Document ol The World Bank Report No: 20438 EC PROJECT APPRAISAL DOCUMENT ON A PROPOSED ADAPTABLE PROGRAM LOAN IN THE AMOUNT OF US$32.0 MILLION TO THE REPUBLIC OF ECUADOR FOR THE RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROJECT (PRAGUAS) IN SUPPORT OF THE FIRST PHASE OF THE RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROGRAM September 20, 2000 Finance, Private Sector and Infrastructure Group Country Management Unit 4 Latin America and Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate EffectiveSeptember, 2000) Currency Unit = US Dollar 25,000 Sucres = US$1 US$0.00004 = 1 Sucre FISCAL YEAR 1 January - 31 December ABBREVIATIONS AND ACRONYMS AME Asociaci6n de Municipios del Ecuador (Ecuadorian Association of Municipalities) APL Adaptable Program Loan BEDE Banco del Estado (Bank of the State of Ecuador) CAS Country Assistance Strategy CB Commercial Bank CODENPE Coordinadora de Nacionalidades y Pueblos del Ecuador (Ecuadorian Council for Nationalities and Indigenous Peoples) CONAM Consejo Nacional de Modernizaci6n (National Council for Modernization) EMS Equipo Municipal de Saneamiento (Municipal Sanitation Unit) EPP Equipo Provincial del PRAGUAS (Provincial PRAGUAS Implementing Unit) FISE Fondo de Inversi6n Social Ecuatoriano (Ecuadorian Social Investment Fund) FMS Financial Management System GOE Government of Ecuador IAA Implementation Assistance Agency LACI Loan Administration Change Initiative MIDUVI Ministerio de Desarrollo Urbano y Vivienda (Ministry of Urban Development and Housing) OITS Organizaciones de Intervenci6n Tecnico-Social (Technical and Social Intermediary Organizations) OM Operation Manual PAHO Pan-American Health Organization PMU Project Management Unit PS Private Sector PSP Private Sector Participation RWSS Rural Water Supply and Sanitation SSA Sub-secretaria de Saneamiento Ambiental (Subsecretariat of Environmental Sanitation) TA Technical Assistance UBS Unidad Basica de Saneamiento (Basic sanitation unit comprising shower, sink and toilet) VIP Ventilated Improved Pit (Latrine) WSS Water Supply and Sanitation WUA Water Users' Association Vice President: David de Ferranti Country Manager/Director: Andres Solimano Sector Manager/Director: Danny Leipziger Task Team Leaders/Task Managers: Oscar Alvarado and Franz Drees ECUADOR RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROJECT (PRAGUAS) CONTENTS A. Program Purpose and Project Development Objective Page 1. Programn purpose and program phasing 3 2. Project development objective 4 3. Key performance indicators 4 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 5 2. Main sector issues and Govermment strategy 5 3. Sector issues to be addressed by the project and strategic choices 9 4. Program description and performance triggers for subsequent loans 10 C. Program and Project Description Summary 1. Project components 11 2. Key policy and institutional reforms supported by the project 13 3. Benefits and target population 14 4. Institutional and implementation arrangements 15 D. Project Rationale 1. Project alternatives considered and reasons for rejection 17 2. Major related projects financed by the Bank and other development agencies 17 3. Lessons learned and reflected in proposed project design 18 4. Indications of borrower commitment and ownership 19 5. Value added of Bank support in this project 19 E. Summary Project Analysis I. Economic 20 2. Financial 22 3. Technical 23 4. Institutional 23 5. Environmental 25 6. Social 26 7. Safeguard Policies 29 F. Sustainability and Risks 1. Sustainability 30 2. Critical risks 30 3. Possible controversial aspects 32 G. Main Loan Conditions 1. Effectiveness Condition 32 2. Other 32 H. Readiness for Implementation 32 I. Compliance with Bank Policies 33 Annexes Annex 1: Project Design Summary 34 Annex 2: Detailed Project Description 41 Annex 3: Estimated Project Costs 55 Annex 4: Cost Benefit Analysis Summary 56 Annex 5: Financial Summary 62 Annex 6: Procurement and Disbursement Arrangements 63 Annex 7: Project Processing Schedule 73 Annex 8: Documents in the Project File 74 Annex 9: Statement of Loans and Credits 76 Annex 10: Country at a Glance 78 Annex 11: Social Assessment 80 Annex 12: Policy Document for the Water and Sanitation Sector 87 Annex 13: Technical Assistance Program for Improving the Provision of Services - PAT 93 MAP(S) ECUADOR Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) Project Appraisal Document Latin America and Caribbean Region LCSFW Date: September 20, 2000 Team Leader: Oscar E. Alvarado Country Manager/Director: Andres Solimano Sector Manager/Director: Danny M. Leipziger Project ID: P049924 Sector(s): WW - Water Supply & Sanitation Adjustment Lending Instrument: Adaptable Program Loan (APL) Theme(s): Poverty Reduction Poverty Targeted Intervention: Y Program Financing Data Estimated APL Indicative Financing Plan Implementation Period Borrower _______ ______ ______ _ _________(Bank FY) IBRD Others Total Commitment Closing US$ m % US$ m US$ m Date Date APLIn 32.00 63.7 18.25 50.25 03/01/2001 02/28/2005 Republic of Ecuador MIDUVI Loan/ Credit _ _ _ _ _ _ API.2 48.00 62.5 28.75 76.75 03/01/2005 02/29/2008 Republic of Ecuador MIDNI Loan/ Credit API-3 50.00 60.2 33.00 83.00 03/01/2008 02/28/2011 Republic of Ecuador MIDUVI Loan/ CreditC API-4 Loani Credit _____ Total 130.00 ~ 80. 00 210.00 Project Financing Data Li Loan El Credit Li Grant -I Guarantee El Other (Specify) For Loans/CreditslOthers: Amount (US$m): 32.00 Proposed Terms: Grace period (years): 8 Years to maturity: 20 Commitment fee: 0.85% for 4 years, 0.75% thereafter Front end fee on Bank loan: 1.00% Financing Plan: Source Local Foreian Total GOVERNMENT 0.00 0.00 0.00 IBRD 16.92 15.08 32.00 LOCAL CONTRIBUTION 18.25 0.00 18.25 Total: 35.17 115.08 50.25 Borrower: REPUBLIC OF ECUADOR Responsible agency: MIDUVIlSSA Address: Sub Secretaria de Saneamiento Ambiental (SSA), Toledo 684 y Lerida, Quito, Ecuador Contact Person: Patricio Ribadeneira Tel: +593 2 549-333 Fax: +593 2 567-022 Email: praguasgandinanet.net Estimated disbursements Bank FY/US$M): FY 2001" 202 003 2004 Annual 6.8 7.4 8.7 9.1 Cumulative 6.8 14.2 22.9 32.0 Project implementation period: 4 years Expected effectiveness date: 03/01/2001 Expected closing date: 02/28/2005 *Local Contribution consists of Municipalities (US$ 8.05 million) and Communities (US$10.2 million) OCS A>- PAD Forn. W Mh, 2C -2 - A. Program Purpose and Project Development Objective 1. Program purpose and program phasing: The development objective of the proposed program, PRAGUAS, is to increase the coverage and effective use of sustainable water and sanitation (WSS) services in Ecuador, with a focus on the poorer populations in rural communities and small towns. An equally important and associated objective is to support the Government of Ecuador (GOE) in the implementation of an overall WSS sector reform program, covering both urban and rural areas. The key elements of the program are: * investment support, for rural areas and small towns; * development and application of improved policies; * strengthening of sector institutions, including the Sub-Secretariat of Environmental Sanitation (SSA) of the Ministry of Urban Development and Housing (NMDUVI), municipal governments, community groups, WSS service providers and the private sector (PS). The program has been designed against the backdrop of Ecuador's worsening socio-economic crisis and has specifically targeted investments to the rural areas and small towns where two thirds of the country's poor reside. According to the Bank's 1999 poverty assessment entitled "Crisis, Poverty, and Social Services in Ecuador", the incidence of extreme poverty increased from 12% to 17% between 1995 and 1998 nationwide, while extreme poverty grew from 23% to 30% in rural areas. In Ecuador's rural areas, PRAGUAS will increase access to sustainable water and sanitation infrastructure while generating temporary and permanent employment opportunities in rural communities benefiting from water and sanitation investments. The program, designed as an Adaptable Program Loan (APL), will also allow for better integration of sector improvements with other more broadly defined state modemization and decentralization reforms undertaken at a national level. These are designed to improve the overall efficiency of central government agencies, to strengthen municipal governments and to create a more favorable environment for private sector participation (PSP) in the provision of services. In the WSS sector, these reforms imply new roles at all levels, and a firm commitment to increased cost recovery through demand-based investment. The SSA will be re-structured and strengthened to assume its new regulatory, facilitation and advisory role. Municipal governments will be strengthened to plan and implement investment programs and to ensure the adequate operation of services in communities within their jurisdiction, through increased participation of service users and the PS in service provision. Municipal governments will also be assisted in delegating service provision to autonomous operators. By the end of the program, PRAGUAS will have * provided a total of 1.6 million additional people in rural areas with water and/or sanitation services that are used effectively and sustained; * initiated and consolidated profound sector reforns that increase sector efficiency and cost recovery both in rural areas and small towns; * achieved a delegation of WSS service provision to autonomous public or private operators in 50 municipal capitals. The adaptive nature of PRAGUAS will support a learning environment for the application of a demand-based approach to sector investments, whereby community groups and municipal governments decide whether to participate in the project based on a clear understanding of the rules of engagement. This - 3 - will include a willingness by municipal governments to delegate service provision and to require users to meet their financial obligations and assume responsibility for sustaining and making effective use of their improved services. The programmatic approach will allow for the gradual application of the new policies throughout the country by providing investment incentives to municipalities that are willing to reform, and coupling the transition with adequate institution building at all levels. The APL will be implemented in three Phases, spread over 10-years: (1) 3/2001-2/2005, (2) 3/2005-2/2008, (3) 3/2008-2/201 1). Key targets for each phase are: Phase 1- (i) 350,000 additional people in small towns and rural communities are served by new/rehabilitated water and/or sanitation infrastructure; (ii) policy reform initiated and SSA restructured; (iii) SSA strengthening underway; (iv) draft sector legislation prepared; and (v) service delegation options tested in at least 8 municipalities. Phase 2 - (i) Policy reform deepened and new financial guidelines widely applied by other sector financiers; (ii) institution building consolidated and expanded; (iii) a total of about 980,000 additional people in small towns and rural communities are served by new/rehabilitated water and/or sanitation infrastructure (phase 1 + phase 2); and (iv) WSS service provision delegated in 20 small municipalities. Phase 3 - (i) Policy reform consolidated; (ii) improved sector efficiency, complete O&M and investment cost recovery and widespread private sector participation in service delivery achieved; (iii) a total of about 1.6 million additional people in small towns and rural communities are served by new/rehabilitated water and/or sanitation infrastructure (phase 1 + phase 2 + phase 3); and (iv) WSS service provision delegated in 50 municipalities. 2. Project development objective: (see Annex 1) The development objective for phase 1 of the APL program ("the project") is the execution of investments for increased WSS service coverage and quality for about 350,000 rural and small town beneficiaries in about 40 rural municipalities as well as in about 6 municipal capitals. In addition, the project DO includes the improvement of sector performance through the application of coherent policies, and the strengthening of sector institutions at the central and local levels. 3. Key performance indicators: (see Annex 1) 1. Sector policy for rural areas launched, increased cost recovery achieved and policy reform initiated for other aspects of sector; 2. Reorganization of SSA complete, with full staffing structure, training and portfolio of services in place in accordance with the restructuring plan; 3. 40 municipal governments have the capacity to oversee service provision in their jurisdiction, and at least 8 have delegated WSS service provision to autonomous operators; 4. Increased capacity of the PS and NGO's to provide goods, services and operating support for service management at the local level, including at least 50 local implementation organizations (OITS) trained and certified; 5. Sustainable new and rehabilitated WSS services serve 350,000 beneficiaries in rural areas and small towns and 210,000 people in rural communities have been trained systems administration, O&M, and hygiene education. -4 - B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R2000-102; IFC/R2000-111 Date of latest CAS discussion: 06/22/2000 The proposed project would support the CAS objectives of poverty alleviation, reduction of government subsidies and increased productivity of infrastructure services as provided for in the CAS (June 1, 1993) and the CAS progress reports discussed by the Board on March 25, 1997 and June 22, 2000. The project is also consistent with the sector policy note discussed with the Ecuadorian government in September, 1998, which reinforces the CAS objectives. The project would improve access to basic WSS services in rural and small town communities, most of which are under the poverty line. The World Bank is working with other donors to support sector reforms and ensure complementarity in lending and technical assistance. The project focuses on poverty alleviation and is in line with the findings of the "Consultations with the Poor in Ecuador" study, which identifies the lack of drinking water as one of the key deficiencies that characterize poverty. The project also supports Ecuador's efforts to modernize and strengthen the WSS sector as it will support sector reforn at the national level, by reshaping sector policies, strengthening institutional reform and promoting capacity building in sector agencies. More specifically, the financial support and technical assistance to be provided under the project would help to operationalize sustainable WSS service management systems, thereby reducing government transfers to operate these services. 2. Main sector issues and Government strategy: Main Sector Issues The WSS sector in Ecuador has a long history of poor performance well below the standards of other Latin American countries. The main problems include: weak institutions and institutional overlap at all levels, lack of sector policies, and no PSP in the provision of services. This results in low WSS coverage rates, and investments that are neither sustainable nor able to keep up with growing demand. Specifically, the main sector issues are: e Unclear roles and functions of sector institutions at all levels. Ecuador is divided into 22 provinces which in turn comprise 214 municipalities. Each municipality is composed of a municipal capital ("cabecera cantonal") and surrounding (mostly rural) areas. Central functions in the WSS sector -- such as canying out fiscal and economic regulation, defining norms, providing training and technical assistance and gathering and reporting sector information -- are poorly developed. The SSA has been largely unable to play the role of sector leader envisaged at its creation. There is still overlap of functions among sector institutions. While municipal governments are supposed to play a more significant role in overseeing service provision, their work is limited, in most cases, to direct provision of WSS services in the urban capital, with little oversight of activities in rural areas. * Lack of a regulatory framework and financial policy. There is no consistent financial policy for the sector in Ecuador. Tariffs are not regulated and -- with city council approval - each municipality can set its own tariffs. This usually results in politically-motivated tariffs that are well below actual costs and, in other cases, in no tariffs at all. Average 1999 tariffs for residential customers were below US$0.03/rn3 -- less than half the cost of operation and maintenance even when investment cost recovery is excluded. Unfortunately, it is precisely the low-income communities in rural areas and small towns whom low tariffs are designed to protect that suffer most from unsustainable financial policies, as low revenue generation - 5 - slows service extension to unserved areas. Sector financiers, such as Banco del Estado (BEDE) and the Fondo de Inversion Social Ecuatoriano (FISE), and other donors often introduce financial policies for their programs which are not coordinated and often contradictory, thereby sending confuising signals to beneficiaries. Although BEDE is a lending agency, and theoretically requires beneficiaries to set tariffs to recover costs, in practice, this condition is not mnet. Many municipally-run WSS utilities set unrealistic and highly distorted tariffs that send misleading signals to consumers while failing to generate the resources necessary to provide reliable service and timely system expansions. In rural areas, WSS investments have reached less than 30% of communities. These investments are usually funded on a grant basis, with communities responsible for covering the cost of daily operations and maintenance. Although many coinmunities manage to keep their systems running, almost none have the resources to undertake major repairs, equipment replacement or service expansion. * Low coverage and quality of services. WSS service levels in Ecuador are among the lowest in South America. Although total coverage rates show 61% for water supply and 40% for sanitation (with no wastewater treatment), these numbers hide the deficit in rural areas, where 50% of the population lives. In the 152 rural municipalities targeted by PRAGUAS (approximately 22% of Ecuador's population), in particular, only 48% of the population has access to adequate water supply and only 35% benefits from appropriate sanitation facilities. In addition, the coverage rates do not reflect the poor quality and intermittent nature of the services. Across the country, only about half of the water facilities installed include systems for disinfection and barely 11% of the urban water systems have full water treatment facilities. Although services reach many more inhabitants in small towns (between 5,000 and 10,000 inhabitants) than in rural areas, the unreliability of the service is usually worse, given the complexity of operating these larger WSS systems. Nationwide, sector investments have failed to keep up with population growth, and coverage actually decreased by three percentage points between 1990 and 1995. * Poor management of services and lack of sustainabilitV According to the Ecuadorian constitution, municipalities are responsible for the provision of WSS services in areas under their jurisdiction, including the rural areas that make up large parts of each municipality. In practice, services in rural areas have largely been provided through community and project initiatives, usually with no linkages to the corresponding municipal administration. Furthermore, in towns, there is as yet little consensus around the idea that utilities should be commercially-oriented, autonomous agencies and that PSP represents a valid option for the provision of WSS services. Apart from 16 water utilities in medium-size and large cities, services in municipal capitals are typically provided directly by the city government with no managerial or financial autonomy. This situation often triggers a downward spiral in which insufficient cost recovery leads to financial problems which in turn lead to poor service and even less cost recovery. Management and operations in these utilities and municipalities has been inefficient. Few are recovering even their operating costs; billing is deficient; meters, where installed, are often not read, and water losses are very high. In rural areas (which include about 10,000 communities nationwide), communities have demonstrated relatively good capacity to keep the water flowing, more or less, on shoe-string budgets, though on balance, coverage rates are much lower. Nonetheless, these systems also show a dramatic decrease in water quality and design flows over time, suffer from poor financial management, and are not sustainable in the long termn. In urban areas, since existing assets are not properly maintained, much less replaced, new investments don't even cover asset depreciation. Overall, investments are not sustainable and reconstruction or major rehabilitation needs to be carried out on a significant number of systems. - 6 - Government Strategy GOE is aware of these issues and wants to turn the sector around. At the same time, in line with its overall policy of decentralization, the central Government intends to diminish its financial participation in the sector and, in return, foresees the need for increasing financial self sufficiency and PSP. Thus, GOE is promoting the transition to independent self-sufficient utilities at all levels, with private operators wherever feasible. Efficient institutions at the national level would regulate the sector and provide technical assistance. Short-term strategy: GOE, through the Consejo Nacional de Modernizacion (CONAM) and MIDUVI is promoting a review of the role of sector agencies at all levels with respect to service provision. It has outlined a comprehensive reform strategy that would redefine the responsibilities of sector institutions, establish tariff structures and economic regulation, and encourage PSP. The Government's short term strategy has three main thrusts: (i) promoting coherent financial and regulatory policies by harmonizing the financing rules used by different sector fnanciers; (ii) reorganizing and strengthening central institutions; and (iii) promoting the creation of self-sufficient autonomous WSS system operators. These three main areas are interdependent and must move forward simultaneously. For rural areas, the GOE will (i) define and establish sound linkages with municipalities; (ii) continue to encourage community-based organizations to promote a demand-driven approach to design, construction and service provision; and (iii) define technical assistance schemes to improve service sustainability in such areas. The project objectives, including PSP, are fully consistent with the reforms proposed by the government. - Sector reorganization and strengthening. As stated above, GOE is defning the roles and responsibilities of sector institutions at all levels, thereby clarifying the functions and institutional relationships of all agencies dealing with WSS. MIDUVI, through SSA, is the core technical sector institution and in charge of setting general regulatory standards. GOE thus intends to restructure the SSA and strengthen it to take responsibility for sector policies and norms, technical assistance to municipalities, training and regulation. It would not execute or finance works. At a local level, municipal authorities are responsible for WSS service provision in their jurisdictions, including the rural areas that account for a large part of most municipalities. In the future, municipalities would no longer provide the services directly, but would delegate them to autonomous (though not necessarily private) operators. According to the GOE's approved sector policy and strategy, municipalities would continue to own system assets and regulate operators within general guidelines established by SSA. Full privatization (sale of assets) is not allowed under the Ecuadorian constitution, but other options for service provision ranging from management contracts (operation and maintenance with commercial risk) to full concessions are permitted. In all cases, service provision would be delegated to a third party, although the scope of responsibility would vary according to the degree of investment. Operators should be independent from the municipal admninistration. Qualifying operators could range from a community organization (junta de agua), more suitable for small communities, to public utilities and private operators who would assume a range of risks which could include full service concessions. In urban areas and some small towns, private operators would be encouraged as the most desirable form of service provision. In particular, the strategy envisions a progressive trend towards increased PSP, with concessions and other integrated provision schemes for large and medium size cities, (30,000 and over) and smaller operators and public institutions in smaller municipalities (5,000-30,000). Municipalities and communities would be encouraged to group to generate a critical size that could easily achieve financial self-sufficiency and -7 - attract the PS. Municipalities would work with communities to decide if the rural communities would have independent juntas or would be served by the operator in charge of the municipal capital. Given the severe financial crisis currently affecting the Ecuadorian economy, it is expected that PSP will start slowly in a small number of municipalities and accelerate towards the end of APL- 1. * Sector policies. regulation and fnancial framework. GOE will establish a regulatory function at a national level in the forn of a Sector Planning Department within SSA. This department will focus its initial efforts on tariff regulation, the definition of norms and standards and the collection of information on the performance of operators. On the financial side, the Sector Planning Department would provide guidelines for tariff structures, methodologies for tariff studies and rules for tariff proposals and approval. The financial policy, reflected in the tariffs, would also include provision and allocation of government subsidies and credit (mainly for investment costs), and would encourage financial self-sufficiency and PSP. As part of this strategy, GOE has defined BEDE and FISE as the two national financing institutions for the sector and divided their target areas to avoid overlap. Policies for rural communities include (i) the use of a demand responsive approach and intensive community participation and training in all stages of the project cycle, (ii) appropriate technology options, and (iii) hygiene and sanitation to achieve greater health impact. * From strategy to action: Existing legislation, especially the 1996 Modemization Law provides the legal framework for the sector reforms described above. Nonetheless, municipalities retain the right to continue providing water and sanitation services directly, should they choose to do so. To induce reform in the short term, GOE will rely mostly on incentives (financial and TA) by applying the sector policy through its financial programs (PRAGUAS, BEDE, among others). In the medium term, GOE plans to strengthen the policy further by passing a water supply law that would create a stronger environment for service delegation and would enforce fnancial policies within sector institutions. Given the fact that most services currently do not cover operating costs, financial improvements will be required in many cases simply to attract PSP. GOE is aware of the magnitude of the task ahead and plans to establish a technical assistance program to promote the above vision, in particular the delegation of services to autonomous operators. A TA division within SSA will be responsible for managing this program (see annex 2, section 1.2 for details). Socio-Economic Context The sector issues and government strategy presented above take on particular urgency in light of Ecuador's worsening socio-economic situation. As shown in table 1 below, rural poverty increased dramnatically in all three of the country's major regions (Costa, Sierra and Oriente) between 1995 and 1998, particularly in the rural Sierra, where 35% of the population lived below the extreme poverty line in 1998. Households are classified as extremely poor, when total consumption expenditure falls below the food poverty line: - 8 - Table 1: Evolution of Extreme Poverty, 1995-1998 40 -- - 35 - 30 25- 20 15 -AM.:,, 5 National Nat. Nat. Costa Costa Costa Sierra Sierra Sierra Oriente Oriente Oriente Urban Rural Urban Rural Urban Rural Urban Rural [ Percent 1995 u Percent 199 Household surveys support the conclusions on the low coverage and quality of services presented under the main sector issues above. When rural households were asked to rate the quality of water and sanitation services in their community as part of the Bank's 1999 Poverty Assessment, 66% of respondents in the rural Costa, 69% of respondents in the rural Oriente and 75% of respondents in the rural Sierra region replied that service had deteriorated over the past 5 years. Water supply coverage is strongly correlated with wealth : While nationally, the percentage of households that lack access to adequate water supply services stands at 39%, the percentage increases to 75% among households in the poorest quintile of Ecuador's population. 