Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12709-BR STAFF APPRAISAL REPORT BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEKENT PROJECT JUNE 6, 1994 Infracstructure Operations Division Country Department I Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS March 31, 1994 Currency Unit: Cruzeiros Reais (CRS) US$1.00 = CR$913.35 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BNH - Banco Nacional da Habitacao INational Housing Bank) BOD - Biochemical Oxygen Demand CEF - Caixa Econ6mica Federal (Federal Savings Bank) CESAN Companhia Esplrito Santense de Saneamento (State Water Company) COFIEX - Comissao de Financiamentos Externos CONSEMA - State Environmental Council CST - Companhia Siderurgica de Tubarao CV - Contingency Valuation CVRD - Companhia Vale do Rio Doce CY Calendar Year DO - Dissolved Oxygen EIB - European Investment Bank FAE - Fundo de Agua e Esgoto (State Water and Sewerage Fund) FGTS - Federal Government Employees' Pension Fund FY - Fiscal Year IBAMA - Brazilian Institute of the Environment and Renewable Natural Resources ICB - International Competitive Bidding IDB - Inter-American Development Bank IDC - Interest During Construction IERR - Internal Economic Rate of Return IFRR - Internal Financial Rate of Return IPC - Consumer Price Index LAF - Loss Adjustment Factor LCB - Local Competitive Bidding LRMC - Long Run Marginal Cost MCC - Marginal Capacity Costs MCL - Minimum Consumption Level MMC - Minimum Monthly Charge MOC - Marginal Operating Cost MPN - Most Probable Number of Coliforms MSW - Ministry for Social Welfare NTL - National Tariff Law O&M - Operation and Maintenance OCC - Opportunity Cost of Capital PLANASA - National Water Supply and Sanitation Program PMU - Project Management Unit PNMA - National Environmental Program RIMA - Environmental Impact Assessment SEAIN - Secretaria de Assuntos Internacionais (International Affairs Secretariat) SEAMA - State Secretary for the Environment SENAM - Environmental Secretariat SIVIG - Global Feasibility Simulation SNS - National Secretariat for Water Supply and Sanitation SWC - State Water Company TOR - Terms of Reference UFW - Unaccounted-for Water WTP - Willingness to Pay FOR OFFICIAL USE ONLY BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY ......................... v I. INTRODUCTION .1 I1. WATER QUALITY MANAGEMENT IN ESPIRITO SANTO. 2 A. Background.. 2 B. Current Water Quality Conditions.. 2 C. Sources of Pollution ..3 D. Institutional Organization ..3 E. Legal and Regulatory Issues ..4 F. Investment Priorities ..5 G. Sector Financing and Tariff Policy .............................. 5 H. Poverty Alleviation .............................. 6 I. Bank Experience and Strategy .............................. 6 1. Bank Experience .............................. 6 2. Bank Strategy ................................ 7 Ill. THE PROJECT ..................................... 8 A. Background.. 8 B. Objectives and Rationale.. 8 C. Description ..9 D. The Borrower and the Executing Agencies ..10 E. Demand Projections ..11 F. CESAN's Investment Program ..11 1. Investment Priorities .11 2. Main Components .12 3. Technical Evaluation. 13 G. Project Cost .14 H. Tariff Analysis.. 15 I. Financial Analysis ..16 1. Project Financing. 16 2. CESAN's Past and Present Financial Performance. 17 This report is based on the findings of an appraisal mission which visited Brazil from November 3 to 18, 1993. The report was prepared by Carlos E. V6elz, Task Manager/Senior Economist; Yoko Katakura, Financial Analyst (LA1IN); and Juan D. Quintero, Environmental Specialist (LATEN); with the assistance of Gloria Bernero (LA1 IN). Abel Mejfa, Water Resources Engineer; Frannie Humplick, Economist (LA1 IN); Luz Marfa Gonzalez, Economist/Financial Analyst; Alvaro Orozco, Environmental Engineer; and Ronaldo Seroa da Mona, Economist (Consultants) panicipated in project preparation. Roberto Bianchi of CESAN coordinated project preparation in Brazil. Amaury Fontenelle, Financial Analyst/Consultant, coordinated CESAN's preparation of its financial projections, and Diomira Faria, Economist/Consultant, performed the field work for the contingency valuation studies. Asif Faiz, Orville Grimes. and Rainer Stackhan are the managing Division Chief, Project Advisor, and Depanment Director, respectively, for the operation. Manuel Mariflo (TWUWS) and Antonio Estache (WDR) are the peer reviewers for the project. This documnent has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (continued) Page No. 3. CESAN's Projected Financial Performance ...................... 19 4. Financial Transfers of the State .......... ................... 21 J. Environmental Impact .................................... 21 K. Poverty Alleviation and Affordability ............................... 22 1. Urban Poverty Impact .................................... 22 2. Affordability ....................................... 23 L. Project Benefits ........................................ 24 1. Economic and Financial Benefits . ........................... 24 2. Rates of Return ..................................... 25 M. Risk Assessment ................. ................... 25 IV. PROJECT IMPLEMENTATION .................... 26 A. Implementation Arrangements ................................... 26 B. Subproject Selection Criteria ................................... 27 C. Project Supervision . ................................... 27 D. Reporting and Monitoring ..................................... 28 E. Procurement ........... .......................... 29 F. Disbursement ........ .............................. 30 G. Advance Contracting and Retroactive Financing ....... ................ 30 H. Accounting and Auditing ....................................... 31 V. AGREEMENTS TO BE REACHED AND RECOMMENDATION ..... ................ 31 LIST OF TABLES 1. Project Cost Summary .14 2. 1994-1999 Investment and Project Financing Plans of CESAN and SEAMA .17 3. Project Cost by Procurement Method .29 LIST OF FIGURES 1. Current Distribution of Service Interruptions .23 2. Expected Distribution of Service Interruptions after Project Implementation .23 LIST OF ANNEXES 1. Bank Loans for Brazil Water Supply and Sewerage ....... .................... 37 2. Pollution Sources ................. 38 3. State of Industrial Pollution Control in Espirito Santo .'42 4. Water Quality Matrix ........................................... 44 5. Organization Charts ........................................... 48 6. Institutional Data: CESAN and SEAMA ................................... 51 7. Water Supply and Sewerage Systems Distributed by Size ...... ................ 53 8. CESAN's 1994-1999 Investment Program ......... ....................... 54 9. Institutional Strengthening Program . .................................... 61 10. CESAN Water Supply and Sewerage Tariffs .......... ..................... 64 11. Marginal Cost Pricing Analysis: Methodology and Results ...... ................ 73 - jjj - TABLE OF CONTENTS (continued) Page No. 12. Financial Statements .......... 82 13. Assumptions Underlying CESAN's Financial Forecasts ........................ 85 14. Transfers of the State of EspIrito Santo to CESAN ........ ................... 93 15. Environmental Assessment ......................................... 94 1 6. Cost-Benefit Analysis: Methodology and Results ........................... 101 17. Project Flows: Legal, Financial and Technical .............................. 111 18. Guidelines for Evaluation of Subprojects . ................................ 112 19. Supervision Plan ......................................... 116 20. Monitoring Indicators .......................................... 118 21. Bid and Consulting Services Packages . .................................. 123 22. Loan Disbursement Schedule ......................................... 129 23. Selected Documents Available in Project File .......... .................... 130 LIST OF MAPS IBRD 25606 .135 IBRD 25646 ......................................................... 136 - v BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT STAFF APPRAISAL REPORT LOAN AND PROJECT SUMMARY Borrower: State of Espfrito Santo. Beneficiaries: State Water Company of Espfrito Santo (CESAN) and State Secretariat of the Environment (SEAMA). Guarantor: The Federative Republic of Brazil. Executing Agencies: CESAN and SEAMA. Amount: US$154 million equivalent. Terms: Repayment in 15 years, at the Bank's standard variable interest rate, with a grace period of five years and loan amortization based on level repayments of principal. Proceeds of the Loan will be on-lent by the State of Espfrito Santo to CESAN on the same terms and conditions as those of the Loan. CESAN will bear the foreign exchange risk. Project Objectives: The specific objectives of this project are: (i) to improve the efficiency of CESAN's water supply and sewerage systems by supporting the company's efforts to operate on a commercial basis with financial self-sufficiency; (ii) to increase the coverage level of CESAN's water supply and basic sanitation services (i.e., sewage collection, treatment, and disposal) in the urban areas of Grande Vit6ria, Guarapari, Castelo, luna, S3o Gabriel da Palha, Nova Venecia, and Conceig5o da Barra, and other towns located in the Santa Maria and Jucu river basins; and (iii) to provide appropriate water and sanitation infrastructure in low-income urban areas of Grande Vit6ria and Guarapari. By achieving these specific objectives, the project will allow to expect: {i) an improvement in the quality of life of about 1.2 million urban inhabitants of the State of Espfrito Santo; (ii) a reduction in the incidence of oral-fecal diseases; and (iii) an improvement in the quality of water for human consumption and recreational uses through the restoration and protection of the environmentally deteriorated rivers that feed the urban areas of Grande Vit6ria and Guarapari, and the estuarine and coastal areas within and adjacent to these municipalities. Project Description: The project comprises an investment component to help finance CESAN's 1994-1999 investment program and an institutional component to strengthen the institutional capabilities of both CESAN and SEAMA. CESAN's proposed investments in water supply will significantly improve systems operation, eliminate existing bottlenecks, incorporate low-income urban areas into CESAN's systems, and increase the service coverage level in the State by about two percent (to 93 percent). The sanitation subcomponent includes the construction of 12 sewerage systems and 10 sewage treatment plants, to increase the service coverage level in the State by about 32 percent (to 43 percent). CESAN's institutional strengthening component seeks to - vi - improve the company's management capacity, operational efficiency, and financial performance through studies, technical assistance, and training in selected areas. SEAMA's institutional strengthening component seeks to reinforce its institutional capacity for water resources management and monitoring of water quality and pollution control; to design and implement environmental information systems and education programs; and to improve its operational and administrative capability. Poverty Aspects: The water supply component of this project is mostly targeted towards the poor. By the end of project implementation, more than 358,000 beneficiaries {about 56 percent of total water component beneficiaries) will be urban poor earning less than two MS. In addition, about 33 percent of the population targeted to receive sewerage services under the project will consist of families earning less than 3 minimum salaries (MS). Environmental Aspects: The project will have a significant positive impact on the environmental quality of the rivers, estuarine ecosystems, and tourist beaches of Grande Vit6ria and Guarapari. All project subcomponents are designed to upgrade the deteriorated environmental conditions and to set up efficient environmental management for the future. Existing and projected environmental quality conditions indicate that without the project, increasing pollution levels will have severe adverse impacts on health and welfare, arising from impaired water use in the project area. On the other hand, improved water quality conditions resulting from the project will have positive impacts on health, natural ecosystems, tourism, and quality of life--particularly of the poor. There are no land use conflicts at the proposed sites and no resettlement is involved. Project Benefits: At the end of the implementation period (December 1999), the project will have directly benefitted about 640,000 people with potable water (395,000 with in-house connections and 245,000 with fewer hours of rationing) and about 770,000 people with sewerage and sewage treatment services. It is estimated that about 78 percent of the beneficiaries of water investments and 33 percent of the beneficiaries of sanitation investments are in the poverty group--households earning less than 3 Minimum Salaries (MS) per month. The principal project benefits will be: (i) better water quality in Esp(rito Santo rivers and marine areas, enhancing tourism activities and other water uses, and improving recreational areas for the urban poor; (ii) better quality of life and environmental conditions in the project area; (iii) better hygienic conditions that will in turn help to decrease infant mortality and to reduce the incidence of water- borne diseases; (iv) the preservation of water supply sources for the urban areas of Grande Vitoria and Guarapari; (v) the preservation of water quality in coastal ecosystems such as mangroves and coastal lagoons; and (vi) a temporary but significant generation of employment. Project Risks: The main project risks relate to Brazil's macroeconomic performance and political conditions. Sector and project priorities could change and the amount of State counterpart funds available for the project could be decreased accordingly. Other risks pertain to a lack of effective abatement of water pollution from industrial sources in specific areas, and a deterioration of CESAN's internal financing capacity resulting from operational inefficiency and inadequate tariff adjustments. The political uncertainty is already somewhat diminished by a broad consensus that the long-neglected basic sanitation sector urgently needs support and a fundamental reorientation of policies and practices. It is also minimized by the consistency between project objectives and the commitment of the federal and the State governments to improve the environment, to increase the efficiency of the public sector, and to strengthen public sector finances. - vii - The risk of inadequate counterpart funding is largely reduced by the intention of the European Investment Bank to finance a large part of the State counterpart. In relation to CESAN's internal financing capacity, achieving the targeted tariff level and operational efficiency is crucial to the success of the project. Strong support from the State to help attain the projected tariff level and operational efficiency of CESAN and the institutional strengthening of both SEAMA and CESAN will help achieve expected benefits and avoid potential risks. To further minimize project risks: (i) a continuous dialogue will be maintained with the present and future authorities, both at the federal and local levels, to assure understanding of and support for the project; (ii) project implementation would be closely supervised; (iii) complementary actions in industrial pollution control, municipal solid waste collection and disposal, and management of water resources and protected areas will be developed through SEAMA's institutional strengthening program; and (iv) a mid-term review will assess project implementation performance. Project Cost: (US$ million) Component Local Foreign Total Water Supply 56.3 14.1 70.4 Sewerage 133.2 33.3 166.5 Operational Development 8.1 2.0 10.1 CESAN Institutional Development 6.3 1.6 7.9 SEAMA Institutional Development 6.4 1.6 8.0 Project Management & Supervision 3.8 1.0 4.8 * Total Base Cost 214.1 53.6 267.7 Physical Contingencies 10.7 2.7 13.4 Price Contingencies 21.5 5.4 26.9 * Total Project Cost 246.3 61.7 308.0 Financing Plan: (US$ million) Source Local Foreign Totat World Bank 92.4 61.6 154.0 State of Espfrito Santo 92.5 0.0 92.5 CESAN 61.5 0.0 61.5 * Total 246.4 61.6 308.0 Estimated Bank Disbursements: (USS million) Bank fiscal Year 1995 1996 1997 1998 1999 - 2000.- - Annual 41.4 30.6 32.6 30.0 15.0 4.4 Cumulative 41.4 72.0 104.6 134.6 149.6 154.0 - viii - Rate of Retum: The internal economic and financial rates of return of CESAN total investment program are estimated at 33% and 15%, respectively. Maps: IBRD No. 25606 and IBRD No. 25646. BRAZIL ESPIRITO SANTO WATER AND COASTAL POLWTION MANAGEMENT PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1. The Brazilian water sector underwent a period of rapid expansion of infrastructure investment and achieved impressive results during the years following the establishment of the National Water and Sanitation Program IPLANASA) in 1971. Increased urban water supply coverage 145 percent in 1970) was assigned top priority and a 90 percent goal was set for 1985. The actual achievement was an impressive 83 percent by 1983 184 percent by 1991). However, this gain was not matched by performance in other areas. As regards sewage collection, both the target and the actual result were modest. The percentage of people connected to urban public sewerage increased from 24 percent in 1970 to 37 percent in 1991, as compared to a target level of 50 percent in 1985. Sewage treatment is minimal as only 10 percent of total wastewater receives some form of treatment. In most locations, raw municipal and industrial sewage is discharged directly into rivers and coastal waters. While coverage of solid waste collection increased from 49 percent in 1981 to 60 percent in 1988, insufficient municipal solid waste collection and disposal remains a major problem, contributing to a combination of land, air and water pollution. Except in a few municipalities, most collected solid waste is disposed uncontrolled in open-air dumps or water courses; incineration or composting are seldom used; and recycling is rare. Action in treatment and proper disposal of sewage and solid wastes has been hampered by: li) low and often misallocated investments, combined with inadequate and inappropriate cost recovery; (ii) low priority often given to environmental concerns by water companies; (iii) inadequate capacity to enforce environmental regulations and standards at all government levels; (iv) high turnover and instability in water companies' management and the resulting lack of continuity in sector policy making; and Iv) insufficient coordination among different levels of Government. 2. The State of Espfrito Santo, a border state between the impoverished northeast region and the relatively richer southeast region, exemplifies the constraints affecting Brazil's water and wastes sector. By 1992, Espfrito Santo's urban water supply coverage level had reached an impressive 87 percent, despite the rapid rate of urban growth and industrialization over the last two decades. However, the increasing discharge of raw domestic and other untreated wastes into Espfrito Santo's rivers, estuaries, and beaches has degraded the water quality of rivers and streams which serve as water supply sources, and has resulted in widespread coastal pollution. In Grande Vit6ria, the State's industrialized capital, streams have become open sewers and most beaches along the urbanized areas of the State coastline are polluted. Of an estimated urban population of 2.05 million, less than 230,000 111 percent) are connected to the sewerage network, and less than 9 percent of total collected wastewater receives some form of treatment. Solid waste collection is below 70 percent and mostly disposed of in uncontrolled landfills, dumps, streams, and the ocean. The increasing level of water pollution is a permanent cause of water-borne diseases and infant mortality. Enteritis and diarrheal diseases constitute the major sanitation-related cause of death. Infant mortality is more than 60 per 1,000 live births, in almost one third of Espfrito Santo's municipalities. Cholera has been reported in the state. 3. The proposed project seeks to improve environmental and health conditions in the urban areas of the State of Espfrito Santo, recover and protect the quality of the State rivers and coastal waters, and improve the operational and commercial performance of the State Water Company (CESAN). To achieve these goals, the project will support CESAN's 1994-1999 investment program, as well as its efforts to operate on a commercial basis with financial self-sufficiency; support the institutional strengthening of both CESAN and the State Secretariat for the Environment ISEAMA); promote corporate autonomy and institutional accountability of sector agencies; and assist SEAMA in preparing and implementing complementary measures for industrial water pollution control, including the development and consolidation of a water resources management system, solid waste collection treatment and disposal, and protection of coastal ecosystems. 4. The remainder of this report is structured as follows. Chapter II discusses water quality management in Espfrito Santo--with special emphasis on institutional, pollution, and financial issues, as well as Bank experience and strategy in dealing with Brazil's water and wastes sector. Chapter III describes the project's scope, objectives, and rationale, and presents the results of its technical, economical, financial, environmental, and social assessment. Chapter IV describes the project's main implementation features, including supervision-related tasks. Finally, Chapter V summarizes the main agreements reached with Brazilian authorities. II. WATER QUALITY MANAGEMENT IN ESPIRITO SANTO A. Background 5. The explosive urban growth and industrialization that has taken place in Brazil over the past several decades have been accompanied by increasing urban environmental degradation. The discharge of raw domestic wastes and untreated industrial and agricultural wastes into water bodies has caused significant water pollution. The environment and the quality of life have deteriorated seriously in the larger metropolitan centers and heavily industrialized areas, and water pollution has become a major problem. Water pollution has resulted from two basic and interrelated reasons: the environmentally uncontrolled industrialization and the inability to create appropriate urban and sanitation infrastructure, particularly for the very poor who invade vacant areas close to the water bodies to establish favelas. Typically, the degradation process starts with industries and households discharging untreated wastes into the natural drainage system, and with favelas invading hazard-prone lands located mostly on river banks and steep slopes, generally ill-suited for provision of basic infrastructure. In addition, inadequate sectoral investments and unrealistic zoning practices have resulted in unmet demand for environmental infrastructure, especially for controlling floods and collecting and treating wastes. 6. Brazil's performance in the area of water pollution management has been very poor. A failure to institute sound pricing policies for both the provision of services and the use of resources has contributed to poor environmental management and inadequate provision of infrastructure. In general, pollution control has been seriously constrained by inadequate levels of investment, lack of appropriate cost recovery, ineffective technology, insufficient coordination between different levels of Government, inadequate capacity to enforce environmental regulations and standards, and limited involvement of users and NGOs. B. Current Water Quality Conditions 7. Water quality remains in relatively good condition in the upper reaches of the Santa Maria, Jucu, Jabutf, Perocao, and Una river basins--the water supply sources for Grande Vitoria and Guarapari. However, these rivers pick up a heavy load of domestic and industrial wastes as they flow through urban centers and industrial areas. Since the provision for sewerage and sewage treatment facilities has not kept up with urban growth, a large volume of raw sewage is discharged directly into urban drainage channels, rivers, bays, and beaches. Of an estimated urban population of about 1.2 million in Grande Vitdria and Guarapari, less than 15 percent have their collected wastewater receiving some form of treatment. Organic waste assimilation in these rivers is generally good, but coliform levels exceed federal water quality standards. Certain areas of the estuarine ecosystems are heavily polluted and water use conflicts--especially for recreational purposes--are evident In most of the beaches of Grande Vitdria and Guarapari. Mangrove ecosystems, coastal lagoons, and related aquatic ecosystems are affected by oxygen depletion and suspended solids. Furthermore, these ecosystems-- - 3 - whether legally protected or not--are constantly under pressure from uncontrolled urban expansion. As a result, the quality of water resources in the project area has diminished markedly and does not meet the standards proposed by the State. C. Sources of Pollution 8. Domestic and industrial wastewater and uncontrolled solid waste disposal are the main sources of pollution of the aquatic ecosystems of Grande Vit6ria and Guarapari areas. Pollution sources and estimated pollution loads--in terms of BOD and coliform--are presented in Annex 2. As shown in that Annex, domestic sewage is the main pollutant, although solid waste disposal on or near streams and other water bodies is also a significant source of pollution. 9. The current low coverage of CESAN's sewage collection and treatment system imposes loads of over 60 tons/day of Biochemical Oxygen Demand (BOD) and 1017 Most Probable Number of Fecal Coliforms (MPN) per day on receiving riverine and estuarine water bodies in the project areas. Coliform levels over 8,000 MPN/1 00 ml in the Vit6ria Bay and the Cariacica beach substantially exceed the 250 MPN/1 00 ml of federal standards for swimming and other water contact sports. The Passagem canal and the urban segments of the Formate/Marinho and Bubu rivers are also heavily polluted. 10. Industrial activities in Grande Vit6ria--mainly steel mills, beer, chocolate and soft drink factories, and meat processing plants--exert an organic load equivalent to 8 percent of the total. The industrial water pollution control program being implemented by SEAMA has addressed all major industrial polluters in the area with relatively good results, although enforcement of effluent standards is difficult because of SEAMA's institutional weaknesses. The National Industrial Pollution Control Project (L3480-BR) identified major water polluting industries eligible for financing of treatment systems. Most of these industries lAnnex 3) have installed wastewater treatment systems, but very few have requested loans under the Project. 11. Although water pollution by major industries no longer represents a high percentage of the overall pollution load, there is still a significant number of medium- and small-size industries that could impair water quality recovery in specific regions located within the project's area of influence. Accordingly, the strengthening of SEAMA's industrial pollution control programs will be an important element of the project. 12. Uncontrolled solid waste disposal systems in most municipalities of the area represent an important potential source of pollution, particularly in the Cariacica beach, Bubu river, and Vila Velha areas (the estimated population contributing to the organic solid waste load is 950.000 inhabitants). A solid waste collection and disposal program for all municipalities in the area should be implemented to consolidate the environmental objectives of the project. This is incorporated into the project through the strengthening of SEAMA's solid waste program, which will allow SEAMA to assist the municipalities in carrying out feasibility and design studies for municipal solid waste collection and disposal systems. D. Institutional Organization 13. The State of Espfrito Santo has played a direct management role in operations of the water supply and sanitation sector through ownership and operation of the State Water Company of Espfrito Santo (CESAN) and management of the State Water and Sewerage Fund (FAE). The federal government has had an important policy-making role in the sector in the past. It exercised responsibility for approval of overall sector investment levels and priorities, and through PLANASA and the National Housing Bank IBNH) and Caixa Economica Federal (CEF), regulated sector activities by establishing tariff and cost recovery policies, credit terms, and other normative guidelines. The decentralization reforms brought about by the Brazilian Constitution of 1988 established that urban development and, consequently, water and sanitation programs, would be managed by the municipalities under federal guidance This decentralized approach to managing the sector has enhanced the role of state and municipal governments in sector organization and regulation. Tariff- setting, for example, was formally transferred from the federal authorities to the states--with so far very positive results for the financial health of most State Water Companies (SWCs). 14. The National Secretariat for Water Supply and Sanitation (SNS), created in 1988 within the present Ministry for Social Welfare (MSW), is responsible for: (i) setting national sector policies for water supply and sanitation; Oii) consolidating planning and investment priorities; iiii) coordinating federal activities with state and municipal initiatives; and (iv) supporting the MSW in its function as manager of the Federal Government Employee's Pension Fund (FGTS). To this end, SNS promotes, helps prepare and finance (mainly with federal budget and FGTS funds lent through CEF as financial intermediary), and supervises sector investment projects and operations. 15. The technical agency responsible for water quality planning and control in the State of Esptrito Santo is the Secretaria de Estado para Assuntos do Meio Ambiente (SEAMA). SEAMA's functions include the enforcement of environmental regulations, the inventory of pollution discharges, the licensing of new industries, and water quality monitoring of State rivers. SEAMA is also responsible for supporting municipalities in setting up local institutions and controls for environmental protection. The constitution of the State of Espfrito Santo stipulates that protection of the environment (especially water resources) is a public function of shared interest among municipalities, and falls under the purview of State management. Meanwhile, the State Council for the Environment is responsible for the implementation of the National Policy for the Environment. 16. Federal government responsibilities for water quality management are channeled through the Environmental Secretariat (SENAM) under the Presidency, and relate mostly to issues of water standards and quality criteria. The Brazilian Institute of the Environment and Renewable Natural Resources (IBAMA) is responsible for formulating and enforcing federal environmental regulations derived from the National Environmental Program (PNMA). The current PNMA, defined by a 1981 law that sought to make social and economic development compatible with the preservation and quality of the environment, provides four policy tools: (i) environmental standards; (ii) environmental zoning; (iii) environmental impact assessments (RIMAs); and (iv) environmental data bases. Licensing is required for all new investments and projects that could possibly cause environmental damage. This includes industries, housing developments and physical infrastructure. RIMAs have been mandatory since 1985 and are used by the states to impose a combination of technological and emission standards, through the licensing procedure. Environmental concern has become widespread at all governmental levels. State level responsibilities include the execution of programs and projects and the control of activities that could adversely affect the environment. States are also responsible for the preparation of norms and standards to complement those enacted by IBAMA. E. Legal and Regulatory Issues 17. The sector has evolved from a situation of abundant financial resources and large untapped demand in congested and wealthy urban areas, to the present situation of constrained investment resources, new water demand primarily in less densely populated and poor urban areas, and increasing environmental concerns. Specific legal and regulatory concerns pertain to: (i) tariff policy design: in particular, cost recovery of sewage treatment and disposal facilities, and the extent to which externalities, such as sewage quality and environmental damage, are accounted for in the tariff; (ii) tariff policy enforcement; (iii) the creation of an independent expert regulatory commission to monitor and enforce license conditions, negotiate license modifications, and control prices; liv) financial policy for sector companies, including availability and terms of financing for sector investments; (v) incentives and/or barriers to competition, including the possibilities of creating public or private regional companies; and (vi) quality, health, safety, and technical standards. - 5- 18. The State of Espfrito Santo in particular would benefit considerably from a water law. Such a law should include a clear definition of responsibilities and functions of the State and municipalities; the definition of mechanisms to guarantee the financial and corporate autonomy of sector utilities; and general guidelines on tariff policy, cost recovery through non-tariff mechanisms, private sector participation, and mechanisms of surveillance and control. Strengthening the corporate autonomy of CESAN and other water and sanitation operating agencies in the State would be a key objective of such legislation. 19. Espfrito Santo is perhaps the leader among Brazilian states in the use of Contract-Plans. Contract-Plans are public management tools that allow the government to grant corporate autonomy to the companies it commands, periodically evaluating their performance against carefully selected monitoring indicators. Contract-Plans were introduced in Esp(rito Santo's public administration in September 1991, and there is one now in effect between CESAN and the State. Nonetheless, this instrument should be strengthened to address the following issues: {i) monitoring indicators; (ii) system of penalties and incentives linked to the Contract's specific objectives; {iii) labor policy; (iv) CESAN's corporate autonomy and accountability; and (v) reasons for modifying and/or terminating the Contract. In addition, an effective implementation of this Contract would require a review of existing laws, a review of CESAN's statutes, the development and implementation of appropriate management information systems, and the institutionalization of regular and independent auditing. 20. The current environmental legislation relating to Espirito Santo's water and wastes sector should be revised to address the following priority areas: (i) the management of water resources in the State, including the establishment and operation of water basins, and the operation of ports; (ii) the promulgation of a State Code for the Environment; (iii) the creation of a State Fund for the Environment; and (iv) the functions, policies, instruments, responsibilities, financing and cost recovery mechanisms concerning solid waste collection and final disposal. F. Investment PrioritTes 21. The lack of resources during the 1 980s compelled BNH and CESAN to give priority to efficiency in investment and operations. Economic selection criteria for subprojects were introduced and water conservation programs were initiated. Despite these actions, inadequate levels of investment have led to deficiencies in the existing delivery systems. More than one-half of the population with access to public water systems receives less than fully satisfactory services, including some rationing. There is a clear need for: (i) investments with emphasis on more efficient maintenance practices, improved cost control, additional attention to the rehabilitation of existing networks, and operational efficiency- including a clearly defined program for reducing unaccounted-for water (currently at about 39 percent); and (ii) adherence to established economic, technical, environmental, and financial project selection criteria. G. Sector Financing and Tariff Policy 22. Sector financing has traditionally been based almost completely on borrowing, with most of the funds derived from the earmarked FGTS. This financial policy of heavy dependence on public funds and subsidies has always been unsatisfactory. First, financing from the FGTS funds has been erratic because decisions are made on an annual basis, contract by contract, and not for complete projects. Second, neither CESAN nor the rest of the SWCs has been financially motivated and administratively able to explore other sources of financing. However, it has been only during the years of strong limitations on state borrowing and the fiscal constraints imposed by the federal govemment, that the negative effects of this policy on the sector's financial health have become apparent. Internal cash generation, through adequate tariff structures and levels such as those proposed under the project, should become a stronger and more reliable source of investment funding (see paras. 77 to 80). - 6 - 23. The Bank has been closely Involved with the Brazilian authorities in the design of water and sewerage tariffs over a long period of time, and participated in the formulation of the National Tariff Law (NTL). Although the NTL is a major step towards securing the financial health of the SWCs, it contains some deficiencies with regard to the tariff structure: i1) it does not necessarily convey the right economic signals because it is based on accounting costs; (ii) it gives inadequate guidance on the degree of cross-subsidies for the financing of services to the poor, (iii) it does not appropriately address the issue of cost recovery for water pollution and other externalities; (iv) it gives inadequate guidance on the relationship between water and sewerage charges; and (v) the suggested structure of charges to be applied to large and small consumers is not appropriate. In addition, the NTL has failed many times to achieve its financial objective (i.e., operational revenues high enough to cover all administrative, operation, and maintenance costs, plus a suitable return on fixed assets), because of the lack of appropriate asset valuation (the companies' margin for tariff increases has been substantially reduced by the legal 12 percent upper limit for return on net operating fixed assets), and, principally, by weak enforcement of the law. H. Poverty Allevlation 24. For the past several decades, poverty in Brazil has become increasingly an urban problem. Although absolute numbers show the poor are about 47 percent urban and 53 percent rural, the rate of growth of the urban poor has increased, while that of the rural poor has declined-V. Reductions in public expenditures for infrastructure and increases in tariffs for infrastructure services are likely to worsen the situation of the poor in the short- to medium-term, as the country attempts to achieve stabilization and growth. Since the provision of infrastructure services is linked to poverty alleviation both indirectly (through growth) and directly (through access to, and targeted subsidies within, the provision of such services), additional effort needs to be made to link infrastructure policy and investment interventions to the needs of the poor. 1. Bank Experience and Strategy Bank Experience 25. The Bank has actively participated in the development of the Brazilian water sector. Since 1971, 18 water and sanitation loans (US$2.03 billion) have been approved to support the objectives of federal and local governments. Although priority has been given to water supply, substantial investments have been recently approved for sewage collection, treatment and disposal. Basic data, including the current status of each operation, are summarized in Annex 1. These operations have helped to achieve: (i) effective decentralization of most water sector responsibilities to the states, including the establishment of strong SWCs; (ii) application of sound economic principles for project selection and investment; (iii) enactment and application of basic water tariff legislation; liv) establishment of a uniform accounting system; and (v) standardization of financial, commercial, and administrative procedures in the SWCs. 26. Ongoing Bank projects in this sector in Brazil include the Water Project in the State of Sao Paulo (L3102-BR), the Water Sector Project for Low-Income Areas and Municipalities IL2983-BR), the Water Sector Modemization Project (L3442-BR), and the Water Quality and Pollution Control Projects for the federal government, Sao Paulo, Parana, and Minas Gerais (Loans 3503, 3504, 3505, and 3554- BR). Several municipal development projects also include important components for water supply, sewerage, solid waste, and drainage. The Water Sector Modernization Project seeks to assist Brazil in the reformulation of the sector's organization and objectives, with primary emphasis on improving -V See Fox, M. Louse 1 S990), Povwf AlrAU tlon in Brazi. 1970487, The World Bank, Internm DOcussion Paper, Latin Aneries and the Caribbean Region. its economic efficiency through the use of commercial practices and regulatory arrangements that foster competition. The Water Quality and Pollution Control Projects, the Bank's first self-standing municipal water pollution control projects based on a comprehensive water basin management approach, seek to protect the Guarapiranga reservoir in the Sao Paulo metropolitan area, the upper lguazu river in metropolitan Curitiba (Parana), and the urban basins of the Arruda, da Onga, and das Velhas rivers in the State of Minas Gerais. 27. The need for effective autonomy for Brazil's water and wastes sector is perhaps the most important lesson that has been learned through the years of Bank involvement in this sector. While a satisfactory tariff policy has been in effect since 1978 and appropriate tariff adjustment proposals have been regularly prepared by the SWCs, the federal government's economic and political priorities have in the end been the main determinants of permissible tariff increases, irrespective of the financial situation and investment needs of the SWCs. The overall result has been uncertainty affecting investment planning and financial stability and the need for substantial subsidies in the form of equity contributions. The Bank has mounted a sustained effort to rectify this situation, but the federal government has repeatedly violated the loan covenants that urge full application of the NTL. The haphazard liquidation of BNH and the subsequent transition of its responsibilities to CEF also exemplify the sector's need for effective autonomy. Changes in institutional arrangements should not be externally imposed on the sector, especially when appropriate alternatives have not been carefully thought through and designed. Bank Strategy 28. The Bank's assistance strategy in Brazil is to support policies and investments that will encourage economic growth and social development in the context of both macroeconomic and environmental sustainability. The emphasis is on efficient resource allocation, increased efficiency in the public sector, and the appropriate targeting and delivery of services to the poor. In this context, the ultimate goal for the water and wastes sector is to place sector operations on a commercial basis, with public funds explicitly directed to provide the poor with access to appropriate services, while protecting the environment. In summary, financial self-sufficiency, accountability of the sector agencies, effective pollution management, and poverty-targeting are the basic goals. 29. Measures to achieve these objectives include: (i) an adequate pricing policy for sector financing requirements that allows a reduction in the previous reliance on debt and/or federal or state government financing. Key issues to be addressed by this policy are cost recovery for sewage treatment and disposal, and externalities such as water pollution; (ii) an improvement of public sector management efficiency through operations founded on a sound commercial basis, the introduction of regulatory arrangements to foster competition and private sector involvement, and improved operational planning and marketing; liii) a policy to direct scarce grant and subsidy resources to poverty-stricken and low-income areas, as a prerequisite for lasting structural reforms and the more immediate goals of maintaining service levels in the face of a rapidly growing urban population; and (iv) a consistent set of regulatory policies addressing the issue of water pollution control and prevention, to provide adequate incentives to prevent further pollution from industrial, municipal and agricultural sources. Besides designing appropriate policy instruments such as pollution taxes, quotas, and marketable permits, these policies should establish sector priorities and goals; assign institutional responsibilities; establish the extent and scope of coordination requirements among federal, state, and municipal entities; and define rules for bearing the costs of pollution control facilities and for monitoring compliance with established regulations. Ill. THE PROJECT A. Background 30. Early in 1990, the National Water Supply and Sanitation Secretariat ISNS) at the Ministry of Social Welfare (MSW) began discussing with the Bank the possibility of Bank support for a strategy aimed at economic efficiency, poverty alleviation, and water resources management and pollution control. In accordance with this strategy, and following Bank supported operations for water pollution control in Sao Paulo, Parana, and Minas Gerais (para. 26), the State of Espfrito Santo, CESAN, and SEAMA presented a proposal to the Comissao de Financiamentos Externos (COFIEX) in March 1992, seeking approval for Bank financing for a water and coastal pollution management project. COFIEX approved the proposal in May 1992. The project was identified in November 1992. Three more Bank missions--in February, April, and July, 1993--assisted CESAN, SEAMA, and other concerned State Secretaries in project preparation. The project was appraised in November 1993. On December 16, 1993, COFIEX approved the technical and financial modifications agreed by the Bank, the State CESAN, and SEAMA during appraisal. B. Objectives and Rationale 31. The specific objectives of this project are: (i) to improve the efficiency of CESAN's water supply and sewerage systems by supporting the company's efforts to operate on a commercial basis with financial self-sufficiency; (ii) to increase the coverage level of CESAN's water supply and basic sanitation services (i.e., sewage collection, treatment, and disposal) in the urban areas of Grande Vit6ria, Guarapari, Castelo, luina, S3o Gabriel da Palha, Nova Venecia, and Conceic3o da Barra, and other towns located in the Santa Maria and Jucu river basins; and (iii) to provide appropriate water and sanitation infrastructure in low-income urban areas of Grande Vit6ria and Guarapari. By achieving these specific objectives, the project will allow to expect: (i) an improvement in the quality of life of about 1.2 million urban inhabitants of the State of Espfrito Santo; (ii) a reduction in the incidence of oral-fecal diseases; and (iii) an improvement in the quality of water for human consumption and recreational uses through the restoration and protection of the environmentally deteriorated rivers that feed the urban areas of Grande Vitoria and Guarapari, and the estuarine and coastal areas within and adjacent to these municipalities. 