.12 0.18 0.18 0.15 0.15

Supervision/Admin. 2/ 1.32 -- 1.32 0.05 0.16 -- 0.25 -- 0.37 -- 0.36 -- 0.13

Base Cost 25.55 14.26 11.29 0.86 0.45 3.98 1.51 4.71 2.45 2.28 2.91 1.70 2.82 0.73 1.15

Physical contingencies 2.55 1.37 1.18 0.09 0.05 0.37 0.21 0.48 0.27 0.19 0.26 0.17 0.28 0.07 0.11

Total Cost (6/82 prices) 28.10 15.63 12.47 0.95 0.50 4.35 1.72 5.19 2.72 2.47 3.17 1.87 3.10 0.80 1.26 t

Price contingencies 8.09 4.11 3.98 0.08 0.04 0.72 0.28 1.30 0.68 0.83 1.06 0.78 1.29 0.40 0.63

Total Pro,ject Cost 36.19 19.74 16.45 1.03 0.54 5.07 2.08 6.49 3.40 3.30 4.23 2.65 4.39 1.20 1.89

1/ Refers to supervision of construction hbndled bv consultants (Miraflnr.s Pimping Station, _anal crossing, sewerage pumpirng stations). 2/ Carried out by IDAMN personnel; 9.3% of base cost of project components supervised by IDAAN. PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Project Cost Estimate - MOP Portion (Colon Storm Drainage)

(US$ million or B million)

TOTAL 1982 1983 1984 1985 FOR. LOCAL FOR. LOCAL Project Component Total FOR. LOCAL FOR. LOCAL FOR. LOCAL 0.30 0.10 0.15 Pipe replacement/repairs 1.25 0.50 0.75 - - 0.20 0.30 0.20 0.14 0.03 - - Pumping stations 0.57 0.46 0.11 - - 0.32 0.08 0.01_ - Purchase of equipment 0.16 0.15 0.01 - - - 0.15 0.03 - - Technical assist./training 0.05 0.05 - - - 0.02 - - Final design 0.19 0.07 0.12 0.04 0.06 0.03 0.06 - - 0.07 - 0.02 Supervision/administrat. 0.21 0.04 0.17 - - 0.02 0.08 0.02 2.43 1.16 0.04 0.06 0.59 0.52 0.54 0.41 0.10 0.17 Base Cost 1.27 ___ .u _ 0.06 0.06 0.01 0.03 Physical contingencies 0.32 0.15 '0.17 0.01 0.01 0.07 0.07 0.60 0.47 0.11 0.20 Total cost in 6/82 prices 2.75 1.42 -1.33 0.05 0.07 0.66 0.59

0.05 - 0.05 0.05 0.10 0.08 0.03 Price contingencies (0.36 0.18 'O.18 -

3.11 1.60 1.51 0.05 0.07 0.71 0.64 0.70 0.55 0.14 0.25 Total Project Cost _~~~~~~~~~~~~U PANAMA SECOND WATER SUPPLY AND SEWERAGE PRaisCr Imaplementation Schedule - Cumulative Completioyn

1982 1983 1984 19 985 1986 T 1987 1988

Sewerage 1~~ 23~ ~4 ~ 1 ~~ 2 ~~~3 ~~4 ~1 2 3 4 1 2 3 4 1 2 314 1 2 31.

Networks (kms) lB B B/C S 1.6 3.2 13.9 4.717.0 9 1.0U 12.6 7.3 2.0122 8123.626.8 31.5 Colcos (k-1) 0/B B B/C 5 12.0 4.0.I 4.4 4.8 8.8 9.6 il10.5 I.1.214.0 16.0 pijpig Station (D) B B f 5 S S 20 70 go1-0 I

Network/collectors 1BB/C 6 12 1619 T (kom) D B S .28 3 7 4 0 43 53 60

Network/collectors (km) D.- B BB/c s 4 8 iO0 1a 124 F26- 2Sj~4

Network replacement (kms) D/B B B/C' S 1.0 3.51 6.0 I I Pumiping Stations (%) 0 2010 - 0…

Transmission main-Arr.-V. Alegre (kms) D/B N /C S 5 -4 2,7 3,0 3.3 5.4 6,04

Pumping station-Miraflores (%) D B B B/C s IS S 20 40 60 80 90 100 11

Canal crossing (%) D B B IB/C s SS S 10 20 40 60 80 9010l- - - Panama City Water Cisl- - - - .~- .

Transmissioni main-Ojo de Aguia-El Crsl(kms) 0/B B B/C S4~ S 0.5 4.0 6.0

Rehabilitation Program (D __ 10/SSl 25 40 50 60 17 80 '90 95 f1O00

ColonSysteRehbilittion rogr M() D/B B . S S 15 30 40 507 1.Q___

Technical Assistance (man-msonthBl D/B B B/C 6 1015 20 2 03 j 4264 50 Meterinig (house connections)

purchase (000) D B B/C S 5 - 015 -20

installatiorns (000)- - - .- - - - - . ..

Purchase of Equipment (7. - -D/B B CS 205 7 140 6 70 80 10___0...... EngineeringConsuligSevcs ]- ~ - --- i

Colon Sewerage Master Pla:n (7 }DIB B B/C 10 30 50 75 100 SupervisionM emstructioii IIVB B B/C 5 11- 120 .o 40 50 60 80 90 l~00'

Supervision sewerage ()j/s B/C S 120 40 70 100

Colon Storm Drainage z Pipe replacement (2) t D/B 25 35 ; 45 70 100 1 Psumpingstation (7.) - /B 5 4 -100 K- - -

D0 Bidding documeizi- Oi~op1Led (rinal designs and specifications or termns of reference) (see Annex 5) S = Supply of equipment/materials B = Bidding C = Contract signed - 53 -

ANNEX 7 Page 1

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Consultant Services, TechnicalAssistance and Training

Scope

1. Under the proposed project, consultantswould be engaged to provide the followingservices:

For the IDAAN Project

(a) technical assistancein various areas (para. 2);

(b) preparationof Colon sewerage master plan; and

For the MOP Project

(a) technical assistance in the organization of a maintenance and operationunit for the storm drainage system in Colon;

(b) preparationof final designs for storm drains and two storm drainage pumping stations;and

Manpower and cost estimates for consultant services are presented in Attachment 1.

Technical Assistance

2. The technical assistance program for IDAAN, estimated to require about 50 man-months of specializedconsultants, would cover the following main areas:

(a) rehabilitationand improvements in the operation of the Panama City and Colon water supply systems; - 54 -

ANNEX 7 Page 2

(b) improvement of IDAAN's maintenance capabilities for water and sewerage;

(d) purchasing procedures and inventory control;

(e) tariff structure review; and

(f) administrative and commercial systems with emphasis on accounting, internal control and information.

3. Under Loan 1280-PAN, IDAAN received advice from specialists from Compagnie des Eaux de Marseille in several areas of management and operation. These specialists and IDAAN staff cooperated closely in evaluating problem areas and recommending improvements which IDAAN personnel carried out under the supervision of the technical assistance specialists. The in- tervention of these specialists was intermittent (2-8 weeks per visit) and obliged IDAAN personnel to carry out agreed upon tasks between visits. This type of implementation-oriented assistance has proven to be quite successful and would be continued during the proposed project.

4. The technical assistance program to MOP, estimated to require about three man-months of specialty consultants, has the objective to assist MOP in the organization of an adequate maintenance and operation unit for the storm drainage system in Colon.