3. Sector issues to be addressed by the project and strategic choices: GOE considers PRAGUAS the main vehicle for sector and institutional reforms. The project would therefore take an integrated approach, and address the following issues: Inconsistent investment financing and cost recovery~ policies applied by nati onal sector fmnanciers and external suport agencies. During APL- 1, PRAGUAS will provide a forum for wide stakeholder participation in the discussion of a new Water Sector Law. A previous draft law -- prepared with less participation -- was derailed before it could pass Congress because several provisions (regulatory structure, ownership of assets) proved unacceptable to key stakeholders. The participatory approach favored by PRAGUAS is expected to generate the necessary backing for congressional approval. Unclear roles and functions of sector institutions at all levels. The project will help consolidate the roles of most sector institutions, especially in MIDUVI and at the municipal level. Municipalities, operators, communities and the SSA would be strengthened to undertake their functions. Low coverage and poor management of services. The proposed project will finance US$42 million worth of WSinvestments in small towns (up to 10,000) and rural communities during APL- 1. In addition, improvements in the management of services will be supported by the institutional strengthening program - 9 - to be carried out by SSA and partially funded by PRAGUAS. 4. Program description and performance triggers for subsequent loans: The program has three main objectives, with the level of intensity phased as follows: Phase 1 Phase 2 Phase 3 Policy reform Moderate Moderate Moderate Institution Building Basic coverage (40 Moderate coverage High coverage municipalities) (about 100 municipalities (about 150 municipalities nationwide) nationwide) Investment Moderate (rural areas and High (rural areas and High: pilot projects in small towns) (whole countiy *) towns) (*) does not include I___ __ __ __ __ __ __ __ __ ___ I__ m ajor cities Given the economic crisis facing Ecuador today, PRAGUAS has been designed to support a moderate pace of policy reform accompanied by an emphasis on institution building at all levels and an accelerating pace of water supply and sanitation investments in rural areas and small towns. Three categories of indicators will be used to track the APL Phases and serve as triggers for subsequent loans: Indicator Triggers for Phase 2 Triggers for Phase 3 Category Policy reform * Draft Water Sector Law * Water Sector Law presented to Bank for presented to Congress; review; * Consistent fnancial policies (including tariffs and subsidies) are applied by all sector financiers; Institution * SSA restructured and * SSA remains responsive to Building: responsive to new sector new sector policies; SSA/MIDUVI policies; municipalities, service providers * At least 5 cases of WSS * At least 20 cases of WSS service delegation by service delegation by municipal authorities to municipal authorities to autonomous operators have autonomous operators have been conducted in municipal been conducted in municipal capitals. capitals. - 10- Investment * 90% of APL- 1 funds for * 90% of APL-2 funds for Program (regional rural component (component rural component (component sequencing) 2) committed; 2) committed; C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Indicative Bank- % of Component Sector Costs % of financing Bank- _US$M) Total (US$M) financing 1. Sector Reform/lnstitutional Institutional 4.50 9.0 4.50 14.1 Development Development IA. Restructuring of SSA and policy reform 1B. Strengthening of municipal governments, NGO's and private WSS operators 2. Water and Sanitation Subprojects in Rural Water 39.00 77.6 22.00 68.7 Rural Areas Supply & 2A. Promotion, community Sanitation development, engineering designs and supervision 2B. Water and sanitation infrastructure, community training and hygiene education 3. Water and Sanitation Subprojects in Rural Water 3.00 6.0 1.75 5.5 Municipal Capitals Supply & 3A. Engineering studies and Sanitation supervision 3B. Civil works 4. Project Management Rural Water 3.43 6.8 3.43 10.7 Supply & Sanitation Total Project Costs 49.93 99.4 31.68 99.0 Front-end fee 0.32 0.6 0.32 1.0 Total Financing Required 50.25 100.0 32.00 100.0 1. Sector reform and institutional development.: This component will address the needs of the entire - 1 1 - sector, both urban and rural (except for the three major cities). It includes two sub-components: lA. Institutional Development and Policy Reform: assistance to SSA to assume its new role in the sector, including (i) major re-structuring in support of decentralization and (ii) creation of a new unit in charge of providing assistance to municipal governments for service planning and delegated management. lB. Strengthening of Municipal Governments. NGO's and private sector service providers: design and implementation of models for WSS service provision through autonomous (preferably private) operators in all interested municipalities in Ecuador. Municipal governments will also be strengthened to oversee sector activities in their jurisdiction. Small municipalities that choose to delegate service provision would become eligible for WSS investments in their urban capital under component 3. Assistance will be provided to help the private sector and NGOs at the municipal level organize small multi-disciplinary companies to provide community development and engineering services as well as to construct systems in rural communities, using demand-based approaches and participatory development strategies. Potential service operators will also be identified and encouraged to form operating companies in small towns. 2. Water and Sanitation Subproiects in Rural Areas: this component comprises two sub-components: 2A. Subproiect Promotion and Preinvestment: PRAGUAS will be promoted in eligible municipalities and communities to stimulate interest in participating in the project. Preinvestment activities will include: community organization and formation ofjuntas, selection of preferred service level, complete engineering designs, initial community training in contract administration, construction and hygiene education, and selection of management models for RWSS services. 2B. Civil works and Community Training in administration, operation, maintenance and hygiene education as well as continued municipal strengthening. Rural water supply systems would include a range of technical and service level options, from simple handpumps and rainwater catchments to small piped systems. Rural sanitation options will focus on on-site systems ranging from improved traditional latrines to ventilated improved pit (VIP) latrines, aquaprivies and "basic sanitation units" (UBS, comprising shower, sink and toilet). A Guide to Technical Options (featuring technical solutions, service levels and their respective costs) has been prepared to allow beneficiary communities to make their choice in relation to their willingness to pay and sustain the services. 3. Water and Sanitation Subnroiects in Municinal Canitals: this component comprises two sub-components: 3A. Engineering studies : municipal capitals (with populations below 10,000 people) that take steps to transfer the operation of municipal water and sanitation services to autonomous public or private operators will become eligible for PRAGUAS funding for studies aimed at rehabilitating municipal WSS infrastructure. 3B. Civil works. PRAGUAS will finance the rehabilitation/expansion of urban WSS systems in eligible municipal capitals up to agreed investment limits. - 12 - 4. Proiect Management: A project management unit (PMU) will be established within SSA/Quito and "Equipos Provinciales del PRAGUAS" (EPP's) will be set up in participating provincial SSA offices. Component 4 will finance the following: * Incremental operating costs for the PMU and the EPP's; * Equipment and software for the PMU (and EPP's as necessary); * Contractual personnel for PMU; * External audits; * Maintenance of the financial management and project monitoring system; * Consultancies (e.g. for a Rural Sanitation Sector Environmental Assessment and periodic reevaluation of economic limits for water supply investments) 2. Key policy and institutional reforms supported by the project: During the first phase, PRAGUAS will act at three levels to support key policy and institutional reforms: * at a national level, the program will promote (i) the definition and refinement of financial policies for the rural water and sanitation sector and the preparation of a draft Water Sector Law; (ii) the establishment of consistent regulatory policies and the creation of a Sectoral Planning Department within SSA; and (iii) institutional reforms within MIDUVI, including a profound restructuring and strengthening of the SSA. In addition, PRAGUAS will be closely linked to other policy reforms in Ecuador, most notably decentralization. • at a municipal capital level, PRAGUAS will promote a new institutional model for service provision, using autonomous public and private entities rather than departments of the municipal government to provide water and sanitation services. To incentivize the delegation of WSS services, small municipal capitals (populations under 10,000) would become eligible for urban WSS investment finance under component 3, while SSA would work with BEDE to secure a line of credit for medium-size (more than 10,000 people) municipal capitals that have successfully delegated their WSS services and wish to upgrade/expand them. * in rural areas, the program will roll out the demand-responsive approach to rural water supply & sanitation to a total of 16 provinces, giving communities control over the systems they want and are willing to pay for. - 13- 3. Benefits and target population: Benefits: The first phase of PRAGUAS will provide new or rehabilitated drinking water facilities to about 350,000 people in about 40 municipalities nationwide, and will promote the improvement of household sanitation and hygiene practices. These benefits will accrue in Ecuador's rural areas which are home to two thirds of the country's poor and where 30% of all inhabitants are classified as "extremely poor". Municipal governments in participating municipalities will also benefit from institutional strengthening provided by the local SSA offices ("Equipos provinciales del PRAGUAS", EPP) as well as one (or several) Implementation Assistance Agencies (1AA, i.e., national or international NGO's or engineering consultants with demand-responsive rural water supply experience). In addition, about 35,000 people living in about 6 medium-size pilot municipal capitals that delegate the operation of their urban WSS services to autonomous public or private operators, will benefit from rehabilitated or expanded water (and/or sewerage) systems financed under PRAGUAS. All investments will respond to community demand for services and will be accompanied by substantial community development activities in organization and training in administration, management and hygiene education to ensure effective and sustained use of the facilities. The project will contribute to the reduction of poverty through cost savings (time) and improved quality of life and health, especially for women and children. International experience (see bibliography for references) points to a strong positive correlation between welfare (as measured by consumption) and participation in community activities by members of households, especially among the rural poor and even more so among the vulnerable, rural poor (defined as poor rural households with pregnant women, children under five, and elderly family members). In addition, community members will benefit in the long-term from the strengthening of a network of formal and informal institutions that would help plan for, install and provide maintenance of rural infrastructure facilities. The private sector and NGOs will be strengthened and this would lead to increased employment opportunities in rural areas. Municipal governments will gain significant institutional capacity to improve services in the district capital and in working with communities to implement the sub-projects. This will contribute to the strengthening of the community-municipality linkages, with spillover effects to other rural development activities. Target population: For the physical investment components, the project will target the rural population of Ecuador living in municipalities with district capitals of less than 10,000, including the residents of rural communities and small towns. Although only 22% of the country's population live in these 152 municipalities, these represent about one third of Ecuador's service coverage deficit with respect to both water and sanitation. Only 48% of the urban and rural population of these small municipalities has access to adequate water supply and only 35% benefits from appropriate sanitation facilities. These communities depend largely on agriculture or trading activities for subsistence. The project will reach these communities by targeting municipalities that have low service coverage rates, high poverty indicators and a high community demand for improved services. Eligibility and prioritization criteria have been developed to ensure that investments respond to community demand and that all eligible communities and municipalities have an equal opportunity to access support. The project meets both criteria (only one is required) for designation as a Poverty Targeted Intervention: (a) the operation has specific mechanisms for targeting the poor through a systematic participatory process for the selection and prioritization of beneficiary municipalities and communities, which include among other considerations poverty indicators, percentage of indigenous peoples within the geographic area, and the percentage of women participating in the project; and (b) the population of project beneficiaries has a significantly larger proportion of poor people than the country's population as a whole (30% of the rural - 14 - population is classified as extremely poor compared with a national average of 17%). The majority of beneficiary population is located in rural communities of less than 10,000 -mostly between 1,000- and 2,000 people- living at subsistence levels, and predominantly below the poverty line. Survey results showed that nearly 100 percent of the potential direct beneficiaries lived below the World Bank's estimated poverty line of US$ 2.13 per capita per day, with an average income of US$ 1.05 per capita per day, after reported monetary income was adjusted upward by 40 percent to capture non-monetary income in rural areas. Employment generation: Communities will provide unpaid unskilled labor for the construction of rural WSS systems as part of the beneficiary contribution to PRAGUAS (30% of construction cost overall, with no less than 10% in cash). Since unskilled labor typically accounts for only 18 - 25% of the construction cost of rural WSS systems in Ecuador, most of the paid employment generated by the program will accrue to professionals (engineers and community development specialists) employed by the OITS for pre-investment activities and supervision as well as to professionals and skilled workers employed by construction contractors. It is expected that PRAGUAS will create approximately 3,000 to 4,000 person-years of employment over the course of APL-1. Border provinces: Particular care will be taken to ensure that promotional activities reach underdeveloped areas in Ecuadorian provinces along the border with Peru (El Oro, Loja, Zamora-Chinchipe, Morona-Santiago, Pastaza, Napo, and Sucumbios) in line with the Special Border Province Development Initiative currently underway. The border provinces account for approximately one fourth of Ecuador's total rural population in small municipalities. PRAGUAS financing will be open to three of the seven border provinces during the first year of the APL (those with the highest poverty indices and WSS coverage deficits) and all others from the second year of APL-1 onwards. Currently only about 293,000 people (42% of a total population of 685,000 living in small municipalities in border provinces) have access to acceptable potable water supply. By the end of APL-1, this figure is expected to increase to about 60% and by the end of APL-3 to about 90%. The PRAGUAS project has been subjected to a poverty audit (see A. Chong: "Basic Infrastructure and Welfare : PRAGUAS project in Ecuador") and has been found to have a design and a targeting strategy that are positive from a welfare perspective. 4. Institutional and implementation arrangements: Implementation period: 3-phase, 10-year APL loan with non-overlapping phases of 4, 3 and 3 years. Executing agencies : MIDUVI/SSA through a specially-created PMU (project management unit) for components 1 and 4, small municipalities (populations of less than 10,000 inhabitants) for components 2 and 3. Given that small municipalities often lack project implementation experience in general and familiarity with Bank procurement guidelines in particular, municipalities will be assisted both by provincial SSA offices (EPP "equipos provinciales de PRAGUAS") and by specialized firms (Implementation Assistance Agencies, LAA's), hired by SSA to support the implementation of the pre-investment and investment activities under component 2. A full discussion of the responsibilities of all actors involved in PRAGUAS as well as a detailed description of the project cycle is provided in annex 2 Onlending arrangements: None. Bank funds will fmance the centrally implemented components (1 and 4) directly through SSA. Payments to contractors and consultants for water supply and sanitation investments in rural areas (component 2) and small towns (component 3) will be made from municipal accounts jointly managed by SSA and program municipalities. - 15- Flow of funds: For the implementation of components 2 and 3 (WSS investments in rural areas and municipal capitals respectively), the GOE will hire the services of a Commercial Bank (CB) with provincial offices for the management of funds. The Central Bank of Ecuador on behalf of the GOE will be responsible for selecting the CB, according to criteria agreed with the Bank. The CB would hold all PRAGUAS accounts in local currency and, following instructions from the PRAGUAS PMU, would transfer funds to municipal accounts jointly managed by SSA (through the EPP's) and program municipalities once relevant Grant Agreements ('Promotion and Preinvestment Grant Agreement" for component 2A, "Rural Water and Sanitation Grant Agreement" for component 2B, "Delegation Investment Grant Agreement" for component 3) between SSA and a participating municipality have been signed. The "Rural Water and Sanitation Grant Agreement" for component 2B, in particular, will require municipalities to deposit 20% of the cost of rural WSS investments in areas under their jurisdiction into their PRAGUAS municipal account upfront. Likewise, beneficiary communities, will deposit 10% of the cost of their systems. Once both the municipality and the community have made their contribution, SSA will make downpayments to the municipal accounts on the basis of the Grant Agreement as described in Annex 6. Payments to contractors would then be made from the CB with authorization from the provincial project unit (EPP) and the municipality. Funds from the Special Account will only be transferred once payment to consultants / contractors is due, or to reimburse payments already made. All project activities would be carried out according to criteria, procedures and guidelines agreed upon between the GOE and the Bank and detailed in the Project Operation Manual (OM). Procurement: The main procurement actions will be carried out by the Ministry of Urban Development and Housing (MIDUNI) and the beneficiary municipalities. All procurement will be carried out in accordance with the Guidelines for Procurement under IBRD Loans and IDA Credits dated January 1995, revised January and August 1996, September 1997 and January 1999 and the Guidelines for the Selection and Employment of Consultants by World Bank Borrowers dated January 1997 and revised September 1997 and January 1999. A procurement capacity assessment was carried out on MIDUVI and a sample of 5 small municipalities and it was deternined that this is a high risk operation, mainly because of the weak capacity of the municipalities. An action plan to mitigate risks has been prepared, including training, adequate staffing of the PMU, supervision and monitoring systems and technical assistance to the municipalities to be provided by a consulting firm (details in Annex 6). Financial management and auditing: A 4-C certification has been issued. The SSA will establish a project financial management system satisfactory to the Bank prior to effectiveness. Participating municipalities will bundle the information collected in rural communities and provide the PMU with quarterly updates on the status of ongoing and completed water supply and sanitation investments in rural areas and municipal capitals under their jurisdiction. The PMU in tum will prepare and submit quarterly project management reports to the Bank in January, April, July, and October of each year, according to guidelines and formats provided in the OM. External auditors acceptable to the Bank would audit the accounts of the project under terms and conditions acceptable to the Bank. Monitoring and evaluation arrangements: Monitoring and evaluation will be done by the Bank and qualified consultants. In each province, the provincial project units (EPP's) and municipal sanitation teams (EMS, equipos municipales de saneamiento) will track program communities for a period of 3 years after water supply and sanitation systems have gone into operation to follow-up on the social indicators (including health impacts and employment generation) mapped during the baseline assessment in each community as well as the effectiveness of financial and operational arrangements. As needed, the Implementation Assistance Agencies will support this process. The Bank will conduct at least two full and one partial supervision missions per year. A mid-term review of APL-1 will be conducted in the third - 16 - quarter of 2002. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Option 1: MIDUVI implements the entire project, including contracting of OITS and construction contractors. This option was rejected because MIDUVI does not have the in-house capacity to manage the large number of small investments that the rural WSS component (component 2) will entail. Furthermore, line ministries have traditionally not demonstrated efficiency in the management of these types of scattered investment programs (as evidenced by the extremely high unit costs achieved by SSA compared to FISE, FASBASE and others). Finally, direct implementation by MIDUVI/SSA runs counter to- both the government's sector strategy and PRAGUAS' objective of strengthening municipalities for the provision of WSS services. Option 2: FISE implements the whole project. This option was also rejected since FISE's poverty alleviation objective gives it a distinct focus in terms of overall approach, targeting mechanisms and financial policies. In addition, its broad project portfolio does not permit it to develop the sectoral expertise required to deliver sustainable community-managed WSS services, and especially to develop the critical mass of community development expertise needed at the subproject design stage. In fact, FISE has an extremely poor record in achieving sustained outcomes from its WSS investments, and GOE has clearly recognized the need for public sector backstopping to community and municipality-managed services - a role that needs to be undertaken by the line agency - SSA. Option 3: Private financial intermediaries. MIDUVI/SSA rejected the idea of delegating community sub-project evaluation, overall financial management and TA to municipalities completely to one or more private intermediaries. Instead, the Bank and SSA agreed that a private Implementation Assistance Agency (1AA) would provide technical support to various stages of the rural subproject cycle (see annex 2) while provincial SSA offices ("Equipos Provinciales del PRAGUAS", EPP) retained responsibility for sub-project evaluation and a commercial bank remained in charge of releasing project funds to service providers (OITS, contractors etc.) in response to disbursement requests from project municipalities approved by the EPP's. Option 4: Project implementation directly through the municipalities, with assistance from a technical organization such as the "Asociacion de Municipios del Ecuador" (AME). This option would have involved transferring project funds directly to participating municipalities who would have made payments to OITS, contractors and other service providers. The approach was discarded given the very weak capacity of many municipal governments, as well as the sheer difficulty of ensuring sound financial management in a project that would have so many different implementing agencies. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings -_______________________________ .____________.____________ (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Municipal strengthening PDM (municipal development S S project I) -17- Health / rural water supply FASBASE S S Rural water supply and sanitation RWSS pilot project S S Other development agencies FISE (IDB), UNDP, UNDP/WB Guayaquil Water emergency -WSP, KfW, CARE Loan (IDB) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) The IDB as well as other donors are currently assisting the government of Ecuador in the water and sanitation sector. In particular, IDB's ongoing emergency Loan to Guayaquil is supporting the privatization of ECAPAG, the water and sewerage utility of the city, a process the World Bank has also supported with the Guayaquil drainage operation which is now in standby mode. IDB also assisted in the preparation of a draft water and sanitation sector law which was not passed by Congress. KFW and GTZ have been active in providing financing to the city of Babahoyo, and GTZ has supported modernization reforms for BEDE, AME and, more recently, PRAGUAS. Other bilateral donors (such as USAID), and NGOs (such as CARE) have provided assistance to rural communities with pilot projects. So far the government has done little to coordinate these efforts and to spell out a clear policy. PRAGUAS represents an opportunity to improve coordination among donors and to ensure that basic policy guidelines are honored by all. 3. Lessons learned and reflected in the project design: Many experiences from within and outside Ecuador contribute to the proposed project design. From within Ecuador, PRAGUAS builds upon the lessons of: 3 The $3 million Bank-financed Pilot Rural WSS component of the FASBASE project . Through this pilot, the demand-responsive approach was first introduced in the country. FASBASE demonstrated that poor, rural communities are willing to organize and able to pay more than 40% of service improvements, as well as take charge of sustaining their services. However, FASBASE's implementation procedures (through the Ministry of Health) also proved to be slow and bureaucratic. 3 FISE and its proven efficiency in sub-project approval, contracting and fund disbursement. At the same time, PRAGUAS learns from FISE the major limitations and poor sustainability that result from the lack of a community development and training component. * A long and rich tradition of rural WSS projects constructed with a high degree of community participation through the ex-IEOS, with support from the USAID-funded WASH programs (1980-1992), as well as experience from major NGOs, such as CARE and Plan Internacional. The projects have all shown the capacity of well-trained Juntas to achieve good operation and management records, albeit with limitations in terms of performing major repairs. PRAGUAS project design also benefits from the work of the Bank's RWSS Thematic Group , the global UNDP-WB Water and Sanitation Program and experiences from other agencies such as CARE, UNICEF, PAHO, etc. The main "best practice lessons" can be summarized as follows: 1. Adopt a demand responsive approach where users determine if they want to participate and select their preferred level of service based on willingness to pay and assume long-term responsibility for service management. 2. Promote institutional reform based on clear roles for key stakeholders where communities own their facilities, the private sector provides goods, services, and operational support, and government -18- facilitates the process. Clearly define the role of local government, service providers and Water User Associations (WUAs). Include clearly defined capacity building components that enable all stakeholders to play their roles and build partnerships. 3. Ensure an appropriate legal framework for ownership and management and clearly allocate responsibilities between national and local government and water users' associations (WUA's). 4. Support the formation of representative WUAs (Juntas) for planning, implementation, and management of community water supply facilities. 5. Establish sound financial policies that lead to sustained services. 6. Integrate water, sanitation and hygiene education. 7. Ensure representative and informed participation of all stakeholders, including women and traditionally excluded groups. 8. For small towns, separate the regulatory, management and operational functions. Promote the contracting out of operations to the PS. Finally, PRAGUAS project design for APL-1 has benefited from the lessons learned during a program pilot phase initiated in March, 1999 in 30 rural communities spread out over 4 municipalities in 4 provinces across Ecuador (see map). The pilot phase drew attention to two deficiencies in the pre-investment phase of the project cycle (see annex 2), namely that the OITS (organizaciones de intervenci6n tecnico social) (i) presented project communities with limited (or no) options with respect to service levels and (ii) did very little financial analysis as to the O&M costs per household that different technical solutions would entail. In response to these weaknesses, simple tariff calculations and additional background on the spectrum of service options available were added to the manuals that OITS will receive as part of an upfront training exercise before they are sent to the field for the next pre-investment phase. Additional lessons, referring specifically to social aspects of the pre-investment phase, are provided in annex 11, section 6. 