32. To improve efficiency in the delivery of water supply and sanitation services, the project will: (i) support CESAN's efforts to operate on a commercial basis with financial self-sufficiency, through a gradual reduction of budgetary contributions from the State accompanied by a substantial increase in internally-generated funds1'; (ii) help use CESAN's scarce resources efficiently through improved investment planning, cost analysis, and pricing, reinforced by a Contract-Plan with the State government. This Contract-Plan will improve the one currently in effect, making explicit the expectations and responsibilities of each party in carrying out sector activities, including regulation and control, administration, investments, and tariffs; and (iii) promote CESAN's corporate autonomy and institutional accountability, strengthening its management capacity, operational efficiency, and financial performance through an institutional strengthening component. During Loan Negotiations, both the State and CESAN agreed to hold annual reviews of the Contract-Plan, not later than year-end. 33. To increase the coverage level of CESAN's water supply and basic sanitation services, the project will support the company's 1994-1999 investment program. The program consists of an efficient, economically justified, and financially sustainable set of investments for urgently needed extension and quality enhancement of water and sanitation services. In addition to its emphasis on 2I CESAN is expected to contribute counterpart funds amounting to 17 percent of its total 1994-1999 investment cost (24 percent including interest during construction). - 9 - investments to expand CESAN's sewerage systems, sewage treatment plants, and outfall structures, the project will also build and reinforce water supply facilities to eliminate existing bottlenecks, to optimize the operation of CESAN's current delivery systems, to serve new demand resulting from expected population growth, and to give service access to low-income and favela populations living in Grande Vit6ria and Guarapari. 34. To provide water and sanitation infrastructure in low-income areas and favelas in the municipalities of Grande Vit6ria and Guarapari, the project will introduce and implement appropriate technical solutions. These technical solutions will make an important contribution to the improvement of public health and sanitary conditions in the low-income areas and favelas of the municipalities, while assuring that these water quality improvements are environmentally sustainable and socially equitable. The project will also help to improve the targeting of the State grants for water and sanitation projects to low-income urban areas. 35. The quality of life of the population living in the urban areas targeted by the project will improve as a result of: (i) the rehabilitation and expansion of water supply and, in particular, the substantial increase in the coverage level of basic sanitation infrastructure; (ii) the expected reduction in the incidence of oral-fecal diseases; and (iii) the expected improvement in the quality of water for human consumption and recreational uses that will result from restoring and protecting the water quality of State rivers and coastal ecosystems. To restore and protect the water quality of rivers and coastal waters, the project will address some key sectoral issues related to the need: (i) to implement water quality norms and standards for water resources (see Annex 4), compatible with the land use and development plans of the State; (ii) to develop and consolidate a state-wide water resources management system; (iii) to help SEAMA improve its management capacity through an institutional strengthening component; (iv) to review the adequacy of CESAN's current tariff structure and levels, with special emphasis on the issue of cost recovery of water pollution control facilities; and (v) to assist SEAMA in preparing complementary and compatible proposals for dealing with collection and final disposal of solid wastes. C. Description 36. The proposed project comprises an investment component to help finance CESAN's 1994-1999 investment program and an institutional component to strengthen the capabilities of both CESAN and SEAMA, through studies, technical assistance, and training in selected areas. 37. The investment component will help finance CESAN's investment program. The proposed investments in water supply will expand the systems of Grande Vit6ria, Guarapari, Castelo, lI3na, Sao Gabriel da Palha, Nova Venecia, and Conceiiao da Barra (see IBRD Map 25606), eliminating existing bottlenecks; and significantly improve the operation of all CESAN's systems. The expansion of water supply systems will focus mostly on incorporating low-income urban areas into CESAN's systems, through the use of low-cost technologies and substantial community participation. The water supply subcomponent will increase the service coverage level in the State by about 2 percent (to 93 percent). CESAN's proposed investment in sanitation seeks to abate water pollution in Grande Vit6ria and Guarapari as well as in the water basins of the Santa Maria, Jucu, Jabutt, Peroqgo, and Una rivers (see IBRD Map 25646). Domestic wastewater which, at present, is mostly discharged without treatment into rivers, estuaries, bays, and coastal waters will be collected, intercepted, and conveyed to ten wastewater treatment plants located in various urban and rural sub-basins. Wastewater treatment technologies will include both anaerobic and aerobic processes, with additional coliform reduction processes in key units. The sanitation subcomponent will increase the service coverage level in the State by about 32 percent (to 43 percent). Project preparation is quite advanced--engineering designs are ready for nine subprojects accounting for about two thirds of estimated project costs. - 10 - 38. CESAN's institutional strengthening component (Annex 9) seeks to improve the company's management capacity, operational efficiency, and financial performance. The component will include the following activities: (i) a managerial development program to improve CESAN's institutional capabilities to carry out its responsibilities under the project; {ii) a training program for CESAN's operational staff in the areas of planning, marketing, financial, and operational techniques; {iii) a program to institutionalize operational and financial planning; (iv) a sanitary education program; (v) a total quality program to improve CESAN's productivity and response to consumer complaints; (vi) acquisition and development of new management systems, including a restructuring of CESAN's data processing; and (vii) the renovation of laboratory equipment. 39. SEAMA's institutional strengthening component (Annex 9) will: (i) strengthen SEAMA's programs in water resources management, solid waste management, monitoring of water quality, industrial pollution control, and coastal ecosystem protection; (ii) design and implement environmental information systems, and environmental education programs (to be delivered through NGOs and community associations); and (iii) improve SEAMA's operational and administrative capability to identify, prepare, and establish norms, guidelines and procedures for environmental assessment and to review and upgrade SEAMA's organizational procedures and work programs. This component will finance major studies and technical assistance, water quality monitoring and laboratory equipment, information management systems and equipment, technical assistance, training programs, and other materials as needed. D. The Borrower and the Executing Agencies 40. The State of Espfrito Santo will be the Borrower. The State Water Company of Espfrito Santo (CESAN) and the Secretaria de Estado para Assuntos do Meio Ambiente (SEAMA) will be the executing agencies. CESAN will execute the investment component and its institutional strengthening program. SEAMA will execute its own institutional strengthening program. CESAN participated as a beneficiary in the completed Water Supply and Sewerage Sector Project (L2249-BR); it performed satisfactorily and developed a good working relationship with the Bank. SEAMA, which has not directly executed a Bank project, is currently participating as a beneficiary of the National Environmental Project (L31 73- BR), and is performing satisfactorily. 41. CESAN, created in 1967 by the State Laws 2282 of February 8 and 2295 of July 13, as Companhia Espfrito Santense de Saneamento, is a corporation owned by the State government with its headquarters in Vit6ria, the State capital. CESAN--like all SWCs in Brazil--operates under 30 year concessions granted by the municipal governments. CESAN's current area of responsibility covers 49 of Espfrito Santo's 72 municipalities (municipalities under CESAN's area of responsibility are shown in IBRD Map 25606). Within these 49 municipalities, CESAN serves 102 localities with water supply and 10 with sewerage service, with coverage levels of about 91 percent in water supply and about 11 percent in sewerage (see Annex 6). About 86 percent of the State's urban population lives in these localities. CESAN operates 84 water supply and 10 sewerage systems which, due to their relatively small size, are difficult and expensive to operate. Two water supply systems account for almost 80 percent of the total water production while 62 systems produce less than 5 percent. Similarly, one sewerage system collects almost 50 percent of the total sewage collected while 6 systems collect less than 9 percent of the total (see Annex 7). 42. As shown in its organization chart (see Annex 5), CESAN is governed by a Board of Directors appointed by the State Governor for a period of four years. The president of the Board of Directors is the Chief Executive Officer. Each of the other Directors is the working head of one of the operational departments. The Directors are responsible to an Administrative Council charged with such functions as ex-ante approval of investment programs and issuing of new shares. A Fiscal Council is responsible among other things for ex-post approval of all budgets and financial statements. This _ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - --_- ---- -11 - structure is common to most Brazilian state-owned companies and is adequate for CESAN's needs. Institutional indicators for CESAN are presented in Annex 6, Attachment 1. 43. SEAMA, the most important institution in the State's Environmental System, was created in 1988 (Law 4126) as the executing agency for the State's environmental policies and programs. SEAMA is part of the State Environmental Council (CONSEMA), created in 1988, to set and supervise policies and regulations for environmental protection, conservation, and improvement. Other government and non-governmental institutions are also part of CONSEMA. SEAMA's organizational structure, together with the creation of a State Environmental Institute, was recently approved by the State Assembly (see Annex 5). Institutional indicators for SEAMA are presented in Annex 6, Attachment 2. E. Demand Projections 44. Service demand projections for water supply and sewerage are made separately for each of the systems analyzed. The markets analyzed include Grande Vit6ria, Guarapari, Domingos Martins, Santa Maria de Jetiba, and Santa Leopoldina. The key independent variable used in the projection is the number of new connections CESAN expects to hook up to its systems in each market every year. Assuming a long-term price elasticity of -0.30N, total water consumption is estimated as the product of the urban population served and the estimated daily water consumption per capita, which is calculated as the weighted average of seasonal consumption4'. Total water production is computed as the sum of water consumed and unaccounted-for in the transmission and distribution networks11. Total water production is equal to production capacity when the system is being rationed, and to water consumption plus unaccounted-for water when there is enough capacity to satisfy the demand. Urban population served with in-house sewerage connections is estimated as the product of total urban population and projected sewerage service coverage levels. The projected amount of sewage collected in each year is estimated based on the number of sewerage connections CESAN plans to install each year end the annual amount of sewage produced per connection!'. The methodology for projecting CESAN's population, water consumption and production, and sewage collection and treatment is presented in Annex 11. According to this projection, by the end of project implementation (December 1999), the project will have extended water supply and sewage collection to additional populations of about 0.39 and 0.77 million, respectively, increasing CESAN's service coverage from 91 percent to 93 percent in water supply and from 11 percent to 43 percent in sewerage. F. CESAN's Investment Program 45. The project is conceived as an integrated water pollution control program for Grande Vitdria, Guarapari, and other smaller localities (see IBRD Maps 25606 and 25646). The scale and timing of physical infrastructure is designed to obtain quantifiable results regarding water resources recovery and conservation in terms of water quality indicators. Project sustainability is assured by integrating the pollution control program with CESAN's six-year investment plan, which also includes increasing 3/ A long-term price elasticity of -0.30 was estimated from the results of a field survey performed as part of a Contingency Valuation (CV) study. 4' Seasonal water consumption is calculated based on CESAN's last three years of records of a sample of users who, during this period, have had moters and have not been subject to rationing. Seasonal variations are minor in Grande Vitoria but highly significant in Guarapari, where the population increases sharply during the tourist season. I/ The average unaccounted-for-water level is assumed to decrease during the project implementation period as a result of the actions to be taken under the institutional development program, and to remain steady at its 1998 level afterwards. e/ The volume of sewage produced per connection has been estimated at 85% of the volume of water consumed. - 12 - coverage of potable water supply in the area and an institutional strengthening program. Annex 8 contains CESAN's detailed investment program for 1994-1999. Environmental monitoring and achievement of environmental objectives will be guaranteed via SEAMA's institutional strengthening program, which will develop complementary actions in industrial pollution control, municipal solid waste collection, treatment and disposal, and management of water resources and protected areas. Annex 9 contains details of the institutional strengthening programs for CESAN and SEAMA over the 1994- 1999 period. Investment Priorities 46. Investment priorities were determined on the basis of technical, environmental, economic, financial, and political criteria. Technical factors include experience with proposed technologies and containment of construction and operating costs. Environmental considerations include potential pollution risks to water bodies (such as rivers, estuaries, and bays) receiving effluents. Economic and financial factors include the size of projected marginal revenues, expected net positive benefits, and affordability of tariffs. Taking all these factors into account, wastewater collection and treatment was given priority over water supply, as the service coverage is much lower for wastewater collection and treatment. Environmental, technical and financial evaluations assigned a high priority to unaccounted- for water (UFW) control and other programs that optimize existing systems over new water supply projects. A large part of the existing shortage of water is expected to be handled through the implementation of the UFW control program and other optimization activities which will be executed during the first two years of project implementation. Extending water supply service to low-income households was given priority over reinforcing current water supply systems. Main Components 47. The water supply component--comprising about 42 percent of proposed investment costs--was designed to reinforce and rehabilitate current systems, to serve new customers resulting from expected population growth, and to incorporate low-income urban areas into CESAN's systems. Subprojects include optimization and expansion of existing water treatment plants, increases in the capacity of storage reservoir and pumping stations, expansion of water transmission and distribution systems, and a UFW control program. These components are expected to ensure effective cost recovery and the sustainability of the investments in sanitation and pollution control. 48. Beginning about 1983, BNH financed programs for operational development that were highly successful. CESAN, for example, was able to decrease its level of UFW to about 40.4 percent from 43.6 percent, in only one year. Since 1987, however, these programs have been drastically cut in almost all SWCs due to lack of financial resources, and UFW is again a very serious problem. In 1992, UFW was estimated at 37 percent in CESAN--a figure that is about equal to the national average (37.3 percent in 1989). A well-designed operational development program forms a prominent part of CESAN's investment program (see Annex 8) and will be financed by the project. 49. The wastewater collection and treatment component, comprising about 58 percent of proposed investment costs, is designed to restore and conserve water quality for the preservation and protection of water supply sources, aquatic ecosystems, and recreational beaches and other marine areas. Subprojects numbered 1 to 12 in Annex 8, Attachment 1, include a total of 823 km of sewerage pipes, 103,365 sewerage house connections, and 10 wastewater treatment plants. Subprojects 1 to 6 are in Grande Vit6ria and their objective is the protection of the Vit6ria Bay, the beaches of Camburi, late, Jurema, and Aterro, and the Passagem Channel, and improvement of the urban drainage system by intercepting wastewater discharges. Subprojects 7 and 8 will collect and treat domestic wastewater in Guarapari, protecting the recreational beaches of this municipality. Subprojects 9 and 10 will protect the water quality of the Jucu river and subprojects 11 and 12 will protect the water quality of the - 13 - Santa Maria river. The Jucu and Santa Maria rivers are the main sources of water supply for Grande Vit6ria. 50. Industrial activities in some river segments, urban run-off channels, and uncontrolled solid waste disposal sites near water courses may impose pollution loads that could impair water quality restoration in some specific locations in the area of influence of the project. Furthermore, coastal ecosystems, protected and un-protected, are subject to urban expansion pressures and lack effective protection. To address these potential problems, the project will utilize an integrated approach to water quality and natural resources management in the river basins and the estuarine ecosystems within the project's area of influence. Technical Evaluation 51. Project siting, technology, and effluent discharge points were selected through comparisons of different water quality scenarios based on water quality modelling techniques. Water quality modelling efforts carried out by SEAMA and CESAN show that implementation of the project is crucial to reach the proposed water quality objectives in all key water bodies in the area. Water quality modelling methodologies and findings are discussed briefly in Annex 15. Projected 20 year scenarios with and without the project confirmed the need for sewage treatment, as well as complementary actions in industrial pollution and solid waste collection, treatment, and disposal. 52. Engineering designs have been completed for nine of the 12 wastewater collection and treatment schemes. Subprojects 2 to 4 and 8 to 12 in Annex 8, Attachment 1, have been appraised and found to be in compliance with all technical and engineering requirements. These subprojects amount to about 59 percent of the total cost of wastewater collection and treatment projects, and 33 percent of the total project cost. Sub-project 7, which also meets all technical and engineering requirements, is undergoing some minor least cost staging adjustments. All subprojects are based on simplified sewerage systems (minimum diameter 4") and anaerobic, aerobic, facultativs and aerated lagoon systems for wastewater treatment. Lagoon systems presented technical, economic and environmental advantages over other types of treatment. There is also sufficient experience with their construction, operation, and maintenance in Brazil. CESAN for example, has satisfactorily operated a pond system over the last several years. 53. Project design adjustments were made to address specific environmental concerns and now meet required coliform removal efficiencies in key areas of the aquatic ecosystems, as well as in recreational beaches. Projected water quality scenarios using mathematical models show that all recreational beaches will meet swimming standards for coliform. 54. Additional analysis of nutrient and algae production in wastewater treatment plants in certain areas of Vit6ria Bay showed low probabilities for potential eutrophication problems. Algae removal systems will not be needed for any wastewater treatment plant. However, monitoring programs will track nutrient loads, and additional research will be carried out into algae removal methods in photosynthetically active lagoon systems. 55. Urban drainage systems analysis determined the need for interceptors along major urban channels which currently function as open sewers. Operational and maintenance experiences in simplified sewerage systems in other localities in Brazil resulted in project design modifications related to minimum diameter, manhole distances, and manhole depths. 56. The water supply project for Grande Vit6ria was found to comply with all technical and engineering requirements. The Guarapari water supply project will need additional engineering and technical studies to be eligible for Bank financing (see Annex 11). The physical losses of water in Grande Vit6ria and Guarapari treatment plants (about 5.6 and 3.8 percent, respectively) were found - 14 - to be excessive due to lack of filtering capacity. Once the required additional filters are in place, these losses should go down to about 2.0 percent. The UFW program, which was found satisfactory, will therefore concentrate on physical losses in reservoirs and distribution systems in addition to commercial losses. 57. Works have been appropriately staged to obtain the least-cost solution. The flat economic-cost curve beyond the optimal stage point permitted the scaling of sub-projects to design periods of up to twenty years without significant economic losses, while introducing agreed environmental end engineering criteria. Subprojects, designed to conform with former BNH standards, are in accordance with proper management practices and the living conditions, expectations, and ability to pay of the beneficiaries. Service standards will consist of water supply by house connections and sewage disposal by public systems. As is customary in the Brazilian water sector, the project emphasizes the use of low-cost sewage disposal techniques. Consolidated service levels over the project implementation period are presented in Annex 20. 58. Engineering studies and design have been carried out competently by consultants. CESAN's engineering department would review designs and supervise construction during project implementation. Before BNH was abolished, the engineering departments of the SWCs were provided with advice and supervision by BNH's technical agents. After BNH's functions were transferred to CEF, this close supervision practically disappeared. This is another area where the project expects to have a significant impact, through a continuous, careful, and well-planned Bank supervision of the project. G. Project Cost 59. The total cost of the project is estimated at about US$308 million equivalent: US$290 million for the investment component and US$18 million for the institutional strengthening component (US$8.8 million for CESAN and US$9.2 million for SEAMA). Project costs are summarized in Table 1. Direct and indirect foreign exchange requirements are estimated at about US$61.6 million (20 percent of total). Costs are expressed in prices as of June 1993, and include physical contingencies estimated on average as 5 percent of base costs--about US$13.4 million, and price contingencies estimated on the basis of an estimated international inflation of 2.8 percent per year for 1994 and thereafter--about US$26.9 million. Due to high domestic inflation rates, all project cost estimates are expressed in US$. Costs include direct taxes (about US$21.3 million). Interest during construction is not included. Changes in the value of Brazil's currency are expected to compensate for the projected domestic inflation over the life of the project. 60. The total cost of the project was determined on the basis of CESAN's 1994-1999 investment program (see Annex 8). The project cost represents about 87 percent of CESAN's investment and institutional strengthening programs and 100 percent of SEAMA's institutional strengthening program during the same period. During Loan Negotiations, CESAN agreed not to change annual investments during the project implementation period by more than 20 percent of the original agreed amounts, without prior Bank agreement. 61. Cost estimates for major subprojects are based on bills of quantities and unit prices prepared by CESAN. Estimates for other subprojects are based on unit costs of similar works. Costs of the institutional development programs are estimated in accordance with prevailing costs of goods and services. About 210 specialist-months of consulting services are included for the institutional strengthening component of SEAMA, 150 specialist-months for the institutional strengthening component of CESAN, and 185 specialist-months for the project management and supervision of the investment component. - 15 - Table 1 Project Cost Summary (US$ mOlions) Component Local Foreign Total Water Supply 56.3 14.1 70.4 Sewerage 133.2 33.3 166.5 Operational Development 8.1 2.0 10.1 CESAN Institutional Development 6.3 1.6 7.9 SEAMA Institutional Development 6.4 1.6 8.0 Project Management and Supervision 3.8 1.0 4.8 * Total Base Cost 214.1 53.6 267.7 Physical Contingencies 10.7 2.7 13.4 Price Contingencies 21.5 5.4 26.9 * Total Project Cost 246.3 61.7 308.0 H. Tariff Analysis 62. CESAN's tariffs are basically in accordance with former BNH guidelines for tariff design (see Annex 10 for a detailed assessment of CESAN's tariff structure and rate levels). Since 1 987, the State government of Espfrito Santo has made use of its right to set tariffs, authorizing regular tariff increases for CESAN (see Figure 1, Annex 10). The State, however, lacks a clear policy to be used as a guideline for tariff setting. Overall, CESAN's average water rates and the combined average rates for water and sewerage are distorted and do not reflect the company's actual economic costs; that is, the marginal cost of providing the services (see Annex 11 for a detailed analysis of CESAN's marginal cost structure). Average non-residential rates are higher and residential rates lower than the corresponding marginal costs (see Table 4, Annex 10). Departure from marginal cost pricing is slightly larger when both water and sewerage services are considered. This result reveals the existence of a cross- subsidization policy that favors sewerage customers. Given that sewerage coverage is substantially lower than water coverage, any subsidy favoring sewerage also favors the highest-income groups of the population. 63. To better serve society and meet the basic requirements of financial self-sustainability and social equity, CESAN needs to rationalize its tariff structure, taking the following eight points into consideration. * First, marginal costs should be used as reference values in the definition of the tariff structure and rate levels. Sewerage rates, in particular, should be increased to approach the corresponding marginal costs. * Second, the practice of applying differential rates to commercial, industrial, and public customers, based on the amount of water they consume, has negative impacts on the allocation of economic resources and should be abolished. A well-designed tariff structure should automatically take into account the consumption patterns of different customers. For instance, a household operating a small family business from its house should receive a clear tariff signal to request its reclassification as either commercial or industrial, once its water consumption exceeds abnormally high levels for residential standards. - 16- * Third, CESAN's current socio-economic classification should be reviewed to achieve the social equity objective that both the State of Espfrito Santo and CESAN pursue with the water supply and sewerage tariffs they apply. In addition, a fixed monthly charge, independent of the volume of water consumption, but increasing with the income level of households should replace the current minimum consumption level. * Fourth, the number of consumption blocks contained in CESAN's residential tariff structure should be reduced to three. The range of these consumption blocks should be set in accordance with current consumption levels. The first consumption block should comprise the minimum amount of water required by a typical family. The upper limit of the second block should be close to the level that is still considered non-excessive for instance, 45 m3/month. * Fifth, tariff rates should be set according to economic costs. Residential rates for consumption levels above the basic block but below what may be considered excessive levels (for instance, larger than 45 m3/month) should be charged with tariffs close to marginal costs. Residential consumption levels considered excessive should not be subsidized for any customer and could be charged a tariff higher than its corresponding marginal cost. * Sixth, the basic residential consumption block and poor households should be targeted as the only groups deserving a subsidy. 3 Seventh, CESAN's tariff levels should be such that they will allow it to generate enough internal cash to cover its operating expenses, debt service, and investment requirements. e And eighth, an automatic mechanism of adjusting rate levels to inflation should be selected and put in place, to keep tariff value constant in real terms in order to promote long-term financial planning and self-sufficiency for CESAN. 64. During Loan Negotiations, both CESAN and the State government agreed to put into effect the tariff modifications described above by December 31, 1994. I. Financial Analysis Project Financing 65. A Bank loan of US$1 54 million equivalent will finance 100 percent of direct and indirect foreign costs plus about 37 percent of local costs. The loan will have a term of 15 years, including five years of grace at the Bank's standard variable interest rate. The balance (US$154 million) will be provided by CESAN and the State of Espfrito Santo. There are also good prospects for the European Investment Bank (EIB) to finance a major part of the State's counterpart requirements (see para. 82). 66. The financial success of the project depends largely on the self-financing capacity of CESAN. This is because one of the project's main objectives is to strengthen CESAN's financial discipline and independence, making it less reliant on government funds. This key departure from the past practice of heavy reliance on debt financing and government transfer continues the strategy initiated by the Water Sector Modernization Project (Loan 3442-BR). Under the proposed project, CESAN agreed to provide a counterpart cash contribution amounting to about 17 percent of the total investment cost. CESAN's counterpart increases to about 24 percent when interest during construction (IDC)--to be financed by CESAN from its internal cash generation--is included in the total investment cost. The remainder of CESAN's investment program will be financed directly by the State through capital subventions to CESAN. During Negotiations, the State agreed that up to 34 percent of the project cost will be made available according to the project schedule and be totally disbursed by December 1999. - 17- 67. Table 2 summarizes the investment and project financing plans of CESAN and SEAMA, including interest during construction amounting to US$31.5 million. Interest during construction will be entirely financed from CESAN's internal cash generation. The financing plan for CESAN is shown in detail in Annex 13. During Negotiations, CESAN agreed to submit to the Bank, not later than April 15 and October 15 of each year, general financial projections for the following six year period (see para. 108). The progress report to be submitted to the Bank by October 15 of each year should also include specific details on the investment plan for the upcoming year. The institutional strengthening component of this project includes a training program for CESAN's financial managers to comply with this requirement. Table 2 1994-1999 Investment and Project Financing Plans of CESAN and SEAMA (US$ million) Source of Fhnds Project Financing ; Investment Fincing-- ________ -_______--_____________ Amount % Amount : _ -___ _ | World Bank (1BRD)W' 154.0 45.4 154.0 37.6 Caixa Econ6mica Federal - - 36.7 9.0 Federal Government - - 1.3 0.3 State of Esptrito Santo 92.5 27.2 122.9 29.9 CESAN 93.0 27.4 94.8 23.2 Total 339.5 100.0 409.5 100.0 - Includes interest during construction of US$31.5 million. b Of which USS 149.4 million corresponds to CESAN's investment program and institutional strengthening component. CESAN's Past and Present Financial Performance 68. CESAN's financial performance has been largely affected by the country's unstable macroeconomic environment. Since 1983, the Brazilian economy has been suffering from high inflation (more than 1,000 percent in 1988, 1989, 1990, 1992, and 1993--see Annex 13) and frequent macroeconomic adjustment plans (1986, 1987, 1989, 1990, and 1991). In addition to Brazil's macroeconomic difficulties, CESAN's financial performance has deteriorated because of an excessive reliance on government financing and subsidies that fostered inefficiency, and a government policy that severely penalized CESAN's earning capability by attempting to curb inflation through frequent institutional tariff freezes. The first tariff freeze was imposed in 1985. 69. Reflecting this environment, CESAN's financial performance has deteriorated over the last several years. Net operating income decreased, as the average water and sewerage tariff slipped in real terms, while operating costs rose steadily (see Annex 12 for past and projected financial statements). From 1990 to 1992, CESAN's average water and sewerage tariff dropped from US$0.47/m3 to US$0.43/m3, decreasing on average 4 percent per year, a rather moderate decrease however compared with the 1982-1988 period. Although the average tariff was increased to US$0.51 /m3 in 1993 to make up for the past losses, a further tariff increase is necessary for CESAN to be able to generate sufficient internal resources to finance the larger investment needs foreseen in the future 70. As CESAN's tariff revenue deteriorated, its operating cost rose steadily. The operating ratio rose from 0.71 in 1990 to 0.90 in 1992, while net operating income decreased from US$20.0 million - 18- in 1990 to a mere US$6.6 million in 1992, not sufficient to comply with the National Tariff Law (NTL)". The personnel cost rose to 67 percent of total operating cost in 1992, a level considerably higher than a sample of other Latin American water utilities (on average less than 40 percent) or a sample of Spanish and French water utilities (average 30 percent)!'. Furthermore, adding the cost of third-party contract labor to the personnel cost, the total personnel and labor costs amounted to more than 83 percent of total operating cost in 1 992. 71. As of September 30, 1993, CESAN had 1,557 permanent employees. Employee productivity, as measured by the number of water and sewerage connections per permanent employee, was 166 in 1990 and 194 in 1992, lower than Brazil's average for the sector (209 as of December 1990). However, labor productivity, as measured by the number of water and sewerage connections per permanent and temporary employee, is even lower: 152 connections in 1992!'. This result underscores CESAN's operational inefficiency. 72. Another factor that could be attributed to CESAN's low productivity and inefficiency is the low turnover of its employees. CESAN does not have a clear remuneration policy based on performance, which has often led to unequal financial rewards to its employees, often favoring long-time employees. Moreover, the retirement pension system managed by the federal government discourages retirement. The maximum amount of pension paid by the federal government is 10 minimum salaries (about US$600 per month), considerably lower than the current salary (including benefits) of the employees. Because of this situation, water companies in other states of Brazil are providing incentives for early retirement by covering the difference between what the employee was earning at retirement and what the federal government pays. Before Negotiations, CESAN prepared and submitted to the Bank the results of a study to determine the medium- to long-term financial effects of adopting a policy of early retirement. Based on the positive implications of adopting the recommendations of this study, CESAN will now design a comprehensive plan to implement such a policy. 73. In addition to operating inefficiency, CESAN also faces billing and collection problems common to most Brazilian water companies: (i) inadequate metering (only 70 percent of the consumption is metered); (ii) long bill processing periods (until recently, the period from meter reading to due date was 33 days-1'); (iii) large accounts receivable (46 days of revenue) due to poor collection efforts; and (iv) financial losses resulting from CESAN's inability to cumulatively adjust consumer bills for inflation. These problems, together with CESAN's short-term oriented financial planning and administration practices, have contributed to the chronic liquidity problems of recent years. During Negotiations, CESAN agreed to adjust overdue accounts for inflation and take other measures to reduce the financial losses resulting from overdue bills. The company in turn delayed payments to its suppliers and contractors, its debt obligation accumulated, and its bill collection efforts faltered. Although CESAN's debt service was reduced substantially following a recent agreement with the State government (see Annex 13 for a more detailed discussion), and it no longer has liabilities in arrears, CESAN's financial management leaves much room for improvement. 2' To be in compliance with the NTL, CESAN's operating revenue should be equal to or larger than the sum of its operating cost, depreciation, and debt service. In 1992, this ratio slipped below 1 (to 0.98). 8J See Yepes, G. 1 989), Management and Operational Practices of Municipal and Regional Water and Sewerage Companibs In Latin America and the Caribboan, The World Bank, Technical Department, LAC Region, August. 1' CESAN's total number of permanent and temporary employees) has been calculated as the sum of CESAN's permanent employees (i.e., CESAN's regular staff) plus the equivalent number of employees hired through third party contracts. This equivalence has been calculated assuming that employees hired through third party contracts earn CESAN's average salary, including social benefits. 0'J CESAN recently instituted a 22 day bill processing period. - 19 - 74. Reflecting the chronic cash shortage, uncertainty of the availability of other financing sources, and the absence of strategic investment planning, CESAN's average annual investment level has been low--about US$18 million in recent years, and not sufficient for investment requirements. While the water supply coverage level grew by 7 percent between 1990 and 1993 (from 84 percent to 91 percent), the sewerage coverage level increased only slightly, from 7 percent to 11 percent during the same period. Meanwhile, the quality of service gradually deteriorated, causing several areas served by CESAN to experience rationing. 75. The project's institutional strengthening component will address the financial and investment planning issues through training and consultancy. One of the tools to be introduced by the project is a realistic six-year rolling plan, to ensure efficient utilization of investment resources within the company. The plan is reinforced by the use of stronger criteria for economic analysis of subprojects and a Contract-Plan between CESAN and the State. 76. Although a basic accounting system is in place, CESAN's financial management, accounting, and information systems need improvement. CESAN does not have a computerized integrated information system, information is complied manually, and the preparation of its financial statements takes up to five months. The financial statements are subject to both external1-' and internal auditing. Although the company has received qualified opinions from its external auditors during the last several years, remedial actions were taken only recently. In addition, CESAN's fixed assets are undervalued because of the insufficient revaluation index allowed by the government in the past. Hence, the institutional strengthening component of the project includes a program to review, develop, and improve CESAN's accounting, information, and auditing systems, as well as a study to revalue its fixed assets. Terms of reference (TOR) for studies of accounting, information, and auditing systems were presented to the Bank before Negotiations. TOR for a fixed asset revaluation study, as well as a draft contract for hiring a consultant to execute it, were submitted to the Bank before Negotiations. The recommendations of the study should be submitted to the Bank for comments not later than June 30, 1995, and incorporated into CESAN's audited financial statements of fiscal year 1995. CESAN's Projected Financial Performance 77. CESAN's financial projections for the period 1994-1999 (presented in Annex 12) are based on the following assumptions: {i) the average water and sewerage tariff will increase by 5 percent in years 1994, 1995, and 1996, in real terms; (ii) the price elasticity of demand is -0.3; (iii) CESAN will gradually improve its. productivity and efficiency; and (iv) the State will continue to provide contributions to CESAN at a level similar to the one observed in the last two years. More detailed notes and assumptions for CESAN's financial forecasts are presented in Annex 13. 