OFFICIAL USE ONLY R2004-0072/1 May 6, 2004 For meeting of Board: Tuesday, May 25, 2004 FROM: Vice President and Corporate Secretary Iran: Ahwaz and Shiraz Water Supply and Sanitation Project Project Appraisal Document Attached is the Project Appraisal Document regarding a proposed loan to the Islamic Republic of Iran for a Ahwaz and Shiraz Water Supply and Sanitation Project (R2004-0072). This project will be discussed at a meeting of the Executive Directors on Tuesday, May 25, 2004. Distribution: Executive Directors and Alternates President Bank Group Senior Management Vice Presidents, Bank, IFC and MIGA Directors and Department Heads, Bank, IFC and MIGA 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 Group authorization. Document of The World Bank OFFICIALUSEONLY ReportNo: 27223-IRN PROJECT APPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$279.00MILLION TO THE ISLAMIC REPUBLICOF IRAN FOR A AHWAZ AND SHIRAZWATER SUPPLY AND SANITATION PROJECT April 29, 2004 Finance, Private Sector and Infrastructure Group Middle East and North Africa Region , This document has a restricteddistributionandmaybe usedby recipients only inthe performanceof their official duties.Its contents maynot otherwisebe disclosed without WorldBank authorization. 1 I CURRENCYEQUIVALENTS (Exchange Rate Effective as o f February 2004) Currency Unit = Iranian Rial (IR) 10,000 Rials = US$1.19 US$l.O = 8,400 Rials FISCAL YEAR March 21 -- March 20 ABBREVIATIONSAND ACRONYMS APL Adaptable Program Loan LCS Least Cost Selection AWWC Ahwaz Water andWastewater MEAF MinistryofEconomic Affairs Company and Finance BOT BuildOperate Transfer MOE MinistryofEnergy CAS Country Assistance Strategy MPO Management andPlanning CB Central Bank Organization CBO NCB National Competitive Bidding CHO Cultural Heritage Organization NGO Non-Governmental COA Court ofAccounts Organization CPAR Country Procurement NWWEC NationalWater andWastewater Assessment Review Engineering Company CQ Consultants Qualification NPV Net Present Value DBO Design-Build-Operate O&M Operation and Maintenance DOE Department o f Environment PAD Project Appraisal Document EA Environmental Assessment PER Public Expenditure Review EMP Environmental Management PFS Project Financial Statements Plan QCBS Quality and Cost Based EO1 Expressions of Interest SelectionMethod FDI Foreign Direct Investment RAP Resettlement Action Plan FEF Front-End Fee RFP Request for Proposal FMR FinancialMonitoring Reports SA Special Account GFA Gross FixedAssets SBD Standard Bidding Document GO1 Government of Iran SOE Statement o f Expenditures GPN General Procurement Notice TA Technical Assistance I A S International Accounting TOR Terms o f Reference Standards TSE Tehran Stock Exchange IBRD International Bank for TSU Technical Support Unit Reconstruction and UFW Unaccountedfor Water Development UNDB UNDevelopment Business ICB International Competitive WBI World Bank Institute Bidding WHO World Health Organization ICR Implementation Completion WR Working Ratio Report wss Water Supply and Sanitation IDA International Development WTP Willingness to Pay Association wwcs Water and Wastewater IRR Internal Rate o fReturn Companies ISA International Standards on WWTP Wastewater Treatment Plant Auditing LAP LandAcquisition Plan I I Vice President: Christiaan J. Poortman Country Director: Joseph Saba Sector Director EmmanuelForestier Sector Manager Franqoise Clottes Task Team Leader: MohammedBenouahi FOROFFICIAL, USEONLY ISLAMICREPUBLICOFIRAN AHWAZ AND SHIRAZWATER SUPPLY AND SANITATIONPROJECT CONTENTS A ProjectDevelopmentObjective . Page 1. Project development objective ........................................................................ 2 2. Key performance indicators ........................................................................... 2 B Strategic Context . 1. Sector-relatedqountry Assistance Strategy (CAS) goal supportedbythe project ............. 2 2. Main Water Supply and Sanitation sector issues and Government 5 strategy ........................................................ 3. Sector issues to be addressed by the project and strategic choices ............................... 6 C ProjectDescriptionSummary . 1. Projectcomponents ..................................................................................... 6 2. Key policy and institutional reforms supported by the project ................................... 8 3. Benefits and target population ......................................................................... 8 4. Institutional and implementationarrangements ..................................................... 8 D ProjectRationale . 1. Projectaltematives consideredandreasons for rejection .......................................... 11 2. Major related projects financed by the Bank and other development agencies ................. 12 3. Lessons leamed and reflected inthe project design ................................................ 12 4. Indications o fborrower commitment and ownership .............................................. 12 5. Value added o f Bank support inthisproject ......................................................... 13 . 1. Economic ................................................................................................. E SummaryProjectAnalysis 13 2. Financial .................................................................................................. 16 3. Technical ................................................................................................. 19 4. Institutional ............................................................................................... 19 5 Environmental ........................................................................................... . 20 6. Social ...................................................................................................... 23 7. SafeguardPolicies ....................................................................................... 25 F SustainabilityandRisks . 1. Sustainability ............................................................................................. 26 2. Critical risks ............................................................................................. 27 3. Possible controversial aspects ......................................................................... 27 G Main LoanCondition . 1. Conditions o fEffectiveness ........................................................................... 28 2 Other ....................................................................................................... . 28 H Readinessfor Implementation . ........................................................ 28 I CompliancewithBankPolicies . ....................................................... 28 This document has arestricteddistribution andmaybe usedbyrecipients only inthe performance of their official duties.Its contents may not otherwise be disclosed without World Bank authorization. Annexes Annex 1: Project Design Summary ........................................................................... 29 Annex 2: DetailedProject Description ....................................................................... 31 Annex 3: Estimated Project Costs ............................................................................. 35 Annex 4a: Cost Benefit Analysis Summary ................................................................... 55 Annex 4b: Socioeconomic Survey: Analysis of Willingness to Pay and Results ........................ 65 Annex 5: Financial Analysis Summary ...................................................................... 72 Annex 6a: Procurement Arrangements ........................................................................ 128 Annex 6b: Financial Management and Disbursement Arrangements ...................................... 137 Annex 7: Project Processing Schedule ........................................................................ 149 Annex 8: Documents inthe Project File ...................................................................... 150 Annex 9: Statement o f Loans and Credits ................................................................... 151 Annex 10: Country at a Glance ................................................................................. 153 Annex 11: EnvironmentalAssessment ........................................................................ 155 Annex 12a: Resettlement Policy Framework .................................................................. 173 Annex 12b: Abbreviated LandAcquisition and Compensation Planfor Ahwaz ......................... 179 Annex 12c: Abbreviated LandAcquisition and Compensation Plan for Shiraz ........................... 180 Annex 13: Agreed Upon Strategy and ImplementationProgramfor World Bank Assistance ......... 182 Annex 13a: Terms o f Reference: DemandManagement Program ........................................... 191 Annex 13b: Terms o f Reference: Optimization of Water Sector Institutions .............................. 195 Annex 13c: Terms of Reference: Customer Health EducationProgram .................................... 198 Annex 13d: Terms o f Reference: National Sanitation Strategy andAction Plan for Sanitation and Hygiene ............................................................................................... 200 Annex 13e: CapacityBuildingProgram ......................................................................... 204 Annex 14a: FirstYear Procurement Plan for Technical Assistance........................................ 206 Annex 14b: FirstYear Procurement Plan for Works ......................................................... 207 Annex 15: Organizational Charts o f Ahwaz and Shiraz WWC andNWWEC ........................... 208 Map o f Iran Map: Ahwaz Water Supply Project Map: Ahwaz Sanitation Project Map: Shiraz Water Supply Project Map: Shiraz Sanitation Project Map: Ahwaz KaroonRiver ISLAMIC REPUBLIC OF IRAN AHWAZ AND SHIRAZ WATER SUPPLY AND SANITATION PROJECT Project Appraisal Document Middle East and NorthAfrica Region Finance, Private Sector and Infrastructure Department Date: April 29,2004 Team Leader: Mohammed Benouahi Sector ManagedDirector: Emmanuel Sector(s): Sewerage (60%), Water supply (30%), Forestier/Franqoise Clottes Central Country ManagedDirector: Joseph P. Saba Central government administration (10%) Project ID: PO71191 Theme(s): Pollutionmanagement and environmental Lending Instrument: Specific Investment Loan (SIL) Health (P), Infrastructure services for private sector development (P), Access to urban services for the Poor (P), Other financial and private sector develop- ment 6).Gender (S) Proiect FinancingData [XI Loan []Credit []Grant []Guarantee [] Other: For Loans/Credits/Others: Loan Currency: United States Dollar Total BankFinancing(US$m):279.00 Borrower Rationalefor Choiceof LoanTerms Available on File: El Yes ProposedTerms (IBRD): Variable-Spread Loan (VSL) Grace period (years): 5 Years to maturity: 17 Commitment fee: 0.75% Front endfee (FEF)on Bankloan: 1.OO% Customers (Connection Fees) - _ _ I I I I I Total: 294.43 175.39 469.82 Borrower: ISLAMIC REPUBLICOF IRAN Responsibleagency: NWWEC, AHWAZ AND SHIRAZ, Water and Wastewater Companies National Water and Wastewater Engineering Company (NWWEC) Address: # 8, Shahid Abdolah-zadeh Street, Keshavars Boulevard, Tehran, Iran Contact Person: Mr.Elahi Panah, T S U Director for water and wastewater projects Tel: 98-21-895 3319 Fax: 98-21-895 5795 Email: elahir>anah@,nww .co.ir Project implementationperiod5 years (2004-2009) ExDectedeffectiveness date: October 1.2004 Emected closing date: Serdember 30.2009 I A. Project Development Objectives 1. Project development objectives: (see Annex 1) The main objectives are to: (a) enhance the quality o f life inthe proposed cities, Ahwaz and Shiraz, particularly inpoor areas by: (i)improving access to satisfactory water supply and significantly increasing coverage of sanitation services; and (ii) improving environmental, hygiene and health conditions, as well as promoting reuse o f treated effluents; (b) strengthen and develop the capacity o f Ahwaz and Shiraz Water and Wastewater Companies (WWCs), and assist the latter in improving their efficiency, sustainability and financial autonomy; and (c) initiate sector reforms, particularly with respect to institutional arrangements, the regulatory framework, demand management, as well as prepare a sanitation strategy. 