4. Indications of borrower commitment and ownership: The SSA and MDUVI have established a dynamic project preparation team that has been preparing PRAGUAS for 2 years. MIDUVI has demonstrated commitment by taking the lead in establishing institutional alliances for the project, hiring special advisors and establishing a control system to gauge project preparation progress. Pilot projects in 4 provinces have been used to fne-tune PRAGUAS' approach to promotion and pre-investment activities. 5. Value added of Bank support in this project: The World Bank has developed a strong relationship with sector agencies in Ecuador based primarily on the experience of the FASBASE pilot project. In addition, the UNDP-World Bank Water and Sanitation Program has been working with the Government to translate the lessons of the pilot project into national policy, and linking the experiences in Ecuador to those of neighboring countries. In PRAGUAS, the specific value added by Bank assistance will be to help establish national policies for the urban and rural WSS sector and to support the development of a long-term national WSS program for rural areas. The Bank can assist MIDUVI in establishing a leadership role in the sector and in coordinating the investment provided by other intermediaries (i.e. FISE and BEDE), as well as other donors (i.e. IDB, UNDP, NGOs and bilateral aid agencies). Finally, the Bank can help link the sector reform process to the overall GOE agenda of state modernization and decentralization. - 19 - E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): O Cost benefit NPV=US$ million; ERR = % (see Annex 4) O Cost effectiveness * Other (specify) Cost benefit and cost effectiveness Cost benefit results of the sample: Average NPV = US$ 35,543; Average ERR = 28 % A detailed economic cost benefit analysis was conducted for the 19 projects included in the pilot phase of the Program. This sample includes a range of technical solutions to be financed and covers all major regions (Sierra, Costa and Oriente). The major benefits of this project are improved water services to approximately 350,000 beneficiaries in about 40 rural municipalities nationwide (APL-1). These include direct user benefits: resource savings (time savings and savings that result from the elimination of individual water treatment, e.g. the cost for boiling water), health benefits (estimated as reduction in costs for coping with water borne diseases) and benefits from increased water consumption estimated by the willingness to pay for the increased consumption, for users who without the project would use less effective and more costly alternatives (such as rivers, bottled water, etc.). The project is demand driven and offers new/rehabilitated WSS infrastructure to communities that express a willingness to participate. Technical solutions will be designed so that beneficiaries can meet the variable costs associated with the level of service they select. Direct beneficiaries will also be required to contribute in cash and labor to cover 30% of investment costs. PRAGUAS also focuses on achieving service sustainability, through intensive user education in effective use, administration, operation and maintenance of the systems. Thus, it is highly probable that user benefits will be realized over time, as shown by the World Bank report "Making Rural Water Supply Sustainable: Recommendations from a Global Study". Additional benefits are expected from on-site sanitation investments, although these were not quantified. Instead, a least-cost analysis of alternatives and cost-effectiveness criteria were used for investment decisions. The sanitation strategy of the project calls for strong promotion and hygiene education, demand generation for investments in sanitation, lower levels of subsidy, targeted coverage levels of at least 60 percent of households per community to achieve full health impacts, and promotion of a wider range of lower cost options. These should bring additional positive health benefits to the communities. The costs included in the analysis were: (i) capital investment costs, (ii) recurrent costs (operations, maintenance and depreciation), (iii) institutional development costs, and (iv) community development costs (organization, training and hygiene education). All transfers, including taxes and subsidies were excluded from the analysis. All costs included were adjusted to reflect economic prices using conversion factors calculated by Banco del Estado, Ecuadores Central Bank. An economic internal rate of return, net present value using a 12% discount rate, and benefit/cost ratio were calculated for each subproject in the sample. Of the 19 pilot projects evaluated, 10 were found to be economically viable with an average NPV of US$ 35,543 and average ERR of 28%. A sensitivity analysis for all major assumptions was conducted to all feasible projects. The results showed that the findings from the economic analysis are robust. Simulations using Crystal Ball based on benefit probability distribution, showed that there is 0 probability of obtaining an unfeasible project, except in one case were there is a low probability of a NPV<0 (7.5%). Results from switching values for investment costs showed that projects will be viable on average up to a cost overrun of 123% which is not likely to happen in this type of project - 20 - especially considering the conservative assumptions made on the cost side allowing for 10% contingencies. In small rural communities there is a risk of low population growth rates caused by migration to urban areas. For that reason a scenario with zero population growth was simulated, results showed that in 80% of the cases the projects will be viable with constant population. These results were taken into consideration for the operational manual to make sure population projections are conservative (see Annex 4 for details). An estimation of an overall Program rate of return was not attempted here; such a calculation would be based on an assumed distribution of community choices of capital investments. Based on the results of the economic analysis of pilot phase subprojects, econometric models were estimated between cost benefit and cost effectiveness indicators. This relation was used to find the critical values to determine the economic viability of subprojects to be financed in the operational phase of the project to save costs and time in project preparation during the implementation phase. Results showed that the average critical value for investment cost per connection for a viable project was US$ 486. Poverty Impact: Distributive analysis: A complete distributive analysis of the benefits was conducted to estimate the poverty impact of the project. Results from the household surveys conducted for the economic analysis of the sample of 19 pilot projects in 30 localities in all three regions showed that 100% of all potential direct beneficiaries of the project were classified as poor. Survey results showed that 100 percent of the direct beneficiaries lived below the World Bank estimated poverty line of US$ 2.13 per capita per day, with an average income of US$ 1.05 per capita per day, after reported monetary income was adjusted upward by 40 percent to capture non-monetary income in rural areas. The quantifiable net impact of the viable water projects on the welfare of the poor is substantial : US$ 1,231 per household on average for the projects in the sample. The quantifiable impact is defined as the net present value of the benefits that the direct beneficiaries will receive under the "with project" scenario, after deducting the financial costs the direct users would pay (30% of investment costs and total operation and maintenance costs). Other benefits for the poor: The Program has been design following a demand driven approach as explained above. To ensure that benefits for the poor are not reduced by this approach, the project has an specific component for promotion and education at the community level with the aim of helping them improve the way they organize and associate, thus contributing to increased social capital (civic association), and reducing the moral hazard associated with the idea that only well-organized communities will be able to participate. Trust, the other major element in social capital would also be developed through women's involvement that is an integral part of project design at the community level. In addition, a targeting mechanism to give priority to the poorest communities was developed. A matrix to prioritize communities (which is part of the Operational Manual) was designed to favor the extremely poor, women, and indigenous and Afro-Ecuadorian groups, thus allowing for a targeting mechanism to increase the impact on welfare to the poor and vulnerable groups such as women and the indigenous population. As there is a strong correlation between poverty and ethnicity in Ecuador, most of these groups are part of the target population of the project. The outreach campaign planned under the project will inform potential beneficiaries of both the benefits and requirements for participation. -21 - 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) PRAGUAS represents an important instrument for the sector to start applying a rational cost recovery and tariff policy in both urban and rural areas. A major activity of PRAGUAS preparation involved support for the application of a national financial policy for the sector. Subsidies would be channeled both through FISE and BEDE (with BEDE also providing credit for the larger and wealthier municipalities). A comprehensive financing (tariff and subsidy) policy is being developed. In urban areas, cost recovery will be achieved through tariffs applied by WSS companies. Tariffs and subsidies for urban areas are still under development and key guidelines will be presented as part of the proposed WSS sector reform. Tariff structures should differentiate the type of costs. To the extent possible, cross subsidies should be eliminated and replaced by a basic sanitary consumption level affordable to all. In principle all companies should cover their operation cost and debt service. Investments should be recovered through tariffs in large cities and, to the extent possible, by internal cash generation and municipal funds. However, the GOE recognizes the need for subsidizing investments directed at low-income beneficiaries as well as for environmental investments such as wastewater treatment. In rural areas, each project and agency now adopts a distinct financial policy - with FISE providing services free of charge (and even paying for community labor), and the FASBASE pilot project recovering more than 40% of investment costs. Through PRAGUAS, GOE has agreed that one financial policy will apply to the entire rural sector (for communities of less than 10,000 people). This policy will require users to pay all operating, maintenance and replacement costs for mechanical/hydraulic equipment for their WSS service. Communities would be eligible to apply for a Government subsidy and enter into a cost sharing arrangement for the initial investment of a WSS facility. The community will choose its preferred service level, and would have to cover all costs above an established ceiling. For water projects, the first phase of PRAGUAS will have the following cost sharing arrangement: community 30%, the municipality 20% and PRAGUAS 50%. Detailed studies and results of numerous projects (FASBASE, CARE, Plan Internacional, ex-IEOS) demonstrate that this is an acceptable policy, and that the majority of communities will in fact be able to achieve a high level of service (house connections) within this ceiling. Poorer communities will not be excluded by this policy, as long as they are allowed to provide some of their counterpart share in-kind as well as cash (as is common practice in Ecuador). At the same time, the per capita ceiling will allow Government to make better use of subsidies, by not financing very costly investments in a few communities at the expense of wider service coverage. This financial policy will be adjusted during each phase of the APL, with a view to introducing greater cost recovery from service users. The financial policy for sanitation investments provides a 70% non-refundable grant to individual households building on-site sanitation systems (up to US$250) in communities that reach 60% sanitation coverage levels overall. PRAGUAS will also finance 100% of school latrines (after communities have excavated the pit). PRAGUAS will cover the full costs of sub-project promotion, pre-investment, municipal strengthening and community development. Fiscal Impact: At the national level, GOE (using proceeds from the Bank's loan) will contribute 50 percent of rural water investment costs, while municipalities will cover 20 percent and beneficiary communities will contribute 30% in cash and in kind. GOE will be responsible for paying the principal and interest on the loan. The - 22 - government, however, will be able to recover a small part of its contribution through taxes on some investment costs paid by construction companies. In the long-run, it is expected that the level of Government subsidy to the rural water sector will diminish over time as a result of the financial policy promoted by PRAGUAS, that would charge direct users for operation, maintenance, and replacement costs (for mechanical/hydraulic equipment), to ensure sustainability. This implies that the "with project" scenario in the long run would yield a positive fiscal impact when compared to the "without project" situation. The net fiscal impact is not calculated here given that insufficient information is available. 3. Technical: PRAGUAS faces no major technical issues, since all technologies considered for water supply and sanitation systems are well-established. Instead, preparation has focused on compiling a comprehensive Guide of Technical Options ("Guia de Opciones Tecnicas", available on CD ROM) that provides OITS with (i) standardized designs for a range of technical options and service levels; (ii) standard costs for individual components (sand filters, storage tanks, latrines etc.); and (iii) revised design standards that reduce construction costs. The availability of standardized designs and cost tables will make it easier for engineers to present rural communities with a range of technical options and associated service levels that allow beneficiaries to weigh what they want and are willing to pay for. One important preparation activity has been to identify and promote the application of lower cost and more appropriate technologies for dispersed rural communities since many Ecuadorian engineers tend to standardize on gravity-flow or pumped piped systems with house connections and meters. While these service levels may be appropriate for larger communities whose members are willing to pay the associated tariffs, alternative options may be more appropriate for smaller communities in the Costa and Oriente regions. Sanitation options include (i) improved traditional latrines; (ii) ventilated improved pit (VIP) latrines with one or two pits and a variety of superstructures; (iii) pour-flush toilets with a variety of superstructures; and (iv) basic sanitation units ("unidades basicas de saneamiento", UBS) that integrate a shower, sink and flush toilet. For larger communities, piped sewerage (standard, small-bore and condominial) will also be an option. Water supplv options include (i) rainwater harvesting systems; (ii) spring catchments; (iii) boreholes with handpumps; (iv) piped systems feeding multi-family taps (public taps have been rejected because of a history of poor maintenance) and/or household connections. 4. Institutional: 4.1 Executing agencies: The main executing agency for PRAGUAS will be the Ministry of Housing and Urban Development (MIDUVI) through the Subsecretariat for Environmental Sanitation (SSA). Together with the Housing and Urban Development Subsecretariats, the SSA is a second-level dependency of MIDWVI, which reports directly to the Minister. SSA will oversee PRAGUAS and act as a general coordinator for project implementation. It will be responsible for overall project planning, supervision, information and reporting functions. SSA will also directly carry out the execution of components I (Sector reform/Institutional Development) and 4 (Project Management) of the project. Subprojects in rural and small town areas (components 2 and 3) will use a decentralized approach, with key implementation roles played by the municipalities and the communities. Municipalities will be responsible for procurement and supervision of contracts and will have fiduciary responsibilities. The project preparation team analyzed the current capacity of municipalities to implement the proposed project cycle. As expected, most small towns are not fully familiar with project management procedures including procurement. Effective implementation of this decentralized scheme is one of the project's proposed - 23 - innovations and challenges. The project will provide capacity building and technical assistance to the municipalities by hiring one (or several) Implementation Assistance Agencies (IAA) that will provide technical assistance to the municipalities and the SSA as necessary. 4.2 Project management: Project management will be carried out in SSA through a Project Implementation Unit (PMU) and the participating SSA regional offices. The PMU will be established for the duration of the project (component 4) and staffed mostly outside of SSA's personnel payroll. This proposal is in line with the Government's vision on decentralization, which calls for ministries and central agencies to focus on policy, programming, technical assistance, facilitation and coordination type of functions, and less on direct implementation. The restructuring of SSA could prove to be a difficult process as it will probably involve reorganization both at headquarters and in the regional agencies. It can involve difficult decisions regarding personnel since there are new functions that will require non-existent candidates to fill certain position profiles. The SSA will also probably decrease its size. As discussed in greater detail in annex 2, PRAGUAS will finance severance payments as needed as part of SSA's restructuring initiative. PRAGUAS's toughest challenge will be to provide sound and effective technical assistance to municipalities, utilities and private operators to help implement the proposed institutional scheme for the provision of sustainable services. In the case of the rural communities, the project will support the creation and strengthening of water user associations (juntas) who will be responsible for operation and maintenance in the respective community. Municipalities will also enter into agreements with their rural communities which would involve the provision of technical assistance. Grouping of communities into multi-juntas, (i.e. one junta serving several communities) will be promoted as a way to generate economies of scale and to reduce operation and maintenance costs. For small and medium-size towns, effective delegation of service to autonomous operators and training of municipalities on regulatory functions represents the main challenge to attain sustainability. The project will provide technical assistance through SSA to carry out such tasks. 4.3 Procurement issues: A procurement capacity assessment was carried out on MIDWVI and a sample of 5 small municipalities and it was determined that this is a "high" risk operation, mainly because of the weak procurement capacity of Ecuador's small municipalities. MIDUVI (through the project management unit, PMU) will carry out project components 1 and 4 while approximately 40 small municipalities will implement components 2 and 3 which account for 84% of total investments under APL-1. While the PMU's procurement capacity can be upgraded rather easily (by contracting experienced procurement staff from the private sector), the procurement experience of project municipalities is typically limited to direct contracting and shopping and is harder to upgrade in the short tern. In view of this limitation, the project team has developed an integrated procurement risk mitigation strategy that includes (i) extensive training for municipalities participating in PRAGUAS in procurement and other RWSS topics under component 2A; (ii) easy "on-demand" technical assistance provided through EPP's (PRAGUAS provincial project units) and especially through Implementation Assistance Agencies (IAA) -- project consulting firms that will provide municipalities with experienced procurement specialists to prepare bidding documents, manage the tender process and assist with bid evaluation; and (iii) use of local engineering consulting firms (OITS) to supervise construction and sign-off on contractor invoices. 4.4 Financial management issues: Accounting, financial reporting, and auditing arrangements. The Project Management Unit would establish a financial coordination unit headed by a qualified financial coordinator to prepare the financial - 24 - statements and assure financial control of the project as well as auxiliary staff to execute financial operations and provide control over project assets. Accounting would be managed by MIDUVI's Financial Directorate, with two full-time accountants responsible for keeping adequate records specifically for the project. They would install a project-specific financial package which would provide the basis for government reporting and support the preparation of PMR Report 1. The project would develop and document the detailed procedures for all financial operations carried out under PRAGUAS. These should include descriptions of the following: job descriptions, cash receipts, disbursements, control over advances, replenishment procedures, account reconciliation and controls, and reporting requirements. The unit would include these in the Internal Operations Manual. The financial management system has been evaluated by a Bank Financial-Management Specialist and is as yet unable to meet minimum Bank requirements. A 4-C certificate has been issued reflecting weaknesses in record-keeping that are being addressed by the addition of specialized consultants that are assisting the project preparation team. For the purposes of carrying out the project, deposits into the Special Account and their replenishments would be made on the basis of cash withdrawal statements based initially on a summary sheet supported by adequate documentation. The PMU would execute an action plan to develop its capacity to produce all components of the financial management system as required under LACI no later than June 30, 2001. An Action Plan for setting up a PMR-based system has been agreed to and includes the following: (a) preparation of a revised project chart-of-accounts, (b) establishment of a format for periodic and annual reporting, (c) a revised project Operational Manual incorporating satisfactory financial and accounting policies for the project, (d) installation of a PMR compatible computerized system, (e) a training program on PMR for all project senior staff, and (f) selection of a private firn to carry out the external project audit. By effectiveness, items (a) through (d) of the Action Plan will be completed and the Borrower will present the Bank with a short list of firms qualified to carry out the external project audit. Following conversion to PMR-based disbursements, replenishments to the Special Account would be based on cash forecasts contained in quarterly Project Management Reports. Each of these reports would: (i) show actual sources and applications of funds for the Project, both cumulatively and for the period, and projected sources and applications of funds for the Project for the following six-months; (ii) list separately expenditures financed out of the credit during the period covered by the report and expenditures proposed to be financed during the following six-month period; (iii) describe physical progress in project implementation, both cumulatively and for the period covered, and explain variances between the actual and previously forecast implementation targets; and (iv) set forth the status of procurement under the Project and expenditures under contracts financed from the credit for the period covered. Audit. The project accounts (including contracts for consultants, goods and works) as well as the deposits and withdrawals from the Special Account would be audited each year by an independent auditing fimn acceptable to the Bank under terms and conditions satisfactory to the Bank. In addition to the annual financial statements conforming to International Standards on Auditing (IFAC Standards), the audit report would include comments on the internal control and on the accuracy and propriety of all expenditures and on the extent to which supporting information could be relied upon as a basis for requesting disbursements from the loan using PMRs. Audit reports with the related statements would be submitted to the Bank within four months of the end of the Borrower's fiscal year. All supporting records would be maintained at the project site for at least one year. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. -25 - No major environmental issues are expected in the implementation of this project, given the small scale of the water supply and sanitation investments envisioned in rural areas and small towns. Minor environmental impacts (proper disposal of construction wastes, erosion control etc.) will be addressed by appropriate guidelines that will be incorporated into the technical specifications governing the work of construction contractors. Appropriate environmental screening criteria for water and sanitation sub-projects have been agreed with the project preparation team and incorporated into the project evaluation manual ("guia de evaluaci6n de proyectos") that has been cleared by the Bank and forms part of the overall Operation Manual. The screening criteria will be used by the provincial PRAGUAS teams (EPP's) to evaluate the technical, social, environmental, financial and economic feasibility of WSS investments prepared by the OITS in conjunction with program communities. PRAGUAS will provide training and technical assistance to the EPP's to support effective use of the screening criteria. As part of APL- 1, PRAGUAS will conduct an environmental assessment of the rural sanitation sector that will provide inputs for additional training and institution-building activities to be conducted under APL-2. 5.2 What are the main features of the EMP and are they adequate? Not applicable. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: N.A. No stand-alone Environmental Assessment (EA) was deemed necessary for this project. Instead, project preparation has focused on the development of appropriate environmental (and other) screening criteria, that will be applied to every single WSS investment undertaken in rural areas and small towns under PRAGUAS. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? No formal stand-alone consultation on the environment was deemed necessary as part of project preparation. It should be noted, however, that extensive community consultation on proposed WSS investments and their environmental impacts is inherently part of the design process used under demand-responsive rural water supply projects. Specifically, stakeholder consultation on environmental issues will be conducted as part of the "Pre-investment" activities described in Annex 2. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? No major environmental issues are expected in the implementation of this project, given the small scale of the water supply and sanitation investments envisioned in rural areas and small towns. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The Bank has worked closely with the PRAGUAS preparation team in the design and implementation of a - 26 - culturally appropriate social assessment, as recommended by O.D. 4.20. The main objective of the social assessment is to incorporate a participation, gender and indigenous strategy into every stage of the project design. A series of consultations both at the agency level and at the community level have been carried out through project preparation to discuss lessons learned from WSS interventions country-wide and to generate socially and financially appropriate strategies for the supply of water and basic sanitation to small towns mainly in rural areas. A Participatory Rural Appraisal in ten culturally diverse communities was carried out by a team of local social scientists with technical assistance from the World Bank. An inter-institutional consultative group, formed by the Subsecretaria de Saneamiento Ambiental (SSA), PRAGUAS, Coordinadora de Nacionalidades y Pueblos del Ecuador (CODENPE), PanAmerican Health Organization (PAHO), and the World Bank-financed health project FASBASE, was organized with the aim of defining a WSS strategy which incorporates gender and inter-cultural principles. Three studies in particular have provided input to sector policy: (1) Participation Strategy of Gender and Indigenous Peoples in WSS Interventions; (2) A Strategy for Basic Sanitation Intervention, and (3) A Communication Strategy for targeted communities. These strategies are reflected in the Operational Manual and may be modified to respond to clients' needs. A series of inter-institutional (government agencies and private sector) workshops was carried out from October 1999 to January 2000 to assist the SSA in defining sector policy and strategies for WSS in Ecuador. Diagnostic data gathered at the municipal and community levels includes relevant socioeconomic, demographic, cultural, health, sanitation, and financial information in addition to technical aspects. It also includes information on (i) social stratification and community government; (ii) community organization (including existence of Water Committees) and NGOs working on WSS; (iii) willingness to pay and savings practices at commercial or community banks; and (iv) hygiene habits and sanitary practices. This information is then used to create the project baseline. The project includes the development of an M&E system which may start at the community level with the participation of the beneficiaries themselves. The Participation, Gender and Indigenous Plan in Annex 11 is intended to assist PRAGUAS in the operation of the WSS participation strategies. It includes a number of actions/activities such as: (a) Inter-institutional Workshops to discuss the Strategies for Water and Sanitation in indigenous communities with a gender focus; Workshops to discuss the Strategy for Basic Sanitation for the sector; Workshops for women and youth in the management of water and sanitation; and (b) Production of training and communication materials for program promotion as well as for periodic training for communities, OITS, EMS and the PRAGUAS implementation unit. Some of these materials will be adapted to the different cultural settings in at least two indigenous languages (quichua and shuar). 