Document of The World Bank Report No: ICR00004012 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-43350 & IDA-52700) ON A CREDIT IN THE AMOUNT OF SDR 19.8 MILLION (IDA-43350) AND SDR 6.7 MILLION (IDA-52700) (US$40 MILLION EQUIVALENT) TO THE REPUBLIC OF HONDURAS FOR A WATER AND SANITATION SECTOR MODERNIZATION PROJECT June 5, 2017 Water Global Practice (GWADR) Latin America and the Caribbean Region CURRENCY EQUIVALENTS At Appraisal (May 17, 2007) Currency Unit = SDR SDR0.65876 = US$1.00 US$1.51801 = SDR1.00 At Closure (December 30, 2016) Currency Unit = SDR SDR1.00 = US$1.34433 US$1.00 = SDR0.74387 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AF Additional Financing AMDC Tegucigalpa, Alcadía Municipal del Distrito Central AMHON Honduras Municipalities Association APL Adaptable Program Loan CAS Country Assistance Strategy CATS Services Transfer Support Consultants (Consultorías de Apoyo a la Transferencia de los Servicios) COMAS Water and Sanitation Municipal Committees CONASA National Council for Water and Sanitation (Consejo Nacional de Agua Potable y Saneamiento) CQ Consultant’s Qualifications CSO Civil Society Organizations Framework Law Drinking Water and Sanitation Sector Framework Law 2003 EIRR Economic Internal Rate of Return ENHPM National Household Survey (Encuesta Nacional de Hogares de Porpositos Multiples) ERSAPS Water and Sanitation Regulator (Ente Regulador de los Servicios de Agua Potable y Saneamiento) FAD Fund for Development Help (Fondo de Ayuda al Desarrollo) FHIS Honduran Fund for Social Investment (Fondo Hondureña de Inversión Social) FIRR Financial Internal Rate of Return FM Financial Management FMA Financial Management Assessment FMAR Financial Management Assessment Report GDP Gross Domestic Product GIC Inter-institutional Coordination Group i GoH Government of Honduras HIPC Heavily Indebted Poor Country IDA International Development Association IDB Inter-American Development Bank IFR Interim Financial Report INE National Statistics Institute (Instituto Nacional de Estadisticas) IPRF Involuntary Resettlement Policy Framework IPSAS International Public Sector Accounting Standard IRM Immediate Response Mechanism ISA International Standards on Auditing JMP Joint Monitoring Program Lps Lempiras M&E Monitoring and evaluation MDG Millennium Development Goal MDRI Multilaterial Debt Relief Initiative MTR Mid Term Review NDP Nordic Development Fund NGO Non-governmental organization NPV Net present value NRW Non revenue water O&M Operation and maintenance OBA Output Based Aid PAHO Pan-American Health Organization PBC Performance Based Contract PDO Project Development Objective PEMAPS Strategic Plan for Modernization of the Potable Water and Sanitation Sector (Plan Estátegico de Modernización del Sector de Agua Potable y Saneamiento) PHRD Policy and Human Resources Development Fund (Trust Fund) PIR Rural Infrastructure Project PIU Project Implementation Unit PLANASA National Plan for Water and Sanitation PNAPS National Water and Sanitation Plan PPIAF Public Private Infrastructure Advisory Facility PPP Public private partnership PRS Poverty Reduction Strategy PRSP Poverty Reduction Strategy Paper RMS Results Management System SANAA National Autonomous Water and Sewer Service (Servicio Autónomo Nacional de Acueductos y Alcantarillados) SCD Systematic Country Diagnostic SDR Special Drawing Rights SEFIN Secretariat of FInance SIL Specific Investment Loan ii SOE Statement of Expenditure SWAp Sector Wide Approach TA Technical Assistance TOR Terms of Reference UAP Project Administration Unit UEPEX External Loans Execution Unit (Unidad Ejecutoras de Préstamos Externos) UNDP United Nations Development Programme USCL Supervision and Control Unit (Unidad de Supervision y Control) USD United States Dollar WSS Water supply and sanitation Senior Global Practice Director: Guang Zhe Chen Practice Manager: David Michaud Project Team Leader: Marco Antonio Agüero ICR Team Leader: Chloë Oliver Viola iii HONDURAS Water and Sanitation Sector Modernization Project CONTENTS Data Sheet vi A. Basic Information vi B. Key Dates vi C. Ratings Summary vi D. Sector and Theme Codes vii E. Bank Staff viii F. Results Framework Analysis viii G. Ratings of Project Performance in ISRs xiv H. Restructuring (if any) xv I. Disbursement Profile xvi 1. Project Context, Development Objectives and Design 1 1.1 Context at Appraisal 1 1.2 Original Project Development Objectives (PDO) and Key Indicators 2 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 3 1.4 Main Beneficiaries 3 1.5 Original Components (as approved in the Financing Agreement) 3 1.6 Revised Components 5 1.7 Other significant changes 5 2. Key Factors Affecting Implementation and Outcomes 6 2.1 Project Preparation, Design and Quality at Entry 6 2.2 Implementation 8 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 10 2.4 Safeguard and Fiduciary Compliance 10 2.5 Post-completion Operation/Next Phase 11 3. Assessment of Outcomes 12 3.1 Relevance of Objectives, Design and Implementation 12 3.2 Achievement of Project Development Objectives 12 3.3 Efficiency Rating: Substantial 15 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 16 3.5 Overarching Themes, Other Outcomes and Impacts 17 4. Assessment of Risk to the Development Outcome Rating: Substantial 18 5. Assessment of Bank and Borrower Performance 18 5.1 Bank Performance 18 5.2 Borrower Performance 20 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners 22 Annex 1. Project Costs and Financing 23 Annex 2. Outputs by Component 24 Annex 3. Economic and Financial Analysis 26 iv Annex 4. Bank Lending and Implementation Support/Supervision Processes 37 Annex 5. Stakeholder Workshop Report and Results 39 Annex 6. Summary of Borrower's ICR and Comments on Draft ICR 40 Annex 7. Comments of Cofinanciers and Other Partners/Stakeholders 55 Annex 8. Tables and Figures 56 Annex 9. List of Supporting Documents 59 Annex 10. Map 60 v Data Sheet A. Basic Information HN Water and Sanitation Sector Country: Honduras Project Name: Modernization Project IDA-43350, IDA- Project ID: P103881 L/C/TF Number(s): 52700 ICR Date: June 5, 2017 ICR Type: Core ICR GOVERNMENT OF Lending Instrument: SIL Borrower: HONDURAS Original Total SDR 19.80M Disbursed Amount: SDR 26.47M Commitment: Revised Amount: SDR 26.50M Environmental Category: B Implementing Agencies: Finance Secretariat (SEFIN) Cofinanciers and Other External Partners: NA B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 03/08/2007 Effectiveness: 02/22/2008 02/22/2008 11/09/2010 Appraisal: 05/04/2007 Restructuring(s): 05/14/2013 10/06/2016 Mid-term Approval: 06/21/2007 05/31/2011 05/31/2011 Review: Closing: 12/31/2013 12/31/2016 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory vi C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Moderately Quality at Entry: Government: Satisfactory Satisfactory Quality of Moderately Implementing Moderately Supervision: Satisfactory Agency/Agencies: Satisfactory Overall Bank Moderately Overall Borrower Moderately Performance: Satisfactory Performance: Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Quality at Entry Project at any time No None (QEA): (Yes/No): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Moderately Closing/Inactive status: Satisfactory D. Sector and Theme Codes Original Actual Major Sector/Sector Public Administration/Central Government 7 7 Public Administration/Sub-National Government 12 12 Sanitation 8 8 Wastewater Treatment and Disposal 26 26 Water supply 47 47 Theme Code (as % of total Bank financing) Public Sector Development/Public Private 10 10 Partnerships Public Sector Management/Public Administration 49 49 Public Sector Management/Public Administration/Administrative and Civil Service 23 23 Reform Public Sector Management/Public 49 49 Administration/Municipal Institution Building vii Human Development and Gender/Labor Market 7 7 Policy Programs Human Development and Gender/Labor Market 7 7 Policy Programs/Labor Market Institutions Human Development and Gender/Labor Market 7 7 Policy Programs/Active Labor Market Programs Urban and Rural Development/Urban Development 14 14 Urban and Rural Development/Urban Development/Urban Infrastructure and Service 14 14 Delivery E. Bank Staff Positions At ICR At Approval Vice President: Jorge Familiar Pamela Cox Country Director: J. Humberto Lopez Jane Armitage Practice David Michaud John Henry Stein Manager/Manager: Project Team Leader: Marco Antonio Agüero Gustavo Saltiel ICR Team Leader: Chloë Viola ICR Primary Author: Elizabeth Hunter Eiseman F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project development objectives are: (a) to improve the sustainability, efficiency, and the reliability of the Recipient’s WSS services in eligible municipalities; and (b) to improve the performance of the Recipient’s national WSS sector institutions in the exercise of their respective roles in conformity with the WSS Sector Framework Law. Revised Project Development Objectives (as approved by original approving authority) The revised project development objective is to support the Recipient to improve: (a) the sustainability, efficiency and reliability of its WSS services in Eligible Municipalities; (b) the performance of its national WSS sector institutions in the exercise of their respective roles in accordance with the WSS Sector Framework Law; and (c) its capacity to respond promptly and effectively in an Eligible Emergency. (a) PDO Indicator(s) Original Target Formally Revised Actual Value Indicator Baseline Value Values (from Target Values Achieved at viii approval Completion or documents) Target Years 7 of the WSS utilities reach cost recovery (ratio total revenue / total operative cost Indicator 1 equal to one). Value 4 5 7 8 Date 01/01/2008 12/31/2013 12/31/2016 11/11/2016 This indicator was 114% achieved. The PROMOSAS’ providers, with the support of a technical assistance firm, reduced operations costs, improved commercial Comments management, strengthened financial management and adjusted tariffs to reach cost-recovery. Indicator 2 5 of the WSS utilities reach a ratio of revenues per volumetric unit of water (dropped) produced of at least 80% TBD via Value 5 NA NA Baseline Survey Date 06/21/2007 12/31/2013 NA NA This indicator was dropped in the Project’s first restructuring—it was not considered to adequately reflect the actual activities financed under the Project. Comments None of the WSS utilities had reached the ratio at the time the indicator was dropped. At least 5 of the WSS utilities increase their service continuity rating by one Indicator 3 category defined by ERSAPS’s performance indicators Value 0 5 NA 4 Date 12/01/2008 12/31/2013 NA 11/11/2016 This indicator was 80% achieved.* The following Project activities, combined with sectorization strategies, helped utilities improve continuity: a) well perforations; b) rehabilitation of existing wells; c) rehabilitation of water plants; and d) the provision of a water tanks to the utilities. This indicator, which was restructured November 2010, was originally worded as: “At least 5 of the WSS utilities increase service continuity (hours of service per Comments day) by 6 hours of more.” The indicator was revised in an effort to support and adopt ERSAPS’ indicators for the sector. ERSAPS’ service continuity ratings are as follows: Category A (from 18 to 24 hours of service per day); Category B (from 12 to less than 18 hours of service per day); Category C (from 6 to less than 12 hours of service per day); and Category D (less than 6 hours of service per day). * Unfortunately, the indicator was ill-conceived as Aguas de Puerto Cortés was Category A to begin with, so it was not possible to increase its service continuity rating, though it did increase the hours of service. At least 50% of the SANAA systems financed under the Project are transferred to Indicator 4 the municipalities. Value 27% 90% 50% 100% Date 01/01/2008 12/31/2013 12/31/2013 11/11/2016 This indicator was exceeded. The target for this indicator was adjusted in the first Comments restructuring. All three SANAA systems (Siguatepeque, Comayagua, and Danlí) were transferred to the Municipalities. Indicator 5 (moved to At least 6 design proposals of autonomous service providers approved by intermediate ERSAPS. level) ix Value 2 6 NA NA Date 01/01/2008 12/31/2013 NA NA While this indicator was 150% achieved, it was moved from the PDO-level to the Comments intermediate level in the Project’s first restructuring. ERSAPS approved 9 design proposals. Indicator 6 CONASA issues the new financial policy of the sector. Value No Yes Yes Date 01/01/2008 12/31/2013 11/11/2016 This indicator was achieved. CONASA issued the Financial Policy for the Water and Sanitation Sector in November 2015. CONASA’s new financial policy aims to ensure that there are adequate funds to achieve sector goals. In addition to Comments outlining sources of funding, it clarifies the roles and responsibilities of the sector actors. The center piece of the policy is a National Fund for WSS that service providers/municipalities can apply to for financing. At least 50% of municipal service providers (non-SANAA WSS systems that are Indicator 7 operated directly by municipalities) supported by the Project are converted into autonomous municipal service providers. Value 100 50 100 Date 05/14/2013 12/31/2016 11/11/2016 This indicator was exceeded. This indicator was included to reflect the addition of Comments new municipalities as part of the Additional Financing. The target was exceeded as 100% of the municipal providers were converted into autonomous providers Indicator 8 Number of water service providers the Project is supporting Value 7 9 9 Date 05/14/2013 12/31/2016 11/11/2016 This indicator was achieved. Core indicator added in the May 2013 restructuring. The Project supported the creation of 9 autonomous municipal service providers, Comments following the Sector Framework through a combination of technical assistance and investments for infrastructure. Time taken to disburse funds requested by Government for an eligible emergency Indicator 9 (weeks) Value NA 4 weeks NA Date 05/14/2013 12/31/2016 11/11/2016 Not applicable. This indicator was included during the second restructuring to Comments reflect the Project’s new IRM component. This component was never triggered. (b) Intermediate Outcome Indicator(s) Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Intermediate Results Component 1: Support to medium-sized municipalities to create autonomous service providers and invest in efficiency, rehabilitation, and expansion of service. At least 7 municipalities have signaled their intention to create an autonomous Indicator 1 service provider in the spirit of the Ley Marco by a letter to the implementing (dropped) agency in order to enter this component. x Value 2 7 Date 02/22/2008 12/31/2013 This indicator was dropped during the first restructuring—it was considered to be Comments subject to different interpretations and to not adequately reflect the actual activities financed under the Project. At least 10,000 additional people in urban areas (covering semi-urban or small Indicator 2 urban areas) provided with access to improved sanitation under the project. Value 0 +10,000 3,700 3,786 Date 02/22/2008 12/31/2013 12/312016 11/11/2016 This core indicator was 102% achieved. The target was revised during the second restructuring to reflect that fact that for most municipalities sanitation was not a Comments priority. New sanitation connections would have required the construction of wastewater treatment plants. Improved customer rating of water supply and sanitation as expressed in increase Indicator 3 by TBD percent in population rating service as satisfactory in participating (dropped) towns. Value 0 NA NA NA Date 02/22/2008 12/31/2013 NA NA This indicator was dropped during the first restructuring—it was considered to be Comments subject to different interpretations and to not adequately reflect the actual activities financed under the Project. At least 4 utilities in participating municipalities reach levels of Non-Revenue Indicator 4 Water (including apparent losses, real losses and unbilled authorized (dropped) consumption) by 10 percentage points. Value 0 4 NA NA Date 02/22/2008 12/31/2013 NA NA This indicator was dropped during the first restructuring—it was considered to be Comments subject to different interpretations and to not adequately reflect the actual activities financed under the Project. Piped household water connections that are benefiting from rehabilitation works Indicator 5 undertaken by the Project. Value 0 2,000 13,167 Date 11/18/2010 12/31/2016 11/11/2016 This core indicator was 658% achieved. This provides a counterbalance to the Comments sanitation indicator—which was underachieved in terms of original target—as utilities and municipalities chose to focus primarily on water. At least 9 design proposals of autonomous service providers approved by Indicator 6 ERSAPS. Value 0 6 9 9 Date 11/18/2010 12/31/2013 12/31/2016 11/11/2016 This indicator was 100% achieved. ERSAPS approved all the providers’ design Comments proposals. 6 of the WSS utilities increase by 20% the ratio of revenues per volumetric unit of Indicator 7 water produced. Value 0 5 6 6 Date 11/18/2010 12/31/2013 12/31/2016 11/11/2016 Comments This indicator was 100% achieved. xi Indicator 8 People trained to improve hygiene or sanitation practices under the Project Value 0 NA 5,000 16,899 Date 05/14/2013 NA 12/31/2016 11/11/2016 Comments This core indicator—added at the second restructuring—was 338% achieved. People trained to improve hygiene or sanitation practices under the Project, Indicator 9 percentage of which female. Value 0 NA 3,000 5,536 Date 05/14/2013 NA 12/31/2016 11/11/2016 Comments This core indicator—added at the second restructuring—was 185% achieved. Indicator 10 Percentage of grievances satisfactorily redressed by service providers per year. Value 0 NA 75% 77% Date 05/14/2013 NA 12/31/2016 11/11/2016 This indicator was 103% achieved. Indicator added at second restructuring in Comments reference to the scaled up accountability activities. At least 6 of the WSS utilities share indicators in the regional benchmarking Indicator 11 database of IBNET according to their protocols. Value 0 NA 6 6 Date 05/14/2013 NA 12/31/2016 11/11/2016 This indicator was 100% achieved. Indicator added during the second Comments restructuring to promote the sharing of utilities performance indicators internationally, through the World Bank-supported IBNET (network). Component 2: Tegucigalpa Non-Revenue Water Reduction Program Indicator 1 NRW (including apparent losses, real losses and unbilled authorized consumption) (dropped) reduced by 15% points in service area. 40% TBD via Baseline Value 25% NA NA Survey Date 02/22/2008 12/31/2013 NA NA This indicator was dropped in the first restructuring—it was considered to be Comments subject to different interpretations and to not adequately reflect the actual activities financed under the Project. Indicator 2 Ratio total income/m3 produced in targeted area increases by 20%. (dropped) Value 0% 20% NA NA Date 02/22/2008 12/31/2013 NA NA This indicator was dropped in first restructuring—it was considered to be subject Comments to different interpretations and to not adequately reflect the actual activities financed under the Project. Indicator 3 Number of active connections in service area. (dropped) Value 28,328 NA 37,750 NA Date 11/09/2010 NA 12/31/2013 NA This indicator was dropped during the second restructuring because it did not Comments accurately reflect the indicators and targets of the Tegucigalpa non-revenue water reduction contract. Percentage increase of collection per cubic meter of supplied water to the project Indicator 4 area. Value 0%, 2.52Lps/m3 20% 25% xii Date 11/18/2010 12/31/2016 11/11/2016 Comments This indicator was 125% achieved. Indicator 5 Urban areas covered by the contract increase service continuity by one category Value C B B Date 05/14/2013 12/31/2016 11/11/2016 This indicator was achieved. This indicator will follow the same ERSAPS categorization for continuity as in PDO indicator N. 2: Category A (from 18 to 24 Comments hours of service per day); Category B (from 12 to less than 18 hours of service per day); Category C (from 6 to less than 12 hours of service per day); and Category D (less than 6 hours of service per day). Component 3: National and Regional Institutional Strengthening Indicator 1 The three sector agencies (SANAA, CONASA, ERSAPS) have substantially (dropped) complied in applying the Ley de Transparencia y Acceso a la Información. Value No Yes NA NA Date 02/22/2008 12/31/2013 NA NA This indicator was dropped during the Project’s first restructuring—it was Comments considered to be subject to different interpretations and to not adequately reflect the actual activities financed under the Project. SANAA/Tegucigalpa has complied with legal requirements for transfer to Indicator 2 municipality. Value No Yes Yes Yes Date 02/22/2008 12/31/2013 12/31/2016 11/11/2016 This indicator was fully achieved. The Municipality has complied with the legal Comments requirements agreed on in the Project. Indicator 3 SANAA has at least one