2. Key performance indicators: (see Annex 1) Key performance indicators, which are detailed in Annex 13 and agreed upon with the Government include: (a) Population coverage o f sanitation services and expansion o f water production capacity and connections; (b) Level of recovery o f costs o f operation and maintenance (O&M) and capital expenditures, as measuredby the working ratio; (c) Quantities and quality o ftreated effluents and their reuse; and (d) Unaccounted for water (UFW). B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 22055 IRN (Interim Assistance Strategy) Date of latest CAS discussion: April 16,2001 General Context Inthe last decade, following almost two decades of war, debt crisis and international isolation which depreciated the capital stock and disrupted economic and institutional development, Iran embarked on a far-reaching political, economic and social reformprogram. A very broadspectrum o f Iran's political actors and society ingeneral has embraced the overall principles and processes o f the Third (FYDP) Five Year Development Plan 1999-2004. Complex debate has centered on the speed, the dislocations, burden and social implications o f the reformprocess, inparticular with respect to the planned removal o f energy sector subsidies. Mindful o f the transition costs, the govemment has operated with great caution to avoid social dislocation. Achievements duringthe period o fthe ThirdFYDPhave been impressive. Iranhas practically no extemal debt, high foreign reserves, no major balance o f payments pressures and a moderate fiscal deficit, which now reflects increasingly explicit subsidies, including indirect subsidies (largely in the energy sector). 2 Growth has been robust with real GDP growing on a 6 percent average during 2000/01 - 2002/03, reaching 7.4 percent over the past year. Structural reforms have advanced with gains in financial markets, trade and price liberalization and tax policy. Institutional reforms have included increased decentralization and greater accountability in budget and public expenditure process. Education and health have realized significant gains. Inclusion o f women has improved with high female education enrollment at all levels. Female inclusion in the labor force is markedly better (and high by MNA standards) but still insufficient. Efforts to move from an economy driven by state dominance and subsidies to increased private sector participation have had some success, though private FDI and domestic investment remains low by intemational standards. Improvementsinthe investment climate for the private sector have gone forward, though slowly. Investment for the run-down economic infrastructure has picked up, but remains constrained, more by the lack o f access to best practice and best technology than finance. Social programs targeting poverty and the disadvantaged have undergone reform, but accountability and results remain uncertain. Finally, following a long period o f neglect, efficient resource management and environmentally sustainable development have become priorities. As Iran embarks on the FourthFYDPthis year, it is at a criticaljunction. Continuingthe direction ofthe ThirdFYDP,there isbroadconsensus on four pillars o fthe FourthFYDP: Achieving fast, sustainable growth, relying on the transition to a market economy. Sharing the h i t s o f growth, addressing the needs o fthe poor and disadvantaged. Enhancingnaturalresource management and the environment. Buildingan efficient, accountable andtransparentpublic sector. These pillarsrepresent goals about which there i s little debate. Regarding the water sector, which is one o f the pillars o f the Fourth FYDR, mentioned above, there i s broad agreement among different groups in Iran on the direction o f the reform agenda. However, less consensus exist on the paths to be taken to achieve the agenda. Through various consultation processes, working documents outlining the essence o f the long-term strategies in the above sectors have been drafted (i.e. Long-Term Water Development Policy Guidelines) calling for the executive branch to start puttingtogether a program for implementation. As it is the case with other economic sectors, Iranis at an importantjuncture inwhich it can accelerate its reformprocess and leap forward toward modemization o f the water sector or at best slow down and underachieve its potential while jeopardizing the sustainability o f its natural resources. The Bank's assistance strategy can play a critical role in facilitating Iran's transition and modemization through a consistent program combining activities on infrastructure development and knowledge generation on one hand, and actions aimed at bridgingthe gaps between physical resources management and people/institutions capacity buildingon another hand. The main issues affecting the water sector in Iran have been identified through various assessments: l o w water use efficiency in urban and rural uses; limited participation by stakeholders in development planning and management; large needs for rehabilitation and development o f hydraulic infrastructure for sustainable water usage; problems o f pollution caused by the discharge o f untreated wastewater into public waterways and aquifers; and weak institutions involved in the sector and limited coordination among stakeholders (See also Para. B 2 and B3). Past involvement o f the World Bank in Iran water sector has been limited and fragmented due to various factors. As a result, significant knowledge gaps have emerged. Opportunitiesto reverse this trend have been sought in the context of the April 16, 2001 Interim Assistance Strategy (2001-2004) through dialogue, leading to the identification o f promising Bank financed infrastructure projects inwater supply 3 and sanitation, and irrigation. The emphasis in the dialogue i s slowly changing from a narrowly focused provision o f commercial financing to a potential strategic partnership indevelopment as Iran i s embarking onto a reform agenda aimed at promoting growth in a socially and environmentally sustainable way and focusing on competitiveness and inclusion into the global economy. The objectives o f the Fourth FYDP and the needs for implementationo f the reform agenda open new opportunities for partnership interms o f technical assistance and a lendingportfolio aimed at well targeted interventions focusing on integrating people, institutions and resources while combining infrastructure with knowledge for the water sector. The Bank should use the large infrastructure needs in the sector to promote capacity building, and institutional development. The assistance strategy for Iraninmeeting the water sector challenges needs to be centered on the following interventions: Pricing policy reforms inwater as gradual ways to improve service delivery requiring a particular attention to cost recovery and investment financing; Design tariff schemes to help poor communities retadimprove their livelihoods and access to basic services in lieu o f the current broad interventions and not well conceived cross subsidy system (Water Supply and Sanitation); Capacity building of sector institutions such as the Regional Water Boards, the Regional Water and Wastewater Companies, The National Water and Wastewater Engineering Company etc. The capacity building effort will include technical, operational, financial management, planning, budgeting and other activities related to improvingthe efficiency o f water service delivery; and Manage and plan land and water resources in a well coordinated and integrated way allowing allocation o f resources between sectors and regions in an efficient and socially and environmentally sustainable manner. The Bank's assistance over the next 10 years puts water supply, sanitation and hygiene, irrigation and drainage, and water resource management at par ina strategic framework supported by the following four pillars: Recognizing that investment without reform will be ineffective in reaching the goals o f environmentallyand socially sustainable development; People and institutions shouldbe at the center o f sustainable water resource development; Delivering water and other related services requires substantial expenditures someone has to pay for; and Safeguarding water resources i s a shared responsibility and involves tradeoffs. Through flexible and simple interventions takmg into considerations Iranian planning and budgeting institutions, The World Bank program will support the water sector while focusing on the political economy o f change and recognizingthe important implementationschallenges. The Bank will not seek to intervene in all aspects of water but would identify those opportunities where it can improve implementation, establish the right framework for monitoring and evaluation and strengthen the national and provincial institutional capacity to carry out reform and achieve results. 4 Water supply and Sanitation Context The Bank strategy for assisting Iran, as described above and in Interim Assistance Strategy, reviewed current development situation in Iran, progress of the process of reforms, and highlighted the development challenges and prospects faced by the country, particularly with respect to water and sanitation. It also outlined the assistance strategy that the Bank Group will follow during the next two to three following years while preparing a Country Assistance Strategy (CAS). The Interim Assistance Strategy was also complemented by an "Urban Water and Sanitation Sector Note", which was discussed at a World Bank Institute (WBI) workshop on June 2002, and endorsedby the Government in September 2003. Government and Bank agreedon the following: (i) strategy, (ii) implementationprogram for the the Bank assistanceto be part o f the coming CAS (2004-2007), and (iii) the key performance indicators (See Annex 13) for the sector. 2. Mainwater supplyand sanitationsector issues and Government strategy: About 96% o f the urban population i s connected to public water supplies. By contrast, only about 16% i s connected to public sanitary sewerage and only part o f the collected sewage i s treated before disposal. The bulk o f sewage is discharged untreated and constitutes a major source of pollution to groundwater and a risk to public health. Ina number of cities without sanitary sewerage, households discharge their sewage through open rainwater drains. World Bank Assistance to the Sector: Inaddition to preparing and disseminating the Water Supply and Wastewater Sector Note in2002 the World Bank has an active Tehran SewerageProject. World Bank Sector Assistance Strategy: Followingthe discussions that took place in September 2003, the GO1and the Bank agreed: (i) to adopt the main conclusions of the sector strategy note which emphasized institutional reforms, i.e., clarification and demarcation of the responsibilities of the institutions involved; streamlining of financial policies; implementation of a tariff scheme consistent with the cost recovery objective; optimization of investment; selecting appropriate least-cost technologies; addressing environmental and healthconcerns; and implementingan integrated water resource management. (ii) to implementthe agreedupon strategy inthe followingthree phases: Phase I:Execution o f the water and sanitation investment projects for the two cities of Ahwaz and Shiraz (2004-2009) and preparation and initiation o f sector reforms (2004). This includes the preparation drafting o f terms o f reference-TOR and selection of consultants) o f studies and technical assistance(TA) programs covering the following areas: demand management, customer education, institutional reforms, the regulatory framework, tariffs and cost recovery, technology and investment priorities, sanitation strategy and integrated water conservation. A new tariff policy will be drafted duringthis phase with WBI assistance. WBI will also assist inpreparing workshops relatedto institutions and sanitation strategy. Phase 11: Execution o f the water and sanitation investment projects for the four cities of Rasht, Anzali, Sari and Babol (2005-2010), launching o f the studies prepared in phase I,and implementationo fthe new tariff scheme initiated andpreparedinphase 1. Phase 111: Implementation of reforms prepared under the first two phases. Investment projects will thenbeprepared for other new cities under an adaptableprogramloan(APL). 