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 wa- ter 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 ground- water sources are being intensified. In the recent past, several attempts to locate aquifers suitable for large-scale exploitation have not been suc- cessful (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 migra- tion 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 ex- pected 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