regional unit operating under the new model. Value No Yes Yes Yes Date 11/18/2010 12/31/2013 12/31/2016 11/11/2016 This indicator was fully achieved. SANAA established a technical assistance and Comments training center in Siguatepeque. Indicator 4 Indicators regarding utilities’ performance are published by ERSAPS. Value No Yes Yes Yes Date 11/18/2010 12/31/2013 12/31/2016 11/11/2016 This indicator was fully achieved. ERSAPS published information on the Comments PROMOSAS utilities’ performance on its webpage (http://www.ersaps.hn/) Indicator 5 At least 5 utilities have published their financial statements on a website. Value 0 5 9 9 Date 11/18/2010 12/31/2013 12/31/2016 11/11/2016 Comments This indicator was 180% achieved. Component 4: Project Management Cumulative percentage of disbursement targeted according to disbursement plan Indicator 1 is met. Value 0 100% 100% 100% Date 02/22/2008 12/31/2013 12/31/2016 03/31/2017 Comments As of April 30, 2017, $39,986,479 had been disbursed. Component 5: IRM established and ready to provide access to financial resources to Honduras in Indicator 1 the case of an eligible emergency. xiii Value No Yes Yes Date 05/14/2013 12/31/2016 11/11/2016 Comments This indicator was fully achieved. G. Ratings of Project Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 10/26/2007 Satisfactory Satisfactory 0.00 2 02/06/2008 Satisfactory Satisfactory 0.00 3 06/11/2008 Satisfactory Satisfactory 2.50 4 09/30/2008 Satisfactory Satisfactory 2.56 5 03/09/2009 Satisfactory Satisfactory 3.67 6 07/22/2009 Satisfactory Satisfactory 3.71 7 03/30/2010 Satisfactory Satisfactory 5.97 8 09/07/2010 Satisfactory Satisfactory 6.30 Moderately 9 03/13/2011 Satisfactory 7.08 Satisfactory Moderately 10 07/19/2011 Satisfactory 8.20 Satisfactory Moderately Moderately 11 02/14/2012 12.98 Satisfactory Satisfactory Moderately Moderately 12 09/27/2012 18.54 Satisfactory Satisfactory Moderately Moderately 13 03/08/2013 22.07 Satisfactory Satisfactory Moderately Moderately 14 08/19/2013 24.59 Satisfactory Satisfactory Moderately Moderately 15 03/06/2014 29.25 Satisfactory Satisfactory Moderately Moderately 16 10/11/2014 31.19 Satisfactory Satisfactory Moderately Moderately 17 03/29/2015 31.19 Satisfactory Unsatisfactory Moderately Moderately 18 10/12/2015 32.06 Satisfactory Unsatisfactory Moderately Moderately 19 05/04/2016 34.66 Satisfactory Unsatisfactory Moderately Moderately 20 06/23/2016 35.22 Satisfactory Satisfactory Moderately Moderately 21 12/13/2016 38.84 Satisfactory Satisfactory xiv H. Restructuring (if any) ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Key Approved Restructuring Date(s) Changes Made PDO Change DO IP in USD millions The Restructuring was carried out (i) to trigger the Involuntary Resettlement Policy (OP 4.12) and put in place appropriate mechanisms to manage involuntary resettlement issues that may arise 11/18/2010 No S S 6.59 during implementation; (ii) to revise monitoring and evaluation (M&E) indicators for the results framework while project development objectives and outcomes remain unchanged; and (iii) to modify the allocations of proceeds The Restructuring was included as part of a US$10 million Additional Financing for the Project to finance the costs associated with the financing gaps in Component 1, the scaling up of the Project to incorporate new municipalities and to include additional institutional strengthening activities. The Restructuring aimed to: (i) incorporate an Immediate Response Mechanism component; (ii) trigger 05/14/2013 Yes MS MS 22.91 OP/BP 7.50, Projects on International Waterways, in the event that municipalities located in trans-boundary basins of Honduras are selected as additional beneficiaries of the Project; (iii) revise the description of Component 1 and 3; (iv) update the Project’s results framework; and (v) reallocate Project funds. The closing date was also extended for three years, until December 31, 2016. Reallocation between disbursement categories to enhance funding for 10/06/2016 MS MS 31.54 additional investments, technical assistance, and supervision xv ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Key Approved Restructuring Date(s) Changes Made PDO Change DO IP in USD millions activities to support utilities in achieving targets. I. Disbursement Profile xvi 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. In 2007, Honduras—Central America’s second-largest country—had one of the highest incidences of poverty and inequality in the Western Hemisphere. Honduras was still in the process of recovering from Hurricane Mitch, which struck in 1998 and resulted in a massive loss of life and assets. After the hurricane, Honduras began implementing an ambitious Poverty Reduction Strategy (PRS) to cut extreme poverty in half by 2015. At appraisal, extreme poverty had decreased, but 50 percent of Hondurans were still living under the poverty line.1 2. The Government of Honduras’ (GoH) strategy to reduce poverty levels relied on the participation of local governments. In 1990, the GoH began a process of decentralization with a municipal law that, among other things, (a) conferred local service delivery responsibilities and fiscal autonomy to the country’s 298 local governments and (b) established a fiscal transfer of five percent of the annual budget to municipalities. At the time of appraisal, this process of decentralization in the water supply and sanitation (WSS) sector was just beginning. 3. The GoH’s decentralization effort included issuing the 2003 Drinking Water and Sanitation Sector Framework Law (the Framework Law). The Framework Law mandated decentralizing the National Autonomous Water and Sewer Service (Servicio Autónomo Nacional de Acueductos y Alcantarillados, SANAA), which managed and provided water supply services to about 30 rural and urban centers.2 The Framework Law stipulated the transfer of SANAA’s assets to the municipalities by 2008. In addition, the Law: (i) required municipalities to set up an autonomous service provider (but did not describe or prescribe a management model for this service provider), (ii) established a sector planning body, the National Council for Water and Sanitation (Consejo Nacional de Agua Potable y Saneamiento, CONASA), and (iii) established the Water and Sanitation Sector Regulator (Ente Regulador de los Servicios de Agua Potable y Saneamiento, ERSAPS), to assist in providing more effective sector governance. After decentralization, and after the transfer of its assets to municipalities, SANAA was intended to become a technical assistance (TA) agency providing support to municipal service providers as well as serving as CONASA’s technical secretariat. 4. The decision to overhaul the structure of the WSS sector reflected a number of systematic service and governance issues. In 2001, only 81 percent of Hondurans had access to potable water and only 68 percent had access to sanitation. The Pan-American Health Organization (PAHO) estimated that 23 percent of contagious diseases in Honduras were waterborne. Although water resources were abundant in Honduras, water scarcity was becoming an issue, particularly in large and mid-sized cities, because of rapid urbanization and insufficient investment in WSS. Water service was intermittent and rationed in many cities, with service only two times a week (and in some cases even less in the summer). The WSS sector institutions were locked in a vicious cycle of weak performance incentives, resistance to cost recovery tariffs, insufficient funding, asset deterioration, squandering of financial resources, and political interference. 5. At appraisal, the GoH was focused on operationalizing the new WSS Framework. The GoH, with the support of the World Bank and the Public-Private Infrastructure Advisory Facility (PPIAF), had developed a Strategic Plan for Modernization of the Potable Water and Sanitation Sector (PEMAPS) and a National Water and Sanitation Plan (PNAPS) to guide implementation of the Framework Law. While CONASA and ERSAPS had been formed, both were relatively weak institutions. The decentralization and re-engineering of SANAA was progressing slowly, and it was becoming clear that the October 2008 decentralization deadline 1 Roughly one half of Honduras’ 7.4 million residents lived in rural areas at the time of appraisal (PROMOSAS Project Appraisal Document). Poverty was largely concentrated in rural areas - 74% of the poor and 86% of the extreme poor lived in rural areas (FY2006-2010 World Bank Country Assistance Strategy). 2 Municipalities provided sanitation services—and in some cases water supply services—through direct municipal provision. 1 stipulated in the Framework Law was not going to be met. A central issue was the severance payments necessary to dismiss SANAA employees who would no longer be necessary once service was handed over to autonomous municipal service providers. This issue was especially sensitive in Tegucigalpa, where SANAA had 57 percent of its connections. 6. Rationale for Bank Assistance. The Bank was well positioned to assist the GoH in its decentralization and institutional strengthening efforts given its global experience supporting WSS sector reform as well as its previous engagement in the Honduran WSS sector; prior to this Project, the Bank had supported: (i) the development and acceptance of the PEMAPS and PNAPS among numerous key sector actors and donors; (ii) an Output-Based Aid (OBA) Water and Sanitation Facility; and (iii) activities to prepare for the transfer of WSS services from SANAA to the Municipality of Tegucigalpa. 7. Higher-Level Objectives. The Project also set out to support the Country Assistance Strategy’s (CAS) Strategic Objectives. The Project’s activities to strengthen WSS service providers would make Honduras more competitive, directly supporting Strategic Objective 1 (Accelerating Equitable Economic Growth and Employment Generation). The Project’s activities to foster transparency in public spending, decentralize service provision, and strengthen professional capacity of WSS sector personnel would support Strategic Objective 2 (Strengthen Governance through State Modernization and Participation).3 In addition, autonomous and efficient WSS service providers would be in a better position to reduce water pollution, supporting Strategic Objective 3 (Strengthen Environmental Protection and Risk Management). In addition to supporting the CAS, the Project directly supported the GoH’s Poverty Reduction Strategy, which ranked improving WSS services and compliance with the 2003 Framework Law as priorities. 1.2 Original Project Development Objectives (PDO) and Key Indicators 8. The Project Development Objective (PDO), as stated in the Financing Agreement and the main text of the PAD, was: (a) to improve the sustainability, efficiency, and reliability of the Recipient’s WSS services in Eligible Municipalities; and (b) to improve the performance of the Recipient’s national WSS sector institutions in the exercise of their respective roles in conformity with the WSS Sector Framework Law. 9. In the PAD’s Data Sheet the PDO is defined as: To improve the sustainability, efficiency and reliability of Honduras’s water supply and sanitation (WSS) services in the participating municipalities through implementing the Strategic Plan to Modernize the WSS sector (PEMAPs). The specific objectives were to: (i) Establish and strengthen municipal service providers and support good governance in WSS services provision through increasing transparency and accountability; (ii) Reinforce the national sector actors (ERSAPS, CONASA, SANAA) to fulfill their new roles a necessity for successful decentralization of the services; and (iii) Reduce non- revenue water in selected areas of Tegucigalpa to provide immediate impact on the service quality. 10. It is not typical for the PDO to be inconsistent between the Data Sheet, the main text of the PAD, and the Financing Agreement. In this case, the ICR team decided to utilize the PDO listed in the Financing Agreement and the main text of the PAD given that the Financing Agreement is a legally binding document. 11. The Project’s success meeting each aspect of the PDO was to be measured by the following key outcome indicators:  The improvement in the sustainability, efficiency, and reliability of the Recipient’s WSS services in Eligible Municipalities measured through: 3 This also supported Honduras’ 2006 Law of Transparency and Access to Public Information, which obliged public institutions to create effective mechanisms that promote transparency in order to combat corruption and illegal activity in public policy. 2 o Sustainability—cost recovery level measured as the ratio of total revenues to total operative cost o Efficiency—revenues per volumetric unit of water produced o Reliability—hours of service per day  The improvement in the performance of the Recipient’s national WSS sector institutions in the exercise of their respective roles in conformity with the WSS Sector Framework Law measure through: o SANAA—number of systems transferred to the municipalities o ERSAPS—number of design proposals of autonomous service providers approved by ERSAPS o CONASA—CONASA issues the new financial policy of the sector. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 12. The PDO was revised during the 2013 Additional Financing (AF) to reflect the addition of the Immediate Response Mechanism (IRM). The GoH and the Bank agreed that all IDA operations should include an IRM component to allow Honduras to access uncommitted funds in the event of a national emergency. The PDO (as described in the Financing Agreement) otherwise remained the same. The revised PDO was to: (a) to improve the sustainability, efficiency, and reliability of the Recipient’s WSS services in Eligible Municipalities; (b) to improve the performance of the Recipient’s national WSS sector institutions in the exercise of their respective roles in conformity with the WSS Sector Framework Law; and (c) to improve the Recipient’s capacity to respond promptly and effectively to an eligible emergency. 13. The 2010 and 2013 Restructurings resulted in adjustments to the Project’s key indicators. During Project implementation, it was noted that several of the indicators were prone to various interpretations and that others did not adequately reflect the Project’s activities. The Bank and the PIU revised the indicators to better clarify and align the indicators with the Project. In addition, the revised results framework adopted benchmarking indicators developed by the new WSS regulator, ERSAPS (in an effort to strengthen its position), for the WSS sector as a whole and aligned the framework with Bank-wide efforts to use “core sector indicators.” The adjustments to the results framework represented a minor, “adaptive4” restructuring. The revised PDO level and intermediate outcome indicators for the Project are presented in the Data Sheet. 1.4 Main Beneficiaries 14. The Project’s main beneficiaries included the residents of approximately six to nine municipalities, with populations between 40,000 and 300,000, who would benefit from improved water service as well as approximately 200,000 residents of Tegucigalpa who would benefit from the NRW activities. In addition, sector institutions, SANAA, ERSAPS, CONASA, and the autonomous municipal service providers, supported by the Project, would benefit from institutional strengthening activities. The AF enabled the scaling up of the Project to reach additional municipalities with populations between 10,000 and 40,000. 1.5 Original Components (as approved in the Financing Agreement) 15. Part 1 (US$21.2 Million). Supporting Eligible Municipalities to Create Autonomous WSS Service Providers and to Invest in the Efficiency, Rehabilitation and Expansion of WSS Service Delivery. A. Provision of technical assistance to Eligible Municipalities to: (1) Identify an appropriate management model for the delegation to autonomous service provider of WSS services; (b) prepare the legal, financial, technical and social instruments required to implement such model; (c) plan the transfer of WSS systems from SANAA to Eligible Municipalities and plan the creation of WSS service providers and related municipal WSS 4 Restructuring to retain or improve relevance as external circumstance changed. 3 oversight and policy-making bodies; (d) plan the efficiency improvement investments under Part 1.B. of the Project; and (e) train the new WSS service providers in their new task; (2) Support their respective WSS service providers created under Part 1.A.1 of the Project to: (a) establish a business plan to enable them to implement their responsibilities under the respective municipal WSS policy; and (b) revise or prepare a master plan to improve efficiency, quality and coverage levels of the WSS service, including a financial and economic analysis; and (3) Design and supervise the investments conducted under Part1.C of the Project. 16. B. Provision of goods, works, services and training to Eligible Municipalities that have successfully identified and designed a management model under Part1.A of the Project, to: (1) Transfer the WSS systems from SANAA to Eligible Municipalities, establish the autonomous WSS service provider and related municipal WSS oversight and policy-making bodies, and prepare the delegation of the WSS service to such provider; and (2) Carry out technical and commercial efficiency improvement investments (such as leak detection, network sectorization, meter installation, billing and collection, and reduction of non-revenue water), including design and supervision if required, within the investment ceilings set forth in the Operational Manual. 17. C. Provision of works to Eligible Municipalities that have successfully delegated their WSS services to autonomous service providers, for the expansion and/or rehabilitation of water supply, sanitation and wastewater treatment systems, all in accordance with the requirements and ceilings set forth in the Operational Manual. 18. Part 2 (US$4.5 million): Tegucigalpa Non Revenue Water Reduction. Design, implementation, financing, supervision and evaluation of a performance-based service contract with a private company, acceptable to the Association, to reduce technical and commercial water losses in a limited geographical area of the Recipient’s Municipality of the Metropolitan District (AMDC – Alcaldía Municipal del Distrito Central, or Tegucigalpa). 19. Part 3 (US$7.7 million): Institutional Strengthening of National and Regional WSS Sector Institutions A. 1. Strengthening of CONASA and SANAA through the provision of consultants’ services and goods for: (a) the creation of a specific unit attached directly to CONASA and housed in SANAA, to oversee the implementation of the PEMAPS (the PEMAPS unit); (b) the preparation of the policy and legal instruments to clarify CONASA’s and SANAA’s respective governance structure, mandate and financing, and the development of a sector financing policy aimed at guaranteeing the long-term sustainability of the sector; (c) a status review and update of the PEMAPS; (d) the development of CONASA’s new municipal WSS sector policy-making and planning roles; and (e) the carrying out of a communications strategy to support good governance and transparency in the Project. 2. Strengthening of ERSAPS through the provision of consultants’ services and goods to: (a) support the definition and implementation of new municipal WSS oversight unites; and (b) enhance its capacity to gauge WSS services management models. 3. Supporting donor coordination activities in the Recipient’s WSS sector. 20. B. 1. Financing of severance payments for SANAA staff laid off in the course of decentralization of WSS services to the Eligible Municipalities. 2. Carrying out of a study on future staffing of SANAA, including: (a) the design of a broader retrenchment program that combines disciplinary staff reductions, addresses payroll fraud, and determines future retrenchment needs; and (b) data gathering on alternative employment found by staff affected by the current retrenchments, and on changes in staff employment totals in SANAA and other service providers. 21. C. Supporting preparatory activities for the transfer of the WSS service delivery from SANAA to the Recipient’s Municipality of the Metropolitan District (AMDC- Alcaldía Municipal del Distrito Central, or Tegucigalpa), including activities such as updating inventories, installing consumer and asset management systems, and planning the transfer process. 22. Part 4 (US$1.6 million): Project Management. A. Provision of technical assistance, equipment, training, travel and general operating costs, as necessary, to operate and strengthen the UAP to enable it to effectively implement, monitor and evaluate the Project. B. Provision of audit services for purposes of Section II.B.3 of Schedule 2 to this Agreement. C. Carrying out of 4 Project management activities to guarantee compliance by each agency and entity involved in the Project with the Recipient’s Transparency Law (Ley de Transparencia y Acceso a la Información Pública, Decree no. 170-2006 dated November 22, 2006) and the Anti-Corruption Guidelines. D. Strengthening of Recipient’s agencies involved in the implementation of the Project through trainings and study tours, purchase of vehicles and equipment and upgrading of working environment. 