6.2 Participatory Approach: How are key stakeholders participating in the project? The backbone of the PRAGUAS project is a participatory approach which incorporates stakeholders and direct beneficiaries in the decision-making processes throughout the project. In principle, the primary beneficiaries live in rural areas of small municipalities (those with cantonal capitals that have less than 10,000 inhabitants) -- in practice the pilot project shows that the bulk of the demand comes from communities of 500-2,000 people. The selection of beneficiary populations at the provincial, municipal and community levels is a systematic tripartite participatory process involving EPP/EMS, municipalities and communities. Selection criteria at each level have been agreed and tested. Open forum and consultations based on informed decisions are the norm in the promotional, pre-investrment and investment phases. Mechanisms have been built into the project to ensure a gender and indigenous focus. Selection criteria at the provincial level include: (a) poverty level according to LSMS 1998; (b) coverage deficit of WSS; and (c) absence of other WSS interventions. Eligible municipalities must (a) have less than 10,000 - 27 - inhabitants in the cantonal capital; (b) agree to PRAGUAS program rules and sector policies; and (c) provide municipal budget support for WSS works. Selection criteria at the community level include (a), (b) and (c) above plus (d) percentage of indigenous and Afro-Ecuadorian population; (e) number of women requesting projects; and (f) per capita savings deposited by beneficiaries in a commercial or community bank earmarked for the project. The OITS is a key player in the project, as it accompanies the community through the project cycle to provide it with the knowledge it needs to make informed decisions about applying to the project, technical options, service levels, financial options and requirements. Communities will own their own systems and be in charge of managing them. Community-based Water User Associations in charge of administration and management of the projects as well as the communities themselves will receive appropriate training in local languages and by means of culturally appropriate materials. Also, the project is planning to develop a participatory M&E system so community members will be involved in periodically assessing the progress of project activities. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Several civil society organizations working on water & sanitation, health and education were invited to forrn a Consultative Group and to participate in project preparation. Two 4-day workshops were held by this Group to discuss the cultural and financial appropriateness of the project. Twenty-two agencies, public and private (including NGOs) participated in the workshops. The main topics of discussion were the use of appropriate multi-cultural and multi-lingual mechanisms to be included in project design, to deal with minority groups and isolated rural communities. Further consultations with agencies and NGOs will be conducted by SSA and the Consultative Group for project evaluation purposes.. (See Annex 11) 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? (a) A key institutional arrangement to ensure that the project achieves its social development outcome is the team composition at the provincial, municipal and community levels to ensure that every step of the project cycle be looked at from a social angle. Thus, each and every team working on the project is formed by social and technical experts working together and concurrently. (See Annex 11) (b) Training at various institutional levels as well as training of beneficiaries is at the heart of the project. At the institutional level, training of technical and social experts at the provincial level and in the municipal sanitation teams (EMS), as well as those working for the "Organizaciones de Intervenci6n Tecnico-Social" (OITS) is emphasized throughout the project cycle. Moreover, communities are trained in community participation in water projects, in water utilization and sanitation education, formation and administration of water committees and the financial responsibilities of being connected to a water system. (c) The criteria used for the selection and prioritization of beneficiary groups at the provincial, municipal and community levels include such aspects as poverty, ethnicity, gender and beneficiary contributions. The beneficiary group's choice of both water and sanitation together (instead of just water) is an important selection criteria, as it tends to improve hygiene habits, reduce illness and promote social well-being. (d) PRAGUAS has also created special mechanisms to include indigenous people, since about 40% of potential beneficiaries self-identify as indigenous/black peoples of Ecuador. Indigenous groups will be presented with all technical options available for water supply and sanitation either in their own language - 28 - or by means of interpreters, and the technical solutions and service levels selected will be adapted to their needs. (e) PRAGUAS has also been designed to respect indigenous institutions such as the Cabildo, and will not build parallel WSS organizations where appropriate structures already exist. In some communities targeted under the pilot projects, a Coordinadora de Agua which is a branch of the Cabildo was constituted in place of a separate Junta de Agua. The Coordinadoras strike a balance between the rules of the Cabildo and those prescribed by the Ley de Junta. 6.5 How will the project monitor performance in terms of social development outcomes? For projects expected to receive authorization to appraise/negotiate (in principle) prior to April 30, 2000, this section may be left blank. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy Applicability OL Environmental Assessment (OP 4.01, BP 4.01. GP 4.01) L3 Yes L No O Natural habitats (OP 4.04. BP 4.04. GP 4.04) El Yes Li No El Forestry (OP 4.36. GP 4.36) C3 Yes LiNo O Pest Management (OP 4.09) O Yes LNo Cultural Property (OPN 11.03) LiYes LNo Li Indigenous Peoples (OD 4.20) Z Yes L No Involuntary Resettlement (OD 4.30) Li Yes Li No L Safety of Dams (OP 4.37. BP 4.37) l Yes L No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) El Yes L No El Projects in Disputed Areas (OP 7.60. BP 7.60, GP 7.60) El Yes L No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. 1. A social assessment was carried out as a joint effort between PRAGUAS and the WB between May and November, 1999 (please see Social Assessment document and Participatory and Gender Plan, annex 11). The social assessment included two studies, "Culture and Gender Strategy for Water and Sanitation Interventions by PRAGUAS", and "Sanitation Intervention Strategy for the PRAGUAS Program". Both studies included consultations with 20 indigenous and non-indigenous communities nationwide. 2. PRAGUAS formed a consultative group including SSA, PAHO, and the Direccion Indigena de Salud del MINSA to discuss the Indigenous and Gender Strategy for WSS Investements that will be institutioralized by SSA. 3. Participatory processes were built into the PRAGUAS project cycle to ensure full participation (see the flow chart of project cycle, figure 1, annex 2). 4. Proper training of the technical-social teams at the provincial and municipal levels will be carried out to ensure that staff is sensitive to the specific needs of marginalized groups (indigenous people and women). 5. A culturally-appropriate information dissemination campaign will be conducted within the project regions in the languages spoken by beneficiaries. - 29 - F. Sustainability and Risks 1. Sustainability: The sustainability of the water and sanitation facilities will be supported by: A. Community Willingness and Capacity to Manaze and Sustain Services: In rural areas this will be achieved by requiring communities to demonstrate their commitment to service improvement upfront, including taking initiative, selecting their preferred service level and management option, making a cash contribution (no less than 10% of overall investment costs), agreeing to an adequate tariff, and undertaking organizational responsibilities (forming a Junta) before funding is approved. Overall, beneficiaries will finance 30% of their water supply investments in cash and through community labor. PRAGUAS will also strengthen community capacity in the areas of organization, operations and maintenance, financial management, hygiene and environmental education, and effective water use and disposal. B. Municipal Government support to Community Management: Municipal governments, too, will demonstrate their ownership by funding 20% of overall investment costs upfront before rural sub-projects under their jurisdiction can be approved. In addition, they will be required to separate service provision in all communities in their municipality from the operation of the water system in the municipal capital. Municipal governments will be strengthened to provide the required technical backstopping to Juntas and small companies, without taking over direct operational responsibilities. C. Competent Service Operators: Since the long-term sector strategy is to assist municipal governments in attracting private operators to manage their water and sanitation systems, these operators have to demonstrate solid technical and financial competence. PRAGUAS will include intensive capacity building to help small entrepreneurs form companies, and eventually to create an association of service providers. The performance of these operators will be closely monitored. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective 1. Sector policies, especially financial, not S 1. GOE has presented a detailed policy letter supported by major WSS sector setting out the WSS strategy the government has stakeholders; adopted. A broad stakeholder dialogue will be conducted during APL- 1 to support the preparation of a new Water & Sanitation Sector Law. In the meantime, PRAGUAS will be rolled out to Ecuador's provinces in a way that minimizes interference with Ecuadorian agencies and outside donors still using financing policies inconsistent with SSA's new strategy. 2. SSA doesn't adapt to new role as sector M 2. Appropriate design and ownership of SSA leader, promoter and facilitator; restructuring program - 30 - 3. Municipalities don't accept new role in S 3. Project will only work in municipalities sector, fail to apply cost recovery policies committed to reform and intervene in the day-to-day operations of service provision; 4. Municipalities fail to provide PS and S 4. Project will only work in municipalities NGO's with long term incentives to committed to reform support community managed services in rural areas; 5. Communities are not willing to select, M 5. Communities selected based on expressed pay and assume management of services demand for service improvement. Adequate training is ensured 6. Women and minority groups do not M 6. Training programs and monitoring indicators actively participate in decision-making include participation elements 7. Juntas/Small town operators are unable S 7. Management training programs with to properly administer water systems follow-up support from municipalities 8. Community members do not improve S 8. High priority given to community hygiene behavior or make effective use of development, hygiene education and sanitation water and sanitation services promotion, before, during and after construction From Components to Outputs 1. MIDUVI (and central government) fail S 1. Design and ownership of institutional to take ownership of SSA restructuring; development component 2. Training programs are poorly targeted M 2. Adequate preparation, M&E and adaptation and designed 3. Municipal and community subprojects S 3. Cost-sharing and eligibility rules enforced, not prioritized based on demand, political rejected communities well-informed of reason interference and project "capture" by municipal authority 4. Software and hardware not properly M 4. Subprojects works should not be funded until integrated and priority given to facility communities are well prepared and have made construction their financial contribution 5. Slow fund approval and disbursement S 5. Adequate design of project procedures to municipal government 6. Inadequate financial and project M 6. Adequate project design, staffing and management procedures institutional reform of SSA/MIDUVI - 31 - 7. Municipalities and communities fail to H 7. Only those rural subprojects for which mobilize counterpart funding municipalities and communities have mobilized their cash contribution upfront will be tendered. In addition, first-time municipalities will be allowed to propose only a small number of their rural communities for PRAGUAS financing until their ability to mobilize municipal counterpart funds has been clearly established. Overall Risk Rating s Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) * Substantial (S) 3. Possible Controversial Aspects: None. G. Main Loan Conditions 1. Effectiveness Condition 1. The Project Operation Manual (OM) has been issued by the Borrower and approved by the Bank; 2. The SSA Restructuring Plan has been approved by the Bank and MIDUVI has issued the respective ministerial resolution for the implementation of the plan; 3. At least one Implementation Assistance Agency (IAA) has been contracted; 4. The PMU has been established and its project coordinator as well as the area coordinators for sector strengthening, investments, and financing/administration have been appointed; 5. The Financial Management Action Plan has been implemented. 2. Other [classify according to covenant types used in the Legal Agreements.] 1. SSA issues water and sanitation tariff guidelines acceptable to the Bank by June 30, 2001; 2. SSA presents a draft Water and Sanitation Sector Law for Bank review by June 30, 2002; 3. SSA maintains an adequately staffed PMU. H. Readiness for Implementation 0 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 0 1. b) Not applicable. 2 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. O 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. E 4. The following items are lacking and are discussed under loan conditions (Section G): - 32 - 1. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. El 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Oscar .40araW lbanny M. Leipzi Andres ano Team eader Sector Manager irec r Cgry Manager/Director - 33 - Annex 1: Project Design Summary ECUADOR: Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) K Perfornance Hierarchy of Objctives0 Indicators Monitoring & Evaluation Critical Assumpotins Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Improved living conditions of % increase in households with Poverty Reduction, the population in small improved living conditions Modernization of the State municipalities through due to water and sanitation improved access to sustainable services available and used WSS services. within rural and small town communities - 34 - Key Perfonnance Hierarchy of ObJectlvs IndIatoms Monitoring & Evaluation Critical Assumptions Program Purpose: End-of-Program Indicators: Program reports: (from Purpose to Goal) Increase coverage and *Phase 1: Quarterly progress reports, Community members make effective use of sustainable I.Draft water sector law supervision missions, effective use of and sustain water and sanitation services prepared, policy reforms end-of-phase reviews services, make productive use in Ecuador, with a focus on initiated and SSA of time savings and increased the poorer populations in rural restructured; water, thereby improving communities and small towns. 2.WSS investments reach health and living conditions 350,000 people in rural areas; 3 Delegation models successfully piloted in at least 8 small towns. *Phase 2: .Policy reform deepened and new financial guidelines widely applied by other sector financiers; 2.A cumulative total of 980,000 additional people in rural areas with new (or rehabilitated) WSS services; 3.Delegated service provision in 20 small towns. *Phase 3: I.Policy reform consolidated, complete cost recovery (O&M and full investment cost) achieved and private sector participation deepened; 2.A cumulative total of 1.6 million additional people in rural areas with new (or rehabilitated) WSS services that are used effectively and sustained; 3.Delegation of WSS service provision to autonomous public or private operators in 50 municipal capitals. - 35 - Project Development Outcome I Impact Project reports: (from Objective to Purpose) Objective: Indicators: Improved sector performance 1. Sector policy for rural areas *Quarterly and annual Sector policies, institutional through the application of launched, increased cost progress reports, frarnework and investment coherent policies, the recovery achieved and policy *Supervision missions, enable an increase in strengthening of sector reform initiated for other *Community and municipal sustainable service coverage institutions, and increased aspects of sector; surveys and impact studies service coverage and quality for approximately 350,000 2. Reorganization of SSA beneficiaries in about 40 rural complete with full staffng municipalities as well as in 6 structure, training and small towns. portfolio of services in place in accordance with the restructuring plan; 3. 40 municipal governments have the capacity to oversee service provision in their jurisdiction and at least 8 have delegated service provision to autonomous operators; 4. Increased capacity of the PS and NGO's to provide goods, services and operating support for service management at the local level, including at least 50 local implementation organizations (OITS) trained and certified; 5. Sustainable new and rehabilitated WSS services serve 350,000 beneficiaries in rural areas and small towns and 210,000 people in rural communities have been trained in administration, O&M and hygiene education. -36 - Key Perfonnance Hierarhy of QbjectivOs Indictor Montriwng & Evaluation Critical Assumptins Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: (1.1) Institutional framework (1.1.1) % of sector Quarterly progress reports, *Sector policies, especially and sector policy defined and investments (involving public consultant reports, financial, supported by major implemented; funds) carried out according to supervision missions, WSS sector stakeholders; agreed policy (25% by Dec consultations with 2001; 50% by Dec 2002; 70% municipalities, independent by Dec 2003; and 90% by Dec evaluations with community 2004); surveys (1.1.2) Water Sector Law prepared by Dec 2002; (1.2) SSA has been (1.2.1) Reorganization (100% *SSA effectively adapts to reorganized and has assumed implemented by June, 2001); new role as sector leader, its new role; promoter and facilitator; (1.2.2) Training program (80% implemented by Dec, 2001); (1.2.3) Deliverables for current year's sector plan achieved (80% by Dec, 2002); (1.3) Local Governments (1.3.1) # of municipalities *Municipalities accept new strengthened to carry out with WSS services delegated role in sector, apply cost delegation of water and (2 by Dec, 200 1; 4 by Dec, recovery and don't intervene sanitation services; 2002; 8 by Dec, 2003); in day-to-day operation of service provision (1.4) NGO's and other private (1.4.1) # of trained private oLong term incentives providers strengthened to operators and NGO's (20 available to PS and NGOs to provide services to OITS by Dec, 2001; 50 OITS support community managed municipalities in project by Dec, 2002) services in rural areas execution and operation; (2.1) Municipalities and (2.1.1) # of additional people *Communities are willing to communities carry out the with new or rehabilitated WSS select, pay and assume subprojects according to the services (70,000 by Dec, 2001; management of services; agreed policy; 150,000 by Dec, 2002; 250,000 by Dec, 2003; and *Women and minority groups 350,000 by Dec, 2004); actively participate in decision-making; (2.1.2) # of people trained in beneficiary communities * Juntas properly administer (40,000 by Dec, 2001; 90,000 water systems; by Dec, 2002; 150,000 by Dec, 2003; and 210,000 by Dec, *Communities make effective 2004); use of services; - 37 - (3.1) Municipalities carry out (3.1.1) # of urban centers with subprojects according to rehabilitated/ expanded WSS agreed policy; systems (I by Dec, 2001; 3 by Dec, 2002; and 6 by Dec, 2003); (4.1) Effective project (4.1.1) Efficiency of Project Financial management system management: planning, Management Unit (PMU) at (FMS) and external audits. fnancing, monitoring, national and provincial levels; evaluation and reporting. (4.1.2) PRAGUAS rules and targets evaluated on a periodic basis with broad consultation. - 38 - Key Prtnance Hierarchy of Objectives indicatom Monitoring & Evaluation Critical Assumptions Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Sector Reform / Consultants, capacity building *PRAGUAS-MIDUVI eMIDUVI (and central Institutional Development for public and private agencies quarterly and annual government) takes and NGO's, equipment and progress reports; ownership of SSA lA. SSA restructuring and workshops restructuring; policy reform; ($4.50 M) *Bank disbursement data; *Training programs are well 1B. Strengthening of *Independent audit reports; targeted and designed; municipal governments, NGO's and WSS operators; *Supervision missions; *Participatory assessments in communities; *Stakeholder consultations at national level. 2. Water and Sanitation Consultants, training, *Municipal and community Subprojects in Rural Areas engineering designs, and civil subprojects prioritized based works ($39.00 M) on demand, without political 2A. Promotion, community interference; development, engineering designs and supervision; *Integration of software and hardware, especially during 2B. Water and sanitation preinvestment phase; facilities, community training and hygiene education; *Quick fund approval & disbursement; *Good coordination between SSA and financial intermediary. *Counterpart funding is available from municipalities and communities; 3. Water and Sanitation Consultants, training Subprojects in Municipal engineering designs and civil Capitals works ($3.00 M) 3A. Engineering studies and supervision; 3B. Civil works - 39 - 4. Project Management Consultants, limited goods eAppropriate staffing, and equipment for financial and project * Operating costs for PRAGUAS/SSA ($3.43 M) management procedures project management unit (PMU); * Contractual staff for PMU; * Equipment and software for PMU * Maintenance of financial management system and collection of monitoring indicators * Audits and consultancies * Rural sanitation sector EA -40 - Annex 2: Detailed Project Description ECUADOR: Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) By Component: Project Component I - US$4.50 million 1. SECTOR REFORM/INSTITUTIONAL DEVELOPMENT MvDUVI and CONAM have prepared a Sector Policy Document that defines the roles of the Sub-Secretaria de Saneamiento Ambiental (SSA), municipal governments, NGO's and private sector service providers in Ecuador's water and sanitation sector. Under component 1, PRAGUAS will provide technical assistance, training, and equipment to enable each sector institution to assume its new sector roles, as described below: 1.1 Subcomponent 1 A: Restructuring of SSA and Policy Reform SSA Restructuring: PRAGUAS will support a major restructuring of SSA that will enable the agency to formulate sector policies and norms, set general regulatory guidelines and provide technical assistance and training to municipalities and other sector institutions. In the future, SSA is expected to act in four core areas: - Definition of 5-year plans to increase water and sanitation coverage, improve service quality and strengthen system management. SSA will (i) coordinate sector investments; (ii) enhance service sustainability by leveraging investments to municipalities that make sound policy choices; (iii) strengthen decentralization by coordinating TA programs to municipalities; and (iv) promote the use of innovative and appropriate technologies. * Definition of regulatory guidelines. SSA will (i) define minimum standards for service quality and continuity for water, sanitation and solid waste collection; (ii) set clear and transparent guidelines for PSP in the sector (incl. standard bidding documents etc.); and (iii) set general tariff guidelines. * Set-up and maintenance of a sector information system. The sector information system is expected to collect and structure information at three levels : (i) macro data needed to define policy and improve planing by national and municipal policy makers; (ii) registers of service providers and operators, standard bidding and contract documents for municipalities and PS partners; and (iii) information on costs, tariffs, and service quality of interest to users. * Provision of TA and training to municipalities, operators and communities. (see component lB below). SSA currently has a total of 269 staff (135 in Quito and 134 in 20 provincial offices). In Quito, SSA is currently organized into three departments ((i) Department of studies, promotion and regional strengthening; (ii) Department of sanitation standards; and (iii) Department of monitoring) with functions that still support the traditional direct implementation of WSS projects. There is considerable overlap in the functions exercised by SSA's departments. - 41 - To support its new role of sector facilitator/promoter, SSA/Quito will be reorganized into two main departments (Sectoral Planning and Technical Assistance) which will be complemented by an Administrative, Financial, and Legal Support Unit. Provincial SSA offices will be restructured to (i) provide municipalities with TA; (ii) promote participation by private sector and community-based operators and service providers; (iii) supply information to the sector information system; and (iv) provide monitoring and follow-up for RWSS projects. It is expected that SSA's restructuring will involve some (perhaps as many as 50) layoffs in addition to new hiring of staff with skills that SSA currently lacks but will need to fulfill its new role in the sector (tariff economists, financial analysts, PSP specialists, contract lawyers etc.). PRAGUAS has, budgeted US$500,000 for out-placement assistance (training for new jobs in the private sector as well as severance payments) in support of this process. It is expected that the restructuring of SSA supported by PRAGUAS severance payments will significantly improve overall sector efficiency, as SSA delegates project implementation activities to the private sector and decentralized levels of government. In addition to severance payments, PRAGUAS will fnance technical assistance, training and promotional activities in support of SSA's restructuring. Policy Reform: PRAGUAS will support a participatory preparation process for a new draft Water and Sanitation Sector Law that reaches out to a range of stakeholders (national and municipal governments, sector financiers, NGO's, private sector participants) in order to build consensus and facilitate subsequent passage by Congress. Previous attempts at passing such a law have been hampered by an insufficiently participative process that made it impossible to reach consensus among key stakeholders on such issues as appropriate regulatory structures and ownership of system assets. The project will: • conduct workshops to discuss the Sector Policy Document to be prepared by MIDUVI and drafts of the proposed Water Sector Law; * provide TA to deepen research into the overlaps and contradictions that currently exist between such laws as the "ley de juntas de agua", the "ley de municipios" and the "ley de modernizacion". Among other things, these laws make contradictory provisions for the ownership of rural WSS system assets. Bank missions will support the preparation process by providing guidance on the appropriate scope for the new sector law (delegation of services, regulatory framework, financial and tariff policy). 