Training

5. The technical assistance programs to IDAAN and MOP would be complemented by training primarily for operators and engineers involved in operation and maintenance. Motivated and promising operators and engineers would be given the opportunity to receive practical training either provided by specialty trainers in Panama or by attending training programs abroad. The training program would be prepared and coordinated with the help of the technical assistance consultants for operation and maintenance. Funds budgeted for training are US$100,000 for IDAAN and US$30,000 for MOP which would be used to finance foreign costs for travel, per diem expenses and course fees. - 55 -

ANNEX 7 Attachment 1

PANAMA SECOND WATER SUPPLY AND SEWERAGE PROJECT Summary of Consultant Services Manpower and Cost Estimates

Manpower, man-months Cost US$ 000 a/ Foreign Local Local Foreign Local Tech. Tech. Support Tech. Tech. Expenses, Activity Staff Staff Staff Staff Staff Misc. Total IDAAN Project Technical assist. 50 -- -- 550 -- 70 620 Master Plan- Sewerage Colon b/ 14 (25) c/ (25) c/ 154 (75) c/ 21 175 Supervision constr. 30 44 74 330 324 80 734 Subtotal 94 44 74 1034 324 171 1529

MOP Project Technical assist. 3 -- -- 33 -- -- 33 Design 6 12 26 66 100 25 191 Supervis. constr. b/ 4 6 6 44 36 15 95 Subtotal 13 18 32 143 136 40 319

TOTAL 107 62 106 1177 460 211 1848 a/ June 1982 prices. b/ Includes only supervision carried out by external consultants. c/ Personnel provided by IDAAN at US$2000/month for technical staff and US$1000/month for support staff is not included in consultancy estimates.

NOTE: Estimated Man-Month Rates Expatriate technical staff: US$11000 Local technical staff: US$ 4000 Local support staff: US$ 2000 - 56 -

ANNEX 8 Page 1

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Allocation of Loan Proceeds

Amount of the Loan Allocated (Expressed in % of Expenditure Category Dollar Equivalent) To Be Financed

1. Equipment and 6,200,00 40% materials and civil works for Part A of the Project

2. Equipment and 6,500,00 70% materials and civil works for Part B of the Project

3. Equipment and 2,600,00 100% of foreign materials for expenditures and 40% Parts C and D of local expenditures of the Project

4. For Part G of the Project:

(a) pipes and 700,00 40% civil works

(b) equipment, 500,00 100% of foreign including main- expenditures and 40% tenance vehicles of local expenditures - 57 -

ANNEX 8 Page 2

Amount of the Loan Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed

5. Consultants' 50% services:

(a) for Parts A, 1,300,000 B, C, D, E and F of the Project

(b) for Part G of 100,000 the Project

6. Training, including 100% of foreign scholarships and expenditures travel and maintenance expenses:

(a) for Part E of 100,000 the Project

(b) for Part G of 20,000 the Project

7. Provision of credit 500,000 50% of amounts under Part A.5 of the disbursed by the Project Borrower

8. Fee 319,212 Amount due

9. Unallocated 2,760,788

TOTAL 21,600,000 - 58 -

ANINEX 9

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Loan Disbursement Schedule

IDAAN Project MOP Project Total Project Cumulative Cumulative Cumulative Bank Fiscal Year Disbursement Cumulative Disbursement Cumulative Disbursement Cumulative and quarter Ending US$ Million Z US$ Million _ US$ Million Z

1983

March 31, 1983 0.3 1 0.1 6 0.4 :2 June 30, 1983 0.3 2 0.1 6 0.4 2

1984

September 30, 1983 0.5 3 0.2 12 0.7 3 December 31, 1983 0.7 4 0.3 18 1.0 'i March 31, 1984 0.9 5 0.5 29 1.4 b June 30, 1984 1.4 7 0.7 41 2.1 11)

1985

September 30, 1984 2.4 12 1.0 59 3.4 16 December 31, 1984 3.8 19 1.2 71 5.0 2:3 March 31, 1985 5.2 26 1.4 82 6.6 30 June 30, 1985 6.6 33 1.5 94 8.2 3B

1986

September 30, 1985 8.4 42 1.6 100 10.1 47 December 31, 1985 10.2 51 11.9 53 March 31, 1986 12.0 60 13.7 63 June 30, 1986 13.2 68 14.9 69

1987

September 30, 1986 14.6 73 16.3 75 December 31, 1986 15.6 78 17.3 8(:) March 31, 1987 16.4 82 18.1 83 June 30, 1987 17.2 86 18.9 87

1988

September 30, 1987 18.0 90 19.7 9:l December 31, 1987 18.8 94 20.5 94- March 31, 1988 19.2 96 20.9 96 June 30, 1988 19.6 98 21.3 - F

1989

September 30, 1988 19.8 99 21.5 9' December 31, 1988 20.0 100 21.6 100C - 59 -

ANNEX 10 Page 1

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Past, Present and Forecasted Financial

Performanceof IDAAN

Introduction

1. This annex contains additional financial data which supplements the informationpresented in Chapter VI. The Basic Performance Indicators and the Financial Statementsshown in Attachments 1 to 5 refer to past performance (1976-81);those shown in Attachments 6 to 9 refer to forecasted performance(1982-88). Past and forecasted results and underlying assumptions are discussedbelow.

Past Performance(1976-81)

2. IDAAN's total revenues during the period increased from US$15 million to US$28 million (81%). As operatingexpenses increased from US$11 million to US$24 million (126%), IDAAN was able to finance only 14% (from net internal cash generation)of its capital expenditures. User contributions through valorizationcharges helped IDAAN to make an additional 11% contribution to its capital expenditures. Debt service payments (about US$26 million) plus increases in working capital and other assets (about US$7 million) absorbed 76% of the US$43 million gross internal cash generation, leaving US$10 million cash for investments.

3. The main reason for the increase of revenues was the 3% monthly increase in water rates from February 1976 to February 1977 and 2% from March 1977 to February 1978. The increase in operating expenses was the result of increase in wages, power and purchased water. Wages almost dou- bled because of a massive hiring of staff during 1977 to comply with the Government'semergency employment plan. All expenses also suffered from the effects of the high inflation rates prevailingin 1979 and 1980 (8% and 14% respectively). - 60 -

ANNEX 10 Page 2

Present Position (1982)

4. IDAAN has taken some actions to improve its financial performance. Among them are: (a) the increase of water rates and introduction of a progressive tariff structure starting in April 1982; (b) the improvement in methods of es-imating consumption through unmetered connections; and (c) the reduction in purchase of treated water from the PCC which resulted from the commissioning in 1982 of IDAAN's new treatment plant in Colon. As a result, its financial performance is expected to be satisfactory. Fore- casted results for 1982 indicate that IDAAN could finance about 60% of its capital expenditures in that year from its net internal cash generation plus valorization charges.

Forecasted Performance (1983-90)

5. IDAAN's financial performance during the eight-year period is expected to be satisfactory. Supervision would be necessary, however, to ensure that IDAAN attains the financial targets.

6. Revenues during the period are expected to be sufficient to fully cover cash operating expenses, debt service payments including non-financed interest during construction, working capital needs, and to leave about US$90 million of internally generated funds. This amount plus about US$22 million of receipts from valorization charges would exceed depreciation charges on revalued fixed assets (about US$105 million) and would finance around 64% of capital expenditures through 1990.

7. IDAAN is expected to finance about 56% of its total capital expenditures during project execution (1983-88) through its net internal cash generation (46%) plus valorization charges (10%). The remaining funds to complete its financing plan would come from Government equity contributions (13%) and borrowings (31%).

Assumptions Used for Financial Projections

8. Panama's consumer prices follow closely the average international inflation rate. Its currency, the Balboa, has been and is assumed to continue at par with the U.S. dollar. Thus, the following inflation rates were used when estimating operating costs: 8% during 1982 and 1983; 7.5% in 1984; 7% in 1985; and 6% for 1986-90.

Consumption Forecast

9. Consumption was estimated on the basis of averages of consumption per connection per month at each consumption category in the Panama City Metropolitan Area, Colon and its surroundings, and the rest of the country, and on the basis of the number of incremental connections IDAAN plans to install during the 1982-90 period. Historical consumption per connection - 61 -

ANNEX 10 Page 3

per month figures were adjusted to account for the increase of metering, improved estimates of consumption for unmetered connections, and the expected impact of the new tariff structure.