78. The average water and sewerage tariff will increase from US$0.51/m3 to US$ 0.61/m3 by 1996, and stabilize thereafter. While revenue from water services increases at a moderate rate of 5.5 percent per year, the revenue from sewerage services grows tenfold, as sewerage service coverage increases from 11 percent to 43 percent. The revenue increase is enhanced by the project's operational development program which aims to reduce UFW by decreasing physical and commercial losses, and increasing consumption metering. Meanwhile, employee productivity, as measured by the number of water and sewerage connections per permanent employee, is expected to improve from 210 (4.8 employees per 1000 connections) in 1993, to 324 (3.1 employees per 1000 connections) in 1999. And labor productivity, as measured by the number of water and sewerage connections per permanent and temporary employee, is expected to increase from the current 168 (6.0 permanent and temporary employees per 1000 connections) to at least 253 (4.0 permanent and temporary employees '" The external auditing is mandatory and is regulated at the State level. The selection of the auditing firm is done every six months through public bidding among private companies--the firm may be re-appointed for consecutive periods for a maximum of two years. - 20 - per 1000 connections) by end-1 999. The assumptions regarding employee and labor productivity result in an annual average productivity gain of 7.5 percent during the project implementation period. As a result, operating expenses (not including depreciation) will gradually decrease from 55 percent of operating revenue in 1993 to 42 percent of operating revenue in 1999. CESAN will also improve its financial resources management by reducing the period of accounts receivable (currently 46 days) to 43 days, and developing a system to adjust overdue accounts for inflation. With larger tariff revenues, improved operating efficiency, and better financial management, CESAN is expected to cover 17 percent of its total investment cost (24 percent including IDC) with its internal cash after fulfilling its debt service and tax obligations. Under this scenario--the so-called Base Scenario or A2 Scenario of Annex 13--CESAN would require a 32 percent (US$118.4 million) contribution from the State 79. This scenario, however, could only be achieved by CESAN's firm commitment to raise the average tariff level and to improve its operational efficiency. Likewise, an adequate provision of the State's counterpart funds is crucial to the timely execution of the investment program. The sensitivity analysis presented in Annex 13, Section E, highlights the importance of the proposed tariff increases and productivity gains, as well as the adequate provision of counterpart funds, for a sound execution of the project. With no tariff increases and no productivity gains (the B3 Scenario), CESAN would only be able to cover 7 percent of the total investment cost with its internal cash, requiring a 43 percent contribution from the State (US$157.8 million). Under the assumption of no tariff increases, even a large productivity gain of 8.5 percent12' (the B1 Scenario) would not allow CESAN to cover more than 14 percent of its total investment cost with internal cash, requiring a 35 percent contribution from the State (US$130.2 million). Under the worst possible scenario of no tariff increases, no productivity gains, and the State's counterpart funds limited to US$15 million per year, the completion of CESAN's current investment program will be delayed by three years. Although CESAN's contribution to investment under this scenario (13 percent) is slightly better that under the 83 Scenario, as CESAN has three extra years of cash generation, its internal financial rates of return will be lower as net incremental cashflow is deferred. In summary, the sensitivity analysis shows that the tariff increase is crucial to the financial independence of CESAN, although expected gains in its employee productivity index would help substantially to achieve this goal. Moreover, an adequate provision of the State counterpart fund is essential in completing the investment program as scheduled with expected rates of return. 80. To further strengthen its financial condition during the project implementation period, CESAN agreed during Negotiations: (i) to generate sufficient internal cash to cover at least 3.5 percent of its 1994-95 total investment program--excluding IDC--by end-1995, 3.8 percent of its 1994-96 total investment program by end-1 996, 8.1 percent of its 1994-97 total investment program by end-1997, 11.2 percent of its 1994-98 total investment program by end-1 998, and 12.7 percent of its 1994-99 total investment program by end-1 99911'; (ii) to substantially achieve the annual targets for its working ratio presented in Annex 20 and, under all circumstances, not to allow this ratio to fall below 60 percent; (iii) to revalue its fixed assets and incorporate the study's recommendations into 1 995 end- year financial statements, and undertake subsequent studies every three years to determine the necessity of further physical revaluations; (iv) to increase its employee productivity, as measured by 121 The employee productivity gin of 8.5 percent results from assuming that CESAN will keep the current number of permanent employees at its December 1993 level. The employee productivity gain of 7.5 percent which underlies the Base Scenario, results from assuming that CESAN will freeze the current number of employees in administration and water supply operations, and that one additional employee will be added to sewerage operations for every 1,500 new sewerage connections (see Annex 13). 13/ The Bank expects CESAN to cover, under normal conditions, 17 percent of its total 1994-1999 investment program by end- 1999 through its internal cash generation, that is, to have a financial performance along the lines contemplated by the Base Scenario presented in Annex 13. However, under macroeconomic conditions that may negatively affect CESAN's financial performance, the 13 percent resulting from the B2 Scenario will be acceptable. The B2 Scenario is responsible for the minimum required percentages. - 21 - the number of water and sewerage connections per permanent employee, to at least 242 by June 30, 1996, and to at least 324 by end-1999; (vI to keep salaries and other permanent employee costs below 70 percent of operating costs (excluding depreciation); (vi) to achieve a debt service coverage ratio no lower than 1.5; and (vii) to carry out an action plan satisfactory to the Bank, to achieve the commercial, physical, operational, environmental, and financial performance targets presented in Annex 20. Financial Transfers of the State 81. The State of Espfrito Santo is one of the few Brazilian states free of debts in arrears. Although it has recently experienced a slowdown in tax revenue, due to the sluggish economy and the lax collection efforts, it has had sufficient revenue to cover its administrative costs, debt service, and a stable level of investments. A summary of financial resources transferred by the State to CESAN is presented in Annex 14. The State has recognized the water and sanitation sector as one of its priority areas, and has been transferring larger amounts of financial resources to the sector during the last few years. The transfers to the sector increased from an annual average of about US$1 million before 1990 (about 0.2 percent of the State's total revenue) to about US$14 million in 1991 and US$11 million in 1992 (about 2 percent of the State's total revenue). These transfers were made either directly to CESAN--to increase its working capital and/or cover total or partial payments of its debt service--or indirectly as counterpart funds to FAE loans!-". State transfers to CESAN during the period 1994-1999 are forecast to average US$19.7 million per year (the Bank project and other projects already contracted), slightly above the 1991 and 1 992 level. The State of Espfrito Santo has given top priority to this investment project, as well as to three other projects that also require counterpart funds ', and budgeted the necessary resources to comply with the counterpart fund requirements during the project execution period. 82. During Negotiations, the State agreed to provide up to 34 percent of the project's direct cost as counterpart funds. The State's counterpart requirement would be much smaller if the projected tariff increases are realized, and CESAN succeeds in enhancing its productivity as discussed in the previous section. To that end, the State of Espfrito Santo also agreed during Negotiations: (i) to allow CESAN to set water and sewerage tariffs at levels that allow it to cover operating costs, debt service, and to generate adequate internal cash consistent with the project's financial plan; and (ii) to promote and support any action that would improve CESAN's management and operational systems. Furthermore, the European Investment Bank (EIB) showed interest in financing a major part of the State's counterpart for the project. The preparation of the EIB loan is underway, and if successful, will largely facilitate the State's ability to fulfill its counterpart requirement. J. Environmental Impact 83. The project will have a significant positive impact on the environmental quality of the rivers, estuarine ecosystems, and recreational beaches of Grande Vit6ria and Guarapari. All subcomponents are designed to upgrade the deteriorated conditions existing in these areas, especially in relation to water resources, and to set up efficient environmental management for the future. The project will help to extend sewerage and build ten sewage treatment plants, expanding sewerage coverage in Espfrito Santo from 11 percent to 43 percent of its population. Water quality modelling efforts have shown that there is a potential for a substantial reduction of coliform levels in key sensitive points in 11d The State Water & Sewerage Fund (FAE) is expected to be abolished and CESAN's existing debt obligation with FAE will be capitalized. i' The other three projects that also require counterpart funds from the State between 1994-1999 are: the Bank-assisted Basic Education Project 'SEDU" (US$22.5 million); BNDES 'Transcol 11' (US$27.6 million); and the already contracted IDB Transportation project (US$15.6 million). - 22 - the area of influence of the project. Existing and projected environmental quality conditions show that without the project, pollution levels will have severe impacts on health and natural resources and impair water use in the project area. On the other hand, improved water quality conditions resulting from project implementation will have positive impacts on health, natural ecosystems, tourism potential, and quality of life. Economic valuation of those positive environmental impacts proved to be of great importance for the area (see Annex 16). About 33 percent of the population to benefit from sewerage services has a household income of less than 3 MS. Furthermore, the contingent valuation study showed that improved water quality conditions of public beaches will especially benefit the poor populations of Grande Vitdria and Guarapari, by making these beaches more accessible for recreation. 84. Negative environmental impacts due to project siting and construction are expected to be minimal. Careful environmental screening of proposed sites for wastewater treatment plants and effluent discharge points has resulted in project modifications and alternate sitings which have been incorporated into final designs. There are no land use conflicts at the proposed sites and there will be no need to relocate families. One proposed site with clay deposits presented some conflicts with traditional artisan communities which produce ceramic pots (panelas). Improved project siting and design, together with an adequate compensatory program incorporated in the project, will guarantee to these communities their livelihood. Residual impacts are related to local water quality and potential eutrophication problems in the area of influence of discharge points. Impacts during construction will be typical disturbances pertaining to this type of project. Mitigation plans to manage possible impacts due to treatment plant failures have been prepared. 85. To assess the project's environmental impact, CESAN was required by federal laws to prepare environmental impact reports (RIMAs) which follow State guidelines and are approved by SEAMA. The RIMA prepared for this project, in accordance with Bank guidelines, was approved by SEAMA and found satisfactory by the Bank. A summary of this report (available in Project Files) is presented in Annex 15. Future sub-projects eligible under this project should be subject to an environmental assessment (see Annex 18) and comply with the agreed environmental monitoring indicators presented in Annex 20. K. Poverty Alleviation and Affordability Urban Poverty Impact 86. The water supply component of this project is clearly targeted towards the poor. Households earning two Minimum Salaries (MS) or less will account for about 56 percent of project beneficiaries, while about 78 percent will be households earning three Minimum Salaries (MS) or less--the Brazilian definition of urban poor. Beneficiaries of the sewerage component have a broader income distribution: about 18 percent comprise households earning less than two MS and about 33 percent comprise households earning less than three MS. This apparent inconsistency results from the fact that, at present, 91 percent of the population served by CESAN is connected to a water supply system but only 11 percent is connected to a sewerage system. The project expects to increase service coverage levels to 93 percent for water supply and 43 percent for sewerage. 87. In addition to connecting new customers to CESAN's systems, the water supply component will also improve service quality. Almost two thirds of CESAN's customers are currently subject to rationing. Under the project, more than half of CESAN's customers will receive a 24 hour service, and the remainder will experience a considerable reduction in the number of hours of rationing. About 44 percent of the areas under rationing are in neighborhoods whose households earn less than 2 MS, and close to 32 percent of the people in these areas receive less than 4 hours of service a day (see Figure 1). The population currently receiving interrupted service has been forced to reduce consumption and resort to other means, such as storing water in permanent or semi-permanent containers. Figure 2 below de.nonstrates the impact of the project on the urban poor, who will comprise about 60 percent - 23 - of the beneficiaries from water supply improvements. As can be seen, the poor will benefit substantially from a greatly improved distribution of service hours. The number of poor households with less than 8 hours of rationing (78 percent without the project) will decrease to about 38 percent with the project. 88. By collecting and treating a large portion of the volume of sewage that is currently dumped untreated into the water bodies of Grande Vit6ria and Guarapari, the project will avoid serious health and environmental consequences. The poor suffer more from unhealthy environments as they live in areas where untreated sewage runs through street drains, and where the lack of sewerage facilities is more severe. This group, therefore, tends to benefit the most from investments in collection and treatment of sewage, even when they represent a small proportion of the population that will actually be connected to a sewerage system. In addition, the urban poor will also benefit from sewage collection and treatment in terms of cleaner beaches that they can easily access and an overall healthier and pleasant environment. 89. Stated Priorities of the Poor. Following the results of a field survey undertaken for the project, about 56 percent of the households earning less than 2 MS per month stated that water supply was their number one priority (see Annex 16). The second stated priority was health and the third was solid waste collection; all services related to the water supply and sanitation sector. Therefore, this project is correctly addressing the key needs of the urban poor in the State of Espfrito Santo. Figure 1. Current Distribution Figure 2. Expected Distribution of Service Interruptions of Service Interruptions After Project Implementation 70 7 70 - 60 60- 50 -50 40 -40- 30 -30- 20 20- 10 10 0 10 0-3 4-8 9-11 12-17 18-20 21-23 >24 0-3 4-8 9-11 12-17 18-20 21-23 >24 Hours of Interruption Hours of Interruption Affordability 90. As discussed in Annex 10, CESAN applies a minimum consumption level (MCL) of 10 m3/month to its residential consumers, and charges differential tariffs in accordance with its own socio-economic classification (see paras. 95 to 97). The MCL, which is intended to provide enough water to satisfy basic needs and maintain minimum health and sanitary conditions, is charged a minimum monthly charge (MMC). The MMC for water consumption for residential customers varies from about 2.4 percent to 6.4 percent of one MS--US$85 as of November 1, 1993. The combined - 24 - MMC for both water and sewerage services for residential consumers varies from about 3.6 percent to about 9.6 percent of one MS. The combined MMC is well below the range of acceptability for Bank standards. (A standard commonly accepted in past Bank projects has been to keep water and sanitation charges under 5 percent of three minimum salaries or 15 percent of one MS). 91. Furthermore, the willingness to pay (WTP) for water supply and sewage collection was investigated using a WTP survey and contingency valuation (CV) methodology. The results indicate that the poor are willing to pay between 2.9 percent and 3.9 percent of their income for water supply services. In the case of sewerage, the results of the CV study indicate that WTP values for the poor amount to about 2.0 percent of their income. Current expenditures on water supply and sewerage by poor households already connected to the service are on the order of 3.8 percent to 5.1 percent of their family income, as estimated by the CV study. The demonstrated WTP values by the poor (combined water supply and sewerage), which are between 4.9 percent and 5.9 percent, are well above the range of present household expenditures. 92. CESAN's Socio-Economic Classification. The residential customers of CESAN are classified in accordance with the physical characteristics of their dwellings as follows: basic, popular, standard, superior, and special. Factors such as the size of the dwelling, the construction materials, and the overall appearance are used in this classification to allocate points to each residence. For example, a dwelling occupying less than 50 m2 is awarded 1 0 points, while a dwelling occupying more than 250 m' is awarded 300 points. Similarly, a dwelling with one sanitary facility is awarded 10 points, while a dwelling with more than three sanitary units scores 250 points. A summation of the scores a dwelling receives from such a survey is then made and a final classification is awarded. The current distribution of CESAN's socio-economic classification is shown in Annex 1 0, Table 2. 93. The physical characteristics of dwellings does not approximate very well the income distribution at the household level (as indicated from survey results and regression analysis). They are, however, as CESAN indicates, a good proxy for income distribution at the aggregate level le.g., at the level of a neighborhood or municipality). More work needs to be done to improve this classification scheme, making it a better tool for targeting. 94. A simplified classification system, that uses three categories instead of the current five, could make CESAN's tariff policy more appropriate for targeting purposes. Such a classification would distinguish between a poor dwelling (the current basic category), a moderate to average dwelling (currently popular) and an affluent dwelling (currently standard, superior, and special). During Loan Negotiations, both CESAN and the State agreed to incorporate suggested tariff policy modifications by December 31, 1994, to make CESAN's tariffs even more affordable to the poorest segment of the population (see para. 63). L. Project Benefits Economic and Financial Benefits 95. At the end of the implementation period (December 1999), the project will have directly benefitted about 640,000 people with potable water (395,000 people with in-house connections and 245,000 with fewer hours of rationing) and about 770,000 people with sewerage and sewage treatment services--mainly in the urban areas of Grande Vit6ria and Guarapari. After 1 999, about 775,000 additional people will also benefit from water production and transmission subprojects, and 450,000 additional people from sewage collection and treatment subprojects. It is estimated that about 78 percent of the beneficiaries of water investments and 33 percent of the beneficiaries of sanitation investments are in the poverty group--households earning less than 3 Minimum Salaries (MS) per month. - 25 - 96. The principal project benefits will include: (i) improved water quality in the Bay of Vitoria and the Passagem Channel, and environmental recovery of beaches at Camburi, late, Jurema, Aterro, and Guarapari, enhancing tourism activities and other water uses and improving recreational areas for the urban poor; (ii) improvement of quality of life and environmental conditions of urban areas surrounding urban drainage channels and overall improvement and preservation of the urban environment; (iii) improved hygienic conditions-leading to decreased infant mortality and reduced incidence of water- borne diseases; (iv) the preservation of water supply sources for the urban areas of Grande Vit6ria and Guarapari; (v) the preservation of water quality in coastal ecosystems such as mangroves and coastal lagoons; and (vi) a temporary but significant generation of employment for unskilled labor. An additional project benefit will be the institutional strengthening of SEAMA and CESAN. Rates of Retum 97. The Internal Economic Rates of Return (IERRs) are calculated considering the Bank project as part of CESAN's overall investment program. The data used for the analysis include: (i) investment costs which consist of the Bank project, other CESAN investments, and all complementary works necessary to achieve the full benefits of the project; (ii) the projected operating and maintenance costs; and (iii) the economic benefits of the project. A project life of 30 years is used in all IERR calculations. The IERR for the water supply component is 35 percent, including the operational development program. The IERR for the sewage collection and treatment component is 13 percent considering only the benefits from sewage collection; 31 percent considering sewage collection, recreation, and environmental protection benefits; and 32 percent considering the entire group of benefits--sewage collection, recreation, environmental protection, tourism, and health. The weighted average IERR of CESAN's total investment program (water supply, operational development, and sewage collection and treatment) is estimated at 33 percent. The IERRs for the entire project and for each independent component are quite robust and compare favorably with the 10 percent opportunity cost of capital (OCC) assumed in the analysis. (See Annex 16, Section D, for a detailed discussion of the project's IERR.) 98. The Internal Financial Rates of Return (IFRRs) were also calculated for different regions and projects using future streams of investment and operating costs, as well as revenues, expressed in constant market prices (US$ as of June 1993). Investment costs include all complementary investments necessary to achieve the full benefits of the project. The life of the project was estimated at 30 years, and CESAN's average tariff was considered to increase 5 percent in 1994, 1995, and 1996. All IFRRs are calculated on a pre-tax basis. The IFRRs for Grande Vitoria are estimated at: 18 percent for the water project; 12 percent for the sewage collection and treatment projects; and 15 percent for the combined water and sewerage project. The IFRR for Guarapari's sewage collection and treatment projects is estimated at 5 percentL'8. The IFRR for Guarapari's sewerage is lower than in Grande Vit6ria because the required initial investment is higher than in Grande Vit6ria. The weighted average IFRR for the entire project is 15 percent. These IFRRs compare favorably with the 10 percent opportunity cost of capital (OCC) utilized in the analysis, and are moderately sensitive to increases in costs or decreases in revenues. For example, an increase of 10 percent in investment and operating costs, combined with a 10 percent decrease in revenues, reduces the IFRR of the combined water and sewerage project of Grande Vit6ria to 11 percent. M. Risk Assessment 99. The main project risks relate to Brazil's macroeconomic performance and political conditions. Other risks pertain to a lack of effective abatement of water pollution from industrial sources in specific areas, and a deterioration of CESAN's internal financing capacity resulting from operational inefficiency 16 The FRR for Guarapari's water projects is not presented here, as the engineering design of the projects are being revised. - 26 - and inadequate tariff adjustments. Furthermore, sector and project priorities could change as a result of the 1994 gubernatorial election, and the amount of State counterpart funds for the project could be decreased accordingly. The political uncertainty is already somewhat diminished by a broad consensus that the long-neglected basic sanitation sector urgently needs support and a fundamental reorientation of policies and practices. It is also minimized by the consistency between project objectives and the commitment of the federal and the State governments to improve the environment, to increase the efficiency of the public sector, and to strengthen public sector finances. In relation to CESAN's internal financing capacity, achieving the targeted tariff level and operational efficiency is crucial to the success of the project (see para. 79). Strong support from the State to help attain the projected tariff level and operational efficiency of CESAN and the institutional strengthening of both SEAMA and CESAN will help achieve expected benefits and avoid potential risks. The risk of inadequate counterpart funding is largely reduced by the intention of the EIB to finance a large part of the State counterpart (see para. 82)V'. To further minimize project risks: (i) a continuous dialogue will be maintained with the present and future authorities, both at the federal and local levels, to assure understanding of and support for the project; {ii) project implementation would be closely supervised; (iii) complementary actions in industrial pollution control, municipal solid waste collection and disposal, and management of water resources and protected areas will be developed through SEAMA's institutional strengthening program; and (iv) a mid-term review will assess project implementation performance IV. PROJECT IMPLEMENTATION A. Implementation Arrangements 100. The borrower will be the State of Espfrito Santo. CESAN and SEAMA will be the executing agencies. Bank funds will be transferred from the State, through a financial agent, to CESAN on the same terms and conditions as the Bank loan, including the foreign exchange risk. SEAMA will receive the proceeds of the Bank loan through direct disbursements from either the loan account or the special account. Implementation of the project will be coordinated by the same Project Management Unit (PMU) established within CESAN for project preparation. CESAN will agree on a Contract-Plan with the State Government, and both CESAN and SEAMA will comply with agreed-upon criteria, including evidence of adequate technical and financial capacity. Subprojects will be appropriately staged to obtain the least-cost solution, based on appropriate feasibility studies. Subproject justification will be based on a comparison of the project's long-run marginal cost (LRMC) vis-a-vis CESAN's average tariff. CESAN, in particular, will comply with a set of physical, environmental, operational, and financial indicators, including the generation of enough internal financial resources to cover all its operating and maintenance costs, depreciation, and debt service, as well as an increasing percentage of its multiyear investment program. Expanding the water supply and sanitation services to poor families will require the formulation of integrated sanitary solutions involving appropriate low-cost technologies and substantial community participation. Two workshops will be held for purposes of orientation and explanation of Bank procedures: the first not later than two months after Loan Signature and the second before mid-1995. The project's implementation period will be 1994-1999. The project completion date will be June 30, 1999. 101. The legal documents will be as follows: (i) a Loan Agreement between the Bank and the State; (ii) a Guarantee Agreement between the Bank and the federal Government; (iii) a Project Agreement between the Bank and CESAN; (iv) a Subsidiary Loan Agreement between the State and CESAN, through a commercial Bank; and (v) a Contract-Plan between CESAN and the State (see Annex 17). 0 The EIB's financing will be especially helpful if it is provided--as it is being planned, in the earlier years of project implementation, when the State counterpart fund requirement is significant. - 27 - Prior to Loan Negotiations: (i) the State renegotiated its debt with the Federal Government; (ii) CESAN and the State agreed on the content and presentation of an improved Contract-Plan; (iii) CESAN prepared a plan to improve the operation of its internal auditing; (iv) a copy of the agreement formalizing CESAN's exemption of amortization payments to the FAE, was submitted to the Bank; (v) CESAN agreed to revalue its fixed assets based on terms of reference satisfactory to the Bank; and (vi) both CESAN and the State agreed to have the Contract-Plan signed by September 30, 1994. And prior to Loan Effectiveness, CESAN should have signed with the State the Subsidiary Loan Agreement. 102. Financial resources will flow as follows: (l) Bank funds will be disbursed to a Special Account opened by the State in a commercial bank; (ii) both CESAN and SEAMA will submit to the PMU receipts as evidence of expenditures made; and (iii) upon request from the PMU, the Borrower will reimburse either CESAN or SEAMA as applicable (see Annex 17). B. Subproject Selection Criteria 103. Each proposed subproject will correspond to the least-cost solution, and will be the object of a feasibility study prepared by CESAN or SEAMA in accordance with the guidelines for evaluation of subprojects presented in Annex 18. Each feasibility study will be reviewed by the PMU, which will submit it to the Bank for its comments. The analysis of a given subproject seeks to establish the priority of the proposed components, its consistency with sector policies, and its contribution to improve the delivery of services in a given'locality. This analysis also aims to ascertain that neither the subproject nor its components would adversely affect the environment and that their benefits equal or exceed their costs. The justification of each individual subproject will be based on the LRMC vis-a- vis CESAN's average tariffs. LRMC will be calculated on the basis of the incremental demand it will satisfy, the estimated investment cost--including complementary works, and the estimated operation and maintenance costs (see Annex 11). 104. Subprojects satisfying the technical, environmental, and social conditions indicated in the guidelines presented in Annex 18, but not complying with the financial and economic conditions (i.e., presenting an average water/sewerage tariff lower than the specified percentage of the marginal cost of providing the service), may be accepted by the Bank on a case-by-case basis. The analysis should, however, explicitly address the following issues: (i) the lack of alternative and feasible solutions; (ii) the difficulty of recovering costs through tariffs; and (iii) the impact on poverty alleviation and health conditions. These subprojects are likely to be in towns where urban poverty prevails and large investments are needed to compensate for the lack of adequate investments in the past. 105. During Loan Negotiations, CESAN agreed to select and design subprojects outside the Bank- financed part of its investment program using the same eligibility criteria agreed for subprojects under the Loan. C. Project Supervision 106. The project will require higher than normal supervision by the Bank, to ensure its successful implementation. Extensive project reviews, to be held each year, will focus on the execution of the institutional strengthening component, compliance with procurement issues, and CESAN's performance as measured by its compliance with agreed physical, operational, environmental, and financial monitoring indicators. CESAN has executed Bank-financed projects under sector loans made to, and directly supervised by, either BNH or CEF, but has not implemented a Bank-financed project. To ensure the timely procurement of goods and works and contracting of consultants' services, special attention will be given to procurement issues. Both CESAN and SEAMA agreed to use the Bank's Standard Procurement Documents. The supervision plan is presented in Annex 19. - 28 - 107. A mid-term project review will: (i) assess progress made by CESAN and SEAMA in carrying out their institutional strengthening programs, as well as the extent of implementation of proposed recommendations; (ii) evaluate progress made by CESAN in carrying out plans to improve its commercial performance, as measured by their degree of compliance with agreed physical, operational, environmental, and financial monitoring indicators (see Annex 20); (iii) assess the effectiveness of the training and institutional strengthening to be provided to SEAMA and CESAN; and (iv) verify compliance with covenants of the Loan and Project Agreements. During the mid-term review, special importance will be given to progress made in the institutional restructuring of the water and wastes sector in the State, and to improvements achieved in reducing UFW and in the overall financial performance of CESAN. During Negotiations, agreement was reached with the State and CESAN, to hold the mid-term project review within two years after Loan Effectiveness. D. Reporting and Monitoring 108. Progress reports will describe and compare past achievements to appraisal projections, review the compliance with the monitoring indicators detailed in Annex 20, and provide a critical assessment of problems and issues arising during project implementation. They will also propose adjustments and remedial actions in case of unsatisfactory progress. During Loan Negotiations, agreement was reached with the State and CESAN to ensure that the PMU will submit complete and partial progress reports, as well as a final report to the Bank. The complete progress reports, to be submitted to the Bank by April 15 and October 15 of each year, will include an assessment of the advancement of the physical works and other activities (such as those included in the project's institutional strengthening component) either completed or under execution by those dates, an analysis of CESAN's performance vis-a-vis the agreed monitoring indicators (Annex 20), a critical assessment of problems and issues arising during the period under analysis, proposals on adjustments and remedial actions required in case of unsatisfactory progress, and general financial projections. The complete progress reports to be submitted to the Bank by October 15 of each year will also include specific details on the investment plan for the upcoming year. The partial progress reports, to be submitted to the Bank by January 15 and July 15 of each year, will only include an assessment of the advancement of the physical works and other activities either completed or under execution by those dates. The final report, to be submitted to the Bank not later than six months after the loan closing date, will include an analysis of the project's key issues based on a retrospective assessment of project implementation from the perspective of the State and CESAN. 109. The set of physical, operational, environmental, and financial targets agreed during Appraisal (see Annex 20, Attachment 1) will be used as monitoring indicators and constitute the basis for project reviews and supervision, including the mid-term review. Five of those indicators (number of water and sewerage connections per employee; personnel costs as a percentage of operating costs--excluding depreciation; working ratio; debt service coverage; and internal contribution to investment) will be included as contractual obligations in the Legal Documents. CESAN's performance will be judged by comparing its actual results with the entire set of agreed indicators presented in Annex 20, including the complementary set of indicators selected for monitoring the expected long-term benefits of the project. In addition to the five indicators listed above, particular importance will be given during supervision and project reviews to the UFW percentage, the accounts receivable comparator, and the percentage of water connections with meters. Substantial compliance with the remaining group of monitoring indicators presented in Annex 20, will also be a contractual obligation under the Project Agreement. This set of monitoring indicators will also be incorporated into the Contract-Plan to be agreed between the State and CESAN. 110. As aquatic ecosystems response to domestic wastewater pollution load reduction is quite uncertain in time, and even more so when there are other sources of pollution as is the case of the project area, the environmental indicators will target measurable parameters, namely: wastewater - 29 - treatment plant efficiencies (to guarantee design goals and theoretical water quality model predictions); water quality monitoring points, frequency and parameters (to guarantee sufficient data to monitor environmental improvement and to establish long-term adjustments in the Espfrito Santo's pollution control program); and industrial pollution load reduction from existing uncontrolled industries (to guarantee reduction of other sources of pollution in specific locations of the area of influence of the project). E. Procurement 111. Civil works will represent about 60 percent of the total project cost, equipment and materials about 33 percent, and consultant services--including studies, technical assistance, training, completion of engineering designs, and project supervision and management--the remaining 7 percent. All contracts which can be packaged to exceed the equivalent of US$4 million for civil works and US$250,000 for equipment or materials will be procured on the basis of International Competitive Bidding (ICB). The Bank's Standard Bidding Documents will be used for procurement under ICB, with the necessary country and project changes agreed between the Bank and CESAN. For purposes of bid evaluation, domestic manufacturers will be given a margin of preference under ICB contracts for goods, in accordance with Bank Guidelines and following the special arrangements agreed between the Bank and the federal government of Brazil. All other contracts for civil works and equipment or materials not exceeding aggregate amounts of about US$60.4 million and US$0.8 million, respectively, will be procured under nationally advertised Local Competitive Bidding (LCB) procedures acceptable to the Bank. Procurement under LCB will use standard bidding documents under preparation by CESAN, based on a bidding document already discussed and agreed between the Bank and the company for the purpose of contracts to be considered for retroactive financing. The standard document submitted to the Bank before Loan Negotiations, reviewed in accordance with Bank comments, will be used for all remaining LCB. Under these assumptions, 78 percent of works and materials will be procured under ICB. Foreign firms will be allowed to participate in LCB. 112. Project costs by procurement method are presented in Table 3. Procurement planning was given a high priority to ensure a smooth and successful implementation of the project. In this regard, a detailed analysis of individual contract values and packaging was undertaken during project preparation and appraisal. Although CESAN has considerable experience in carrying out procurement, it is not fully familiar with Bank procedures. However, CESAN was fully involved during the analysis of procurement planning, gaining considerable experience and understanding of Bank procurement procedures. In addition, during the project launching seminar special attention will be given to clarifying and finalizing procurement implementation details. Annex 21 presents a summary of the detailed packaging of bids agreed for procurement purposes. 113. Consultants for detailed engineering and training, project management and supervision of construction, and the various studies and technical assistance planned under the institutional strengthening component, will be selected and hired in accordance with the Bank's Guidelines for the Use of Consultants (August 1981). When provided by firms, consulting services below the equivalent of US$100,000 will be subject only to the Bank's prior review of the terms of reference and the qualification of the selected consultant. When provided by individuals, consulting services below US$50,000 will also be governed by the same procedures. 114. All procurement under ICB (about 72 percent of total project costs) will be subject to the Bank's prior review of advertising, bidding documents, bid evaluation, and contract awards. In the interest of expediting project execution, all procurement under LCB will be subject to ex-post review by sampling. However, to ensure that adequate procurement procedures are followed, the Bank will review and approve--irrespective of the amount, the first two contracts under LCB for goods and for works. With these arrangements, the Bank's prior review of procurement procedures and documents will cover more than 80 percent of total Bank financed contracts. All procurement documents will be - 30 - subject to periodic and selective ex-post review by the Bank and external auditors. If the Bank determines in the review by sampling that procurement is inconsistent with agreed procedures, no expenditures for such items will be financed out of the proceeds of the Loan, and the Bank may cancel an equivalent amount of the Loan. Table 3 Project Costs by Procurement Method" IUS$ millions) PROJECTELEMENT: tC LCB OTHER TOTAL Civil Works 122.9 60.4 183.3 (49.2) (24.2) (73.4) Equipment and Materials 99.4 0.8 100.2 (59.7) (0.3) (60.0) Consulting Services 24.5 24.5 (20.6) (20.6) Total 222.3 61.2 24.5 308.0 (108.9) (24.5) (20.6) (154.0) iFigures in parentheses are the respective anounts financed by the Bank loan. F. Disbursement 115. The loan will be disbursed as follows: (i) 100 percent of foreign expenditures for civil works and imported equipment and materials; (ii) 45 percent of local expenditures for civil works, equipment. and materials; (iii) 100 percent of expenditures for services of foreign consultants; and (iv) 85 percent of expenditures for services of consultants domiciled in Brazil. To expedite project execution, a Special Account in the amount of US$8 million will be established in a commercial bank, acceptable to the Bank, to cover project expenditures. Loan disbursements against contracts for civil works below the equivalent of US$4 million, for goods below the equivalent of US$250,000, for consultant services provided by firms below the equivalent of US$100,000, and for consultant services provided by individuals below the equivalent of US$50,000 will be made under the Statements of Expenditure procedure prepared and certified by the PMU. Detailed documentation will be retained by CESAN and SEAMA for inspection during supervision missions and for audit by their external auditors. No force account works are envisaged. The estimated schedule of disbursement provides for loan disbursement in six years (see Annex 22). The Closing Date will be December 31, 1999. G. Advanced Contracting and Retroactive Financing 116. The Bank loan will finance works to be carried out during the period 1994-1999. Some of the works are urgently needed, for instance to rehabilitate and expand systems and to begin UFW control programs, and these are scheduled to start early in 1994. Other works are parts of annual investment programs with expenditures spread over the agreed investment period. In view of these needs, the project will provide for the following: (i) advanced contracting as of January 1, 1994, and amounting to US$20 million; and (ii) retroactive financing up to US$8 million for eligible expenditures made not more than 12 months prior to the Loan Signing date. Advance contracting and retroactive financing will be subject to the following conditions: (i) the subproject should comply with the agreed eligibility criteria; (iil Bank procurement guidelines should have been followed; and (iii) disbursements claims - 31 - against retroactive financing should be submitted no later than 90 days after the Loan Effectiveness date. H. Accounting and Auditing 117. Prior to Loan Negotiations, CESAN should have terms of reference ready for an assessment of its accounting and financial system, including an evaluation of its internal audit procedures. It was agreed, during Loan Negotiations, that external independent auditors will carry out an audit of the following: li) project accounts; (ii) financial statements of CESAN; (iii) Statement of Expenditures; and (iv) the Special Account. It was also agreed at Loan Negotiations that audit reports corresponding to each year will be submitted to the Bank no later than June 30 of the following year. V. AGREEMENTS TO BE REACHED AND RECOMMENDATION 118. Prior to Loan Negotiations the State submitted to the Bank a copy of the agreements between: (i) the State and CESAN on the capitalization of CESAN's debt with FAE (para. 101); and (ii) the State and the federal government on the renegotiation of Espfrito Santo's debt (para. 101). 119. Prior to Loan Negotiations CESAN submitted to the Bank: (a) TOR for studies on financial administration and internal auditing, information systems, and total quality (para. 101 ); (b) a copy of the agreement between CESAN and the Association of Paneleiras (Annex 1 5); (c) a complete program to comply with the conditions required in the environmental licenses issued by SEAMA (Annex 15); (d) a study on the financial effect in the medium-term of the introduction of a voluntary retirement program (para. 72); le) TOR for a fixed assets revaluation study and a draft contract for hiring a consultant to execute it (para. 76); and (f) complete information on tariffs and service costs for 1993. 120. Prior to Loan Negotiations the State and CESAN submitted to the Bank a draft of the Contract- Plan with general policies, objectives, and operational and financial indicators that covers the whole project period (1994-1 999), and a draft of a specific Contract-Plan that covers the first year of the project (para. 101). 121. During Loan Negotiations, the State of Esprrito Santo agreed: (a) to authorize, permit, or promote necessary improvements in CESAN's management and operational systems, and if necessary, any adjustment in the company's tariff rates to ensure continual compliance with the agreed financial performance indicators, including the generation of adequate internal cash consistent with financial plans for the project (para. 82); (b) to ensure timely provision of counterpart funds as envisaged in the financing plan of the project (paras. 