1.2 Subcomponent 1 B: Strengthening of Municipal Governments, NGO's and Private WSS Operators 1.2.1 Delegation Assistance and Strengthening for Municipal Governments Water supply and sanitation services in Ecuador's 214 municipalities are currently provided by 16 public utilities (in the larger cities), municipal governments (in medium and small towns) and water committees ("juntas administradoras de agua potable") in very small urban centers and rural areas. Given the weak performance of the sector overall (see section B2 in the main text for a detailed discussion), the GOEs strategy calls for the delegation of WSS service provision to autonomous public and private operators over the next 10 years. SSA (through PRAGUAS) would provide technical assistance to interested municipalities (except the country's three largest) to (i) guide them towards delegation; and (ii) strengthen -42 - both municipalities and the new autonomous operators to assume their new roles once delegation has taken place. Ecuador's three largest cities (Quito, Guayaquil and Cuenca) are considered capable of contracting TA to prepare delegation processes without assistance from the national government. Once municipalities have delegated the provision of water and sanitation services to either autonomous public or private operators, those with small municipal capitals (under 10,000 inhabitants) will qualify for PRAGUAS grants (see component 3 below) that will cover (i) 100% of the cost of engineering designs and supervision for the expansion/rehabilitation of water supply systems; and (ii) 50% of the cost of water supply infrastructure up to an agreed limit. For municipalities with larger municipal capitals (in excess of 10,000 inhabitants), SSA will work with BEDE to secure a line of credit that will allow delegating municipalities to upgrade/expand their water supply infrastructure. The following table presents a medium-term vision for service provision and summarizes water supply financing options for municipalities that choose the reform path: Table 1: Delegation profiles and available investment financing Population Municipalities Likely delegation Investment financing by model SSA (PRAGUAS) BEDE More than 300,000 3 Large national or international private operators Between 30,000 and 300,000 30 Samll/medium (1) private operators Between 10,000 and 30,000 44 Public or mixced (1) capital utilities Between 2,000 and 10,000 95 Municipal companies (2) Less than 2,000 42 Water committees (2) TOTAL 214 137 74 Notes: (1) Investment financing through a line of credit to be negotiated with BEDE (2) Investment financing under PRAGUAS component 3. The delegation models identified above are preliminary. Four delegation pilots are currently underway in Caluma (mixed capital company, "empresa de economia mixta"), Tena (users' cooperative), Pedro Moncayo (consortium of water committees contracting outside operator) and Quevedo (management contract with commercial risk) to develop models that are viable in the Ecuadorian context. The SSA restructuring supported under component 1A will create a Department of Technical Assistance within SSA/Quito that will define the general framework for TA to municipalities and a system of provincial TA officers that will respond to requests for delegation assistance from interested municipalities. When municipalities request TA for delegation, SSA will assist them in contracting teams of local consultants that will (i) help municipalities to identify appropriate models and (ii) prepare the legal, financial, technical and social instruments required to implement it. Based on experience with the pilot - 43 - delegation cases discussed above, the consulting teams would typically comprise a lawyer, a fnancial analyst, an engineer and a community development specialist. PRAGUAS would provide grants to eligible municipalities to fnance the work by these consultants. Eligibility criteria for small municipalities (those that also qualify for component 2) and medium-sized municipalities differ slightly. The following table summarizes the implementation principals for delegation assistance to municipalities. Table 2 Implementation principles for delegation TA Criteria Small municipalities Medium-sized municipalities Definition *Population of less than 10,000 *Population of between 10,000 and people in municipal capital 300,000 in municipal capital Minimum Eligibility *Interest in delegating service *Interest in delegating service Requirements provision confirmed by mayor and provision confirmed by mayor and municipal council; municipal council; *Agreement to raise tariffs in eAgreement to raise tariffs in municipal capital to levels that cover municipal capital to levels that at least O&M and 30% of cover at least O&M and 30% of investment costs; investment costs; Priority given to *Have at least 60% water supply municipalities that... coverage in the municipal capital; *Willingness to group with other small municipalities to achieve economies of scale; *Express interest in delegation *Express interest in delegation models tha involve private models that involve private participation. participation. Services financed by Before delegation Before delegation PRAGUAS *100% (net of taxes) grant to finance *100% (net of taxes) grant to finance consulting services to prepare consulting services to prepare delegation; delegation; *Training and study tours; *Training and study tours; After deleeation: After delegation Continued training for municipality * Continued training for and new operators to assume new municipality and new operators to roles. assume new roles. Financial incentives *Municipalities that delegate service *BEDE may offer line of credit to provision become eligible for finance expansion/rehabilitation of component 3 (see below) water/sanitation infrastructure. investments in municipal capitals (50%1O grant fnancing from PRAGUAS); eMunicipalities that do not delegate service provision are eligible only for investments in rural areas (component 2). As a result of the 4 pilot delegation cases, a number of tools (guidelines on asset valuation, financial models, draft statutes for different delegation models) were developed during project preparation to support the local consulting teams in their work. -44 - Over the course of APL-1, it is expected that approximately 15 municipalities will receive delegation assistance from PRAGUAS and that no less than 8 of these will successfully delegate service provision. The pace of service delegation is expected to quicken during APL-2 and APL-3 as successful pilots are marketed as examples nationwide. In addition to delegation assistance, small municipalities participating in component 2 of PRAGUAS would receive assistance in (i) providing rural communities with the technical support they require to operate their systems; (ii) procurement management; (iii) improved water & sanitation investment planning. 1.2.2 Assistance to NGO's and private sector service providers In addition to the delegation assistance provided to municipalities, PRAGUAS will organize and finance workshops, study tours, and training programs that will allow NGO's and private service providers to assume their roles in the new sector structure. Training events for private sector operators will be organized through Ecuadorian universities and ANEMAPA ("La Asociacion Nacional de Empresas Municipales de Agua Potable, Alcantarillado y Servicios Conexos") and will (i) promote the new sector strategy and the PRAGUAS approach to rural and small town WSS; (ii) provide information on delegation models, the financial returns of systems that have already been delegated and sources of investment financing. Assistance will be also be provided to help the private sector and NGOs at the municipal level organize small multi-disciplinary companies that provide community development, engineering and facility construction services in rural communities that focus on demand-based approaches and participatory development. Over time, SSA will also establish a certification program for sector professionals and artisans (i.e. small-scale system operators, contractors, plumbers, etc.) Additional background information on the technical assistance program developed by SSA to support municipalities, NGO's, private sector service providers and users is provided in annex 13. Project Component 2 - US$39.DO million 2. WATER AND SANITATION SUB-PROJECTS IN RURAL AREAS Under this heading, PRAGUAS will finance (i) promotion, community development, and engineering activities (component 2A) as well as (ii) water and sanitation infrastructure, health & hygiene education, and community training (component 2B) for water and sanitation subprojects in rural areas. All rural communities in Ecuador's 152 small municipalities (those with provincial capitals with less than 10,000 inhabitants in 1990) that lack appropriate water and/or sanitation infrastructure are eligible for PRAGUAS fnancing, subject to the rules and procedures described below. Communities that have water and/or sanitation facilities but wish to expand and/or rehabilitate them are also eligible, provided that they accept PRAGUAS' financing rules and cost recovery requirements. 2.1 Basic Principles Table 3 summarizes the basic principles governing the implementation of the PRAGUAS rural WSS - 45 - component: Table 3: PRAGUAS rural WSS implementation principles Criteria Observation Eligible investments Construction or rehabilitation of water supply and sanitation investments such as: * Water suppl : (i) rainwater harvesting systems, (ii) spring catchments, (iii) boreholes with handpumps, (iv) piped systems feeding multi-family taps and/or household connections; * Sanitation: (i) improved traditional latrines, (ii) ventilated improved pit (VIP) latrines with a range of superstructures, (iii) pour-flush toilets with a range of superstructures, (iv) basic sanitation units that integrate a shower, sink and flush toilet; (v) piped sewerage (standard, small-bore and condominial) for larger communities. Investment ceilings * Water : US$ 700 per connection (for piped systems with household connections) or per household (all other systems). Economic viability will be checked for systems above US$ 415 per connection; * On-site single-household sanitation systems : US$250 per unit; * On-site sanitation systems in schools : US$8 per pupil. Financing rules Proiect preparation : 100% (net of taxes) non-refundable grant to municipalities (subcomponent 2A) Proiect implementation (subcomponent 2B): * Water supply: PRAGUAS: 50% (grant) Municipalities: 20% (cash) Communities : 30% (no less than 100/% in cash) Individual beneficiaries pay full cost of individual household connections and 100% of any costs above ceiling * On-site sin2le-household sanitation systems: PRAGUAS: 70% (grant) Households + Municipality: 30% up to ceiling, (at least 15% of materials in cash), 100% of any costs above ceiling * On-site sanitation svstems in schools: PRAGUAS: 100% (grant): (except excavation of pit) Beneficiaries: excavation of pit Eligibility requirements * Rural communities in small municipalities (municipal capitals with less than 10,000 inhabitants) and small municipal capitals themselves; * Municipalities in each province that accept program rules (financial participation, tariffs, demand-driven approach, etc.) are ranked using a municipal Drioritization matrix; * Once municipalities have been selected, rural communities within these municipalities that accept program rules are selected using a communitv prioritization matrix; * Sanitation investments will be limited to rural communities that achieve at least 60% coverage; * Communities must have legal control over water source before WS investments can proceed. Cost recovery * Communities must agree to tariffs that cover at least O&M costs as well requirements as the replacement cost of all electrical and mechanical equipment/valve work over 10 years. - 46 - 2.2 The Roll-out Strategy Each year over the life of the project, PRAGUAS will take a batch of communities from eligible municipalities through a 5-step project cycle that includes (i) promotion, (ii) pre-selection, (iii) pre-investment, (iv) investment, and (v) follow-up & technical assistance. It is expected that 5 batches of communities will be able to complete the cycle by the end of APL-1, beginning with a pilot batch of 30 communities drawn from 4 municipalities in 4 provinces that began the cycle during project preparation (March, 1999). To ensure that PRAGUAS will not exceed SSA's implementation capacity (at a national and especially at a provincial level), the program will open in only 9 provinces during the first year of APL-1 (the pilot provinces of Azuay (Sierra), El Oro (Costa), Pastaza (Oriente) and Bolivar(Sierra) as well as 5 others prioritized according to water and sanitation coverage, poverty and regional participation criteria) . During the second year of APL-1, municipalities and communities from all of Ecuador's provinces (except Galapagos) will become eligible for PRAGUAS financing. Particular care will be taken to ensure that promotional activities reach underdeveloped areas in Ecuadorian provinces along the border with Peru (El Oro, Loja, Zamora-Chinchipe, Morona-Santiago, Pastaza, Napo, and Sucumbios) in line with the Special Border Province Development Initiative currently underway. The border provinces account for approximately one fourth of Ecuador's total rural population in small municipalities. Currently only about 293,000 people (42% of a total population of 685,000 living in small municipalities in border provinces) have access to acceptable potable water supply. By the end of APL-1, this figure is expected to increase to about 60% and by the end of APL-3 to about 90%. It is expected that by the end of APL-1 about 40 municipalities will have joined PRAGUAS. Approximately, 40-50 more would join during each of the following two program phases (APL-2 and APL-3). Once in the program, municipal governments would prioritize communities under their jurisdiction that require water and/or sanitation investments according to clearly defined criteria contained in the Operation Manual and submit them to PRAGUAS for financing either all at once or in batches. To achieve economies of scale in terms of community mobilization, PRAGUAS would typically require municipalities to assemble batches of rural communities that can absorb at least US$150,000 in water and/or sanitation investments, though some flexibility will be allowed in light of Ecuador's current economic crisis. An upper limit on the size of batches that could be nominated by a given municipality during any funding cycle would be determined based on the availability of municipal and community counterpart financing (20% and 30% of investment costs respectively). Municipalities that join PRAGUAS could request investments in rural areas (under component 2) and -- after a one year wait -- in the municipal capital itself (under component 3). The one year waiting period is intended to encourage WSS investments in underserved rural areas before additional investments are undertaken in small urban areas where basic water supply services are generally available. In addition, any small municipality seeking PRAGUAS assistance for "urban" investments would be required to delegate WSS service provision to an autonomous public or a private operator. 2.3 Main Actors SSA/MIDUVI will implement PRAGUAS in collaboration with eligible municipalities and communities. Four types of legal agreements would be signed between the different parties: * Delegation Preparation Grant Agreements (between SSA/PRAGUAS and each municipality -47 - interested in delegating water and sanitation service provision under component 1B) setting forth, (i) the technical assistance to be provided to that municipality; and (ii) the municipality's obligation to carry out the delegation studies with support from consultants. * Delegation Investment Grant Agreements ((between SSAIPRAGUAS and each municipality that has delegated water and sanitation service provision under component IB and has qualified for PRAGUAS financial support under component 3) setting forth, (i) the engineering studies and civil works for water supply/sanitation system expansion/rehabilitation to be carried out; (ii) timetables for implementation; and (iii) the municipality's obligations for the studies and works. * Promotion and Preinvestment Grant Agreements (between SSAIPRAGUAS and a selected municipality interested in preparing water supply/ sanitation investments in rural areas) setting forth the general terms and conditions for (i) technical assistance to the municipalities; and (ii) the preparation of investments in rural areas. * Rural Water and Sanitation Grant Agreements (between SSA/PRAGUAS, a selected municipality and the rural communities for whom water supply/sanitation investments have been prepared under the Promotion and Preinvestment Grant Agreement) setting forth (i) the works and training activities to be carried out in the rural communities; (ii) the financial contributions of the respective parties; (iii) the ownership of assets constructed under the Grant Agreement; (iv) the responsibility of the communities' "Juntas de Agua" to operate the system; (v) the municipality's responsibility to provide technical support; and (vi) the municipality's obligation to carry out activities under the Grant Agreement in accordance with the Operation Manual. Within this general framework, the role of PRAGUAS' main actors can be summarized as follows : A proiect management unit (PMU) set up within SSA/MIDUVI will be responsible for overall coordination. Provincial SSA offices will form EPP's (equipos provincialas del PRAGUAS) which will assist municipalities that join PRAGUAS in setting up municipal sanitation teams (EMS's, equipos municipales de saneamientc) and then support them in program promotion and pre-investment activities. Technical & Social Intermediary Organizations (OITS, organizaciones de intervencion tecnico v social) -- private companies and/or NGOs that have been pre-qualified to undertake community development and prepare engineering designs -- will work with rural communities to plan investments, set-up water & sanitation committees ("juntas de agua") and prepare for system operation. During the promotion and pre-investment phases, one or more Implementation Assistance Agencies (IAA) -- national or international NGO's or engineering consultants with demand-responsive RWSS experience -- will strengthen the EMS's and help them in supervising the OITS working in their municipalities. During the investment phase, the IAA(s) will assist the EMS's in selecting and supervising construction contractors and channeling project information back to the PMU. 2.4 The Project Cycle The project cycle and the responsibilities of main actors are summarized below: - 48 - Selection of Provinces System operation - PMU - Communities - ion of Municipalities Operational assistance & - EPP - additional training - Contractor then EMS + private Municipal capacity building sector - - EPP, (IAA)- Follow-up - EPP, EMS - Prioritization of communities -EMS - Execution of works and san/hygiene education Contractor, Community - Pre-selection and packaging of communities Supervision of contractor - EPP, EMS - - OITS, (IAA) - Supervision for on-site sanitation systems O iITS - Promotion and Preinvestment Grant Agreement Contracting of construction firms (Municipality - SSA) -EMS, (IAA) - Contracting of OITS Rural Water and Sanitation Grant - EMS, EPP, (IAA) - Agreement - SSA, Municipalities, Communities- Baseline community assessment Technical, social, environmental, and formation of W&S Committees financial and economic evaluation - OITS, Communities - EPP, ()AA) - Final designs and definition of training and sanitation ed. Plan Initiate collection of community - OITS, Communities - financial contribution - Communities - Selection of operation model - Municipalities, Communities, OITS. EPP - Pre-designs and costs of alternatives Selection of technical alternative -OITS - - Communities - Note: Primary actors (bold), supporting institutions (italics), support on demand (parenthesis) Figure 1: PRAGUAS project cycle for rural communities -49 - Subcomponent 2A: Promotion, community development, engineering designs and supervision (US$5.0 million) Subcomponent 2A provides grant financing to eligible municipalities to help rural communities under their jurisdiction prepare water and/or sanitation projects that qualify for PRAGUAS investrnent financing. Project funds will be used to finance, inter alia, (i) promotional activities (workshops, media campaigns etc.), (ii) contracting of OITS and IAA; (iii) training for OITS, EPP, as well as EMS; and (iv) the production of required training materials. Subcomponent 2A activities will be accomplished in three phases as follows: Promotional phase (2 months): At the beginning of each funding cycle, the PMU confirms which provinces are eligible and sets-up/strengthens EPP's where SAA lacks the institutional infrastructure to support the project. In each province, the EPP's then promote PRAGUAS and invite expressions of interest from those municipalities that * have municipal capitals with populations below 10,000; * agree to operate rural systems under management models consistent with Ecuador's new sector policy; * agree with the new financial policy for the sector as well as PRAGUAS rules and procedures; * are willing to form municipal sanitation teams (EMS). In provinces where several eligible municipalities express interest, the EPP's prioritize responses based on * initial city budget allocations (per capita) for rural water and sanitation services; and * a composite index of water and sanitation coverage and poverty levels (available from census data). Once municipalities for a funding cycle have been selected, the EPP's help city authorities establish EMS's (typically, though not necessarily within the Unidad de Obras Publicas). As needed, the Implementation Assistance Agency (IAA), will be called upon to build EMS capacity in such areas as contracting, contract administration and demand -responsive RWSS techniques. The EMS's will then proceed to promote PRAGUAS among community leaders and rural populations. Interested communities submit standardized request forms (solicitudes comunitarias) that demonstrate acceptance of PRAGUAS rules and provide baseline information to the municipal government. The municipal government, in turn, will prioritize the solicitudes in an open forum (with EPP participation) using criteria developed by PRAGUAS, to draw up a first list of subproject requests for the pre-investment phase. The EPP will support the selection process by ensuring that all eligible communities have an equal opportunity to apply for project funds and that community selection is conducted in an open and transparent manner. In parallel with community-level promotional activities, the EPP will identify the NGOs, development agencies and private companies that provide sector-related services in the province and that might join PRAGUAS as OITS. The agencies will be invited to PRAGUAS promotional and training sessions to exchange ideas and strengthen their capacity to implement demand-based, community-managed WSS programs. As needed, the IAA can be brought in to support this process. In time, PRAGUAS will develop a broad base of community development, engineering design, construction and management service providers in each province, that will ensure adequate competition in tenders at the local level. At the end of - 50 - these promotion/training activities, the EPP will pre-qualify local OITS. Pre-selection phase (2 months): Once the municipality has presented its list of proposed communities, the EPP verifies the availability of municipal government resources to cover 20% of expected investment costs and adjusts the list of communities accordingly. The EMS and EPP group these finalists into packages that fit the community development/engineering design capacity of the OITS short-listed earlier. Standard Promotion and Preinvestment Grant Agreements are then signed between the municipality and SSA to define commitments and responsibilities during the pre-investment phase. Pre-investment phase (4 months): During this phase, the municipality contracts one or more OITS that assist program communities in selecting and planning service levels and design alternatives that.they want and are willing to pay for. Community participation in the municipal tender evaluation committee (comisi6n de evaluaci6n y calificaci6n) will assure that rural populations have a voice in selecting the OITS that they will work with. The EPP (and -- as needed -- the IAA) will assist the EMS in adapting standard bidding documents and managing the tender process. Once one or more OITS have been selected, they will sign contracts with the municipal government which will authorize disbursements (subject to approval from the EPP) once agreed pre-investment products (designs, BOQ's etc.) have been satisfactorily completed. OITS and communities will agree on activity plans, prepare baseline community assessments and set up gender and ethnicity- balanced water and sanitation committees (juntas de agua). Terms of reference for the OITS have been designed to emphasize an integrated approach to water, sanitation and health & hygiene promotion. Since PRAGUAS requires communities to cover at least 30% of the cost of water supply infrastructure overall and no less than 10% in cash up front, beneficiaries will be encouraged to open community savings accounts for RWSS investments as early as possible. The OITS will help communities to choose service levels and technological options from standardized design alternatives that have been prepared as part of the Operation Manual (OM), and will explain the investment cost, tariff, operational and environmental implications of each choice. Table 3 (see above) summarizes eligible investments, investment ceilings, financing rules, eligibility requirements and cost recovery policies. PRAGUAS will encourage rural communities to adopt on-site household sanitation solutions. Communities that mobilize enough households to reach an overall coverage level of 60% (a threshold that guarantees that they will enjoy both the individual and the public health benefits of their investments) will be offered grants that cover 70% of the cost of household units up to a ceiling of US$250 per unit during the investment phase (see component 2B below). Beneficiary households (supported by municipalities) will be required to put up 30% of the cost of the units they select in cash and/or in kind up to the overall ceiling of US$250 and 100% of any costs above the ceiling. During the pre-investment phase, the OITS will make the rounds of all households in a given community with a "sanitation menu" that shows pictures and diagrams of each system (VIP latrines, pour-flush toilets, basic sanitation units (UBS) etc.) as well as a materials list that allows each household to instantly price the value of its contribution. Households will sign simple standard contracts that define the contribution to be provided by them and by PRAGUAS. The OITS will then pool the materials required for each community. In communities that request both water and sanitation services, these materials will be tendered-together with the goods and works required for the water supply system. For communities that request only sanitation, at least 3 bids to supply (and deliver) latrine materials will be solicited from local sources. During the investment phase (see below), OITS will supervise the construction of on-site household sanitation systems by the beneficiaries. To stimulate the demand for sanitary facilities, PRAGUAS will finance 100% of the cost of on-site school - 51 - sanitation systems (not counting excavation of the pit which must be accomplished by the community) up to a ceiling of US$8 per pupil during the pre-investment phase. Finally, a detailed training and hygiene education program will be drawn up by the OITS in conjunction with community members as well as school and health clinic personnel who work at the community level. The pre-investment packages will be reviewed by the EPP using standardized technical, environmental, economic, financial, legal and social criteria/check-lists. As needed, the IAA will assist the EPP in this process. Once community sub-projects have been reviewed, the EPP will verify the availability of community and municipal contributions and package investments. Communities that fail to mobilize at least 10% of their contribution in cash, will be deferred to the following funding cycle. The overall investment package in each municipality will be sized so that municipal contributions cover 20% of projected investment costs. Subcomponent 2B: Financing for water and sanitatio.i infrastructure, community training and hygiene education (US$34.0 million) Once community subprojects have been screened and tendered, PRAGUAS will support the following activities: Investment phase (10 months): During the investment phase, local contractors and communities will construct the water supply and sanitation infrastructure designed under component 2A using resources provided by PRAGUAS, the municipalities and the beneficiary communities themselves. During this phase, the IAA will support the EMS in (i) contracting construction firms to carry out physical works in communities; (ii) supervising the OITS (which will be kept on from the pre-investment phase to the extent that their performance has been satisfactory); and (iii) providing regular informnation on implementation progress (physical and social) to the PMU. The IAA will be paid on a fee-for-service basis. The OITS will supervise the contractors who will construct water supply systems and conduct the community development and hygiene education activities designed during the pre-investment phase. To the extent possible, small local contractors will be used for these activities. Contractors will provide community liaison officers that organize community labor inputs (known as "mingas" in quichua) and will supply materials for the construction of on-site household sanitation systems by beneficiaries under the supervision of the OITS. Follow-up and TA for community management phase (3 years): The PRAGUAS approach to post-construction sustainability can be summarized as follows: * Under the supervision of the OITS, the contractor will stay on in the communities for a period of 6 months after water supply systems have been completed (provisional reception of works) to (i) put systems into operation; (ii) launch the collection of the agreed tariffs; (iii) reinforce hygiene education as necessary and (iv) strengthen the "juntas de agua" in such tasks as basic accounting, maintenance, etc. Communities through their 'juntas de agua" will own and operate the systems built with PRAGUAS assistance. * Once the contractor and the OITS have withdrawn, the EMS and EPP will conduct regular technical support visits at 6 month intervals for a period of 3 years to monitor system operation and