1.6 Revised Components 23. The 2013 AF/Restructuring included several adjustments to the Project’s components. The most significant adjustments focused on revising the components to reflect the support of the sector framework in a clearer and broader manner. The PAD focused a significant part of the institutional strengthening activities on the implementation of the Strategic Plan for the Modernization of the WSS Sector (PEMAPS), which was intended to be a roadmap for the implementation of the Sector Framework. However, it was not prioritized by the GoH and became outdated. See Annex 8, Table 1 for detail on each adjustment. 24. In addition, a fifth component was added to the Project to reflect an agreement between the GoH and the Bank that all IDA operations include an Immediate Response Mechanism (IRM) “to allow the country to access uncommitted funds in the event of a national emergency.” No funds were allocated to this component, but the inclusion of this component allowed for the use of simplified procedures and rapid restructuring to meet crisis and emergency needs when necessary. The IRM Operational Manual, prepared at a Country-Level, outlined the details of the Mechanism, which was not triggered during project implementation. 1.7 Other significant changes Table 1. Other Significant Changes RESTRUCTURING OTHER SIGNIFICANT CHANGES LEVEL I The involuntary resettlement safeguard (OP4.12) was triggered given that municipal RESTRUCTURING authorities and service providers expressed the need to prioritize physical works that 11/09/2010 could potentially involve easements, construction on either privately-owner or leased land, and land acquisition. At appraisal, only complementary, efficiency enhancement works were foreseen. The M&E indicators were revised (as illustrated in the Data Sheet) in order to better align the indicators with the Project’s investments, to minimize the risk of misinterpretation of the indicators, to incorporate ERSAPS’ indicators for the WSS sector and to incorporate World Bank core indicators. The allocation of proceeds was modified to increase the amount of works and accelerate disbursement. This was in response to the GoH’s request to accelerate disbursement for employment generation. ADDITIONAL The Project received an Additional Financing of US$10 million to cover the higher- FINANCING AND than-expected costs associated with the creation of WSS service providers and to RESTRUCTURING OF support the inclusion of new municipalities in the decentralization process. THE PROJECT The AF/Restructuring also: (i) Incorporated a component on IRM; (ii) Triggered the 05/14/2013 International Waterways (OP7.50) Safeguard; (iii) Updated the Project’s results framework (see Data Sheet); (iv) Reallocated funds; and (v) Extended the Project’s closing date by three years (until December 31, 2016). LEVEL II Disbursement categories reallocated to prioritize activities and allow full RESTRUCTURING disbursement before the disbursement deadline, April 30th, 2017 10/06/2016 5 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 25. Soundness of background analysis. The Project directly supported the implementation of the Honduran Water Sector Framework Law. At appraisal, the GoH was actively involved in decentralizing the sector, and the Project incorporated lessons learned from the experience to- date. For instance, at appraisal, an Inter-American Development Bank (IDB) Project supporting the decentralization process was struggling to “win” the commitment of the municipalities. The IDB Project offered loans to the municipalities. Taking this experience into account, the Bank’s Project attempted to make engagement more attractive to the municipalities by offering them grants under a matching scheme. The Project also drew on the Bank’s international experience implementing WSS projects, specifically regional experience that illustrated the importance of policy in dramatically improving service. Although the WSS Framework Law established the roles and responsibilities of key sector institutions (CONASA, ERSAPS and SANAA), the institutions were weak and struggling to fulfill their respective roles. Reflecting this lesson and this reality, the Project included a development objective focused solely on strengthening sector institutions. 26. Assessment of Project design. The PDO was strongly aligned with the GoH’s sector priorities and sector agencies’ ongoing activities. The Project took a comprehensive stance to the sector reform, focusing not only on service improvements, but also on building a well-structured and well-governed sector. While the Project was ambitious in supporting the GoH’s plans for major transformations in the sector, the PDO presented feasible, measurable, and grounded objectives. The Project team closely tied each aspect of the PDO to an outcome indicator (see M&E Design Section for more detail). The PDO focused on improvements rather than “zero to one” changes. 27. The Project’s components directly supported the achievement of the PDO. The Components included a number of complex activities for which the Bank could add significant value. For Component One (Part 1), which supported the creation of new service providers, the design established a straightforward method to support the creation of decentralized utilities through a phased approach that included tailored, on-the-ground technical assistance (TA). The only eligibility requisite for municipalities to begin the process was population size (the Project focused on municipalities with 40,000 to 300,000 residents), minimizing the risk of municipalities being selected as a political favor. The “stepped approach” required municipalities to achieve certain benchmarks before they could receive financing and provided specific incentives for utilities demonstrating better results, thus promoting competition (given the limited funds available) and transparency (see Diagram 1, Annex 8: The Stepped Approach). 28. Recognizing the complexity of the decentralization of SANAA in Tegucigalpa, the Project aimed to improve services and prepare for the handover to the Municipality of Tegucigalpa (rather than focus on the creation of a fully operational municipal provider). Support for the handover of the Tegucigalpa system was critical given that the success of the transfer was considered a “game changer” in the entire decentralization process. The IDB was also actively involved in supporting the transfer of the Tegucigalpa system, financing studies to prepare for the transfer among other activities. The Project’s activities aimed to complement the IDB’s investments.5 Component 2 (Part 2) focused on improving the sustainability, reliability, and efficiency of Tegucigalpa’s WSS system by reducing NRW in Tegucigalpa through a performance based contract (PBC), which was innovative for SANAA at the time. Prior efforts 5 The Project aimed to provide consistent and complementary technical advice and financial support. The Project’s partnership arrangements included a Mesa Sectorial to promote dialogue between the GoH, donors and civil society. In addition, one of the objectives of the PEMAPS was to promote alignment between donors’ investments. At the national level, both the IDB and the World Bank were supporting the Tegucigalpa transfer. The banks agreed that once a decision about the reform in Tegucigalpa was made that they would develop consistent assistance for the process. The Project also focused on municipalities that were not benefitting from the IDB projects to prevent overlap / conflict of interest based on the different financing approaches. 6 to reduce NRW in Tegucigalpa had not been successful; the Bank aimed to demonstrate that a results-focused approach might produce better outcomes. 29. The sector strengthening activities (Component 3/Part 3) focused on establishing the responsibilities of key sector agencies and strengthening their capacity to successfully carry these out. One shortcoming was the Project’s emphasis on the PEMAPS, which was expected to guide the roll out of the WSS Framework Law in a harmonized manner, during initial project preparation. Although the PEMAPS was widely accepted at the time of design, it lost relevance over the course of implementation. The design’s inclusion of funds for severance payments reflected a sound understanding of the sector and central challenges to decentralization — without these payments, decentralization is unlikely to have taken place. 30. Implementation Arrangements. The Project’s comprehensive approach to supporting the sector reform required the involvement of various sector actors. Although theoretically CONASA would have been the logical lead-implementing agency given its high-level policy role, it was agreed that, at appraisal, CONASA did not have the capacity to lead the Project. 31. The Secretariat of Finance (SEFIN) was selected to lead the Project. Although this was a non-traditional choice to lead a WSS project, SEFIN had higher levels of procurement and financial management (FM) capacity than sector institutions and, since it was not a direct beneficiary of any project activities, was better placed to play the role of “honest broker” between sector institutions. SEFIN also had previous experience leading WSS projects with multilateral financing; in 2004, SEFIN had created a Project Administration Unit (UAP) specifically to manage financial resources from the World Bank, the IDB, and other donors. The Project co- financed the salaries and operational recurrent costs of the UAP. The Financing Agreement also established that changes to key staff could only be made if satisfactory to the Bank, promoting consistency in coordination. 32. The implementation arrangements sought to maintain fiduciary processes and standards at a level acceptable to the Bank while employing the technical capacity of existing sector institutions. The UAP was in charge of managing funds for all Project components and led most procurement processes (the design contemplated that municipalities with adequate capacity would engage in procurement as well). The UAP was also responsible for leading technical supervision6 of Component 1, 4 and 3B (severance payments). In turn, SANAA was responsible for leading the technical supervision of Component 2 and 3C (preparation for the transfer to Tegucigalpa), and CONASA and ERSAPS for leading the technical supervision of Component 3A (TA). A high-level ad hoc group, the Inter-institutional Coordination Group (GIC)—which included representatives from SEFIN, SANAA, CONASA, the Honduras Municipalities Association (AMHON) and ERSAPS—was expected to monitor project progress and ensure institutional coordination. 33. Adequacy of the government’s commitment. The GoH’s decision to designate SEFIN as the lead implementing agency signaled a high-level of commitment to the Project. In addition, the GoH’s Poverty Reduction Strategy illustrated its commitment to sector decentralization. Nevertheless, the commitment of sector institutions to the implementation of the Framework Law, particularly SANAA, was not as clear. The General Manager of SANAA publically voiced his personal opposition to the Framework Law in 2007, and SANAA’s labor unions actively protested and blocked decentralization efforts. Amidst this tension, the GoH and a number of sector institutions reiterated their support for the reform and their commitment to proceed with the reform. A demonstration of commitment to the Project was also required by all key sector agencies in order for PROMOSAS to move forward; a criteria for effectiveness was an inter- institutional agreement signed by SANAA, ERSAPS, CONASA, and SEFIN. 34. Assessment of risks. At appraisal, the Project’s risks were rated as Substantial. The design team identified and proposed adequate mitigation measures for the majority of the relevant risks. For example, the risk that the municipalities would not be interested in participating in the 6 Preparing ToRs and bidding documents and reviewing the inputs of consultants among other responsibilities. 7 Project was mitigated through utilizing attractive financing (grants as opposed to loans). The risk of low implementation capacity at the local level was mitigated by integrating on-the-ground TA in the Project design. Given SANAA’s poor track record on NRW, the design employed a PBC to reduce NRW in the metropolitan area of Tegucigalpa. In addition, given that the Project would be implemented through a presidential election cycle, the Project’s Financing Agreement included legal clauses against unnecessary changes in the Project’s implementation staff. A risk that was not identified was the municipalities’ resistance to installing micrometers and eventually raising tariffs. The sustainability of the Project’s investments relied on the capacity of the autonomous municipal service providers to charge tariffs that covered their operation, maintenance, and future investment costs. There was, however, significant political resistance to increasing tariffs systematically to ensure cost recovery (see the Project Outcomes section for more detail). 35. Safeguards. At appraisal, the municipalities benefitting under Component 1 had not yet been selected. The following safeguards were triggered based on the type of work foreseen and the country context: Indigenous Peoples, Environmental Assessment, Natural Habitats, and Physical Cultural Resources Safeguards Policies. Given that the locations of the works had not been identified at appraisal, a broad environmental management and social framework was developed. The Project was classified as Category B according to World Bank Operational Guidelines, and the framework built on the Honduras OBA Water and Sanitation Conceptual Framework. In addition, the GoH developed an Indigenous Peoples/Ethnic Communities Policy Framework. The UAP was responsible for compliance with safeguards. Although the UAP had one environmental and one water engineer on staff, the Project design included the hiring of a specialist responsible for the Project’s environmental and social needs. 2.2 Implementation 36. The Project closed with a Moderately Satisfactory Implementation Rating given its achievement of five of its six results level indicators, 15 of its 16 intermediate indicators as well as its almost full disbursement (99.8 percent). The Project overcame an array of extraordinary political obstacles that delayed and complicated implementation progress. Nevertheless, the Project’s strong alignment with the Framework Law as well as its holistic approach to sector reform and adaptable, hands-on leadership and supervision resulted in the Project’s successful implementation. Table 2 in Annex 8 provides a summary of major events at the project, sector, and national level. 37. Delays in Reform. At appraisal, the deadline for the transfer of all water systems from SANAA to the municipalities was October 2008. In 2008, the National Parliament extended the deadline by five years, until October 2013. Although decentralization was still an ongoing process in October 2013, no additional deadlines were established. The extension (and subsequent elimination) of the deadline generated doubt about the GoH’s intention of actually carrying out the reform; several alternative visions for the WSS sector began to circulate. The GoH, however, asserted its commitment to the reform, highlighting the decentralization process in the Country Vision (2010-2022) and National Plan (2010-2038). 38. Tumultuous Political Environment. During implementation, the Project encountered a number of challenges due to the political environment in Honduras. The most notable was the June 2009 coup, in which then President Manuel Zelaya was detained by the Honduran military and exiled to Costa Rica. In line with OP7.30, the Bank stopped processing withdrawal applications. Without new resources from the Bank, financing for most ongoing contracts stalled. Bank disbursements resumed in December 2009, but the elections and entrance of a new administration further delayed implementation. To stabilize the portfolio, the Task Team reinforced implementation arrangements and ensured that the operational plans for 2010 were consistent with the GoH’s fiscal constraints and emergency priorities. Another political challenge that persisted throughout most of implementation was the resistance of SANAA’s labor union to activities that threatened to change the status quo. For example, when the SANAA union withdrew support for the Tegucigalpa PBC, SANAA workers declined to read meters although, according to the contract, they were supposed to accompany the contractor in this activity. SANAA’s management decided not to counter the union because of upcoming national elections. 8 Ultimately, the meter readings were neither incorporated into SANAA’s commercial system nor used as the basis for customer billing. At the municipal level, the Project’s inclusion of funds for severance payments was critical for overcoming labor union resistance and successfully transferring services from SANAA to the autonomous municipal service providers. 39. Politicized Tariffs and Resistance to Metering. The Project’s main political challenge at the municipal level revolved around resistance to increased tariffs and metering. ERSAPS provided guidance on tariff setting, but the municipal governments were responsible for setting the tariff levels. Municipal politicians, especially during election years, were hesitant to raise tariffs, thus limiting the capacity of the autonomous providers to charge cost recovery tariffs. In addition to tariff levels, the installation of micrometers proved to be a political issue in a number of municipalities. In the most drastic cases, meter installation stalled because of the threat of negative repercussions. Hands-on TA, the active involvement of the municipal service providers (including house-to-house visits in some cases) and the decision to rollout micrometer pilot zones helped mitigate resistance to tariff increases and meters. 40. Flexible Technical Assistance. The structure of the TA was key to the successful implementation of the Project.7 At the municipal level, the TA firm worked hand-in-hand with the autonomous municipal service providers to develop and execute annual action plans based on the providers’ capacities and needs. The TA contract was also partly performance-based—tying some payments to the utilities’ achievements of outcomes. The TA firm was based in the field, permitting consistent dialogue between the providers and the firm. The TA helped build the capacity of the providers’ staff, many of who had limited prior experience in the sector, to carry out their roles. The TA also helped ensure that the municipal providers had adequate tools (such as a commercial management systems) and information (such as a basic information on the layout of the systems and the number of connections) necessary to manage the systems. During the ICR field visits, the providers highlighted the TA as a critical component of their overall success, also noting their reliance on the TA and their desire for continued support. The TA, however, was not as appropriate for the small towns that were included in PROMOSAS as part of the AF. These providers had lower capacity and needed substantial preparation and handholding before they would benefit from the level of TA the other providers received. The TA firm neither had the capacity nor the time to fully attend the needs of these small town providers. Another shortcoming of the TA was its propensity to focus solely on creating autonomous municipal providers, downplaying the potential benefits of eventually adopting a corporate model. The PROMOSAS providers did not clearly understand the advantages of corporate models. 41. Hands-On Supervision: Mid-Term Review (MTR) and Restructuring. The Task Team carried out a comprehensive MTR in June 2011 in which they visited each of the municipalities participating in the Project. Although disbursements were lower than expected, the Project was still on-track to meet its development objectives, and beyond adjustments to the operational manual to ease disbursement requirements for the municipalities, no major adjustments were required at the time. Over the course of implementation, however, the Task Team processed three restructurings, which facilitated implementation and helped maintain the Project’s relevance. For instance, during the first restructuring, funds were moved to investments that would quickly generate employment given Honduras’ critical unemployment situation. The AF/second restructuring responded to, among other issues, the shortage of funds the autonomous municipal service providers encountered for improving their service efficiency. The third restructuring reallocated funds between disbursement categories to enhance funding for additional investments, TA, and supervision activities to support the providers. In addition to formal restructurings, the Project’s flexible design enabled the Project to respond to institutional/beneficiary needs on a 7 It is worth noting that the TA was not part of the original project design, but was introduced a year into implementation when it became apparent that this was the only way forward, and much effort went into the design of the TA contract. 