66 and 82); - 32 - (c) to take any administrative action required to support CESAN to adjust both current and overdue accounts cumulatively for inflation, and to eliminate overdue bills (para. 82); (d) to have the Contract-Plan signed by September 30, 1994 (para. 101); (e) to hold a Mid-Term Review within two years after loan effectiveness to assess completion of studies and degree of implementation of proposed recommendations; to evaluate progress made by CESAN in carrying out plans to improve its commercial performance; to assess the effectiveness of the training and institutional strengthening to be provided to SEAMA, and to verify compliance with covenants of the Loan and Project Agreements (para. 107); and (f) to submit to the Bank progress reports by January 15, April 15, July 15, and October 15 of each year (paras. 67 and 108); (g) to have independent audits of project accounts, CESAN's financial statements, statement of expenditures, and the Special Account, and submit the results to the Bank not later than June 30 of the following year (para. 117). 122. During Loan Negotiations, CESAN agreed: (a) to select all individual subprojects, including those outside the Bank-financed part of its investment program, based on agreed subproject selection criteria (para. 80); (b) to substantially achieved the annual targets for its working ratio presented in Annex 20 and, under all circumstances, not to allow this ratio to fall below 60 percent (para. 80); (c) to take all measures necessary to generate sufficient internal cash to cover at least 3.5 percent of its 1994-95 total investment program--excluding IDC--by end-1995, 3.8 percent of its 1994-96 total investment program by end-1996, 8.1 percent of its 1994-97 total investment program by end-1997, 11.2 percent of its 1994-98 total investment program by end-1998, and 12.7 percent of its 1994-99 total investment program by end-1999 (para. 80); (d) to refrain from changing annual investments during the project implementation period by more than 20 percent of the investment amounts originally agreed, without prior Bank agreement (para. 60); (e) to gradually reduce personnel costs by: (i improving employee productivity, as measured by the number of water and sewerage connections per employee, which should increase to at least 254 by end-1 996, and at least 324 by end-1 999 (para. 80); and (ii) maintaining salaries and other permanent employee costs below 70 percent of operating costs (excluding depreciation), through December 31, 1999, and thereafter (para. 80); (f) to maintain a debt service coverage ratio not less than 1.5 (para. 80); (g) to carry out programs satisfactory to the Bank to improve its performance vis-a-vis agreed physical, operational, environmental, and financial targets (paras. 80 and 109, and Annex 20); - 33 - (h) to prepare and submit to the Bank not later than September 30, 1994, a tariff proposal based on Bank recommendations and an action plan for its implementation, and to put into effect the agreed recommendations by December 31, 1994 (paras. 64 and 94); (i) to adjust overdue accounts for inflation or take other measures which will reduce the financial losses resulting from overdue bills by December 31, 1994 (para. 73); Uj) to prepare a detailed study on the amounts and likely fiscal implications of a fixed asset revaluation before June 30, 1995, and incorporate the results into the audited financial statements of fiscal year 1995. This study should be repeated every three years to determine the necessity of further physical revaluations (paras. 76 and 80); and (k) to have the Contract-Plan signed by September 30, 1994 (para. 101), and to annually review it with the Bank and the State, not later than year-end (para 35). 123. Prior to Loan Effectiveness, CESAN should have signed with the State the Subsidiary Loan Agreement (para. 101). 124. Recommendation. Subject to the above conditions, the project is suitable for a Bank loan of US$154 million equivalent, to be repaid over a period of 15 years at the Bank's standard variable rate, with a five-year grace period and a loan amortization schedule based on level repayments of principal. Advanced contracting for up to US$20 million and retroactive financing for up to US$8 million for expenditures incurred after January 1, 1994, is also recommended (para. 1 16). BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT STAFF APPRAISAL REPORT ANNEXES BRAZIL ANNEX 1 ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT BANK LOANS TO BRAZIL FOR WATER SUPPLY AND SEWERAGE YEAR LOAN No. AMOUNT BORROWER PURPOSE Status of 04130194 COMMENTS US* Millon Corrmit. Dbbi 1971 757-BR 22.0 City Watr Co. Sao Paulo water distribution and storage. 100% 100% Project Performancs Audit Report IPPARI dated 04/04/80 1971 758-BR 12.0 City Water Co. Sao Paulo sewage collection and disposal. 100% 100% Idem. Loan amount reduced from US$1 5.0 million. 1974 1009-BR 38.0 BNH Water supply nd sewerage in the state of Minn 100% 100% Project Performance Audit Report dated 08/30/93. Geais. 1978 1309-BR 40.0 BNH Water supply nd sewerage in the state of Minas 100% 100% Project Completion Report IPCR) dated 04122/89. Gerask. 1978 1525-BR 62.5 BNH S5wersg colection & disposal in rnmtropolkan Sio 100% 100% U5t67.6 nillon cnae1d 1/86 PCR dated 1118/97. Paulo. 1979 1658-BR 100.0 BNH Water supply nd sewwrag in the state of Bahia, 100% 100% Project Completion Report dated 02/27/87. C-ed. wnd Pmrnambuco. 1980 1823-BR 130.0 BNH Wtr supply and sewrage in the states of Parani. 100% 100% Project Performance Audit Report dated 01/14/88. Santa Catrina nd Rio Grand do Sul. 1980 1860-BR 139.0 BNH Third Min_ Gersi Water supply nd sewerage. 100% 100% Project Conmpetion Report dated 02/23/90. 1981 1970-BR 180.0 BNH Multictate watersupply&sewerageproj ctinthe 100% 100% ProjectCompletionR port dated 07/27/90. states of Amazonas. Gdim. Mato Grosso do Sul, Pari6 Perba. and the Federal Disrct. 1983 2249-BR 302.3 BNH Wtwr suply and sewrag sector projet. 100% 100% PCR datd 10/24/91. 1985 2532-BR 18.3 Govt. of Brazi Technical mamstance to develop national rural water 100% 100% Unuued funds anounting to US$6.22 million cnceled. PCR and sanitation policies, mid a pilot rural wsanttion dated 10/21/91 - project in one state. 1998 2983-BR 80.0 CEF Water Sector Project for mn bicipalte nd low- 100% 34% ilesntsaton of Low-Income component IUS0S0 nilion) incor roes. in just beginning. 1989 3102-BR 280.0 SABESP Water Supply nd Sew rage Sector Project in Silo 99% 34% Loan becam affectivo on 07/08/90. After some delys due Paulo. to procurent problems. irplmntation advances now at a better pace. 1992 3442-BR 250.0 Govt. of Brazil Ititutional strengthening of the water supply & 38% 2% Loan becacm effective on 08/08/93. Implementation of the sewerage sctor. Specific invetments in the states khthutional conVmonnt advance at a atisactory pace nd of S nta Catrina. Mato Grocso do Sl nd Bais the investment component i beginning to Improve after the thres SWCa becm eligible for Bank financing. 1992 3604-BR 119.0 St. of Sio Paulo Watr QualitV nd Pollution Control. 39% 9% Loan becme affective on 05/17/93. 1992 3505-BR 117.0 St. of ParanA Water Quality and Pollution Control. 41% 2% Loan becawe effective on 05/17/93. 1992 3503-BR 9.0 Govt. of Brazi Water Quality nd Polution Control. 40% 0% Loan signature expected for second quarter-1994. 1993 3554-BR 145.0 State of Mines Water Quality nd Pollution Control. 42% 0% Loan becamre ffective on 09/08/93. Gersis -38- ANNEX 2 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT POLLUTION SOURCES 1. Domestic and industrial wastewaters and uncontrolled solid waste disposal are the main sources of pollution of the aquatic ecosystems of the Grande Vit6ria and Guarapari areas. The following matrices summarize the estimates of pollution loads from these sources. Organic loads (expressed as Biochemical Oxygen Demand, BOD) exert great oxygen demands on receiving water bodies which might affect aquatic life and other uses. Bacterial loads (expressed as Most Probable Number of Coliforms, MPN) can impair water uses such as water supply and recreation. The project is intended to reduce these loads, mainly from domestic sources, and will improve mechanisms and complementary actions for industrial pollution control and municipal solid waste collection and treatment. 2. Domestic pollution loads are based on population estimates and per-capita organic load potential (0.054 kg of BOD/capita/day). These estimates correspond to design parameters of all wastewater treatment systems carried out by CESAN. 3. Industrial pollution loads are taken from existing files in SEAMA's industrial pollution control program. Only major polluters are included as medium- and small-size industries are not yet fully controlled by SEAMA. The matrix shows potential and remaining loads after installed industrial wastewater treatment systems. Population equivalent estimates are based on remaining loads (after treatment) divided by the per-capita organic load potential (0.054 kg of BOD/capita/day). The existing wastewater treatment system in each major industry is also included. 4. The water pollution potential of uncontrolled solid waste disposal is taken from data from SEAMA's solid waste program using population estimates, per-capita solid waste production, and factors for contents of dry solid waste, organic matter, and BOD/organic matter ratios in total solid wastes for the municipalities in the area of influence of the project. However, these loads are not exerted directly on water bodies unless solid wastes are disposed near or directly in them. The real and effective pollution loads from this source is therefore very difficult to estimate. ANNEX 2 Attachment 1 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT DOMESTIC POLLUTION SOURCES 1993 SOURCES POPuLATION RECEIVING WATER 80DY WASTE WATER FLOW POTENTIAL SOD LOAD POTENTIAL COLU LOAD t:m3/dayl lko/dev (MPNIdayI 1. JUCU RIVER BASIN 9,715 JUCU RIVER 1.220 525 1.2 X 10" - Marechal Floriano 11,452 CORREGO DO GORDO 2,525 618 2.6 X 10l - Dorringo Martin Subtotal 21,167 3,745 1,143 3.7 X 10' 2. Ste MARIA RIVER BASIN - Sta. Maria de Jetiba 16,824 CORREGO SAO WIZ 3,959 908 3.9 X 10' - Ste. Leopoldina 4,067 Sta. MARIA 976 220 1.0 X 10" - Cariacica 184,000 BUBU/MARINHO BAIA 22,080 9,936 N.A. Subtotal 204,991 27,015 11,064 4.9 X 10 3. GUARAPARI BASIN Guarapari Downtown 94,058 OCEAN 22,550 5,059 22.5 X loll - Morro Beach 152.344 OCEAN 24,572 8,227 24.6 X 10"1D Subtotal 24e.402 47,122 13,286 47.1 X 10" 4. VITORIA BAY - Costa Beach 258,806 VICTORIA BAY 40,090 13,975 40.0 X 10" - Pau District 46,000 VICTORIA BAY 13.238 2,484 N.A. Subtotal 304,80e 53,320 16,459 40.0 X 10" 5. ESPIRITO SANTO BAY - Praia do Canto Beach/Envron 212.000 PASSAGEM CHANNEL 29.290 11.448 29.3 X 10' - Fatima District 14,928 PASSAGEM CHANNEL 6,912 8O6 6.9 X 10" - Vitoria Downtown 182.000 VITORIA BAY 21,168 7,128 N.A. Subtotal 408,928 57,370 19,382 36.2 X 10" 80D: Biochemical OxVgen Demand MPN: Cdliform Most Prbabe Number (MPN/day) BOD LOAD: (population) x (BOD/peron/dayl - (population) x 0.054 Kg/day COLI LOAD: (MPN Cogl Concantrationi I Wste War Flow) SOURCE: CESAN NA. Not Avalea ANNEX 2 Attachment 2 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT INDUSTRIAL POLLUTION SOURCES 1993 ~SOURCES EQUIVAL.ENT AECEIVNG WATER BODY ~ BOD IOAD (kald) TREATMENT TREATMENT TYPE POPULwION EFFICIENCY POTENTIAL REMAINBIG 1. JUCU RIVER BASIN - INDUSTRAS DE BEBIDAS ANTARTICA 635 JUCU RIVER 1.617 34 97.9 ANAEROBIC LAGOON + ACTIVATED SLUDGE - C.C.P.L 370 JUCU RIVER 400 20 95.0 ACTIVATED SLUDGE - REAL CAFE 577 FORMATE RIVER 690 31 95.5 AERATED LAGOONS - CHOCOLATES VITORIA 8.411 FORMATE RIVER 454 454 0.0 DESIGN APPROVED BY SEAMA - FRIGORIFICO HAROLDO 106 FORMATE RIVER 58 6 90.0 EMSCHER TANK+ ANAEROBIC - DUMLHO 23.148 JUCU RIVER 1,250 1,250 0.0 LAGOON+FACULTATIVE LAGOON - PESSA 27.666 MARINHO/BAY 1.494 1,494 0.0 DESIGN APPROVED BY SEAMA - CHOCOLATES GAROTO 1,300 NETWORK/BAY 70 70 0.0 DESIGN APPROVED BY SEAMA - WIGI 2,888 NETWORK/BAY 156 156 0.0 DESIGN APPROVED BY SEAMA - REFRIGERANTES IATE 2.235 MARINHO/BAY 121 121 0.0 DESIGN APPROVED BY SEAMA BRASEPEROLA 4.694 FORMATE RIVER 643 254 60.6 PHYSICAL-CHEMICAL TREATMENT Subtotal 72,030 6,953 3,890 2. Sta MARIA RIVER BASIN - FRINCASA 833 ITUANGA CREEK 1,300 45 96.7 ANAEROBIC AND FACULTATIVE LAGOON - FRIGORIFICO PALOMA 685 BUBU RIVER 1.208 37 97.0 ANAEROBIC AND FACULTATIVE LAGOON 0 - FRIGORIFICO SERRA GRANDE 10.074 ITUANGUA CREEK 544 544 0.0 DESIGN APPROVED BY SEAMA - FRIMACAL 685 BUBU RIVER 1.208 37 97.0 ANAEROBIC AND FACULTATIVE LAGOON * FRIGORIFICO CINCO PONTOES 9.259 PIRANEMA CREEK 500 600 0.0 DESIGN APPROVED BY SEAMA - REFRIGERANTES VITORIA 55 BUBU RIVER 127 3 0.0 UPFLOW DIGESTER AND ACTIVATED SLUDGE Subtotal 21,591 4,887 1.166 0 3. ESPIRITO SANTO BAY A) Comrpnhia Vale Do RPi Doc.-CVRD - Suporintendencia do Estrada 430 OCEAN 23 23 0.0 N.A. - Sup_rntondeia do Pelatizacoo N.A. OCEAN N.A. N.A. N.A N.A. - Suprintanencis de Portos 1,033 OCEAN 55 55 0.0 N.A SI CompanNh Siderurgica de Tubro CST- Cawboquiffica 3,003 OCEAN 5,002 161 97.0 ACTIVATED SLUDGE SubtotW 4.4e6 5.080 239 TOTAL 98,087 16,s20 5,194 BOD: Biochemical Oxvgen Demad BOD Load: BOD concentration x W_tewatr Flow Equivalet Populaion: kxdetu OD Load/BOD/captk/day - 0.054 Kg/capitaday Source: SEAMA Idustria Poldion Prgam NA. Not 4lavblb ANNEX 2 Attachment 3 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT SOLID WASTE PRODUCTION AND WATER POLLUTION POTENTIAL 1993 : i- y Popla0o SoldWte Pot-"a B L Equivalent CurrentB Stuton --- : ..t Prodcto,n fKq/day) Ppulam atio aler olkrlutio (Kg:d-yi Co letio Disposi - - SERRA 239,705 119,853 11,475 212,507 Good Good None Controlled Landfill VITORIA 272,907 136,454 13,065 241,942 Good Acceptable Great Recycling Plant CARIACICA 284,783 142,392 13,633 252,471 Erratic Bad Great Open Dumps VILA VELHA 283,766 141,893 13,586 251,587 Erratic Bad Great Open Dumps VIANA 44,357 22,179 2,124 39,324 Good Bad Great Open Dumps GUARAPARI 58,343 29,169 2,793 51,723 Good Bad Great Open Dumps TOTAL 1,183,881 591,940 56,675 1,049,554 BOD: Biochemical Oxygen Demand SOLID WASTE PRODUCTION: Population x 0.5 Kg/person/day BOD load: Solid Waste Production x DC x OM x Cl DC: Fraction of dry solid waste = 0.78 OM: Fraction of organic matter = 0.21 Cl: BOD/organic matter ratio 0.57 Source: SEAMA's Solid Waste Program -42- ANNEX 3 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT STATE OF INDUSTRIAL POLLUTION CONTROL IN ESPIRITO SANTO' COMPANY AIR POLLUTION WATER POLLUTION CVRD 2 _ Partially controlled - Totally Controlled - There are 3 electrostatic precipitators to be installed in the pellet factories before December 1993 CST 2 _ Partially controlled - Partially controlled (activated sludge) - Installation of disulphur of kiln gas - A system for the removal of (without time limit), and substitution of ammonia to be installed before kiln door and other small particle September 1995 systems is 95% completed as of January 31, 1994 - CTS is asking for US$30 million COFAVI 2 _ Partially controlled - Treatment system needing - Installation of second phase of iron improvement undusting system required before January 1994 CBF - Project under analysis DUMILHO - Company requested to present a - Company requested to present a project project TERCON - Controlled - Controlled ORNATO L Controlled - Control system being implemented LOGASA - Controlled INCOSPAL - Installed control system needing - Controlled improvement SOBRITA - Control system being implemented - Controlled SIDEPAR - Uncontrolled CONCREVIT - Controlled - Controlled ANDRADE E - De-activated factory - De-activated factory FREITAS SERVICO - De-activated factory - De-activated factory CONCRET. GRANDE VITORIA CARBO - Control project under analysis - Controlled INDUSTRIAL REAL CAFE - Installed control system needing - Controlled improvement CHOCOLATES - Uncontrolled - Control system project approved VITORIA -43- ANNEX 3 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT STATE OF INDUSTRIAL POLLUTION CONTROL IN ESPIRITO SANTO' (Cont.) -COMPANY AIR POLLUTION WATER POLLUTION BRASPEROLA 2 - Controlled - Physical/chemical treatment system installed - Biological treatment system to be installed before March 1994 CCPL - Controlled - Control system beginning operation ABATEDOURO - De-activated factory - De-activated factory SAO SEBASTIAO ALBERTO P. - De-activated factory - De-activated factory LEIROZ FRIMACAL - Uncontrolled - Implemented treatment system with operational problems PALOMA - Uncontrolled - Implemented system with operational problems SERRA GRANDE - Control system project approved and .________________ _______________under implementation CORTUME DO - De-activated factory - De-activated factory NORDESTE IPESSA - Controlled - Treatment system approved and under implementation CHOCOLATES - Controlled - Partially controlled GAROTO _ DPI - De-activated factory - De-activated factory VENNER LINE - De-activated factory - De-activated factory GINCAL - Controlled CASSARO - Uncontrolled GINCAL (SS) - De-activated factory - De-activated factory RAMIRO - Uncontrolled ARACRUZ - Controlled - Controlled CELULOSE 2 - The company is showing - The company is installing an improvement in already installed emergency lake for rain water control systems, to obtain approval storage for an operating license - The company requested US$30 million for air and water projects _ As of July 31, 1993. Major pollutants only. 2 Industries which have asked for financing under the Industrial Pollution Control Project (PRONACOP). Source: SEAMA Industrial Pollution Control Program -44- ANNEX 4 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT WATER QUALITY MATRIX 1. The water quality matrix presented in this Annex summarizes the current and desired water quality levels for the project area. The current and desired water quality conditions are given for the Santa Maria da Vitoria river basin, the Jucu river basin, the Guarapari river basin, and the coastal waters in the area of influence of the project. The water quality models which are discussed in Annex 15 (Environmental Assessment), are based upon the Pollution Sources Matrix (Annex 2) as organic load inputs and the current water quality conditions as a model calibrating tool. The projected water quality conditions for a time horizon of twenty years, forecasts future conditions without wastewater treatment, and under different wastewater collection and treatment strategies. The water quality objectives act as points of reference or goals to be achieved for the water pollution management program. 2. The current water quality conditions are taken from the results of sporadic water quality monitoring campaigns carried out by SEAMA. The selected water quality parameters are Dissolved Oxygen (DO), Biochemical Oxygen Demand (BOD), and Coli-fecal concentration (expressed as Most Probable Number of Coliforms, MPN/1 OOml). These parameters have a direct correlation with the project as the proposed treatment systems are intended to reduce organic (as BOD) and coliform (as MPN) loads from domestic sources, and the expected results will be measured as reduction of BOD and MPN, and as improvement of dissolved oxygen (DO) levels in receiving water bodies. Water quality objectives and water use classifications are taken from the proposed water quality objectives legislation prepared by SEAMA and currently being promoted through the State's legal process. The proposed legislation is included in project files. The proposed legislation includes water use class and water quality limits for fresh waters (inland rivers and creeks), brackish waters (mainly estuaries and coastal lagoons and other waters with intermediate salinity), and coastal waters (beaches and the open sea). 3. Proposed water use categories and water quality limits for selected parameters are summarized at the end of the matrix. - 45 - ANNEX 4 Attachment 1 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT WATER QUAUTY MATRIX -Cutn CURRENT WATER QUAUTY * River/Sagmens cft59-y SODMo.I 00mg/I MPN/1 Oon-m SANTA MARIA DA VITORIA RIVER BASIN 1.0 SANTA MARIA RIVER River Head AA AA to S. Sebastiao River B A to S. Sebastao Baixo Creek D 2.0 7.3 >2.2 x 104 B to S. Leopoldina B 2.0 8.5 3.4 x 102 B to Mangarai River D 2.0 2.8 2.4 x 10' B to Tide Influence Area B 2.0 7.0 1.6 X103 8 to River Mouth I_F 1 .1 Tributaries to Santa Maria River Duas Bocas, Prata, and Mangarai Rivers, and S. Sebastiao Baixo & D'Ouro Creeks B NA NA NA B 2.0 BUBu RIVER River Head AA AA to Areinha Creek B 2.0 6.0 2.8 x 103 B to Monitoring Point 1CO16 D 64.0 5.0 >2.4x 103 B to Tide Influence Area E 296.0 0.9 >2.4 x 104 C to River Mouth J NA NA NA G 2.1 Tributaries to Bubu River Tanque Creek B NA NA NA B Areinha Creek E 21.0 1.9 >2.4 x 10' C Cahoeiro Creek D NA NA NA B JUCU RIVER BASIN 1.0 Jucu RivER River Head AA NA NA NA AA to Jucu North Arm AA NA NA NA AA 1.1 Jucu North Arm River Head to Pedra Azul Creek B NA NA NA A to Tijuco Preto Creek B NA NA NA B to Confluence with South Arm D 2.0 7.9 2.0 x I03 B 1.1 .1 Tributaries to North Arm Tijuco and S. Vicente Creeks, and Melga9o and Galo Rivers B NA NA NA B 1.2 Jucu South Arm River Head to S. Floriano Creek A NA NA NA A to Fundo River B NA NA NA B to Confluence with North Arm D 2.0 7.6 >2.4 x 10' B 1.3 From Confluence of North & South Arms to Tide Influence Area D 2.0 7.6 3.6 x 103 B to River Mouth I NA NA NA F - 46 - ANNEX 4 Attachment 1 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT WATER QUALITY MATRIX (cont.) PJv.r/Sqm.nts I Categ .................. .. URENT WATERt OUAUTV * Poob 20 F EJUCU RIVER BASIN 1.2.1 Tributaries to South Arm S. Floriano Crook A NA NA NA A Fundo River a NA NA NA a 2.0 FoCMMATE tavrER River Head AA AA to Jaquita Creek A NA NA NA A to Montanha Creek B NA NA NA B to Marinho River D 30.0 3.0 >2.4 x 104 B 2.1 Tributaries to Formate River Jaquita Creek B NA NA NA B Roda D'Agua Creek B NA NA NA B Montanha Creek B NA NA NA B Areainha Creek D NA NA NA B Tanque Creek D NA NA NA B 3.0 MARINHO CREEK River Head AA NA NA NA AA to Tide Influence Area E 40.0 0.4 >2.4 x 104 C to River Mouth J NA NA NA F GUARAPARI RIVER BASIN 1. JABuTn RIVER HEAD AA NA NA NA AA to Tide Influence Area A NA NA NA A to River Mouth F NA NA NA F 1.1 Tributaries to Jabuti River Concei9io River A NA NA NA A 2. PERoQAo RIVER . to Oratorio River A NA NA NA A to Tide Influence Area B NA NA NA B to River Mouth I NA NA NA F 3. UNA RIVER to Amarelo Creek B NA NA NA B to tide influence area D NA NA NA C to River Mouth I NA NA NA F COASTAL WATERS From Maringa Creek Downstream to Praia Mole K K K K K to Costa Beach M NA NA NA K to Baff Jucu Upstream K NA NA NA K to Jucu River Mouth M NA NA NA K to Setiba K NA NA NA K to Guarapari Downtown M NA NA NA K to Meaipe Downtown K NA NA NA K ANNEX 4 Attachment 2 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT PROPOSED WATER QUALITY CATEGORIES Water Ouafty Catgore/Clae - W-atr UWea - Freeh Water reckish Water Coastal & Sea Water AA A B C D E FF F G H I J KK K L M N Public Supply w/w.o. Disinfection x D H X D H D H Preservation of water communities x 0 I x x 0 1 x 0 0 Scientific/educational purposes x x E G E G X X E G Public supplya fter treatment X x S H x x X S H S H Flora & fauna protection x x N L x x N L X X N L Recreation through direct contact x 0 Y x x 0 y x 0 Y Grazing/agricultural uses x T x x x T x T Fishng X X M P x x MI P x x M P Navigation X x x E 0 x E 0 E 0 Recreation through indirect contact x x E L X E L x E L Landscape preservation X x T L T L T L Energy generation x x u x u u Industrial supply x R T x G T K T Shellfish/aquatic life/raw 0 E 0 E x O E consumption R D R D R D Conservation of reefs/sea ecosystem c X Breeding of species H x L -Water Qality Umits BOD DO MPN/ Class mng/l mgDO 100 mPN SOD Biochem4cal Oxygen Denand Close ngA mg -0r DO Dissolved Oxygen AA,FT.KK <3 >6.5 Absent MPN/100 rS Most Probable Numbers of Coliforms A, F. K <3 >6.5 <250 * Worst conditions found during most recent BG, <5 - - water quality monitoring campaign C,H <10 >5.0 <4000 L <10 >6.0 <4000 D.l Does not meet B/C, G/H M Does not meet L E. J. N Highly polluted ANNEX 5 Attachment 1 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN PROJECT MANAGEMENT UNIT ORGANIZATION CHART Steering Committee [ l Board of Directors General Coordinator Project Management Unit Planning,&EcFnancial Studies EEnvironment &S Supevisin Fnancal tudis Eginerin Stuies Ucensing Studies Water Resources Development ANNEX S Attachment 2 BRAZIL ESPIRITO SANTO WATER AND COASTAL POULUTION MANAGEMENT PROJECT COMPANHIA ESPIRITO SANTENSE DE SANEAMENTO - CESAN ORGANIZATION CHART |=~~R-d _S d Uod AdWow PVesd . Iwou Illook ON" oflDo vim *~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Pfuism~~~~~~~~~~~ Tenlpt | b 1[Pnnn iS - l| Controlze Pl also eedn |Findnc Di_atr| 0_ |Acrnitativle Fi n|wlo Superintendent |MeIterrolinbta nn||l SueinedetSuprntnet uenfnw Spdtwin ANNEX 5 Attachment 3 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT ENVIRONMENTAL INSTITUTIONS PROPOSED ORGANIZATION CHART Secretary of State for the State Institution for the | Enviroment SEAMA Environrment IEA Technical and Legal Advisory BMoard Administrative Coundcl | DeputYD irectors I e l l l ~~~~~~~~~ ~~~~~~~~~~~~~President l Natural Resources | | Technical SupportControlEducaEdan R esr h & | C datr ||Coordinator| | Coordinator| | Coordinator Reaton Technical Director| Community Developrent Support Control Relations 0 f < 0 -51- ANNEX 6 Attachment I BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN INSTITUTIONAL DATA December 1993 NDICATOR UNIT CESAN A. SOCIO-ECONOMIC Average Monthly Household Income MSiJ 5.9 Households Eaming 1MS or Less per Month % 15.7 Households Eaming 2MS or Less per Month % 32.5 Households Eaming SMS or Less per Month % 61.4 Electricity Coverage % 89.2 Infant Mortality #/000 38 Life Expectancy years 64 B. OPERATIONAL State Urban Population #(000) 2,048 Urban Population in Concession Area #(000) 1,512 Urban Population in Concession Area % 74.0 Municipalities Served with Water Supply # 49 Localities Served with Water Supply # 102 Water Coverage Level % 91 Water Systems in Operation # 86 Water Connections # 296,256 Water Customers # 443,387 Per Capita Production (Annual Average) lpd 269 Per Capita Consumption (Annual Average) lpd 145 Water Billed per Customer (Annual Average) m3/month 26.9 Municipalities Served with Sewerage # 9 Localities Served with Sewerage # 10 Sewerage Coverage Level % 11 Sewerage Systems in Operation # 10 Sewerage Connections # 29,320 Sewerage Customers # 55,199 C. ADMINISTRATIVE Total Number of Employees # 1,557 - Administrative Employees # 644 - Water Operations Employees # 840 - Sewerage Operations Employees # 73 Number of Professionals # 214 Annual Average Salary per Employee US$ 21,164 Annual Employees Turnover % 1 Average Staff Trained in Last 5 years #/yr 331 Administrative Regions # 5 Regional Offices 46 1/ MS = Minimum Salaries. -52- ANNEX6 Attachment 2 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT SEAMA INSTITUTIONAL DATA December 1993 INDICATOR UNIT: SEAMA A. OPERATIONAL Industries Controlled (from July 1992 to July 1993) 173 Inspections in 1993 1,044 Environmental Licenses Issued in 1993 400 Environmental Impact Reports (RIMAs) Issued in 1993 2 B. ADMINISTRATIVE Number of Employees 325 Total Number of Professionals 140 Annual Average Salary per Employee US$ 7,000 Annual Employees Turnover % 34 Average Staff Trained in Last 5 years #/yr 108 ANNEX 7 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT WATER SUPPLY AND SEWERAGE SYSTEMS DISTRIBUTED BY SIZE December 1993 WATER SUPPLY SEWERAGE ANNUAL AVERAGE - - - VOLUME PER SYSTEM Systems Annual Production Systems Sewage Collected (000 m3S) ____________ % m3(000) % - m3(000 % - Up to 100 30 35.7 1,562 0.8 4 22.2 275 1.9 From 101 to 500 33 39.3 8,850 4.5 6 33.3 1,746 12.2 From 501 to 1,000 12 14.3 7,398 3.7 3 16.7 1,761 12.3 From 1,001 to 5,000 7 8.3 9,741 4.9 5 27.8 10,567 73.6 From 5,001 to 10,000 1 1.2 7,995 4.0 0 0.0 0 0.0 From 10,001 to 15,000 0 0.0 0 0.0 0 0.0 0 0.0 From 15,001 to 50,000 0 0.0 0 0.0 0 0.0 0 0.0 From 50,001 to 100,000 0 0.0 0 0.0 0 0.0 0 0.0 More than 100,000 1 1.2 163,216 82.1 0 0.0 0 0.0 Total Systems 84 100.0 198,762 100.0 18 100.0 14,349 100.0 SYSTEMS: avWs4 -54- ANNEX 8 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN'S 1994-1999 INVESTMENT PROGRAM 1. The 1994-1999 investment program of CESAN (Attachments 1 and 2) has been designed mainly to reduce the water pollution levels of rivers and coasts in the area of Grande Victoria and Guarapari (see IBRD Maps 25606 and 25646). To achieve this objective, CESAN will improve the operational efficiency of its water supply and sanitation system, improve the quality of its water supply and sanitation services, and increase current coverage levels of both services. At the end of the implementation period (December 1999), about 550,000 people will have gained access to water supply and more than 770,000 people to water-borne sewerage services. After 1999, a significant number of additional people will also benefit from subprojects that, although being the least-cost solution, will be exhibiting varying degrees of spare capacity during the first operational years. Other important physical objectives are included with the agreed monitoring indicators presented in Annex 20. 2. CESAN's total investments for 1994-1999 will be about US$305.5 million (excluding physical and price contingencies, and interest during construction) of which US$251.9 million will be the Bank project. About US$70.4 million of projected inve0tments under the IBRD project (28%) will be directed to optimize, reinforce, and expand its water supply\systems; about US$166.5 million (66%) to expand its sewerage systems through the construction of new systems that will include treatment and appropriate final disposal of sewage; about US$10.1 million (4%) to optimize and control unaccounted- for water (UFW); and the remaining US$4.9 million (2%) to manage and supervise the investment programs. A. WATER SUPPLY 3. The water supply component of the Bank project covers three specific geographical areas: Grande Vitoria (US$40.6 million), Guarapari (US$19.4 million), and other cities and towns of the interior (US$7.5 million). The additional US$10.1 million CESAN plans to invest in optimizing and controlling UFW will be distributed among these areas, proportionally to the current number of connections in each area. Grande Vit6ria 4. In this geographic area, US$40.6 million will be invested in water treatment plants, pumping stations, transmission pipelines, reservoirs, distribution pipelines, and connections. The most important works are described in the following paragraphs. 5. Treatment Plants. The treatment plant of Carapina will be expanded to cover an additional population of about 141,000 inhabitants. Works will include a raw water pumping station of 1,250 CV and two filters of 293.5 I/s each. 6. Transmission and Sub-Transmission Pipelines. The total length of the transmission and sub- transmission network will be increased by about 33.8 km. New transmission pipelines will be built for the systems of Garoto (10.0 km), Ibes (12.2 km), Setor Civit (3.5 km), SetorJacaraipe (3.1 km), and between Santa Clara-Santo Antonio (1.5 km) and to connect ETA l-Argolao (2.5 km). The sub- transmission network of Cariacica will be expanded 1.0 km. 7. Reservoirs. Storage capacity will be increased by about 30,890 m3. Additional storage capacity will be built in the following systems: Planal (10,000 m3), Santa Clara (1,390 m3), Vale Esperanca (5,000 m3), Garoto (5,000 m3), Ibes (6,000 M3), and Setor Civit (3,500 M3). -55- ANNEX 8 8. Pumping Stations. Pumping stations in CentroNit6ria-Santa Clara (60 HP), Carapina/Serra- Setor Civit (three pumps of 700 HP and one of 350 HP), Carapina/Serra-Setor Jacaraipe (200 HP), Nova Almeida/Serra-Setor Nova Almeida (100 HP) will be constructed. 9. Distribution System. To expand the service, CESAN will build the Anel Sotema/Itaquari (2.6 km), and new distribution networks for ETA Carapina/Cidade Continental (10.3 km) and Castelo Branco/Cariacica (4.5.km). And to respond to expected population growth, CESAN will build 680.7 km of new distribution pipes and 59,041 new connections in Grande Vit6ria. Guarapari 10. In the area of Guarapari, an investment of US$ 19.4 million in water supply will be divided into the following items: 11. Treatment Plants. A complete new treatment system will be built. This system will cost about US$10.3 million and comprise a new water intake, pumping stations (three of 450 CV, three of 175 CV, and three of 350 CV), a transmission pipeline for raw water (14.7 km of 700 mm in diameter), and the treatment plant for 560 I/s. 12. Reservoirs. Five new reservoirs with a total capacity of about 13,544 m3. will be built. One of these reservoirs will have a capacity of 7,500 m3, two of 2,372 m3, one of 1,000 m3, and one of 300 m3. 13. Transmission Pipes. One transmission pipe of 18.4 km in length will be built. 14. Distribution. There will be a construction of 100.6 km of distribution pipelines, and 2,831 connections with meters and 318 without meters. Other Cities and Towns 15. Other cities of the interior will be served with the following systems: luna (49.2 I/s treatment plant), Nova Venecia (interceptor, transmission pipelines, and a 82.3 I/s treatment plant), Castelo (interceptor, transmission pipelines, and a 79.2 I/s treatment plant), Conceicao da Barra (reservoir of 1,400 m3 and sedimentation tank), Sao Gabriel de Palma (interceptor, transmission pipelines, and reservoir). Additionally, attention will be given to expected population growth by building 185.6 km of new distribution networks, and 8,276 connections with meters and 921 without meters. Investments Outside the Bank Project 16. Investments of about US$47.2 million (excluding physical and price contingencies and IDC) will be implemented outside the Bank project (see Attachment 2). These investments are for expanding the water supply production system of Grande Vit6ria. Most of these projects are already under construction with financing by CEF and the State government. The investments seek to increase water intake in about 1,300 I/s; to build the water treatment plants of Vale Esperanqa (1,800 I/s) and Cobi (100 I/s); to add 1.65 CV of pumping capacity; and to build a 34.5 KV power transmission line of 11.0 km, a new water transmission pipeline of 2.0 km (1,500 mm in diameter), and a new reserve pumping station. B. SEWERAGE AND SANITATION 17. The sewage collection and treatment component of the Bank project covers the same three geographical areas adopted for water supply: Grande Vit6ria (US$129.8 million), Guarapari (US$25.9 million), and other cities and towns of the interior (US$9.5 million). The sub-projects of this component are of major importance in the Bank project, and will determine the real innovation in the -56- ANNEX 8 services provided by CESAN. The principal data are presented in Attachment 1. These sub-projects consist of connections, systems of collection and transportation, residual water treatment, and final disposal. Grande Vit6ria 18. The sub-projects for Grande Vitoria were design to protect the Bay of Vitoria and the beach of Camburi, and to strengthen urban infrastructure. They are the following: * Vit6ria/Centro (50 km of sewerage collectors and interceptors, two pumping stations, and one treatment plant for activated sludge); * Praia do Canto (168.6 km of sewerage collectors and interceptors, ten pumping stations, and one system of ponds); * Serra/Bairro de Fatima (18.1 km of sewerage collectors and interceptors, and two pumping stations); * Vila Velha/Praia da Costa (197.9 km of sewerage collectors and interceptors, 13 pumping stations, and one facultative pond); * Vila Velha/Paul (68.7 km of sewerage collectors and interceptors, and five pumping stations); and * Cariacica/Campo Grande (142.8 km of sewerage collectors and interceptors, seven pumping stations, and one system of ponds). Guarapari 19. The objective of sewerage and sanitation works to be built in Guarapari is to protect the beaches and the urban infrastructure of this important tourist center. The subprojects contemplated are the following: * Praia do Morro (78.9 km of sewerage collectors and interceptors, 9 pumping stations, and one system of ponds); and * Guarapari/Centro (46.9 km of sewerage collectors and interceptors, 4 pumping stations, and one aerated lagoon). Other Cities and Towns of the Interior 20. These projects are primarily directed to the protection of the basins of the Jucu and Santa Maria rivers, which are the sources of potable water for Grande Vit6ria. These projects are: * Domingo Martins (10.5 km of sewerage collectors and interceptors, two pumping stations, and one system of ponds); * Marechal Floriano (12.8 km of sewerage collectors and interceptors, six pumping stations, and one system of ponds); * Santa Maria do Jetiba (18.6 km of sewerage collectors and interceptors, four pumping stations, and one system of ponds); and -57- ANNEX 8 * Santa Leopoldina (6.6 km of sewerage collectors and interceptors, five pumping stations, and one system of ponds). Investments Outside the Bank Project 21. Investments of about US$6.4 million (excluding physical and price contingencies and IDC) will be built outside the Bank project (see Attachment 2). A part of these investments are for building a sewerage and sanitation system in the area of Jardim Camburi (Grande Vitdria). The project, already under construction, is being financed by IDB and the Federal Government under the PROSEGE program. About US$1.7 million (of a total cost of about US$6.4 million) is the project's remaining cost. The project includes: 3,345 connections, 39.9 km of collectors, a pumping station for raw sewage of 66 CV, and an outfall pipe of about 1.4 km. rANNEX 8 Attachment 1 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT PROPOSED SEWERAGE AND WASTEWATER TREATMENT SYSTEMS No. SYrSTEM CiTy POPuLATIONw CONNECTIONS' SEVERAOr AS WATER COST F0I CAPITA EN-INEERIN (I) SYSTEw ,TREATMENT AJ$ lO) CS0E4# 01 Vit6dr-Centro Vatoria 78,660 11,386 60 Activated Sludge 12.139 168 NO 02 Pria do canto a Vlt6rIe 212,000 22,633 169 Aerated Pond 40,534 202 YES Adjacdncias 03 Balrro de Fitima * Senr 18,119 4,256 18 Aerated Pond 2,989 171 YES Adjac6ncias Fecufative Pond' 04 Praia de Costa a Vila Velha 207,045 24.490 198 Fecuftative Pond 41,498 203 YES Adjacnclas _ 05 Paul a Adjacdnclas Vila Velhe 39,258 6,836 69 38,273 216 NO 06 Caepo G3rande a Cariecics 143,393 20,078 143 Fecuhtatve Ponds 20,887 164 NO ___________ Adjacdncies 07 Praia do Morm o Guareperl 152.344 6,265 79 Anaerobic Pond 15,235 110 YES Adjec6ncias Facuftative Pond 08 Guarapear - Centro Guarapari 84,724 4,291 47 Aerated Pond 10.547 129 YES 09 DomIngos Matnns Domingo. Martins 11,452 868 11 Imhotf + Bboflter 1,466 166 YES - Soda Facuhthtae Pond 10 Machal Florbano - Marechal Florbano 9,374 881 13 Anaerobic Pond 3,532 410 YES Sede Facuttative Pond 11 Santa Leopeldin - Santa Leopoldina 4,067 481 7 Facuhatkv Pond 1.090 299 YES Sede 12 Sta. Maria Jetibi- Santa Maria 16.824 900 19 Inhotf + BlofIter 3.231 277 YES Sede de JetibA Facuftatie Pond TOTAL 977,260 103,366 823 161,421 186 1 Total benfkid at nd of design perod Total connetorn at beghnhe of project 3 Sewae bamt in anothw system 4- 59 ~~~~~~~~~ANNEX8 Atchment 2 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN'S INVESTMENT PROGRAM USS Thousands as of Junw, 1993 --SCRIPTION 1994 1995 19:6 1997 1998 1 I IBRD PROJECT A WATER SUPPLY 4,645 5,019 5,205 34,957 15,843 4,887 70,356 A1 GRANDE VITORIA 3.240 3.394 ,3.553 21,736 4.566 4,092 40,601 Raw atwr Intake, Trnsmison & Pumping 0 0 0 0 606 0 0 606 Treatment 0 0 0 852 0 0 852 Treabd WaterTransmission&Pumping 0 0 0 11,326 0 0 11,326 ReCwrvoi & Distbbution 2,165 2,251 2.337 7,657 3,205 2,618 20,233 Connections 1,075 1,143 1.216 1,295 1.361 1.474 7,584 A.2 GUARAPARI 51 53 50 9,616 9,619 57 19,446 Raw Water Intake, Transmision & PumpIn 0 0 0 2922 2,922 0 5,844 Treatmont 0 0 0 1,578 1.578 0 3,156 Treated Wate Transrnision & Pumping 0 0 0 2,370 2,370 0 4,740 Reservoirs & Distibuton 0 0 0 2,894 2,694 0 5,388 Connections 51 53 50 52 55 57 318 A.3 OTHER SYSTEMS 604 629 658 3,445 1,438 738 7,512 Raw atWr Intake, Transmisson & Purnpng 0 0 0 533 175 0 708 Treatdmnt 0 0 0 1.160 291 0 1.451 Trebd Water Transmison & Pumping 0 0 0 268 148 0 416 Resrvoirs & Distribution 467 487 505 1,325 659 567 4,010 Connections 137 142 153 159 165 171 927 A.4 ENGINEERING 750 943 944 160 0 0 2.797 B SEWERAGE 25,199 38,003 47.046 15,246 26,578 14,461 166.533 B.1 GRANDE VITORIA 17,672 29,286 35,923 6,020 26,497 14.378 129,776 Connectons 2,631 3,257 3,701 1,807 6,106 3,695 21,197 Collectors & lnterceptors 9.297 11,630 13,179 2.642 13,764 6,938 57.460 Pumping Statons & Raw-Sewage Prsure Pipe 2,166 3,792 4,611 397 2,689 1,419 15,074 Treatment & Outfl Pipes 3,578 10,607 14,432 1,174 3,938 2,326 36,055 B.2 GUARAPARI 7,109 8,126 5,720 4,878 46 47 25,926 Connections 538 615 449 387 46 47 2082 Collectors & Interceptors 3,128 3,575 1,645 1,401 0 0 9.749 Pumping Stations & Raw-Sewage Pressure Pipes 1,484 1,696 794 677 0 0 4,651 Treatment & Outfall Pipes 1,959 2,240 2,832 2,413 0 0 9,444 8.3 OTHER SYSTEMS 18 19 5,018 4,348 35 36 9,474 Connections 18 19 347 282 35 36 737 Collectors & Intercoptors 0 0 1,934 2,084 0 0 4,018 Pumping Stadons&Raw-S wagoPresure Pipes 0 0 659 439 0 0 1,096 Treatment & Outfall Pips 0 0 2,078 1.543 0 0 3,621 B.4 ENGINEERING 400 572 385 0 0 0 1,357 C OPERATIONALDEVELOPMENT 3,769 2,287 1,965 1,055 907 160 10,143 D PROJECT MANAGEMENT & SUPERVISION 700 900 1,000 1,000 850 400 4,850 IBRD PROJECT BASE COST 34.313 46,209 55.216 52.258 43.978 19.908 251.882 Physical Contingenci 1,716 2,310 2,761 2,613 2,199 995 12,594 Price Contingenies 1,137 2,755 5,008 6,409 8,837 3.429 25.574 TOTAL IBRD PROJECT COST 37.166 5275 62.984 61.279 53.014 24.332 290 050 -60- ANNEX11B Attachment 2 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN'S INVESTMENT PROGRAM USS Thousads am of Jun.. 1993 QE$CFIPTJON 1994 199........I 1. .99 .F :71997 1996 .....T.. A 11 OTHER INVESTMENTS A WATER SUPPLY 13,211 25,851 0 0 0 11,131 47,193 A.1 GRANDE VITORIA 13,211 25,851 0 0 0 8,131 47,193 A.2 OTHER SYSTEMS 0 0 0 0 0 3,000 3,000 B SEWERAGE 1.715 0 0 0 0 9,706 6.421 B.1 GRANDE VITORIA (PROSEGE) 1,715 0 0 0 0 4,706 6.421 B.2 OTHER SYSTEMS 0 0 0 0 0 5,000 5,000 OTHER INVESTMENTS BASE COST 14.928 25.851 0 Q 0 20.837 59.614 Physical Contingencls 746 1,293 0 0 0 1.042 3,081 Price Contingencies 495 1,541 0 0 0 3,589 5,625 OTHER INVESTMENTS COST 18,167 28.885 0 0 0 25.488 70.319 III TOTAL INVESTMENT PROGRAM TOTAL INVESTMENT BASE COST 49,239 72,060 55,216 52,258 43.978 40,745 305,496 Physical ContingencIs 2,462 3,603 2,761 2,613 2,199 2,037 15,675 Price Contingences 1,631 4,296 5,008 6,409 6,837 7,017 31,198 TOTAL INVESTMENT COST 5SSS 79 959 62g984 61t279 53 014 49 800 ;l.§369 -61- ANNEX9 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT INSTITUTIONAL STRENGTHENING PROGRAM A. CESAN 1. The implementation of CESAN's institutional strengthening program will improve its technical, administrative, financial, and operational capacity. This component will provide technical assistance, training, and equipment to design and implement: (i) a managerial development program to improve CESAN's institutional capabilities; {ii) an information systems program including acquisition and development of new management systems; and (iii) a sanitary education program targeting the communities in the project's area of influence. This component will also finance the construction of CESAN's new headquarters. The total cost of the program is estimated at about US$8.8 million. Engineering design, project management and supervision, and CESAN's operational development program will complement the company's strengthening program. Technical Assistance 2. Technical assistance will provide: {i) consultant services to help prepare a new Contract-Plan between CESAN and the state government and carry out major studies in re-evaluation of fixed asse.s, financial management and auditing, demand for water and sewerage services, information systems, environmental studies, total quality, and design of educational materials; and (ii) individual specialists to assist CESAN's technical, administrative, financial, environmental, and social divisions to implement the programs. Training 3. The technical training and personnel development program will include: {i) post-graduate courses leading to Master of Science degrees in sanitary engineering and business administration for 4 staff members; (ii} technical visits in Brazil and other countries; and (iii) local, national and international short courses, workshops and seminars in waste treatment plant design and operation, project planning and evaluation, financial and auditing systems, marketing, water quality analysis, water quality models, water quality monitoring systems, environmental assessment, information analysis, and community programs. Equipment 4. The project will provide the necessary equipment to implement the programs. The equipment will include: (i) renovation of water and wastewater quality laboratories; (ii) information systems, hardware and software; (iii) vehicles for the Project Management Unit; and (iv) sewerage maintenance equipment. B. SEAMA 5. Industrial activities in some minor river segments and urban run-off channels and uncontrolled solid waste disposal sites near water courses will exert pollution loads that will impair water quality recovery in some specific locations in the project's area of influence. Furthermore, coastal ecosystems, protected and un-protected, are subject to urban expansion pressures and lack effective protection. Therefore, an integrated approach to water quality and natural resource management in the river basins and the estuarine ecosystems of the project's area of influence will guarantee the attainment of proposed environmental objectives. This and other opportunities for environmental quality enhancement in the area have been identified and will be addressed by SEAMA's institutional -62- ANNEX 9 strengthening program. The total cost of the program is estimated at about US$8.7 million. This component will strengthen SEAMA's operational, administrative, and institutional capabilities through studies, technical assistance, equipment, and training in the areas of water resource management, industrial pollution control, collection and disposal of solid waste, conservation of ecosystems, and environmental information and education. 