management by the 'junta"; - 52- * The EPP and EMS will encourage the "juntas de agua" operating in each municipality to join in a consortium that would meet regularly with the EMS to (i) coordinate bulk purchases of such inputs as chlorine; and (ii) jointly contract equipment maintenance for such items as motorized pumps, generators etc. as needed. * The EMS will call the juntas de agua operating in each municipality together on a regular basis for training activities designed to consolidate the management models, apply appropriate tariffs, ensure the adequate use of facilities and support sustainable improvements in hygiene and environmental education. Project Component 3 - US$ 3.00 million 3. WATER AND SANITATION SUB-PROJECTS IN MUNICIPAL CAPITALS This component has been designed to provide small municipalities (those will populations under 10,000 in the municipal capital) that have successfully delegated WSS service provision to autonomous public or private operators according to the program rules described under component lB above with access to PRAGUAS financing for limited rehabilitation/system expansion investrnents. Investment ceilings will be determined on a case-by-case basis. PRAGUAS would provide a non-refundable grant to selected municipalities covering 100% (net of taxes) of the cost to contract engineering consultants that would prepare technical designs and tender documents and supervise the construction of works. In addition, PRAGUAS would provide a non-refundable grant to municipalities to cover up to 50% of the construction costs of eligible investments. Municipalities would have to finance the remaining 50% of investment costs from their own resources and agree to increase tariffs as shown in table 2. Under APL-1, US$0.5 million and US$2.5 million have been budgeted under this component for designs & supervision and works respectively. Project Component 4 - US$3.43 million 4. PROJECT MANAGEMENT A project management unit (PMU) will be established within SSAlQuito and "Equipos Provinciales del PRAGUAS" (EPP's) will be set up in participating provincial SSA offices. These teams will oversee the day-to-day operations of PRAGUAS. The PMU will contract (i) an overall project coordinator; (ii) a coordinator for sector strengthening; (iii) a coordinator for water and sanitation subprojects in rural areas and small towns; and (iv) a coordinator for financial managementladministration. These specialists will be complemented by an administrative support unit and a technical support group (including legal and procurement specialists). Component 4 will finance the following: * Incremental operating costs for the PMU and the EPP's; * Equipment and software for the PMU (and EPP's as necessary); - 53 - * Contractual personnel for PMU; * External audits; * Maintenance of the financial management and project monitoring system; * Consultancies (e.g. for a Rural Sanitation Sector Environmental Assessment and periodic reevaluation of economic limits for water supply investments) The Rural Sanitation Sector EA will provide inputs for additional training and institution-building activities that will be conducted under APL-2. - 54 - Annex 3: Estimated Project Costs ECUADOR: Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) Local Foreign Total Project Cost By Component US $million US $million US $million Sector Reform/Institutional Development 3.71 0.09 3.80 Water and Sanitation Sub-projects in Rural Areas 22.47 10.62 33.09 Water and Sanitation Sub-projects in Municipal capitals 1.25 1.25 2.50 Project Management 2.37 0.55 2.92 0.00 Total Baseline Cost 29.80 12.51 42.31 Physical Contingencies 2.98 1.25 4.23 Price Contingencies 2.39 1.00 3.39 Total Project Costs 35.17 14.76 49.93 Front-end fee 0.32 0.32 Total Financing Required 35.17 15.08 50.25 Local Foreign Total Project Cost By Category US $mitlion US $million US $million Goods 0.16 0.74 0.90 Works 22.49 14.02 36.51 Services 10.89 0.00 10.89 Incremental Operating costs 1.13 0.00 1.13 Severance payments 0.50 0.00 0.50 Total Project Costs 35.17 14.76 49.93 Front-end fee 0.32 0.32 Total Financing Required 35.17 15.08 50.25 - 55 - Annex 4 ECUADOR: Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) Introduction The primary objective of the Ecuador Rural and Small Towns Water Supply and Sanitation Program (PRAGUAS) is to increase coverage and effective use of sustainable water and sanitation (WSS) services in rural areas and small towns across Ecuador. To achieve this objective, phase one of the ten-year APL will provide new or rehabilitated drinking water facilities to about 350,000 people in about 40 rural municipalities and will promote improved household sanitation and hygiene practices. Responsibility for O&M costs will be assigned to the beneficiaries who will also pay a 30 percent cash and labor contribution to capital costs for project implementation. The project also includes a pilot sub-component for rehabilitation and expansion of existing water and sanitation systems in small towns. The project requires communities to initiate participation in project activities and to validate their commitment and need for the project via a cash contribution towards the expected capital cost. The self-selected project communities (from those poor communities already identified as eligible) will choose their preferred level of service from a menu of options. The selection of specific investments will be subject to negotiations among prospective users and district assemblies. The final size of the community and the level of service that will be achieved is not known at this point, and would be determined during project implementation. However, the project design ensures that technical solutions would be economically viable. Agreement to project rules regarding cost recovery is a prerequisite for project participation. In particular, the project rules require that user charges cover operation and maintenance expenses, and that communities confirm and demonstrate their willingness to adopt these charges. To ensure that investments are and remain economically viable, sub-project performance will be monitored and information collected on a continuous basis. Conceptual basis for assessing economic benefits In rural areas, consumers use water for drinking, cooking, bathing, washing and productive uses, such as cooking for sales, construction and so forth. A distinction between residential and commercial users is not made. The water quality required depends on the purpose or use. Brackish water might be acceptable for washing but not for drinking. People in the rural areas rely on a variety of traditional sources, such as rivers, ponds, springs and rain water. Both the quality and price (time) of water from these sources are different, and each water source serves different needs. When alternative sources, such as wells, boreholes, and piped water systems become available, they are potential substitutes for water from other sources. The incremental quantity of water supplied under a project can be divided into two parts: one part replaces the previous sources and quantity of water used, the other part is a net increase in water consumption. In this context, the benefit of the first part is equal to the savings of economic costs of consumers who no longer use the former water sources. These include time savings, reduced costs for altemative purification methods such as boiling the water, substitution of more costly sources such as bottled water and water tankers, and reduced costs for health related expenditures due to water borne diseases. The benefit of the second part is equal to the area below the demand curve between the with-project and without-project use of each consumer. - 56 - Methodology A detailed economic cost-benefit analysis was made for the 19 subprojects identified on the pilot phase of PRAGUAS. This sample represents different types of technological options to be financed and all major regions of the country (Sierra, Costa and Oriente). The size range of the systems analyzed was between 18 to 154 connections, (in all cases households expressed their preference for a house connection, so there is a 1 to I relation between number of households and estinated number of connections in each community). To estimate the benefits for increased water consumption due to improved water quality, more reliable and lower cost water service provided by the project, a profile of consumption patterns which indicate the quantity of water used and the amount of time and/or money spent for water from different sources was used. This data was collected by applying surveys to communities with water services selected from the group of communities with similar FASBASE projects where metering was available, to estimate the "with project" consumption, and from the pilot PRAGUAS communities information for the "without project" situation. The benefits for resource savings were estimated from the surveys of PRAGUAS pilot project communities, basically time savings and other costs (monetary and non-monetary) reported in the interviews. Based on FASBASE surveys, it can be expected that where treatment systems are in place, households would replace most consumption from other sources with new piped water supply. For PRAGUAS projects it was assumed that all other sources would be replaced by the PRAGUAS source. Health benefits known to users are captured in their willingness to pay for good quality water; additionally, reduction in costs related to water borne diseases (diarrhea) were assessed based on the frequency of occurrence and monetary expenditures (in the last two weeks of the survey) by the potential beneficiaries. Survey results showed, however, that illness-related monetary expenditures were not significant, and can therefore be excluded from the analysis. The time lost (related to the episode) was not quantified. The typical costs included in the analysis were: (i) capital investment costs, (ii) recurrent costs (operations, maintenance and depreciation), (iii) institutional development costs, and (iv) community development costs (organization, training and hygiene education). All transfers including taxes and subsidies are excluded from the analysis. All costs included in the economic analysis were adjusted to reflect economic prices using conversion factors calculated by Banco del Estado, Ecuador's Central Bank. The estimation of a Program rate of return was not attempted here; such a calculation would be based on an assumed distribution of community choices of capital investments. It was considered more important to establish that each of these possible choices generates acceptable economic retums. The returns to the phase one investments will be estimated at the end of three years and will be used as input to refine the eligibility criteria for sub-projects to be financed in the second phase. The results of the economic cost benefit analysis of the pilot projects (NPV, B/C ratio and EIRR) were used to design the eligibility criteria for the sub-projects to be financed during the implementation phase and the financial policy of the Program. Summary of Benefits and Costs: The major benefits of phase one of the program are improved water services to approximately 350,000 beneficiaries in about 40 rural municipalities. These include direct user benefits: resource savings (time savings and savings from purification mechanisms such as energy for boiling water), health benefits (estimated as reduction in costs for coping with water borne diseases) and benefits from increased water consumption estimated by the willingness to pay for the increased consumption, for users who without project will use less effective and more costly alternatives (such as rivers, etc.). The project is demand - 57 - driven and offers improvements to communities that express a willingness to participate, and are scaled to a level of service with affordable variable costs for beneficiaries. Direct users will also be required to contribute in cash and labor to cover 30% of investment costs. PRAGUAS also focuses on achieving service sustainability through intensive user education in effective use, administration, operation and maintenance of the systems. Thus, it is highly probable that user benefits will be realized over time. Additional benefits are expected from the on-site sanitation component, although these will not be quantified. Rather least-cost analysis of the alternatives and cost-effectiveness criteria will be used for investment decisions. The strategy calls for strong promotion and demand generation of user investment in sanitation, low levels of subsidy, targeted coverage levels of at least 60 percent of households per community to achieve full health impacts and promoting a wider range of lower cost options. These should bring additional positive health benefits to the communities. The main results of the economic analysis of the sample are presented in Table 1. Of the 19 subprojects evaluated, 10 were economically viable, with EIRR ranging from 13.6% to 54.1% with an average return of 28% and an average NPV of US$ 35,543. Table 1. Results of the Economic Cost-Benefit Analysis of the Sample Total Present Resource Net Economic Investment System number of Value of savings as Present Internal cost/ connections Benefits % of total Value Rate of connection (US$) benefits (US$) Return (US$) El Rodeo 37 8,432 80% (12,241) -2.0% 466 Ulucata 35 15,273 73% (6,670) 7.4% 469 Puca 150 74% 16,529 20.1% 215 52,926 Yanazacha 40 81% (10,510) 1.3% 438 11,295 Buravalle 51 72% (14,539) -3.1% 420 9,662 Charquiyacu 84 72% 9,752 19.1% 289 18,722 Guayabal 55 65% (10,050) 5.4% 512 35,120 Lomas del Pita - 150 63% 96,671 45.0% 292 Yatuvi Piedra 143,415 Redonda Yatuvi - El Triunfo 154 63% (26,395) 7.7% 907 81,680 Sitio Nuevo 35 64% (12,995) 2.7% 750 15,454 Tarapal- Piedra 109 59% 43,459 23.2% 549 Hendida - San 106,700 Jacinto- Buza Alto - 58 - Puente de Buza 45 65% 61,108 54.1% 511 26,697 El Cristal - La Balsa 48 59% 6,272 18.1% 458 85,562 El Recogimiento y 32 70% (17,428) 1.1% 1,202 Santa Helena 14,773 San Rafael - 66 60% (6,545) -3.2% 526 Janduyacu 78,481 El Capricho 28 64% 77,374 45.9% 421 20,625 San Fransisco Puni - 18 80% 40,001 28.3% 1,022 San Pedro 4,378 Rey de Oriente 96 66% 2,638 14.8% 319 115,031 San Vicente 33 64% 1,627 13.6% 568 21,927 Sensitivity analysis: A sensitivity analysis for all major assumptions was conducted. It showed that the results from the economic analysis are robust. Benefits: Using the information from the surveys, a probabilistic distribution of the benefits was obtained, being normally distributed with a standard deviation of 4% of the mean. Simulations using Crystal Ball were made for each viable subproject. The results are shown in the following table: Table 2. Sensitfvi analysis - Benefits Subproject Probability of an NPV range unfeasible project (US$) (NPV US$1 million ICB All US$250,000 ICB All US100,000 QCBS All 50,000 Bank's guidelines for All individual consultants <50,000 Bank's guidelines for Prior review restricted to individual consultants TOR's only Total value of contracts subject to prior review: approx. US$25 million Overall Procurement Risk Assessment High Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits) - 68 - Procurement supervision will be conducted as part of regularly scheduled supervision missions. 1Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. -69 - Disbursement Allocation of loan proceeds (Table C) Disbursement A US$32 million loan will be extended to the Republic of Ecuador in support of the US$50.25 million (including contingencies and front-end-fee) program of activities described in annex 2. This loan will be the first tranche in a 3-part Adjustable Program Loan (APL). Overall, the Bank would finance 64% (US$32.0 million) of the activities to be carried out under the first phase of the APL. During subsequent loan tranches of the APL, (APL-2 and APL-3), the Bank's overall financing percentage will be reduced slightly as shown in the "Program Financing Data" table. For project activities undertaken under components IB, 2A, 2B, 3A, and 3B, SSA will sign Grant Agreements with participating municipalities that will stipulate, inter alia, the financial contributions of the GOE, municipalities and communities towards the works, goods and services to be procured as discussed in annex 2 and defined in the Operation Manual. For these activities, disbursements from the Special Account will then be made on the basis of the terms detailed in the Grant Agreements. Disbursements for goods and consulting services contracted directly by the PMU/SSA will be made directly against the contracts for such items. The closing date for APL- 1 will be February 28, 2005. Allocation of loan proceeds for APL- I is presented in Table C. Table C: Allocation of Loan Proceeds 7 ;Expend>iture i:0007 Categoy tAmount in 10$niiion:n Financing Percentage (la) Goods procured under components 0.27 100 % of foreign and 1 and 4 of the project 85% of local expenditures (1 b) Goods procured under Rural Water 0.50 100% of the amounts disbursed under and Sanitation Subprojects each Grant Agreement (2a) Civil works for Rural Water and 14.41 100% of the amounts disbursed under Sanitation Subprojects each Grant Agreement (2b) Civil works for Delegation 1.06 100% of the amounts disbursed under Investmnent Subprojects each Grant Agreement (3a) Consultants' services, training and 2.03 100% audits under components I and 4 of the project (3b) Consultants' services for 2.54 100% of the amounts disbursed under Delegation Preparation Subprojects each Grant Agreement (3c) Consultants' services for Promotion 4.23 100% of the amounts disbursed under and Pre-investment Subprojects each Grant Agreement (3d) Consultants' services for 0.42 100% of the amounts disbursed under Delegation Investment Subprojects each Grant Agreement (4) Incremental Operating Expenditures 1.13 88% (5) Severance Payments 0.50 100% (6) Refinancing of PPF 1.30 Unallocated 3.29 - 70 - Total Project Costs 31.68 Front-end fee 0.32 Total 32.00 Note.: Severance Payments means the cost of compensatory payments and/or training of SSA/MIDUVI staff made redundant under the SSA Restructuring Plan. Special Account and Flow of Funds At the outset, when funds are being disbursed under the traditional disbursement method based on documentation, the executing agency (MIDUVI/SSA) will set up a Special Account (SA) with an authorized allocation of US$2.5 million at the Central Bank of Ecuador on terms and conditions satisfactory to the World Bank. The advance will be limited to US$1.0 million until cumulative disbursements under the loan have reached US$4.0 million. When the project moves to PMR-based disbursements, the authorized allocation will be US$4.0 million. In addition to the Special Account, a Central PRAGUAS Account (CPA) will be opened at a private bank in Quito and special Municipal Project Accounts (MPA) will be opened at provincial branch offices of the same bank. The Project Implementation Unit (PMU) will make payments from the CPA directly to consultants and suppliers contracted under components 1 and 4 of the project. For severance payments made within the framework of SSA restructuring (component IA), disbursements will be made from a separate category (see table C above). For consulting services, civil works and goods contracted by municipalities under components 2 and 3, provincial PRAGUAS offices ("Equipos Provinciales del PRAGUAS", EPP) and municipalities will open joint municipal project accounts (MPA) in which communities and municipalities will deposit their financial contribution towards rural (component 2) and small town (component 3) RWSS infrastructure. Payments will be made directly to consultants and contractors by the private bank once both the EPP and the municipality have authorized the transfer. Initial payments from the Special Account to the MPA's will be made on the basis of Grant Agreements between SSA and participating municipalities. Details of this flow of funds, as well as guidelines for each step are contained in the project's Operation Manual. Detailed supporting documentation, including certification, for expenditures will be kept by the project implementation unit (PMU) for at least one fiscal year after the year in which the last disbursement takes place. For all contracts requiring the Bank's prior review, full documentation will accompany disbursement requests until disbursement is based on PMR's. Detailed documentation will be retained by the PMU for inspection during supervision missions and for audit by external auditors acceptable to the Bank. These auditors will audit the Special Account, Central PRAGUAS Account and Municipal Project Accounts annually. The audit report will be submitted to the Bank no more than 4 months after the end of each fiscal year. Detailed terms of reference for the auditors will be prepared following guidelines included in the World Bank's Financial Accounting, Reporting and Auditing Handbook. - 71 MIDUVI/SSA is in the process of integrating the project's accounting function and its physical and financial planning with MIDUVI's financial management system in a way that will allow the PMU to produce the comparative PMR's required by the Bank. It is expected that the system will be fully operational by June 30, 2001. Until such time as the PMU is capable of producing PMR's, disbursements would be made using traditional disbursement methods (direct payments, reimbursements and the SA, on the basis of SOE's or full documentation). Under PMR-based disbursements, the Special Account would be replenished quarterly, based on a six-month budget presented in the PMR's. All replenishment applications would be accompanied by reconciled statements from the Central Bank showing all transactions in the SA. Reporting: The PMU would prepare and forward to the Bank quarterly PMR's (respectively by January 31, April 30, July 31 and October 31 of each year). By December 31 of each year beginning in 2000, the PMU would prepare and forward to the Bank an annual implementation plan detailing project activities contemplated for the subsequent calendar year. The SSA will submit an Implementation Completion Report (ICR) 6 months before the close of each stage of the APL to assess project effectiveness and sustainability. Assessment of Agency's Financial Management Capacity An assessment of Agency's financial management capacity was conducted on site from February 22 to February 25, 2000, by a Financial Management Specialist, and in accordance with guideline OP/BP 10.02 and the Project Financial Management Handbook dated February 1999. The objectives of the assessment were to determine if the Project Management Unit has the capacity to properly manage and account for all project proceeds and to produce timely, accurate and reliable project management reports for use by management and submission to the World Bank. On the basis of the assessment performed, the Financial Management Specialist concluded that, at this time, the project does not yet meet the Bank's minimum financial management requirements (a 4-C certification has been issued), due in part to weaknesses in record keeping. This shortcoming will be remedied by effectiveness. In addition, MIDUVI/SSA is in the process of integrating the project's accounting function and its physical and financial planning with MIDUVI's fnancial management system in a way that will allow the PMU to produce the comparative PMR's required by the Bank. The action plan for achieving PMR capacity includes: 1. Preparation of revised chart of accounts; 2. Preparation of Accounting Manual; 3. Definition of format for periodic and annual reporting (PMR); 4. Completion of Project Operating Manual, satisfactory to the Bank; 5. Installation of PMR compatible computer system; 6. Carrying out of training on PMR preparation and its use in project management. PPF Refinancing The disbursed amount of PPF P-366-EC along with interest and charges will be refinanced from the loan upon its effectiveness. - 72 - Annex 7: Project Processing Schedule ECUADOR: Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) Proiect Schedule Planned Actual Time taken to prepare the project (months) 27 32 First Bank mission (identification) 02/27/98 02/27/98 Appraisal mission departure 01/15/2000 03/08/2000 Negotiations 03/15/2000 08/02/2000 Planned Date of Effectiveness 03/01/2001 Prepared by: MIDUVI - Subsecretariat of Environmental Sanitation (SSA) Preparation assistance: N/A Bank staff who worked on the project included: Name Speciality Oscar Alvarado Team Leader - Sr. Water & Sanitation Specialist Franz Drees Co-Team Leader -Engineer Jennifer Sara Sr. Water & Sanitation Specialist Ma. Angelica Sotomayor Economist Ximena Traa Social and gender Specialist Efraim Jimenez Sr. Procurement Specialist Livio Pino Financial Mgmt. Specialist Marcelo Romero Operations Officer Marta Molares-Halberg Sr. Counsel Guillermo Yepes Sector Institutional Specialist Lourdes Elena Rural Water Consultant Juan David Quintero Sr. Environmental Specialist Issam Abousleiman Disbursement Officer Patricia Acevedo Team Assistant Note: The "time taken to prepare the project" reflects planned and actual times from the Identification Mission to the Board Date - 73 - Annex 8: Documents in the Project File* ECUADOR: Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) A. Project Implementation Plan 1. Manual Operativo (Project Operating Manual) B. Bank Staff Assessments 1. Social Assessment; 2. Economic Analysis of Sample of 19 Subprojects; 3. Analysis of Municipal Finance; 4. Basic Infrastructure and Welfare : PRAGUAS Project in Ecuador, Alberto Chong, June, 2000. C. Other 1. Rediseno Organizacional de la Subsecretaria de Saneamiento Ambiental, GTZ, January, 2000; 2. Programa de Asistencia Tecnica, Lineamientos Generales, GTZ, January, 2000; 3. Estrategia de Intervenci6n para Proyectos de Saneamiento e Higiene, CARE Ecuador, January, 2000; 4. Ecuador, Consultations with the Poor, The World Bank, Poverty Group, PREM, September, 1999; 5. Poverty and Policy in Latin America and the Caribbean, Quentin T. Wodon and others, LCSPP, The World Bank, Discussion Draft, October, 1999; 6. Ecuador, Social Sector Review (AAA): "Crisis, Poverty and Social Services in Ecuador", November 1999. Human and Social Development Group, LACR, The World Bank Report by Donald R. Whinkler, LCSHD. Decision Draft. 7. Rural Water Projects: Lessons From OED Evaluations, OED Working Paper Series No. 3; The World Bank, March 2000 8. Razones Precio Cuenta, Banco Central de Ecuador, Quito, 1998. 9. Making Rural Water Supply Sustainable: Report on the Impact of Project Rules, Jennifer Sara and Travis Katz, The World Bank, 1997. 10. Making Rural Water Supply Sustainable: Recommendations From a Global Study. Jennifer Sara and Travis Katz, The World Bank, 1997. 11. Water, Waste and Well-Being: A Multicountry Study, Steven Esrey, American Journal of Epidemiology, Vol. 143 No. 6, The Johns Hopkins University School of Hygiene and Public Health, 1996. 12. Water and Sanitation: Health and Nutrition Benefits to Children, Susan Burger and Steven Esrey. In: Child Growth and Nutrition in Developing Counties; Priorities for Action, Cornell University, 1996. 13. Effects of Improved Water Supply and Sanitation on Ascariasis, Diarrhea, Dracunculiasis, Hookworm Infection, Schistosomiasis, and Trachoma. S.A. Esrey, J.B Potash, L. Roberts and C. Schiff; Bulletin of the World Health Organization, 1991. 14. The Impact of Improved Water Supplies and Excreta Disposal Facilities on Diarrheal Morbidity, Growth and Mortality Among Children. Steven Esrey and Jean-Pierre Habicht, Cornell University, 1985. 15. Evaluating the Impact of Development Projects on Poverty, A Handbook for Practitioners, Judy Baker, Directions in Development, The World Bank, 2000. 16. Ethnicity, Neighborhoods and Human Capital Externalities, American Economic Review, pages 365-390, June 1995. - 74 - 17. The Company You Keep: The Effects of Family and Neighborhood on Disadvantaged Youths, Case, Anne and Lawrence Katz, National Bureau of Economic Research Working Paper, May, 1991 *Including electronic files - 75 - Annex 9: Statement of Loans and Credits ECUADOR: Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'c P007131 1997 Ecuador AG RESEARCH 21.00 0.00 0.00 18.71 4.48 2.35 P007135 1998 Ecuador AGRIC CENSUS & INFO 20.00 0.00 0.00 13.73 1.30 0.00 P039084 1998 Ecuador EC HEALTH SERVIC MODERN 45.00 0.00 0.00 40.76 6.73 0.00 P007087 1993 Ecuador EC SOC DEVT IIIHEALTH&N 90.20 0.00 0.00 21.42 1.17 0.00 P070337 2000 Ecuador EC-SAL 151.52 0.00 0.00 151.52 0.00 0.00 P055571 1998 Ecuador EL NINO 60.00 0.00 0.00 8.30 -3.38 0.00 P007128 1996 Ecuador ENV MANAGEMENT PROJ 15.00 0.00 2.99 6.27 9.26 -0.01 P064045 2000 Ecuador Fin SectrTA Ln 10.00 0.00 0.00 10.00 0.00 0.00 P007100 1991 Ecuador GUAYAS FL'D CNTL 59.00 0.00 0.00 1.84 1.84 1.50 P040086 1998 Ecuador INDIGENOUS PEOPLES 25.00 0.00 0.00 16.29 4.16 0.00 P040106 1998 Ecuador INTLTRDE,1NTEGRATIO 21.00 0.00 0.00 18.51 5.01 0.00 P007105 1994 Ecuador IRRIGTA 20.00 0.00 0.00 6.28 6.22 -0.07 P036058 1997 Ecuador JUDICIAL REFORM 10.70 0.00 0.00 5.01 1.07 0.00 P007129 1994 Ecuador MINING TECHNICAL ASSISTANCE 14.00 0.00 3.00 1.30 4.30 0.30 P007115 1992 Ecuador RURAL DEV 84.00 0.00 0.00 8.63 8.63 8.63 P007136 1995 Ecuador TAMDRNOFSTATE 20.00 0.00 0.00 3.59 -0.47 0.00 Total: 666.42 0.00 5.99 332.16 50.32 12.7 - 76 - ECUADOR STATEMENT OF IFC's Held and Disbursed Portfolio 3 1 -Jul- 1999 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1997 Agrocapital 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1969/73/77/81/82/87 COFIEC 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Concessionaria 11.50 1.30 0.00 15.00 2.93 0.33 0.00 3.82 1999 FV Ecuacobre 9.00 0.00 0.00 0.00 7.50 0.00 0.00 0.00 1998 Favorita Fruit 10.00 5.00 0.00 0.00 10.00 5.00 0.00 0.00 1999 La Universal 8.20 5.00 0.00 0.00 8.20 5.00 0.00 0.00 1993 REYBANPAC 5.71 0.00 0.00 0.00 5.71 0.00 0.00 0.00 Total Portfolio: 47.91 11.30 0.00 15.00 37.84 10.33 0.00 3.82 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic Total Pending Commitment: 0.00 0.00 0.00 0.00 - 77 - Annex 10: Country at a Glance ECUADOR: Rural and Small Towns Water Supply and Sanitation Project (PRAGUAS) Latin Lower- POVERTY and SOCIAL America middle- - Ecuador & Carib. income Development diamond' 19S8 Population. mid-vear (tmillions) 12.2 502 908 Life expectancy GNP per capita (Atlasmethod, US$) 1,530 3,940 1710 GNP (Atlas method, US$ billions) 18.6 1.978 1,557 Averaae annual growth. 