Income Statement Items

Revenues

10. Revenues from water sales for 1982-84 were derived from the consumption estimates described in para. 9 above and from average tariffs resulting from tariffs implemented in April 1982. The need for tariff increases for 1985-86 is expected to be met through the introduction of a separate sewerage charge (para. 12). However, should inflation be higher than expected (para. 8), additional tariff increases would have to be introduced sooner. During 1987-90, tariffs would have to be increased only to maintain the 1986 value in real terms. Other operational revenues were forecasted as follows:

Penalties for Late Payment: IDAAN charges 10% on the total amount of water billed when payment is made more than 30 days after the billing date. Foreseen collection improvements would reduce revenues from this source.

Connection Fees and Installation Cost of House Connections: IDAAN charges B/20 for connection rights and bills the customer for the cost of materials and labor incurred for the installation of the house connection. Fees and cost of materials are expected to increase with inflation.

Interest of Valorization Charges: IDAAN charges interest on deferred payments of valorization charges. An increase in revenues is forecasted during the 1983-90 period as a result of new works entering into operation and higher interest rates.

11. Non-operational revenues include earnings from invested cash, rent of facilities, earnings on sale of obsolete or unneeded assets and other minor revenues which are not related to water supply or sewerage operations. No substantial increase of these revenues is foreseen.

12. Revenues from sewerage services are forecasted under the assumption that starting in 1985 a sewerage surcharge of 20% of the amount billed for water consumption will be levied on connected customers. An inventory of sewerage house connections is expected to be completed during 1983, and a comprehensive study on a sewerage surcharge is expected to be completed during 1984. - 62 -

ANNEX 10 Page 4

Costs

13. Operating costs are segregated by main object of expenditure. Growth is projected as follows:

Wages: at par with inflation rates. Savings on recommended personnel reductions are assumed to be offset by promotions and salary increases.

Chemicals: in proportion to increases in production, adjusted for inflation.

Power: 2% in real terms to account for increased pumping capacity and increased use of fuel and lubricants required to improve maintenance.

Materials: in proportion to increase in number of connections, including the cost of materials used for house connections.

Purchase of water: at par with inflation rates. Projections as- sume that purchase of water will be maintained at levels which would avoid penalties for purchases in excess of ceiling volumes.

Other: 10% per year. Other operating expenditures include miscellaneous expenses which can neither be charged to other operational cost categories nor be capitalized.

Depreciation: 2.5% per year on fixed assets. This average results from the current composition of useful lives of, and depreciation allowances for, operating fixed assets computed following the straight-line depreciation method.

Other indirect costs: 1% of total billing. Indirect costs include provisions for bad debts.

14. No forecast of non-operational costs is made since there are no records of prior non-operating expenditures; therefore, there is no basis to make an assumption.

Flow of Funds Items

Contributions

15. Government equity contributions include committed amounts for projects to be financed by IDB, the amounts for the project to be financed by the proposed Loan (equivalent to 24% of project costs, excluding interest during construction); and amounts already committed for on-going projects. - 63 -

ANNEX 10 Page 5

16. User contributions (valorization) include property betterment levies to be billed to beneficiaries of completed projects. Projections take into account on-going projects that are to be apportioned to users when completed.

17. Developers' contributions are not included in the forecasts, since it is not possible to forecast water supply distribution and sewerage collection networks they will donate. As assets donated by developers would be reflected as contributions in the sources of funds and as investment in the application of funds, the contribution would be offset.

Borrowings

18. New borrowings include the following amounts, terms and conditions:

Loan Amount Interest Commitment Front-end Grace Amortz. Lender (millions) Rate Charge Fee Period Period IBRD US$20.0 a! 11.43% b/ 0.075% 1.5% d/ 3 12 IDB-IC US$13.0 9.25% c/ 1.25% 1.0% 4.5 20.5 IDB-SF US$13.0 2.0% c/ 0.50% 1.0% 8.5 21.5

a/ Does not include US$1.6 million for the MOP component since this amount would be onlent to and repaid by the Government. b/ Capitalized during construction period. c/ Financed and capitalized during grace period. dt Financed and capitalized during first year of loan effectiveness.

Investments

19. Investments include works under the proposed loan and contracted IDB loans, on-going projects, planned expansion works and capitalized interest. Cash surpluses are assumed to be invested in expansion and maintenance works.

Debt Service

20. Forecasted debt service reflects interest and principal payments on existing obligations and the borrowings described above.

Balance Sheet Items

21. Cash balances are forecasted at levels sufficient to cover one month of wages and about 50% of accounts payable to PCC. - 64 -

ANNEX 1 0 Page 6

22. Accounts receivable from water sales are net of bad debt provisions for they are expected to be reduced from the current equivalent of four months of billing to three months of billing by 1983 and continue at the same level thereafter.

23. Receivables from valorizationcharges are gross (no provision for bad debts is made). They are expected to be reduced gradually from the current equivalent of 12 months of billing to a maximum of three months of billing by 1985.

24. Inventoriesof material for normal operations are forecasted to be sufficient to cover three months of materials and chemicals.

25. Inventoriesof constructionmaterials are expected to be gradually reduced from current levels of about US$2.5 million equivalent to US$1.0 million equivalentby 1985.

26. Other current assets are expected to remain at levels not exceeding US$1.0 million.

27. All fixed assets and accumulated depreciationare revalued. A 1.05 revaluationfactor was used. This average factor is lower than inflation, since results from itemized revaluationof labor, material and equipment costs during 1980 and 1981 (excluding land and small equipment and tools) averaged about 70% of Panama's consumer price index.

28. Payables to Panama Canal Commission are assumed not to exceed US$1.0 million per year.

29. Payables to suppliers are assumed to be equivalent to two months of operating costs (other than wages, power and purchase of water).

30. Other current liabilities which include contractor deposits (guarantees)are assumed not to exceed a level of US$10.0 million in amy year. -65 -

ANNEX 10 Attachment 1 PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT IDAAN'S Basic Performance Indicators

1976 1977 1978 1979 1980 1981

Population and Population Served by IDAAN I/

Population of Panama, mid-year (000) 1,657.1 1,698.7 1,741.3 1,785.0 1,830.2 1,876.8 Population served with water, mid-year (000) 841.5 854.8 901.5 922.3 930.6 1,026.2 Population served with sewerage, mid-year (000) N.A. N.A. N.A. N.A. 616.3* 640.0* Percent of population served with water (7M) 50.7 50.3 51.8 51.7 51.0 54.7 Percent of population served with sewerage (7.) N.A. N.A. N.A. N.A. 33.7* 34.2* Persons per water connection - average 9.0 7.8 7.5 7.1 7.0 7.0

Operations

Production capacity/year (109 US gal.) 20.5 N.A. N.A. N.A. 35.0 35.0 Purchases of water - maximum allowed (10 US gal.) N.A. N.A. N.A. N.A. 18.1 18.1 Production of water (109 US gal.) 18.44 20.97 23.98 26.24 31.98 33.0 Purchase of water (109 US gal.) 16.23 15.11 15.52 15.99 16.45 17.6 Water available for sale (109 US gal.) 34.67 36.08 39.50 42.23 48.43 50.66 Sale of water - total 2/ (109 US gal.) 24.10 25.47 24.73 26.29 28.93 31,84 Sale of water - metered (109 US gal.) N.A. N.A. 10.52 11.42 13.80 14.10 Sale of water - non-metered (109 US gal.) N.A. N.A. 14.36 14.87 15.13 17.74 Unaccounted-for water (109 US gal.) 10.57 10.61 14.77 15.94 19.5 18.82 Unaccounted-for water (%) 30.5 29.4 37.4 37.7 40.3 37.1 Connections water supply, end of year (000) 102.8 115.1 125.3 134.5 142.9 150.3 sewerage, " " " (000) N.A. N.A. N.A. N.A. N.A. 84.5* metered """ (000) 47.9 46.1 41.5 48.9 58.0 59.7 non-metered """ (000) 54.9 69.0 83.8 85.6 84.9 90.6 Standpipes N.A, N.A. N.A. N.A. N.A. 17.0 Consumption/connection/month (000 US gal.) 21.5 19.5 17.8 16.9 18.7 18.1 Consumption/contlection/month - met. 6nIy (D01 US- gal.) N.A. N.A. 20.0 21.1 21.5 20.0 Consumption/connection/ month-noin-metE only 100 US gal.) N.A. N.A. 15.7 14.6 14.8 16.8