9 case-by-case basis. The inclusion of a clause to limit turnover within the UAP team was also key to the success of the Project as it promoted consistent supervision over the course of implementation. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 42. M&E design. The UAP was responsible for coordinating M&E activities. In addition to producing annual monitoring reports, the UAP’s social team was responsible for conducting focus groups and organizing baseline surveys. The participating municipalities were responsible for providing data on their autonomous service providers’ performance. Although the indicators presented a clear method for measuring the achievement of the PDO, several of the indicators had overly ambitious targets, were subject to misinterpretation, and did not closely align with the Project’s investments. For instance, the indicator, “At least 90 percent of SANAA systems transferred to the municipalities,” went beyond the scope of the Project, which was focused on facilitating the decentralization process in six to nine municipalities. The indicator “5 of the participating WSS utilities increase service continuity (hours of service per day) by 6 hours or more” was very ambitious, especially given that a baseline on service continuity had not yet been established. The disconnection between several indicators and Project activities reflected the fact that the municipalities had not been selected at design. 43. M&E implementation. Over the course of implementation, the monitoring indicators were adjusted to better reflect the Project’s reach and activities (see the Data Sheet for more detail) and to better evaluate the Project’s progress. The UAP encountered difficulty ensuring the quality of data from the municipalities. This was in part because the municipalities lacked data on the status of service in their respective areas. A credible baseline for the results framework indicators was not established until 2013. M&E implementation began to improve as the municipal service providers gained greater knowledge and control of their respective systems. The UAP produced annual reports on implementation progress and published and distributed informational bulletins on the Project’s progress. In addition, ERSAPS produced reports on service provider performance and published performance indicators on its webpage. The GIC was established, but it lacked leadership and did not actively participate in monitoring project progress or institutional coordination.8 The Project closed with a Moderately Satisfactory M&E Rating. 44. M&E utilization. The Project’s intermediate indicators promoted utilization of the M&E data. For example, in compliance with one indicator, providers posted their financial statements online. In compliance with another indicator, ERSAPS published service providers’ performance indicators on the ERSAPS webpage. The allocation of Component 1 funds was linked to the performance of utilities as measured by ERSAPS. This encouraged the providers to report their indicators to ERSAPS and helped providers benchmark their performance against others. In addition to publication at the national level, six of the municipal service providers began sharing their performance information with the international benchmarking database, IBNET. These activities helped promote transparency and compliance with the 2006 Law of Transparency and Access to Public information. 2.4 Safeguard and Fiduciary Compliance 45. Environmental and Social Safeguards. The UAP hired an Environmental Specialist and a Social/Communication Specialist on full-time consultancy contracts. These two consultants addressed safeguard policy issues in addition to carrying out other relevant environmental, social, and communication activities. The Project received Satisfactory social and environmental safeguards ratings throughout implementation. The requirements for construction works, granting 8 The GIC initiative also established an operative level “GICO” to perform as a deliberative space to discuss technical project issues. The UAP and institutions lost interest in continuing with the GICO, especially during the final stage of the project, as activities in the institutional component were already implemented or the majority committed, and the UAP’s efforts were focused on procurement and concluding the pending infrastructure. Rules and roles were not clearly established for either the GIC or the GICO, and participation by institutions was limited. 10 environmental licenses, and applying environmental contract clauses when appropriate. There were no issues on the ground in regard to civil works. 46. During implementation, the International Resettlement (OP 4.12) and International Waterways (OP 7.50) Safeguards were triggered. Although the Project originally did not foresee any involuntary resettlement, service providers expressed the need to prioritize physical works that could potentially involve easements, construction on either privately-owned or leased land, and land acquisition. An Involuntary Resettlement Policy Framework (IRPF) was prepared and approved by the Bank in 2010.9 The potential location of the new beneficiary municipalities led to the triggering of the International Waterways Policy, but an exception to the riparian notification requirement was granted given that the Project’s activities would only involve minor additions and rehabilitations and would not adversely affect the quality or quantity of water flows. 47. Fiduciary Compliance. The positioning of the UAP within SEFIN proved advantageous: the Project finished with a Satisfactory FM rating and a Moderately Satisfactory procurement rating. The most significant financial challenges arose because of events external to the Project, specifically the GoH’s austerity measures10 and the resulting tension of whether there would be adequate financing to fully disburse the AF. The Project encountered greater challenges in managing procurement activities. The 2012 Procurement Post Review revealed several loopholes in the UAP’s management of files and administration of contracts. These errors were tied to organizational issues. The Procurement rating was upgraded after the March 2014 procurement post review but was again downgraded in March 2015 given a noted drop in quality control from the UAP. The UAP’s procurement management suffered from a high turnover of procurement personnel. Over the course of the Project, the UAP had seven different procurement specialists. The UAP attributed this high turnover to the low salary offered to the specialists. Although the Moderately Satisfactory rating was maintained, the UAP, working closely with the Bank Task Team, had an impressive procurement performance during the final months of operation that resulted in the award and completion of all major contracts. 2.5 Post-completion Operation/Next Phase 48. At the time of the ICR, the World Bank and the GoH were carrying out a pre- identification mission for a potential follow-up project. PROMOSAS established an effective mechanism for transferring service responsibility from SANAA to mid-size municipalities, and the GoH had committed to decentralizing the 13 WSS systems still managed by SANAA in its Country Vision and National Plan (see Relevance section), The follow-up project would build upon PROMOSAS’ progress and assist the GoH in achieving its decentralization goals. Moreover, the follow-up project would support sector institutions, which are key to the long-term health of the sector and the success of the decentralization effort, to carryout their roles and responsibilities in line with the WSS Framework Law. 49. The National Plan for Water and Sanitation (PLANASA), which was approved by CONASA in 2014, includes a results framework with performance indicators that are highly relevant to the Project and will permit future M&E of the Project’s impact. For example, PLANASA’s indicators include “Three regional SANAA offices established to provide TA for providers and municipalities,” and “ERSAPS regulates providers with more than 5,000 connections and the latter pay regulation fees,” among other indicators. 9 Two families were resettled—one in Puerto Cortes and one in Comayagua 10 In December 2014, the International Monetary Fund (IMF) approved a US$113.2 million Stand-By Arrangement and a 75.4 million Stand-By Credit Facility for Honduras. The arrangements focused on maintaining macroeconomic stability and included measures for sustained fiscal consolidation. 11 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 50. Relevance of Objectives (Rating: Substantial). The Project’s objectives are aligned with the WSS Framework Law as well as the Government priorities detailed in the Country Vision (2010-2038) and the National Plan (2010-2022). These strategies highlight the GoH’s intention of continuing the decentralization process supported by this Project. For example, Goal 4.3 of the Country Vision is to achieve a decentralization of 40 percent of public investment to the municipal level. In the National Plan, Strategic Pillar 5, Health as a Fundamental Building Block for Improvements in the Quality of Life, contains the following indicator: number of municipalities managing their own water and sanitation systems. The continued relevance of the Project’s decentralization and sector strengthening objectives are also highlighted in PLANASA: its strategic lines of action include “decentralization of services” and “sector institutions and governance.” 51. While the Country Partnership Framework FY2016 to FY2020 does not include specific objectives for the water sector, there are several entry points for the water sector including under Pillar 1: Fostering Inclusion (Objective 1: Expand Coverage of Social Programs) and Pillar 3: Reducing Vulnerability (Objective 6: Boost Resilience to Disasters and Climate Change). In addition, the Bank’s 2016 Honduras Systematic Country Diagnostic (SCD) highlights the lack of access to potable water and improved sanitation solutions as key factors that limit inclusion and equal distribution of wealth. The Project remains very relevant for the GoH—it has requested Bank support to design a follow-up operation with the objective of continuing the sector reform and building on the progress made under PROMOSAS. 52. Relevance of Design and Implementation (Rating: Substantial). The Project’s design reflected lessons learned from past modernization projects, particularly the importance of a strong institutional and policy structure to sector sustainability. The Project’s components, which were well linked to the PDO, remain highly relevant to Honduras’ consolidation of the sector reform. The Project’s design to support the decentralization of service provision to autonomous municipal providers in mid-sized cities is especially relevant given the Project’s effective support of this process (described in detail in the Achievement of PDOs Section below) as well as the GoH’s plan to continue the process of decentralization. The Project’s design is not as relevant for remote, small-sized cities given their (generally) lower human resource capacity levels. 53. The Project’s approach to institutional strengthening activities also remains highly relevant given the key role the institutions will play in the long-term sustainability of the reform. The Project provided the institutions with the tools necessary to successfully carry out their roles and responsibilities in the sector. The support provided to the institutions under the Project, however, needs to be paired with greater Government commitment in order to be fully effective. While the institutions made significant strides over the course of implementation because of the Project’s needs-based TA approach, the advances could potentially be lost because of a lack of governmental support for the institutions. 54. In regard to the relevance of the results framework, the restructurings, as described in the Monitoring and Evaluation section, were key to strengthening the link between the indicators and the Project’s activities. The restructurings also further aligned the indicators with ERSAPS’ internal indicators, further strengthening the relevance of the indicators post-Project. 3.2 Achievement of Project Development Objectives Objective 1: Improve the sustainability, efficiency, and reliability of the Recipient’s WSS services in Eligible Municipalities (Rating: Substantial) 55. The Project supported the creation of seven autonomous service providers by providing TA to support the formation of the service providers, short-term efficiency improvement measures (including surveys and diagnostics of service provision, installation of meters, and construction of offices) and investment funding (for technical improvements for the WSS system) once services were transferred (see Annex 2 for more detail on the specific investments). The Project 12 also provided support to two autonomous municipal service providers that were already operating (Puerto Cortés and Choloma). In addition, the Project’s investments,11 supported activities to prepare the Municipality of Tegucigalpa for the eventual transfer of the Metropolitan WSS System from SANAA. Table 2 highlights the sustainability, efficiency and reliability improvements the municipal providers12 made over the course of the Project. The infrastructure works have directly benefited a total of 13,167 families with improved water services and 3,786 families with improved sanitation. Overall, the improvements in the providers indirectly benefitted about 650,000 people (108,000 families)13 with improved WSS service. 56. The Project focused on improving the municipal service providers’ capacity to deliver sustainable, reliable and efficient service. The Project’s sustainability goals focused on improving the financial health of the providers. This was done through improving the providers’ capacity to systematically monitor their income and expenses and improving the providers’ service efficiency (technical and commercial). The Project surpassed its sustainability outcome indicator by 14 percent; eight of the providers achieved operating cost recovery. The Project’s reliability goals focused on improving the continuity of service through improving system infrastructure and strengthening the providers’ capacity to operate the systems. While the Project missed its reliability outcome indicator (at least five of the providers increase their service continuity rating by one category defined by ERSAPS’ performance indicators) by 20 percent, seven of the nine providers improved or maintained service continuity.14 The Project’s efficiency goal focused on minimizing NRW (physical and non-physical losses) through supporting technical (leak detection, the installation of meters and sectorization) and commercial (billing and collection) activities. The Project fully achieved the associated indicator for this objective: six of the WSS utilities increase by 20% the ratio of revenue per volumetric unit of water produced. In addition, the Project supported a PBC to reduce NRW in a pilot area of Tegucigalpa. The contract, which benefited approximately 200,000 households, resulted in reduced NRW levels, increased service continuity and increased metered consumption. The Project fully achieved the two indicators on the PBC. Table 3 details the impact of the PBC in Tegucigalpa. 57. The Project’s support to the transfer of services from national to municipal service provider in Tegucigalpa was unique given that it financed activities to develop the groundwork for future sustainable, reliable, and efficient service. The Project financed consultants to help develop the commercial and financial model for the municipal service provider, conducted various diagnostics on WSS service within the municipality, developed a water balance for the primary distribution system, and assisted in developing a business plan among many other activities (See Annex 2 for more detail). The Project met the associated indicator. 11 The Projects efforts to support the transfer were complemented by the Honduras Integrated Urban Water Management in the Greater Tegucigalpa Area Grant (P125903), which as approved by the WB on March 23, 2011, in the amount of US$400,000 (RETF),. 12 With the exception of the municipal provider in Tegucigalpa given that the transfer is still ongoing. 13 Not including the beneficiaries of the NRW contract in Tegucigalpa. 14 In addition, Puerto Cortes’ progress could not be captured by this indicator as it began and ended in the highest service continuity category, Category A. 13 Table 2. Autonomous Municipal Service Providers’ Performance15 Autonomous municipal Sustainability Reliability: Continuity Efficiency: Income per M3 service provider Cost Category17 produced (lps/m3) Recovery16 Before  After  Before  After  % Increase  Aguas de Puerto Cortés S.A. 1.01 A (22.34h) A (23.2h) 3.94 5.08 129% de C.V. Aguas de Choloma S.A. de 1.04 C (7h) B (13.5h) 3.10 3.27 105% C.V.18 Aguas de Siguatepeque 1.68 D (3) C (7.83) 2.42 4.92 203% (transferred from SANAA) Servicio Aguas de 2.24 B (12.18) B (12.5) 1.63 2.37 145% Comayagua (transferred from SANAA) Aguas de la Lima 1.79 B (16) B (16) .63 1.22 94% Service provided by the Municipality prior to the Project Aguas de Danli 1.23 D (3) C (7.8) 2.71 4.06 150% Aguas del Valle (Villanueva, 1.43 C (9) C (7) 4.43 4.95 12% San Manuel y Pimienta) Aguas de Tutule 1.05 B (13) B (10) .83 1.66 100% July 2014 transfer Aguas de Teupasenti .88 D (3) C (8) 1.52 2.01 32% July 2014 transfer Sources: Technical Assistance Final Report, December 2016 and ERSAPS Presentation on Indicator Achievement,“Cumplimiento de Indicadores del PROMOSAS,” October 2016. Table 3. Results of the Performance-Based Contract Indicator Unit Baseline Target Achievement 18 month 30 months Increased Service Hours/ 2 days 8.4219 16.84 5.8720 13.1 Continuity Increased Metered Percentage 0% +30% + 80.29% +125.26% Consumption Source: IWA Task Force on PBC: Tegucigalpa PBC Case Study Objective 2: Improve the performance of the Recipient’s national WSS sector institutions in the exercise of their respective roles in accordance with the WSS Sector Framework Law (Rating: Substantial) 58. The Project met all of its PDO-level indicators related to this objective. The Project used a flexible approach to support key national WSS sector institutions (SANAA, CONASA, and ERSAPS) to fulfill their roles as established in the Framework Law. The Project financed operational costs as well as the development of tools and strategies to strengthen the institutions’ performance. The successful achievement of Objective 1 is in part attributable to the roles these sector institutions played in fostering the development of the autonomous municipal service providers. 59. SANAA. Aside from the decentralization support described above, the Project supported SANAA in its effort to become the central TA entity for the sector. This included financing the 15 Most of the “Before” data comes from a 2013 survey carried out by the TA firm and the UAP that was deemed more credible than the original baseline. 16 Information on cost recovery pre-Project was not available. 17 The categories were defined by ERSAPS as: Category A (from 18 to 24 hours); Category B (from 12 to less than 18 hours of service per day); Category C (from 6 to less than 12 hours of service per day); and Category D (less than 6 hours of service per day). 18 Mixed Company formed several years before the Project began. The IBD financed the development of the master plan. Entered at Phase 1B. 19 This indicator, and its baseline and target were modified to be based on a 2-day cycle given the fact that water is distributed only every other day. 20 For the first two months of this measurement period the contractor had not installed pressure meters and the Supervision Consultant penalized it by assigning an assumed continuity of 0, which dragged the average down. 14 development of a SANAA regional capacity building and TA center in Siguatepeque as well as pilot TA projects in Villa de San Antonio and Taulabé. The TA center offers classes and workshops to service providers, has laboratories to test water quality, and offers TA for WSS providers in need of assistance. The center, however, still depends on outside financing to operate, and SANAA needs to dedicate more staff and resources to the center in order to meet demand for training courses. In Villa de San Antonio and Taulabé, SANAA staff successfully provided technical support to the providers, assisting in establishing service baselines and diagnostics, applying appropriate laws, and implementing a geographic information system, among other activities. Demand for TA currently exceeds SANAA’s capacity, illustrating the need and rationale to further build upon the progress made under this Project. The Project, through the creation of the TA center and the support of the TA pilots, provided SANAA with tangible examples of how to move forward in its new role as a TA entity. Moreover, the demand for SANAA’s TA services (both at the center and in the field) validated the need for a TA-focused institution at the central level. 