1992-98 T1I Population (16) 2.1 1116 11 Labor force (16) 3.0 23 1.5 GNP / Gross per primary Most recent estimate (latest year available, 1992-98) capita enrollment Poverty (% of populftion below nationol povetyj line) 35 Urban ooulation (% of total population) 61 75 58 s Life expectancy at birth (vears) 70 70 6S Infant mortality (per 1,000 live births) 33 32 38 Child malnutrition % of childrenundet 5) 17 8 . Access to safe water Access to safe water (16 of poPulation) 55 75 75 Illiteracy (f of population age 15+) 9 13 14 t Gross primary enrollment (6 of school-age populafion) 127 113 103 Male . . 105 - - Lower-middle-incom1e group Female - .. 100 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1977 1987 199l 1998 Economic ratios* GOP CUSS billions) 6.7 10.5 19.8 19.7 Gross domestic investment/GDP 265 22.7 20.2 24.7 Trade Exports of goods and services/GDP 24.8 24.0 30.0 25.3 Gross domestic savings/GDP 23.5 16.4 21.2 18,0 Gross national saevinslGDP M0.g 9.6 135 13,9 Current account balance/GDP -5.2 -11,3 -3.8 -10.7 Domestic lnterestoayments/GDP 1.0 1.9 3if6 4.0 Investment Total debt/GDP 34.5 8W8. 75.5 81.6 Savings Ivt Total debt service/exports 3.7 4.2 31.0 30.5 Present value of debttGDP I 68.8 Present value of debtlexports 222.7 Indebtedness 1:977-87 198s-9s 1997 1998 1:999-03 (average annual growth) GDP 2.5 2.9 3.4 0.6 - -Ecuador GNP Per capita .0.8 0.8 1.2 2.3 ---Lower-middle-income grouP Exports of goods and services 3 2 6.0 3.6 -2.5 STRUCTURE of the ECONOMY 1977 1987 1997 1998 Growth rates of output and Investment (%) (% of GDP) Acriculture 16.6 15.3 121 12.0 Industry 34.4 32.3 35.1 32.7 10 Manufacturing 18.0 19.5 21.4 21.9 Services 48.9 52.4 52.8 55.2 0 94 95 e7 99 Private consumption 61.7 70.7 67.2 70.4 -.10 General government consumption 14.8 12.8 11.6 117 -GDI e GDP Imports of goods and services 27.8 30.3 29.0 32 0 1977-87 1988-98 1997 1998 Growth rates of exports and imports (%) (average annual growth) Agriculture 3.0 3.1 4.1 -0.6 12 - Industry 2.6 2.9 3.4 -0.6 8 Manufacturina 2.3 2.5 3.5 0.4 Services 2.2 2.9 3.1 1.8 4 Private consumDtion 3.0 2.4 2.5 1.7 o General qovernment consuimption -0. t -0.7 °. ° 1.' 93 94 95 ff 97 NO Gross domestic investment -3.3 3.4 14.1 8.5 -4 Imports of ooods and services -1.9 4.2 6.4 3.8 I - Exports Ilmports Gross national Product 1.9 3.0 3.3 4.2 Note: 1998 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-qroup average, If data are missing, the diamond will be incomolete. - 78 - Ecuador PRICES and GOVERNMENT FINANCE Domestic prices 1977 1987 1997 1998 Inflation (%) (% change) 00 Consumer prices 13.0 29.5 30.7 36.1 1 Implicit GDP deflator 17.5 38.0 25.9 35.2 Govemment finance 20 (% of GDP, includes current grants) 0 Current revenue .. 20.1 14.0 14.1 93 94 95 96 97 9S Current budget balance .. -4.1 -1.5 -1.1 -GDP deflator CCPI Overall surplus/deficit .. -9.6 -1.5 -0.1 TRADE (US$ millions) 1977 1987 1997 1998 Export and Import levels (US$ millions) Total exports (fob) 1,401 2,021 5,264 4,141 5,000 Oil and products .. 818 1,412 791 Bananas .. 267 1,327 1,070 4,000- Manufactures .. 361 1,011 981 Total imports (cif) 1,361 2,158 4,955 5,503 Food .. 125 612 713 2,000 Fuel and energy .. 294 437 327 Capital goods . 732 1,481 1,830 o Exportprice index (1995=100) .. 86 107 104 92 93 94 9s 93 97 98 Import price index (1995= 100) 42 74 91 87 X Exports * Impors Termsoftrade(1995=100) .. 115 118 119 BALANCE of PAYMENTS (US$ millions) 1977 1987 1997 1998 Current account balance to GDP ratio (%) Exports of goods and services 1,603 2,442 6,000 4,988 4-- Imports of goods and services 1,774 2,702 5,787 6,311 Resource balance -171 -260 213 -1,322 0 v.9 Net income -208 -1,059 -1,347 -1,573 Net current transfers 38 132 391 776 "' - Current account balance -343 -1,187 -743 -2,119 . Financing items (net) 465 1,070 981 1,722 Changes in netreserves -121 117 -238 397 .12| Memo: Reserves including gold (US$ millions) .. 656 2,236 1,762 Conversion rate (DEC, locaLWUS$) 25.0 170.5 3,998.3 5,446.6 EXTERNAL DEBT and RESOURCE FLOWS 1977 1987 1997 1998 (US$ millions) Composition of total debt, 1998 (US$ millions Total debt outstanding and disbursed 2,295 9,348 14,918 16,092 IBRD 44 689 851 854 | 854 IDA 36 34 24 23 G: 2,069 B: 23 C:67 Total debt service 60 103 1,891 1,521 0 260 IBRD 10 85 173 130 IDA 0 1 1 1 Composition of net resource flows Official grants 5 38 48 | E: 1,973 Official creditors 35 176 31 626 Private creditors 579 23 95 614 Foreign direct investment 35 75 577 476 Portfolio equity 0 0 0 F: 8,426 World Bank program Commitments 70 268 32 1 A-IBRt) E - Bilateral 70 268 32 ill ~~~~~B - IDA 0 - Other multilateral F - Private Disbursements 13 137 165 85 C - IMF G - Short-term Principal repayments 6 43 105 80 Net flows 6 94 60 5 Interest payments 4 43 69 51 Net transfers 3 51 -9 -46 Development Economics 9/9199 - 79 - Additional Annex No.: 11 Social Assessment A social assessment was carried out as a joint effort by the PRAGUAS preparation team and the World Bank during project preparation with the purpose of ensuring the inclusion of the beneficiaries and stakeholders -- particularly women and indigenous people -- from the initial stages of project design and throughout the entire project cycle. In the context of Ecuador, the term "indigenous" refers to the "Nacionalidades y Pueblos del Ecuador" (NIP) which include all individuals who identify themselves as either indigenous or as Afro-Ecuadorians. An inter-institutional Consultative Committee was. organized with the aim of defining a water and sanitation strategy which incorporates gender and culture. Members of this group are the Subsecretaria de Saneamiento Ambiental (SSA) / PRAGUAS, the Coordinadora de Nacionalidades y Pueblos del Ecuador -official National Coordinator of Indigenous Peoples since 1998- (CODENPE), the Pan-American Health Organization (PAHO), and the World Bank-financed Health Project FASBASE. Two studies in particular will also contribute to the finalization of Ecuador's water and sanitation strategy. The first one, titled "Participation Strategy of Gender and Indigenous People in Water and Sanitation Interventions", (September to December, 1999) was coordinated by the Consultative Committee and carried out by a team of local consultants. The second is aimed at defining the "Hygiene and Sanitation Implementation Strategy". A series of workshops was conducted with the participation of stakeholders of the water and sanitation sector. The first one took place on October 1 1 and 12, 1999 to discuss case studies and lessons learned from existing Water and Sanitation (WSS) projects in different cultural contexts. Those attending the workshops included the WB-funded projects PRODEPINE (Indigenous Project) and FASBASE (Health Project), as well as Instruct/CEPCUSSA, SSA/CEPCU, the Association of Municipalities of Ecuador (AME), line ministries and mayors, FINAE (Achuar), Central and Regional CODENPE, representatives of the different Nationalities and Peoples of Ecuador (NIPs), Central and Regional PAHO, National Council of Women (CONAMU), Water Committees, Fundaci6n Natura and other environmental organizations. Another workshop on the results of the Participatory Rural Appraisal contributed to the definition of the Gender and Participation Strategy in the sector. A third one discussed Hygiene and Sanitation Strategies. The social assessment discusses: (a) a quick overview of the present socioeconomic conditions in Ecuador, and those of the WSS sector in light of LSMS 1998; (b) an Institutional Analysis of the PRAGUAS project and its participation strategy; (c) the participation strategy built into the project cycle; (d) lessons learned from pilot projects; (e) characteristics of the Indigenous NIPs in Ecuador; (f) an Implementation Strategy for WSS integrating gender and culture, (g) the results of the first inter-agency workshop on WSS interventions in Ecuador and lessons learned, (h) a Hygiene and Sanitation strategy, and finally (i) Recommendations and a Participation, Gender and Indigenous Plan. 1. A quick overview of the WSS sector in light of the socioeconomic conditions in the country Ecuador's 12.3 million inhabitants live in 22 provinces. Almost half of the population live in the Coastal Region, 46% in the highlands of the Andes range, 4.6% in the Amazon region, and only 0.1% in the Galapagos Islands. Ecuador's macroeconomic and financial crisis has brought instability, unrest, and upheaval of all sectors of the population. Several factors have contributed to this situation including (a) a - 80 - fall in oil prices, (b) damage caused by El Ninio in 1998; (c) the snowball effect of the Asia, Russia and Brazil crises; (d) financial shocks caused by fiscal and banking sector crises; and finally (e) more than a year of unrest caused by small but potentially large eruptions of the Pichincha and Tungurahua volcanoes. Unemployment is over 20% and over 38% of the population lives on less than US$2 a day. By the end of 1998, 42.2% of the population could not afford the basic food and service basket. In terms of WSS, there are major differences in the distribution of facilities between urban and rural areas. Over 80% of water installation facilities (mostly household connections) are in urban areas, where only 50% of the population resides. The largest deficit is found in the coastal region. In the rural highland region, 42% of people have household connections, 35% have access to communal facilities and 23% draw water from rivers. This is not the case for the coastal regions, where 39% use river water and 20% use wells. In the Amazon region, 45% also use river water for cooking. 2. Institutional Analysis The SSA will be responsible for setting the norms for the WSS sector, once a Sector Policy is in place. The Project Management Unit (PMU) of PRAGUAS is in charge of coordinating efforts by central, provincial and municipal teams. PRAGUAS decentralization efforts stress institutional arrangements that ensure that the participatory strategy is systematically applied at all levels. It must be born in mind that a distinctive feature of the project is that the technical teams (central, provincial, municipal and local implementation units (OITS, "organizaci6n de intervenci6n tecnico social")) comprise at least two specialties "technical and social". Thus, the project promotes the ideal of the engineer-sociologist capable of adapting supply to the actual demands (technical options and service levels) of the communities. The OITS' mandate is to accompany the community through the process. The OITS is responsible for providing technical assistance and training (a) to reach appropriate levels of community organization for appropriation of the project; (b) to help communities identify the best technical option and service level; (c) to assess community capacity and commitment (social, technical and financial) to formulate, implement and sustain the project; and (d) to assess training needs (including hygiene and sanitation). Water Committees and Communal Law Consultations with communities and the Consultative Committee show the concept of water committees as the administrative project units is widely accepted in the country. Only in certain NIPs communities have requested the OITS not to introduce a new and parallel structure, but to identify one within their local government (cabildos, coordinators or assemblies). The Cabildo is the community organization which deals with different legal, organizational, or developmental issues in indigenous communities. A water cabildo has the same functions of a water committee, but it would be articulated as part of a more general organization which may be the Communal Assembly/ coordinators! assembly) which may be trained to fulfill that function. 3. Identification of beneficiaries to include the poor and indigenous 152 of Ecuador's 214 municipalities with populations below 10,000 people (1990 Census) are eligible for program investments. It is expected that PRAGUAS will reach about 350,000 people in approximately 40 rural communities as well as at least 6 municipal capitals with new or rehabilitated WSS infrastructure - 81 - during the first phase of the project. Selection criteria at the provincial, municipal and especially at the community level are key to reaching the desired objectives. At the provincial level, the criteria include: (i) poverty rates based on poverty maps and LSMS 1998; (ii) coverage rates for WSS; (iii) absence of other WSS interventions; (iv) installed capacity of the SSA provincial office. To avoid regional biases, a balance will be sought between the coastal, highlands and Amazon regions in each project phase. Eligibility and selection criteria at the municipal level were also agreed. Eligible municipalities (i) have less than 10,000 inhabitants; (ii) agree to PRAGUAS program rules and new sector policies; and (iii) are willing to form municipal sanitation teams (EMS). From all municipalities meeting the above criteria, those chosen will be prioritized based on (i) poverty index; (ii) WSS coverage; (iii) per capita budget assigned to WSS works relative to population. The single most important selection process will be at the community level. Besides the above criteria of coverage, the following will complete the evaluation criteria: (iv) percentage of indigenous and Afro-Ecuadorian population; (v) number of women requesting projects; and (vi) per capita savings deposited in a commercial or community bank earmarked for the project. 4. Financing of PRAGUAS projects and beneficiaries' willingness to pay All preinvestment costs are covered by PRAGUAS. For the investment costs, the municipalities and communities are expected to contribute. Community contributions will cover 30% of investment costs (at least 10% in cash) for rural WSS projects. Contributions may be in cash or in kind (local materials, labor). A bank account with deposits committed to the project is a community prioritization criterium. Some of the case studies presented by NIPs in workshops organized by the Consultative Committee show communities' resourcefulness in fnding funds for their water projects, as financial contributions empower people and entitle them to ownership and the right to demand improved services. 5. Participatory mechanisms in every step of the project cycle Pre-selection (2 months) Since a limited number of municipalities will be targeted at a time, it is recommended that the promotion campaign not be regional but local within the municipalities selected. It is strongly recommended that a simple "set of rules" of the project be disseminated throughout the target region to reach those living in isolated areas and those who are bilingual or monolingual. The eligibility criteria to participate in the project must be discussed in an open forun, in the language spoken in the community. Three events are planned for the promotion phase: (i) General Assembly at the provincial level, where the PMU and EPP consult with all mayors and inform them about the project; (ii) Municipal Assembly of mayors and community leaders who will in turn consult and inform communities; (iii) Community Assembly where all community members discuss basic rules. It is recommended that advantages and disadvantages of technical options and costs, service levels, potential independent private sector contractors be discussed in open fora. - 82 - Pre-investment (4 months) Independent OITS (Organizaciones de Intervenci6n Tecnico Social) typically formed by an engineer and a social scientist! specialist are hired to assist the community throughout the process. OITS are hired following World Bank procedures for contracting of consultants. The OITS is the single most important team. It earns the community's trust, then takes it by the hand providing technical assistance and training to choose the best technical option of water and/or sanitation and service level. It assists the community in calculating its contribution (cash/ kind), opening a bank account, creating the Water Users Association, planning a budget, and planning for sustainability. Having prepared a package of at least five communities, the OITS presents the proposals to the mayor to ensure funding, who in turn sends them to the EPP. The OITS ensures that the participatory strategy is promoted for gender equity and inclusion of indigenous population in those communities. The mechanism recommended is "direct invitations" to participate, clarifying that the data such as poverty rate, number of women and indigenous participating add to 50% of the evaluation criteria for prioritization. Investment (10 months) The investment packages reach the EPP. They include: community development component; training plan; construction designs; and rehabilitation of WSS systems. The EPP verifies that : (i) the Water Users Association has been formed; (ii) there is evidence of a bank account and a community contribution; (iii) legal agreements (e.g. property rights for spring catchments) have been finalized; (iv) management and environmental plans are defined. Training in project management, and sanitary education are particularly important. 6. Most important Lessons Learned from the Preinvestment Phase of Pilot Projects 1. Professional profiles for staff forming the EPP, EMS, OITS and Juntas de Agua must be established. Hiring of OITS under World Bank procurement procedures must be enforced. 2. Main project "rules" must be delivered to stakeholders and beneficiaries alike early in the pre-investment phase, in simple language, with illustrations. 3. The OITS must provide high quality information to the communities with regard to technical options and costs, service levels, community participation throughout the project cycle including maintenance. 4. The participatory strategy to include women and indigenous people in all meetings, events, decision-making processes, etc. must be presented as a necessary condition to participate in the project. 5. The investment package must be calculated according to the municipal budget allocated for WSS projects. 6. The level of interest in water is much higher than in sanitation. The promotional campaign for sanitation must include technical options, a financing package and the possibility to contract the private sector. 7. Although most communities agree to form a Water Users Association, some indigenous communities prefer to form Water Cabildos or Coordinators to conform with traditional sociopolitical structures. 7. Characteristics of the Nationalities and Indigenous Peoples of Ecuador (NIPs) The exact number of indigenous peoples in Ecuador is subject to debate. Different accounts may vary between 12% and 35% depending on definitions. In general terms, approximately 25% of the Ecuadorian population (3.3 million) self-identifies with one of the 26 distinctive groups, although some of them may be - 83 - identified by other Ecuadorians as "peasants of indigenous descent". It is believed that about 12% of NIPs are monolingual in their indigenous language. In all groups, women tend to remain monolingual. NIPs are concentrated in 288 clearly identified rural and peri-urban communities (parroquias). CODENPE is a good source of information on the location, characteristics and behaviors of the NIPs. They are the poorest segment of the population. In all groups decisions are made in an open forun called Cabildo, Assembly, or Congress. Their community organization around projects is more efficient than that of people in urban areas. The participatory communal activity of team work is called "minga" based on the system of 'prestamanos" by which 'I give you a hand today, and count on you giving me a hand tomorrow.' About 90% of NIPs live under the poverty line. They are classified into 10 Nationalities as follows: QUICHUA. This group speaks quichua, the second official language in Ecuador after Spanish. Approximately 2,900,000 quichuas are divided into sixteen groups (Pueblos) in the provinces of Bolivar, Imbabura, Pichincha, Cotopaxi, Chimborazo, Cuenca, Loja. They live in the Andes mountains between 2,000 and 4,000 meters above sea level. Subsistence agriculture is their main source of food and income. Quichua pueblos are: Otavalo, Imbaya, Caranqui, Cayambi, Cutacachi Quichua Rumacuna, Quitu Cara, Panzaleo, Chibuleo, Salasaca, Pueblo Guaranga, Puruha, Cainari, Saraguru. The Amazonian quichua are approximately 266,000 in number along the Napo, Aguarico, Pastaza, Bobonaza rivers. In all the quichua communities, decisions are made in General Assemblies headed by the indigenous authorities of the Cabildos. In these communities, no projects can be initiated without the approval of the indigenous authorities. AWA. In Northern Esmeraldas and Tulcan provinces, they are 3,500 living in an area of 100,000 acres, and speak Awapit. Their government is the Centro Awa del Ecuador. TSACHILA. In Santo Domingo, Pichincha province. They are 2,500 and speak Tsafiqui. Semi-tropical rain forest. The highest authority is the shaman and witch doctor. CHACHI. In Esmeraldas province, surrounded by rivers, they live in 46 centers which form the Federaci6n de Centros Chachi de Esmeraldas (FECCCHE). They are 12,000. HIUANCAVILCA. In Guayas province. They are 34,850 and they speak Spanish. COFAN. Only 850 people speaking A 'Ingae. They live in the northeast of Amazonia along the tributaries of the Amazon. They are famous for their crafts and ornaments. They are organized in centers and Canqque (communities). Their representative is the Organizacion Indigena de Cofanes del Ecuador (OINCE), CONFENIAE Y CONAIE. SIONA and SECOYA. Although they speak the same language Baicoca, they belong to two different cultures. A population of 970 people scattered in 47,000 acres of legal and 127,000 acres of communal land. Divided in three centers, they are represented by the Organizaci6n Nacional Indigena Siona del Ecuador (ONISE uqe), whose Congress meets every 3 years. The highest authority is the Jujuque (elder). HUAORANI. About 2,700 people speaking Huao Terero. They live in the Amazonian provinces of Pastaza and Napo. Their crafts include blow guns, hammocks, necklaces with animal teeth, beans and small insects. They are hunters and gatherers. Represented by the Organizaci6n de la Nacionalidad Huaorani del Ecuador (ONHAE). The Communal Assembly and Cabildo are their main fora. ACHUAR. About 5,000 people who live south of the Amazon, bordering with Peru. Their language is - 84 - achuar. Located in Pastaza and Morona Santiago provinces, surrounded by rivers. They are represented by their Congress, family associations and Sindico. SHUAR. A population of about 75,000, speaking shuar. They occupy 6 Amazonian provinces. They are divided into 4 groups and represented by four different Federations. For the past 25 years, the Salesian order has promoted the teaching of the Radiophonic bilingual School. 8. Inter-institutional Coordination for Policy Making A Consultative Committee to "discuss and formulate the Participatory Strategy for WSS with the inclusion of women and NIPs" was formed. Its members are the SSA, PRAGUAS, CODENPE, PAHO and FASBASE. They coordinate efforts with other sector stakeholders and beneficiaries. The function of CODENPE is to coordinate with government agencies in the formulation of policy dialogue, sector reform, and decision-making that affects the NIPs. 9. A WSS Intervention Strategy which Integrates Gender and Inter-cultural values Two studies have been carried out in support of the participatory strategy for the PRAGUAS project. These studies aim at providing the project with more systematic mechanisms to address WSS needs in all the different cultural strata of Ecuador. This information will allow the project to "truly respond to demand". Ten indigenous communities were chosen for the indigenous study. The second study aims at assisting PRAGUAS in the formulation of a Strategy of Sanitation Intervention in the WSS sector. The strategy will allow the formulation of integrated sanitation plans to be coordinated between the EMS and the communities. 10. Series of Workshops to discuss Participatory, Gender, Indigenous, and Financial Strategies for the WSS sector A series of Workshops were conducted with the participation of stakeholders, line ministries, social scientists, representatives of NIPs, OPS, PRODEPINE, IDB, KfW, GTZ, and beneficiaries to discuss the strategy. It is particularly important that all strategies (participation, gender, sanitation, indigenous, WSS) are discussed by all sectors, as this dialog prepares the ground for consensus on sector reform. 11. Monitoring and Evaluation The diagnostic data gathered at the municipal and community levels includes relevant socioeconomic, demographic, cultural, health & sanitation, and financial information. It also includes social stratification and community government, community organization (including existence of Water Committees) and NGOs working on the WSS sector in the area. Moreover, willingness to pay and savings practices at commercial or community banks are included, as well as hygiene habits and sanitary practices. Most relevant information is then used to create the project baseline which will be instrumental for the development of the M&E system contemplated under the project design. It is envisioned that community training will include management of the M&E system at the community level. - 85 - 12. Main Conclusions of the Social Assessment 1. The participation strategy is a living instrument. It was tested in the Pilot Projects and improvements were made in the strategy and the instruments used. The strategy may be readjusted for improvement from timne to time. 2. It is recommended that the results of the studies on "Participation, Gender and the Indigenous in WSS Interventions", the study on the "Intervention Strategy for Implementation of WSS projects", and the "Information and Communication Study" be used to refine the strategy for the sector. 3. The promotional campaign should be limited to the targeted municipality to avoid raising false expectations in non-selected municipalities. However, these campaigns should include all the necessary information people need to make informed decisions with regard to technical options and costs, service levels, financial arrangements, timing, community contribution (cash or kind), bank account required, tariffs to be expected, maintenance plans, etc. It is recommended that the technical and financial options be explained up front. 4. For the sake or transparency, the eligibility and prioritization criteria of municipalities, communities and subprojects should be part of the basic information given out to municipalities, OITS and communities. 5. Training and Technical Assistance to communities, municipalities, EPP, EMS, OITS, Water Users Associations is key to project efficiency and sustainability. When training the communities, provisions must be taken to invite a representative number of indigenous people and women. Provisions include sending personal invitations, organizing child care facilities in the community, etc. 6. Communication of objectives, mechanisms, procedures, etc. must be done in the language of the beneficiaries. Also, all the training delivery and information dissemination should ideally be done in the target languages, with the semantic and cultural appropriateness needed to convey messages. One of the most effective vehicles for this is the radio. Topics may include: The Water Users Association, its rights and responsibilities; Contracting NGOs to build water systems; How to open a bank account and savings strategies. 7. The community diagnosis is important to provide information on the socioeconomic situation of the community, its level of organization and commitment, its financial status, cultural practices, etc. It's also important as the baseline to be able to monitor and evaluate impact later on. 8. The community contribution in cash and in kind empowers beneficiaries and promotes ownership. As they learn to manage "their" project, they demand quality service. Although the pilot projects experience (phase I) indicates community willingness to pay 20-30% of project investment, it is important to collect more information before commitments are made. Labor and local materials should be systematically quantified as part of the contribution. 13. Participation, Gender and Indigenous Plan An Action Plan was agreed on by PRAGUAS and the World Bank. It includes : (a) Inter-institutional Workshops to discuss the Strategies for Water and Sanitation in Indigenous communities with a gender focus; a Workshop to discuss the Strategy for Basic Sanitation for the sector; Workshops for women and youth in management of water and sanitation; (b) Elaboration of training and communication materials for program promotion as well as for periodic training of communities, OITS, EMS, and also the PMU/PRAGUAS; some of these materials will be adapted to the different cultural settings in at least two indigenous languages (quichua (official language) and shuar). - 86 - Additional Annex No.: 12 Policy Document for the Water and Sanitation Sector Sub-Secretariat of Environmental Sanitation- SSA Reorganization and Strengthening 1. Background The Sub-Secretariat of Environmental Sanitation (SSA) under the Ministry of Housing and Urban Development (MIDW VI) is responsible for the water supply and sanitation sector in Ecuador. The Sub-Secretary of SSA reports directly to the Minister. The current organization of SSA was implemented in 1992 as part of a sector decentralization strategy. This reorganization led to the abolition of IEOS (Instituto Ecuatoriano de Obras Sanitarias), a centralized agency responsible for service provision and construction of water and sanitation works in urban and rural areas in Ecuador. At the same time, local governments were made responsible for the provision of services and construction of works. Initially, SSA was responsible for general regulatory functions for the sector, including the environment. After the Ministry of the Environment was created in 1994, it took over responsibility for environmental functions. In the past, SSA's effectiveness has been hampered by frequent changes in the central administration and a lack of resources and experienced personnel, all of which undermined SSA's capacity to lead the sector effectively. Key functions such as policy formulation and development, integrated planning and general coordination and strengthening of the sector have rarely been exercised. Moreover, SSA's old responsibilities (including a strong focus on engineering design, supervision and construction of WSS works) lingered for many years, albeit at a reduced level. In some ways, SSA's transformation has indeed been dramatic. SSA has, for example, trimmed its staff from some 2,500 in the early nineties to about 269 people today, of which about half are located in nine regional offices. Nonetheless, SSA's past lack of focus continues to undermine its effectiveness today, as demonstrated by (a) a lack of credibility as sector leader and main coordinator with other sector agencies; (b) an insufficient human resource base with serious gaps in areas such as finance, project finance and economics; and (c) unmotivated personnel. 