Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 36579-EC PROJECT APPRAISAL DOCUMENT ON A Public Disclosure Authorized PROPOSED ADAPTABLE PROGRAM LOAN (APL-2) IN THE AMOUNT OF US$48 MILLION TO THE REPUBLIC OF ECUADOR FOR THE SECOND RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROJECT Public Disclosure Authorized (PRAGUAS 11) IN SUPPORT OF THE SECOND PHASE OF THE RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROGRAM June 23.2006 Finance, Private Sector, and Infrastructure Bolivia, Ecuador, Peru and Venezuela Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the Public Disclosure Authorized performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = US Dollar FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS APL Adaptable Program Loan BCE Central Bank of Ecuador (Banco Central del Ecuador) BdE State Development Bank of Ecuador (Banco del Estado) BOT Build, operate and transfer contract CADS Consultancy to support the delegation of water, sanitation and/or solid waste services (Consultorias de apoyo a la delegacidn) CAS Country Assistance Strategy CGE General Controller's Office (Contraloria General del Estado) CNRH National Council on Water Resources (Consejo Nacional de Recursos Hidricos) CODAE Afro-Ecuadorian Development Corporation (Corporacidn de Desarrollo Afroecuatoriana) CODENPE Ecuadorian Council for Nationalities and Indigenous Peoples (Consejo de Nacionalidades y Pueblos Indigenas del Ecuador) DINEIB Nacional Bilingual Intercultural Education Directorate (Direccidn Nacional de Educacidn Intercultural Bilingiie) DNSPI National Directorate of Indigenous Health ECAPAG Former public Water and Sewerage Utility of Guayaquil (Empresa Cantonal de Agua Potable y Alcantarillado de Guayaquil) EMAAP Metropolitan Water and Sewarage Company of Quito (Empresa Metropolitana de Alcantarillado y Agua Potable de Quito) EMS Municipal Sanitation Unit (Equip0 Municipal de Saneamiento) ENDEMAIN Demographic and Mother-Child Health Survey (Encuesta Demogrdjka y de Salud Matema e Infantil) EPAS Provincial Water and Sanitation Teams (Equipos Provinciales de Agua y Saneamiento) FISE Ecuadorian Social Investment Fund (Fondo de Inversidn Social Ecuatoriano) FORMIA Project for the Strengthening of Alternative Municipalities (Proyecto para el Fortalecimiento de Municipalidades Altemas) GOE Government of Ecuador (Gobiemo de Ecuador) GOT Guide to Technical Options (Guia de Opciones Tkcnicas) ICB International Competitive Bidding ICE Special Consumption Tax (Impuesto sobre Consumos Especiales) EOS Ecuadorian Institute for Water and Sanitation Works (Instituto Ecuatoriano para obras sanitarias) IMIS Integrated Monitoring Information System (Sistema Integrado de Informacio'n de Monitoreo) INTERAGUA International Water Services Guayaquil IPP Indigenous Peoples Plan IS International Shopping JASS Water User Board (Junta administradora de 10s servicios de saneamiento) LOREyT Ecuadorian Fiscal Responsibility Law (Ley Orgdnica de Responsabilidad, Estabilizacidn y Transparencia) M&E Monitoring and Evaluation MEF Ministry of Economy and Finance (Ministerio de Economia y Finanzas) MIDUVI Ministry of Urban Development and Housing (Ministerio de Desarrollo Urbano y Vivienda) NCB National Competitive Bidding NGOs Non-governmental organizations NS National Shopping OITS Technical and Social Intermediary Organizations (Organismos de Intervencidn Tdcnicos y Sociales) OM Operation Manual (Manual de Operaciones) O&M Operation and Maintenance PAHO Pan-American Health Organization PDO Project Development Objective PMU Project Management Unit (Unidad de Gestidn del Proyecto, UGP) POA Annual Investment Plan (Plan Operativo Anual) PRA Participatory rapid appraisals PRAGUAS Rural and Small Towns Water Supply and Sanitation Project *RFp Request for Proposals SANEPAR ParanA State Water Utility (Companhia de Saneamento do Parand) SAPSyRS Sub-secretariat of Water, Sanitation and Solid Waste (Sub-Secretaria de Agua Potable Saneamiento y Residuos Sdlidos) SBD World Bank's Standard Bidding Documents SCP Strategic Communication Program SIG Management Information System (Siestera de Informacidn Gerencial) SIISE Integrated Social Indicators System (Sistema Integrado de Indicadores Sociales) SINDEPE System of Social Indicators for the nationalities and peoples of Ecuador (Sistema de Indicadores Sociales de las Nacionalidades y Pueblos del Ecuador) SINSOC Social Impact Information System (Sistema de Informacidn de Impacto Social) SISASAR Sector information system for water, sanitation and solid waste (Sistema de Informacidn para 10s sectores de agua, saneamiento y desechos sdlidos) STP Sewage Treatment Plant TA Technical Assistance VIP Ventilated Improved Pit (Latrine) UBS Basic Sanitation Unit comprising shower, sink and toilet (Unidad Bdsica de Saneamiento) WSP Water and Sanitation Program (Programa de Agua y Saneamiento) wss Water Supply and Sanitation Vice President: Pamela Cox Country Director: Marcel0 Giugale Sector Manager: John Henry Stein Task Team Leaders: Franz R. Drees-Gross and Maria Angelica Sotomavor ECUADOR Second Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS 11) CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE.................................................................. 1 1. Country and sector issues .................................................................................................... 1 2 . Rationale for Bank involvement .......................................................................................... 2 3 . Higher level objectives to which the project contributes ..................................................... 3 B. PROJECT DESCRIPTION.................................................................................................. 4 1. Lending instrument .............................................................................................................. 4 2. Program objective and Phases ............................................................................................. 4 3 . Project development objective and key indicators .............................................................. 6 4 . Project components .............................................................................................................. 6 5 . Lessons learned and reflected in the project design .......................................................... 13 6 . Alternatives considered and reasons for rejection ............................................................. 16 C. IMPLEMENTATION ......................................................................................................... 17 1. Partnership arrangements (if applicable) ........................................................................... 17 2 . Institutional and implementation arrangements ................................................................. 17 3 . Monitoring and evaluation of outcomes/results ................................................................ 18 4 . Sustainability ..................................................................................................................... 19 5 . Critical risks and possible controversial aspects ............................................................... 21 6 . Loadcredit conditions and covenants ............................................................................... 22 D. APPRAISAL SUMMARY .................................................................................................. 23 1. Economic analysis ............................................................................................................. 23 2 . Technical ............................................................................................................................ 26 3 . Fiduciary ............................................................................................................................ 27 4 . Social ................................................................................................................................. 28 5 . Environment ...................................................................................................................... 29 6 . Safeguard policies .............................................................................................................. 30 7 . Policy Exceptions and Readiness ...................................................................................... 31 Annex 1: Country and Sector Background............................................................................... 32 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 40 Annex 3: Results Framework and Monitoring......................................................................... 41 Annex 4: Detailed Project Description ...................................................................................... 54 Annex 5: Project Costs ................................................................................................................ 79 Annex 6: Implementation Arrangements .................................................................................. 80 Annex 7: Financial Management and Disbursement Arrangements ...................................... 85 Annex 8: Procurement Arrangements ....................................................................................