60. ERSAPS. The Project supported the development of numerous tools to help ERSAPS fulfill its role as the sector regulator. The Project supported developing and publishing regulations on: the quality of WSS services, attention to inquiries and complaints from users, infractions and sanctions, fees for supervision, inspection and counseling from ERSAPS, and tariffs for urban WSS services. The Project also supported ERSAPS’ outreach efforts to build monitoring and regulatory capacity at a local level through financing capacity building activities and equipment for municipal supervision and control units (USCLs, Unidades de Supervisión y Control). The USCLs provided a method for on-the-ground monitoring, assisting in collecting performance indicators that ERSAPS—with the support of the Project—published on its webpage and used to develop annual sector performance reports. The Project improved ERSAPS’ capacity to fulfill its role as sector regulator, promoting transparency in the sector among other benefits. Nevertheless, additional support from the GoH is needed for ERSAPS to become fully operational (See Risk to Development Outcomes section for more detail). 61. CONASA. The Project helped CONASA carry out a number of activities critical to its role as the lead policy institution for the sector. With the support of the Project, CONASA helped municipalities establish Water and Sanitation Municipal Committees (COMAS)21 to ensure citizen participation and representation in local water service management. The Project also financed consultancies to support CONASA in developing a WSS sector information system, an organizational structure for SANAA once the decentralization process is complete, and a Sector Financial Policy.22 As with ERSAPS, additional support from the GoH is need for CONASA to maximize use of the tools developed under this Project. 62. The Project achieved its objective of improving sector institutions’ performance in their respective roles. Nevertheless, institutional reform is a long-term process and these institutions need significant support from the GoH to maintain the gains made under this Project and to reach their full effectiveness. 3.3 Efficiency (Rating: Substantial) 63. An economic analysis was carried out to evaluate the works implemented under the Project, using actual costs and benefits obtained from the interventions. Annex 3 provides details on the methodology and results of the evaluation compared to those expected at appraisal. Costs and benefits were transformed to 2007 prices to make them comparable with those used at 21 The COMAS are an important instrument that enabled citizen participation in the project and in some places (for instance, Danli, Siguatepeque) protected the provider from political interference. In some cases they are an important part of the corporate governance structure of the provider (for instance, in Danli) and in other cases act as facilitators between the provider and the Municipal Board (Corporación Municipal). 22 The centerpiece of the Policy is a National Fund for Water in which financing from various sources would be collected to provide a source of easy-to-access credit for WSS service providers as well as donations for providers with limited financial capacity. The Project financed various workshops to support the rollout of the Policy. At the close of the Project, the Fund was still not operational. 15 appraisal and to eliminate the impact of currency fluctuation, which was reflected in inflation of 31% and depreciation of 8.7% against the USD on average during the period. During appraisal and the preparation of the AF, a sample of candidate municipalities were evaluated using a cost benefit analysis. Results showed average returns of 33% and 9% respectively. For this ICR, the evaluation considered interventions in five municipalities, whose cost represents 70% of works implemented under Component 1. 64. Results show that interventions in all of the municipalities were worthwhile as the benefits surpassed the costs, positively impacting the economic development of the municipalities. Actual average returns are 22%, lower than the expected return of 33.5% at appraisal.23 Several reasons explain the lower than expected returns at appraisal: (a) only one of the municipalities evaluated at appraisal was included in the Project;24 (b) health benefits—which were included during appraisal—were not included in this evaluation since the improvement of service did not eliminate intermittence of service; and (c) some of the expected benefits from metering, improvements in billing, and better water usage were not realized as some municipalities could not install meters because of resistance from customers. 65. From a financial point of view, the project shows satisfactory results as incremental revenues were higher than incremental operating costs—providing reassurance for the sustainability of the works implemented. From the utilities’ point of view, results show that all municipalities reached full operating costs and are generating a financial surplus that allows them to partially fund capital investments. At the time of the AF, the Project was extended by three years to ensure completion of both the original and scaled-up activities. The extended time period is part of the cost of the Project’s adaptive approach. 3.4 Justification of Overall Outcome (Rating: Moderately Satisfactory) 66. Split Evaluation. Although the Project’s core objectives remained constant throughout implementation, the Board approved two restructurings in which PDO-level indicators and targets were revised. As a result, the ICR team conducted a split evaluation (See Table 5 below). When analyzing the Project against its original outcome indicators, the Project meets four of its six targets. The Project does not meet two of its original outcome indicators: (1) at least 90 percent of the SANAA systems transferred from the municipalities, which was revised because it went beyond the reach of the Project and (2) five of the participating WSS utilities increase service continuity by six hours or more, which was revised to be in line with ERSAPS’ sector wide indicator on service continuity. The revision of these indicators reflected an M&E design issue rather than a Project performance issue. The split evaluation also considers the Project’s outcome against the outcomes established in the first restructuring. In this scenario, the Project would have met five of the six PDO indicators. None of the PDO-level indicators were dropped in the second restructuring; targets were only made more aggressive to reflect the AF. The Project maintained substantial relevance and efficiency throughout implementation. 67. Although the Project achieved Substantial ratings for Relevance, Efficacy and Efficiency against the revised PDOs, the ICR team proposes rating the overall outcome as Moderately Satisfactory rather than Satisfactory given the Substantial risk to the development outcomes. Table 5. Split Evaluation Against Against Against Revised Overall Original Revised PDOs PDOs (2013) PDOs (2010) Relevance 23 The economic evaluation during AF was conducted only for the interventions to be financed with the US$ 10M of AF. The average weighted ERR for the AF was 9%. The evaluation was based on actual achievements attained at that time, yet previous interventions were not included, and therefore its results do not represent the whole project. On the other hand, the evaluation at appraisal as well as the evaluation at ICR included interventions financed under the whole project and hence are comparable. 24 During appraisal, the following three municipalities were evaluated: Le Ceiba, Choluteca, and Siguatepeque. Ultimately, however, only Siguatepeque was included in the Project. For this particular municipality, actual returns (29%) were higher than expected at appraisal (24%). The situation among municipalities varies widely—during appraisal, estimated returns ranged from 17% to 61%. 16 Relevance of Objectives Substantial Substantial Substantial Relevance of Design & Substantial Substantial Substantial Implementation Efficacy PDO1: Improve the sustainability, Modest Substantial Substantial efficiency, and reliability of the Recipient’s WSS services in Eligible Municipalities PDO2: Improve the performance of Modest Substantial Substantial the Recipient’s national WSS sector institutions in the exercise of their respective roles in accordance with the WSS Sector Framework Law. Efficiency Substantial Substantial Substantial Rating MU S S MS Rating value 3 5 5 4 Weight (% disbursed before/after 16% 57% 27% 100% PDO change) Weighted value (2x3) .48 2.85 1.35 4.68 Final rating 5 (rounded) 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 68. In regard to poverty impacts, the AF focused on supporting Honduras’ poorest municipalities.25 In addition, the Project supported the use of social tariffs to ensure that all households, regardless of income level, could afford WSS services. The Sector Financial Policy also included various mechanisms to ensure poor service providers could access funds. In regard to social development, the Project encouraged active citizen participation and engagement through the creation of COMAS, which are made up of the managers of municipal corporations, organized civil society and/or residents, to oversee local policy and planning issues.26 In addition, the GoH promoted the creation of USCLs, which are made up of three members of civil society and one regulation and control expert hired by the municipality, to monitor the quality of water service and compliance with sector regulations. In addition, the staff at the autonomous municipal service providers developed outreach and communication material to guide their users on water conservation practices and how to read meters among other themes. The Project did not have a strong gender focus. A post-Project analysis of five PROMOSAS I service providers revealed that only 86 out of the providers’ 466 employees were female. Women were also underrepresented in decision-making positions. As a result of this underrepresentation, PROMOSAS II will support the development and implementation of a gender strategy focused on promoting greater inclusion. (b) Institutional Change/Strengthening 69. In regard to institutional strengthening, the Project provided training courses, study tours, and TA from international consultants for staff at municipal service providers and sector institutions. The SANAA training center in Siguatepeque will continue to offer training courses after the close of the Project, perpetuating this type of institutional strengthening. The Project also supported activities that focused on training the trainers. An additional, unexpected outcome was the formation of the Associations of Municipal Water Service Providers (AHPSAS). The Association formed during implementation to promote knowledge sharing. Currently 23 of the municipal service providers are involved in the association.27 In regard to institutional change, 25 While the AF targeted poor municipalities (C or D as per the Municipal Poverty Index), the original Project did not add a poverty filter. The focus was on modernization, and the majority of the municipalities that participated were not poor in comparison to other municipalities in Honduras. 26 CONASA assists in the initial training and establishment of the COMAS. 27 Some of the results include: (i) 2 water operator’s partnerships led by AHPSAS: CONAGUA, Aguas de Medellin, and one international exchange event with SUNASS; (ii) Several local exchange events with national providers, including providers that are 17 the success of the Project – as seen in improved service quality and efficiency - has validated the decentralization process and has helped to consolidate support for the implementation of the WSS Framework Law. (c) Other Unintended Outcomes and Impacts (positive or negative) 70. Another positive, unintended outcome was the development of five-year business plans to guide municipal service provider’s post-Project. The UAP, ERSAPS and TA helped the providers develop these plans, and the providers, during the ICR field visits, displayed considerable ownership of the plans. The plans included activities aimed at protecting watersheds to ensure continued access to quality water. This is especially important, as the impact of climate change on water resources has become increasingly notable in Honduras. 4. Assessment of Risk to the Development Outcome (Rating: Substantial) 71. The autonomous municipal service providers have, on a whole, reached a stable level of operation and are providing more efficient, reliable, and sustainable service. As mentioned above, the providers developed five-year business plan to guide their development post-Project. The capacity of the providers to implement the business plans, sustain the Project outcomes and continue to improve service quality, however, depends largely on the providers’ capacity to bill and collect tariffs at a fair level.28 Many providers improved their financial position drastically after decentralization. This was in part because SANAA was tremendously inefficient. For example, after the 2008 decentralization in Siguatepeque, employees per 1,000 connections went from 5.5 to 2.3 and collection ratios went from 35 to 113 percent. Cost recovery surged from 63 to 123 percent in two years. After these tremendous initial gains, however, cost recovery began to decrease because the Municipality did not increase tariffs for three years.29 To maintain the gains from decentralization, the service providers need political support to keep tariffs at an adequate level. Ideally, ERSAPS and the USCLs would be able to depoliticize tariffs and enforce annual adjustments in rates. 72. The WSS institutions, however, have limited enforcement power and depend heavily on outside financing to operate. For example, at the time of the Project’s close, ERSAPS neither had the authority to enforce its regulations nor the financing to carry out its basic functions and to provide consistent support to the USCLs. Fifty percent of ERSAPS’ staff was financed by the Project, and few USCLs were operational. The commitment of the GoH to the sector reform is critical for the improvements and tools developed under Project to be maintained. The deadline for decentralizing the remaining systems operated by SANAA has been missed with no consequences, decreasing the urgency for SANAA to fully develop its capacity as a TA agency and limiting the relevance of CONASA and ERSAPS. Until the decentralization process is finalized, SANAA will remain, to a certain extent, the de facto leader of the sector. 73. The planned follow-up project, PROMOSAS II, will mitigate the risks of providers’ and institutions’ performance backsliding. Nevertheless, the ICR team maintained the risk as Substantial given that the current political environment in Honduras is far more challenging than when the Project launched in 2007. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (Rating: Moderately Satisfactory) 74. The Bank only had eight months to prepare the Project given a pressing deadline to access available IDA funds. Despite this short preparation period, the Bank conducted a thorough not part of PROMOSAS; (iii) Representing the sector in the national water council – CONAGUAH, gaining recognition from sector institutions and other sectors as well and (iv) CONAGUAH is led in this case by the ministry of agriculture. 28 Tariff reviews will probably be put on hold in the short-term, as local authorities seeking reelection in 2018 are unlikely to raise water tariffs in 2017. 29 World Bank, A Public Expenditure Review. Honduras: Decentralization of Water and Sanitation Services. 18 background analysis and aligned the Project with the GoH’s sector objectives and priorities. The Project’s flexible TA approach at the municipal and national levels revealed an in-depth knowledge of the Honduran WSS sector and was key to the Project’s success across the changing priorities of three presidential administrations. The Project was ambitious in its decision to support the GoH’s sector reform at the national level, yet solid in its reasoning. As past Bank experience has shown, long-term sustainability is closely linked to the presence of a developed institutional framework. At design, the GoH was attempting to establish the national level WSS institutions and needed further assistance to do so. The Bank had significant value to add in institutional strengthening activities and designed the strengthening components to focus on realistic/manageable, “stepping stone”-type improvements. In addition, the country context at design was quite distinct from the country context at the time of the ICR. At the time of design, Honduras’ had a relatively stable democracy, and the GoH was motivated to carryout a transformative institutional modernization project. By Project closing, the political context of the country was far more fragile. Another highlight of the design was the inclusion of the NRW PBC, which was novel for Honduras at the time. Minor design shortcomings included the M&E Results Framework, which proved to have a number of indicators that were subject to misinterpretation. The Bank also underestimated the risk of community resistance to micrometers and overestimated the degree of acceptance of the PEMAPS. (b) Quality of Supervision (Rating: Moderately Satisfactory) 75. For the first five years of implementation, the Bank Task Team provided consistent and hands-on support to guide the Project. Although three TTLs led this Project during this time period, new TTLs were incorporated in Project supervision before officially taking charge. This created smooth transitions and did not present significant disruptions in terms of implementation. During this time period, the Task Team demonstrated flexibility and adaptability to changing policies and disruptive events. For instance, as the PEMAPS lost relevance, the Task Team adjusted the Project’s course. When employment generation became critical in Honduras, the Task Team shifted funds to focus on activities that would help spur employment. When it became clear that the original Project had underestimated the time and cost of improving service quality and continuity, the Team smoothly integrated an AF to advance progress. Although the AF was critical to the success of the Project, it resulted in a design shortcoming—the inclusion of small municipalities in the Project. The decentralization approach supported by the Project was more effective for mid-sized cities than small-sized cities. This shortcoming was exacerbated by a two- year gap in supervision that took place directly after the AF. The TTL in charge of the Project took a hands-off approach to supervision, and Project progress suffered. During this period, the UAP highlighted how the Bank’s slow response on procurement processes limited the agility of the Project. Nevertheless, the Project made an impressive recovery during the last 18 months of supervision when Bank management assigned a local TTL as well as a lead sector expert to the Project. The impact of having a local team managing the Project enabled very close supervision that propelled the Project to a Moderately Satisfactory finish. For the majority of the Project, the Task Team was actively involved in supervising the Project. Furthermore, the Task Team effectively coordinated efforts with the WSP on a number of TA focused activities, including the development of the Sector Financial Policy. The Bank team provided effective supervision on safeguards, procurement and FM issues. Overall, the UAP expressed a high-level of satisfaction with Bank supervision support but requested additional environmental and social support from the Bank on sensitive issues, such as the installation of micrometers, in PROMOSAS II. (c) Justification of Rating for Overall Bank Performance (Rating: Moderately Satisfactory) 76. Given the two ratings above, the ICR team rated overall Bank performance as Moderately Satisfactory. 