Finances

Average water tariff per 1000 US gal. (B/) 0.56 0.70 0.85 0.86 0.81 0.79 Workiinz ratio (%) 68.2 59.1 58.5 66.7 75.9 85.3 Debt service ratio (times) 1.7 1.9 2.3 2.0 1.4 0.8 Internal cash ratio () - - 3.5 1.5 0.1 Contribution to investment 3/ (%) - 14.5 23.6 18.8 50.3 22.1 Contribution to investment 4/ (7) - 2.9 14.3 2.1 42.9 21.2 Current ratio (times) 1.6 2.2 2.0 2.5 1.7 1.3 Debt to Debt + Equity ratio (%) 51.9 44.7 40.5 39.2 25.9 25.7

Management

Number of permanent staff (end of year) 1,734 1,898 1,838* 1,779 1,765 1,769 Number of temporary staff ( " " " ) 205 188 200* 215 310 522 Employees/thousand water connections (perm.+ temp.) 19 18 16 15 15 15 Employees/thousand water connections (perm. only) 17 16 15 13 12 12

N.A. = Not available. * = Estimated.

1/ Data for 1976-79 was extrapolated from 1970 census at 2,50% growth rate. 3/ Includes users' contribution through valorization 1980 data corresponds to May 11,1980 census. 1981 data was extrapolated payments (property betterment levies). at 2.517 growth rate. Population served by IDAAN refers to population served through house connections. 4/ Without users' contributions.

2/ Data prior to 1980 does not include government cnnsumnftion, - - which TDAAN omitted to include in its statistics (separate billing). PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Past Financial Performance of IDAAN

(Millions of Balboas)

1979 1980 1981 INCOME STATEMENT I/ 1976 1977 1978 22.7 23.6 25.6 Water revenues 13.6 17.9 21.7 0.4 1.0 1.1 Other operational revenues 21 0.5 0.5 0.4 1.2 1.1 1.1 Interest on valorization charges 3/ 1.3 1.4 1.3 24.3 25.7 27.8 Total Revenues 15.4 19.8 23.4 7.1 6.8 6.8 Wages 3.8 4.4 4.9 0.4 0.6 0.6 Chemicals 0.5 0.6 0.6 4.8 5.6 Power 4/ 1.3 2.4 2.1 2.3 1.6 1.9 2.2 Materialls 11 0.8 1.8 3.6 5.2 7.0 Purchase of water 1.8 2.5 2.8 0.2 1.5 Other 5/ 2.0 1.0 1,5 1.2 16.2 19.5 23.7 Total Costs 10.5 11.7 13.7 8.1 6.2 4.1 Income before depreciation 4-9 8.1 9.7 4.7 5.8 5.8 Depreciation 6/ 2.3 2.6 4.3 3.4 0.4 (1.7) Income before interest 2.6 5.5 5.4 1.6 2.2 2.2 Interest 1.8 1.8 1.7 0.6 0.1 0.1 Non-operational revenues (net) 0.4 0.4 0.5 2.4 (1.7) (3.8) Net income (loss) 1.2 4.1 4.2

analysis and > | 1/ Breakdown of accounts differ from breakdown shown in audited financial statements, to facilitate p comparison with financial projections. 2/ 1976-79 excludes penalties for late payments which are shown under non-operational revenues with external audit reclassification). (to agree P 3/ Restated to reflect adjustments made in 1981. 4/ Includes fuel and lubricants. 51 Includes provision for bad debts. 6/ 1976-77 on unrevalued assets; 1978-81 on revalued assets. PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Past Financial Performance of IDAAN

(Millions of Balboas)

1976 1977 197T ' 1980 1981 1976-81

FLOW OF FUNDS

Gross internal generation 1/ 5.3 8.5 10.2 8.7 6.3 4.2 43.2 Working capital increase (-) decrease (+) - 2.6 - 4.0 - 0.7 - 2.-.2 + 2.1 + 5.2 -2.7 Other assets or liabilities increase (-) decrease (+) 1.5 + 0.3 - 2.7 1.5 + 3.0 -1.8 -4.2 Debt service: -Interest 1.8 1.8 1.7 1.6 2.2 2.2 11.3 Principal 1.3 2.7 2.8 2.7 2.2 3.3 15.0 Net internal cash generation 2/ 2.3 0.2 7.0 2.1 10.0

Equity contributions 3/ 1.2 1.1 0.5 1.7 1.6 4.5 10.6 Users contributions 4/ 1.4 1.2 1.5 1.6 1.2 1.5 8.4 Other contributions or donations 5/ 0.4 7.0 7.0 0.5 1.2 3.0 19.1 Borrowings: IBRD Loan 1280-PAN 0.2 1.2 1.1 2.3 4.2 9.0 Other - foreign -- ~~~~ ~~~0.2 ~~0.44.3 2.9 0.1 7.9 Other - foreign 4.1 0.1 3.4 0.2 0.1 0.9 8.8

Funds from other sources 7.1 10.0 13.8 9.4 9.3 14.2 63.8 Total Source of Funds 5.2 10.3 16.1 9.6 16.3 16.3 73.8 __ -- 1.7 2.0 8.3 9.7 21.7 Investments: IDAAN/IBRD Project 0.1 0.9 0.4 0.6 2.0 Capitalized interest -- 1.0 5.1 3.7 1.0 1.0 11.8 IDAAN/IDB/AID Projects 5.2 9.3 9.2 3.0 6.6 5.0 38.3 > | Other works IDAAN 6 / 5.2 10.3 16.1 9.6 16.3 16.3 73.8 Total Application of Funds (01

1/ Income before depreciation plus net non-operational revenues. 2/ Funds available for investment. 3/ Government budgetary contributions. 4/ Valorization charges (principal only). 5/ Developers donations/contributions. 6/ Includes donated assets (developers). PANAMA SECOND WATER SUPPLY AND SEWERAGE PROJECT Past Financial Performance of IDAAN (Millions of Balboas)

BALANCE SHEET 1976 1977 1978 1979 1980 1981 Fixed assets I / 108.0 115.4 216.5 253.0 297.7 330.5 Accumulated depreciation 1l/ 23.5 26.1 71.9 89.0 96.5 108.6 Net fixed assets 1_i 84.5 89.3 144.6 163.5 201.2 221.9 Works in progress 7.3 10.2 16.2 10.0 19.5 22.4

Cash and bank deposits 2 / 2.5 4.4 3.1 3.9 2.4 1.7 Accounts receivable water (net) 2.8 4.8 6.8 8.1 10.5 8.7 Accounts receivable valorization 3.2 3.3 3.6 3.9 3.6 3.0 Inventories 1.9 2.1 2.8 3.3 3.8 3.9 Other current assets 0.4 0.3 0.5 0.6 0.4 0.7 1 Total Current Assets 10.8 14.9 16.8 19.8 20.7 18.0 o Other Assets 3 / 2.4 2.1 5.0 6.6 3.5 5.9 Total Assets 105.0 116.5 182.6 199.9 244.9 268.2

Payable to Panama Canal Cotmission 4 / 1.5 1.2 0.7 1.3 1.4 1.2 Other current liabilities 2.7 3.1 4.8 4.5 7.4 10.0 Current maturities 2.7 2.6 2.7 2.1 3.2 2.8 Total Current Liabilities 6.9 6.9 8.2 7.9 12.0 14.0 Other liabilities 0.2 0.2 0.4 0.5 0.4 0.9 Long-term debt 5 / 48.1 46.3 48.1 51.6 53.5 56.0 Equity 6 / 49.8 63.1 125.9 139.9 .179.0 197.3 Total Liabilities 105.0 116.5 182.6 199.9 244.9 268.2