2. The need for a new SSA The GOE has developed new water and sanitation guidelines, which are to be the seed of a new policy reform agenda to be developed as part of the PRAGUAS Project (see Annex 2). These guidelines call for: * Better definition of the roles and responsibilities of different agencies and stakeholders in the sector and a more decentralized sector environment; * A redefined institutional setup at the local level to foster local participation, oversight and accountability; * Financially self-sufficient, independent and commercially oriented service providers; * Strong promotion of the private sector to participate in financing and operations; * A revamped cost recovery, tariff structure and subsidy policy; and * Strong community participation in the design and operation of demand-driven services in rural and - 87 - peri-urban areas. Developing and imnplementing this sector policy at a national level represents a. huge challenge, as all sector institutions need to shed bad old habits and ineffective policies and embrace a cultural renewal in the way business is conducted. A new sector approach also calls for strong promotion of innovative ideas as well as staff training and oversight at all levels. The proposed sector reform is an ambitious undertaking that requires a strong and committed SSA with the leadership to guide the transformation to a modem and responsive sector. The country's current economic situation poses both a threat to these reforms (as resources will be in short supply for the foreseeable future) and an opportunity to test and implement bold and innovative ideas. 3. Reorganization and Restructuring of SSA SSA has the mandate to be the lead agency to develop and guide the detailed formulation and implementation of the above mentioned policy objectives. The imnplementation strategy calls for a new SSA that is capable of effectively discharging its responsibilities and promoting change at the local level while introducing innovative (for Ecuador) ideas such as PSP, in an environment conducive to the rapid development of the water supply and sanitation sector. SSA should, therefore, become more of a facilitator to promote change and delegate functions to the local level and rural communities. In the first four years, the PRAGUAS Project will support SSA to gradually assume its new responsibilities and consolidate its leadership role. 4. SSA's Main functions and Activities SSA's role and responsibilities in the medium term have been grouped into four key deliverable products: 4.1 Sector Policies and Planning SSA will be responsible for preparing and issuing the sector reform policy and the sector development plan in close coordination with the Ministries of Health, the Environment and Finance, and other major stakeholders. SSA will also take the lead in coordinating sector development programs and identifying key agencies, at all levels, to implement them. The initial four-year sector development plan aims to: * Improve the coverage and quality of water supply and sanitation services; * Increase efficiency in investments and the provision of WSS services; * Promote different forms of PSP and competition through benchmarking; * Support the financial rehabilitation of service providers; * Develop criteria for cost recovery, tariff structure and subsidies; * Develop financial programming for the allocation of national resources and proposed central government budgets supportive of sector development goals; * Identify technical assistance, research and training needs at all levels; and * Promote demonstration projects to validate new organizational structures at the local level to provide incentives to other local governments to reform local services. SSA, with the help of external consultants, will develop these policy and development objectives as well as instruments and strategies to achieve them. - 88 - 4.2 Sector Regulation and Norms SSA, with PRAGUAS support under APL-1, will prepare draft legislation, bylaws and guidelines to support the above-mentioned goals, in close consultation with other relevant ministries and major stakeholders, to cover the following main areas: * Framework legislation to be enacted by the Legislative and Executive branches of Govermment, as appropriate, related to the organization of local services and the delegation of these services to independent public or private sector providers; * Promotion of sector regulation, a participatory approach, and community oversight. These are meant to further clarify existing legislation related to the rights and obligations of service providers, the regulator and consumers. These include: (i) definition of the role of SSA, local governments and communities in the regulation of services; (ii) guidelines for the design of tariff structures, cost recovery and the allocation and management of subsidies; and (iii) service quality requirements for service providers and competition for and in the market; * Technical norms. Update of standards for the design, construction and provision of water supply, wastewater and solid waste services. 4.3 Information system SSA is to develop and manage a sector information system. This product is envisaged as a comprehensive system to help the GOE understand the provision of services, their quality and coverage. It will also provide reliable and timely information to assist SSA and other sector agencies in sector planning, budgeting and programming while promoting competition among service providers. In support of the latter objective, SSA will develop benchmarking indicators to promote competition among service providers and to help improve the productivity of investments and operations. 4.4 Technical Assistance and Sector Coordination A strong new mandate for SSA is to provide technical assistance to municipalities, utilities and community-based organizations which run the services. SSA will also help local govermments in delegating the provision of services to autonomous and accountable public or private operators. The proposed TA includes: * Advice to municipalities and communities in selecting and implementing responsive delegation models (public or private) and in strengthening the capacity of operators to reach universal coverage and improved living standards through sanitary education campaigns; * Assistance to municipalities to develop their capacity to supervise and "regulate" the delegation contracts. The TA will also cover project financing and programming and assistance to structure municipal (urban and rural) investment plans, including tariff structures; * Assistance to community-based organizations or "Juntas de Agua" to enhance their capacity to provide W&S services and help establish productive linkages with the municipalities and other Juntas. This assistance will include (i) the definition of investment programs, financing and cost recovery; (ii) access to technical support; and (iii) guidelines for community participation. It is important to note that technical assistance should be carried out via the corresponding municipality; * Improvement of operations. SSA is to make available a comprehensive set of guidelines and benchrnarking information to help utilities increase efficiency and expand coverage. This would include systems/models for financial administration (billing, collection, cost accounting). It is - 89 - worth noting that this TA will be offered to both private and public utilities. 5. Proposed Organizational Structure The proposed reorganization envisages that all functions to be discharged by SSA will be grouped in two areas or Directorates (a reduction from the existing three): The Sectoral Planning Directorate and the Technical Assistance Directorate. Both directorates will use the existing Provincial Directorates of MIDUVI to help maintain a close interaction with local governments, communities and utilities and to implement the products discussed above. The reorganization also includes the creation of a small unit for fmancial control and administrative support to make processes more agile. Figure 1 shows the proposed structure for SSA. The reorganization of SSA depends on a new organizational culture and values that focus more on leadership and less on supervision. Successful reorganization will also require improved procedures and the creation of integrated multi-disciplinary teams (matrix) in place of separate units. 6. Strengthening of SSA The above reorganization requires that SSA be staffed with qualified personnel in accordance with the proposed functions. To achieve this, SSA needs to recruit new staff, especially in the finance, economic, social and legal areas. Profiles for the required staff have already been defined. It is expected that some layoffs of existing personnel will be required, and severance plans are being finalized. Intensive training is also needed to bring staff skills to an acceptable level and to help SSA rapidly assume its leadership role. To this end PRAGUAS will support the transition and the institutional strengthening plan. This plan will be particularly intensive in TA in the first phase of PRAGUAS. - 90 - Fig. 1 Proposed Organization of SSA Ministerio de Desarrollo Urbano y Vivienda, MIDUVI Subsecretaria de Saemet ........................... 7. Implmentaton Pla Ambiental. SSA Ac n t Direccy on de D eccvn acivenas de Direcariones d Planeacirn Sectorial Promocifn y Provinciales Asistencia Tecnica ....... .......... ... ............................................ t Operational 7. Implementation PLan According to the policy framework and sector development objectives, the main activities to be carried out during the first four years of the PRAGUAS Project are shown in Table 1. -91 - Table 1. Prog ram of Activities Activity Cost Year1 Year2 Year3 Year 4 :__ __ _ _ (000)0000000000000 ;Is I 2s Is 2s is 2s Is 2s 1. Preparatory Phase 290 80 90 70 50 Reorganization SSA 100 XX Demonstration XX XX XX Projects (4 cities) 100 _ Project Monitoring XX System 50 Workshops for SSA 40 XX XX XX ..(3). Promotion of PSP XX XX 2. Implementation 1,320 220 300 300 250 150 100 Phase _ New demonstration XX XX XX XX XX projects (5/year) 320 Monitoring system & XX XX XX benchmarking 100 I Reform Policy Paper 350 XX XX xx xx Regulatory Aspects 450 XX XX XX XX Governance Service Provision Physical Infrastructure Workshops for local 100 XX XX XX XX XX XX Governments & dissemination _ _____ 3. TA to Local 550 40 40 100 100 100 70 50 50 Governments/NGOs __= Benchmarking XX XX XX Dissemination. Anemapa a/ 50 Operators 200 XX Xx xx Local governments & 300 XX XX XX XxX Xx xx xX XX communities Total US$ 2,160 120 130 390 450 400 320 200 150 The implementation plan will be developed in full detail for the first year of the operation and will include monitoring indicators and a feedback mechanism that will be updated every six months. - 92 - Additional Annex No.: 13 Technical Assistance Program for Improving the Provision of Services - PAT Background 1. The Water and Wastewater Sector in Ecuador has had a long history of poor performance, well below the accomplishments of other countries in Latin America. Low service levels of 61% for water supply and 40% for sanitation and the nearly complete absence of wastewater treatment attest to this. Ecuador has 16 utilities in medium and large cities and, in most cases, the water and sanitation service is provided directly by municipalities. Indicators of quality of service point to a worrisome situation. Water treatmnent of any kind is provided in less than 50% of systems; water losses are estimated at more than 50%. In only 16 medium and large cities is there the semblance of a utility, while in the rest of the country water and wastewater services are provided directly by the city government. Very few of these utilities manage to cover their operating costs; billing is deficient and meters, when installed, are often not read. 2. While several factors explain the situation described above, a lack of appropriate service management is undoubtedly the main cause. The existing model of municipally run water services has failed consistently to provide adequate services. Yet, in most cities there is not yet a consensus that utilities should be commercially oriented, autonomous and financially solid agencies, and that the private sector represents a valid and viable option for financing and operating water and wastewater services. 3. The effects of many years of neglect cannot realistically be overcome with rapid fixes. There is a need first to better define the roles of central and local institutions and to strengthen their capacity to play their mandated role in the sector. Severe budget constraints at the central and local levels, the absence of financially strong local utilities and an incipient culture of full cost pricing and payment for services among the population also point in the direction of a slow sector recovery process. These constraints suggest the need to work with progressive local governments to develop innovative demonstration projects where cost recovery and sound institutional/ organizational solutions become the central focus of sector reform to serve the poor. The Government's strategy, designed to support its decentralization and modernization efforts, envisions full responsibility and capacity building of the municipalities to provide the water and sanitation services in areas under their jurisdiction (by delegating to third, autonomous parties as explained below) and bringing substantial private sector participation. The Technical Assistance Program (PAT for its acronym in Spanish) directly supports the above strategy and is envisioned to help operationalize the delegation of WSS services to third parties. PRAGUAS will support the establishment, launching and main operations of PAT. Also, the PAT represents one of the core functions of the reorganized SSA. Objectives 4. The PAT"s main objective is to assist municipalities, water and sanitation providers and consumers in improving service provision for water and sanitation, through delegation and supervision of contracts and strengthening of the capacity of providers. In line with this objective, the PAT has been established to attain the following goals: * Municipalities. (i) Improve their capacity to delegate/contract the services, and follow-up and regulate the delegation contracts, (ii) improve their capacity to manage allocation of grants and subsidies within the general financial policy for the sector, (iii) be able to organize and coordinate - 93 - the technical supply offered by private sector providers, NGOs and other suppliers, (iv) increase awareness and willingness to assess the option of associating with others to gain economies of scale in service provision, and (v) improve health and sanitation conditions. * Community Operators (Juntas). The PAT will provide (i) training and TA to improve their management capacity to effectively provide water supply and sanitation services, (ii) assistance to promote associations of Juntas and, whenever feasible, their transformation into utilities, and (iii) training to protect water resources and improve sanitary conditions. * Private Providers. PAT will assist in: (i) the creation and establishment of private and mixed capital utilities, (ii) strengthening of utilities to improve service provision, (iii) defining the best conditions to allow an enabling regulatory and legal framework for utilities to operate in, and (iv) increasing private inflow of funds and hence diminishing the sector's dependency on public financing. * Service Users. (i) Communities aware of their new role and responsibility with respect to water and sanitation services, (ii) awareness of adequate use of water and sanitation facilities and training on health-related issues, and (iii) awareness and promotion of sustainability in terms of payment for the service and protection of water resources. General Description of the PAT 5. The PAT is a technical assistance program at the national level. It covers water and sanitation services but could also allow for solid waste collection whenever the service is jointly provided. The PAT will focus on municipalities as the core client but communities, providers and customers will also benefit from its products. 6. The PAT will operate by financing studies and technical assistance primarily intended to support the GOE's policy of delegating services to autonomous operators. This delegation involves the capacity to delegate and supervise the contract, and strengthen the operator. In rural areas, where Juntas will provide the service, the PAT will assist with the creation of such juntas and provide assistance and guidelines for service provision by organized communities. In all cases, the PAT will also assist consumers. The proposed assistance will include training events, consultancies and studies, as well as documents and materials. In particular, the program will offer the following products: Preparatorv Phase 7. The preparatory phase entails the establishment of the TA system, and developing the capacity to deliver the PAT's services. The main activities are: * Rules and Regulations for Delegation. The PAT will compile, develop and disseminate documentation on the legal regulatory framework and examples regarding the delegation of services. These include tariffs and subsidies as well as legal and regulatory texts that must be introduced in the delegation contracts. * Demonstration Proiects. The PAT will carry out a group of about 5 pilot projects to better understand the challenges posed by delegation and test different organizational models, as well as to refine the instruments needed for this assistance by the PAT. It is also expected that the pilot delegation cases will serve as models and inspiration for other municipalities to follow. These - 94 - pilots will be the first cases to attempt delegation of the water and sanitation services in the country. These pilots will be carried out in close coordination with BEDE, AME and other sector institutions that are expected to be part of the PAT system. * Promotion and dissemination of the PAT will be a key activity for the program during the preparatory phase. Successful delegation processes are expected to become the best promotion strategy. * Selection of Municipalities. During the first phase of PRAGUAS, the PAT will begin with limited capacity and has therefore established a modest goal for successful delegation processes. The selection of municipalities will need careful consideration and well-founded criteria. Basic elements of these criteria include (i) demonstrated willingness to adopt the new institutional model, (ii) agreement with the sector policy and PRAGUAS regulations, and (iii) higher priority for municipalities willing to select a common operator. * Support to Private Operators and Entrepreneurs. Given the lack of historic demand for services to privately operate the water and sanitation systems, it is no surprise that there are not, as yet, experienced local operators. Experience elsewhere in Latin America indicates that it is improbable that international operators will be interested in the small municipalities. Therefore, the strategy calls for aggressive promotion, adequate information, clear and transparent processes and assistance to local entrepreneurs to build initial capacity to operate systems. e Preparation of Instruments for the PAT. The Program will develop a set of key instruments to facilitate the delegation processes for all parties involved. The include: (i) model terms of reference to prepare the feasibility studies, the bidding documents and the contracts to delegate water and sanitation services, (ii) guidelines to conduct quick diagnostics of a particular system, to help determine the institutional options and to define an action strategy to cany out the delegation process, (iii) guidelines for financial projections and analysis, including a tariff model to analyze financial viability, (iv) tools to develop a municipality's capacity to regulate and follow-up on a delegation contract, and (v) guidelines on institutional! managerial options. The PAT will also develop a manual to guide the provision of technical assistance. 3 Training is also a key activity during the initial phase of PRAGUAS. Training modules will be developed to promote and increase capacity to all actors in the delegation system. The training program will focus on the PAT teams, consultants and municipalities. The PAT will also promote the creation of formal training in educational institutions in Ecuador and will develop a training plan including the modules, contents, duration and identification of candidate trainees. * Monitoring and Evaluation System. The PAT will have a monitoring and evaluation system. This system will be part of the sector information system to be developed under PRAGUAS. Implementation Phase 8. This refers to the normal execution of the PAT, and will focus on actually providing the technical assistance. Phase one will be a prerequisite, as it is expected that service providers will have been identified, all parties trained, instruments developed and municipalities selected. As indicated before, it is expected that during the first phase of PRAGUAS, approximately 15 municipalities would have begun the delegation process and about 8 would have actually completed the process successfully. Phase two and three will expand and at the end of APL-3, not less than 50 of the municipalities would provide WSS - 95 - services under delegation contracts. The PAT will also monitor and assist BEDE and/or other institutions that might contribute to this delegation process. This phase will consist of the following general activities: 9. Support to about 15 Municipalities. The PAT will finance studies and technical assistance to municipalities that abide by the regulations and that have been defined during the preparatory phase. This phase assumes that the functional structure of the program is consolidated and procedures have been clearly established. In brief, interdisciplinary teams in SSA and its regional offices -- in a combined effort with the municipality -- will carry out the following main activities: * Identify the cases and conduct an institutional and financial assessment. * Agree on an action plan with the municipality. * Establish a municipal counterpart. * Consultants carry out the feasibility studies, and assist the municipalities in choosing the most suitable institutional option and the proposed investment program. * The final design, bidding documents and draft delegation contracts are prepared. * In parallel, the design for the regulation at the municipality is developed. * After the documents are approved, the bidding process begins, with consultants supporting the process. * An operator is selected. Service is delegated and operations begin under the responsibility of the operator. * If the options study recommends maintaining a public utility, consultants provide TA for the creation and strengthening of such an enterprise. 10. In addition, this phase will include (i) promotion and dissemination processes, (ii) training to involved parties, and (iii) monitoring and evaluation activities. For each completed delegation, comprehensive evaluations will be carried out. Organization for the Implementation of the PAT 11. The PAT has been designed as a system with several actors providing services under the coordination of SSA. It represents a long-term effort and is one of SSA's key functions. 12. Program Management will be conducted by the Technical Assistance Department in SSA. There will be a program coordinator. The coordinator will perform managerial functions including policy, programming, budgeting, contracting services and management of program execution, coordination of outside institutions and within SSA and MIDUVI, and monitoring and evaluation. Inside SSA, the program will delegate the management of specific plans and programs to TA coordinators. These coordinators will oversee and support operations nationwide based on a geographical division. Provincial Delegations will provide follow-up support and perform various supervision tasks. Most operations will be carried out by consultants or firms that provide multidisciplinary services to prepare feasibility studies, prepare bidding documents, assist throughout the delegation process and provide TA to municipalities in establishing regulatory functions and strengthening utilities. Role of Key Participating Institutions 13. As mentioned above, the PAT involves the collaborative effort of several institutions. The table below shows the main institutions and their proposed role. - 96 - Participant Key Role/Function MIDUVI-SSA Coordinator of the program and responsible for its execution and follow-up. Municipalities The main target of the PAT. Municipalities are responsible for the provision of services to be carried out in a delegated fashion. Autonomous Providers Main beneficiaries of the PAT. Their creation and strengthening is the main purpose of PAT. Community Operators Same as above Technical Assistance Providers PAT will be supported and actually implemented by private consultants. .____________ _ These providers will be trained by the PAT. CONAM/MOSTA General policy framework for modernization of the state. Currently CONAM approves privatization contracts. This function will be transferred to MIDUVI. ANEMAPA Assist with training and dissemination BEDE - Banco del Estado Key participant. As the financial institution for the sector, BEDE will provide financial support and TA for larger municipalities under the policy outlined in PAT. AME Association of Ecuadorian Will support the TA process with promotional events. Municipalities Activities, Costs and General Timeframe 14. Total program cost for the first four years (phase 1 of PRAGUAS) is estimated at US$1.6 million. PRAGUAS will cover the entire cost of this first phase, excluding the incremental operating costs of services provided by SSA's permanent staff. PRAGUAS will not provide financial assistance to other PAT activities carried by other institutions such as the delegation processes under BEDE's coordination. 15. The table below describes the proposed activities under the PAT and its unit and total cost grouped into development phase and actual implementation phase. Costs are based on the assumption that PRAGUAS will support the establishment of the PAT in MIDUVI and that during the first phase of PRAGUAS the program will assist about 15 municipalities. DEVELOPMENT PHASE TYPE UNIT COST TOTAL US$ COST US$ Activities 1. Organization of SSA 2. Define National and Local Regulations Tariff levels Consultant 6,050 18,150 Subsidies systems Consultant 6,050 18,150 Operator instruction & regulation Consultant 6,050 18,150 3. Execution of Demo Projects Introduce 4 pilot projects Municipality 34,810 139,242 4. Dissemination of Executed Projects (3 programs) Programs 10,000 30,000 5. Selection of Municipalities Define selection & priority criteria (1 month) Consultant 6,050 12,100 6. Organization of the Monitoring and Evaluation systems Consultant 6,050 18,150 7. Support Programs Edition and dissemination Program 10,000 20,000 8. Knowledge Update (3 workshops) Workshops 3,230 9,690 TOTAL COST 283,632 - 97 - IMPLEMENTATION PHASE TYPE UNIT COST TOTAL US$ COST US$ Activities 1. Participation with A.T. Development of AT projects in 9 municipalities Municipality 34,810 313,294 Execution of AT projects in 13 municipalities (1 st year) Municipality 34,810 452,535 Execution of AT projects in 13 municipalities (2nd year) Municipality 34,810 452,535 2. Monitoring & Evaluation Systems Maintain monitoring & evaluation system updated Consultant 6,050 24,200 Program adjustment: schedule, tools, tariffs, subsidies, Consultant 6,050 24,200 regulations . 3. Knowledge Update Plan Offer to governments & local authorities Workshops 3,230 12,920 Offer to community & public operators Workshops 3,230 12,920 4. PAT Dissemination Programs 10,000 30,000 TOTAL COST 1,322,604 - 98 - ECUADOR RURAL AND SMALL TOWNS WATER SUPPLY AND SANITATION PROJECT (PRAGUAS) .~~~~~~~~~ . -RI4 E;t z -0,:: :.: 'f :0; S 78A 77' 76' COLOMBIA PACIFIC OCEAN 17 1 . A _~~~M C.k JO e e' M 'gIEA0D OCN P PLOPOETs- K:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~;~ ~~~~~~~~~~~~~~~~~~~~~PERU r . CMTRGOS Sdi.,G L KIO;TL ISSAL _ (ARCHIPiFIAGO DE COLbN} PILOT PROJECT SITFES * SOCIAL ASSESSMENT SITES CIMATIC REGIONS: Gnp yupetrh Psd*hEftr-w 6Mo 25 50 75 00 iAATMIf oEE1A ~ITRAINL8UDRE 7 moxmrcepneTch dmsI I L I I .A .. SLE EDT WS N) RE ChA PROl°NCE 80'IDAS SAN 9LY .I_RR 0 25 50 75 14 2 5 00 MA NERATOALRONARE o El' ES' OLOMKLOMETSRS ISABEL o I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~NTOA AIA