19 5.2 Borrower Performance (a) Government Performance (Rating: Moderately Satisfactory) 77. The GoH’s decision to manage the Project from SEFIN, consistent provision of counterpart funds and the approval of PLANASA and the Sector Financial Policy greatly facilitated Project implementation. Although the GoH provided adequate support to the Project, the GoH’s delay in establishing deadlines for the decentralization of SANAA as well as limited support for sector institutions, especially in regard to funding for ERSAPS and CONASA, reduced the Project’s potential impact on institutional strengthening activities. Nevertheless, the GoH’s continuous support for the WSS reform was notable given the changes in presidential administrations, the appearance of new counter-reform proposals, and the resistance of the politically powerful SANAA labor union. Furthermore, the GoH’s endorsement of the WSS decentralization process in the Country Vision and National Plans will help consolidate PROMOSAS’ achievements. (b) Implementing Agency or Agencies Performance (Rating: Moderately Satisfactory) 78. The UAP/SEFIN team was the central implementing agency, responsible for the majority of Project activities. At the beginning of the Project, the Task Team noted limited commitment on behalf of the UAP/SEFIN team given their various commitments beyond the Project and limited vested interests in the sector. The UAP, however, was quickly strengthened and coordinated the Project with great care. Staff turnover within the UAP was very low, permitting consistent leadership. On the ICR field visits, it was clear that the UAP had been actively exercising its role as the supervisor and coordinator of Project activities. The UAP was up-to-date on the details of Project progress and also had significant rapport with the various autonomous municipal service providers the ICR team visited. The UAP encountered minor procurement and M&E issues during implementation but successfully improved performance over the course of implementation. Austerity measures limited the capacity of the UAP as well as the motivation of the team. During this period, the GoH confiscated the UAP’s vehicles, limiting their capacity to visit the field, and declined the UAP’s requests for reimbursement for the costs of using their own vehicles. This limited morale and resulted in a temporary drop in the quality of supervision and coordination. 79. SANAA was responsible for leading implementation of the NRW component and the activities in preparation for the transfer of services in Tegucigalpa. SANAA successfully oversaw the implementation of the PBC. SANAA labor union resistance, however, limited the reach of the activity. In particular, the incorporation of the new meters in the organization’s day-to-day operations and the knowledge exchange foreseen between the firm and SANAA staff. 80. CONASA was responsible for leading implementation of Part 3A, which included TA for institutional strengthening at CONASA, ERSAPS and SANAA. CONASA successfully oversaw the development and approval of the sector financial policy, a critical document for the health of the Honduras water sector. (c) Justification of Rating for Overall Borrower Performance (Rating: Moderately Satisfactory) 81. Given the two ratings above, the ICR team rated overall Borrower as Moderately Satisfactory. 6. Lessons Learned 82. Designating a non-sector entity to manage implementation in difficult operating environments. The success of a Project is largely dependent on the effectiveness of the Project Implementation Unit (PIU). Choosing a PIU, however, can be complicated, especially when there are several sector agencies with potentially competing interests, there is a lack of capacity at the sector level and/or the sector is undergoing a reform. In these cases, it is worthwhile to evaluate the possibility of positioning the PIU within a non-sector entity. The success of the PROMOSAS Project was largely tied to the positioning of the PIU/UAP within SEFIN. The UAP was able to act as an “honest broker” between various sector actors, had greater procurement and fiduciary capacity than the sector institutions, and was in a better position to ensure adequate budget 20 assignments. The Project’s inclusion of a clause in the Financing Agreement that established changes to key staff could only be made if satisfactory to the Bank further strengthened the effectiveness of the UAP by promoting continuity in leadership. 83. Enhancing selection criteria and utilizing competition to motivate reforms. Establishing selection criteria can help filter participants who are not highly committed to a project and increase the feeling of selectivity/exclusivity for those who are. The TA highlighted two pre- conditions that could have been used with PROMOSAS: (i) the degree to which the providers were measuring water consumption and utilizing meters; and (ii) whether or not tariffs had been adjusted in the last two years. To inspire competition and continued commitment, preconditions such as these could be also used as part of a stepped approach to access additional funding after access to the first phase of funding. In addition to these benefits, pre-conditions and selection criteria can be used to determine the capacity-levels of the participants and to differentiate the Project’s approach accordingly. For instance, in the case of PROMOSAS, there were two clear groups of “eligible municipalities,” mid-sized cities and small cities, with distinct realities and capacities. The small cities had far lower capacity, most notably in the lack of human resources, to operate and manage the system and were not prepared to implement the same level of activities as the mid-sized cities. They needed far more on-the-ground assistance. A differentiated approach that focused on first building leadership (one of the key determining factors in the success of each PROMOSAS provider) and the small cities’ providers’ team could have helped the small cities assimilate the subsequent TA more effectively. 84. Supervising in a client-focused, adaptive and hands-on style. The gap between Project design and Project implementation is significant as a Project’s design includes many projections on the operating environment on the ground. In addition, the reality on the ground is always changing. A strong alignment between the Project and sector laws and long-term strategies as well as a hands-on, client-focused, adaptive approach is key given this reality. In the case of PROMOSAS, the operating environment – between a coup d’état, three different presidential administrations, and the implementation of national austerity measures – was changing rapidly. In addition to the Project’s direct support of sector laws ad strategies, having a local team on the ground and a flexible approach to TA proved invaluable given these circumstances. The task team was able to provide close supervision and tweak the Project to respond to changing needs as necessary. The extension of the Project from five to nine years was also key to maintaining the high-level reform process in Honduras’ ever-changing political environment. The Project supplied an apolitical, steady source of financing for the sector reform. 85. Implementing NRW PBCs in high-risk countries. In countries where PBCs are novel, including capacity building on the PBC model is key. Explaining the PBC’s conceptual design to all interested parties (potential contractors and supervisors) at the outset of the Project, ideally during a pre-bid meeting, can help improve the quality and quantity of the proposals. A kick-off workshop with all actors, including the contract designers, can also help facilitate implementation. For PROMOSAS, the overall performance-based portion of the PBC was quite limited (15 percent) given the country risk. Nevertheless, a higher amount would probably have better focused the contractor’s attention on achieving results. In addition, given their complexity, PBCs require significant implementation time and resources. The proposed duration of PROMOSAS’ PBC, 30 months, was too short and the resources assigned (to the engineering phase in particular) were too limited. The time, effort, and financing required to implement PBCs in high-risk countries may not be justifiable for small contracts.30 86. Overcoming resistance to metering through pilots. Meters oftentimes invoke images of privatization and high tariffs. Overcoming this image and the associated community resistance to 30 Michaud, David. “NRW Management: The Case of Tegucigalpa.” Published in a report by The International Water Association, 2017. 21 meters is challenging but crucial for both the installation and long-term sustainability of the meters. In addition to providing social outreach campaigns on the use of meters, PROMOSAS autonomous municipal service providers highlighted the utility of beginning micro metering programs in pilot zones, showing the tangible benefits of the meters, and gradually extending metered-areas outwards to cover their entire service area. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 87. The UAP’s closing report on the Project (See Annex 6) is aligned with the ICR. The UAP also reviewed the ICR and agreed with the large majority of the report. They highlighted the level of ambition of the initial indicators and the difficulty of establishing an initial baseline. Looking forward to the PROMOSAS II Project, the UAP recommended additional Bank social and environmental supervision, especially for sensitive issues such as the installation of micrometers and the development and implementation of social outreach campaigns. The UAP also recommended more hands-on Bank support for M&E activities. Most of the UAP’s comments have been incorporated in the report. The UAP and the ICR teams, however, had different views on the achievement of the PDO-level indicator on continuity At least 5 of the WSS utilities increase their service continuity rating by one category defined by ERSAPS’s performance indicators. The UAP regards the indicator as achieved given that Puerto Cortes began in Category A and remained in Category A. The ICR team, however, does not concur as the indicator specifies that there must be an increase in rating by one category. (b) Other partners and stakeholders No stakeholder workshop was conducted; there were no other co-financiers or partners for this Project. 22 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Appraisal With Additional Actual/Latest Percentage of Components Estimate (USD Financing (2010) Estimate (USD Appraisal + AF millions) millions) Component 1 21.2 30.00 24.20 80.67% Component 2 4.5 4.5 7.71 171.33% Component 3 7.7 8.4 8.86 105.48% Component 4 1.6 3.02 4.06 134.44% Total Baseline 97.62% 35.00 45.92 44.83 Costs Physical Contingencies 0.00 0.00 0.00 Price Contingencies 0.00 0.00 0.00 Total Project 97.62% 35.00 45.92 44.83 Costs Front-end fee PPF 0.00 0.00 .00 Front-end fee 0.00 0.00 .00 IBRD Total Financing 97.62% 35.00 45.92 44.83 Required (b) Financing Appraisal Revised Actual/Latest Estimate Estimated* Percentage of Source of Funds Estimate (USD (USD M) Appraisal (USD M) Millions) 5.00 (3.4 from Municipalities Borrower 5.13 4.88 100% and 1.6 from GoH) International Development 30.00 40.00 39.95 99.8% Association (IDA) *Revised estimated includes AF TOTAL 35.00 45.13 44.83 99.9% 23 Annex 2. Outputs by Component Type of Investment/Outputs Component 1A  Contracting of TA firm  Supervision of works  Studies: diagnostics, investment plans and designs for each municipality/provider  Development of investment and business plans for the service providers Municipalities 1B  Contracting of small works or water system rehabilitation work  Acquisition of tools to manage the water systems  Computer equipment, furniture and equipment for the office, work vehicles  Tanker trucks for carrying drinking water  Acquisition and installation of equipment to disinfect water  Acquisition and installation of micro and macro meters  Development of communication/outreach material on water conservation and metering 1C  Construction of drinking water lines  Construction of storage tanks and pipelines, improvements in the network  Construction and rehabilitation of water treatment plants  Construction of sewerage systems  Construction of offices for water service providers  Drilling of and equipment for water wells  Detection and repair of leaks in the water network SANAA 2  Execution of a pilot project to reduce NRW in an area that covers 200,000 residents that utilized a performance-based contract.  Contracting of a firm to supervise the pilot. 3A  Remodeling of and equipment for the office for the pilot project of TA offices for SANAA in Siguatepeque.  Acquisition of office and computer equipment and furniture of the office. As well as vehicles  Support for the implementation of workshops 3B  Severance payments for the transfer of SANAA systems to the municipalities of Danli, Siguatepeque and Comayagua 3C  Contracting of consulting firms for the preparation of studies to support the transfer of the Tegucigalpa system from SANAA to the Municipality. Specifically, the Project financed: o Specialized consulting to the Municipality on the transfer and diagnostic of the system o A study to calculate the required severance payments 24 o Audit of EFAs and accounting separation for SANAA in 2010 and 2011 o Audit of EFAs and accounting separation for SANAA in 2008 and 2009 o Elaboration of a cadaster of SANAA’s networks and inventories o Audit updating SANAA’s furniture, equipment and inventory ERSAPS 3A  Contracting of consultants  Equipment, furniture, computers and vehicles for the offices  Support for carrying out workshops  Equipment (computer equipment, lab kits and motorbikes) for carrying out water tests at the 11 municipal control units  Development and publication of regulations on: the quality of WSS services; attention to inquiries and complaints from users; infractions and sanctions; fees for supervision, inspection and counseling from ERSAPS; and tariffs for urban WSS services.  Support to ERSAPS’ outreach efforts to build monitoring and regulatory capacity at a local level through financing capacity building activities and equipment for USCLs CONASA 3A  Contracting of consultants  Equipment, furniture, computers and vehicles for the offices  Support for carrying out workshops  Development and printing of Sector Financial Policy & PLANASA  Development of an organizational structure for SANAA post-decentralization  Development and implementation of a WSS Information System (SISAPS)Support to CONASA’ outreach efforts to build the capacity of COMAS  Support developing the 2016 Monitoring Country Advances in WSS (MAPAS) Report 25 Annex 3. Economic and Financial Analysis A. Economic Analysis 1. The project’s objective was to improve the sustainability, efficiency, and reliability of Honduras’s water supply and sanitation services in the participating municipalities. To achieve this, the following activities were included in the project: a) support municipalities to create autonomous WSS providers and invest in efficiency, rehabilitation, and expansion of the services; b) reduction of non-revenue water in Tegucigalpa; and c) institutional strengthening of National and Regional WSS entities. 2. The infrastructure works have directly benefited a total of 13,167 families with access to improved water services and 3,786 families with access to improved sanitation. The improvements in the utilities indirectly benefitted 108,000 families with improved WSS service Methodology Used during Preparation 3. During preparation, economic and financial analyses were conducted for interventions under Subcomponents 1B and 1C (Provision of goods, works, services, and training to Eligible Municipalities), and 2 (Tegucigalpa Non Revenue Water Reduction). A sample of potential participating municipalities were chosen for the evaluation as follows: a) for component 1, three utilities: La Ceiba, Choluteca, and Siguatepeque31; and for wastewater on project in La Esperanza; b) for component 2, four water sub-projects in neighborhoods in Tegucigalpa were evaluated. 4. At appraisal, the evaluation used a cost benefit analysis. Benefits were estimated as resource savings for the economy resulting from a better use of water resource by the utility and by the customers. Some connected users were expected to benefit from improvement in service reliability and continuity. No increase in coverage was expected. Specifically, economic benefits measured at appraisal included: a) cost savings in operations, b) reduction in coping costs faced by population due to poor service (price of water purchased to private vendors; cost of time when fetching water from additional sources), and c) value of health savings. 5. Expected returns in water supply interventions varied in a range from 13% to 61%, while the wastewater subproject did not return positive results. The cash-flows were discounted over a 20 year-period using a 12% discount rate. In 2013, an additional financing of US$10M was prepared. At this time, the economic evaluation was updated with assumptions adjusted to actual numbers from project implementation. The evaluation at AF included only interventions to finance under the additional US$10M and did not include interventions financed under the original project. Therefore, the results showing 9% return are not comparable to expected returns at appraisal, as the scope of the interventions was different. Table A3.1. Expected and Actual Returns Expected Returns Expected Returns PAD AF % % Component 1 La Ceiba 61% Choluteca 17% 31 During implementation, only Siguatepeque benefited from project interventions. 26 Siguatepeque 24% Component 2 Water (NRW Tegucigalpa) PRAAC-EU barrios en desarrollo 20% Barrios en desarrollo Tegucigalpa 31% La Masica 43% La Esperanza 13% Wastewater La Esperanza No positive Return Total 33.5% 9% 6. A financial analysis was also conducted for eligible sub-projects, with results showing that many of them were expected to be financially unfeasible. The resulting deficit was expected to be covered by the OBA (Output Based Aid) subsidy. Financial benefits were measured based on the income/revenue and expenditure streams of the project. The increase of revenue was expected from: a) increase in volume of water billed to customers, b) increase of revenue collection rate, and c) improvement of the customers’ database and cadaster update. Methodology Used for this ICR 7. The evaluation for this ICR followed the same methodology used during preparation: a cost benefit analysis, now based on actual achievements and costs of works and activities implemented. Actual costs and benefits were compared with those foreseen at time of appraisal. Flow of actual benefits and costs were transformed to 2007 prices to make them comparable to those expected. The same discount rate (12 percent) and time period (20 years) were used. 8. Net benefits were estimated as the incremental benefit of two scenarios: with and without interventions. For the with interventions scenario, actual costs and actual benefits were projected per each municipality. For the without project scenario, costs and benefits were projected under a business as usual scenario. 9. Benefits resulted from efficiency gains attained from the interventions. Economic benefits were measured as: a) operating costs savings from reductions in non-revenue water and b) customers’ benefits resulting from water supply and quality improvement and decrease of rationing. Financial benefits were measured as savings of operating costs and increase of revenues due to improvement of water distribution and billing practices. 10. For this ICR, the evaluation of Component 1 was conducted for five out of nine municipalities that implemented infrastructure works, whose costs represent 70% of total cost of works in Component 1. Not enough information was available to evaluate interventions in SANAA under Component 2. Costs 11. Expected cost of interventions were US$45M (US$35M during appraisal and US$10M for the Additional Financing). Actual cost of interventions was US$ 44.8M, differing just 0.4% from expected costs. 27 Table A3.2: Expected and Actual Costs Expected Investment Actual Investment Cost Costs (Million USD) Nominal USD PAD With AF Million 1. Supporting eligible municipalities to create autonomous service providers 21.20 21.92 24.20 2. Tegucigalpa Non-Revenue Water Reduction 4.50 8.17 7.71 3. Institutional Strengthening of National and Regional WSS institutions 7.70 7.71 8.86 4. Project Management 1.60 3.02 4.06 Unassigned 4.18 Total 35.00 45.00 44.83 12. The funds used to pay for investment consisted of: 89% from the World Bank (IDA funds); 6% from the government of Honduras; and 5% from Municipalities. Table A3.3: Composition of funds of Actual Investment Actual Cost Million US$ % World Bank 39.71 88.6 % Government of Honduras 3.01 6.3 % Municipalities 2.11 5.1 % Total 44.83 100.0% 13. For this evaluation, the investment costs were transformed to 2007 prices to make them comparable with the ones expected at appraisal. To make the transformation, the cost of the activities was broken down per currency and date of occurrence. This allowed for exchange rate fluctuation of the Honduran lempira (Lps) and inflation during the implementation period. Disbursements from the loan were transformed to nominal Lps using the exchange rate at time of disbursement. Then they were transformed to 2007 Lps using 2007 exchange rate. Counterpart funds were transformed to 2007 Lps using the CPI index from the time of appraisal to the date when funds were invested. 14. From the time of preparation in 2007 to the end of the implementation period in 2016, the exchange rate went from Lps 18.45: USD 1.00 to Lps 23.01: USD 1.00; that is, the Honduran Lempira lost 20 percent of its value against the USD. The inflation rate was as high as 70 percent in the same period. Each disbursement and payment was affected differently depending on the time of occurrence. Results show that total cost was affected by an average exchange rate of Lps 20.2: USD 1.00, which corresponded to 8.7% average depreciation; and 31% average inflation. 