6. The Water Resource Management Program will include water quality monitoring of inland and coastal ecosystems, hydrological data base management, and a study for the design of a State Water Resources Plan. 7. The Industrial Pollution Control Program will include industry surveys, industrial toxic waste studies, updating and implementation of industrial pollution control and licensing programs, design of industrial effluent standards, and the design of manuals for pollution control for small industries. 8. The Municipal Solid Waste Program will be strengthened to assist Espfrito Santo's municipalities in the preparation of solid waste collection and disposal projects. The program includes the preparation of guidelines for solid waste management; landfill siting; assistance during project implementation; and design of solid waste recollection, treatment, and disposal systems for key municipalities in the area of influence of the project, especially near Grande Vitoria. 9. The Ecosystems Conservation Program will include the preparation of management plans for state natural conservation units within the project area which are not included in the National Environmental Plan. The coastal lagoon ecosystem of the Setiba State Park, managed by SEAMA, and the mangrove ecosystem of the Lamirao Reserve, managed by the municipality of Vitoria, will be primary targets of this program. 10. The Environmental Information Systems Program will strengthen SEAMA's work in the fields of ecological and economic zoning, design and implementation of geographical information systems for selected sub-basins in the project area, design and implementation of data bases for industrial pollution control, and water quality monitoring and hydrological data. This program will also improve and/or establish SEAMA's water quality models for major rivers, estuaries, and bays in the State. 11. The Environmental Education Program, to be designed and implemented with local NGO participation, will support and assist the environmental education programs of the associations of municipalities, prepare and disseminate environmental education materials, and provide environmental training to local NGOs, municipalities, and associations of municipalities. 12. The strengthening of SEAMA's operational and administrative capability will enable it to establish a comprehensive legal and regulatory framework for water quality objectives and effluent standards; to improve its work at identifying, preparing, and adopting norms, guidelines and procedures for environmental assessment; to increase NGO and community organization participation; and to update and improve existing water quality laboratories and field sampling equipment. A comprehensive training program for SEAMA's staff will be developed, including seminars, short courses, technical visits and study tours. In addition, SEAMA's organizational procedures and work programs will be reviewed and upgraded. This component will also include the construction of the headquarters for the State Institute for the Environment, to be built within an urban park in Vitoria. -63- ANNEX9 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT INSTITUTIONAL STRENGTHENING COMPONENT USS Thousand- as of Jun., 1 99 -SSC1~IPflCM i. 1994 :996 1996 1997 1996 19999TOTAo I SEAMA A STUDIES 400 500 350 100 0 0 1.350 A.1 Legal and Rogulalory Framowork R"eiw 100 0 0 0 0 0 100 A.2 Environmentb Informamion Systm 100 100 0 0 0 0 200 A.3 Solid Wast Collection nd DIsposl 100 200 200 0 0 0 500 A.4 Industry Survey 50 0 0 0 0 0 50 A.5 Watr QualityModeilng 50 0 0 0 0 0 50 A.6 Water Resources Management 0 100 0 0 0 0 100 A.7 Manageme ntPlanforProtected Are 0 100 50 0 0 0 150 A.8 OthwrStudIe 0 0 100 100 0 0 200 B TECHNICAL ASSISTANCE 100 150 150 150 150 50 750 C TRAINING 50 150 150 200 200 200 950 D EQUIPMENT 400 1,000 1,000 0 0 0 2.400 E OTHER SERVICES 100 200 200 50 50 0 Go0 F HEADQUARTERS 50 200 850 850 0 0 1,950 SEAMA'S BASE COST 1.100 2.200 2.700 1.350 400 250 8.000 Physical Connngencies 78 156 191 96 28 17 566 Price Contingencies 35 125 237 163 59 6 625 SEAMA'S COST 1.213 2.481 3.128 1.609 487 273 9.191 11 CESAN A STUDIES 450 150 100 50 0 0 750 A.1 Contract Plan 30 0 0 0 0 0 30 A.2 Fbced Assets Revaluation 150 0 0 0 0 0 150 A.3 Financial Management and AudWng 100 0 0 0 0 0 100 A.4 Information Systems 50 0 0 0 0 0 50 A5 Demand 50 0 0 0 0 0 S0 XS Totl Quality 50 50 0 0 0 0 100 A7 EnvlronmentalStudie 20 50 50 0 0 0 120 A.8 Othe Studbs 0 50 50 50 0 0 150 B SANITARY EDUCATION PROGRAM 100 130 130 130 130 130 750 C TRAINING 100 150 150 100 50 50 600 o EQUIPMENT 100 700 500 250 250 0 1.800 D.1 Water and Wastewater Ouality Analys 0 300 300 0 0 0 600 D.2 InformatIon Systems, Computer, Plotter & Software 100 400 200 0 0 0 700 D.3 Sewage Cleaning Equipment 0 0 0 250 250 0 500 E HEADQUARTERS 0 0 0 0 2,000 2,000 4.000 CESAN'S BASE COST 750 1.130 680 530 2,430 2.18 7. Physical ContIngencies 0 0 0 0 100 100 200 Price Contingencies 24 64 76 62 375 S8 659 CESAN'S COST 774 1.194 956 592 2.9053 III TOTAL COST 1 7 3.7 4o4 . 3 392 21 79 -64- ANNEX 10 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN WATER SUPPLY AND SEWERAGE TARIFFS Legal Framework 1. Brazilian State Water Supply and Sewerage Companies (SWCs) began applying in 1978 a uniform tariff structure known as the National Tariff Law (NTL). The NTL was established by Law No. 6,528 of May 1978, and was further defined by Decree No. 82,587 of November 1978. The NTL was conceived by the National Water Supply and Sanitation Program (PLANASA) as the major underpinning framework of sector regulation and implemented under the direction of the former Banco Nacional da Habitagao (BNH). 2. In January 1 987, as a part of the Cruzado Plan, the federal government gave autonomy to state and municipal governments to set their own water and sewerage tariffs. As shown in Figure 1, the State of Espirito Santo has since 1987 used this provision to authorize major tariff increases to CESAN. The State however, lacks a clear tariff policy to be used by CESAN and other municipal companies as a guideline for tariff setting. The Bank project will provide technical assistance to the State to prepare a law for regulating its water and sanitation sector, that will include a well-defined tariff policy. Figure 1. CESAN's TARIFFS AND SERVICE COSTS US$/m3 0.6 0.5 -in--- Average Walor 0.4 Ta iff 0.3 -c'-- /-;- Average Sevwerage Tanff 0.2 Average Service Cost 0.1 0 Year cN Lo *I tO G o CM CD cm cN 83 S 83 83 83 83 8 83 9g 9g -65- ANNEX 10 General Principles 3. CESAN's water and sewerage tariffs (see Table 1) continue to be defined by the two main principles established by the NTL: financial equilibrium for the SWCs and social equity for residential customers. The financial equilibrium principle maintains that the combined average tariff-' for water supply and sewerage should be high enough to generate a revenue equal to CESAN's service cost (SC). SC is defined as the sum of operating expenses--personnel, materials, electricity and other third party services, general, and fiscal expenses (DEX); annual allowances for depreciation, doubtful accounts, and amortization of expenses (DPA); and a remuneration for investment (RI) that should be at least equal to the debt service--interest payments and capital amortization due in a given period of time, but not larger than 12% of the acknowledged investment in operating fixed assets. 4. The social equity principle maintains that tariff setting should take into account the ability to pay of households. CESAN's tariff structure classifies residential customers into five categories, depending on their socio-economic level. The socio-economic level assigned to each household depends on the type of housing, as measured by physical standards such as area, materials, location, and access to utilities. The residential tariff structure is then defined using minimum consumption levels and increasing block tariffs for each socio-economic category. The assumption underlying this structure is that household income is positively correlated with the type of housing as well as its water consumption level. This tariff structure allows cross subsidies between socio-economic categories. Residential Tariffs 5. Minimum Consumption Level. The minimum consumption level (MCL) corresponds to the minimum volume of water that should be billed to a household each month. The MCL, currently set at 10 ml per household per month, claims to represent the minimum volume of water a family requires for maintaining basic health and sanitary conditions. As of September 1993, the minimum bill resulting from the MCL ranges from US$2.06 per month for the arustica category to US$5.41 for the 'superior and 'special' categories (see para. 7). The monthly consumption of about 25% of CESAN's households is below the minimum level of 10 m3. 6. Establishing an MCL is equivalent to setting a fixed rate with a right to consume the minimum level free of charge. Usually, the main reason for including MCLs in a rate schedule is that it allows utilities a full or partial recovery of customer-related fixed costs. Establishing MCLs for accommodating low-income households does not generally accomplish its purpose; on the contrary, it may contribute to significant departures from the objective of improving poor families' welfare when handled aggressively. This case is what seems to be occurring in Esptrito Santo. Therefore, the adoption of a fixed monthly charge independent of water consumption but increasing with the income level of the household would be a significant improvement in CESAN's tariff structure. 7. Socio-Economic Categories. Residential customers are classified in one of the following five socio-economic groups: basic, popular, standard, superior, and special. As of September 1993, 16.4% of CESAN's residential customers were classified as basic, 40.3% as popular, 40.3% as standard, 2.2% as superior, and 0.8% as special (see Table 2). CESAN's assumption behind its current classification of residential customers is that the socio-economic category assigned to each household is positively correlated with its income level. More precisely, CESAN assumes that the average monthly income per household is: less than one minimum salary (MS) for the basic category, 2 MS for the popular category, 3 MS for the standard category, 10 MS for the superior category, and 20 MS for the special category. In the State of Espfrito Santo, the average monthly income is 3.4 MS per household. 1 Average tariffs are defined dividing operational revenue by volume sold. Required average tariffs are defined dividing service cost by volume sold. ANNEX 10 Table 1. CESAN'S TARIFF STRUCTURE AS OF SEPTEMBER 1993 1/ MIffft00:At8NIMUM -M - ONTf;j;Xf-- 0: - 4HLY WATIERCO NSUMPTIQOWM4 ESTIMATED ST- MTEfD E CATEGORY rMONIL m3I- nh _ G A-ERAG- n4 t ; ;:Xt::: SILLB : xZ: 10cM4 1S e 1 20 .i: M -- WC.cS 3 OcMW0-144&:: 45< WT IB YEW SWG0 tJtWG -408Y"ES- swe WTiR S § 8WG -WTR--X10 8WGES!I00 WrRE B SWRG -WO "SW ::WT: USs/Cust-mo. Awe VSAVTR S:m3USfm USA# Impm US/i ;ut-o asdentla 0.48 0.23 7.86 3.77 - Basic 2.06 1.03 2.92 1.46 4.00 2.00 4.76 2.38 5.41 2.71 6.06 3.03 0.26 0.10 3.42 1.28 - Popular 3.03 1.51 4.22 2.11 5.84 2.92 6.82 3.41 7.79 3.90 8.76 4.38 0.39 0.18 6.01 2.77 - Standard 3.90 1.95 5.41 2.71 7.57 3.79 8.76 4.38 10.06 5.03 11.25 5.63 0.54 0.24 9.56 4.22 - SupeIor 5.41 2.71 7.57 3.79 10.39 5.19 12.12 6.06 13.85 6.92 15.58 7.79 0.93 0.44 25.93 12.27 - Speckal 5.41 2.71 7.57 3.79 10.39 5.19 12.12 6.06 13.85 6.92 15.58 7.79 1.06 0.49 41.12 19.01 Small Commerdal 8.66 4.33 8.66 4.33 13.63 6.82 13.63 6.82 13.63 6.82 13.63 6.82 1.09 0.46 18.45 9.23 Othr Commercial 12.23 6.11 13.63 6.82 13.63 6.82 13.63 6.82 13.63 6.82 13.63 6.82 1.38 0.69 345.18 172.59 Industrl 12.77 6.38 14.17 7.09 14.17 7.09 14.17 7.09 14.17 7.09 14.17 0.70 1.41 0.70 578.68 287.29 Pubic 8.22 4.11 12.01 6.01 12.01 6.01 12.01 6.01 12.01 6.01 12.01 601 11.58 4.54 800.69 314.29 8pecil Contracts - CST 0.24 NA 2/ NA -CVID 0.52 NA 2/ NA CESAN 0.50 0.28 GRANDE VITORIA 0.53 0.28 GUARAPAFI 0.54 NA OTHER SYSTEMS 0.30 NA I/ The ras evela prsenbd in this Table are applicable to the systems of Grande Vltoria and Guarapai. Raft evls applcabls hI ottr sytems are 80% of these value. 2/ CST and CVFD wert billed US$626,096 and US$526,937 durtng Saptember 1993, based on the special contracts they have whh CESAN. -67- ANNEX 10 Table 2. CESAN's WATER CUSTOMERS AND CONSUMPTION September 1993 Tariff Category Water Customers Water Sold per Month _ - * -- r % m3t(000) -| _% ___ /customer Residential 394,032 91.6 6,467 55.5 16.41 - Basic 64,746 15.0 852 7.3 13.15 - Popular 158,707 36.9 2,444 21.0 15.40 - Standard 158,846 36.9 2,812 24.1 17.70 - Superior 8,734 2.0 244 2.1 27.88 - Special 2,999 0.7 116 1.0 38.79 Small Commercial 29,027 6.7 491 4.2 16.93 Other Commercial 1,652 0.4 413 3.5 250.13 Industrial 890 0.2 365 3.1 410.41 CVRD and CST 2 0.0 3,576 30.7 1,788,000.00 Public 4,776 1.1 330 2.8 69.16 TOTAL 430,379 100.0 11,644 100 27.05 8. Socio-Economic Classification and Household Income. CESAN's current residential classification aims to alleviate poverty conditions of poor families, making water and sewerage services affordable to them. CESAN's assumption of a positive correlation between the income level and the socio-economic classification allows a cross-subsidization in favor of those households without ability to pay the actual cost for service. However, an analysis based on a sample of users taken from a recent contingency valuation studyz', revealed that household income: (i) is actually different from the one assumed by CESAN for each category; and (ii) is not closely correlated with the socio-economic level determined by the residential categories--the average monthly income was 3.6 MS for rustic customers; 3.9 MS for popular customers; 2.3 MS for standard customers; 8.5 MS for superior customers, and 18 MS for special customers. Even though the sample was not selected for income purposes, it is clear that the current classification should be reviewed to achieve the social equity objective that both the State of Esprrito Santo and CESAN pursue with the water supply and sewerage tariffs. 9. Consumption Blocks. Water consumption by residential customers is also charged in accordance with an increasing block tariff system. The consumption blocks are determined as follows: less than 10 m3 (equal to the MCL), from 10 to 15 mi, from 16 to 20 m3, from 21 to 30 mi3, from 31 to 45 m3, and from 45 m3 onwards. Different rate levels are then set for each socio-economic category as follows: the rates applicable to basic households (presumably those families with lower incomes) are 2.6 times lower than those applicable to special and superior households (presumably those families with higher incomes), 1.9 times lower than those applicable to standard households, and 1.4 times lower than those applicable to popular households (see Table 1). 10. Water Consumption and Household Income. CESAN's use of an increasing block tariff system aims to encourage a reasonable consumption of water and to allow cross-subsidization in favor of poor families. To practice a cross-subsidization policy is possible because, as shown in Figure 2, CESAN's average household water consumption distribution is positively correlated with household income level-- as measured by the socio-economic classification. The basic and popular categories concentrate almost half of their households (47% and 46%, respectively) in the range below 10 ml per month. 31 Ample Visao Asesoria a Servico. (1993), Programs de Despoluleso don Ecoaiat.maa Utoreneos do Estedo do Espirito Santo: Cuantlflcacao doe Beneficlo., July. ANNEX 10 Fig 2. CESAN's HOUSEHOLD (Hh) WATER CONSUMPTION DISTRIBUTION Sasic Category Popular Category 50 50% 40 40 30 30 20 20-E 10 10 - 10 15 20 30 45 100 10 15 20 30 45 100 m3/Hh m3/Hh Standard Category Superior Category 50- 50% 40 40 30- 30 20 20 9 10 15 2 10 1 20 30 45 100 10 15 20 30 45 100 m3nih m3/Nh Speckal Category AM Categone 50 50 40 40 30 30 10 15 20 30 45 100 10 15 20 30 45 100 m3IHh m3/Hh -69- ANNEX 10 Meanwhile, more than half of the households of the special category (55%) consume more than 30 per month. On the other hand, the basic and popular categories have a very small number of households 14%) consuming more than 30 ml per month. But almost one-quarter of special households (24%) consume more than 45 m3 per month. However, the small differences observed among the average values of the first three categories, as well as the large standard deviation exhibited by all income categories, suggest that this policy could be somewhat regressive. A large group of residential households is paying average and marginal tariffs well below the marginal cost of providing the service (see Annex 11). It is clear, for instance, that consumptions higher than 45 m3/month are excessive and should not be subsidized to any customer. In addition, some very poor households could be paying bills higher than what they can afford. These facts allow CESAN ample room for increasing revenues just by eliminating unnecessary subsidies now being granted to high-income families, and for maintaining and even increasing the subsidies granted to very poor families. However, to achieve the results being pursued will required a revision of the current socio-economic classification to assure an appropriate targeting of subsidies. 11. Monthly Bills. Average monthly water bills vary from US$3.42 for basic households, to US$41.12 for households in the 'special" category. Accepting CESAN's assumption in relation to the average monthly income per socio-economic category (para. 7) and estimating the MS at about US$85 per month, the water bills correspond on average to about 4.0%, 3.5%, 3.7%, 3.1 %, and 2.4% of the family income of each socio-economic category. Non- Residential Tariffs 12. Non-Residential Classification. The non-residential classification distinguishes between commercial, industrial and public customers. A set of lower rate levels applies to small commercial customers, and specific tariffs apply to those industries with special contracts (para. 13). In addition, commercial, industrial, and public customers without meters are divided into four sub-categories based on the number of staff employed, level of consumption of water, diameter of their connections, and final usage. 13. Special Contracts. Special contracts regulate CESAN's relationship with the Companhia Siderurgica de Tubarao (CST) and the Companhia Vale do Rio Doce (CVRD). These contracts guarantee a minimum amount of water to both companies and the tariffs to be charged. CESAN currently guarantees 0.254 mJ/s of treated water at US$0.52/m3 to CVRD, and 1 m3/s of untreated water at US$0.24/m3 to CST. As of September 1993, the water consumption of these two companies represented 31 % of CESAN's total volume of water billed (91 % of total industrial consumption). In the terms of revenues these two companies account for 20% of CESAN's total invoices. 14. Non-Residential Tariff Structure. CESAN's current non-residential tariff structure defines minimum consumption levels for each non-residential type of customer, that are smaller than the remaining rates in that category. In addition, all non-residential rates are greater than CESAN's average tariff. Differentiating between commercial, industrial, or public customers based on their water consumption level has negative effects on the resource allocation process. CESAN seems to be aware of this point, as minimum consumption levels for non-residential customers are explained by households classified as commercial or industrial customers because of the small family business they own and operate from their houses. However, a well designed tariff structure should automatically take care of this classification process. Households having a small family business within or attached to their homes should find themselves better off when classified as residential customers. Likewise, households having a larger than normal family business should find themselves better off when classified as non-domestic customers. In addition, CESAN's selected criteria to differentiate customers--such as activity and number of staff, are not related with the cost of providing service. Instead, this tariff differentiation may create incentives to change the classification and lower tariffs through irregular practices. Second, CESAN's application of higher tariffs in the non-residential sector are passed on to the residential customer, distorting the distribution objective. And third, the fact that -70- ANNEX 10 tariffs in the non-residential sector are higher than the cost of providing the service could result in negative consequences to the economy because it encourages exploration of alternatives, such as digging of wells or the operation of independent systemsrs. Sewerage Rates 15. Sewerage and water supply tariff structures are the same, with sewerage rates being equal to 35% of water rates when sewage is not treated, and 50% when sewage is treated (as of 1993, 9% of the water consumed is collected but only 6% of water consumed is collected and treated). Sewerage rates are not based on supply costs, but on financial factors. Systems without treatment have rates significantly higher than costs (except for residential customers), while systems with treatment have rates generally smaller than costs. Economic Subsidies 16. As shown in Table 3, CESAN has several water supply and sewerage systems which have different supply costs, but which are aggregated and consolidated for financial and pricing purposes. CESAN's tariff structure is uniformly applied to all customers, independent of the individual system that serves them. Rate levels are also the same for all non-residential customers, independent of the individual system that serves them. Rate levels for residential customers served from systems outside Grande Vitoria and Guarapari are 83% smaller. This pricing feature results in large economic subsidies in favor of those customers being served from more expensive systems. Table 3. WATER SUPPLY AND SEWERAGE SYSTEMS DISTRIBUTED BY SIZE December, 1992 .....A....A. .. WA. ,, ..... . . ... . .... ..... Up to 100 32 38 1,455 1 3 30 134 From 101 to 500 30 36 7,779 4 3 30 847 8 From 501 to 1,000 12 14 7,950 4 1 10 541 5 From 1,001 to 5,000 6 7 7,818 4 2 20 3,866 36 From 5.001 to 10.000 2 2 1S,444 8 1 10 5,242 49 From 10.001 to 15,000 0 0 0 0 0 0 0 0 From 15.001 to 50,000 0 0 0 0 0 0 0 0 From 50,001 to 100,000 2 2 153,330 79 0 0 0 0 More than 100,000 0 0 0 0 0 0 0 0 All CESAN Water Supply System 84 100 194.776 100 10 100 10.630 100 17. Inside each system, as shown in Table 4, all non-residential customers are heavily over- charged, while most residential customers are heavily subsidized {the exception being those classified In the superior and special categories)1'. On average, residential customers receive an average g A recent survey found that about 10% of CESAN's major non-resldentlal olients have wellb to complemnt the water s*rioc they recelve from CESAN (see CESAN (1993). Estudo de Demanda d Agua. October. 1' Table 4 combine. the recults of the marginal cost pricing analysis preented on Annex 11 wlth CESAN's ournnt tariff *tructure. ANNEX 10 Table 4. CESAN'S MARGINAL COST AND TARIFF STRUCTURES AS OF SEPTEMBER 1993 MARGINAL COST (USrSm3) AVG. TARIFFS ._- RATIOTARIFF I MARGINAL COST WATER SEEwERAGE (USSjrS3) WATER SEWERAGE I WATER & SEWERAGE REGION AND TARIFF CATEGORY - 1W) ...ATh4. wmIST 'MA WATM WA)hBAf WrITUSA W$OTRBATh(mt? WTItThBAW :!CIRM4w .oiA CM TotaJU OM W" omot : ito CM TO Q w I.Ta cwp toTOal .* .tto SEA"V esA5oN tSM(UN esOK samOgw I soACKS&V;sAskt XSON$~ 5SAS011 SMAUE Ia5CI MA"~ ISAOSt SMCNt 5BASC4 SSASGE stwowr weA GRANDE VITORIA 0.53 0.28 NON-RESIDENTIAL CUSTOMERS 0.62 0.33 - Industries Servd withRaw Water 0.22 0.22 NA NA NA NA 0.24 NA 1.08 1.00 NA NA NA NA 1.08 1.00 1.08 1.00 - Industlies Served torn Trtment Plnt 0.28 0.27 NA NA NA NA 0.52 NA 1.89 1.00 NA NA NA NA 1.89 1.90 1.80 1.00 - Industries Served trom Prim. Distribution Pipes 0.48 0.48 0.36 0.36 0.57 0.57 1.41 0.70 2.06 2.906 1.04 1.94 1.22 1.22 2.52 2.52 2.01 2.01 - induties S-rved tom Sec. Distribution Pipes 0.58 0.58 0.30 0.30 0.57 0.57 1.41 0.70 2.44 2.45 1.04 1.04 1.22 1.22 2.25 2.25 1.83 1.83 - Small Commrcial 0.58 0.58 0.36 0.36 0.57 0.57 1.09 0.38 1.80 1.89 1.05 1.05 0.00 0.00 1.57 1.57 1.28 1.28 - Other Commercal 0.58 0.58 0.30 0.30 0.57 0.57 1.38 0.50 2.39 2.40 1.30 1.39 0.87 0.87 2.00 2.01 1.63 1.63 - Public 0.58 0.58 0.30 0.36 0.57 0.57 1.16 0.45 2.01 2.01 1.25 1.25 0.78 0.78 1.71 1.72 1.40 1.40 RESIDENTIAL CUSTOMERS 0.58 0.58 0.30 0.30 0.57 0.57 0.48 0.23 0.83 0.83 0.64 0.64 0.40 0.40 0.70 0.70 0.62 0.02 !j - Basic 0.58 0.58 0.30 0.36 0.57 0.57 0.28 0.10 0.45 0.45 0.28 0.28 0.17 0.17 0.38 0.38 0.31 0.31 - Popula 0.58 0.58 0.30 0.30 0.57 0.57 0.39 0.18 0.67 0.68 0.50 0.50 0.31 0.31 0.61 0.61 0.49 0.50 - Standard 0.58 0.58 0.30 0.30 0.57 0.57 0.54 0.23 0.93 0.04 0.84 0.64 0.40 0.40 0.82 0.82 0.67 0.07 - suprork & Specil 0.58 0.58 0.38 0.30 0.57 0.57 0.97 0.48 11.6 1.68 1.27 1.27 0.80 0.80 1.52 1.53 1.24 1.24 GUARAPARI 0.54 NA NON-RESIDENTIAL CUSTOMERS 0.45 NA - Industries Served trom Prim. Distribution Pipes 1.60 1.39 0.58 0.58 0.82 0.82 1.38 NA 0.87 0.99 NA NA NA NA NA NA NA NA - Industries Served rorn Sec. DIstributon Pipes 1.64 1.61 0.58 0.58 0.82 0.82 1.38 NA 0.75 0.80 NA NA NA NA NA NA NA NA - Small Commercil 1.84 1.61 0.58 0.58 0.82 0.82 0.98 NA 0.53 0.61 NA NA NA NA NA NA NA NA - Other Commercial 1.84 1.61 0.58 0.58 0.82 0.82 1.34 NA 0.73 0.83 NA NA NA NA NA NA NA NA - PubHc 1.64 1.61 0.58 0.58 0.82 0.82 1.07 NA O.5 0.67 NA NA NA NA NA NA NA NA RESIDENTIAL CUSTOMERS 1.64 1.61 0.58 0.58 0.82 0.82 0.44 NA 0.24 0.27 NA NA NA NA NA NA NA NA - Basic 1.84 1.61 0.58 0.58 0.82 0.82 0.23 NA 0.13 0.14 NA NA NA NA NA NA NA NA - Popular 1.64 1.61 0.58 0.58 0.82 0.82 0.30 NA 0.20 0.22 NA NA NA NA NA NA NA NA - Standard 1.U4 1.61 0.58 0.58 0.82 0.82 0.46 NA 0.25 0.29 NA NA NA NA NA NA NA NA - Suprior a Speca 1.84 1.61 0.U 0.58 0.82 0.82 0.64 NA 0.40 0.52 NA NA NA NA NA NA NA NA -72- ANNEX 10 economic subsidy equal to 21 %. When economic subsidies are calculated for the combined services of water supply and sewerage without treatment, non-residential customers are overcharged less but households are subsidized even more (32%). When treatment is included in the sewerage service, non- residential customers are overcharged even less but households are subsidized almost twice as much as when they receive sewerage without treatment (61 %). Financial Subsidies 18. Overall, and taking Grande Vitoria as representative of all CESAN's systems, non-residential customers without special contracts are heavily overcharged from a financial viewpoint. The average water tariff for non-residential customers is 1.32 times CESAN's average tariff (from 106% for the small commercial category to 166% for the industrial category). On the other hand, the basic and popular categories of CESAN's residential customers are heavily subsidized (51 % and 26%, respectively), while the other residential categories are overcharged (2% in the standard category, 75% in the superior category, and 100% in the special category). Because of the way sewerage tariffs are defined (para. 1 5), financial subsidies (overcharges) resulting from sewerage services are similar to those obtained for water In percentage terms. -73- ANNEX 1 1 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT MARGINAL COST PRICING ANALYSIS: METHODOLOGY AND RESULTS 1. Marginal cost pricing has been applied to evaluate CESAN's tariff structure and the cost- effectiveness of its prospective investments in water supply and sewerage. Long-run average incremental costs (LRAIC) have been estimated for CESAN's water supply and sewage collection and treatment systems located in Grande Vit6ria and Guarapari. The planning horizon covers 30 years (1994-2023) and the opportunity cost of capital (OCC) is assumed at 10%. Projections of Water Consumption and Production 2. The urban population, projected by CESAN based on census data, is assumed to grow at a uniform rate from 1993 to the year in which the expanded water supply system reaches the saturation point. Saturation takes place at the year in which required water production (water demand plus unaccounted-for water) becomes equal to water production capacity. The urban population is assumed to be static after the saturation year, constrained by the project's water supply capacity. The urban population served is equal to total urban population times the estimated service coverage level. Using the long-run price elasticity of -0.30 estimated from the results of a Contingency Valuation (CV) study, total water consumption is projected as the product of the urban population served by an estimated daily water consumption per capita, which is calculated as the weighted average of seasonal consumption. Seasonal water consumption is calculated based on CESAN's last three years of records of a sample of users who, during this period, have had meters and have not been subject to rationing. The average unaccounted-for water (UFW) level is assumed to decrease during the project implementation period as a result of the actions to be taken under the institutional development program, and to remain steady at its 1998 level afterwards1l. The incremental volume of water available to CESAN's old and new customers as a result of the reduction in unaccounted-for water, BRL, is equivalent to an expansion in production capacity21. Required seasonal and total water production is computed as the sum of water consumed and lost in the transmission and distribution networksa'. CESAN's special contracts with the Companhia Siderurgica do Tubarao (CST) and the Companhia Vale Do Rio Doce (CVRD) guarantee minimum volumes of 1 m'/s of untreated water for CST and 0.254 m3/s of treated water for CVRD. CVRD projected demand is calculated assuming a level of losses of only 2%, given that the industry is served directly from the treatment plant. CST projected demand is not included in CESAN's total projections since water projects are designed to satisfy treated water needs. Water production capacity is increased in accordance with the start up it The assumption of constant UFW levels after 1998, will require from CESAN to Internalized into its day-to-day operations all the measures that will allow the expected change. Because of the strong implications of this requirement, the operation and maintenance (O&M) costs associated with the unaccounted-for water control program have been assumed at 10% of the investment cost of this program-that is, twice as much as the O&M costs associated with other investments. 31 The following formula is used to approximately calculate the marginal benefit from reducing unaccounted-for water: t BRLt -WPC (Lk_-Lk) - WPt* (L.-Lt) where L, is the loss level in year t and L. is the average loss rate in the base year. 3' This can be mathematically expressed as: where WC,, 1, and WP, are the consumption amount, the average loss level, and the total production in year t, respectively. -74- ANNEX 1 1 of new facilities. Actual total water production is equal to production capacity when the system is being rationed, and to the volume of water production required when there is enough capacity to satisfy it. The actual incremental water production at year t is calculated as the difference between the actual water production level at year t and the actual water production level at the base year (i.e., 1993). The seasonal index of excess capacity shows the percentage of the current production capacity which is not utilized. The net present values of the incremental volumes of water resulting from reducing the unaccounted-for water level and expanding supply capacity are calculated using the assumed OCC. As an example, population, consumption, and production projections for the water supply system of Grande Vit6ria are presented in Attachment 1. Projections of Sewage Collection and Treatment 3. The urban population served with in-house sewerage connections is estimated as the product of total urban population and projected service coverage levels. The projected amount of sewage collected in each year is estimated based on the number of sewerage connections projected for each year and the amount of average sewage produced per connection in each year,I. The amount of sewage produced per connection is assumed to remain constant during the project implementation period. The incremental amount of sewage collected in year t is calculated as the difference between sewage collected in year t and in the base year. The total and incremental amounts of sewage both collected and treated are calculated analogously. The net present values of the incremental amounts of sewage only collected and sewage both collected and treated are then calculated using the assumed 0CC. Incremental Costs in Water Supply Systems 4. Incremental costs in water supply systems result from building new capacity, reducing UFW levels, and operating and maintaining new facilities. The capacity costs include investments for project management and supervision, operational development (to reduce UFW), water intake, water supply treatment, transmission, distribution, and connections1'. All investment costs are expressed in market prices as of June 1993, and include physical contingencies. Incremental fixed operating and maintenance (O&M) costs are associated with the formed capital stock. Therefore, incremental fixed O&M costs in year t are assumed to be 5% (except operational development that is estimated at 10%-- see footnote 1) of the capacity investment costs accumulated from year 1 to year t. Total investment costs are equal to the sum of capacity investment costs and incremental fixed O&M costs. The net preset value of these stream of costs are calculated using the assumed OCC as the discount rate. Project investment and O&M costs for Grande Vit6ria are presented in Attachment 2. Incremental Costs in Sewerage Systems 5. Incremental costs in sewerage systems result from building new capacity and operating and maintaining new facilities. The capacity cost includes investments for project management and supervision, sewerage connections, collectors, pumping stations, interceptors, and final disposal and treatment. As in water supply, all investment costs are expressed in market prices as of June 1993, and include physical contingencies. Also, as in water supply, all incremental fixed operating and maintenance (O&M) costs are associated with the formed capital stock and are accumulated over years. Incremental fixed O&M in year t are assumed to be 5% of the capacity investment costs e The volume of sewage produced per connection has been estimated at 85% of the volume of water consumed. C Capacity investment costs also include the set of complementary Investments to be built after the project implementation period is completed and up to the year in which the new system capacity reaches saturation, Complementary investments, mainly secondary distribution and house connections, are calculated based on the number of incremental connections to be served in each year, with given unitary costs. -75- ANNEX I 1 accumulated from year 1 to year t. Again as in water, the net present value of all streams of costs are calculated using the assumed OCC as the discount rate. Marginal Operating Costs 6. Water Supply Systems. The Marginal Operating Cost (MOC) is calculated for each season as the cost of the last water source used to satisfy the projected demand in that season, in that year. The last water source, the marginal water source, is found from optimizing the operation of the water system (namely, satisfying the projected demand at the minimum cost possible). To find out the marginal source is then necessary to know the unitary costs of all inputs (chemicals and electricity) necessary to produce an additional m3 of water. In cases of shortage (that is, when available water sources and/or facilities are insufficient to satisfy the projected demand for water), the MOC has been assumed to equal the users' willingness to pay for having a non-interrupted service!'. The MOC at each stage of the water supply chain is equal to the MOC at the water intake level multiplied by the corresponding Loss Adjustment Factor (LAF). Seasonal differences are irrelevant in Grande Vitoria, but highly significant in Guaraparf given its role as an important tourist center. The annual equivalent cost of the marginal costs corresponding to the years up to system saturation are then calculated using the assumed OCC. As an example, the results for Grande Vitdria are presented in Attachment 3. 7. Sewerage Systems. MOC for the sewerage systems are equal to the sum of the cost necessary to collect and/or treat an additional m3 of sewage (mainly, electricity). Seasonal differences are irrelevant. Long-Run Average Incremental Costs 8. Water Supply Systems. Long-run average incremental costs (LRAIC) have been calculated at each stage of the water supply chain as the ratio of the sum of the present value of the respective capacity investment and incremental fixed O&M costs to the sum of the present values of the incremental volume of water resulting from reducing the unaccounted-for water level and expanding supply capacity. LRAIC have not been seasonally differentiated, that is, capacity investment and incremental fixed 0&M costs have been evenly allocated to both seasonsZ1. Since investments that reduce UFW levels produce results that are equivalent to increasing water production capacity, the present value of these investments is added to the present value of the capacity investment cost associated with building new water intake facilities. Since LRAIC are calculated based on incremental water production, an adjustment for water losses should be made at each stage of the water supply system to find the actual marginal cost. To this end and based on the current UFW distribution, loss adjustment factors (LAF)1' have been calculated at the system's steady leakage level (see, as an example, the June 1993 water balance for Grande Vitoria in Figure 1). Marginal capacity costs (MCC) e' The Contingency Valuation Study done for the preparation of this project found that currently rationed households are willing to pay-in addition to their monthly bills, monthly installments of about USS6.66 to get a reliable service, and US$3.64 to reduce the number of hours during which they are subject to rationing. The difference between these two values (US$3.02) corresponds to the households' willingness to pay for receiving a non-rationed water service. Given that the average monthly consumption subject to ratioring is estimated at about 5 ma per household, the rationing cost has been estimated at about US$0.60 per actually consumed m'. Assuming a 30% UFW level, the USS0.60 per actually consumed m3 is equivalent to US$0.42 per produced m3. 71 For Guaraparr, however, seasonal differences are notable and a precise estimation of its LRAIC should take these differences into account. a The Loss Adjustment Factors (LAF) are calculated as follows: i( 1-L1 ) where LAF, and L are the LAF and the percentage of unaccounted-for water divided by 100 at level i of the water supply system, namely, water intake, treatment, transmission, primary distribution, secondary distribution, or connections. -76- ANNEX 1 1 at the water intake level are then equal to the product of LAF at that level for the corresponding LRAIC; the MCC at the water intake level plus the LRAIC at the treatment level; the MCC at the transmission level is equal to the LAF at that level multiplied by the sum of the MCC at the treatment level plus the LRAIC at the transmission level; and so on!'. The estimated LRAIC, LAF, and MCC for Grande Vit6ria are presented in Attachment 4. Figure 1. WATER BALANCE IN THE GRANDE VITORIA REGION AS OF JUNE 1993 SURFACE WATE R CST (100%1 11 3.6'hl 0 188.4%) WATER TREATMENT FILTERShRS CVRD lE0.4'h 115.2SI 8TRANSMISSION OTHER LOSSES > 10 SS% INDUSTRIES (1.8%I) (72.9%1 LOSSES AT | RESEI 113.0%) DISTRIBUTION NETWORK LOSSES > (14. r | | [ ~~~~~~~~~~~WATER BILLED TO lI COMMERCIAL LOSSES WATER CONSUMED BY RESIDENCES,.AE OSM ILLEGAL CONNECTIONS COMMERCES, SMALL W CONSUMED AND (18t6.7%) | (4.B%T (33 |l.Ohi 4 INFILTRATION (5.0%) (80.9%) s SEERGE | LTREA MNPLANT | !' The Marginal Capacity Cost (MCC) is calculated as follows: MCC1 =LRAIC, *LAF1 MCC2 = (MCC1, LRAIC2) *LAF2 MCC1, (MCC(11) +LRAICI) *LAPF -77- ANNEX 1 1 9. Sewerage Systems. LRAIC for connections, collectors, and main collectors have been calculated, at each stage of the chain, as the ratio of the sum of the present value of the respective capacity investment and incremental fixed 0&M costs to the sum of the present value of the incremental volume of sewage collected. LRAIC for interceptors and final disposal and treatment have been calculated, at each stage of the chain, as the ratio of the sum of the present value of the respective capacity investment and incremental fixed O&M costs to the sum of the present value of the incremental volume of sewage collected and treated. LRAIC associated with the sewerage systems do not exhibit any seasonality. Estimated LRAIC for Grande Vit6ria are presented in Attachment 4. Marginal Costs and Average Customer Costs 10. Marginal Costs at each stage of either the water supply or the sewerage chain are equal to the sum of the corresponding MCC and MOC at that stage. Average Customer Costs comprise monthly billing costs (US$0.81 /customer-month) and the investment costs associated with CESAN's strengthening program (US$0.34/customer-month). Estimated Marginal Costs and Average Customer Costs for Grande Vit6ria and Guarapari are presented in Attachment 4. Final Comment 11. The results obtained for the Guarapari water supply system (see Attachment 4) illustrate the application of the marginal cost pricing methodology at evaluating the cost-effectiveness of prospective investments. Resulting marginal costs for Guarapari water supply system are not only significantly higher than for Grande Vitoria, but outside the acceptable range of eligibilityl'. After learning about these results, CESAN revisited the engineering designs proposed for expanding Guarapari water supply system and found that, in effect, some of the assumptions and decisions that were originally made resulted in an overdimension of required facilities. CESAN is currently revising the project engineering designs. 121 As indicated in Annex 18, water supply projects to be built in medium-sized cities-defined as those with more than 50,000 people but less than or equal to 500,000 people, will be accepted only if the average water tariff in that city exceeds 75% of the estimated marginal cost of providing the service to residential customers. ANNEX 11 Attachment I BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT POPULATION, CONSUMPTION AND PRODUCTION PROJECTIONS FOR THE WATER SUPPLY SYSTEM OF GRANDE VITORIA Urban Population Water Consumption 1! Unaccounted -for Water Production Requied Water Production Actual Water Excess (Rationing) ; - Water .; 5000 4S i:i-S 0 ffft;; -0Capacity Producton Ye. Total Coverage Served Tou rt 1 - OR Total Level In W Tourist M Total Tourist off z Ta Incro- Torist off Level Season Seaon . 3/ Available Season Ses8on Season Seasonr 4/ menal Season esoni ~:(000) % (000) (000)m3 (000)m3 (000)m3 _% C000)m2l: (0~00)rnS t00O)mt3 (600)m3 (q00)rn (000)m3 (000)m3 (0001.3 % 1993 1,125 88.4 995 22,218 61,940 84,158 40.0 NA 35,725 9,302 135.087 33,482 90,354 132.836 NA (6.3) 0.0 1994 1.169 88.9 1,039 22,801 63.555 86,356 39.0 1,328 36,129 100,481 136,610 33.482 99,354 132,836 0 (7.3S (1.1 1995 1,214 89.4 1,085 23,401 05,217 88.618 37.0 4,084 36,000 100,123 136,123 47,790 141,811 136.123 3,287 32.8 41.6 1906 1,261 90.0 1.135 24,040 68,967 91,020 34.0 8,037 35,425 98.531 133.956 48,585 144,170 133,958 1,120 37.1 48.3 1997 1,310 90.6 1.187 25,050 69,786 94,838 31.0 12,061 35,439 98,5609 134,008 48.585 144,170 134,008 1.172 45.7 46.3 1998 1.361 91.4 1.244 26.156 72,848 99,004 30.0 13,817 36,541 101,624 138.185 53.251 158,015 138,165 5.329 39.7 55.5 1999 1.414 92.0 1,300 27,259 75,904 103.163 30.0 14,411 38,117 105.989 144,106 53,251 158,015 144,106 11.270 34.7 49.1 2000 1,469 92.0 1,351 28.242 78,628 106,867 30.0 14.940 39,521 109,877 149,398 53,251 158,015 149,398 10,562 29.9 43.8 2001 1.526 92.0 1,404 29,264 81,457 110,720 30.0 15,490 40,961 113,921 154,902 53,251 158,015 154,902 22,066 25.3 3a.7 2002 1,585 92.0 1,458 30.327 84,401 114.728 30.0 16,063 42,500 118,127 160,627 53,251 158.015 180,627 27.791 20.8 33.a 2003 1,647 92.0 1,515 31.432 87.44 118.896 30.0 10.058 44,079 122,503 166,582 53,251 158,015 166,582 33,746 16.5 29.0 2004 1,712 92.0 1.575 32,583 90,650 123.233 30.0 17,278 45,722 127,055 172,777 53,251 158,015 172,777 39,941 12.3 24.4 2005 1,779 92.0 1.636 33,779 93,964 127,743 30.0 17,922 47.432 131,789 179,221 53,251 158,015 179,221 46,385 8.2 19.9 '. 