5 3. Sector issuesto be addressed by the project and strategic choices: Issues (a) Poor performance of water supply and on-site wastewater disposal facilities, causing increasing risk for ground and surface water pollution and health and environmental risks resultingfrom the discharge andre-use ofuntreated effluent for irrigation. (b) Limitedtechnical, institutional and financial capacity of WWCs. (c) Lack o f clarity o f institutional responsibilities o f sector entities. (d) Nontransparent andinadequatetariff structures and levels. Inaddressingtheseissuesthe projectwill aimat: (a) increasing coverage of sanitation services in the proposed cities in significant proportions and improving access to quality water supply; (b) improving the financial and operational performance of Ahwaz and Shiraz WWCs; (c) implementing a capacity building component for the WWCs concerned and other sector institutions; and (d) preparingthe reform agenda that will be implementedinphases I1and I11definedinthe strategy. C. Project DescriptionSummary 1. Project components (See Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Long-term development plans have been designed for the extension of water and wastewater system and facilities in Ahwaz and Shiraz over the period 2004-2027. These plans are formulated to serve a population o f about 2.2 and 1.9 million respectively inAhwaz and Shiraz by 2027. They are scheduled to be implementedin four phases and the project under consideration covers works proposed under phase 1 (Refer to the enclosedmap). Areas to be covered will be as follows: InAhwaz: The water component ofthe project aims at improving the quality ofwater andregulating the pressure in the water system. This will be done by rehabilitating the existing water treatment plants and providing additional treatment to ensure adequatewater quality, constructingfive new reservoirs with the required pumping stations, and implementing the necessary transmission lines. Additionally, rehabilitation o f the water network and implementation of 19,000 house connections will take place where needed throughout the project period. Financing o f the house connections will be done from the WWC's ownrevenues. To upgrade and expand the treatment capacity of the water treatment plants No. 1 and 2, dual media filtration, ozonation and activated powder injection systems are proposed to be added. Inlight o f the lack of sufficient local experience with such technologies, a design and build contract whereby services from internationalexperience i s acquired i s beingconsidered. The wastewater component includes the improvement and rehabilitation o f the existing treatment plant in the west o f Ahwaz (Choneibeh) including the construction o f 9 kmpipeline from the treatment plant to the proposed sludge lagoon that will be constructed under the project. Additionally, this component includes the construction of the first two modules of a new treatment plant inthe east o f Ahwaz, and the implementationofthe wastewater collection systemthat are planedto connect 750,000 personsby 2007. 6 In Shiraz: The water component will finance works that will increase supply capacity and regulate the pressure inthe water network. This will be achieved by digging and equipping 17 wells; constructing four reservoirs, the required pumping stations and pressure reducing valves; and laying and extension o f the transmission and distribution system. Rehabilitation o f the water network and implementation o f 22,000 house connections will take place where needed throughout the project period. Financing o f the house connections will be done from the WWC's own revenues. The wastewater component will include works that will extend the collection system in the city, the construction o f the first two modules o f a new wastewater treatment plant and the provision o f outfalls from the treatment plants For the wastewater treatment works o f the first phase in both cities, it i s proposed to apply the design-build-operate approach in order to optimize the design and to ensure proper operation and maintenance o f completed works inthe initial stages o f operation while buildinglocal capacity to runthe treatment plants. Build-operate and transfer-type o f contracts would be considered for the subsequent phases. These contracts will increase the involvement o f international private sector in providing wastewater services, which will ensure sustainable service delivery. The project also includes operation and maintenance equipment and TNtraining/consultant services for institutional development and project management, engineering design and construction supervision, updating o f the wastewater development program and feasibility studies and engineering design for phase 2 investments. ndicative Bank Yo of Component costs Yo of financing -Bank- (US$M) Total (US$M) financing _____ AHWAZ Rehabilitation, improvement and expansion o f water systems 77.06 16.4 39.44 14.1 and facilities Rehabilitation, improvement and expansion o f wastewater 157.4 33.5 92.78 33.2 systems and facilities Provisiono f operation and maintenance equipment and 1.15 0.2 0.92 0.3 consumer water meters for WWCs Technical assistance/consultant services, TSU and training' 17.32 3.7 15.89 5.7 SHIRAZ Rehabilitation, improvement and expansion o f water systems 44.35 9.4 22.30 8.0 and facilities Rehabilitation, improvement and expansion o f wastewater 154.05 32.8 90.61 32.5 systems and facilities Provision o foperation andmaintenance equipment and 1.15 0.2 0.92 0.3 consumer water meters for WWCs Techmcal assistance/consultant services, TSU andtraining 14.54 3.1 13.34 4.8 AHWAZ and SHIRAZ Rehabilitation, improvement and expansion o f water systems 121.41 25.8 61.74 22.1 and facilities Rehabilitation, improvement and expansion o f wastewater 311.46 66.3 183.39 65.7 systems and facilities Provisiono f operation and maintenance equipmentand 2.3 1 0.5 1.84 0.7 consumer water meters for WWCs Technical assistance/consultant services, TSU andtraining 31.86 6.8 29.23 10.5 Total Project Costs 467.03 99.4 276.21 99.0 Front-end fee (1%) 2.79 2.79 Total Financing Required 469.82 100.0 279.00 100.0 7 The proposed Bank loan would be US$279.00 million. No co-financing has been raised only few institutions such as the Islamic Development Bank are active in the sector. The remaining amount o f about US$190.82 million equivalent would then be provided by Government and locally through internal cash generation. Bank financing under interceptors and laterals would, to a large extent, be limited to pipes with a size above 200 mm serving as interceptors. The cost estimates are based on prices o f latest contracts awarded and on current Tehran Stock Exchange (TSE) rate o f 8,400 Rials to one US$, and future exchange rates will be adjusted to local inflation to take place during the years o f project implementation. 2. Key policy and institutionalreformssupportedby the project: The contribution o f the project to reforms will be threefold. First, it sets well-defined financial and operational performance criteria, the main ones being to reach a workmg ratio equal to 0.75 and an UFW ratio below 27% by the end o f the project. Meeting these criteria will require considerable effort interms o f technical, financial and commercial management. Second, it initiates the preparation o f a comprehensive sector reform agenda that would be implemented in future phases (see paragraph B-2). Third, it has an upgrading component (training, TA, equipment and establishment of Technical Support Units(TSU) withinWWCs andNWWEC) aimed at strengthening the overallmanagementcapacity o fthe companies involved. 3. Benefitsandtarget population: The proposed project i s expected to benefit a population o f about 2.4 million people, living in two large cities and representing about 3.5% o f the population o f Iran. While the water systems are well developed and population coverage i s almost total inthe two cities, sewerage coverage i s very l o w and the need to develop adequate sewage systems i s urgent. Only one wastewater treatment plant (WWTP), located in Ahwaz, i s inoperation at the present time and even this plant treats only part o f the generated wastewater and i s inneed o f rehabilitation. Because o f the deleterious effects o f the current state o f living conditions and the environment, the construction o f modem sewage systems is expected to generate significant health and environmental benefits. The implementation o f the project will address the water and sanitation needs o f the populationo f the two cities, a large proportion o f which i s poor. The topographic characters o f the cities in question and the downstream effects o f water and sewage flow are such that the most polluted areas are the ones inhabited by the poorest o f the population. Traditional water-related diseases such as helminthes, hepatitis A, conjunctivitis, s k m diseases, and to a lesser extent typhoid and cholera are quite prevalent. 4. Institutional and implementationarrangements: Sector Organization: Several institutions are involved inthe sector. At the central government level it i s under the responsibility o f the Ministry o f Energy (MOE), with a deputy minister specifically incharge of water and sanitation. At the regional level eleven Water Boards manage and allocate water resources while thirty-three provincial and city WWCs provide supply water and wastewater services. These WWCs are assisted by NWWEC in matters of policy, investment planning, human resources development, and in the establishment of standardized systems and procedures. Finally, the National Economic Council sets tariffpolicy for the whole country, with some differentiation across regions. 8 Implementation Arrangements Project Management Each WWC will be responsible for the management and implementation of its project and for subsequent operation and maintenance of the facilities that will bebuilt.TSUs will be established within each WWC and the NWWEC to strengthen capacity within Govemment institutions. Responsibilities of the TSUs in WWCs will include planningcoordination, monitoring and reportingwhile the TSU inNWWEC will also be incharge of consolidating periodic reports for all implementingagencies.NWWEC will also assistthe WWCs in preparing International Competitive Bidding (ICBs) and large value consultancies. TSUs will report directly to their respective WWCs and NWWEC. Duringnegotiations of the project, agreementhas beenreached onthe TSUs' staffing levels and responsibilities. Project Implementation and Schedule WWCs/TSUs will use local consultants for engineering design and construction supervision for routine works, but would need foreign expertise for complex works such as wastewater treatment works. Final agreementon these arrangementshasbeenreached duringnegotiations. Important packages of the project, estimated at a total amount o f about US$SO million, are at a final design stage and are scheduled for the first year o f the implementation period. MOE and WWCs have agreed to hire consultants to prepare tendering documents to be ready for execution by Bank loan effectiveness. Still a satisfactory implementation o f the Project requires that: (i) WWCs be supported by competent TSUs; and (ii) Management and Planning Organization (MPO) and WWCs provide the counterpart funds on a timelybasis. Project Monitoringand Supervision Fulfillment of the key performance indicators will be monitored along with the execution of the project and TSUs are expected to play a major role inbothmonitoring and supervising the project. Bank supervision will also be needed, which will require significant resources, particularly inthe first two years o f implementation. Inaddition, capacity building will require a major effort. On average, two to three supervision missions per year will be needed with approximately 25 staff weeks