28 Figure A3. 1. Actual Costs of Works, Exchange rate and Inflation during the period 2007- 2016 15. Comparison of actual cost expressed in nominal Lps to actual costs expressed in 2007 Lps shows 11% difference, explained by 8.7% average depreciation of the local currency against the US dollar, and 31% of average inflation. Table A3.4: Impact of Currency Fluctuation on the Cost of the Project Investment Cost (Million) Difference Nominal Lps 2007 Lps % Actual Investment cost  World Bank Funds 800.1 730.6 -8.7%  Counterpart Funds (GoH and Municipalities) 103.2 70.7 -31% Total 903.3 801.3 -11% 16. The depreciation of the Lempira and the inflation was applied to the cost of all interventions evaluated for this ICR. Investment per Municipality and Component 17. 54% of total investment went to the municipalities in component 1; 17% to NRW program in Tegucigalpa in component 2; 20% to Institutional Strengthening of National and Regional Entities (SANAA, CONASA, and ERSAPS) in Component 3; and 9% to Project Management in Component 4. 18. Actual investment in the municipalities was US$ 24M, 87% of which came from World Bank funds, 4% from the GOH; and the remaining 9% from the Municipalities. 48% of the Component 1 went to infrastructure works, 33% to technical assistance, and 19% to efficiency improvement. 19. For this evaluation, the costs of non-work activities (TA and project management) were included as part of the costs of the interventions, given the importance of these activities for attaining the benefits. 29 Table A3: Actual Investment Cost per Component and Source of Funds World Munici Share Bank GOH palities Total % Component 1. Promote Medium Size Municipalities 21.03 1.07 2.11 24.20 54% 1.A Technical Assistance 8.22 0.02 0.00 8.24 1.B Tooling and Efficiency Improvement 3.74 0.11 0.38 4.23 1.C Investments 9.07 0.93 1.73 11.73 2. Tegucigalpa Non-Revenue Water Reduction Program 7.71 0.00 0.00 7.71 17% 3. National and Regional Institutional Strengthening 8.09 0.77 0.00 8.86 20% 3.A Technical Assistance 2.16 0.17 0.00 2.33 3.B Severance Payment 3.95 0.60 0.00 4.55 3.C Preparation Transfer Tegucigalpa 1.97 0.00 0.00 1.97 4. Project Management 2.88 1.18 0.00 4.06 9% Total 39.71 3.01 2.11 44.83 100% 20. Details of investments per municipality from World Bank funds show that the municipalities with the highest investment were Choloma, and Siguatepeque, which received 4.4 and US$ 3.1M respectively. Comayagua, La Lima, Mancomunidad,and Puerto Cortes received in average US$ 2.5M. Table A3.6: Actual Investment Cost per Municipality (WB Funds) Million US$ COMPONENT 1 1A 1B 1C Total Municipalities:  Choloma 1.2 0.8 2.4 4.4  Comayagua 1.2 0.3 1.1 2.6  Danli 1.0 0.4 0.4 1.8  La Lima 0.9 0.3 1.0 2.1  Mancomunidad 1.1 0.4 0.7 2.1  Puerto Cortes 1.0 0.3 1.5 2.8  Siguatepeque 1.2 0.6 1.3 3.1  Teupsenti 0.6 0.1 0.2 0.9  Tutule 0.6 0.0 0.6 1.2 TOTAL COMPONENT 1 8.7 3.1 9.2 21.0 COMPONENT 2 SANAA 7.7 - - 7.7 TOTAL COMPONENT 2 7.7 7.7 COMPONENT 3 3A 3B 3C SANAA 0.6 4.0 2.0 6.5 CONASA 0.5 - - 0.5 ERSAPS 1.1 - - 1.1 TOTAL COMPONENT 3 2.2 4.0 2.0 8.2 COMPONENT 4 Project Management 3.0 - - 3.0 TOTAL 21.6 7.1 11.2 39.9 30 21. SANAA received funds to its program of non-revenue water reduction, as well, as to institutional strengthening, in the three areas included in Component 3: technical assistance, severance payments, and preparation to transfer. SANAA received in total US$14M or 36% of World Bank funds. Other entities beneficiaries of institutional strengthening component were CONASA and ERSAPS. Sample 22. This evaluation was conducted for interventions under Component 1 in five municipalities: Choloma, Comayagua, Danli, Puerto Cortes, and Siguatepeque—with a total population of about 388,860 inhabitants. Coverage of the water service was close to 100%, yet the service was intermittent and in many cases the water quality was not potable. Table A3.7: Population and Connections in the municipalities selected in the sample Population Households with Households with 2016 water Connections Sewerage Connections Municipalities:  Choloma 131,935 26,387 21,060  Comayagua 81,620 16,324 -  Danli 40,235 8,047 -  Puerto Cortes 78,180 15,636 5,544  Siguatepeque 56,890 11,378 6,837 TOTAL 388,860 77,772 33,441 Benefits 23. Benefits from interventions result from efficiency improvement attained at the utility level from activities implemented under the project. Efficiency gains attained were: a) reduction of Non-Revenue-Water (both physical leaks and commercial losses), b) improvement of commercial efficiency (better revenue collection rates, better cadaster of customers, and better billing practices based on actual consumption, and c) improvement of continuity and quality of the services in areas poorly served. 24. Financial benefits were measured from the operator’s perspective as savings of operating financial costs and increased revenues. Cost and revenues were estimated based on actual figures of production, operating costs, billing database, and actual tariffs in each of the utilities. Information was obtained during the implementation period. 25. Economic benefits were measured as: a) savings costs in the operation of the service when physical losses were reduced; and b) reduction of coping costs faced by population due to poor service (mainly price of water purchased to private vendors and price of containers to store water). The magnitude of benefits was different among municipalities depending on specific situation of the service when the project started implementation and actual achievements with the interventions. 26. Savings of operating cost was estimated as the volume of water reduced multiplied by the production and operating cost per cubic meter. This estimation was based on utilities’ figures of volume of water produced, water losses, and cost of producing and distributing a cubic meter along the implementation period. 27. Improvement from the project was measured through: a) reduction of unaccounted for water; however, the information of volume of water billed before implementation was uncertain 31 for some municipalities where meters were non-existent and monthly bills were fixed regardless of consumption. Instead, volume of water was more reliable. All the municipalities but Comayagua reduced the volume of water produced per connection as efficiencies were gained; b) revenue per cubic meter produced increased in all municipalities; and c) continuity of water supplied, measured by hours of service per day increased, though it still has ample room to improve. 28. In all municipalities, intermittence of the service reduced, but was not eliminated. Some utilities do not show much improvement in the average indicator, yet the distribution of water improved and some areas are better served. Table A3.8: Achievements from the Project Volume of water Revenue per cubic Continuity of water produced per connection meter produced supplied (m3/year) (L/m3produced) (hours per day) Before After Before After Before After Municipalities:  Choloma 632 541 3.10 3.27 7 13.5  Comayagua 620 629 1.63 2.37 12.18 12.5  Danli 626 565 2.71 4.06 3 7.8  Puerto Cortes 754 668 3.94 5.08 22.34 23.2  Siguatepeque 423 380 2.42 4.92 3 7.83 29. Important but unquantifiable benefits were not included in the evaluation, such as: scarcity of the water resource, competitive uses, or environmental externalities, and so results may be underestimated. 30. The customers’ benefit was estimated from savings on coping costs when water quality and continuity improved. The benefit varied among municipalities; a) in some, population had to fetch water from water sources nearby, facing poor water quality, small quantities, and spending time pursuing water, b) in other municipalities, population relied only on the deficient quantity supplied by the utility, facing small quantities, and high price from private vendors. During preparation, it was found that vendors charged US$ 0.40 for a 19-liter container of water, which roughly equates to US$ 21/m3. 31. Currently the service is still intermittent in all the municipalities, and so people still must face difficulties to get additional water to supply their needs. The coping costs are still high, yet they have reduced as water supplied increased. Price paid to private vendors is high and it varies from Lps 180/m3 to Lps 50 to 25 per container of 55 gallons, which in terms of cubic meter ranges from Lps 120 to Lps 240, which corresponds to about US$5 to $10 per m3. Table A3.9: Coping costs  L.50/container of 55gallons Choloma  Water Truck  L.50/container of 55gallons Comayagua  Water Truck Danli  Private vendor charging 180 Lps/m3 Puerto Cortes  Stream at 10km  L.30/container of 55gallons Siguatepeque  Water Truck 32 32. The socio-economic situation of the population in the municipalities is difficult as their income level is low—they cannot afford to pay for all their water deficit, and the difficulties increase. 33. Tegucigalpa Non Revenue Water Reduction. It was designed and implemented under Component 2. The interventions were implemented in a specific area of Tegucigalpa as a case study, under a service contract with a private company to reduce technical and commercial water losses in a limited geographical area of the Municipality Metropolitan District. The achievement with the project was the execution of a pilot project to reduce NRW in an area that covers 200,000 residents that utilized a performance based contract. 34. The interventions targeted a more efficient usage of the water. The utility estimated that water leaks were reduced, and that customers have more control of their bills as their consumption is measured. The actual cost of this intervention was US$7.7 million; however, its associated benefits could not be measured due to lack of information for the project area. Results of the Economic Evaluation 35. Results of the economic evaluation show that the interventions in the municipalities were worthwhile as benefits surpassed the costs and returns are 22%, which is higher than the 12% discount rate. Table A3. 10: Results of the Economic Evaluation Present Value of Flows (000 US$) Costs Benefit Net Benefit IRR  Choloma 3,754 4,921 1,167 15%  Comayagua 1,915 2,382 467 15%  Danli 1,446 3,341 1,895 21%  Puerto Cortes 2,392 6,566 4,174 30%  Siguatepeque 1,915 7,388 5,473 29% TOTAL 11,422 24,599 13,177 22% 36. Current guidelines of the World Bank set lower than 12% discount rate to evaluate social projects. The recommended discount rate is linked to growth rate in the country: 3% per capita growth rate translates into a 6% discount rate, and per capita growth rate of 1%-5% yield discount rates of 2%-10%. 37. This evaluation was complemented with a sensitivity analysis to test the impact on the present value of net benefits under lower discount rates. Results show that the lower the discount rate the higher the benefits. 10% discount rate shows net benefits of US$ 18M , while 6% shows US$ 32M. Table A3. 11: Sensitivity Analysis for Net Benefits under lower Discount Rate Present Value of Net Benefits (000 US$) 12% 10% 6%  Choloma 1,167 2,178 5,147  Comayagua 467 956 2,423  Danli 1,895 2,649 4,911  Puerto Cortes 4,174 5,300 8,575  Siguatepeque 5,473 7,075 11,813 TOTAL 13,177 18,159 32,869 33 Comparison between Actual and Expected Returns. 38. Actual returns are higher than expected at Additional Financing (9%), yet lower than expected at Appraisal (33.5%). As it was previously explained, the AF was conducted only for interventions to finance under the additional US$ 10M and did not evaluate the whole project and so it is not comparable with results from appraisal or from this ICR. Table A3. 10. Expected Returns at Appraisal Appraisal Additional Financing Actual Returns Weighted Average ERR 33.5% 9% 22% 39. Among the reasons that explain lower than expected returns at appraisal can be cited: a) not all the municipalities evaluated at appraisal had interventions under the project. During appraisal three municipalities were evaluated (la Ceiba, Choluteca, and Siguatepeque), yet only Sigatepeque ended up join PROMOSAS. For this specific municipality, actual return is higher (29%) than expected at appraisal (24%). The situation among municipalities varies widely, at appraisal returns varied widely from 17% to 61% depending on the municipality, and consequently no comparison can be made when municipalities are different; b) During appraisal, health benefits were included, however, not included in this evaluation, as service improvement was not enough to eliminate the intermittence and guarantee reliability of water quality and quantity; and c) some of the benefits from metering and improvement of volume billed were not included as in specific municipalities, customers opposed metering. 40. The economic evaluation conducted during preparation of the AF was carried out including only the expected activities planned under the AF, estimating an “incremental ERR” for the additional financing portion, and not including the first phase. This ICR evaluates the works implemented under both phases and, therefore, the results are not comparable. Table A3.12. Expected and Actual Returns Expected Returns Expected Returns Actual Returns PAD AF AF % % % Component 1 La Ceiba 61% Choluteca 17% Siguatepeque 24% 29% Choloma 15% Comayagua 15% Danli 21% Puerto Cortes 30% Total Component 1 22% Component 2 Water (NRW Tegucigalpa) PRAAC-EU 20% Barrios en desarrollo 31% La Masica 43% La Esperanza 13% Wastewater 34 La Esperanza No positive Return Total 33.5% 9% 22% 41. Overall. The efficiency of the Project is rated Substantial, yet the following issues were addressed and included in the overall ratings: a) the information collected during the implementation was not enough to properly estimate the impact of the investments; b) the project took 9.5 years of implementation without adding benefits; c) even though water intermittence reduced, it is still a problem that needs future attention. B. Financial Analysis 42. The financial evaluation of the project was conducted including actual costs and benefits as they were paid and received from the service operators. Costs consisted of only operating costs. Investment costs were funded by the Government and not by the operators. Benefits consisted of tariffs paid by the customers. 43. Costs and revenues consisted only of flow of incremental costs and revenues generated by the project, that is, those associated with the implemented interventions in their respective areas of influence. Similar to the economic evaluation costs and revenues were transformed to 2007 prices. 44. Results show that incremental revenues are higher than incremental operating costs, which reassures the sustainability of the works. Financial Analysis of the Operators 45. The financial analysis of the operators differs from the financial analysis of the project in the following ways: a) the information included in the analysis corresponds to the whole operation of the utility and not just to the service provided at the area of the project; b) the figures correspond to the financial results of the whole utility expressed in nominal terms; and c) all programs being implemented by the operator are included. 46. The objective of this analysis is to test if the financial burden than the project will bring to the utility will not generate a risk to its viability. The information used for the analysis corresponds to the financial statements of the utilities during the implementation period. For some utilities information was available since 2010 and for others since 2013. For all, but Puerto Cortes, financial results of 2016 were available. Detail of financial results during the period is shown in table A3.14 47. Results show that the project will no generate a liability for the utility and revenues will allow the utilities complying with their financial obligations. All utilities, without exception s present better financial results as consequence of improvement of their capacity to systematically monitor their income and expenses because of the project. The municipalities not only reached full operating cost (Choloma showed 99% cost- recovery level) but presented surplus that allow them to partially fund capital investment. Table A3.13: Cost Recovery Before the After implementation of project works Municipalities:  Choloma 90% (2013) 99% (2016)  Comayagua 101% (2010) 128% (2016)  Danli 68% (2011) 144% (2016)  Puerto Cortes 101% (2010) 103% (2015) 35  Siguatepeque 105% (2013) 153% (2016) 48. Detail of results of income statement in each of the utilities is presented below. Table A3. 14: Income Statement (000 Lps) 2010 2011 2012 2013 2014 2015 2016  Choloma Revenue 108,323 94,155 96,873 106,697 Operating costs 120,031 94,958 101,140 107,479 Net income (11,708) (803) (4,267) (783) Cost recovery (%) 90% 99% 96% 99%  Comayagua Revenue 11,824 15,232 16,041 18,672 25,781 25,435 Operating costs (w/o capital expenses) 9,165 9,020 9,745 10,830 8,822 11,451 Net income 2,660 6,212 6,297 7,842 16,959 13,984 Cost recovery (%) 129% 169% 165% 172% 292% 222% Capital Expenses 2,574 3,585 624 1,274 5,510 8,404 Cost recovery (with capital expenses) (%) 101% 121% 155% 154% 180% 128%  Danli Revenue 2,432 10,383 11,572 17,606 18,202 21,033 Operating costs 3,552 13,275 10,674 13,461 15,526 14,583 Net income (1,120) (2,892) 899 4,145 2,676 6,450 Cost recovery (%) 68% 78% 108% 131% 117% 144%  Puerto Cortes Revenue 33,821 42,529 45,360 53,643 52,075 56,524 33,821 Operating costs 33,578 41,876 44,897 53,107 51,703 55,136 33,578 Net income 243 652 463 537 373 1,388 243 Cost recovery (%) 101% 102% 101% 101% 101% 103% 101%  Siguatepeque Revenue 11,533 14,736 24,855 27,746 Operating costs 10,977 13,424 17,296 18,187 Net income 556 1,312 7,559 9,559 Cost recovery (%) 105% 110% 144% 153% 36 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Rosa Elena Bellido Language Program Assistant GSURR Diomedes Berroa Lead Specialist OPSPF EXTCD - Karla Chaman Sr Communications Officer HIS Ana Consuelo Funez Rosales Country Program Assistant LCCHN Pilar Elisa Gonzalez Rodriguez Senior Counsel LEGLE John V. Kellenberg Manager CASEE Nicole Andrea Maywah Consultant GEN01 Jose Eduardo Mestre HQ Consultant ST GWADR David Michaud Practice Manager GWA03 Dante Ariel Mossi Reyes Senior Operations Officer LCROS Fabienne Mroczka Sr Financial Management Specialist GGO22 Gustavo Saltiel Lead Water and Sanitation Spec GWA04 Maria Angelica Sotomayor Lead Economist GSU13 Araujo Miguel Vargas-Ramirez Sr Water & Sanitation Spec. GWA03 Rafael Vera Consultant GWA03 Kimberly Vilar Senior Social Development Spec GSU04 Meike van Ginneken Practice Manager GWA06 Supervision/ICR Rosa Elena Bellido Language Program Assistant GSURR Etel Patricia Bereslawski Lead Procurement Specialist GGO08 Aberboj Diomedes Berroa Lead Specialist OPSPF ECSHD - Michele Bruni Consultant HIS EXTCD - Karla Chaman Sr Communications Officer HIS Yoonhee Kim Sr Urban Economist GSU12 Patricia Lopez Martinez Senior Infrastructure Finance GWA03 Nicole Andrea Maywah Consultant GEN01 David Michaud Practice Manager GWA03 Dante Ariel Mossi Reyes Senior Operations Officer LCROS Fabienne Mroczka Sr Financial Management Specia GGO22 LCSPT - Beate Gisela Mueller Procurement Specialist HIS Jose Simon Rezk Sr Financial Management Specia GGO22 Luis Tineo Lead Operations Officer GFDRR Rafael Vera Consultant GWA03 Kimberly Vilar Senior Social Development Spec GSU04 Meike van Ginneken Practice Manager GWA06 Marco Antonio Agüero Sr Water and Sanitation Specialist GWA03 Task Team Leader Chloë Oliver Viola Sr Infrastructure Economist GWA08 ICR Team Leader Elisabeth Eiseman Consultant ICR Author ICR Economic and Luz Maria Gonzalez Consultant Financial Analysis 37 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY07 231.95 FY08 3.42 Total: 235.37 Supervision/ICR FY07 0.00 FY08 131.44 FY09 104.40 FY10 80.69 FY11 108.75 FY12 108.57 FY13 85.10 FY14 119.62 FY15 132.74 FY16 136.21 FY17 173.03 Total: 1,180.55 38 Annex 5. Stakeholder Workshop Report and Results No stakeholder workshop was conducted. 39 Annex 6. Summary of Borrower's ICR and Comments on Draft ICR Executive Summary 2008-2016 PROMOSAS Report 1. How did PROMOSAS emerge? To support the implementation of the Sector Framework Law, decentralization and potable water and sanitation services were strengthened in several municipalities of Honduras. On November 16, 2007, the Republic of Honduras and the International Development Association (IDA) formalized the original contract of Credit AIF-4335-HO, aimed at the implementation of the Potable Water and Sanitation Sector Modernization Project (PROMOSAS, by its Spanish acronym), for the amount of US$ 30.0 million with matching funds of US$ 5.0 million dollars. Subsequently, on July 12, 2013, an Additional Financing Credit Agreement AIF-5270- HO of US$10.0 million with a matching amount of US$ 900.0 thousand dollars was signed. Both to be finalized on December 31, 2016. 