2006 1,848 92.0 1,700 35,024 97,412 132,430 30.0 18,592 49,210 13a.714 185,924 53,251 158,015 185,924 53,088 4.3 15.6 o 2007 1,920 92.0 1,767 36,311 100,977 137.288 30.0 19,286 51,049 141,808 192,857 53.251 158,015 192,857 60,021 0.5 11.4 2008 1,995 92.0 1,836 37,e48 104,682 142,330 30.0 20,006 52,959 147,100 200,059 53,251 158,015 200,059 67,223 0.0 7.4 2009 2V 2.007 92.0 1,846 37,853 105,248 143,101 30.0 20,116 53,251 147.909 201,160 53,251 158.015 201,160 68,324 0.0 6.8 2010 2,007 92.0 1,846 37,853 105,248 143.101 30.0 20,116 53,251 147,909 201,160 53.251 158,015 201,160 88,324 0.0 6.8 2011 2,007 92.0 1,846 37,853 105.248 143,101 30.0 20,116 53,251 147,909 201.160 53,251 158,015 201,160 68,324 0.0 6.8 2012 2,007 92.0 1,846 37,853 105,248 143.101 30.0 20,116 53,251 147,909 201,160 53,251 158,015 201,160 68,324 0.0 6.8 2013 2.007 92.0 1,848 37,a83 105,248 143.101 80.0 20,110 53,251 147,909 201,160 53,251 158,015 201,160 68,324 0.0 6.8 2014 2,007 92.0 1,846 37,853 105,248 143,101 30.0 20,110 53,251 147,909 201,160 53.251 158,015 201,160 88,324 0.0 0.8 2015 2,007 92.0 1,846 37,853 105,248 143.101 30.0 20,110 53,251 147,900 201,160 53,251 158,015 201,160 68,324 0.0 OA 2016 2,007 92.0 1,848 37,853 105,248 143,101 30.0 20,116 53,251 147,909 201,160 53,251 158,015 201,160 68,324 0.0 6.8 2017 2,007 92.0 1,846 37,853 105,248 143,101 30.0 20,116 53,251 147,909 201,160 53,251 158,015 201,160 68,324 0.0 OA 2018 2.007 92.0 1,846 37.853 105,248 143,101 30.0 20,116 53,251 147,909 201,160 53,251 158,015 201,160 68,324 0.0 6 a 2019 2,007 92.0 1,846 37.853 105,248 143,101 30.0 20,116 53,251 147,909 201,160 53,251 158.015 201,160 68,324 0.0 6.8 2020 2,007 92.0 1,846 37,853 105,248 143,101 30.0 20,116 53,251 147,909 201,160 53,251 158,015 201,160 68,324 0.0 6.8 2021 2,007 92.0 1,846 37,853 105,248 143,101 30.0 20,116 53,251 147,900 201,160 53.251 158,015 201,160 68,324 0.0 6ea 2022 2,007 92.0 1,846 37,a53 105,248 143,101 30.0 20,116 53,251 147,909 201,160 53,251 1 58,015 201,160 68,324 0.0 6 a 2023 2,007 92.0 1,846 37,853 105,248 143.101 30.0 20,116 53,251 147,9009 201,160 53,251 158,015 201,160 68,324 0.0 6.a NPV (10%) _ I I I I I _ 127,347 ___ I 258,081 I_I Ul Annual aver* iumpdois ebdimated at 206 Idp, endudingCVRD. Bemuseft dhe fucamtingpapzatn t an" auvrar anampIo brrames by 7.2* ding thie Toaud Seam. CVRD -dm$ bi estumated t 0.254 ls dudig both sas. The tourist t*sem has 92 days and off-sean 273 days 2V The expanded water supply sy tm ofGrmde Viloda begs oo opent at . cakpadty durtg th teist seam dfths yr. 31 The ettnanted-kgwalervICVRDd Iessatedat bout2%. CVRDIs senaddireedy fra modCESAN's rwtreattentplnte 4/ Acual wtr produd-padtyequab reqred ter produaiew whth a srpAand w ter prodwinct pdtywhe ther s a dedt. ,ANNEXI1I Attachmont 2 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT ESTIMATED INVESTMENT COSTS IN THE WATER SUPPLY SYSTEM OF GRANDE VITORIA (USS Thousands as of June 1 993) -_-_- Coapacty Inveatm-nt Cot I1 - Incromental Fixed O&M Costa 21 Total Yea Project Operat. Water Tretnenl Tronsmis. Diosribut. Connect. Total - Operat. Water Troatmoni Tranrmis. Distribut Connect. Total Costs Manag. D-velop Intak- Develop Intake & Spn. 3L 4t _ - _ __ _ __ 1003 0 0 17,600 9,408 0 0 0 27.107 0 880 475 0 0 0 1,355 28,462 1094 212 2,758 12,506 1,818 0 2.273 1,129 20.804 276 1,506 586 0 114 s5 2,517 23,212 1995 222 1,.74 900 0 0 2,364 1,200 6,449 443 1,555 566 0 232 116 2,012 0,362 1990 232 1,437 991 0 0 2,454 1,277 6,391 587 1,605 566 0 355 180 3,292 9,84 1007 1,421 772 804 895 11,892 8,040 1,360 25,183 684 1,645 610 595 757 248 4,519 29,702 1998 299 664 0 0 0 3,365 1,450 5,778 730 1,645 610 505 925 321 4,826 10,604 1999 268 118 0 0 0 2,750 1,548 4,683 742 1,645 610 595 1,062 398 5.053 9.736 2000 0 0 0 0 0 1,488 748 2,236 742 1.645 610 595 1,137 436 5,165 7,400 2001 0 0 0 0 0 2,432 1,222 3,654 742 1,645 610 505 1,258 497 5.347 9,001 2002 0 0 0 0 0 2,530 1,271 3,800 742 1,645 610 595 1,385 560 5,537 9,338 2003 0 0 0 0 0 2,631 1,322 3,953 742 1,645 610 595 1.516 626 5.735 9,688 2004 0 0 0 0 0 2.737 1.375 4.113 742 1,645 610 595 1,653 605 5,941 10,153 2005 0 0 0 0 0 2,847 1,430 4,277 742 1,645 610 595 1,796 767 6,154 10,432 cD 2006 0 0 0 0 0 2.962 1.488 4.450 742 1.645 610 595 1,944 841 6,377 10,827 2007 0 0 0 0 0 3,063 1,539 4,602 742 1,645 010 595 2.097 918 8,607 11,209 2008 0 0 0 0 0 3,183 1,599 4,781 742 1,645 610 5W5 2,256 998 6,846 11,628 2000 0 0 0 0 0 487 244 731 742 1,.45 610 595 2,280 1,010 6,883 7,614 2010 0 0 0 0 0 0 0 0 742 1.645 610 595 2.280 1,010 6,883 6,883 2011 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1,010 6,883 6,883 2012 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1,010 6.883 6,883 2013 0 0 0 0 0 0 0 0 742 1,645 610 595 2.280 1,010 6.883 6.883 2014 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1,010 6,883 6,883 2015 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1,010 0,883 6,883 2016 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1.010 6,883 6.883 2017 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1,010 6,883 6,883 2018 0 0 0 0 0 0 0 0 742 1,45 610 595 2,280 1,010 6,883 6,883 2019 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1.010 6,883 6,883 2020 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1,010 6,883 6,883 2021 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1,010 6,883 6,883 2022 0 0 0 0 0 0 0 0 742 1,6451 10 595 2,280 1,010 6.883 6,883 2023 0 0 0 0 0 0 0 0 742 1,645 610 595 2,280 1,010 6,883 6,883 NPV(I osq 8 s 5,076 31,060 11,70t 8,123 23,381 0,892 92,000 A26 1017 6,119 4.127 11,553 4,802 48,905 141,045 1/ Includes the eatimated coat of bnvstmncnts outside th Bank project 2/ Incremental fixed O&M coats er assumed to be 5% of capacity investment costs, except the O&M coats associad with Operational Devlopment that we estimated at 10%. There we no O&M cots asaociatd with Management and Suprwvision. 3/ The investmnt cobs associated with Project Management and Supervision we distributed among CESAN's watr and sewrage systems, and hside ech system among Grand Vtora, Guwaperl, and other systems in function of total estimated capacity costs In ach system and geographical wrea 4/ The Investment cotbs associted with the Operational Development Program we distributed among CESAN'h watr systems in function of th currnt number of connctions. S/ Distribution coats we estimad ad US$218 per connectlon from yer 2000 onwrds. 6/ Connection costs we estimated at US$115 per rcsIdental dwelling torm yew 2000 onwrds. ANNEX 11 Attachment 3 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT MARGINAL WATER SOURCE AND MARGINAL OPERATIONAL COST (US$ as of June 1993) Tourist Season Off-Season Year MriaMarginal .Margin,al WarSore CsMrgnaterterSouceCost~~ 1994 Rationing 0.4200 Rationing 0.4200 1995 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 1996 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 1997 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 1998 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 1999 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 2000 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 2001 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 2002 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 2003 Jucu River & Vale Esperanza 0.0165 Jucu River & Vale Esperanza 0.0152 2004 Jucu River & Cobi 0.0173 Jucu River & Vale Esperanza 0.0152 2005 Jucu River & Cobi 0.0173 Jucu River & Cobi 0.0153 2006 Jucu River & Cobi 0.0173 Jucu River & Cobi 0.0153 2007 Jucu River & Cobi 0.0173 Jucu River & Cobi 0.0153 2008 Jucu River & Cobi 0.0173 Jucu River & Cobi 0.0153 2009 Barra do Jucu River 0.0295 Jucu River & Cobi 0.0153 Annual Equivalent Cost at 10% (1994-2009): 0.0639 0.0623 MWS&oc: lV2119 ANNEX 11 Attachment 4 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT MARGINAL COST STRUCTURE OF CESAN'S WATER AND SEWERAGE SYSTEMS AT GRANDE VITORIA AND GUARAPARI (US$ as of June 1993) LRAIC Loss Marginalapcity M-g' prin Margnali ' 'Cst .'Average, Before Losses Adjustme Cost . Cost ..C..u. . . . . . . . ...... . . , , . : stomer Region. System and Stage Tourist Off- Factor Tourist :Off:- Tourist Off : To ::o'rist- Co- Season easo n as SSeasS- eason Seas Season Seaso, . US$/m3 US$1m3 ,, US$/m3 USSIm USS/r USS/K,3. US$/m3 S$/m3 ":' -'USS/imo.: GRANDE VITORIA WATER SUPPLY SYSTEM Water Intake 0.16 0.16 1.00 0.16 0.16 0.06 0.06 0.22 0.22 variable Treatment 0.05 0.05 1.02 0.21 0.21 0.07 0.06 0.27 0.27 variable Transmission 0.03 0.03 1.01 0.24 0.24 0.07 0.06 0.31 0.31 variable Distribution 0.09 0.09 1.19 0.40 0.40 0.08 0.08 0.48 0.47 variable Connections 0.04 0.04 1.12 0.49 0.49 0.09 0.09 0.58 0.58 1.15 SEWERAGE SYSTEMS co Connections 0.09 0.09 0.85 0.08 0.08 0.01 0.01 0.09 0.09 1.15 Collectors & Interceptors 0.22 0.22 1.00 0.30 0.30 0.01 0.01 0.31 0.31 NA Disposal of Untreated Sewage 0.05 0.05 1.00 0.35 0.35 0.01 0.01 0.36 0.36 NA Sewage Treatment 0.19 0.19 1.00 0.49 0.49 0.07 0.07 0.56 0.56 NA Final Disposal of Treated Sewage 0.01 0.01 1.00 0.50 0.50 0.07 0.07 0.57 0.57 NA GUARAPARI WATER SUPPLY SYSTEM Water Intake 0.40 0.40 1.00 0.40 0.40 0.18 0.01 0.58 0.42 variable Treatment 0.16 0.16 1.02 0.58 0.58 0.18 0.01 0.76 0.59 variable Transmission 0.25 0.25 1.01 0.83 0.83 0.19 0.01 1.02 0.84 variable Distribution 0.32 0.32 1.19 1.37 1.37 0.22 0.02 1.59 1.39 variable Connections 0.04 0.04 1.12 1.59 1.59 0.25 0.02 1.84 1.61 1.15 SEWERAGE SYSTEMS Connections 0.09 0.09 0.85 0.08 0.08 0.01 0.01 0.09 0.09 1.15 Colectors & Interceptors 0.39 0.39 1.00 0.47 0.47 0.01 0.01 0.48 0.48 NA Disposal of Untreated Sewage 0.10 0.10 1.00 0.57 0.57 0.01 0.01 0.58 0.58 NA Sewage Treatment 0.28 0.28 1.00 0.75 0.75 0.06 0.06 0.81 0.81 NA Final Disposal of Treated Sewage 0.00 0.00 1.00 0.76 0.76 0.06 0.06 0.82 0.82 NA I/ The Los Adjustment Factor of 0.85 is appHed in tbe sewerage system. at the connection stage, to allow charging sewerage users based on its consumption of water as measured by the meter. ANNEX 12 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN: INCOME STATEMENT Current US$ Thousands Historic Eatimatod Pr , a _ d. year 1990 1991 1992 1993 1994 1996: 199 1997 1996 1999 Water Billed ('000 m3) 134,994 133.730 134,558 138,921 141,468 143,061 144,757 148,826 153,147 157.739 Sewage Billed ('000 m3) 9,724 11,130 12,059 12,045 13,179 14,546 22,389 36,229 44,705 55.618 Avg.Tariff-Water (US$/m3) 0.49 0.46 0.45 0.53 0.56 0.59 0.62 0.62 0.62 0.62 Avg.Tariff-Sewage (US$/m3) 0.23 0.28 0.23 0.29 0.32 0.54 0.57 0.57 0.57 0.57 Avg.Tariff (US$/m3) 0.47 0.45 0.43 0.51 0.54 0.58 0.61 0.61 0.61 0.61 Operatina Revenues 70.318 67.524 65.163 84.969 86.084 94,874 105.293 115.991 123.708 133.026 Water 65,778 61,409 60,395 74,190 79,327 84,232 89,492 92,007 94,679 97,517 Sewerage 2.236 3,094 2,747 3,505 4,249 7,879 12,734 20,606 25,427 31,634 Other 2,304 3,021 2,021 7,274 2.507 2,763 3,067 3.378 3,603 3,875 Ooeratina Expenses 44.861 38.089 49.341 47.097 49.164 50.094 51.533 5,575 55.337 57.507 Personnel 30,509 25,665 33,100 32,953 34,149 34,866 35,825 37,054 38,115 39,301 Materals 2,967 2,223 2,905 2,294 2,754 2.819 2,952 3,193 3,401 3,653 - Chemicals 1,138 546 884 601 933 917 888 877 892 922 - Other Materials 1,829 1,677 2,022 1,693 1,821 1,902 2,063 2.316 2,508 2,730 TNrd Parties 10,626 8,982 12,485 10.977 11,278 11,383 11,642 12,078 12,467 13,078 Co - Electricity 5,469 4,201 4,559 5,235 4,091 4,045 4,053 4,225 4,427 4,730 - Other Thrd Parties 5,157 4,780 7,926 5,742 7,186 7,338 7,589 7,853 8,040 8.348 General 673 721 779 796 897 937 1,017 1,141 1,236 1,346 Fiscal 86 498 72 76 86 90 97 109 118 129 Deorec. & Provisions 5.353 17,079 9,231 7.321 16.633 26.552 28.807 32.013 34.422 36.863 Deprec.+ Prov.for Amort. 4,707 16,420 8,631 6,995 16,329 26,216 28,434 31,603 33,983 36,392 Prov. for Bad Debts 646 659 600 326 305 336 373 411 438 471 Operatina Income 20.104 12.357 6.590 30.551 20.286 18.228 24.952 30.403 33.950 38.65e Net Non-Op. Expenses (1,809) (256) (3,494) 0 0 0 0 0 0 0 Net Financial Expenses 4,934 (1,937) 2,549 947 1,430 1.896 1,880 2,118 1.917 6,997 Net Inflation Adjust. (84,919) 21,142 46,258 0 0 0 0 0 0 0 Pre-Tax Income (71,558) 35,180 46,804 29,604 18,856 16,331 23,072 28.285 32,033 31,659 Net Income Tax Charge 1,255 4.888 5,195 14,730 12,774 11,708 15,479 18,490 20,699 20,832 Net Income (Loss) (72.813) 30.292 41.609 14_874 6.082 4.624 7.593 97_95 11.334 10.827 RATIOS: Operating Ratio 0.71 0.82 0.90 0.64 0.76 0.81 0.76 0.74 0.73 0.71 Working Ratio 0.64 0.56 0.76 0.55 0.57 0.53 0.49 0.46 0.45 0.43 NTLcompliance 1.20 1.06 0.98 1.34 1.17 1.12 1.23 1.27 1.30 1.18 RoR/ Avg Net Fixed Asets - 16.1% 6.3% 26.3% 4.6% 4.0% 5.3% 5.8% 6.1% 6.5% ANNEX 12 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN: FLOW OF FUNDS STATEMENT Current US$ Thousands HistodQ --t-maet-- P r:-.o: I t - .d - Year 1990 199t 192 199 1994 1 995 1996 1997 1996 1 99 TOTAL SOURCES 26.514 (13.709) (8.567) 52.554 81.166 109.095 97,572 89.054 86.070 91.755 Internal Sources 2.072 (38,267) (21.458) 24.847 26.062 34.431 39.348 44.594 48.384 55.453 Net Inc. (Loss) aft.tax (72,813) 30,292 41.609 14,874 6,082 4,624 7,593 9,795 11,334 10,827 Plus: Depreciation 4.707 16,420 8.631 6,995 16,329 26,216 28,434 31,603 33,983 36,392 Net Financial Expenses 6,164 4,568 3,884 2,978 3,652 3,591 3,319 3,196 3,067 8.234 Monetary Correction 64,014 (89,547) (75.583) 0 0 0 0 0 0 0 External Sources 23.173 9.760 1.329 1.085 18.969 26.234 31.970 30.936 27.958 13.335 CEF 23,173 9,760 1,329 693 0 0 0 0 0 0 FAE 0 0 0 392 0 0 0 0 0 0 IBRD 0 0 0 0 18,969 26.234 31,970 30,936 27,958 13,335 Other 0 0 0 0 0 0 0 0 0 0 Eouitv 1,269 14.798 11.562 25.333 34.847 48.430 26.256 13.525 9.727 22.968 Federal Government 0 0 0 1,289 1,288 0 0 0 0 0 6 TOTAL APPLICATIONS 26.514 (13.709) (8.567) 52.554 81.166 109.095 97.572 89.054 86.070 91.755 Caoital Exoenditures 12.550 15.248 24.692 17.990 54.810 84.516 69.268 69.296 65.298 57.439 Proposed Project 0 0 0 0 37,938 52,469 63,940 61,871 55,917 26,670 Other Investments 11,655 14,289 24,692 17,928 16,167 28,685 0 0 0 25,467 Interest During Construction 0 0 0 61 705 3,362 5,328 7,425 9,381 5,303 Capitalized Admin. Costs 895 959 0 0 0 0 0 0 0 0 Inc/(Dec I in Workina Capital (1.789) (50.041) (57.942) 25.583 18.637 16.798 22.693 14.147 15.161 16.266 Increase in Other Assets 7.400 12.500 16.970 0 0 0 2 2 Q Q Debt Service 8,352 8.585 7.713 8.982 7,719 7.781 5.611 5.611 5.611 18.050 Amortization 2,189 4,017 3,829 6,004 4,067 4,189 2,293 2,415 2.544 9.817 Interest 6,164 4,568 3,884 2,978 3,652 3.591 3,319 3,196 3.067 8.234 Cash Beginning Year - 1,142 1,327 363 1,570 1,639 1,670 1,718 1,786 1,845 Cash in Year - 185 (964) 1,207 69 31 48 68 59 72 Cash at Yaar End 1,142 1,327 363 1,570 1,639 1,670 1,718 1,786 1,845 1,917 RATIOS: e t Service Coverage 0.2 -.6 -2. . .3 7.01 7.95 .62 3. 1Internal Cash/invest. -46.2% 15.6% 116.5% -54.2% -1.8% 8.0% 8.9% 28.1% 32.6% 30.4%1 ANNEX 12 BRAZI ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT CESAN: BALANCE SHEET Current US$ Thousands Historic Esiae ~j ac j td Year 1990 1991t11 92 1993 1994 919929 16. 079 1999 ASSETS 76.128 145,759 166.427 181.996 531.936 591,281 633.370 672.382 704.662 726.875 Current Assets 11.438 16.678 9.066 13.640 13.085 14.130 15.385 16.704 17.669 18.836 Cash 1,142 1,327 363 1,570 1,639 1,670 1,718 1,786 1,845 1,917 Net Accounts Receivable 8,814 9,474 7,063 10,531 9,858 10,864 12,057 13.283 14,166 15,233 Inventory 387 253 350 248 298 305 320 346 368 396 Deferred Payments & Other 1,095 5,625 1,290 1.290 1,290 1,290 1,290 1,290 1,290 1,290 Short-Term Investment 0 0 0 0 0 0 0 0 0 0 Lona -Term Assets 74 61 72 72 72 7U 72 72 72 S Total Fixed Assets 64,616 129.020 157.289 168.284 518.779 577.079 617.912 855.eo6 686.920 707.967 Net Fixed Assets 50,863 102,199 107,530 124,805 449,720 458,187 490,395 549,131 570,081 610,444 - Gross Fixed Assets 74.782 151,763 167,416 190,963 696,809 730,249 789,045 876,936 929.498 1.003,692 - Less: Acumulated Depreciation 23,920 49,564 59,886 66,158 247,089 272,062 298,650 327,805 359,417 393,248 G Work in Progress 6,625 23,094 46,585 40,333 62,206 107,241 111,701 86.644 97.475 79,958 Long -Term Intangible Assets 7.128 3,727 3,175 3,145 6,853 11,650 15.816 19.830 19,364 17,565 LIABILITIES & EQUITY 76.128 145.759 166.427 181.996 531.936 591.281 633.370 672.382 704.ee2 726.875 Current Liabilities 12.100 34.297 30.412 22.591 25.126 24.948 19.365 19.426 26.078 33.460 Accounts Payable 3.398 24.278 13,295 15.021 12,915 10,862 9.405 9,526 9.533 9.349 Current Portofolio of Long-Term Debt 6.460 7.012 12.019 4.067 4,189 2,293 2,415 2,544 9.817 17,763 Third Party Services 2.242 3.007 5,099 3,503 8,022 11,793 7,545 7,356 6.728 6.348 Total Lona-Term Debt 113.700 95.776 101.983 105.016 105.080 129.021 158.576 186.968 205.110 200.681 Less: Current Portio 6,460 7.012 12,019 4.067 4.189 2,293 2.415 2.544 9.817 17.763 TotalLong-TermDebt 120.160 102,788 114,002 109.083 109.269 131,314 160.991 189.512 214.926 218.444 Eouitv (49.672) 15.687 34.032 54.389 401.731 437.312 455.428 485.9ss 473.474 492.733 RATIOS: Current Ratio 0.95 0.49 0.30 0.60 0.52 0.57 0.79 0.86 0.68 0.56 Long-Term Debt: Equity Ratio -2.29 6.11 3.00 1.93 0.26 0.30 0.35 0.40 0.43 0.41 Accounts Receivable Comparator Idays) 47 52 40 46 43 43 43 43 43 43 -85- ANNEX 13 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT ASSUMPTIONS UNDERLYING CESAN'S FINANCIAL FORECASTS A. Introduction 1. CESAN's financial projections are based on: (i) audited financial statements for FY90-92; (ii) the FY93 budget; and (iii) financial projections and explanatory notes for 1994-2000 as prepared by CESAN. 2. Because of the high inflation in Brazil during the past decade, historical financial statements have been translated into current US dollars (using the year-end exchange rates for balance sheets and average exchange rates for income statements). The projections are also prepared in current US dollars. International inflation was estimated at 2.8% for year 1994 and thereafter. Ya Endysar Average DDomest: ntenational . ........ ... .. tExhan R:I ate Exchange Rate In.la..n ..f.ti.n .ndex X Cr$JU S CrJUS$ %) 1 993 im1I00 1990-' 170.6 68.2 1,397 90.3 1991 1,068.8 404.9 528 93.9 1992 12,387.5 4,512.3 1,059 97.5 19932' 273,931.4 87,675.1 2,111 100.0 B. Income Statement Revenues 3. Operating Revenue consists of sales of water and sewerage services in Grande Victoria and other regions (Guarapari and other Interior systems). Major assumptions in the projections are that: (i) water coverage will increase from 91% in 1993 to 93% in 1999; lii) there is a price elasticity of demand of -0.3, so the volume billed per household will decrease in relation to planned tariff increases; (iii) sewerage coverage will increase from 11 % in 1993 to 43% in 1999; and (iv) other operating revenues such as connection and installation fees, and income from sale of equipment will amount to 3% of the water and sewerage services revenue. 4. Retail Prices. The average water tariff is projected to increase by 5% in 1994, 1995 and 1996, and remain constant in US$ terms thereafter. The sewerage tariff is estimated to be 50% of the water tariff in 1994, and 80% in 1995 and thereafter. These levels enable CESAN to comply with the NTL, and to generate sufficient internal cash for a contribution to investment. S In 1990, the Cruzeiro (Cr$) replaced the Novo Cruzado (NCz$) at the rate of 1 - 1,000. v In 1993, the Cruzeiro Real (Cr$) replaced the Cruzeiro (Cr$) at the rate of 1 = 1,000. -86- ANNEX 13 5. Unaccounted-for Water (UFW) is measured by the difference between water produced and water consumed, and include losses due to metering errors, theft, and other physical and commercial losses. The projection assumes that CESAN will reduce its UFW from an estimated 39% in 1994 to 30% in 1998 and maintain that level thereafter. (See Monitoring Indicators, Annex 21). 6. Metering. CESAN will increase the percentage of metered connections from 70% in 1993 to 90% by 1996. Expenses 7. Operating Expenses include personnel, materials (chemicals and others), other third party services (electricity and contract labor), and general and fiscal (value added tax) costs. Variable costs (chemical and electricity) are based on CESAN's 1994 budgeted unit costs and production volume. Personnel costs, which account for 70% of operating cost, are projected to reflect an estimated average annual productivity gain of 7.5% (the number of connections per employee increases from 210 (4.8 employees/i 000 connections) in 1993 to 347 (2.9 employees/1 000 connections) in 1999. With the dramatic increase in the number of sewerage connections (more than 133,000 connections will be added by the project), CESAN will have to increase the number of employees operating the sewerage systems to ensure proper operation and maintenance. 8. The number of employees required per connection, however, is different for water and sewerage. In general, water connections require more employees than sewerage connections. Here, we assumed that for each 1,500 new sewerage connections, CESAN will have to add one employee to its sewerage operation. The projected productivity gain of 7.5% assumes that CESAN will be able to freeze the number of employees in the administration and water operation. The average salary is estimated to increase by 2% per annum, in real terms. 'Third party labor' is estimated to increase in proportion to the number of employees. Third party labor is engaged mainly in meter reading, maintenance, and other regional operations. 9. Depreciation is calculated on a straight-line basis, assuming an expected useful life for different types of assets. The effect of the proposed asset revaluation study (to be commenced by CESAN early in 1994) was taken into account in the 1993 projections. Provision for doubtful accounts is 1.5% of accounts receivable, as determined by law. 10. Net financial expenses is the net of interest on long-term debt (excludina interest during construction on IBRD, CEF and FAE loans, which are capitalized). The projection assumes no interest income from investment. 11. Net inflation adjustment in the historic financial statements is net of monetary corrections on asset and equity accounts, and of foreign exchange gains and losses on long- and short-term debts. 12. Tax Expense is the sum of income taxes (35% of net income after interest expenses), the "social contribution tax' (10% of the income tax), the social security tax (2% of operating revenue), and the public service capital tax (0.65% of operating revenue + state and government transfer). Brazilian corporate law allows for an income tax loss carry-forward of up to four years. As CESAN has been reporting operating losses and losses were carried forward, it has not paid income taxes (the social contribution tax however was paid) in the past several years. The projection assumes that CESAN will start paying taxes in full, starting in 1994. Taxes for 1993 will be slightly lower, as CESAN had an accumulated loss of US$8.3 million at the end of 1992, which has been carried forward to 1993, reducing the tax requirements. -87- ANNEX 13 C. Balance Sheet Assets 13. Accounts receivable are expected to decrease to 43 days of annual sales revenue by 1995, from 46 days in 1993, as the bill processing period is reduced to 22 days from its current 33 days. Inventory consists of chemicals and other materials and represents 39 days of total material cost. Cash is assumed to be 12 days of operating revenue. 14. Fixed Assets are revaluated with inflation every year and increase with investments. CESAN's current book value of net fixed assets is underestimated because of the inadequate revaluation of assets in the past. Until 1990, the revaluation index allowed by the government was much lower than the inflation rates. Although Decree 322 of 1991 enable the company to choose a more appropriate revaluation index for its assets3J, and CESAN's assets were partially revalued in 1991, a more thorough study on the revaluation of assets is needed to determine the real value of its assets. Under the project, a study to determine the real value of CESAN's fixed assets will be initiated. In 1994, the real value of CESAN's fixed assets is adjusted upwards by multiplying the current book value figure by 3.5, to reflect the expected revaluation (a similar study in Sao Paulo resulted in a recommendation to multiply by 4.58 times the book values of reviewed fixed operating assets). Depreciation expenses are adjusted upwards accordingly. Liabilities and Equity 15. Long Term Debt consists of local and external debt obligations with IBRD, CEF, FAE, and other creditors. The total long term debt as of May 1993, was US$94 million, of which US$86 million was internal (mainly to CEF) and US$8 million was external. Of the internal debt, US$62 million is due to CEF, and US$22 million to FAE. CEF debt was recently renegotiated to be paid back in 20 years with an interest rate of 5%. FAE debt, on the other hand, is expected to be capitalized, after formalizing the negotiations with the State of Esptrito Santo. The projection assumes that the FAE renegotiation will be completed during the first quarter of 1994, and US$22 million will be converted into CESAN's equity. A copy of the agreement formalizing CESAN's capitalization of FAE debt will be a condition of Negotiations. 16. As for the external debt, the debt service was reduced substantially following an agreement reached with the State of Espfrito Santo by which: (i} the State will assume the total principal payment (amortization) of CESAN's existing external debt, which will be converted into CESAN's equity; and (ii) CESAN will continue to pay interest to its external creditors. 17. Share Capital increases with the increased equity participation of the State over the period, as shown in the financing plan (Table 1). D. Borrowing and Investments Project Financing 18. Proposed Bank Loan. US$149.4 million equivalent borrowed over 15 years, including 5 years of grace, at the Bank's variable lending rate (7.43% at the time the projections were made). The first disbursement is expected during mid-1 994, and the first repayment will start during mid-1 999. The commitment fee is 0.75% of undisbursed balance. 3' Either the National Treasury Bonds (BNT) index or the consumer price index. -88- ANNEX 13 19. Intemal Cash Generation. CESAN is expected to finance about 21 % of the projected Bank investment program (US$61.4 million) with internally generated resources. Including interest during construction, CESAN's financing percentage will increase to 28% (to US$92.9 million). 20. Other Resources. The State of Espirito Santo will finance about 29% of the projected investment (US$88.0 million). Non-Project Investment Borrowing 21. In the period 1994-1999, CESAN is expected to borrow US$ 36.7 million from CEF (already contracted), at an annual interest rate of 6%, maturity of 25 years, and a commitment fee of the 1.0% of the undisbursed balance. The already contracted State transfer for non-Bank project investments, should amount to US$28.5 million during the project period. There is no transfer from the federal government, except for the US$1.3 million transfer already contracted for 1994. Table 1. FINANCING PLAN FOR CESAN's TOTAL INVESTMENT PROGRAM (US$million) Financing Plan For IBRD Projectl8: * IBRD Loan 19.0 26.2 32.0 30.9 28.0 13 3 24.9 149.4 50.0 * State Transfers 19.0 19.7 26.2 13 5 9 7 0.0 14.7 88.0 29 5 * CESAN's Internal 0.0 8.5 5.7 17 5 18 3 13.3 10.2 61.4 20.5 Resources Total 37.9 52.5 63.9 61.9 55.9 26.7 49.8 298.8 100.0 Financing Plan For IBRD Project and CESAN's Other Investments: * IBRD Loan 19.0 26.2 32.0 30.9 28.0 13.3 24.9 149.4 40.5 * State Transfers 21.1 25.1 26.2 13.5 9.7 22.8 19.7 118.4 32.1 * CESAN's Internal Resources 0.0 6.5 5.7 17.5 18.3 15.3 10.2 63.3 17.1 * CEF 13.4 23.3 0.0 0.0 0.0 0.0 6.1 36.7 10.0 * Federal Transfeor 1.3 0.0 0.0 0.0 0.0 0.0 0.2 1.3 0.3 * Total 54.1 81.2 63.9 61.9 55.9 52.1 64.5 369.1 100.0 " Does not include capitalized interests (US$ 31.5 million on Bank project), which will be fully financed by CESAN's internal resources. Total Investment Costs 22. The total investment cost of CESAN is estimated to be US$ 369.1 million (US$ 400.7 million including capitalized interest), of which US$298.8 million represents the Bank project (US$330.3 including capitalized interest). CESAN is expected to finance 17% of the total investment cost with its internal cash. Including IDC, CESAN's financing will rise to 24%. -89- ANNEX 13 E. Sonsitivity Analysis 23. Two sets of sensitivity analysis were conducted to measure the project risk. One pertains to CESAN's operational performance and tariffs, and the other pertains to the State Government's ability to provide counterpart funds to the project. The second sensitivity analysis was done specifically to address the issue of the poor track record of Brazilian state governments in providing counterpart funds in a timely manner. CESAN's Operational Performance 24. Two factors were identified as crucial to the success of this project: (i) the average tariff level; and (ii) operational efficiency as represented by labor (employee) productivity. Under the Base Scenario described above, the average tariff level is expected to increase by 5% in years 1994, 1995, and 1996, and the productivity index to increase by 7.5% per year (in terms of connections per employee). With such productivity gains and tariff levels, CESAN's internal cash generation would cover 17% of the total investment cost, after operating cost and debt service. 25. The various scenarios analyzed and a summary table for the results under the six possible combinations are presented below. The combination "A2" corresponds to the Base Scenario. CESAN's Contribution to Investment: * US$ million US$68.1 US$62.3 US$40.6 * % of total Investment Cost" 19% 17% 11% Espirito Santo's Counterpart: * US$ million US$113.6 US$118.4 US$141.1 * % of total Investment Cost 31 % 32% 38% CESAN's Contribution to Investment: * US$ million US$51.5 US$46.6 US$23.9 * % of total Investment CostO 14% 13% 7% Esprrito Santo's Counterpart: * US$ million US$130.2 US$135.1 US$157.8 * % of total Investment Cost 35% 37% 43% Y Not including interest during construction (capitalized interest) of USS31.5 million, paid from CESAN's internal cash. 26. Tariff Increases. Scenarios "A1, 'A2', and 'A3 assume tariff increases of 5% in 1994, 1995, and 1996. The average water and sewerage tariff remains at US$0.61 after 1997. This assumption, together with the projected increase in water consumption, translates into an annual average revenue increase of 7.6% between 1993 and 2000. 27. Scenarios 'Bl w, 1B2, and 1B3" assume no tariff increase. The average water and sewerage tariff level stays as in 1993 at US$0.51 /m3. This assumption, together with the projected increase in water consumption, translates into an annual average revenue increase of 6% between 1993 and 2000. -90- ANNEX 13 28. Productivity Gains. Scenarios 'A1" and "81 assume productivity gains of 8.5% per year. Under these scenarios, the number of connections {water and sewerage) will increase from 210 (4.8 employees per 1,000 connections) in 1993 to 347 (2.9 employees per 1,000 connections) in 1999. The productivity gain of 8.5% could be achieved if CESAN keeps the number of employees at the 1993 level, despite the considerable increase in the number of sewerage and water connections it needs to service. 29. Scenarios "A2" and 'B2' assume productivity gains of 7.5% per year. Under these scenarios, the number of connections per employee will increase from 210 in 1993 to 324 (3.1 employees per 1000 connections) in 1999. See para. 8 of this Annex for an explanation of how the 7.5% (the base scenario regarding employee productivity) was attained. 30. Scenarios OA3' and B3' assume no productivity gains. Under these scenarios, the number of connections per employee remains at 210. 31. Results. The sensitivity analysis confirms that the average tariff level and the employee productivity will have a large impact on CESAN's cash generation. Under the base scenario 'A2", (tariff increases of 5% in years 1994, 1995, and 1996, a moderate productivity gain of 7.5% per year, and a price elasticity of demand of -0.3), CESAN will be able to cover more than 17% of the investment cost from its internally generated funds (24% including IDC). Under this base scenario, the working ratio4' will decrease from 0.55 in 1993 to 0.43 in year 2000. On the other hand, if CESAN's productivity stays at the current level, its contribution will drop to a mere 11 % even with the projected tariff increase. 32. Under Scenarios "Bi", "B2, and 'B3" (that is, under the assumption of no tariff increases), even with the productivity gain of 8.5%, CESAN's contribution to investment will be 14% of the project cost. With the most pessimistic scenario of no productivity gain and no tariff increase, CESAN's contribution will drop to 7%, requiring almost US$158 million (43% of the project cost) from the State. Counterpart Funds 33. The scenarios analyzed above, however, implicitly assume that the State government would have the ability to provide counterpart fund requirements. It also assumes that the State government will not change its recent policy to increase its investment in the sanitation sector. In order to determine the effect of the State not being able to provide counterpart funds, we analyzed a scenario where the State is not able to provide more than US$15 million per year in transfer to CESAN, including the counterpart fund for the project. In addition, we worsened this new scenario even more by combining it with the 1B3" scenario presented above, that is, by assuming no productivity gain and no tariff increases. The limited amount of State counterpart funds and CESAN's internal cash generation implies scaling down the investment program executed each year. 34. Under such a scenario, implementation of the investment program originally scheduled for 1994-1999 would take three more years (from 1994 to 2002). However, CESAN's contribution to its total investment program increases to about 13%, almost twice the contribution resulting from the B3Y Scenario, as CESAN will be able to contribute three extra years of internal cash generation to the investment program. A summary table of the results for this low counterpart fund scenario, vis-a-vis the 1B33 Scenario, is shown below. I/ Operating Cost (not including depreciation) over Operating Revenue. -91- ANNEX 13 *133- Scenario and the 9 years US$ 62.4 million US$ 134.9 million State contribution a Avg. US$ 7.2 million * Avg. US$ 15 million per limited to US$15 per year year million per year. * 13% of total investment * 37% of total investment OB3u Scenario and Ng 6 years US$ 23.9 million US$157.8 million ceiling on the State * Avg. US$ 4.0 million * Avg. US$26.3 million per contribution. per year year * 7% of total investment * 43% of total investment 35. Its is important to note that the internal financial rate of return (IFRR) under the most pessimistic low counterpart fund scenario would decline slightly, as the net incremental revenue from the project is deferred. For example, for the Grande Vit6ria region, the IFRR would decline to 15% (from 18% under base scenario) for the water supply system and to 4% (from 12% under the base scenario) for the sewerage system. With expected tariff increases, however, the decline in the IFRR is minimal: to 17% for the water supply system and to 11 % for the sewerage system. The impact of a tariff freeze is much higher for the sewerage system, since a steeper increase in sewerage tariffs is expected and CESAN's investment program concentrates on the expansion of its sewerage systems. F. Ratio Analysis 36. The definition and the explanation of the financial ratios presented with the financial statements (Annex 12) are as follows: 37. The Operating Ratio is defined as the ratio of operating expenses plus depreciation to operating revenue. The ratio dropped in 1993 with the sharp increase in tariff levels and low level of investment. The ratio then increases in 1994, as the depreciation expense is adjusted upwards with the revaluation of fixed assets expected that year. The ratio then gradually decreases as CESAN's operational efficiency improves. 38. The Working Ratio is defined as the ratio of operating expenses to operating revenues. Personnel and labor cost accounts for more than 80% of operating expenses. The ratio drops steadily as CESAN achieves its expected productivity gains. 39. NTL Compliance is achieved when the ratio of operating revenue to operating cost plus depreciation plus debt service is equal to or larger than 1. With the projected tariff increase, CESAN will be able to comply with NTL throughout the project execution period. 40. The Rate of Retum on Average Net Fixed Assets is defined as the percentage of net operating income after depreciation in relation to average net fixed assets. The rates of returns are erratic in the last several years, as a result of the fluctuation of the real tariff and thereby tariff revenue. The percentage is naturally lower after the expected revaluation of fixed assets, as the depreciation expenses increases and fixed assets triples in size. The 1994 percentage reflects the full revaluation. 41. The Current Ratio is defined as the ratio of current assets over current liabilities. 42. The Debt to Equity Ratio is defined as the ratio of long-term debt over equity. CESAN's total long-term debt does not include the current portion of CESAN's long-term debt. -92- ANNEX 13 43. The Accounts Receivable Comparator is calculated by multiplying the accounts receivable plus the provision for bad debt by 360 days, and then dividing this product by CESAN's operating revenue. 44. The Debt Service Coverage Ratio is defined as the ratio of net income after tax plus interest on long-term debt plus depreciation to amortization plus interest. 45. The Percentage of CESAN's Investments Financed by Intemal Cash is calculated as follows: (i) the sum of interest during construction, increases in working capital, and debt service is subtracted from the sum of income after tax, depreciation, and financial expenses; and (ii) that difference is divided by CESAN's total investments (project and non-project), MIL including interest during construction. -93- ANNEX 14 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT TRANSFERS OF THE STATE OF ESPIRITO SANTO TO CESAN Current US$ millions ...... Toal ransfers toSanitation ' T Tranfer to CESAN W.::.. F~~~~~S ,,~o ,.-' ::lo Re."e,:e ''':-;'.''US$ mlin eeu 1988 399.0 1.5 0.4 0.6 0.2% 1989 716.3 4.3 0.6 1.7 0.2% 1990 799.0 4.0 0.5 1.2 0.2% 1991 686.9 9.5 2.1 14.7 2.1% 1992 659.0 13.4 2.0 11.3 1.8% 1993 4' 656.0 26.8 4.1 14.7 2.2% 1994 i' 724.1 26.8 3.7% 21.1 2.9% 1995 1' 758.3 26.8 3.5% 25.1 3.3% 1996 61' 768.7 26.8 3.5% 26.2 3.4% 1997 6' 767.1 26.8 3.5% 13.5 1.8% 1998 6' 776.9 NA NA 9.7 1.2% 1999 El 772.6 NA NA 22.8 3.0% tl Source: State Government of Espirito Santo. Revenues include ICMS, other tax income, transfer from the federal government, and credit operations. Z' Source: State Government of Espirito Santo. XI Source: State Government of Espirito Santo for the historical transform and CESAN's Financial Projections for the projected transfers. 41 Estimated. fI Projected. -94- ANNEX 15 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT ENVIRONMENTAL ASSESSMENT A. Introduction 1. The Espfrito Santo Water and Coastal Pollution Management Project consists of works of potable water, sewerage, interceptors, and sewage treatment plants for the Grande Vit6ria and Guarapari areas, as well as sewerage and sewage treatment plants for municipalities in the Santa Maria and Jucu river basins. The project also includes institutional strengthening components for the State Water Company of Espfrito Santo (CESAN) and the State Secretariat of the Environment (SEAMA). 2. Major environmental issues in the project are related to the sewage treatment components. An environmental assessment report (EA) was prepared by CESAN in mid-1 993. This report brings together, summarizes, and updates the findings of all environmentally related work done both by CESAN and SEAMA during project preparation. The draft EA was subject to public hearings as required by Brazilian law. Additional community participation workshops were held to address specific issues (see para. 22 and Box 2). A copy of the EA was also submitted to SEAMA for detailed review and comments. Formal Bank review of the final EA was carried prior to appraisal and it was found to be fully consistent with Bank policy guidelines concerning environment. B. Project Description 3. The sewerage and wastewater treatment component will include the construction of sewerage and wastewater treatment and disposal systems for 12 urban areas: Praia do Canto, Praia da Costa, Bairro de Fatima, Centro de Guarapari, Guarapari/Praia do Morro, Santa Maria de Jetiba, Santa Leopoldina, Domingo Martins, Marechal Floriano, Centro de Vit6ria/Cariacica I, Paul, and Cariacica II. With the exception of the last three areas, all other systems already have selected waste treatment technologies and completed engineering designs. Annex 8, Attachment 1, summarizes the wastewater components of the project. C. Legal and Administrative Framework 4. The project requires two sets of licenses. The first set, which includes municipal licenses for the siting and construction of civil works, rights of way, and infrastructure crossings (roads, railways, etc.), has been already approved by the concerned municipalities. The second set includes State licenses for the siting construction, and operation of water and sanitation facilities. SEAMA, the State agency responsible for this environmental licensing process, has already approved the EA--the necessary condition for granting these licenses, and granted all siting licenses. The project has been prepared within the context of Esp(rito Santo's Water Resources Management Plan. The project will strengthen this plan by providing technical assistance to SEAMA to design and implement water quality regulations and monitoring programs. 5. CESAN will be responsible for the construction and operation of all sewerage and wastewater treatment plants. Monitoring of treatment efficiencies and quality of effluents will also be under CESAN's responsibility. Monitoring of water quality in aquatic ecosystems and the management of a water quality network for inland and ocean waters will be carried out by SEAMA. -95- ANNEX 15 D. Environmental Baseline Water Quality 6. The principal water resources in the area of influence of the project are the Santa Maria de Vit6ria and Jucu rivers, which are the main sources of water supply for Grande Vit6ria (the state capital) and the cities of Santa Maria de Jetiba, Marechal Floriano, Santa Leopoldina, and Domingo Martins. In the Guarapari area the main watersheds are the Una, Perop3o, and Jabutf rivers, the latter constituting the main water supply source for Guarapari. The estuarine and bay areas of Grande Vit6ria and Guarapari constitute important ecosystems with spawning and maturing sites for numerous aquatic species for continental and ocean fisheries. The ecosystems include several beaches with tourism potential, and the fisheries represent the main livelihood for approximately 14,000 low-income fishermen in the areas of Vit6ria, Barra do Jucu, Vila Velha, Peroggo, and Guarapari. 7. Existing water quality conditions are relatively good in all upstream reaches of water basins with still good waste assimilation capacities. However, once rivers enter the metropolitan areas they receive untreated domestic sewage and industrial waste waters. Dissolved oxygen and coliform levels reach critical levels in the lower portions of all rivers. Water quality monitoring of coastal and bay waters indicate that there are several areas with inappropriate conditions for contact sports, swimming, and other recreational uses. Tourist beaches close to the estuarine areas have critically high coliform levels. 8. Water pollution sources in the area of the project include untreated domestic sewage, industrial effluents, and inappropriate disposal of solid wastes in water courses. Deforestation, inappropriate agricultural and land use practices, and road construction in the upper watershed contribute to relatively high erosion rates, pesticide run-off, and sedimentation loads in the lower reaches of the rivers and the estuarine and bay ecosystems. Water use conflicts are evident as the dilution of untreated waste water discharges hinders tourism, fisheries, water supply, and irrigation. Aquatic and Terrestrial Ecosystems 9. Terrestrial ecosystems in the area of influence of the project, especially in the proposed wastewater treatment plant sites, are deteriorated. Only two sites (Guarapari and Praia do Morro) present relatively good vegetation cover with forests in an advanced stage of regeneration. Besides the riverine and estuarine ecosystems described above, the area has important patches of mangroves in Vit6ria (18 kM2) and Guarapari (6 kM2). In addition to heavily polluted waters flowing into these mangrove areas, uncontrolled urban expansion and solid waste disposal systems are exerting additional pressures on these ecosystems. Other important aquatic ecosystems in the area of influence of the project are coastal lagoons and salt water marshes which are found in small areas around some of the wastewater treatment plants. 10. There are 21 Conservation Units or legally protected areas totalling 1 1,300 hectares in the area of influence of the project; 8 of these units are managed by the State and the remaining 13 by the municipalities (9 in Grande Vit6ria alone). These areas present variable conditions of preservation and are subject to different threats such as illegal fishing and hunting, water pollution loads, fires, uncontrolled urban expansion, cutting for firewood, and leachates from sanitary landfills. The Biological Reserve of Lamerio, a mangrove ecosystem in Grande Vit6ria exacerbated by practically non- existent protection, is representative of the above conditions. There are approximately 46 aquatic and terrestrial animal species represented in these protected areas which some degree of ecological importance, that are either locally threatened or in danger of extinction. -96- ANNEX 15 Economic Conditions 11. The principal economic activities in the region are port activities related to mining (Tubarao), cellulose lAracruz Cellulose), and the commercial harbors of Vit6ria, Capuaba, and Ubu. Brazil's third major steel company (CST) is located in the area, as well as the industries belonging to the Companhia Vale do Rio Doce (CVRD). Tourism also plays an important role in the local economic activity of Grande Vit6ria and Guarapari, attracting large numbers of out of state visitors during the summer season. 12. Local artisan communities make pots from clay deposits which are found near mangrove ecosystems in the area. These pots represent a cultural symbol for the State and most tourism campaigns are based upon the use of these pots for typical fish dishes (moqueca de peixe). 13. Potable water supply coverage varies from 85% to 90% in all municipalities. Sewerage and sewage treatment coverage is low (11 %). Solid waste collection and disposal is also deficient, with coverage from 50% to 80%. With the exception of Grande Vit6ria, most solid wastes are disposed of in open dumps near water courses. Given these sanitary conditions, water related diseases are the main causes of mortality and morbidity among children and lower income segments of the population. E. Environmental Impacts Water Quality 14. Water quality modelling efforts for the river-bay systems forecast major improvements and recovery of dissolved oxygen and coliform levels in key points in the area of influence of the project. These positive impacts will enhance water uses including potable water supply, recreation, and tourism, reduce health-related risks, and benefit aquatic fauna by reducing water toxicity. 