for each year, i.e. 125 staffweeks for the whole project implementationperiod. FinancialManagement The Ahwaz and Shiraz Water and Waste Water Companies (WWC) operate as private sector entities and the financial systems inplace are based on the principles and procedures of the trading law o f The Islamic Republic o f Iran. The responsibility for the project implementation will be assigned to the respective WWC and the NWWEC. Each o f these water companies will be assisted by a TSU to follow on the project activities including the preparation of the project accounts and financial statements. The BRD loan will be lent to The Islamic Republic o f Iranwho will channel part ofthe proceeds and make available the counterpart financing, on-budget transfer basis, to the WWCs while the balance of the loan will be channeled inthe form o f liability. The repayment o f the capital and all cost associatedwith the part of the loan, made available as liability, such as commission and commitment fees would be the responsibility of the respective WWC. As per applicable rules the WWCs have to meet certain internal requirements, requested by the Ministry of Finance, prior to receiving this part o f the loan proceeds. The decision to process the funds inthe form of loans or grants will depend on the nature o f the activity financed with all sewerage capital investment to be financed through budget transfers from the central government to the 9 WWCs. The part o f the project made available to the water companies on budget transfers basis will be implemented through the regulations governing the national budget processes. All payments, under this part o f the project, will be subject to the applicable government controls. These controls are appliedby the 1) MPO with mandate to allocate the needed funds, from the loanproceeds and counterpart funds through a framework agreement with the WWCs; 2) the Ministry o f Economic Affairs and Finance (MEAF) who assigns the financial controllers responsible for payments control, co-signing o f checks, keeping accounts o f the spending unit and providing monthly financial reports to the treasury; and 3) the Court o f Accounts (COA) who perfonns post audits to the transactions and payments under this part o fthe project. The flow o f the funds to be channeled on lending basis to the companies will be subject to the policies, procedures and controls inplace at the water companies. These controls have been found to be adequate. Accordingly these procedures and controls being the government and the WWC, plus the engagement o f an external independent auditor, will be used to follow on the overall project funds being the loan proceeds and the counter part financing. While part o f the technical assistant component o fthe project, will be implemented by The NWWEC who operates as a private sector entity and collect fees from the WWC across the country. The two W W C and the NWWEC are equipped with accounting systems that are capable o f generating year-end financial statements. However, it was observed that the accounting systems require enhancement to become capable o f generating timely project reports including the Bank required Financial Monitoring Reports (FMRs). To overcome this limitation in the project reporting the NWWEC, who overview and monitor the operations o f the WWC inthe country, has proposed to open a cost center within the present accounting systems used by the WWCs. This cost center will be configured to report on transactions relating to the project including the source and use o f funds and the activities financed through the project funds. It was agreed that a version o f the system will be configured to reflect this additional cost center prior to end o f June 2004. The services o f a financial officer, to be domiciled within each o f the TSUs, will be required prior to project effectiveness. This officer has to collaborate with the MEAF controller, maintain the project accounts with the help o f the configured accounting system, prepare the project budget and consolidate the accounts for the generation o f the project Financial Monitoring Reports (FMRs). Inorder to institutionalize these tasks the financial officer will prepare, with the assistance of a consultant, a project manual for financial procedures detailing the tasks and procedures for the project including the flow of funds and information between the various units implementing the project. The NWWEC will submit to the Bank, quarterly and within 45 days from the end o f the Iran Hejri calendar quarter, a set of FMRs presented in Englishdetailing the project financial status at each o f the two water companies and the consolidation o f the over all activities. The FMR format was prepared and agreed with the borrower. The Borrower opted to replenish the Special Account (SA) using transaction based disbursement, by means o f Statements of Expenditures (SOEs), usingthe SA for those expenditures below the disbursement letter threshold, and by direct payments accompanied by supporting documentation for the balance. The Project's financial statements will be audited annually by an external independent auditor, acceptable to the Bank, in accordance with intemationally accepted auditing standards. The WWCs will submit the project audit reports and the entity audited financial statements to the Bank not later than six months following the closing o f the fiscal year subject to the audit. The fiscal year inThe Islamic Republic o f Iran follows the Hejri Solar Calendar thus startingon March21, xx andending on March20, xx+l. The project audit Terms of Reference (TOR) will be prepared and submitted for the Bank's n o objection, n o later than nine monthsprior to the end o f each fiscal year. As the different portions o f the loan, depending on the channeling modality, will be subject to different regulations and controls, and to ensure that funds are available for project implementation five U S $ Special accounts will be opened in addition to the accounts for the counter part financing. Each water company will open two U S $ Special Accounts and will follow on the project withdrawal applications 10 and direct payment requests relating to its activities. While the NWWEC will manage the fifth $ SA whichwill be usedto finance the TA activities with scope to cover the two WWCs. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Rationale for Selecting the Cities The two cities have been selected for eligibility under the proposedproject from a list o fprioritizedurban areas included in the five-year development plan. This selection i s based on the criteria of existing environmental conditions, including important environmental externalities going beyond the city's geographical boundaries, sewerage conditions and threat to health, existing social conditions, and progress inproject preparation. The degree o f pollution or pollution threat is the main selection criterion. InAhwaz the main source ofwater, the Karoon River,is highlypollutedby wastewater discharges.This river, whichi s the largest inIran, is also the source ofwater for other important cities located downstream of Ahwaz. The city o f Shiraz, which has a rich cultural heritage and a great tourism potential, has a weak wastewater collection system and no treatment facilities. Alternatives Considered Altematives analyzed are of strategic and technical nature: (i) Strategic: Public utilities versus private sector approach: Currently, neither the local legal and institutional environment nor the internationalconditions are favorable for thejump-start into advanced forms of private sector involvement such as build-operate-transfer (BOTS) or concessions. Deep reforms have yet to be implementedin many areas: procurement regulations, foreign exchange regulations, banlung (there are currently only public banks), foreign participation, labor regulations, etc. Lifting constraints and creating an enabling environment for the development of the private sector i s an important objective for Iran in general, regardless of what takes place inthe water sector. The fulfillment of this objective takes a macroeconomic and institutional dimensionthat goes beyond the water sector. Some of these reforms may be fostered through this project but most o f them require important structural horizontal actions rather than sector-specific actions. Discussions about other arrangements such as service or management contracts are also premature before a proper enabling environment is put in place, the legal framework i s overhauled and the reforms listed above, particularly in the area o f pricing, are implemented. (ii) Technical: Inthe course o f the preparation of the development program, different alternatives were evaluated with respect to the number and location of treatment works, on-site sanitation, alignments for the trunk main systems, method o f pipe-laying, pipe materials, and phasing for programimplementation. The option o f on-site sanitation was found unfeasible in Ahwaz and Shiraz due to high water tables. The borrower expressedthe concern of polluting the water tables in case of improper construction of on-site sanitation. Furthermore, the government has already invested significant resources in the upgrading and expansion or in the construction o f treatment plants (Choneibeh inAhwaz, Emergency Zone inShiraz). Finally, various parts o f the trunkmains are beingimplementedwith local financing. For the wastewater treatment works alternative treatment processes; activated sludge, oxidation ditches, oxidation ponds and aeratedlagoons, and site locations were evaluated with the activated sludge method proved to be the least cost solution. The comparison 11 between the different altematives took into account investment, long-term operation and maintenance costs as well as evaporation and seepage costs. Under the project all treatment plants will be tendered as a design-build-operate (DBO) contract, consequently the final treatment process will be agreed upon through bidding. (c) Various options have also been analyzed on the handling o f sludge, which will be treated sufficiently to ensure its use for soil conditioning; and (d) For the wastewater treatment works considerations have also been given to conventional financing versus a DBO contract. For phase 1, it was also proposed to apply the DBO approach in order to optimize the design and to ensure proper operation and maintenance o f completed works. 2. Major related projects financed by the Bank and/or other development agencies (completed, on- going and planned) Sector Issue Project I Latest Supervision (PSR) Ratings Implementation Development Progress (IP) Objective (DO) Bank-financed COMPLETED - Improved flood protection for Tehran Drainage Project human life, property and infrastructure; - Improved floodprotectionfor Sistan FloodProject human life and agricultural areas. - Reconstructionandrehabilitationof Earthquake Recovery infrastructure Project ONGOING - Improved sanitary and Tehran Sewerage Project S S environmental conditions Other development agencies NIA 3. Lessons learned and reflected inthe project design: The lessons learned from the Tehran Sewerage Project will be incorporated inthe design o f this project. The experience with this project highlights the need to: (i) establish strong project management capacity through locating TSUs within Government entities and WWCs rather than outside and to retain institutional capacity within government institutions; (ii) plan and finance the necessary household connections to the water distribution and wastewater collection networks; (iii) familiarize the Borrower's staff withBank requirements, including those relatedto safeguards; (iv) have an appropriate tariff scheme to ensure the financial viability o f the WWCs; and (v) consider a selective use o f the private sector. 