1/ Revalued starting 1978. 2/ Excludes funds set aside for capital expenditures. 3/ Includes funds set aside for capital expenditures. 4/ For puchased water. 5/ Excludes current maturities. io 6/ Includes users' contributions (valorization charges) and other contributions and/or donations (developers). PANAMA SECOND WATER SUPPLY AND SEWERAGE PROJECT

IDAAN PANAMA INCOME STATEMENT MILL BALBOA ACTUAL FORZCAST

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

POPULATION-THOUSAND 11 1876.75 1924.65 1973.68 2023.85 2075.18 2127.67 2181.33 2236.18 2292.21 2349.45 POPULATION SERVED- WATER 1/ 1120,21 1165.87 1236.47 1268.57 1324.34 1385.32 1409.81 1467.07 1512.31 1546.12 % POPULATION SERVED- WATER 1/ 59.69 60.58 62.65 62.68 63.82 65.11 64.63 65.61 65.98 65.81 CONNECTIONS- WATER TUS, 2/ 146.57 156.30 167.54 178.03 187.31 195.60 203.84 211.96 218.50 223.51 SEWER CONNECTIONS-THOUSAND 2/ 84.50 94.10 97.20 106.80 112.40 117.40 132.50 137.70 142.00 145.30 POPULATION SERVED-SEWERAGE l/591.50 658.70 680.40 747.60 786.80 821.80 927.50 963.90 994.00 1017.10 % POPULATION SERVED-SEW 1/ - 31.52 34.22 34.47 36.94 37.91 38.62 42.52 43.10 43.36 43.29

VOLUME SOLD-MILLION TUG 31.84 34.86 36.81 39.12 40.70 42.53 43.68 44.70 45.48 46.21 CONSUMPTION/CONNEC/MONTH 18.10 18.59 18.31 18.31 18.11 18.12 17.86 17.58 17.35 17.23 % UNACCOUNTED FOR WATER 37.14 36.00 34.00 30.00 28.00 25.00 25.00 25.00 25.00 25.00 PRODUCTION-MILL.TUG 50.66 54.47 55.77 55.89 56.53 56.70 58.25 59.61 60.64 61.61 PER CAPITA PRODUCTION LCD 468.94 484.46 467.76 456.84 442.66 424.46 428.43 421.32 415.81 413.25 AVERAGE WATER TARIFF /TUG 0.80 1.00 1.07 1.07 1.07 1.07 1.13 1.19 1.26 1.33

WATER REVENUES 25.57 34.86 39.39 41.86 43.55 45.50 49.36 53.20 57.30 61.46 SEWER REVENUES 0.00 0.00 0.00 0.00 . 5.23 5.46 6.42 6.91 7.45 7.99 OTHER OPERATIONAL REVENUE 2.22 2.10 2.20 2.50 2.40 2.80 2.70 2.80 3.50 3.40

TOTAL REVENUES 27.79 36.96 41.59 44.36 51.18 53.77 58.48 62.91 68.25 72.85

WAGES- WATER 6.80 7.34 7.93 8.53 9.12 9.67 10.25 10.87 11.52 12.21 CHEMICALS 0.60 0.69 0.77 0.83 0.90 0.96 1.05 1.14 1.22 1.32 POWER 5.60 6.03 6.64 7.30 7.98 8.67 9.38 10.14 10.96 11.85 MATERIALS 2.20 2.53 2.92 3.35 3.78 4.20 4.64 5.11 5.59 6.06 PURCHASE OF WATER 7.00 7.01 7.57 8.16 8.75 9.32 9.87 10.47 11.09 11.76 OTHER 1.48 1.55 1.63 1.71 1.80 1.89 1.98 2.08 2.19 2.30

DIRECT COSTS-WATER 23.68 25.15 27.46 29.87 32.33 34.71 37.17 39.80 42.57 45.50 OTHER INDIRECT COSTS 0.00 0.35 0.39 0.42 0.49 0.51 0.56 0.60 0.65 0.69 ======_== = = =-= c = _ ======_-=- = - -= - -=-= TOTAL COSTS 23.68 25.50 27.86 30.29 32.82 35.22 37.73 40.41 43.22 46.19

INCOME BEFORE DEPRECIATION 4.11 11.46 13.73 14.07 18.36 18.55 20.75 22.50 25.03 26.66 DEPRECIATION 5.81 8.62 9.43 10.39 11.45 12.49 13.48 14.45 15.77 17.44

INCOME BEFORE INTEREST -1.70 2.83 4.30 3.68 6.91 6.06 7.27 8.05 9.27 9.22 INTEREST CHARGED OPER. 2.16 1.60 2.80 2.60 2.60 3.25 3.46 4.65 5.09 4.96 NON OPER.REVENUES (+) 0.07 0.20 0.20 0.30 0.30 0.40 0.40 0.40 0.40 0.40

NET SURPLUS (+) -3.79 1.43 1.70 1.38 4.61 3.21 4.21 3.80 4.57 4.65

AVERAGE RATE BASE 3/ 112.40 127.35 143.09 163.67 186.37 206.41 222.86 236.45 261.34 298.31 WORXKINRATIO % 85.21 69.00 66.99 68.28 64.12 65.50 64.52 64.23 63.33 63.41 -RATE OF RETURN % 4/ 0.6 4.9 5.5 4.6 5.8 4.9 5.2 5.3 5.4 4.8

n 1/ Mid-year. 2/ Average of the year. 3/ Excluding fixed assets donated by developers and those being recovered through valorization charges. 4/ Excluding from the income base, the annual depreciation charges on assets described in footnote 3/ above. PANAMA SECONDWATER SUPPLY AND SEWERAGEPROJECT

IDAAN PANAMA FLOW OF FUNDS MILL BALBOA ACTUAL ____-_-- ______FORECAST

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

SOURCES OF FUNDS

INCOME BEFORE DEPRECIATION 4.11 11.46 13.73 14.07 18.36 18.55 20.75 22.50 25.03 26.66 NON-OPER.REVENUES (NET) 0.07 0.20 0.20 0.30 0.30 0.40 0.40 0.40 0.40 0.40

GROSS INTERNAL GENERATION 4.18 11.66 13.93 14.37 18.66 18.95 21.15 22.90 25.43 27.06 GOVERMENT GRANTS 4.52 2.10 4.70 5.10 4.30 2.30 1.60 0.00 0.00 0.00 OTHER CONTRIBUTIONS l/ 4.51 2/ 1.90 1.60 2.00 2.10 2.20 3.00 3.20 4.00 4.30 INCREASE OTHER LIABILITIES 0.52 -0.36 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 IBRD LOAN 0.00 0.00 0.70 3.10 6.40 5.40 3.20 1.20 0.00 0.00 OTHER FOREIGN LOANS 0.00 2.40 6.49 7.81 7.88 0.68 0.25 0.25 0.26 0.00 NATIONAL LOANS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 OTHER LOANS 5.25 3.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TOTAL LOANS 5.25 5.44 7.19 10.91 14.28 6.08 3.45 1.45 0.26 0.00 SHORT TERM LOANS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TOTAL SOURCES 18.98 20.74 27.42 32.38 39.34 29.53 29.20 27.56 29.69 31.36

APPLICATIONS OF FUNDS

INVESTMENT IN PROJECT 0.00 0.00 1.87 7.07 9.89 7.53 7.04 3.09 0.00 0.00 I CAPITALIZED INTEREST 0.64 1.20 0.98 1.31 2.09 2.23 2.26 2.10 0.26 0.00 IBRO 1280-PAN 9.74 4.60 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00° IDB PROJECT 0.00 2.80 14.20 14.70 8.30 0.00 0.00 0.00 0.00 0.00 IDAAN OTHER PROJECTS 6.01 2/ 8.27 5.70 2.50 7.40 0.00 0.00 0.00 0.00 0.00 I OTHER WORKS EXCESS CASH 0.00 0.81 0.98 0.22 5.67 11.17 9.49 10.90 16.64 18.26