15. Residual negative impacts are associated with the disposal of treated effluents in water bodies with low dilution and waste assimilation capacity. In these cases, there will be some probability of eutrophication of these water bodies, persistent low dissolved oxygen levels and high coliform concentrations. However, mathematical models demonstrate that the area of influence of these deteriorated conditions will be much less extensive than existing conditions. Water quality conditions can also be impaired during malfunctions of wastewater treatment plants and pumping stations, and by the inappropriate disposal of solid wastes generated in the wastewater treatment systems. Aquatic and Terrestrial Ecosystems 16. Positive impacts related to water quality are also important for aquatic and terrestrial ecosystems. Improved water quality will benefit aquatic fauna and associated terrestrial animals. Spawning and maturing sites will present better conditions for fish and shrimp species, thus increasing their population. 17. Negative impacts on aquatic and terrestrial ecosystems are related to wastewater treatment plant siting. Hydraulic and economic considerations in engineering designs require these sites to be in the lower parts of the basins served by sewerage systems. Treated effluent pipes or canals must also go through lowlands. These areas are generally associated with mangrove and coastal lagoon ecosystems in the area of influence of the project. Vegetation loss, soil instability, erosion, and coastal lagoon disturbances will be caused in three of the proposed wastewater treatment plant sites. However, the magnitude and importance of these impacts are quite low, and have been further reduced with appropriate changes in design, project siting, and additional engineering works. -97- ANNEX 15 Economic Conditions 18. Improved environmental conditions will benefit tourism, fisheries, and health. The construction of sewerage systems and interceptors will also improve the sanitary conditions of urban channels, thus enhancing the overall quality of life in the urban areas. 19. Again, negative impacts may be associated with project siting. One major social and cultural impact of great importance and magnitude is related to the location of the wastewater treatment plant for the Praia do Canto system. This site contains the principal clay deposit for the preparation of clay pots (panelas) by local artisan communities. Because of the social, economic, and cultural importance of this impact, additional technical and social studies were carried out in order to identify alternatives for mitigation and compensation measures (see Box 2). 20. Other social and economic impacts are of lesser importance and magnitude and are related to construction practices typical of this type of projects: disruption of traffic patterns, interference with other urban infrastructure, noise, and dust. However, these impacts will occur during the construction period only. Project siting will require the relocation of some existing infrastructure at those sites. Cumulative Impacts 21. Cumulative impacts were also analyzed in the area of influence of the project. Perhaps the most critical situation arose in the Joanna D'Arc neighborhood where the treatment plant located in that area will add additional environmental pressure to a region already overloaded by an existing quarry, a solid waste composting plant, an asphalt plant, and increased traffic from a major city road. F. Mitigation Measures 22. Perhaps the most efficient techniques for mitigating negative impacts caused by the project have been careful project siting and the selection of appropriate alternatives for wastewater treatment technologies. Project siting has kept the disturbance of aquatic and terrestrial ecosystems to a minimum and has avoided the location of any plant within protected areas. All wastewater treatment technologies were selected independently for each system according to water quality restrictions, receiving water body assimilation capacity, eutrophication potential, and available land. Several water quality models were used intensively in this process Isee Box 1). 23. Additional measures for minimizing impacts on water quality and aquatic and terrestrial ecosystems include: lengthening effluent pipes or canals to water bodies with higher waste assimilation capacity; changing effluent pipe layout in order to avoid coastal lagoon ecosystems; design of solid waste treatment facilities in all wastewater treatment plants; contingency plans for eventual raw sewage discharges caused by system malfunctions; design of containment walls in unstable sites in order to avoid soil disposal and erosion on mangroves; design of appropriate construction practices; and the design of revegetation plans/vegetation barriers around all wastewater treatment plants. 24. Additional engineering and socio-economic studies carried out by CESAN and SEAMA, with the participation of the Municipality of Vit6ria and the Association of Paneleiras, identified several mitigation and compensatory programs for the social and cultural impacts resulting from the Praia do Canto site. A well developed community consultation and participation program around this potentially sensitive issue has turned this project into a major opportunity for the paneleiras to maintain their activity (See Box 2). 25. Cumulative impacts in the Joanna D'Arc neighborhood were the subject of an intensive community consultation program. Inter-institutional agreements were reached in order to strengthen environmental control in existing pollution sources (quarry, asphalt plant, and composting plant), -98- ANNEX 15 BOX 1: WATER QUALITY MODELLING: METHODOLOGIES AND FINDINGS Water quality modelling was a major tool used to quantify the achievement of water quality objectives during project preparation. Using the data from the matrices of pollution sources (Annex 2) and existing water quality (Annex 4) it is possible to arrive at the most efficient wastewater treatment scheme in order to obtain a specific set of water quality objectives for wastewater receiving water bodies, as follows: (i) define the specific water quality objectives for a given water body (river, bay, estuaries, etc.) according to the State's present and proposed future water quality legislation; (ii) calibrate a water quality model (for rivers: QUAL-2e; for ocean: Marine Pollution Model, MPM) to simulate current water quality conditions, and then to simulate water quality conditions for a time-horizon of twenty years, without project implementation, to obtain future water quality levels; and (iii) analyze different wastewater collection, treatment and disposal alternatives which will achieve, through water quality modelling, the desired objective in the time horizon. This methodology permitted the identification of needed treatment efficiencies, the most appropriate disposal points and the need for additional and complementary actions in industrial pollution control in some specific locations in the area of influence of the project. Perhaps the most important conclusion of the modelling efforts is that project implementation is required to bring water quality up to the standards needed for swimming and other water contact sports in the beaches of Camburi, late, Jurema, and Aterro. Water quality modelling will be a major component in the institutional development programs of both CESAN and SEAMA. establish additional green areas in the neighborhood, plan for the long term removal of the solid waste plant from the neighborhood, and construct more tree barriers and additional mitigation measures in the wastewater treatment plant, including some areas which will be set aside in the site for community recreation (soccer, basketball). 26. Other mitigative measures for minor socio-economic impacts include: design of project construction schedules taking into consideration local traffic conditions, and tourism activities and timing; reconstruction or reposition of affected infrastructure; and project presentation and sanitary education programs for communities in the vicinity of pumping stations and wastewater treatment plants. G. Summary of Negative Impacts and Mitigative Measures 27. Attachment 1 summarizes major negative environmental impacts and the proposed mitigation measures, indicating the sewerage and/or wastewater treatment plant system affected by these impacts and measures. H. Institutional Requirements 28. Achieving the project's environmental goals and enhancing the positive environmental impacts identified will require complementary and coordinated actions by other governmental agencies and non- governmental organizations. Additional actions in solid waste recollection and disposal, industrial pollution control, water quality monitoring, conservation of ecosystems and water resource management were identified as necessary conditions to guarantee the achievement of water quality objectives and overall environmental recovery of the area of influence of the project. These actions will be carried out under SEAMA's institutional development component and will be coordinated within -99- ANNEX 15 BOX 2: CULTURAL IMPACTS IN PROJECT SITING: THE PANELEIRAS CASE The cultural complex of clay pots orpaneleiras is believed to have been in Brazil before the arrival of the Portuguese (Tupiguarani and Una traditions). The exploitation of the Mulemba Valley clay deposits goes back several generations. The work is performed mainly by women and the younger members of the families who transport the clay from the deposits to work areas located 8 km away. The community, and similar ones from other areas of the State, is organized around an Association of Paneleiras. The pane/as and the fish dishes that are associated with them have become a symbol of the State and the capixaba culture. This situation was one the most critical problems at the initial stages of the project given the lack of suitable areas for the location of wastewater treatment plants in this heavily urbanized area. The Bank requested additional technical and socio-economic studies. These studies demonstrated that remaining clay deposits in the Valley would last 6 more years at the current rate of exploitation. Geological studies identified alternative clay deposits in other areas; however, clay characteristics will require different technologies for the preparation of pots. Social studies determined that more than 60% of the approximately 100 families (500 people) of paneleiras depend exclusively on this activity. A community consultation program defined a compensatory and social development program for the paneleiras to be implemented through CESAN and the Municipality of Vitoria, and supervised by SEAMA, which includes: guaranteed legal access to new deposits; technical assistance, equipment, and training for new clay technologies; excavation, transportation, and storage of clays from the Mulemba Valley; technical assistance in commercialization techniques and one sales outlet in Vitoria; upgrading of existing sanitation and infrastructure in working areas; and support to other cultural activities of the paneleiras. existing or proposed federal or State programs. CESAN has established an Environmental Unit in order to carry out all future environmental work and develop a sanitary education program. The project will also finance training programs, laboratory equipment, environmental information systems, and specific environmental studies for both SEAMA and CESAN. Environmental and sanitary education programs will be carried out through local NGOs and community associations. -100- ANNEX 16 Attachment 1 TABLE 1: NEGATIVE ENVIRONMENTAL IMPACTS AND MITIGATION MEASURES Sewerage and Wastewater ySVtem H~~~~~~~~ Sc a~o = 0 a a u *a E 0 ~ 00~ co co c Environmental Impacts _ Mklgative Measures * 'L 0 d f"W ater Q u a t ; 2l it _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __X :- #; S t - -itE t -Residual water quality -Design & construction of degradation from disposal of additional links of final effluent treated wastewater in water bodies X X X X X X X X X X X X discharge pipes/channel to with low waste assimilation points/water bodies with higher capacity & dilution potential D.O. waste assimilation potential level reduction, high coliform levels & local low to medium eutrophication potential -Water quality deterioration form X X X X X X X X X X X X -Design & construction of solid disposal of solid waste from waste disposal systems for all wastewater treatment plants wastewater treatment plants -Water quality deterioration from -Adoption and implementation of raw sewerage discharge due to efficient O&M plans; designed malfunctions in wastewater X X X X X X X X X X X X & implementation of contingency treatment plants, pumping stations plans for raw sewage discharge & main collectors events in key sensitive areas 07 Aquiatic & Ter'restr Ia Ecoystems t-t gg;-2fi - -Alteration of coastal lagoons X X -Select alternative waste treatment ecosystems & other wetlands plant site -Loss of secondary forests X X -Implementation of revegetation (capoieiras) in advanced state program barriers around sites of recovery -Alteration of mangrove wetlands -Appropriate disposal of by earthworks, construction waste X construction waste/earth cuts; disposal, soil instability construction of containment walls Sobil and Economic Compon*nts i .. ... -Closure of clay deposits for local Access to new deposits to allow for artisan communities ("paneleires") X permanence of activity; compensation measures for community organization -Transformation of land use -Scenic recuperation/revegetation/ patterns in area of influence of X X X X X X X X X X X X enclosures of wastewater wastewater treatment plants treatment plants; municipal land use zoning enforcement -Displacement/closure of -Construction/reposition of affected infrastructure: groundwater wells X X X X X infrastructure; relocate PauV/Vilha for domestic & agro-industry, Velha wastewater treatment plant soccer fields, port infrastructures -101- ANNEX 16 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT COST-BENEFIT ANALYSIS: METHODOLOGY AND RESULTS A. Introduction 1. The Esp(rito Santo Water and Coastal Pollution Management Project is expected to benefit the entire population served by CESAN, about 74% of Espfrito Santo's urban population (2.05 million as of December 1993). At the end of project implementation (December 1999), CESAN's investments in water supply will have directly benefited about 640,000 people--about 1.41 million people once the project facilities saturates, and its investments in sewerage about 770,000 people--about 1.22 million people once the project facilities are operating at full capacity. Seven categories of benefits arising from project implementation are identified for the cost-benefit analysis. These categories include: (i) direct utility increases from being connected to a water supply network and/or from an improved water service, that is, a water service with fewer hours of rationing--water supply benefits; tii) direct utility increases from being connected to a sewage collection network--sewage collection benefits; {iii) specific utility increases from the availability of clean water in the recreational beaches of Vit6ria and Guarapari bays--water recreation benefits; (iv) general increases in utility, from an ecological perspective, arising from cleaner waters in rivers, estuaries, and bays, excluding those from water recreation in beaches--environmental recovery benefits; (v) expected revenue arising from increases in tourism activities--tourism benefits; Ivi) expected reductions in public health care expenditures as a result of the project--health benefits; and (vii) expected increases in fishing production--fishing benefits. 2. An economic analysis was conducted to measure the willingness to pay for the water supply component and to quantify the direct benefits of the project arising from this component--benefit (i) abovel' A separate economic analysis was conducted to measure the willingness to pay for the sewage collection and treatment component and to quantify the direct benefits arising from this component--benefits (ii) through (v) above.-I Health benefits--benefit (vi) above, were determined using a proportion of the hospital expenditures faced by Brazil's National Health System (INAMPS) that originates from the State of Espfrito Santol'. Due to data limitations, fishing benefits--benefit (vii) above, were not measured, even though there is a clear indication that they are important for the sustainability of the fishing sector in the state. 3. This annex presents: li) a summary of the assumptions, methodologies, and field studies conducted to quantify project benefits; (ii) a description of the project beneficiaries; (iii) the calculated unit and total benefits for each of the seven categories described above; (iv) a summary of the project investment costs; and (v) the economic rates of return for the components of the project. Y Farn, Diomirs (1993), Estudo de Avaliglo Economica Para o Gerencbamento de Demanda do Agua, Relatorio Preliminar, Programa de Despoluigao dos Ecossitemas Utorineos do Esptrito Santo, Novembro. IV Ampla Vislo (1993) Cluantificaclo doe Beneficlo.: Relbt6ro Prellminar, Programa de Despolucico dos Ecossistemas Utorineos do Estado do EspIrito Santo, Julho. XI Seros da Motta R S (1993), Health Costs Associated wkth Household Wate Pollution In Brazi, International Conference on Environmental Fconomics, Santiago de ChNi, June 22-24. -102- ANNEX 16 B. Methodologies for Benefit Quantification 4. The benefits of the project are quantified using contingency valuation (CV) and opportunity cost (OC) methodologies. A travel cost (TC) methodology is also applied to measure the water recreation benefits in order to check the robustness of the results from the contingency valuation methodology. Contingency Valuation Methodology 5. A Contingency Valuation (CV) study was used to estimate the five first project benefits identified above: water supply, sewage collection, water recreation, environmental recovery, and tourism benefits. CV is a method to elicit an individual's economic valuation of different types of goods including: (i) private goods which have no revealed market value due to the potential customer's lack of experience with such a good (new customers connecting to a water supply network after having used other sources for a long time); (ii) private goods with no revealed market value due to the customer's lack of experience with a particular attribute of the good (such as fewer hours of rationing from a water supply network with a history of interrupted service); (iii) public goods valued at their user benefits (sewage collection and treatment and water recreation benefits); and (iv) natural resources which may not have an explicit market value (environmental benefits). 6. This method provides a direct estimate of the monetary value of benefits of such goods by establishing hypothetical markets. The markets are defined using the particular service attributes (e.g., four more hours of water supply) that are being evaluated to assess preferences. The potential beneficiaries are asked how much they would be willing to pay for a new service or an improvement in the levels and type of service provided by the project. The respondent is asked to choose between: (a) paying a hypothetical price in exchange for an expected benefit, if the project is implemented; and (b) not implementing the project hence having no expenses. The prices quoted cover the full range of possibilities for the willingness to pay (WTP). As such, the methodology elicits the preferences for water supply and sewerage related benefits as well as the perceived utility from receiving these benefits. The preferences are measured in terms of the proportion of project beneficiaries willing to pay a given price for a defined service, obtained from the proportion of 'yes' responses to the WTP a given price for a project. The quoted WTP by each questionnaire respondent is a valuation of the perceived utility derived from the project, as well as a measure of the degree of acceptance of the project. The WTP prices estimated by CV methodology represent the average unit benefit accruing to each project beneficiary. The total project benefits are obtained by multiplying the average (or median) WTP by the number of project beneficiaries. 7. Dealing with the Limitations of the CV Methodology. The CV methodology has a number of limitations which have been extensively identified in the literature, that may lead to biases in the estimation of WTP values and the consequent valuation of benefits. One of the conditions for the CV methodology to work well is that subjects being interviewed must understand or be familiar with the service being valued, and that subjects must have had (or be allowed to obtain) prior valuation and choice experience with respect to the consumption levels of the service. These conditions are met by almost all of the potential project benefits because: (i) everyone uses water even if not connected to a water supply network and hence is familiar with the potential benefits and differences between a *good and "bad service; (ii) the benefits of sanitation are easily explained and perceived by individuals as they are aware of the consequences of not having the service, even if they cannot easily perceive the relative differences in quality of service; (iii) most people (especially in the project area) have used the beaches and know the value of a clean beach in terms of their recreation needs; and (iv) the project beneficiaries are well informed about the value of clean rivers, estuaries, and bays. For the case of benefits type (iii) and (iv), which are environmental goods, it is more difficult to rely upon the estimates from the CV methodology, especially for those residents who do not live close to the areas that will be affected by the project. This is mainly because even an experienced and knowledgeable consumer may find it difficult to value a resource that is ordinarily not priced. As a result, a Travel Cost methodology was used to test the robustness of the CV estimates. -103- ANNEX 16 Travel Cost Methodology 8. The Travel Cost (TC) methodology was used to measure the willingness of beneficiaries such as tourists to pay a premium, over and above the normal price, to visit a recreational site. Demand for the good is measured by the frequency of visits per year, and is related to variables affecting consumption such as travel cost and distance. The TC method was used to check the results of the CV analysis regarding water recreation benefits. A comparison of the results from both methodologies yielded very similar estimates. This satisfied the robustness test of the CV results and provided more confidence in the CV estimates. Opportunity Cost Methodology 9. The Opportunity Cost (OC) methodology was used to estimate two of the seven project benefits identify above: indirect benefits deriving from increased revenues from tourism and from reductions in public health expenditures. The OC methodology estimates the foregone revenues in tourism and the foregone savings in health expenditures, without the project. For the case of tourism benefits, estimates are made of the flows of tourism in the region affected by the project. Assumptions were also made as to the impact of the project on these flows. Similarly for the case of health benefits, the contribution of the project towards reducing health-related expenditures is made based on assumptions on the extent to which investments in sanitation and water supply are correlated with reductions in water-borne diseases. C. Calculation of Project Benefits Water Supply Benefits 10. Definition of Project Beneficiaries. There are six groups of potential project beneficiaries for the water supply component. These potential beneficiaries are categorized as follows: e Group 1. This group includes the population that is currently receiving rationed service but that will begin to receive a 24-hour supply with the project. This group will receive incremental benefits over and above the benefits they currently have from being connected. e Group 2. This group includes the population that is currently receiving rationed service but that will receive more hours of service with the project. This group will also receive incremental benefits but lower than in Group 1 due to the continued rationing of service with the project. * Group 3. This group includes the population that is currently not connected to service but that will be connected to a 24-hour supply after the project. This group will receive total benefits because this population is not yet connected to CESAN's network. Alternative sources of water such as wells, public standposts, and even clandestine consumption are currently being used by households in this group, * Group 4. This group includes the population that is currently not connected to service but that will be connected to a rationed service after the project. This group will also receive substantial benefits but slightly lower than in Group 3 because of the rationing. * Group 5. This group includes the new customers that will result from future population growth--the largest proportion of total new connections. The benefits of this category will be spread over time, following the general trend in population growth and the changes in Espfrito Santo's economic activity. * Group 6. This group includes the regular visitors who own houses in the Guarapari area and hence behave like residents, and seasonal tourists who live in temporary rentals for weekends, -104- ANNEX 16 a few days, or other such arrangements. This fluctuating population accounts for about 4.5% of Guarapari's urban residents and has an average cumulative occupancy of about 4 months out of the year. This group, currently receiving a rationed service, will begin to receive a 24- hour supply with the project. 11. Characteristics of Project Beneficiaries. The number of people benefiting from the project is summarized below by group. By the end of 1999, the number of beneficiaries in group 5 will account for 58% of the total number of beneficiaries. Once the project facilities are operating at full capacity, the share of group 5 will have increased to 81 %. Benefit Group Beneficiaries at Beneficiaries at Project end-1 999 Saturation Number of People (000) Number of People (000) Group 1 182.6 182.6 Group 2 55.4 55.4 Group 3 19.7 19.7 Group 4 1.5 1.5 Group 5 373.7 1,147.7 Group 6 6.0 6.0 Total 638.9 1,414.9 12. By end-1999, 76% of new connections to service (Groups 3, 4, and 5) will be located in Grande Vit6ria, 2% in Guarapari, and the remaining 22% will be in Santa Maria de Jetiba, Santa Leopoldina, Domingo Martins, Marechal Floriano, and other small cities and towns. Also by the same date lend-1 999), 94% of those households benefitting from less hours of rationing (Groups 1, 2 and 6) will be located in Grande Vitoria, and the remaining 6% in Guarapari. 13. As shown below, the water supply component of the project is clearly targeted toward the poor--households earning less than 2 Minimum Salaries (MS) per month. Available data did not allow further subdivision of the 2-5 MS range, but it was found from recent survey results that at least 50% of the potential beneficiaries in this range earn between 2 and 3 MS. Income Category Number of People % (000) 00-02 MS 198.3 55.6 02-05 MS 156.2 43.8 05-10 MS 1.4 0.4 >10 MS 0.7 0.2 Total 356.7 100.0 14. Benefit Quantification. The benefits accruing to the various groups are calculated by identifying the appropriate population category among the beneficiaries and multiplying the number of households in each category by the unit benefit. The unit benefits for groups 1, 2, 3, 4, and 6 are obtained from the results of a CV analysis, where the median WTP values represent the average benefit per household. 15. The CV questionnaire covered beneficiaries of all groups, except Group 5. The CV analysis results for Group 3 could not be used for the case of Group 5 because the Group 3 residents represented in the CV survey are from very low income groups whose WTP levels may be biased -105- ANNEX 16 downward. It is expected that households to be connected in the future (Group 5), will have an income distribution closer to Espfrito Santo's general income distribution than that exhibited by Group 3 beneficiaries. The median WTP for project benefits resulting from the CV study is summarized below: Benefit Group Benefit (US$/month/household) Group 1 6.66 Group 2 3.64 Group 3 8.94 Group 4 5.91 Group 5 39.61 Group 6 8.82 16. An elasticity approach was used to project the demand from beneficiaries classified in Group 5. The CV analysis allowed a calculation of the elasticity of demand (in ml per household) with respect to price, income, and other household-specific variables. The result from the CV methodology is a function relating the WTP (measured in percentage terms) to explanatory variables such as price, income, education, and age. This percentage could be interpreted as the probability that a particular individual would be willing to pay the price appearing on the right hand side of the estimation, for the service evaluated. As such, it can be used to calculate the expected demand (in terms of quantity) given a price. At any population level, this percentage represents the fraction of the population willing to pay a given price for a service, for an average consumption of the good. An elasticity value is obtained from estimating a "joint" WTP function across all possible service combinations, with the assumption that these combinations (24-hour service, rationed service, and no service) will be present in the future. Using the estimated results, a long-run (without lags) price elasticity of -0.30 was estimated and used to calculate the benefits for Group 5. Sewage Collection and Treatment Benefits 17. Definition of Project Beneficiaries. The sewage collection and treatment component, which includes investments in Grande Vit6ria and Guarapari, has five types of benefits: (i) direct benefits from having household sewage collected; (ii) water recreation benefits derived from the availability of clean water in recreational beaches (due to the collection and treatment of sewage); and (iii) environmental recovery benefits derived from the availability of clean rivers, estuaries, and bays (due to the collection and treatment of sewage); (iv) tourism benefits derived from an expected increase in tourism activities; and (v) health benefits derived from an expected reduction in public health care expenditures. 18. Characteristics of Project Beneficiaries. The households to be connected to CESAN's sewerage system will be the beneficiaries of the sewage collection subcomponent. Water recreation, tourism, and health benefits will accrue to the households of Grande Vit6ria and Guarapari, as well as to the tourists (home-owners and seasonal tourists) visiting these localities. Environmental recovery benefits will accrue to households living in Grande Vitdria, Guarapari, and other municipalities within the project area, as well as to the tourists visiting the project area. The number of people benefiting from sewage collection, water recreation, and environmental recreation is shown in the Table below. The expected increase in tourism activities will indirectly benefit all inhabitants of Grande Vit6ria and Guarapari. The expected reduction in health expenditures will benefit the federal and State governments, as well as all inhabitants and visitors of Grande Vit6ria and Guarapari. -106- ANNEX 16 Benefit Type Number of People (000) Number of People (000) At end-1 999 At Project Saturation Sewage Collection 774.4 1,221.8 Water Recreation 1,490.5 2,153.0 Environmental Recovery 1,505.3 2,174.2 19. Although people benefiting from sewage collection are also benefiting from water recreation and environmental protection, double counting of benefits does not occur because of the nature of the benefits. The direct benefits from collecting are easily perceived from any individual household. Benefit perception is straightforward because households are well aware of the serious consequences that the lack of this service has on their health and ambient living conditions. As shown in the Table below, the allocation of project benefits by category of income is balanced across income categories and not targeted towards the poor as the water supply component. In the case of water recreation, the additional value derived from water recreation is clearly different from the direct benefits of having raw sewage removed from one's residence. In the case of environmental recovery, the impact of collected and treated wastewater on water supply sources and other ecological systems is quite separate from the direct benefits of having raw sewage removed from one's residence, as well as the additional benefits derived from water recreation. Finally, the expected benefits from an increase in tourism activities as well as from a reduction in health expenditures will be clearly additional to the three types of benefits discussed above. Therefore, due to the location and level at which they are perceived, these benefits are mutually exclusive, and the project total benefits from the sewage collection and treatment component can be derived from a straightforward summation. Income Category Number of People (000) Households (%) At end-1 999 00-01 MS 3.1 0.4 01-02 MS 134.7 17.4 02-03 MS 119.3 15.4 03-05 MS 146.4 18.9 05-10 MS 201.3 26.0 10-15 MS 87.5 11.3 >15 MS 82.1 10.6 Total 774.4 100.0 20. Benefit Quantification. The project benefits for sewage collection, water recreation, and environmental recuperation are calculated as unit benefits per household. These unit benefits are the median WTP values obtained from the results of a CV analysis. The different type of project benefits are calculated by identifying the appropriate number of households that will benefit from each particular category--as was presented earlier, by the unit benefit. Unit values for these three type of benefits are estimated as shown below. Benefit Type Benefit (US$/month/household) Sewage Collection 8.20 Water Recreation 7.82 Environmental Recuperation 5.82 -107- ANNEX 16 21. Tourism Benefit Quantification. An opportunity cost (OC) approach is used to calculate the benefits deriving from tourism. The main tourism service in the State of Espirito Santo, which is firmly engaged in the development of its tourism sector, is based on sun and beaches. An improvement in the quality of its beaches has therefore the potential to increase the demand for tourism in the State". The projected flow of tourists between origin and destination states, as well as the benefits derived from tourism, are presented in one of the CV studies'. Two scenarios were used for projecting the flow of tourists to Espfrito Santo in that study: (i) a conservative scenario which assumes an annual 1 .8% growth rate in GNP over 20 years of analysis; and {ii) an optimistic scenario using an annual 6.5% growth rate. Tourism benefits were quantified assuming that: {i) the current number of tourists visiting Espfrito Santo is about 1 million per year; {ii) each tourist spends about US$120 per year; (iii) the flow of tourists visiting Esprrito Santo will grow in accordance with the pessimistic scenario; (iv) 40% of tourist expenditures represent local value added; (v) the project will be responsible for attracting 25% of the expected number of incremental tourists; and (vi) about 50% of the tourists entering the State will frequent the areas affected by the project. 22. Health Benefit Quantification. The current levels of water and environmental pollution exact high health expenditures from Espfrito Santo's State government and its population. The incidence of oral-fecal diseases is high (up to 12,000 cases in the State for 1990) and the consequent health care costs resulting from hospitalization following water and sanitation related diseases are substantial (around US$1 million in 1990). The considerable efforts made by the State in the past to increase water coverage (currently at about 88%), have significantly reduced water-related diseases. However, the current level is still relatively high because of the lack of sewerage facilities. Health benefits were quantified assuming that: i) about 71 % of all health expenditures originate in waterborne diseases; (ii) urban households spend on average about US$0.67 per year on health; and (iii) after the project the incidence of waterborne diseases will decrease by about 92%!'. The total health benefits are obtained by multiplying the unit benefits derived from reduced health expenditures by the projected urban population. The pattern of benefits from the reductions in health-related expenditures would, therefore, follow the general pattern of growth of the urban population in Espfrito Santo. 23. Fishing Benefits. The estuaries, bays, and coastal waters in the State of Esp(rito Santo provide an important source for the fishing industry. The coast of Esptrito Santo is approximately 521 km long, stretches across 14 coastal municipalities, and serves up to 60 communities of fishermen. The volume of fish produced by the State in 1989 was about 13,899 tons, making up close to 2% of the national fishing production. The fish derived from the waters of Espfrito Santo represent some 18 species, including tuna, shrimp and lobster. The environmental impact of coastal and river pollution on the diversity and quantity of fish from these waters is believed to be serious. Data limitations precluded an estimation of the benefits deriving from the fishing industry following the project. Other Non-Quantifiable Benefits 24. In addition to fishing benefits, the project also has other non-quantifiable benefits such as: {i) improvements in the future planning and management of the water and environmental systems in the State of Espfrito Santo; and {ii) a temporary but significant generation of employment for non-qualified 41 Tourism specialists have estimated between 25% and 50% the incremental expansion of tourism that will result from the implementation of this project. I Ampla Visao (1993) Quantiflcaclo doe Benflcilos: Relat6rlo Pretiminar, Programa de Despoluicio dos Ecossistemas Utortineos do Estado do EspIrito Santo, Julho. e Seroa da Motta estimated the correlation between the incidence of waterborne diseases and sanitation levels at about 92%. See Seroa da Motta (1993) R.S. (1993) Health Costs Associated with Household waste Pollution In Brazil, Internationl Conference on Environmental Economics, tantiago de Chile, June 22-24. -108- ANNEX 16 labor. These benefits are over and above all the quantifiable benefits discussed in the last two sections. D. Internal Economic Rates of Retum 25. The evaluation of economic viability considered the Bank project as a part of CESAN's overall investment program, and hence evaluated the economic viability of the Bank project including all CESAN investment costs during the 1994-2023 period of analysis"1. Other data used in the analysis include the incremental operation and maintenance costs projected for that period, and the economic benefits resulting from the project, as discussed in the preceding Sections. 26. Water Supply Component. A weighted tax rate of 9% is used to obtain the project costs (investment plus operation and maintenance costs) without taxes. This tax rate corresponds to the rate for goods and services broken down as follows: {i) a 12% equipment and materials tax (Imposto sobre Circulaglo de Mercadorias e Servigos-lCMS) applied to 58% of project costs; and (ii) a 5% civil works and consultant tax (IPI) applied to 42% of project costs. An interest rate of 10% is used to calculate the net present value (NPV) of the project costs resulting from the water supply component. 27. Six investment categories were developed for the analysis: (i) permanent residents of Grande Vitdria only; (ii) permanent residents of Guarapari only; (iii) permanent residents of Guarapari and tourists visiting the area; (iv) permanent residents of both Grande Vit6ria and Guarapari; (v) permanent residents of both Grande Vit6ria and Guarapari, plus tourists visiting Guarapari; and (vi) permanent residents of both Grande Vit6ria and Guarapari under the assumption that all of them could be classified as poor, that is, earning less than 2 MS per month. The investment category (vi) is a theoretical scenario built to represent the case where the above targeting of the low income category, in terms of new connections to the system resulting from population growth, is continued throughout the project analysis period. The differential economic rate of return between this scenario and scenario (v) is an estimate of the opportunity cost of poverty targeting. 28. The Internal Economic Rates of Return (IERR) for the six investment categories mentioned above are summarized below. IERR are high because of the high WTP values estimated by the CV analysis. As can be seen from the IERR, all the investment scenarios are economically viable, excluding scenario VI which assumes a continued targeting of the poor throughout the analysis period. However, even this IERR (8.78%) is very close to the assumed opportunity cost of capital for Brazil (10%). Investment Scenario IERR (%) I. Grande Vit6ria 34.97 II. Guarapari (Residents) 10.48 Ill. Guarapari (Residents and Tourists) 10.55 IV. Scenario I + II 33.36 V. Scenario I + III 33.30 VI. Scenario V plus Poverty Targeting 8.78 29. However, as pointed out in Annex 11, the marginal cost pricing analysis found that the proposed subproject for reinforcing and expanding Guarapari water supply system was not acceptable. The subproject marginal cost falls outside the acceptable range of eligibility for this type of projects in a city of Guarapari's size. Therefore, given that CESAN is currently revising the engineering designs of Guarapari water supply project and the new marginal costs are expected to resemble those of 11 In the case of the water supply component, a group of specific investments executed during 1992 and 1993 was also Included because they form part of the overall investment package from which the benefits of the World Bank project are derived. -109- ANNEX 16 Grande Vitdria, the IERR for Grande Vit6ria alone (Scenario l) is the most representative IERR for the entire water supply component of the project. 30. Confirmation of the High IERR for Water. One of the questions in the CV survey was open ended, asking people to list their six major priorities. The results of the survey show that the most important priority of the people surveyed is water supply, followed by health and solid waste collection; all sectors related to water supply and sanitation. The importance of water as a priority generally declines with increasing income, as expected since the higher income households generally have better service and even when the reliability of service is low, they are capable of adopting alternatives to cope with unreliable supply (such as building storage tanks and filtering water in their homes). The size of the water bill (included in the other category) is generally not a problem, as it did not feature very prominently in the list of priorities of the people surveyed. This result indicates that people are generally willing and able to pay for the water services they demand. The survey results, in combination with the high values of WTP estimated for this component of the project, provide confidence in the high IERR calculated above. A summary of the priorities by income group is shown in the Table below. 31. Sewage Collection and Treatment Component. A weighted tax rate of 7% is used to obtain the project costs (investment plus operation and maintenance costs) without taxes. This rate corresponds to the rate for goods and services broken down as follows: (i) a 12% equipment and materials tax (ICMS) applied to 25% of project costs; and (ii) a 5% civil works and consultant tax (IPI) applied to 75% of project costs. An interest rate of 10% is used to calculate the net present values (NPV) of the project costs resulting from the sewage collection and treatment component. Income Stated Priorities (%) Category Water Health Waste Transport Other@' 00-01 MS 56 17 7 12 9 01-02 MS 56 16 11 8 8 02-03 MS 45 17 17 11 10 03-04 MS 48 16 10 15 10 04-05 MS 47 15 12 13 12 05-10 MS 42 8 21 19 11 >10 MS 28 17 18 28 8 Total 47 15 14 14 9 32. The costs and benefits resulting from the sewage collection and treatment component of the project are grouped into three categories in order to analyze the project's economic viability: (i) sewage collection only; (ii) sewage collection, water recreation, and environmental protection; and (iii) sewage collection, water recreation, environmental protection, tourism, and health. The IERR for these three categories are summarized below. V' This priority includes the importance attached by the population to both education and the water bill. -1 10- ANNEX 16 Category IERR (%) Sewage Collection Only 12.79 Sewage Collection, Water Recreation & Environmental Protection 31.11 Sewage Collection, Water Recreation, Environmental Protection, Tourism & Health 32.17 33. The IERRs for this component of the project are slightly lower than those for the water supply component for at least two reasons: (i) as commonly stated, people perceive water supply as more important than sewage collection and treatment; the estimated WTP for the water supply component is higher than the estimates for all other categories of benefits, such as those derived from sewage collection, water recreation, and environmental recovery; and (ii) the water supply component also includes an improvement in service quality (a considerable reduction in the number of hours in which the service is rationed), and it has been repeatedly shown that rehabilitation and improvement projects generally have higher rates of return than new projects. 34. As shown in the IERR above, the sewage collection and treatment component of the project is economically viable for all categories. The ERR of the category that only includes sewage collection is significantly lower than the other two, This result illustrates the notable importance attached to a clean environment by the population of Espirito Santo. 