4. Indications of borrower commitment and ownership: Borrower commitment and ownership are reflected through (i) Government giving high priority to the sector, particularly to wastewater in its long-term planning and its request to the Bank for continued support to the sector; (ii) MOE financing from its own budget the background studies and its willingness to pay (WTP) for detailed engineering and preparation of tenders for this project; (iii) WWCs taking initiatives to respond quickly to the Bank's requirements and formally agreeing on the proposed strategy inthe sector and future collaborationwith the Bank; and (iv) willingness of Government to fund urgent 12 operations (construction o f network, wastewater treatment plants, etc.) in many cities, including the ones being considered inthis project, prior to the proposedproject implementation. 5. Value added of Banksupport in this project: The value added o f Bank support would mainly include: (i) addressing a long standing problem, i.e. lack o f wastewater collection systems within an appropriate policy and financial framework; (ii) assisting the Government inthe preparation o f sector reforms; (iii) introducing key financial and operational indicators that would improve the efficiency of the WWCs; (iv) providing foreign exchange that i s essential for the purchase o f mechanical and electrical equipment for water and wastewater treatment works; (v) raising the level of awareness and attention to environmental, health and social issues; and (vi) fostering competition through the involvement o f international contractors for major civil works contracts and equipment. E. Summary Project Analysis (Detailed assessmentsare inthe project file, see Annex 8) (limit to 2 to 3 pages withone table) 1. Economic (see Annex 4): 0 Costbenefit NPV=US$million; ERR=% (see Annex 4) 0 Cost effectiveness 0 Other (specify) The benefits expected under the project from the provision o f modem sewerage systems are better health for the targeted population, protection o f the limitedwater resources, provision o f an alternative source o f water for irrigation and reduction inthe cost o f environmental degradation. The main health effect would be a significant reduction inwater-borne diseases, mainly indiarrhea and dysentery. These diseases result invarious economic costs - workdays missed for adults and schooldays missedfor youngsters duringthe sickness period, the cost o f medication and eventually o f hospitalization. In addition, there will be a significant improvement in the living conditions o f targeted population. The water component will provide safe and affordable drinkable water to the expanding populationinthe two cities. Water in Shiraz: The population o f Shiraz, which i s estimated at about 1.2 million inhabitants in 2003, enjoys almost total coverage by the water supply network. Plannedinvestment is therefore needed to meet the needs o f future additional population as well as to rehabilitate parts o f the existing network. Since water demand i s projected over a longer horizon (beyond 2027), this appraisal assumes that other investments will be carried out at least up to that year. In the hypothetical situation o f no project households and other users would have to find alternative means o f meeting their needs, essentially by purchasing water from water vendors at highprices and by investment in storage capacity. The avoidance o f such cost i s the main benefit o f the project. Secondly, given the advantage o f house connection over buyingand storing water and the huge difference in cost, the project will allow households to consume a larger volume o f water than under the alternative, which will increase their welfare (their consumer surplus). Thirdly, the Shiraz WWC provides water in much better hygienic conditions than water vendors, which reduces healthhazards. All these benefits will rise in the future as populationincreases. Even ifbenefits are limited to the first component, i.e. the cost o f water in the absence of the project, the investment i s largely justified, yielding an IRR higher than 40% (Annex 4). Sensitivity analysis shows that IRR remains high, at about 25%, even if benefits are cut by as much as 20% and cost raised inthe same proportion as compared to the base scenario. The cost o f water under altemative means of supply i s 13 estimated at about one U S dollar per cum against less than ten cents only for pipe water. Taking into account the other two types o fbenefits will result inan even higher economic return. Water in Ahwaz: Like Shiraz, the population o f Ahwaz, which reached over 1.1 inhabitants in 2003, is fully covered by the water distribution network, but capacity needs to be expanded in treatment and storage, as well as in the transmission and distribution network in order to meet the future needs o f a fast growing population. Economic benefits are similar to those for Shiraz water project Once again, even ifbenefits are limited to the avoidance o f the cost o f water under the alternative to the project, the estimated economic IRR i s found to be very high, equal to 32% inthe base case and remaining close to 20% even under unfavorable assumptions concerning costs and benefits. For Ahwaz, the alternative to meet water demand, which will be in this case much lower than under the project, i s through the purchase o f bottled water, which i s partially used during summer time, and more likely through the purchase o f bulk water from water vendors. This alternative supply i s very costly, estimated at about US$ 1per m3. Wastewater in Shiraz: Three types o f benefits are separately assessed: avoidance o f the cost of alternative methods o f sewage discharge if the project i s not undertaken, health benefits and finally the increase inagricultural value-added that would result from the use o f treated wastewater inirrigation. Under conservative assumptions concerning the healthbenefits the IRRi s close to 20%. The mainbenefit o f the project i s saving the cost of absorption wells as an alternative to discharge wastewater, which accounts for more than 80% of total economic benefits over the period 2004-2027. Health benefits are underestimated if they are based only on the illness cases reported to Shiraz public health services. There are many other cases that are not reported to these services, those that are handled by private hospitals or clinics or by referring to pharmacies. According to the socio-economic survey carried out in preparation for the Project, about 7.5% o f households had at least one case o f diarrhea duringthe two weeks preceding the surveys. Based on this information and on conservative assumptions concerning the effects o f improper discharge o f wastewater on health, health benefits are estimated to be much larger than what the official data imply and IRR rises to over 40%. The latter still exceeds 15% even ifbenefits or cost are respectively lower and higher than inthe base scenario (Annex 4). Wastewater inAhwaz: Benefits are assessedaccording to the same method as for Shiraz, relying on the same three types o f economic benefits. Inthe case of Ahwaz, there maybe anadditionalfourthbenefit, a less polluted environment inand along the Karoon River, which would stimulate and improve the quality o frecreational activities inthe city. Once again it i s believed that official health data underestimate the real extent o f water-borne diseases. The socio-economic survey for Ahwaz gives about the same ratio for the incidence o f diarrhea among the population as in Shiraz, which is much higher than the implied official ratio. Based on survey results the IRRis estimated inthe base scenario at about 8.5% (5.7% basedonHealthDepartment data). Itdeclines to less than 5% if cost or benefits change unfavorably by 20%. The saving o f the cost o f discharge to absorption wells accounts for a large proportion o f the project benefits. These values are much lower than for water. Still they are acceptable, especially when considering that the project will generate other benefits that are difficult to measure, the main one being the significant improvement inthe environment and inthe quality o f life, starting with immediate surroundings. 14 Tariff Policy: The current system comprises connection rights, subscription fees and water consumption tariffs in addition to the house connection fees, which are directly bome by the customer. All these components are set and revisedon a periodic basis by the National Economic Council. Connection rights for water are currently based on dwelling size and a city adjustment coefficient, which depends on several factors the most important o f which are the cost o f water supply and population density. Average connection fees are about US$310 for the whole country and the minimum fee is approximately equal to US$l50. Ahwaz fee is estimated at about US$280 in2003. With a few exceptions, the connection fee for wastewater i s the same as that for water. These fees have been regularly increased inthe last five years, at the rate of 10% annually inall these years withthe exception o fthe year 2000 in which the fee was increased by 15%. In addition to connection fees, the WWCs charge the customer the fullcost for houseconnection. Regarding water consumption, the current system is based on a fixed fee that depends only on the size o f the connection pipe and on the type o f customer (household or other types), and on a volumetric charge basedon increasing block-tariffs. The fixed fee, or the subscription fee, i s about 2,000 Rials (25 U S cents) for most domestic customers while the structure o f variable tariffs i s based on a complex formula. The formula is the same for all WWCs and there i s no volumetric charge ifconsumptionfalls below 5 cumper month. Above this minimum, prices increase with the level o f consumption and generally vary across companies. The average volumetric tariff for the country stood at about 6 U S cents in 2002 and it varied from 2 cents for monthly consumption below 20 cum, to about 4.5 cents and 12.5 cents respectively for 20-40 and for more than 40 cum o f monthly consumption (Annex 4). Tariffs and water bills are low even ifwhen relatedto income and they are extremely l o w by comparison withtariffs practicedinrecent years inother countries with similarand even lower per capita income than Iran, Tariffs inJordan, Tunisia and Yemen, for instance, are between five and fifteen times higher than in Tehran and several times higher than the average tariffinall o f Iran(Annex 4). New measures introduced in the system have given conflicting signals as to the direction the tariff structure is taking. On the one hand tariffs have been raised in greater proportions for higher than for lower consumption brackets. In addition to the regular increases, the Council introduced since 2001 a penalty or surcharge for consumption exceeding a certain volume varying across cities in the range o f 18 to 25 cum per month (24 cum for Ahwaz and 20 cum for Shiraz). This penalty was set for the year 2002 at 100% o f the tariff given by the formula for consumption above the cut-off volume. It has been raisedto 150% in 2003 and i s expected to be further increased to 200% in 2004. These changes are thus widening the tariff gap between low and highconsumption brackets. On the other hand the decision has been taken to set lower bound and upper bounds for tariffs, defined with respect to average cost. In2002 the lower bound was set at one fourth of average cost and the upper bound at three times the average cost. This adjustment explains the significant increase inthe average tariff for the low consumption category o f 0 to 20 cum per month between the years 2001 and 2002. These changes reduce tariff differences between consumptionbrackets and therefore work inthe opposite direction o f the first measures o ftariff increases. Moreover, and in spite of these increases, revenues from water sales, and from wastewater when applicable, do not cover operation and maintenance cost in most cases. The worlung ratio for Ahwaz WWC is estimated at 96% and 90% respectivelyfor the budgetyears 2001-2002 and2002-2003 while for Shiraz it has been estimated at 107% and 92% for the same years. These ratios are currently significantly above the ratio o f 75% targeted for the end o fthe project period. The rate structure i s needlessly complex for both volumetric rates and connection fees. Volumetric tariffs are based on complex formulas that differ across consumption brackets and WWCs. Because of this complexity the tariff structure lacks transparency. Moreover, the