TOTAL INVESTMENT 16.39 17.69 23.73 25.80 33.35 20.93 18.80 16.09 16.90 18.26 FOREIGN LOAN AMORTIZATION 0.00 0.00 0.00 0.00 0.00 2.12 2.28 2.28 2.2$ 2.37 NATIONAL LOAN AMORTIZATION 0.00 0.00 0.00 0.00 0.00 0.00 0. 0 0.00 0.00 0.00 OTHER LOANS AMORTIZATION 3.27 2.80 2.90 3.00 3.50 3.40 3.40 3.44 4.10 4.14 SHORT TERM lOANS AMORTIZ. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

TOTAL AMORTIZATION 3.27 2.80 2.90 3.00 3.50 5.52 5.68 5.72 6.38 7.01 OPER.INTEREST LONG T.OEBT 2.16 1.60 2.80 2.60 2.60 3.25 3.46 4.65 5.09 4.96

TOTAL OPERATIONAL INTEREST 2.16 1.60 2.80 2.60 2.60 3.25 3.46 4.65 5.09 4.96

TOTAL DEBT SERVICE 5.43 4.40 5.70 5.60 6.10 8.78 9.14 10.37 11.47 11.97 INCREASE IN WORK.CAPITAL -5.20 -0.05 -2.21 0.79 0.09 0.12 1.26 1.09 1.32 1.13 OTHER ASSETS 2.36 -1.30 0.20 0.20 -0.20 -0.30 0.00 0.00 0.00 0.00

TOTAL APPLICATIONS 18.98 20.74 27.42 32.38 39.34 29.53 29.20 27.56 29.69 31.36 DEBT SERVICE RATIO 2/ 0.69 2.08 2.09 2.08 2.28 1.72 1.86 1.84 2.17 2.26 % CONTRIBUTION TO INVESTMENT 4/36.30 59.41 49.89 37.91 44.29 59.96 73.13 90.98 98.46 100.00

1/ Users contributions through valorization charges. 2/ FY81 includes developers' donations. 3/ Times gross internal generation covers debt service (including capitalized interest). 4/ Net internal generation plus users contributions (valorization charges) as a percentage of total investments. PANAMA SECOND WATER SUPPLY AND SEWERAGEPROJECT

IDAAN PANAMA BALANCE SHEET MILL BALBOA ACTUAL FORZJT -

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

A S S E T S ASSET/

FIXED ASSETS IN OPER, 330,51 359.30 394.80 436.33 479.50 519.40 559.17 597.22 663.98 731.44 MINUS ACCUM.DEPRECIATION 108.58 122.64 138.19 155.49 174.71 195.94 219.22 244.63 272.63 303.70

NET FIXED ASSETS 221.93 236.67 256.60 280.84 304.78 323.47 339.96 352.59 391.35 427.73 WORK IN PROGRESS 22.38 27.80 34.00 38.00 50.00 55.00 60.00 66.00 46.00 30.00 CASH AND BANKS 1.69 1.48 1.54 1.60 1.57 1.62 1.78 1.84 1.90 1.97 ACCOUNTS RECEIVABLE(NET) 8.64 12.20 10.40 11.09 12.79 13.44 14.62 15.73 17.06 18.21 ACCTS RECEIV VALORIZ 3.04 2.80 2.50 2.00 1.50 1.00 1.00 1.00 1.00 1.00 DMEITOR lPRODUCT.HATRu. 1.45 0.80 0.92 1.04 1.17 1.29 1.42 1.56 1.70 1.84 INVENTORY CONSTRUCT KATILS. 2.50 2.50 2.50 2.00 1.00 1.00 1.00 1.00 1.00 1.00 OTHER CURRENT 0.66 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

TOTAL CURRENT ASSETS 17.98 20.79 18.86 18.74 19.04 19.35 20.82 22.13 23.67 25.03 OTHER ASSETS 5.90 4.60 4.80 S5.00 4.80 4.50 4.50 4.50 4.50 4.50

TOTAL ASSETS 268.19 289.85 314.27 342.58 378.62 402.32 425.27 445.22 465.52 487.26

EQUITY AND LIABILITIES

EQUITY 39.42 39.42 39.42 39.42 39.42 39.42 39.42 39.42 39.42 39.42 1 CONTRIBUTIONS 38.36 42.36 48.66 55.76 62.16 66.66 71.26 74.46 78.46 82.76 REVALUATION SURPLUS 104.98 116.07 127.91 140.74 154.78 170.02 186.19 203.19 220.82 240.39 OPERATIONAL SURPLUS 14.61 16.04 17.74 19.12 23.74 26.95 31.15 34.95 39.53 44.18

TOTAL EQUITY 197.37 213.90 233.73 255.04 280.10 303.05 328.03 352.02 378.22 406.75

LONG TERM DEBT(NET) 55.98 58.52 62.71 70.13 78.88 79.28 77,01 72.08 65.33 58.32

ACCOUNT PAYABLES 1.23 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1,00 PAYABLES PROCURERS 4.85 3.03 3.32 2.41 2.62 2.81 3.02 3.23 3.46 3.69 PAYABLES OTHER 5.10 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 CURRENT MATURITIES 2.80 2.90 3.00 3.50 5.52 5.68 5.72 6.38 7.01 7.01

TOTAL CURRENT LIABILITIES 13.98 16.93 17.32 16.91 19.14 19.49 19.74 20.61 21.47 21.70 SHORT TERM DEBT 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 OTHER LIABILITIES 0.86 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

TOTAL LIABILITIES 70.82 75.96 80.53 87.54 98.52 99.27 97.25 93.20 87.30 80.52

TOTAL EQUITY-LIABILITIES 268.19 289.85 314.27 342.58 378.62 402.32 425.27 445.22 465,52 487.26

-WORKING CAPITAL-MILLION 6.80 6.75 4.54 5.33 5.42 5.54 6.80 7.89 9.21 10.34 U' -CURRENT RATIO 1.29 1.23 1.09 1.11 0.99 0.99 1.05 1.07 1.10 1.15 % DEBT/(DEBT+EQUITY) 22.10 21.48 21.16 21.57 21.97 20.74 19.01 17.00 14.73 12.54 CD,C

1/ Revalued. PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT Financing Plan 1983-88

IDAAN-PANAMA Million Balboas Total % 1983 1984 1985 1986 1987 1988

Income before depreciation 107.96 77.84 13.73 14.07 18.36 18.55 20.75 22.50 Net non-operational revenues 2.00 1.44 0.20 0.30 0.30 0.40 0.40 0.40

Gross internal cash generation 109.96 79.28 13.93 14.37 18.66 18.95 21.15 22.90 Total debt service (-) -45.69 -32.94 -5.70 -5.60 -6.10 -8.78 -9.14 -10.37 Total work. capital needs (-) 1/ -1.14 -0.82 2.21 -0.79 -0.09 -0.12 -1.26 -1.09 Other liabilities (+) or assets (-) 0.10 0.07 -0.20 -0.20 0.20 0.30 0.00 0.00

Net internal cash generation 63.23 45.59 10.24 7.78 12.67 10.35 10.75 11.44 Users contributions (valoriz.) 14.10 1Q.17 1.60 2. 00 2.1Q 23,Q 3,20

Total contribut. to investment 77.33 55.76 11.84 9.78 14.77 12.55 13.75 14.64

Investment in project 36.49 26.31 1.87 7.07 9.89 7.53 7,04 3.09 Interest during construction 10.96 7.91 0.98 1.31 2.09 2.23 2.26 2.10 Other works (IDAAN/IDB) 37.20 26.82 14.20 14.70 8.30 0.00 0.00 0.00 Other works by IDAAN 54.04 38.96 6.68 2.72 13.07 11.17 9.50 10.90

Total investment 138.69 100.00 23.73 25.80 33.35 20.93 18.80 16.09

Total to be financed (+) 61.36 44.24 11.89 16.02 18.58 8.38 5.05 1.45

Financed by Government contrib. (equity) 18.00 12.98 4.70 5.10 4.30 2.30 1.60 0.00

IBRD loan 20.00 14.42 0.70 3.10 6.40 5.40 3.20 1.20 1 ¢ Other foreign loans (IDB) 23.36 16.84 6.49 7.82 7.88 0.68 0.25 0.25 9 National loans 0.00 0.00 0.00 0.00 00 0,00 0.00 0.00* Total loans 43.36 31.26 7.19 10.92 14.28 6.08 3.45 1.45

Total financed 61.36 44.24 11.89 16.02 18.58 8.38 5.05 1.45

1/ Cash increases included in working capital. 73 -

ANNEX 11 PANAMA SECONDWATER SUPPLY AND SEWERAGEPROJECT

IDAAN'S Water Tariffs, Effective April 1, 1982 (B/ per 1000 U.S. gallon)

Consumption category Consumption brackets (1000 U.S. gal.)