2. What is PROMOSAS? PROMOSAS is a project of the Republic of Honduras implemented by the Ministry of Finance through its Project Management Unit. The project aimed to improve sustainability, efficiency and reliability of the water and sanitation sector in the country by improving the performance of the national institutions of the sector. The PROMOSAS approach was oriented towards the urban areas of the municipalities with populations between 40,000 to 300,000 inhabitants. To distribute the additional funding, municipalities with urban populations between 10,000 and 40,000 inhabitants, which have poverty levels that are classified as category D or C were identified. PROMOSAS helped to establish water service providers at the municipal level, by combining technical assistance in reform writing and investments, based on a “hands-on” approach. 40 3. PROMOSAS Project Beneficiary Municipalities 4. The creation of 7 Water and Sanitation Decentralized Units through PROMOSAS  Teupasenti Unit  Danli Unit  Tutule Unit  Comayagua Unit  La Lima Unit  Mancomunado Provider (Villanueva, San Manuel y Pimienta)  Siguatepeque Unit 41  Two existing water companies benefited: Choloma and Puerto Cortes.  Technical assistance, training, tools, and equipment given to 9 Water and Sanitation Suppliers, as well as investments in construction works and buildings.  Seven percent of the national population in total benefited from the PROMOSAS Project. 5. PROMOSAS Objectives PROMOSAS has two objectives: 1. To improve the sustainability, efficiency and reliability of water and sanitation sector service providers in beneficiary municipalities. 2. To improve the performance of the water and sanitation national institutions in their respective roles in alignment with the Sector Framework Law. 6. PROMOSAS Components PROMOSAS has five components: • Support for Medium Sized 1 Municialities • Program to Reduce Water Usage 2 that does not Generate Revenue • Institutional Strengthening (SANAA, 3 CONASA, ERSAPS) 4 • Project Management 5 • Rapid Response Mechanism 43 7. Aqueduct Status prior to Implementation Aqueducts operated by  Aqueducts operated by the  SANAA: Municipalities: Established as Service  Providers: 1.Comayagua 1. La Lima 1. Puerto Cortes 2.Siguatepeque 2. Villanueva 2. Choloma 3.Danli 3. Pimienta Group A and B Aqueducts were built as decentralized Water Units 8. Compliance of the Main Outcome Indicators The PROMOSAS Monitoring and Evaluation System has a matrix of twenty-three (23) indicators that are based on Project Development Objectives (PDO) and organized into four linked components. The Components are influenced by quantitative and qualitative indicators, which amount to annual cumulative goals that describe the data collection, source, methodology and verification for those responsible. Seven (7)  • Cost Recovery Goal  • Enhanced  Indicators Continuity • Increase in Water  Eight (8)  and Sanitation  Outcome  Connections Indicators • 20% Increase in  income/ water UV One  component  • Contingency  Indicator  Indicator No. 5 44 Indicator 1: Here it can be seen how, with the implementation of PROMOSAS, Service Providers from Comayagua, Siguatepeque and La Lima significantly improve their cost recovery. Indicator 2: Service Providers from Danli, Siguatepeque, Teupasenti and Aguas del Valle significantly improved their service hours. The implementation of PROMOSAS has allowed Puerto Cortes and Choloma to ensure sustained quality. Indicator3: PROMOSAS invested in Micro and Macro Measurements of all Municipal Providers, achieving improvements in three; Puerto Cortes, Danli, and Comayagua Indicator 4: It can be observed that the Service Providers in Danli, Choloma, and Aguas del Valle significantly increased their annual collection as a result of PROMOSAS. 45 9. ANI Program Achievements The Program to Reduce Water Usage that does not Generate Revenue (ANI by its Spanish acronym), is aimed to improve the operability of the service provider (SANAA). This Program was implemented in the south zone of Tegucigalpa, targeting an approximate population of 200,000 inhabitants. No. Project Outcome Indicator Goal Achieved 1 Increases by one category the continued Passed from category C (less than 6 provision of service in the urban zone covered by h/d) to Category B (12 h/d) the Project 2 Percentage increase of cubic meters of water Growth from 18% to 25% supply in the Project zone Other positive outcomes 1 •960 clients recategorized 2 •355 unregistered users cancelled 3 •16,000 micro water meters read monthly for 10 months 4 •Service Continuity increased from 8.4 h/p to 13.8 h/d in pilot zone 5 •Increased collection per m3 produced by L.0.81 6 •Increased invoicing collection by L.1,802,805 7 •9,000 direct services normalized COMPENSATION PAYMENTS Compensation payments were made during SANAA employee cuts as a result of the decentralization of water services for the municipalities for the amount of US$4,552.2 thousand dollars. 46 Compensation Amount in Payments thousands of Dollars Siguatepeque 965.8 Comayagua 1,797.9 Danli 1,789.2 Total 4,552.2 Preparation Activities for the Transfer to Tegucigalpa: according to the table, support for the preparation activities to transfer the SANAA service provision to the Municipality of Tegucigalpa (AMDC), cost US$2.0 million dollars: Sub-component 3C: Support for the Transfer to $2,052.1 Tegucigalpa Support Consultancy to UGASAM 11.2 Hydraulic Modeling Consultancy AMDC 46.4 Specialized Consulting for AMDC in transfer of 510.8 the water service Study to calculate labor severance payments 58.7 SANAA/Metro Auditing of EFAs and accounting segregation from 59.9 SANAA 2008 and 2009 Auditing of EFAs and accounting segregation from 30.0 SANAA 2010 and 2011 Elaboration Cadaster SANAA networks 1,209.1 SANAA auditing of inventory of furniture and 126.0 equipment SANAA The PROMOSAS Project financed the development of a number of support programs for SANAA in its process to adopt is role as Technical Entity for both urban and rural potable water service providers, municipalities and water administration boards. The figure shows the main objective of SANAA and the outcomes obtained. Main objective Outcomes 47 Business Plan Regional offices of  Siguatepeque refurbished and  adjusted to operate the  Documentation and Training  Center Support SANAA in the definition and adoption of its new  role as Support Technical Entity for the municipalities  and Service Providers Companies. This includes funding  studies that help to define the technical assistance  demands and an optimal business model for SANAA. Technical Assistance Pilot for  the Water service providers of  Taulabe and Aguas de Villa de  San Antonio in the  Department of Comayagua  SANAA Strategy Technical Draft 10. ERSAPS: Achievements implemented through PROMOSAS  8 Water service providers received their respective Management Model approval report.  Performance based Indicators of Service Providers published in their web page (www.ersaps.hn), with technical, financial, administrative and water quality improvement data.  ERSAPS shared the indicators in the “International Network of Comparisons for Water and Sanitation (IBNET)” data base of 6 water beneficiary providers of PROMOSAS.  The PROMOSAS Project focused on providing ERSAPS technical and financial support, to strengthen both the municipalities and the providers and for them to start operating the APS, Supervision and Control Units (USCL).  The World Bank developed a pilot program of the virtual platform “usuariosagua.org” to validate the effective use of the platform with the EPS: Waters of Siguatepeque and Water services of Comayagua, activating the virtual spaces for users to make their claim to benefit the users of the potable water and sanitation services at the national level. 48 11. CONASA: Main Achievements with PROMOSAS Support In compliance with indicator No. 5 of the PDO: CONASA issued the new sector financial policy; this indicator is reported as achieved, since the Sector Financial Policy was approved by CONASA’s Board in Full, in November 2015. This Policy is the set of objectives, principles, mechanisms, resources, entities and rules that determine and guide the funding structure of the sector, to achieve the PLANASA objectives, in particular: (i) improve the quality and continuity of water supply; (ii) expand water and sanitation services coverage; (iii) expand and improve the potabilization infrastructure and wastewaters treatment; (iv) enhance the management capacity of service providers; and (v) advance in the institutional development of the sector. Another CONASA achievement was the approval of the National Plan for Potable Water and Sanitation (PLANASA) in December 2014. Subsequently, the executive version was prepared and disclosed in the AMHON General Assembly. With the support from PROMOSAS, the executive summary of PLANASA will be published in the second half of October. The extended version of PLANASA is being developed and is hoped to be printed by the end of October. 12. SWOT Analysis of the Water and Sanitation Sector Hereafter is an outline of the SWOT analysis prepared by the external Consultant responsible of the final PROMOSAS Project evaluation. The consultancy’s results are studied in detail through the revision of the Project’s strengths and weaknesses; to be considered by the Sector and municipal service providers, in order to guide near future decision-making. STRENGTHS 49  Two international Technical Assistance projects delivered to empower municipal providers.  Stakeholders in the decentralization process learned that it is a gradual process.  PROMOSAS left a legacy for a new culture of municipal service supply.  ERSAPS defined and enhanced new management models for new municipal providers, from deconcentrated units to municipal capital companies and mixed capital models.  PROMOSAS encouraged municipalities to adopt good practices in technical, commercial and administrative management.  Providers recognized the importance of updating their cadastre networks, micro measurements, sectorizing and technological monitoring of aqueduct administration.  Some business management practices, Business Plan, Investment Plan, and activity outsourcing was implemented.  The increased participation of the communities (COMAS and USCL) in the board of the sanitation service providers, in the development of the sanitation sector.  Strengthened the Municipal Water and Sanitation Unit (UMAPS), now better prepared for the transfer of water and sanitation services of Tegucigalpa’s metropolitan system.  Associated of Potable Water and Sanitation Service Provider Companies established. WEAKNESSES  Municipal water service tariffs are limited by political factors, which affects the financial stability of providers.  Size of the Municipalities, makes it difficult for them to achieve sustainability beyond operations cost and some maintenance. Currently, many municipalities greatly invest in infrastructure out of urgency without anticipating future needs.  The low level of average income of users.  Lack of professionals in small sanitation services providers.  Lack of timely and good quality technical assistance provided by local institutions.  Weak organizational processes and information is not reliable or timely.  Rapid urbanization and climate change continue to affect the availability of hydraulic resources and detriment the quality of water supply. OPPORTUNITIES 50  Continuing decentralization efforts and strengthening municipal providers given that positive and significant impacts in the quality of water supply have been achieved.  Facilitating future technical assistance support through the PROMOSAS Project outcomes to develop the sector and its sanitation service providers both at the World Bank level and the government level.  Outsourcing activities and Associating Municipalities to contract services, in view of achieving cost reduction.  Revising the Sector Law on Water and Sanitation, in order to correct current deficiencies in the system THREATS  Eventual lack of positive or negative incentives associated to projects financed by international or national organizations for the water and sanitation sector that guide action and finally promote a culture change in the sector.  Lack of a climate related risks mitigation plan. New water reservoirs are needed to ensure human consumption and risk.  Risk of political interference in the management of Sanitation Service Providers, which divert their goals and objectives. 13. PROMOSAS Financial Management During the project, all the IDA 4335 HN and IDA 5270-HN funds subscribed between the Government of Honduras and the World Bank were fully executed. US$ 40.0 Million World Bank funds were executed in 9 years, in addition, during this period US$ 5.1 Million dollars were executed as a national matching contribution, oriented also to strengthen municipal suppliers and the Potable Water and Sanitation Sector. 51 The external audit certified the reasonableness of the figures of our financial statements. However, beyond this validation, we stress that it is the full execution of the funds agreed, that is, 100% of the funds invested in the Potable Water and Sanitation Sector and the population of 11 beneficiary municipalities of PROMOSAS. 52 WORLD BANK COUNTERPART DESCRIPTION FUNDS FUNDS MUNICIPALITIES COMPONENT Total Total 1 21,025,494.18 3,177,435.42 Siguatepeque 3,079,346.06 595,700.22 Technical Assistance to the Municipalities 1A 1,112,218.91 18,837.48 Support in Tools to service provider 1B 651,062.37 83,826.69 Investment in Rehabilitation and System Expansion 1C 1,316,064.78 493,036.05 Comayagua 2,568,647.09 436,383.55 1A 1,132,617.34 0.00 1B 394,387.79 69,204.30 1C 1,041,641.96 367,179.25 Puerto Cortes 2,765,024.43 551,549.22 1A 975,819.68 0.00 1B 351,688.49 72,425.02 1C 1,437,516.26 479,124.20 Choloma 4,382,075.28 797,173.57 1A 1,108,612.97 0.00 1B 867,076.47 109,122.82 1C 2,406,385.84 688,050.75 Danli 1,815,624.95 156,516.56 1A 913,682.88 0.00 1B 497,571.82 65,441.60 1C 404,370.26 91,074.96 La Lima 2,094,964.61 402,227.83 1A 790,005.62 0.00 1B 336,936.52 64,641.10 1C 968,022.47 337,586.73 Mancomunidad 2,072,678.05 237,884.47 1A 982,093.31 0.00 1B 469,703.45 30,950.70 1C 620,881.29 206,933.77 Tutule 1,309,875.34 0 1A 596,687.00 0.00 1B 59,048.51 0.00 1C 654,139.83 0.00 Teupasenti 937,258.38 0.00 1A 606,452.26 0.00 1B 108,389.68 0.00 1C 222,416.44 0.00 53 Water that does generate income (ANI) 2 7,712,807.95 0 3 8,088,982.92 767,866.60 ERSAPS 3A 1,115,152.44 93,980.02 CONASA 3A 519,538.04 31,521.53 SANAA 3A 530,004.13 43,214.62 Labor benefits 3B 3,953,790.70 599,150.43 Transfer support 3C 1,970,497.61 0.00 Management Unit 4 2,879,122.04 1,179,990.58 Total Investment 39,706,407.09 5,125,292.60 54 Annex 7. Comments of Cofinanciers and Other Partners/Stakeholders There were no other co-financiers or partners for this Project. 55 Annex 8. Tables and Figures Diagram 1. The Stepped Approach (Source: Project Appraisal Document) Table 1. Restructured Components COMPONENT ORIGINAL RESTRUCTURED RATIONALE PART 1.A.2B Revise or prepare a master Revise or prepare an action There was no counterpart at plan to improve efficiency, plan to improve efficiency, the local level to design a quality and coverage levels of quality and coverage levels of comprehensive master plan. the WSS service, including a the WSS service, including a To ensure a flexible and financial and economic financial and economic responsive approach to on-the- analysis analysis ground developments, the TA focused on developing annual action plans as opposed to overarching master plans PART 1.A.3 Design and supervise the Design and supervise the Adjusted to reflect the investments conducted under investments conducted under responsibility of the TA to Part1.C of the Project. Part 1.B.2 and Part1.C of the support technical and Project commercial efficiency investments as well. PART 3.A.1 Strengthening of CONASA Support to CONASA and As described in the AF, this and SANAA through the SANAA to strengthen their activity was “… revised to provision of consultants’ institutional capacity to reflect the support of the sector services and goods for: (a) the comply with the WSS Sector framework in a clearer and creation of a specific unit Framework Law through, inter broader manner. The PAD attached directly to CONASA alia: (a) the development of a focused a significant part of and housed in SANAA, to sector financing policy for the institutional strengthening oversee the implementation of CONASA aimed at activities for the the PEMAPS (the PEMAPS guaranteeing the long-term implementation of the unit); (b) the preparation of the sustainability of the WSS Strategic Plan for the policy and legal instruments to sector; and (b) the piloting of Modernization of the WSS clarify CONASA’s and technical assistance activities Sector. This document was SANAA’s respective by SANAA, including intended to be a roadmap for governance structure, mandate providing operational, the implementation of the and financing, and the commercial and managerial Sector Framework. However, development of a sector it was not prioritized by the 56 financing policy aimed at support to local WSS service GoH and became outdated. guaranteeing the long-term providers.” The Project has since focused sustainability of the sector; (c) its institutional strengthening a status review and update of activities on the direct the PEMAPS; (d) the implementation of the development of CONASA’s principles of the Ley Marco.” new municipal WSS sector policy-making and planning roles; and (e) the carrying out of a communications strategy to support good governance and transparency in the Project. PART 3.A.3 Supporting donor coordination Dropped The Project foresaw co- activities in the Recipient’s financing a PEMAPS unit. In WSS sector. 2010, the Government changed its planning scheme, installed a new planning system, framed within the newly approved Country Overview/National Plan Law (Plan de Nación y Vision de País, 2010) which defined a bottom-up planning scheme, dividing the country in regions based on main watersheds. The PEMAPS was then considered outdated, and did not fit anymore in this framework. PART 3.B.2 Carrying out of a study on Dropped Although there was significant future staffing of SANAA, resistance from the SANAA including: (a) the design of a Union, the PIU was able to broader retrenchment program deliver a complete analysis of that combines disciplinary the staff costs, including the staff reductions, addresses amount of the severances payroll fraud, and determines payments legally earned by future retrenchment needs; and workers, of the 13 systems still (b) data gathering on pending to be decentralized. alternative employment found The final calculations were by staff affected by the current made official by the Ministry retrenchments, and on changes of Labor. However, the design in staff employment totals in of a broader retrenchment SANAA and other service program was never carried out. providers. Table 2. PROMOSAS – Major Events that Impacted Implementation Year Project Sector National 2007 June—Project Approval 2008 February—Project Effectiveness October—SANAA decentralization deadline extended by 5 years 2009 June—Project funding stopped as a June—Military Coup: then- result of Coup President Zelaya ousted November—Presidential Elections December—Funding flows re-start 2010 January—President Lobo takes office November—First Project November—National Plan (2010- restructuring 2022) and Country Vision (2010- 2038) published 57 2011 March—IP rating drops to MS because of slow disbursements (23% disbursed) July—PDO rating drops to MS 2012 2013 May—Additional Financing & Second Restructuring Approved 2014 January—President Hernandez takes office IMF austerity measures imposed limiting budget for Project implementation December— National Plan for WSS December— GoH signs fiscal approved consolidation plan with IMF 2015 March—IP rating drops to MU because of budget allocation restraints tied to austerity measures June—President appointed a Junta Interventora at SANAA to oversee the process of transferring services to the municipalities and to finalize the handover of the Municipality of Tegucigalpa (AMDC) October—Third Project restructuring November—Sector Financial Policy approved 2016 June—IP rating upgraded to MS December—Project closes 2017 April—Final disbursements 58 Annex 9. List of Supporting Documents Agua Sur, SEINCO & INECON. PROMOSAS Technical Assistance Final Report, March 2017. Water and Sanitation Program (2013) A Public Expenditure Review: Decentralization of Water and Sanitation Services, Washington, DC: The World Bank World Bank, Aide Memoires, Implementation Status Reports and Restructuring Papers for the Honduras Water and Sanitation Sector Modernization Project. Washington, DC. World Bank, Financing Agreement for the Honduras Water and Sanitation Sector Modernization Project, Washington, DC. World Bank, Project Appraisal Document on a Proposed Credit to the Republic of Honduras for a Water and Sanitation Sector Modernization Project, Report No. 39570- HN, May 18, 2007, Washington, DC. World Bank, Proposed Additional Credit to the Republic of Honduras for the Honduras Water and Sanitation Sector Modernization Project, Report No: 75523-HN, May 14, 2013. 59 Annex 10. Map 60