structure is such that rates increase by more than threefold when consumptionrises from 20 cum or less to slightly higher volumes. This sharp 15 change may not be an issue under the existing system inwhich tariffs are generally low but deserves to be reviewed under a new framework in which tariffs would be based on costs and rebalanced between consumption brackets. Regarding sewage bills they are currently levied and collected only in city neighborhoods where a network exists and are based on water bills (70%). Since these services have been very limited, or practically non-existent, the need has not yet been felt by the WWCs to properly assess the costs involved. As these services develop costs should be assessed separately from water so as to evaluate the appropriateness o f the existing tariff structure. All these shortcomings point to the need for a consistent and comprehensive tariff reform. Aware o f this need, the Government has appointed a working group to that effect. According to members o f this group, the proposed reform will be in line with the objectives set in the draft Fourth Development Plan (2005-2009), which are simple and transparent tariff structures and full cost recovery for water supply and wastewater services. Since most urban households are already connected to the water network and only a few are connected to a sewerage network that i s yet to be constructed in most cases, the issues o f willingness to pay and affordability o f connection rights may arise. Inorder to ease the burden the government has facilitated household access to bank credit for this purpose. For water consumption, a guiding objective i s to gradually narrow the blockrate spread, which i s too wide under the existing system, to move ultimately to a unique cost-based tariff system and to provide income subsidies to the poor. This implies that the tariff reform, along with significant improvements inproductivity and in the management o f these companies, should aim at reducing this ratio towards the 75% target. The principles stated inthe Fourth Development Plan are sound and point in the right direction o f an efficiency based tariff policy. Guided by these principles, a comprehensive and consistent reform should replace the inconsistent piecemeal approach o f recent years. A workshop on comprehensive tariffreforms i s scheduled under the Project, to be organized jointly with WE31and with a follow-up on recommendations. 2. Financial(see Annex 4 and Annex 5): NFV=US$ million; FRR=% ) The project will generate financial benefits to the Ahwaz and Shiraz WWCs from several sources, including: increased water sales and disposal o f wastewater made possibly through the investments undertaken under the project; income from connection fees made possible from the new water and wastewater connections due to the project and the increased tariff that will be implemented in order to meet financial performance targets agreed to between the Government o f Iran and the World Bank. The analysis has been conducted in current terms based on net cash flows generated by the project over a 25- year period. The analysis shows that the financial rate o f return (FRR) for Ahwaz would be 13.3% and 10.2% for Shiraz both o f which are above the 10% assumed cost o f capital. Detailed analysis i s presented under Annex 5. 16 FinancialCost-Benefit Analysis (US$ million) Ahwaz Shiraz Financialcosts 265.9 238.6 Investment 207.7 199.5 Increasedsalary and utilitycosts 39.5 24.4 Increasedmaintenance costs 18.7 14.7 FinancialAssessment ofthe Water andWastewater Companies(WWCs): A detailed analysis has been carried out for the Ahwaz and Shiraz WWCs dealing with the past, current and future financial performance of the WWCs. The detailed analysis i s presented in Annex 5 whereas the section below summarizes the financial situation o f the WWCs and the implications of the proposed project ontheir likely future financial performance. Past and current performance of the Wastewater Comuanies: Both the Ahwaz and Shiraz WWCs have been incurring significant net losses in the past which are projected to continue in the year ending March 20, 2004. While both companies have achieved working ratios (operating expenses/operating revenue) below 1inthe past, insufficient past spending on maintenance resulted in underestimation of the working ratios achieved. Maintenance spending as a percentageof gross fixed assets was as low as 0.29% in2002/03 inShiraz and 1.5% on average inAhwaz. The industrystandardcalls for 2.5%-3%. The financial performance of the companies i s further aggravated by high water losses resulting in a much larger need for water to pass through the system than i s billed for. Water losses were as high as 45% in 1999/00 and have come down to about 37.7% in 2002103 in Ahwaz and have averaged about 30% inthe past in Shiraz. Of the water that passes through the system, only about 73% was paid for in terms o f collections in2002/03 inAhwaz. The collection performance has remained the same in2003/04 at about 74%. Nonetheless, at the end of 2002/03, the accumulated accounts receivables equaled 12 months o f billings. In Shiraz, collection performance has been very good inthe past but i s estimated to have deteriorated in 2003/04 possibly as an effect of increased tariff in 2002/03. The good collection performance of the past has resulted in relatively manageable accounts receivables, which reached 5.6 months at the endof2002/03. Future Financial Performance of the WWCs: Projections to assess the future financial position and performance o f the WWCs have been carried out for the period 200415-2013/14. The project financial analysis presented above was estimated over the project's 25 year expected lifetime. The key assumptions for the projections are presented in Annex 5. Detailed assumptions are recorded in the project files. 17 The projections for the future financial performance have been anchored by the financial targets agreed between the Government o f Iran and the World Bank during their sector strategy discussions in September 2003. These targets comprise the following: Working ratio o f 0.75 by the financial year 2008/09 (operating expenses excluding depreciation and interedoperating revenue. Labor productivity reaching 3 by project completion (expressed as number o f staff per 1,000 water connections). Accounts receivables reduced to 4 months by 2008/09. 0 Unaccounted for water to reach27% by 2008/09. The targets aim to gradually improve the financial and operational performance o f the WWCs by achieving cost recovery o f O&M, and part o f capital investment. Meeting these targets will require increases in the water and sanitation tariff, but will also depend on simultaneous improvements in collection performance and a significant reduction in water losses. The main targets will be covenanted inthe loan agreements, particularly the worlung ratio, collection ratio and UFW. The analysis assumes that the cost i s govemed by a Bank loan to the company. The Government i s assumed to cover in grant form the cost o f water components not covered by the Bank loan or connections fees as well as the cost o f the wastewater components not covered by connection fees. Likelv Future Financial Performance o f Ahwaz: As illustrated in Annex 5, meeting the targets under the agreed financing arrangements will require a significant tariff increase o f 84% in 2004/05. After this year it would fall to about 32% and then lie around 15% during the rest o f the project implementation period. The average tariff increase between 2004/05 and 2008/09 would be about 32%. However, a net deficit would be incurred to the WWC because what remains from the revenues once operating expenses are covered i s still insufficient to cover depreciation and financial charges. The net accumulated deficit would amount to US$7.9 over the period 2004/05-2013/14. As a second scenario, the tariff increase required to achieve full cost recovery, has also been analyzed, which shows that the tariff increase would initially (in 2004/05) need to be much larger at loo%, but the average tariff increase during the project implementation period would practically be the same, 33%. A key prerequisite for both scenarios, however, i s that an aggressive action plan on improving collections is implemented which includes the writing-off o f accounts receivables that are deemed unlikely to be collected. Annex 5 presents a breakdownof each company's accounts receivables and the assumptions deployedto achieve the target o f accounts receivables not exceeding 4 months by 2008/09. Similar effort should be made on reducing water losses. UFW i s high, particularly for Ahwaz. Likelv Future Financial Performance o f Shiraz WWC: As illustrated in Annex 5, the tariff increases required differ significantly inthe base and second scenario. Inthe base scenario - which targets the tariff increase required to meet the worlung ratio target o f 0.75 by 2008/09 -the tariff increase i s very significant inthe year 2004/05, about 70% andwould be greatly reducedthe year thereafter to about 23%. The average tariff increase between 2004/05 and 2008109 would be about 34%. A net deficit of US$10.4 million would be incurred due to what remains from the revenues once operating expenses are covered i s still insufficient to cover depreciation and financial charges. As in the case o f Ahwaz, the impact on the required tariff increase differs significantly when seeking full cost recovery. Inthis case, the required tariff increase in2004/05 would be 88% and the average increase would be 36%. However, an important issue i s that in the base scenario, Shiraz would have to work hard to improve its performance beyond meeting the financial targets agreed to in order to avoid negative cash flow inthe years 2004-2008. The cash flow position would be much better under the scenario where tariffs are increased for full cost- recovery. The cash flow issues above-mentioned can also be positively affected by improving efficiently o f operations and by reducingUFW to less than agreed upontarget o f 27% by end o fproject. 18 3. Technical: The project i s technically sound as investments under the project were selected based on a comprehensive water and wastewater development plan o f the Ahwaz and Shiraz. During the preparation o f these plans, different technical alternatives were analyzed and the most feasible one was selected. The feasibility criteria took into account technical, economical, environmental, health, and social factors o f each alternative. Inboth cities, phasing o f works i s planned in a way to optimize the operation o f the water system by dividing the project area into pressure zones, reducing as a result pumping costs. For wastewater, surveys o f wastewater characteristics were carried out and most suitable treatment process (activated sludge) was selected for the two cities. To achieve the project objectives however, the implementation capacity o fAhwaz and Shiraz water andwastewater companies should be raised. The rate o f connections and implementation o f the secondary network i s key to ensure proper operation o f the treatment plants (proposed and the ones under construction). 4. Institutional: 4.1 Executingagencies: Two main executing agencies will implement this project: Ahwaz and Shiraz Water and Wastewater Companies. The NWWEC and the Department o f Environment (DOE) will also be involved. 4.2 Projectmanagement: The WWCs, assisted by their TSUs, will plan and manage their project components. They will supervise construction works, consultants and O&M. They will be in charge o f all procurement issues and will be supported by the NWWEC in procurement using ICBs and large consultancies. The NWWEC will consolidate periodic reports, and would prepare with the support o f consultants all ICBs related to the project. DOEwill be responsible for its component, which is mainly capacity buildingo f the enforcement role o f the regional departments o f environment. TORSwill be prepared for key TSU staff. 