Residential a/ Up to 10 11-15 16-20 21-30 31-50 50+

Panama and Colon cities b/ 0.80 1.36 1.51 1.62 1.67 1/ Marginal zones of Panama and Col6n cities c/ 0.71 1.36 1.51 1.62 1.67 1/ All other cities (interior)bI0.71 1.36 1.51 1.62 1.67 1/ Rental housing where unit rent exceeds B/75.0/month 0.71 1.36 1.51 1.62 1.67 1/

Commercialand Industial Up to 10 11-100 101-150 151-200 201+ Commercial 1.15 1.51 1.70 1.81 2/ Industrial 1.15 1.51 1.70 1.81 2/

Official Up to 10 11-15 16-20 21-30 31-100 101-150 151+ Central government 0.80 1.36 1.51 1.62 1.67 1.70 3/ Autonomous entities 0.80 1.36 1.51 1.62 1.67 1.70 31 Semi-autonomous entities 0.80 1.36 1.51 1.62 1.67 1.70 3/ Municipalities 0.80 1.36 1.51 1.62 1.67 1.70 3/

Rural Systems built under Up to 3.5 "Junta-Pueblo-Gobierno" program__ 0.71

a/ For multi-family residences with more than one pef family-house connection, the consumption brackets are fixed on a pro-rata basis. bl A minimum 8,000 gal. is billed even if actual consumption is lower. cl A minimum 6,000 gal. " " " " " " I 1 d/ Fixed tariff.

1/ For consumption in excess of 50,000 gal. the commercial/industrialtariff is applied. 2/ For consumption in excess of 200,000 gal. B/1.62 is charged for each additional 1,000 gal. 3/ For consumption in excess of 150,000, the commercial/industrialtariff is applied. PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Revenue Covenant Computation

(B/. million)

1983 1984 1985 1986 1987 1988

Gross internal generation 13.9 14.4 18.7 19.0 21.2 22.9 Less: Debt service 5.7 5.6 6.1 8.8 9.1 10.4 Interest during construction (excludes financed interest) 0.2 0.5 0.9 1.4 2.0 1.9 Increase in working capital - 0.8 0.1 0.1 1.3 1.1 Increase in other assets 0.2 0.2 - _

Net internal generation 1/ 7.8 7.3 11.6 8,7 8.8 9.5 Plus: Users contributions (valorization) 1.6 2.0 2.1 2.2 3.0 3.2

CASH BASE 9.4 9.3 13.7 10.9 11.8 12.7

Net Revalued Operating Fixed Assets -- beginning of year 236.7 256.6 280.8 304.8 323.5 340.0 Net Revalued Operating Fixed Assets -- end of year 256.6 280.8 304.8 323.5 340.0 352.6 RATE BASE (average net revalued op. Fixed Assets) 246.7 268.7 292.8 314.2 331.8 346.3

Internal cash ratio = 100 x Ratel Base 3.8 3.5 4.7 3.5 3.6 3.7

I/ Differs slightly from Flow of Funds Statement because reduction of working capital, reduction of other assets or increase of short-term liabilities (source of funds) are excluded for the purpose of revenue covenant computation, PANAMA

SECOND PANAMA WATER SUPPLY AND SEWERAGE PROJECT

Monitoring Indicators

1982 1983 1984 1985 1986 1987 1988

Population -/

Total Panama (000) 1,924 1,974 2,023 2,075 2,127 2,181 2,236 Target IDAAN (000) -2 1,299 1,330 1,365 1,400 1,460 1,497 1,534 % served water 3/ 90 92 94 95 95 95 95 7O served sewerage - 51 52 54 56 59 61 63

Water Production and Sales 9 Water produced (10 gal) 54.5 55.8 55.9 56.5 56.7 58.3 59.6 WaLer sold (109 gal) 34.9 36.8 39.1 40.7 42.5 43.7 44.7 Unaccounted-for water (%) 36 34 30 28 25 25 25

Operations -/

Number of connections - water (000) Panama Metropolitan 80.8 85.8 90.8 95.7 100.4 105.1 109.9 4.0 Arraijan District 2.0 2.1 2.2 2.3 2.4 3.8 Santiago 5.1 5.2 5.4 5.5 5.6 5.8 6.0 La Chorrera 9.1 9.5 9.9 10.3 10.7 11.1 11.5 All IDAAN systems 156 167 178 187 195 203 212

Number of connections - sewerage (000) Panama metropolitan 63 67 72 77 82 88 91 3.2 Santiago 1.3 1.3 1.3 1.4 1.8 2.3 La Chorrera 2.0 2.0 2.0 2.1 2.6 3.6 4.6 All IDAAN systems 94 97 107 112 117 133 138

Metered connections (000) 70.2 91.9 115.7 130.9 136.5 142.1 148.4 Metered connections (7%) 45 55 65 70 70 70 70 Consumption/connection (103 gal/month) 18.6 18.3 18.3 18.1 18.1 17.9 17.6 Employees per 1000 connections 14.4 13.1 12.1 11.2 10.5 9.8 9.0

Financial

Average tariff per 1000 gal sold (US$) 1.00 1.07 1.07 1.20 1.20 1.28 1.34 Average revenue per 1000 gal sold (US$) 1.06 1.13 1.13 1.26 1.26 1.34 1.41 Operating ratio (%) 69.0 67.0 68.3 64.1 65.5 64.5 64.2 Debt service ratio (7/) 2.08 2.09 2.08 2.28 1.72 1.86 1.84 Revenue covenant target (%) - 3.5 3.5 3.5 3.5 3.5 3.5 17.0 N Debt/(Debt + Equity) 21.5 21.2 21.6 22.0 20.7 19.0 Accounts receivable tariffs (months billings) 4 3 3 3 3 3 3 Accounts receivable valorization (months billings) 12 9 7 3 3 3 3

1/ Yearly averages. 2/ Total population in communities with more than 500 inhabitants. 3/ With respect to IDAAN's target population. - 76 -

ANNEX 14 Page 1 ,

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Draft Outline of Terms of Reference for Tariff Study

Introduction

1. IDAAN agrees on the need to revise the current tariff structure for water and sewerage services provided by IDAAN. For this purpose, IDAAN will review its tariff policy during the implementation of the proposed project.

Objectives

2. The purpose of the tariff study is to determine a tariff structure which is adequate to meet IDAAN's financial requirements, comprising self-sufficiency and contribution to investments, to reflect as closely as possible the costs to the economy of meeting increasing demands for water and sewerage services and to assure that services will be affordable to the whole population.

General Guidelines

3. The tariff study should take into consideration the following aspects:

(a) resource allocation objectives through the application of tariffs that reflect as closely as possible long-run mar-, ginal costs of water and sewerage services separately;

(b) social objectives through the application of affordable tariffs and fixed charges for minimum consumption which allow the low-income population to have access to the services;

ANNEX 14 Page 2

(d) different tariff levels for different users reflecting costs of the services and differences in ability to pay.