35. CESAN's Total Investment Program. The IERR of CESAN's total investment program, calculated as the weighted average of the IERR of the proposed investments in water supply, operational development, and sewage collection and treatment, is 33.36%. Therefore, CESAN's investment program as a whole is economically viable. -1 11- ANNEX 17 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT Project Flows I Legal - Financial - Technical Federal Government 1 IBRD…--------- ---- 1 ~~2a Stat o EsprtoCommercial Bank *' Stanteof sp r o CESAN Santo Special Account < ___LJT_MU SEAMA ----------I---- l I i _____ ___| Contractor…|I ------ Consultant Supplier FINANCIAL RESOURCES LEGAL DOCUMENTS 1 Guwantee Agreement 2. Loan Agrcwment 3. Agreement State/Conmwcial Bank 4. Onlending Agreement 5. Proect Agreeoent _ _ _ _ - TECHNICAL AND RNANCIAL DOCUMENTS ACCOUNTABIUTY OF EXPENSES -112- ANNEX 18. BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT GUIDELINES FOR EVALUATION OF SUBPROJECTS 1. These guidelines have been prepared to provide a common framework for the evaluation of subprojects by all entities involved in this operation: The State of Espfrito Santo, CESAN, SEAMA, and the Bank. The evaluations will be prepared by either CESAN or SEAMA, reviewed and submitted to the Bank by the Project Management Unit (PMU), and approved by the Bank. 2. The objective of these evaluations is to determine the technical, environmental, financial, and economic feasibility of each proposed subproject. Each subproject should correspond to the least-cost solution. The technical evaluation will analyze this issue, as well as the priority of the proposed components, its consistency with sector policies, and its contribution to improve the delivery of services in a given locality. The evaluation also aims to ascertain that neither the subproject nor its components would adversely affect the environment and that their benefits equal or exceed their costs. The justification of each individual subproject will be based on the long-term average incremental costs (LRAIC) vis-a-vis CESAN's average tariffs. LRAIC will be calculated on the basis of the incremental demand it will satisfy, the estimated investment cost--including complementary works, and the estimated operational and maintenance cost (see Annex 11). 3. The evaluation of sanitation subprojects will also verify that each proposed subproject adequately contribute to meet the water quality objectives agreed during project preparation (see Annex 4), as well as those other objectives defined by applicable federal, state, or local regulations. The achievement of water quality objectives will be assessed using the water quality models for rivers and ocean, and other bay and estuarine models developed during the preparation of the project (see Annex 15). The waste assimilation capacity of receiving water bodies will be considered as the principal criterium for the selection of final disposal points. 4. A subproject is the sum of one or more components from three main categories: (i) institutional development programs; (ii) rehabilitation of existing infrastructure; and {iii) construction of new facilities. These categories are listed in descending order or priority. The composition of a subproject, however, should be tailored to the specific needs of a given locality. 5. Several steps will be followed to perform this analysis in a systematic and effective way. First, the current water supply and/or sewerage systems will be described and evaluated in detail. Second, the existing and future demands for these services will be carefully determined. Third, all feasible alternatives to provide the services demanded, including the removal of institutional and physical constraints, will be explored and compared. Fourth, based on the former analysis, a group of clearly defined alternatives will be selected. Fifth, the alternative corresponding to the least-cost solution will be identified. Sixth, an environmental assessment will be performed to ensure that the proposed subproject meets acceptable environmental protection standards, social concerns, and community participation. Seventh, a marginal cost pricing analysis will be performed to evaluate the tariff structure, the economic benefits, and the cost-effectiveness of the project. Institutional Strengthening Programs 6. Both CESAN and SEAMA institutional strengthening programs were assessed during appraisal. Both programs, designed to improve these agencies' efficiency, are justified on the basis of a general assessment of their overall design and main organizational units, of the effectiveness of the proposed financial, commercial, and operational activities, and of the training needs of their staff. To assure an accurate post-evaluation of these programs, both CESAN and SEAMA will develop appropriate accounting systems to carefully record all costs and benefits associated with them. The level of -1 13- ANNEX 18 aggregation will depend on the nature of the activities--for example, costs and benefits associated with CESAN's financial improvements may be aggregated in a single account, but not costs and benefits associated with operational improvements. Investment Projects 7. The evaluation of a water supply and sewerage system begins with an engineering assessment of the main existing components of the system {main physical dimensions, materials, condition, reliability, and capacity). This engineering evaluation provides the basis for assessing the feasibility of rehabilitating the system's components to bring them up to their optimal capacity at a cost usually lower than that required to construct a new facility. 8. Demand Analysis. The evaluation of a water supply or sewerage system continues with an analysis of existing coverage levels and type of service provided as well as per capita and aggregate consumption and production volume. The demand analysis will address, at a minimum, the following issues: * existing coverage levels and types of service provided (including total population, population served, number of house connections, standpipes, and septic tanks); * metered water consumption (based on house connections), preferably disaggregated by main users (residential, commercial, industrial, and public), and estimated unmetered consumption (including a detailed explanation and justification of the criteria used for estimation); * price and income elasticities of demand; * metered water production and estimated unmetered production (with the same breakdown and explanations as indicated above); and * unaccounted-for water (UFW), defined by the difference between production and metered consumption. 9. The analysis of historical production, UFW, and demand will cover the previous two to five years. Projections of water consumption, UFW, and water production will be based on the projected growth of house connections or service accounts, and will also consider the effects of increasing water metering, implementing specific plans to reduce UFW and improve marketing practices, and increasing water prices (if applicable) and regional income. Projections of sewage collection will also be made on the basis of the number of connections to the sewer system and reasonable assumptions on consumption and infiltration flows. Sewage collection projections will be broken down by type of final treatment and disposal systems used. Water and sewage projections will be made on a yearly basis up to the time in which the system begins to operate at its full capacity. 10. Least-Cost Solution. In determining the optimum investment expansion plan (i.e., the least-cost solution), the following aspects will be taken into account: * all investment works will be built or expanded as far into the future as possible, as determined by the demand projection and the existing capacity of the component under analysis; and * facilities will be sized so as to minimize idle capacity. Several models are available to determine the optimum size and sequencing of investments. 11. To determine the optimal expansion program of a water supply or sewerage system, an analysis of all technically feasible alternatives will be made and the most promising ones compared on the basis of discounted total costs (capital and operational). A special effort will always be made to include in -114- ANNEX 18 the analysis an alternative related to rehabilitation and/or optimization of existing facilities. A discount rate representative of Brazil's opportunity cost of capital will be used to perform the analysis. The one with the lowest cost will be selected. A sensitivity analysis will be conducted when two or more alternatives present similar costs. 12. It will be remembered that only economic costs enter into the calculations. Costs will be expressed in constant prices; that is, inflation will not be taken into account. Financial and transfer costs such as interest, depreciation, and taxes will not enter into the calculations. Moreover, economic costs to be included are the incremental investment and operating costs associated with the component. These costs are determined on the basis of an analysis of the situation uwitho and "without' the project, which is not necessarily the same as "beforew and wafterw the project. Annex 11 contains a detailed description of the methodology to be used for calculating water and sewerage incremental costs. 13. Construction Indicators. Unit costs and tangible monitoring indicators that can be easily followed during project execution will be explored and developed for each subproject. These indicators will be routinely used during project execution as control devices to ensure that all investments will produce the intended results and remain cost-effective. Unit cost indicators are also intended to create a cost data bank to be used to improve cost estimates for future subprojects and to help identify cost- effective and replicable programs. 14. Benefit and cost parameters will be followed closely during the construction of each subproject. An adverse change in any of these parameters will trigger a review of the project and, if necessary, the subproject will be modified to ensure that maximum net benefits continue to accrue. 15. Environmental Analysis. All subprojects will be screened to determine the degree, if any, to which potential environmental impacts may occur. All projects will comply with the Bank's environmental policies. Site selection will avoid direct and indirect damage to existing municipal and state protected areas and unprotected sensitive coastal ecosystems. Special attention should be given to social and cultural issues associated with the site and the surrounding communities. Special consideration will be given to proposed actions that will prevent or mitigate any adverse effects and ensure that the subproject is environmentally sound and sustainable. Many subprojects are likely to require only a limited environmental analysis. Each assessment will include: e a detailed description of the project and of relevant environmental conditions; * an analysis of positive and negative impacts likely to result from the project's components, including social and cultural impacts; * an analysis of alternatives to mitigate any adverse effects, as well as costs and benefits of proposed remedial actions; * a proposed plan to reduce potentially significant adverse environmental, social, and cultural impacts to acceptable levels; its capital and recurrent costs; as well as its institutional and training requirements (if any); * a monitoring plan regarding environmental impacts and performance; and * the final report should include the conclusions and recommendations of all community and public consultation meetings held during the study. 16. Regardless of the environmental analysis required for a given project, all existing local, state and federal environmental regulations should be complied with. All proposed projects should have approved Location and Installation Environmental Licenses by SEAMA. -115- ANNEX 18 17. Subproject Eligibility. In large cities, defined as those with more than 500,000 inhabitants, water projects will be approved only if CESAN's current average water tariff in that city (AWTi) exceeds 75% of the marginal cost of providing the water supply service to residential customers with the given project (MCWi) in 1994, 80% in 1995, and 85% in 1996 and thereafter. In medium-sized cities, defined as those with more than 50,000 but less than or equal to 500,000 inhabitants, water projects will be approved only if the AWTi exceeds 75% of the MCWi in 1994, and 80% in 1995 and thereafter. In small-sized cities and towns, defined as those localities with more than 5,000 but less than or equal to 50,000 inhabitants, water projects will be approved only if the AWTi exceeds 60% of the MCWi in 1994, 65% in 1995, and 70% in 1996 and thereafter. In rural communities, defined as those localities with 5,000 people or less, water projects will be approved only if the AWTi exceeds 60% of the MCWi. Sewerage projects in large cities will be approved only if CESAN's current average sewerage tariff in the project's site (ASTi) exceeds 60% of the marginal cost of providing the sewerage service to residential customers with the given project (MCSi) in 1994, 65% in 1995 and 75% in 1996 and thereafter. Sewerage projects in medium-sized cities will be approved only if the ASTi exceeds 60% of the MCSi in 1994, 65% in 1995, and 70% in 1996 and thereafter. Sewerage projects in small-sized cities and towns will be approved only if the ASTi exceeds 60% of the MCSi in 1994 and 1995, and 65% in 1996 and thereafter. Sewerage projects in rural communities will be approved only if the ASTi exceeds 60% of the MCSi. In any case and year, and independently of the size of the locality, the ASTi should cover 100% of the marginal cost of collecting the sewage from residential customers with the given project. 18. Social Considerations. Subprojects satisfying the technical, environmental, and social conditions indicated in the guidelines presented in Annex 18, but not complying with the financial and economic conditions (i.e., presenting an average water/sewerage tariff lower that the specific percentage of the marginal cost of providing the service), may be accepted by the Bank on a case-by- case basis. The analysis should, however, explicitly address the following issues: (i) the lack of alternative and feasible solutions; (ii) the impossibility of recovering costs through tariffs; and (iii) the impact on poverty alleviation and health conditions. These subprojects are likely to be in towns where urban poverty prevails and large investments are needed to compensate for investments not made earlier. -1 16- ANNEX 1 9 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT SUPERVISION PLAN 1. Bank Supervision Inout into Key Activities. A preliminary schedule of supervision missions including key activities and specialization needed in indicated in the table below. The key activities shown in the table are in addition to desk supervision needs, which include the review of: (a) progress reports; lb) studies and recommendations; {c) audits; (d) procurement documents, awards and resulting issues; (e) updating of plans and operational guidelines; and (f) correspondence. These desk supervision needs are estimated to require six staff weeks per year during the entire implementation period. 2. The main emphasis during the initial project phase would be on; (a) assisting the Project Management Unit (PMU) to launch the program in coordination with the executing agencies, the Bank operational guidelines, and the agreed monitoring system; (b) making certain that all parties are knowledgeable of the project objectives and scope, and of required project documentation; and (c) confirming that all parties are familiar with Bank procedures with emphasis on procurement, auditing (especially Statements of Expenditure), disbursements, and progress reports. 3. When the system is in place, Bank assistance will focus on: (a) institutional strengthening of both executing agencies--CESAN and SEAMA; (b) preparation and implementation of CESAN's unaccounted-for water program; (c) eligibility of subprojects; (d) preparation of agreed studies and implementation of recommended actions--in particular those actions conducive to a reorganization of the water and sanitation sector in the State of Espfrito Santo; (e) water quality monitoring; (f) monitoring of environmental impacts of subprojects; (g) monitoring of the implementation of the environmental action plan, especially in the control of water pollution of medium- and small-size industries, and solid waste collection, treatment, and disposal systems; and (h) community involvement and training. 4. Borrower's Contribution to Suoervision. The responsibilities of the Borrower (the State of Esp(rito Santo), the executing agencies (CESAN and SEAMA, and the Project Management Unit (PMU) are described in the main text. The PMU will be in charge of overseeing all project activities, including project monitoring and coordination; execution of project studies; arrangements for Bank supervision missions; and submission of project documents for Bank review and approval, including progress reports. -117- ANNEX 19 Attachment I BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT BANK SUPERVISION INPUT INTO KEY ACTIVITIES Approximate Dates Activity Expected Skill Requirements Staff Input (month/year) I (staff-weeks) 7-8/94 Supervision Mission: Procurement 6 Project Launch Workshop Disbursement Engineering Economics/Financial Analysis Environment 10-11/94 Supervision Mission: Economics/Financial Analysis 4 Emphasis on overall tuning and Procurement understanding of Bank procedures Engineering 1-2V95 Supervision Mission: Economics/Financial Analysis 4 Review overall progress Environment 4-5/95 Second Workshop on project Procurement 6 implementation Disbursement Engineering Economics/Financial Analysis Environment 7-11/95 Two Supervision Missions: Economics/Financial Analysis 8 Review overall progress Engineer/Procurement 2-4/96 Supervision Mission: Economics/Financial Analysis 4 Review overall progress Engineer/Procurement 6-8/96 Mid-term Review: Economics/Financial Analysis 8 Assess completion of studies and Engineering implementation of Environment recommendations, progress made Procurement in improving commercial Disbursement performance, effectiveness of institutional strengthening, and compliance with covenants 10-11/96 Supervision Mission: Economics/Financial Analysis 4 Review overal progress Engineer/Procurement 1997 Three Supervision Missions: Economics/Financial Analysis 12 Review overall progress Engineer/Procurement Environment 1998 Three Supervision Missions: Economics/Financial Analysis 12 Review overall progress Engineer/Procurement Thorough review of project status Environment and final plans for completion l 1999 Three Supervision Missions: Economics/Financial Analyst 12 Including one to prepare PCR Engineering/Procurement Environment -118- ANNEX 20 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT MONITORING INDICATORS 1. The specific objectives of this project are: (i) to improve the efficiency of CESAN's water supply and sewerage systems by supporting the company's efforts to operate on a commercial basis with financial self-sufficiency; (ii) to increase the coverage level of CESAN's water supply and basic sanitation services (i.e., sewage collection, treatment, and disposal) in the urban areas of Grande Vitdria, Guarapari, Castelo, luina, Sbo Gabriel da Palha, Nova Venecia, and ConceiClo da Barra, and other towns located in the Santa Maria and Jucu river basins; and (iii) to provide appropriate water and sanitation infrastructure in low-income urban areas of Grande Vit6ria and Guarapari. By achieving these specific objectives, the project will allow to expect: (il an improvement in the quality of life of about 1.2 million urban inhabitants of the State of Espfrito Santo; {ii) a reduction in the incidence of oral-fecal diseases; and (iii) an improvement in the quality of water for human consumption and recreational uses through the restoration and protection of the environmentally deteriorated river basins of Santa Maria, Jucu, Jabutf, Pero$3o, and Una, as well as the estuarine and coastal ecosystems within and adjacent to the municipalities of Grande Vitoria and Guarapari. 2. The set of physical, operational, environmental, and financial targets presented in Attachment 1 will be used as monitoring indicators for the project's specific objectives. The definition of each of these indicators is presented in Section A of this Annex. The project's expected long-term benefits will be monitored using the complementary set of indicators presented in Section B of this Annex. Both the project targets and its expected long-term benefits will be monitored jointly by CESAN and SEAMA. The long-term monitoring plan will be financed by the Bank. A. Definition of Monitoring Indicators of Project Targets Physical Indicators a Water Treatment Capacity as a Percentage of Total Capacity is equal, in year t, to the sum of the water treatment capacity actually installed from year 0 (1994) to year t, divided by the total water treatment capacity to be installed during the project implementation period. * Water Connections as a Percentage of Total Connections is equal, in year t, to the sum of all water connections actually installed from year 0 (1994) to year t, divided by the total number of water connections to be installed during the project implementation period. * Sewerage Connections as a Percentage of Total Connections is equal, in year t, to the sum of all sewerage connections actually installed from year 0 (1994) to year t, divided by the total number of sewerage connections to be installed during the project implementation period. * Sewage Treatment Capacity as a Percentage of Total Capacity is equal, in year t, to the sum of the sewage treatment capacity actually installed from year 0 (1994) to year t, divided by the total sewage treatment capacity to be installed during the project implementation period. Operational Indicators * The Water Coverage Level in year t is defined as the estimated number of urban residents that are currently served by CESAN's water systems at December 31 of year t divided by the estimated number of people living in CESAN's area of influence at December 31 of year t. -119- ANNEX 20 * The Water Connections with Meters Indicator is calculated in percentage terms as the total number of CESAN's water connections with a meter attached to them divided by the total number of CESAN's water connections. * The Unaccounted-for Water Indicator for Year t is calculated in percentage terms as the volume of water produced in year t minus the volume of water sold in year t over the volume of water produced in year t. * The Residual Chlorine in Water Pipes is to be calculated using an analysis program based on samples of CESAN's water distribution systems. The analysis program should include at least 300 points in Vit6ria and 60 points in Guarapari, and should have a sampling frequency of once a day for Vit6ria and twice a week for Guarapari. In any given year, each point must present concentrations equal to or higher than 0.2mg/l, more than 96% of the times it is measured. Concentration of less than 0.2mg/I must never be present in two consecutive sampling dates. * The Number of Water and Sewerage Connections per Permanent Employee in Year t is calculated by dividing CESAN's total number of permanent employees (i.e., its regular staff) at December 31 of year t by the total number of water and sewerage connections under operation at December 31 of year t. * The Number of Water and Sewerage Connections per Permanent and Temporary Employee in Year t is calculated by dividing CESAN's total number of temporary and permanent employees (i.e., its regular staff plus the equivalent number of third party employees) at December 31 of year t by the total number of water and sewerage connections under operation at December 31 of year t. The equivalent number of third party employees is approximated by dividing the total cost of third party contract labor by the average annual salary of CESAN's employees, including social benefits. 3 The Personnel Cost over Operating Cost is calculated as the percentage of personnel cost to operating cost n=X including depreciation. a The Sewerage Coverage Level in year t is defined as the estimated number of urban residents that are currently served by CESAN's sewerage systems at December 31 of year t divided by the estimated number of people living in CESAN's area of influence at December 31 of year t. * The Sewage Collected over Water Consumed Indicator in Year t is calculated as the percentage of the volume of sewage actually collected by CESAN in year t divided by the volume of water actually consumed by CESAN's customers in year t. * The Sewage Collected and Treated over Water Consumed in Year t is calculated as the percentage of the volume of sewage actually collected and treated by CESAN in year t divided by the volume of water actually consumed by CESAN's customers in year t. Environmental Indicators * The Efficiency of Sewage Treatment Plants measures the reduction of organic load (BOD5) observed in wastewater. The sewage treatment efficiency of each plant will be calculated using the following formulae: (BODin - BODo,) / (BOD.n) * 100. The percentage corresponding to plant y will be given by the monthly average results obtained from applying the water quality sampling program to plant y. -120- ANNEX 20 * The Number of Water Quality Monitoring Stations In Year t will be calculated as the number of operational water quality monitoring stations for inland and sea waters in good working condition in year t. * The Pollution Load Control for Existing Industries in Year t will be measured as the percentage of additional organic load (BOD,) under control at the end of year t, out of the total pollution load of all uncontrolled industries at end-1 994. An industry survey will be carried out during 1994 to provide an updated reference baseline. Financial Indicators * The Average Water Tariff in Year t is equal to CESAN's water revenue in year t divided by the volume of water billed in year t. The average water tariff is given in (US$/ml). * The Average Sewerage Tariff in Year t is equal to CESAN's revenue for sewerage services in year t divided by the volume of sewage billed in year t. The average sewerage tariff is given in (US$/m3). * The Working Ratio is defined as the percentage of operating expenses in relation to operating revenues. * The Accounts Receivable Comparator is calculated by multiplying the accounts receivable plus the provision for bad debts by 360 days, and then dividing this product by CESAN's operating revenue. This indicator is expressed in number of days. - The Rate of Retum is defined here as the percentage of net operating income after depreciation in relation to average net fixed assets. 41 Debt Service Coverage is defined as the ratio of net income after tax plus interest on long-term debt plus depreciation over amortization plus interest. e The Net Intemal Cash over Investment Indicator is defined here as cashflow from operation (the sum of net income after tax, depreciation, financial expenses, and monetary correction--if any) minus the sum of interest during construction, increase in working capital, and debt service, over CESAN's total investments (the Bank's project and other investments), not including IDC. B. Monitoring Indicators of Long-Term Benefits Water Quality 3. The water quality sampling and analysis program will include 130 stations distributed throughout the Santa Maria, Jucu, and Guarapari river basins; the estuarine areas within Grande Vit6ria and Guarapari; and the coastal waters adjacent to these municipalities. To track improvements in water quality, the following indicators will be analyzed on a three-month basis: * Biochemical Oxygen Demand (BOD) * Dissolved Oxygen (DO) * Total Number of Coliforms (MPN/1 00 ml) * Phosphates * Nitrates -121- ANNEX 20 Health Conditions 4. Improvements in health conditions will be evaluated based on data from the area's major hospitals. Trends in the following diseases will be monitored and analyzed quarterly. * Diarrhea * Intestinal Worm Infections * Skin Lacerations--due to contact with polluted waters Quality of Life and Water Use 5. In addition to the physical indicators for infrastructure construction and service coverage, two additional indicators will be monitored to perceive how the project is improving the quality of life and enhancing water use in the area of influence of the project. * Rationing of Water Supply. As measured by the number of hours-person per year. * Inappropriate Water Conditions for Recreation. As measured by the number of days per year that health authorities find the conditions of public beaches, both in Grande Vitoria and Guarapari, inappropriate for water recreation. Coastal Ecosystems 6. The effective area of mangrove forest in the Lamir3o Reserve will be quantified every two years to appraise how the project is protecting coastal ecosystems. ANNEX 20 Attachment 1 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT MONITORING INDICATORS OF PROJECT TARGETS INDICATOR ~~~~~Actual~~ Eitimate-d :~~~Projecte _______ _*__* __ 19 1993 1994 1995 1096 1997 1996 1999 PHYSICAL Water Treatment Capacity as a % of Total NA NA 12 69 69 69 86 100 WaterConnectionsasa%ofTotal NA NA 14 29 46 63 81 100 Sewerage Connections as a % of Total NA NA 4 6 31 58 66 100 Sewerage Treatment Capacity as a % of Total NA NA 0 16 63 80 80 100 OPERATIONAL Water Coverage Level (%) 88.4 91.2 91.4 91.6 91.9 92.3 92.7 93.2 Water Connections with Meters (%) 65.5 70.3 79.1 86.9 90.1 90.1 90.1 90.1 Unaccounted-br Water (%) 37.0 36.3 39.0 37.0 34.0 31.0 30.0 30.0 Residual Chlorine in Water Pipes (mg/Q >0.2 >0.2 >0.2 >0.2 >0.2 >0.2 >0.2 >0.2 W&S Connections per Permanent Employee 194 210 220 229 254 280 294 324 W&S Connections per Perm. & Temp. Employee 152 168 177 185 198 219 236 253 Personnel Cost/Operating Cost (%) 67.1 70.0 69.4 69.4 69.2 68.9 68.6 68.0 SewerageCoverage Level (%) 10.9 11.0 12.7 13.1 22.7 31.8 33.2 43.3 Sewage Collected/Water Consumed (%) 8.7 8.7 9.8 9.8 14.8 23.1 27.6 33.4 Sew. Coll.& Treated/Water Consumed (%) 5.9 5.4 5.8 6.6 11.6 20.0 24.6 32.0 ENVIRON MENTAL Efficiency of Sewage Treatment Plants (%) >80 >80 >80 >80 >80 >80 >80 >80 WaterQualityatMonitoringStations(#) 0 0 0 130 130 130 130 130 Pollution Load Control for Existing Industries (%) NA NA 10 35 45 55 65 75 FINANCIAL Average Water Tariff (US$/m3) 0.45 0.53 0.56 0.59 0.62 0.62 0.62 0.62 Average Sewerage Tariff (US$/m3) 0.23 0.29 0.32 0.54 0.57 0.57 0.57 0.57 Working Ratio (%) 76 55 57 53 49 46 45 43 Accounts Receivable Comparator (days) 40 46 43 43 43 43 43 43 Rate of Return (%) 6.3 26.3 4.6 4.0 5.3 5.8 6.1 6.5 Debt Service Coverage (times) -2.8 2.8 3.4 4.4 7.0 8.0 8.6 3.1 Net Intemal Cash/Investment (%) 116.5 -54.2 -1.8 8.0 8.9 28.1 32.6 30.4 ANNEX 21 Attachment 1 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT BID PACKAGES FOR CIVIL WORKS: WATER SUPPLY t.-: | I EEstimated BIdding xocution System -- -Purpo* Type Cot 1993 1994 - 19 05 1 906 199 7 1998 L 1999 US$ milIloo 301401 jI 940j[9 2034q CM243P149lOI92Q30134011012C130140110 j 9 l119 2[ G. Vitoria - Sta. Maria Pumping,Treatm-nt LCB 1.70 & Reservoirs I__I__L Grand Vdtoria Rese.voirs A Transmission LCB 3.07 G. Vtoria - Civit, Jacaraipe, Pumping,Trasmission. LCB 3.45 NAlmeida & Other Sectors Reservoirs & Distribution G. Vitoria - Sta. Clara, Pumping,Trasmission, LCB 0.99 Caraicica, Itaguari & Others Reservoirs & Distribution Guaraparl Treatment LCB 3.00 Lot I Guarapari Wator Intake, Pumping LCB 2.50 Lot II & Transmission Guarapwri Ressrvoirs LCB 2.11 Guarapari Pumping, Transmission LCB 2.94 . ...... _________ _________ & Distribution _ _ _ _ _ _ _ Other Systems - luna Treatment LCB 0.15 Other Systems - N.Venecia W.Intake, Treatment. Pumping LCB 1.45 & San Gabriel da Plaha Transmission & Reservoirs Other Systems - Castolo Watwr Intake, Transmission, LCB 0.55 Treatment & Reservoirs _______ Other Systems - Treatment & Reservoirs LCB 0.47 Conceicao da Barra Grande Vitoria Distribution & Connections LCB 2.51 Lot I Grande Vtoria Distribution & Connections LCB 2.89 Lot 11 Grande Vitoria Distribution & Connections LCB 3.34 Lot III ___ Gurapwri & Other Systems Distributin & Connections LCB 0.51 Lot I _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ Guatapa,I & Other Systems Distribution & Connections LCB 0.56 .. Lot II11_ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ Guerapwri & Other Systems Distribution & Connectons LCB 0.63 Lot III _ _ __ ANNEX 21 Atwcdrewt 2 BRAZL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT BID PACKAGES FOR GOODS: WATER SUPPLY Estfimatd L :- :- System I Papoe Type Caost 19 9 1994 1995 1 996 1997 1998 1999: :,_::__ US$ million 13QI04QI 1?102Q39I4Q 1Qi2Q1SQI4Q0 Il 2Q[3Q014t 101 201314Q41 1 tl 2O3q 40Qt2O 2QJ 3Q G. Vitoria - Ste. Maia I ron Catst Pipes J CB 10.29 Guarapari I ron Cast Pip" ICB 7.89 OtIw Systbms - N.Venech ITron Cast PpesI 0.98 lurt, Cast, Conc. & SGdaP. GLmrepi & Othr Systems PVC Pipes [CB 1.95 Guerapr4i & Other Systems Steel Pipes LCB 0.05 G. Vitoria, Guarapsri Pumps & Eltcricai | ICB 4.82 & Other Svstems iuipment I_____ G. V-rtorigL GLarepwi F&ii Bed ~~~0.40 & Other Systems ____________ ____ Guarapari & Oher Systems Fber Gass | LCB 0.07 Other System - N.Venech Concrete Lea 0.07 lurn, Cast., Conc. & SGdaP. Other Systems - N.Venecia hnsurance Equipmrent LCB 0.005 & San Gderiel da Plahae I77_77 I _ GuLarapri & Ower Systems Laboratory LCB 0.09 Oter Systers - N.Venecia, Aluminium LCB 0.004 luna, Cast, Conc. & SGdaP. Grade Vrtoria Guarapari PVCPipeC 4.66 & Oth Systems- Interior Grarde Vitorb, Guwaira PVC Pipe )CB 5.38 & Other Systemsa-Intrior___ Grand. Vrtoria. Guarapari PVC Ppes riB 6.20 GradIVMIuarapari Waer Meters I C 1.07 l - NM- & Oer Systems-hIneior Grande Vrtoria, Guiaperi Wabtr Metes IIB 1.26 & evirG Gio v l_ Water Meter _ _ 1.51 & Othe Systems-"atrlar __ ___ ANNEX 21 Attachment 3 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLWTION MANAGEMENT PROJECT BID PACKAGES FOR CIVIL WORKS: SEWERAGE Estimated _ .....___.___BWddin/ie io System Ppospe cstimed 93Q 19 9a4 1C _ 1Q 3 18 1 _______________ ________________ US$ million 30I 401 10I20 30 40 Q1020 30 40I IC' 2013 040 1020 30 40 10120130140 102034 Vitoria - Centr Treatment & Ourfall Pipes LCB 2.69 Loti I_ _ _ _ Vitoria - Center Pumping Station & Raw- LCB 0.53 Lot IISwg Pesr ips ___ Vitoria - Center Connecwons & ColPectors ICB 8.30 Lot IllII_ _ __ _ _ _ _ Praia do Canto -B4 Treatment & Outfal Pipes - CB 9.05 Lot I Praia do Canto - B4 Pum-ping Shttions & Raw- LCB 2.01 Lot 11 § Sewaae PrsaPpes -… Praiado Canto - B4 jConnections & ColIctors ICB 10.54 - i Lot IllII_ _ _ _ Praia do Canto - 85 iPumping Station LCB 0.37 Lot I _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Praia do Canto - B5 Connections & ColIkctors ICB 9.16 Lot II11__________ Bairro de Fatima Pumping, Pressure Pipes, 1 LCB 2.90 Collectos & Connections __ __ Vila Volha - PraiaciaCosta Treatment & Outfal Pipes ICB 19.48 _ _ L - - - 3 X X . __ Lot Vila Velha - Praia cla Costa Pumping Station & FRaw- LOB 2.35 Lot 1I Sewage Pressure Pipes ____ VilaVelha- PraiadaCosta Connections&Collectors ICB 14.21 - - Lot III Vila Volha - Paul Pumping Station & Raw- LCB 0.37 Lot I Sewage Pressure Pipes ______ Vila Velha - Paul Connectons & Collectors ICB 7.43 Lot II COriacica - Campo Grande Treatment & Outfal Pipes ICB 4.90 _ Lot I Clriacica - Campo Grande Pumping Station & Raw- LCB 0.48 _ Lot ai Sewae Pressure Pipes I ________ Cs'iaclca - Campo Grande Connebctions & Collectors lCB 14.48 ANNEX 21 Atachment 4 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLWTION MANAGEMENT PROJECT BID PACKAGES FOR CIVIL WORKS: SEWERAGE (cont) Estimated Biddi I System Purpose Typo Cost 1 1994 =T TT 1996 -1 _ 1998 7 i 1 US$ million 30 40 1012 30 40 1020 30 4 1 20Q 3040 102 040Q 11220 3Q 40 1012013 Guarapari - P do Mrro Treatment & Outl Pipes LCB 3.61 _ _ j Lot I_ _ _ _ _ _ Guarapari - P. do Morro Pumping Station & Raw- LCB 1.49 Lot II Sewage Pressuire Pipes __ Guaraparl - P. do Morro Connections & Colectors ICB 6.03 - _ Lot IllII_ _ _ _ _ _ _ _ Guarapsi - Centro Treatment & Outfal Pipes ICB 5.42 Lot I _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Guaraperi - Centro Pumping, Pressure Pipes, ICB 6.71 Lot li Collectors & Connections Domingos Martins Treatment Pumping. Pressure LCB 1.18 ____ ____ _ __ ___ __ P pes, Coll ctos & Connects. _ _ _ _ Marechal Floriano Teatment, Pumping Ressure LCB 2.91 Pjpes._Coltectas & Connects. Sant- Leopoldirn I Treatment. Pumping. Pressure 1 LCB 1.06 'Pipes, Collectors & Connects. _ -a Santa Maria de J etioa , Tre Pumping, Pressure LCB 2.65 _______________ ~jes.Collectors & Connecs.___ Grande Vitoria Connectons LCB 0.40 | - _ Lot I _ _ _ _ Grande Vitoria Connections LCB 0.93 G3rande Vioria Connections LCB 1.57 Guarapsi Connections LCB 0.04 Lot I Guarapri Connecibons LCB 0.08 Lot II_ _ _ _ _ _ _ Othw Systems (Interior) Connectons LCB 0.03 Lot I I _ Othe Systems (Interior) Connections LCB 0.04 Lot II I_ 0the Systems (Interior) Connecbons LCB 0.06 Lot III _ __ ANNEX 21 Attachnent 5 BRAZL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT BID PACKAGES FOR GOODS: SEWERAGE Estimated Biddlng/Enast System Pupos .yp 0 19931 1994 1 995 1998 1997 199 1999 I_____________ _______________ US$Srnllb o3Qi4Qi lQl2Ql3Q [ j 40 1 012QISQ14 1Q12Q13$04Q|01 20913?P401112QP3ILIQ 1912QiSQoig4 Vitoria-14, V.Vdhl-PdaC PVC Collctors ICB 12.22 Gupa -P. do Morro Vitoria-15, Guarapri-C ronCast Collctors ICB 3.27 0. Martins & M. Florlano Carimcica, Sta. Leopoldins Iro n Cast Collectors ICD 2.33 & Sta. Muliade Jetlba Vitrlha-Centro Sa n Cast Colcors ICB 2.59 V.Vedha-PLai Vitoria-B4, V.Velha-PdaC Concret Collectors ICB 1.91 28… Guwrq~i- P. do Morro ________ VWtoria-B5 Guarapari-C ConcreteCollectors ICB 0.95 0. Matins & M. Floarino Caracka. St. Leopoldira Concrebt Collectors LCB 0.19 & Sta. Mlaride JetibaM Vr1orls-Cenro,Serra ConcreteCollctors ICB 0.37 V.Vdlha-Pati Vitoria-B4, V.Velha-PdaC Steel Collectors ICB 2.50 GuLrapai -P. do Monro --… Vitoria-15, Guaraparl-C Stede Colecbos LCB 0.06 _ _ _ D. Maifns & M. Florlano Caricic StUL eopoldins Steel Collctors LCB 0.04 _ _ _ & SW. Marlade Jetiba ____t_____ Vitoria-B4, V.Velha-PdaC MiSeIe CoS&ctius Imert CB 2.81 _ Gunapwli-P. do Monro V Toria-55 Gu tapai-C Miscellaneou mumert tCB 1.16 D. Martins & M. Florlao _ _ __ _ _ _ _ __ _ _ _ Caricc Ste. Leopoldina Misceollneous 6qulent ICB 0.97 & Sb.L Marinade Jetiba Vitorlta-Cto,Ser MisceltaneousEqulpment ICs 0.64___ X __ t- l Vltoria-1B4, V.Velha-PdaC Molyetiyen Eqpmrt IB28 Gu tr"i-P. do Mono ol_tB.___________ Gitrau1e tla a rPVCC Collecors L CB 0.18 Gra *Vioria, Gti PVCoCodlectrs t CB 0.47 Gno Ssrtams-rInterorr 0.71 _ _ 0_64 Grad Vrtola Momapi PVC Collectos 08 00 wf Systems- Inteior I__ _ _ _ _ _ _ _ Grande Vd=4 GLiarapari PVC ColWcWm ICB 0.42 ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~aDPKsaIM0 ANNEX 21 Atthchmrwnt 6 BRAZIL ESPIRrrO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECTS CONSULTANT SERVICES AND OTHER PROCUREMENT 1;X;f Esllimeted::t::; :l 0 :77Prep aVon rldri/Exulo System:t Purpose Typo Cost 1993 1994 I 1995 I 1996 1997 1998 1999 ______________ ____USS million 30140 I1020304Q[0102030Q40II1020i304010J2013014011Q120[30140012QI3J4 CESAN Studies CC 0.79 CESAN Sanitary Education Program CC 0.83 CESAN Training CC 0.65 Water Systems Engineering CC 3.20 Sewerage Systems Engineering CC 1.51 ------ Water & Sewerage Systems Project Management CC 5.32 _ _ . g i & Supervision I CESAN Operational Development CC 7.72 _ _ 3) CESAN Miscellaneous Equipment ICB 1.95 _ _ = CESAN Headquwters ICB 4.89 SEAMA Studies CC 1.43 SEAMA Technical Aistance CC 0.82 - SEAMA Trahing CC 1.06 SEAMA Other Services CC 0.65 SEAMA Miscellaneous Equipment ICB 2.56 _ SEAMA Headquaters ICB 2.24 = - -129- ANNEX 22 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT LOAN DISBURSEMENT SCHEDULE Bank Fiscal Year Quarterly Cumulative Disbursements and Quarter Ending Disbursements US$ million US$ million % of Total FY 1994 March 31, 1994 0.0 0.0 0.0 June 30, 1994 0.0 0.0 0.0 FY 1995 September 30, 1994 17.8" 17.8 11.6 December 31, 1994 9.8 27.6 17.9 March 31, 1995 6.9 34.5 22.4 June 30, 1995 6.9 41.4 26.9 FY 1996 September30, 1995 6.9 48.3 31.4 December 31, 1995 6.9 55.2 35.8 March 31, 1996 8.4 63.6 41.3 June 30, 1996 8.4 72.0 46.8 FY 1997 September 30, 1996 8.4 80.4 52.2 December 31, 1996 8.4 88.8 57.7 March 31, 1997 7.9 96.7 62.8 June 30, 1997 7.9 104.6 67.9 FY 1998 September 30, 1997 7.9 112.5 73.1 December 31, 1997 7.9 120.4 78.2 March 31, 1998 7.1 127.5 82.8 June 30, 1998 7.1 134.6 87.4 FY 1999 September 30, 1998 5.9 140.5 91.2 December 31, 1998 4.7 145.2 94.3 March 31, 1999 2.2 147.4 95.7 June 30, 1999 2.2 149.6 97.1 FY 2000 September 30, 1999 2.2 151.8 98.6 December 31, 1999 2.2 154.0 100.0 1/ Includes US$8 million deposit into the project's Special Account. -130- ANNEX 23 BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION MANAGEMENT PROJECT SELECTED DOCUMENTS AVAILABLE IN PROJECT FILE A. General reports and studies of the water and wastes sector and environment: Al. CESAN (1992), Uma Sintese do Perfil Ambiental do Estado o das Estrat6gias para RecuperaqAo, Doc.02/92, November. A2. Commiss5o Coordenadora do Relat6rio Estadual sobre Meio Ambiento e Desenvolvimento (1992), Meio Ambiento o Desenvolvimento no Espfrito Santo, Relat6rio Final, May. A3. Moraes Netto, Sergio (1993), Legisla$ao Ambiental do Estado do Espfrito Santo - Proposta de RegulamentagSo-. Doc. EA 002/93, July. A4. Moraes Netto, Sergio (1993), Anexo I, Legisla$ao Ambiental do Esprrito Santo, Programa Despoluiglo dos Ecossistemas Litoraneos do Estado do Espfrito Santo, July. B. General reports and studies relating to the project: B1. AMPLA ViSAO ASSESSORIA E SERVICOS (1993), Quantifi9lo dos Beneficios do Componento de Esgotamento SanitSrio - Relatorio Preliminar, Doc. EF 01 5/93, July. B2. Analise, Instituto de Pesquisa (1 993), Proje9lo de Populag5o nas Areas de InfluOncia do Programa: 1991/2030, Doc. EE 005/93, June. B3. CESAN (1993), AvaliagSo da Experiencia Operational com Tipo de Redo Projetada, Avalia=co de Coliformes, e Avaliagao de Algas, Doc. EE 001/93, April. B4. CESAN (1993), Programa de Controle de Aguas nio Faturadas para Grande Vit6ria o Guarapari - Perfil do Projeto, Doc. EE 006A/93, July. 85. CESAN (1993), Estudos para Priorizagio de ImplantagSo dos Empreendimentos, Doc. EE 007/93, July. B6. CESAN (1993), Cronograma Frsico-Financeiro Resumido, Doc. EE-007A/93, July. B7. CESAN 1 993), Considera$oes sobre as Projeq8es dos Demonstrativos Financeiros da CESAN, Doc. EF 007/93, April. B8. CESAN (1 993), Termos de Referencia para Reavaliailo do Ativo Fixo da CESAN, Doc. EF 008/93, July. B9. CESAN (1993), Programa$ao de Investimentos Simula9lo EconOmico-Financeira da Cesan, Fichas T6cnicas dos Empreendimentos. Doc. EF 009/93, July. B10. CESAN (1993), Estudo Preliminar de Avaliaflo do Custo de Fornecimento de Agua a CVRD e CST. Doc. EF 010/93, June. B11. CESAN (1993), Estimativa de Custos de Operagflo e ManutenqBo - Agua o Esgoto. Doc. EF 011/93, June. -131- ANNEX 23 B1 2. CESAN 1 993), Identificaflo dos Coeficientes de Sazonalidade por Regiao. Doc. EF 012/93, June. B13. CESAN (1 993), Projeg6es Demograficas para Cidades e Vilas do E.S. de Populaq8e3 Residentes a Flutuantes no Horizonte 2005 e Calculo da Taxa de Atendimento da CESAN no Periodo 1990/1993, Doc. EF 013/93, July. B14. CESAN (1993), Anteprojeto de Educa9So Sanitaria. Doc. EG 002/93, July. B1 5. CESAN (1993), Estudos Ambientais. 5 Volumes: Summary, Main Report, plus 3 Annexes, September, 1993. B16. CESAN and SEAMA (1993), Estudo do Comploxo Paneleiras e Jazida do Vale do Mulemba, Relatorio Sintesis plus 3 Annexes, Doc EA 012/93, November, 1993. B17. CESAN (1993), Proposta do Piano de Licitag5o. Doc. EG 003/93, August. B18. CESAN (1 993), Planos de A9So para Administra9lo Financeira e Auditoria Interna da CESAN. Doc. EF 016/93, September. B19. CESAN (1993), Impacto da Inflaglo sobre as Demonstra6oes Financeiras da CESAN: 1986 a 1992. Doc. EF 017/93, September. B20. CESAN (1 993), Termos de Referencia para o Programa de Controle e Reduflao de Aguas Nlo Faturadas, Doc. EE 0068/93, September. B21. CESAN (1993), Cronograma Flsico-Financiero - Resumido/Detalhado, Doc. EE 007B/93, July. B22. CESAN (1993), Proposta de Estudo de Reformulag5o do Projeto do Sistema Integrado de Abastecimiento de Agua de Guarapari, Doc. EE 010/93, December. B23. CESAN (1993), Sistema de Esgotamento Sanit6rio de Praia do Morro - Guarapari. Projeto Reformulado Sintese, Doc. EE 01 OA/93, December. B24. CESAN (1993), Estudo de Demanda de Agua, Doc. EF 018/93, October. B25. CESAN (1993), Sfntese da Situagao de Drenagem Pluvial na Grande Vitoria e em Cariacica, April. B26. CESAN (1993), Plano de Licitagao, November. B27. FARIA, DIOMIRA M.C.P. (1993), Estudo de Avaliag1o Economica para 0 Gerenciamento do Demanda de Agua, Relatorio Preliminar, November. B28. SEAMA (1 993), Termos de Referdncia para Estudos Ambientais - Texto Final -. Doc. EA 001 /93, May. B29. SEAMA 1 993), Fauna Aquatica. Doc. EA 005/93, July. B30. SEAMA (1 993), Analise de EIA/RIMA. Doc. EA 006/93, July. B31. SEAMA (1 993), Fontes Contaminantes - Beneffcios -. Doc. EA 007/93, July. -132- ANNEX 23 B32. SEAMA (1993), Proposta de Normatizagflo da Qualidade das Aguas do Estado do Espfrito Santo. Doc. EA 009/93, July. B33. SEAMA (1993), Piano de AgIo da SEAMA 1994 - 1999, Volumes I e 11, Doc.EA 010/93, September, 1993. B34. SEAMA (1 993), Matriz de Fontes de Polui9ao e Planilhas Eletronicas, Doc. EA 01 1/93, September 1 993. B35. SEAMA (1994), Termos de Referencia para Inventario Industrial, Sistema de lnformagoes Ambientais, o Viabilidade Residuos Solidos Grande Vit6ria, Doc. EA 013/94, January. B36. SEAMA (1993), Diagn6stico de Recursos Hldricos, Doc. EA 008/93, June. B37. SEPLAE (1993), S6ries Hist6ricas das Contas do Estado -1985 1992, Proje9ao de Receita e Despesas do Estado -1993 2000, Doc. EF 001/93, April. B38. UFES (1993), Estudos Complementares, Controle de Algas - Relat6rio Final, Doc. EE 002A/93, June. B39. UFES (1993), Estudos Complementares, Controle de Algas - Analise de Eutrofiza9lo, Relat6rio Final, Doc. EE 0028/93, July. B40. UFES, SEAMA (1993), Estudos Complementares para RemogSo de Coliformes, Doc. EE 003/93, June. B41. UFES (1993), Estudos Complementares, DeterminagSo do Tombo da Mare, Relat6rio Final, Doc. EE 004A/93, July. IBRD 25606 41 30 41 00' 40-30' 40!00' 39130' BRAZIL ESPIRITO SANTO WATER AND COASTAL POLLUTION B A H I A a8o00 MANAGEMENT PROJECT 1''e 1 I-00- MUNICIPALITIES SERVED BY: CESAN FUNDAC.O4 NACIONAL DA SAUDE MUNICIPALITY MUNICIPALITIES BENEFITTED BY: 830 * WATER SUPPLY PROJECTS ( .onceicdo do Barra A SANITATION PROJECTS WATER SUPPLY AND SANITATION PROJECTS : m N RIVERS MUNICIPAL CAPITALS * STATE CAPITAL Pl 19*00 -- MUNICIPAL BOUNDARIES STATE BOUNDARIES INTERNATIONAL BOUNDARIES ) 19-30' )BO ° .4 19-30' M I N A S o < r S / } { 9 l PERU'' 3 R A Z I L 5 ;05^ do C n i s o H Plums 9 rsolivlA~~d St EsPs S. Jos6 do Cal, EoMf 21-00 ML°osa ft °pemirim 21-00'