4.3 Procurement issues: Lessons learned from past and ongoing Bank-financed projects in Iran show difficulties when applying fiduciary requirements for these projects. There are several procedures and practices under the current procurement framework in Iran that do not fully conform with the Bank procurement practices. Among these difficulties i s the approach for recruiting consultants including, restrictions regarding hiring international consultants, restrictions on participation o f foreign bidders, restrictions on invitations to bidding to the list of qualified contactors by MPO, absence o f clear evaluation criteria in bidding documents etc. The most important impediment for procurement under Bank projects i s the non-adherence to Loan Agreements. Some institutions that are involved inimplementation do not acknowledge the precedence o f procurement arrangements stated inloan agreements over national procedures. Some discrepancies exist between the Bank Guidelines and procedures and some o f the national procedures. Whde procurement under ICB can be conducted according to the Bank Guidelines with some constraints, the situation i s more difficult when it comes to the selection o f consultants and national competitive bidding. The followingtwo agreements havebeenreachedwith the government for loan effectiveness: (i) Agreement onthe applicabilityoftheBankGuidelinesfor the selection andemploymentof consultants and procurement under ICB. This will be ensured by providing a one-year, renewable exemption for all procurement packages under the project, which will be carried in accordance with the loan agreement (the list of these packages are provided inAnnex 14). This will be later replacedby the framework agreement that the Government and the Bank are currently working on to address all fiduciary issues for Bank financed projects; and 19 (ii) Agreement on National Competitive Bidding (NCB) procedures that will be acceptable to the Bank. This should include the development o f an N C B document that will be acceptable to the Bank. This can either be based on a modified national document or a modified version o f the Standard BiddingDocuments (SBD) of the Bank. The second main issue i s the limited capacity in the WWCs to conduct procurement according to the Bank Guidelines. The current capacity for these companies is limited to conducting local and national level procurement and mainly for works and recruitment o f design and supervision engineering firms. Weak knowledge of Englishlanguage i s also a serious constraint. The capacity o f the WWCs should be enhanced by recruiting competent procurement officers for concerned WWCs, and at NWWEC. These officers will have the task o f ensuring that Bank procedures are followed during the different phases o f the procurement cycle. It i s essential that procurement officers be recruited by July 2004 in order to familiarize themselves with the project and the Bank procedures. Upon recruitment, intensive training on the Bank procurement procedures should be carried. The project will be implemented inthe two WWCs. The majority o f the procurement packages shouldbe launched during the first two years. To prepare for the project and ensure that the first year bidding packages will be ready by loan effectiveness, the WWCs should recruit consultants to commence the design and preparation o f biddingdocuments activities for the different works. A critical sub-component i s the procurement process for the design and construction o f Waste Water Treatment Plants. Takmg into consideration the required periods for recruiting a consultant to carry out the assignment for the design and supervision, pre-qualification o f contractors, tendering and award o f contracts and the construction phase; this sub-component i s already on a tight schedule and the process for long listing of consultants for the design and supervision should be launchedby June 2004. 4.4 FinancialManagement issues: The discussions with the government revealed that part o f the loan proceeds will be channeled to the WWCs inthe form o fbudget transfers while the balance will be transferred inthe form o f liability where the repayment o f the capital and all cost associated with the interest and commitment fees would be the responsibility o f the WWC. These additional costs will have impact on the financial status o f the WWCs. While the funds channeled in the form o f budget transfers, and the counter part financing for part o f the funds channeled inthe form of liability can only be disbursed after the budget lines are opened withinthe government budget and a framework agreement detailing the activities to be financed i s signed between the MPO and each o f the WWCs. To mitigate the risk o f the WWCs not being able to make available part o f the project counterpart funds, the support o f the MPO is required through committing to provide these funds, to the water companies. This can be achieved through the framework agreements to be signed with the WWCs. Also, the Bank will assist the WWC and the NWWEC to achieve the objectives of the project financial arrangements through the launch o f workshops and initial intense supervision. (Financial management arrangements are detailed inAnnex 6). 5. Environmental: Environmental Category: A (FullAssessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The proposed project i s an environmental and social improvement operation. It has been classified as Category "A" because o f the extension o f water treatment plants, the construction of wastewater 20 treatment plants, the re-use of sludge and treated effluent, the potential impact from the discharge of industrial effluents, and the presence of archeological sites inthe city of Shiraz. Environmental assessment (EA) studies including environmental management plans (EMP) were prepared for the two cities incompliance with the requirements of the Islamic Republic of Iran as well as the World Bank Procedures, including Operational Policy OP 4.01 "Environmental Assessment" and Operational Policy Note OPN 11.03 "Cultural Heritage". The reports covered three major areas: (i) Project description, legal and regulatory framework, and baseline conditions; (ii) Analysis of impacts and design alternatives; and (iii)EnvironmentalManagement Plan. The EA indicated that the execution of the project will have positive impacts in terms of reducing pollution of natural resources, will generate significant economical, social and public healthbenefits, and will enablethe government to enforce existing environmental regulations and standards. Major environmental issues are: (i) risk of poor performance of water treatment facilities that would lead to insufficient water quantity of inadequate quality if the water supply system i s not properly maintained and monitored; (ii)possible discharge of toxicharmful industrial substances into the wastewater collectionnetwork becauseof lack of enforcement on the provision o fthe requiredpre-treatment; and (iii) use of treated effluent for irrigation and of treated sludge for soil conditioning could, in case o f any adverse diversions intreatment quality, cause a healththreat to people. Other issues are mainly related to inconvenience to be experienced duringconstruction such as disruption o f traffic pattem, disruptedaccess to residential or/and other buildings, change in the landscape (loss of vegetation), noise nuisance, air pollution due to dust formation, safety hazard from construction activities and inappropriate disposal of excavated materials and construction debris. Mitigationmeasuresto ensurethat potential adverse environmental impacts are minimizedwere identified and include: Routine maintenance of the water supply system and regular monitoring o f water quality includingwater sources, treatment plants andreservoirs; Connections will be provided only to industries that pre-treat their effluents to levels which comply with the World Bank Environmental Guidelines mentioned in the "Pollution Prevention and Abatement Handbook"; Restricting the use of treated effluents for irrigation in case World Health Organization (WHO) Guidelinescannot bemet; 0 Drying o f sludge for one year, before its use as soil conditioner, to ensure elimination of nematode eggs; Construction activities will be coordinated with all concerned authorities prior to the start of the construction works. Inaddition GoodPractice EnvironmentalProcedures will be adopted. 5.2 What are the main features o f the EMPand are they adequate? The EMP covers all components funded by the project as well as existing water supply sources and wastewater treatment facilities including any facilities that are under construction. The plan outlines the measures incorporated in the design, construction and operation o f the project to mitigate potential environmental impacts. It also includes a monitoringprogram, institutional arrangement for implementing the various tasks as well as capacity buildingand technical assistancefor key stakeholders involved inthe 21 project. The cost of implementing the EMP was estimated and appropriate budgetary allocations were provided as part of the project cost. 5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: January 2004. EA reports have been made available at the Info Shop and a number o f locations in Iran including: Department o f Environment, Ministry o fEnergy, and WWCs. 5.4 H o w have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted? At the initiation of the project, technical, financial, environmental and social issues associated with the project were discussed in meetings attended by consultants, representatives o f City Councils, Municipalities, WWCs and various other stakeholders. Further consultations were held during project preparation to facilitate stakeholder involvement and awareness at all levels o f project implementation and to ensure that information required for decision-malung i s available to all interested parties. TORSfor the EA studies were developed and shared with key stakeholders in scoping meetings, which were held on April 2002. In addition the Bank team provided a one-day training on August 2002 regardingthe Bank's safeguardpolicies. The EA process included public consultations, which were carried out at various stages. Consultations involved line ministries, city authorities, provincial DOE, WWCs, local communities, NGOs and the public. This process was complemented by additional consultations undertaken in preparation o f the Resettlement Action Plan (RAP) and the Social Assessment (SA). The EA executive summaries in EnglishandFarsi were distributedto all concerned stakeholders. A public hearingwas held inAhwaz on October 28", 2003 and in Shiraz on January 4*, 2004. The public hearings were attended by a large number o f people including representatives o f most ministries, Governors, MPs, local communities, NGOs, contractors, consultants, university professors andmedias. The public didnot have any restriction on the implementation of the project, on the contrary all presents welcomed the project, requested its initiation the soonest possible and asked for additionalactivities to solve pollution problems. 5.5 What mechanisms have been establishedto monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives andresults o f the EMP? The EMP includes monitoring activities to be conducted during construction and operation. Responsibilities for daily monitoring o f construction activities and compliance with the EMP will be part o f the construction supervision activities. Monitoring o f environmental impacts duringoperation will be undertaken by the operators o f the facilities, who will be supervised by the WWCs. An intemational consultant will assist the environment and safety officer at the TSUs in implementing and monitoring the EMP activities. The Bank will receive regular reports from the WWCs on the progress o f the project including the status of EMP. Moreover, a Bank environmental specialist will participate at the supervision missions. In addition, provisions have been made for the recruitment o f an intemational specialist to monitor the project in the mid term review and the Implementation Completion Report (ICR). The adopted indicators reflect the objectives o f the EMP and provide a basis for improved project results. Moreover, the project provides clear monitoring indicators (Annex 13) to be used for monitoring and evaluation purposes duringproject supervision. 