4. IDAAN will pay special attention to the following deficiencies of its present tariff structure:

(a) tariffs do not discriminate between consumers who have access to water supply and sewerage and those who have access to water supply only;

(b) not sufficient progressivity of tariffs in relation to volumes consumed; and

ANNEX 15 Page 1

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Revolving Fund for the Financing of In-House Sanitary Installations

1. The objective of the sewerage components in Panama City, Santiago and La Chorrera is the improvement of sanitary conditions. Attainment of this objective is only possible if the great majority of the households living in the project area actually connect to the infrastructure provided. For families which in the past depended on latrines for excreta disposal, the installation of in-house plumbing and sewer lines leading from the house to the sewer lateral may cost as much as US$600, even if only rudimentary facilities are installed. Many low-income families are expected to have to forego connection unless some financial assistance would be provided. The most effective way of assuring that financial assistance would be provided as part of the proposed project is the establishment of a revolving fund.

2. Based on income estimates in the project area (para. 2.06), it is assumed that 40% of all potential beneficiary families in Panama City, 30% of those in Santiago and 25% of those in La Chorrera would require financial assistance. No assistance is necessary in Colon since in-house plumbing is provided as part of the new housing units. It is further assumed that, on the average, a family would need a loan of US$600, to be repaid over a period of 5 years at 12% interest. Based on these assumptions, the cash flow analysis in Attachment 1 shows that through 1988, a total of US$1 million would have to be paid into the revolving fund. Through 1990, about 2,800 families would benefit from the financial assistance provided. After 1989, the revolving fund would continue to function entirely from loan repayments. Since the foreign component of the in-house plumbing is estimated at about 50% of the total cost, the fund's initial replenishments would be shared in equal parts by IDAAN and the Bank. IDAAN would make an initial deposit of US$100,000 to the fund by June 30, 1985.

3. All in-house plumbing work would be carried out by qualified local plumbers in accordance with standards and unit prices approved by TDAAN. To initiate a loan from the revolving fund, the property owner would make a request to IDAAN. After IDAAN has inspected the premises and agreed to the proposed installation, the property owner would enter into a - 79 -

ANNEX 15 Page 2

contract with the plumber and sign a loan agreement with IDAAN for the amount of the contract. IDAAN would make both progress and final payments to the contractor from the fund. Final payment would be made after inspec- tion of the completed installations. IDAAN would periodically submit disbursement requests to the Bank based on statements of expenses, duly certi- fied by the external auditors. These statements of expenses would be for groups of contracts.

4. The loan conditions could vary with the financial resources of the borrower. In certain hardship cases, IDAAN would consider providing grants to cover part of the installation. Details regarding on-lending arrangements, eligibility criteria for loans and grants, the source of grant funds, administrative procedures and safeguards for providing assistance only to the truly needy would be presented to the Bank for review by no later than June 30, 1984. PANAMA

SECOND PANAMA WATER SUPPLY AND SEWERAGE PROJECT Revolving Fund for Financing of In-House Sanitary Installations and House Connections

A. Number of Connections Requiring Financial Assistance

Panama City La Chorrera Santiago Total FinancingTotal Total Connections Total Connections Total Connections Connections Required Year Connect. Req. Financ. 1/ Connection Req. Financ. 2/ Connection Req. Financ. 3/ Req. Financ. US$1000 4/ 1985 250 100 100 78 1986 375 150 464 116 294 88 354 293 1987 416 166 1,002 251 469 141 558 492 1988 416 166 1,099 275 819 246 687 635 1 1989 312 125 928 232 557 167 524 518 m 1990 312 125 1,001 250 624 187 562 586 °

1/ 40%; 2/ 25%; 3/ 30%; 4/ Based on init cost of US$600, including price contingencies in 12/81 prices.

B. Revolving Fund - Cash Flow Analysis

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Amount to be financed 1/ (78) (293) (492) (635) (518) (586) U Recovery of 1985 outlays 10.6 21.2 21.2 21.2 21.2 10.6 Recovery of 1986 outlays 40.2 80.4 80.4 80.4 80.4 40.2 Recovery of 1987 outlays 67.2 134.4 134.4 134.4 134.4 67.2 Recovery of 1988 outlays 87.6 175.3 175.3 175.3 175.3 87.6 Recovery of 1989 outlays 70.9 141.7 141.7 141.7 141.7 70.9 Recovery of 1990 outlays _ 80.5 161.0 161.0 161.0 161.0 Net Outlays Required 2/ (67.4) (231.6) (323.2) (311.4) (35.8) 36.9

1/ Loan for installation to be repaid at 12% interest in 5 years; US$13.7/month at 12/81 prices. 2/ Amount to be financed minus repayments. - 81 - ANNEX 16 Page 1

PANAMA

SECOND WATER SUPPLY AND SEWERAGE PROJECT

Selected Documents and Data Available in Project File

Panama General National Census -1980,Preliminary data; General Controller's Office, August 1980

Panama en Cifras 1976-1980; Controller's Office of the Republic of Panama November 1981

Socio-economic Study of Five Urban Centers (Panama, Colon, Santiago, La Chorrera, David), MIPPE, MIVI, IDAAN; April 1980

Sector Related Information

Law No. 98 of December 29, 1961, creating IDAAN

Annual Report, October 1980-September 1981; IDAAN; October 1981

Water Supply and Sanitation Sector Study, Republic of Panama; WHO-PAHO/World Bank Cooperative Programme; December 1979

Program of Rural Water Supply Systems and Water Supply and Sewerage Systems in Small Urban Centers - Stage IV, Project Report; IDB; November 1981

Technical Norms for the Design and Construction of Water Supply and Sewerage Systems; IDAAN; 1979

Project Related Documentation - Technical, IDAAN

Sewerage Masterplan for the City of La Chorrera; Consortium Tecnipan-Hazansaw; October 1981

Sewerage Masterplan for the City of Santiago; Consortium CM/TAMS; May 1981

Preliminary Design of Water Pumping Station at Miraflores Treatment Plant and Pipeline Crossing Canal; Metcalf and Eddy-Inpasa; July 1981

Preliminary Cost Estimates for Projects Miraflores Pumping Station and Pipeline Crossing the Canal; Letter to IDAAN by Metcalf and Eddy/Inpasa; March 24, 1982 - 82 - ANNEX 16 Page 2

New Project Transmission Main for the Eastern Sector of the City of Panama (Juan Diaz, Pedregal, Tocumen); IDAAN; March 1982

Technical, Financial and Economic Justification of the Sewerage Project in Santiago; IDAAN, December 1981

Technical, Financial and Economic Justification of the Sewerage Project in Panama City; IDAAN; November 1981.

Technical, Financial and Economic Justification of the Water Supply Project in the Arraijan District; IDAAN; December 1981.

Technical, Financial and Economic Justification of the Sewerage Projects in Col6n; IDAAN; November 1981.

Technical Proposal for the Execution of the Storm Drainage Improvement Project in Col6n; MOP; no date.

Report of Mission "Water Supply Metropolitan Area! Societe des Eaux de Marseille; July 1980

Report of Mission "Pressure Regulationi' Panama City; Societe des Eaux de Marseille; August 1981

Report of Mission "Metering"; Societe des Eaux de Marseille; November 1981

Report of Mission "Sewerage"; Societe des Eaux de Marseille; February 1982

Report of Mission "Commercial Systems"; Societe des Eaux de Marseille; August 1981

Source Metering Program; IDAAN; December 1981

House Connection Metering Program; IDAAN; October 1981

Project Related Documentation - Technical MOP

Study Water Supply and Sewerage Systems in Colon; Consortium Consultora Delta, S.A. and Sanidro; no date

Study Storm Drainage Systems in Colon; Ingenieria y Arquitectura Lakas, S.A., May 1981.

Project Related Documentation - Financial and Economic - IDAAN

Financial Projections, Appraisal Mission World Bank, July 1982 Financial Statements as of Dec. 31, 1982, IDAAN, March 1982

Budget 1982, IDAAN, 1981 Miscellaneous working papers, Appraisal Mission World Bank, April 1982. __---_____d IBR -15943RI

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