22 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. A Social AssessmenWillingness To Pay survey was conducted and a summary is shown in Annex 4. This section draws on its findings. Quality of life for the poor and vulnerable. The central social concern o f this project is meeting a basic need of resident populations in Ahwaz and Shiraz for inadequate water and sanitation system with adverse impact on their health and immediate environment. Although water supply coverage i s high, sanitation i s desperately poor, particularly inunplanned and informal settlements, which are substantial in both cities. Individual infiltration sewerage systems are common: when found combination with a deteriorated potable water infrastructure, dnnking water i s contaminated by untreated sewage. In poor areas and informal settlements, open drains and collection o f stagnant pools o f wastewater are common. During summer or when it rains these create an unpleasant and unhealthy environment characterized by odor, flies and polluted stagnant water. Poor children are particularly exposed, and pedestrian communication is difficult and unpleasant. Vendors sometimes wash vegetables and other food items in water from open drains, and untreated effluent ends up being used for irrigating food crops in nearby agncultural areas, thus bringingdirect, risking bothpublic health and the wider natural environment. Serious public health hazards are a particular risk for poor and vulnerable people inhistoric city centers and informal settlements, and put at risk the entire city population. During field visits, discussions with poor families revealed the highhealth care costs to families caused by water-borne diseases, particularly inthe summer. A major positive long-termoutcome ofthe projectparticularly for the very poor, wouldbe a more livable and healthy environment, a greater sense o f dignity and quality o f life, better health, and reducedhealth care costs. Poor tenants are particularly vulnerable, because increased property values and increased water and sewerage rates will be reflected in higher rents, possibly resulting in evictions o f the poorest tenants and their replacement Protection measures such as rent caps may be required and are discussed below, and city councils and community organizations have a significantrole to play. Although people are aware o f issues in general, there i s a need to influence current knowledge and attitudes. Expectations that government provides subsidies and free services will need to be moderated by increased awareness o f the need for individual cost-sharing. By including stakeholders in the project implementationphase, such concerns will be addressed. (See also 6.3 below). 6.2 Participatory Approach: H o w are key stakeholdersparticipating inthe project? During project preparation, meetings were conducted in Ahwaz and Shiraz to discuss the technical, financial, environmental and social issues associated with the project. These meetings were attended by the WWCs, the design consultants, members o f the City Councils, Municipalities, WWCs and various other stakeholders. The EMP public workshop discussions (attended by a Bank staff member inthe case o f Ahwaz) were well conducted, informative, and well attended by officials and members o f the public, men and women. NGOs and CBOs have already been involved, and the project is creating a space in which newly elected councils (comprising in many cases active and committed citizens), individual, citizens and the WWCs can enhance participation. For Shiraz and Ahwaz, both o f which are considerably larger cities with populations o f around 1million, mechanisms for local consultations and participation seem to be limited primarily to the Friday prayers, 23 and.local neighborhood councils have yet to be established, but elected city councils will be closely involvedinthe project. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? The project has already involved NGOs and CBOs. There have been close consultations with local stakeholders that included the municipalities, members of regional authorities, local councils and residents on the street. Public consultation meetings took place inrespect o fthe environmental assessment that included active NGOs inAhwaz and Shiraz. Other civil society organizations will play an important role inthe public communications aspect o f the project. Willingness to pay for sewerage services will not come through top-down communication from officials, but from an accurate family level appreciation of benefits and costs. A participatory action research approach i s requiredinorder for community members to work out and understand the costs and benefits of the project to them. The local health services (centers, clinics and posts) would organize workshops inwhich the costs o f the burdenof disease arising from waterborne pollutioncanbe calculated at the family level: burden of disease on children and their development, costs of medical care, medication, treatment, transportation, hospitalization and time lost, plus workmg hours lost through the illness of a working individual or for care of a dependant. Anticipated savings from reduced burden of disease can be related to the costs o f connection and services. This awareness can then be disseminated through community and neighborhood groups: neighborhood cooperatives, social and religious groups and adult learning, and local opinion leaders. Community-based awareness raising and information dissemination i s far more effective inIran than official communications. Public education and awareness campaigns will also be undertakenby local NGO's experienced indealing with water and sanitation issues incoordinationwiththe WWCs andlocalcity councils. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Social development outcomes will be insured by: (i) the creation o f city-wide andor local neighborhood committees that will be established inthe preparation phase o f the project (see 6.2), and whose role will be to coordinate and mediate between residents, WWCs and other concerned institutions; (ii) instating public education andawarenesscampaigns that will also target gender differences inthe use of water and sanitation services; (iii)the implementation of an equitable standard tariff against consumption that also considers the ability to pay of different income groups; and (iv) institutional capacity buildingthat will help WWCs better understand community beliefs, knowledge and practices as well as handle customer relations; ensure maintenance and deal with complaints. Public education and awareness campaigns will be undertaken by local NGO's experienced in dealing with water and sanitation issues in coordination with the WWCs and local city councils. The MOEwill have national responsibility for ensuring that the WWCs meet service standards. 6.5 How will the project monitor performance interms o f social development outcomes? In addition, a participatory approach will be incorporated into the monitoring and evaluation of the project. These will comprise beneficiary assessments that will include residents, the neighborhood councils (where available), representatives of local groups and other concerned NGO's. These assessments, in which communities themselves can help identify the relevant indicators, will gauge changes in attitudes and practices and feed into the public relations and customer service department of the WWCs, with the aim of helping them better understand the issues at hand. These will include gender related concerns and differentiation inthe use of water and sanitation services. Elected city councils will continue to be closely consulted. 24 As part o f project preparation a comprehensive social assessment has been launched in each o f the cities. This assessment, which is to establish baseline indicators at the level o f households, will examine, report and make basic suggestions on: a) current health conditions o f the local populations in direct relation to the existing water and wastewater systems, b) the cost to subscribers for completion o f individual household connections inrelation to existing systems, c) factors that could positively or negatively affect the incidence o f connections to the new project; d) the levels o f deprivation or poverty severe enough to hinder households from getting physical connections without supplementary support; and e) estimates o f actual costs to consumers o f water and wastewater systems. Duringimplementation, a phase I1of the survey will be launched in conjunction with the execution o f works. These are meant to monitor project impact on the health and income o f residents. These surveys will also include bothqualitative and quantitative assessments.They will take place inAhwaz and Shiraz within 6-12 months of the establishment o fconnections ineach o fthe individual cities. The areas sampled will represent different income levels, but will ensure inclusion o f areas with highly vulnerable populations. The findings of these surveys will be shared with all stakeholders, and inparticular with city councils. 7. SafeguardPolicies: 7.1 Are any o fthe following safeguardpolicies triggered by the project? I I ProjectsinInternationalWaters7.60, (OP 7.50, BP 7.50, GP 7.50) Yes ProjectsinDisputedAreas (OP BP 7.60, GP 7.60)* No 7.2 Describeprovisions made by the project to ensure compliance with applicable safeguardpolicies. Preparation o f the project was comprehensive, encompassing an assessment o f issues conceming environment, cultural heritage and land acquisition. Environment and Cultural Property: The potential negative environmental impacts o f the proposed project were defined indetail through the EA. The findings o f the EA were the basis for the development o f an EMP with a special cultural heritage component to address issues related to cultural property in Shiraz and to meet the requirements o f OPN 11.03. The EMP defines appropriate prevention and mitigation measures as well as monitoring activities. Institutional strengthening has been also included in the EMP; in addition to the environment and safety officer at the project TSU, the project will provide necessary laboratory equipment to conduct required analyses. The implementation of the EMP will be an integralpart o f the project supervision process, and a Bank environmental specialist will participate at the supervision missions to monitor the implementation activities. The preparation o f the environmental assessment included extensive public consultation and the produced documents will be disclosed at the InfoShop and inpublic places inIran. 25 Projects in International Waters (OP 7.50): While Operational Policy 7.50 i s applicable, no notification to other riparian states i s required given the rehabilitation nature o f the works to be financed under the project. Cultural Property (OPN11.03): Shiraz. Shiraz, the capital o f Fars province, i s an ancient city. It lies 35 kmnorth o f Persepolis, the most important historic site o f ancient Iran, contains several other historic sites, and i s an important tourist destination. Most o f the works lie outside the city inbarren, uninhabited or agricultural lands, well away from any areas o f cultural interest. However, the sewerage lines inthe city required careful treatment. The final design o f the project concerning the pipelines was sent to the Cultural Heritage Organization (CHO), which has legal authority to ensure protection o f archeological sites. Following careful review and recommendations, some minor changes were incorporated in the design, and CHO has now issued a permit for construction o fpipelines. Ahwaz. There are no sites o f culturalvalue inthe area. Involuntary ResettlementOPIBP 4.12: The implementation o f the project required includes the expropriation o f land for the construction o f treatment plants, pumpingstations and sewerage lines. Given the common characteristics o f this project in each city, a Resettlement Policy Framework has been prepared together with abbreviated resettlement action plans for the first two cities. Iranian law conforms in all major respects to Bank guidelines, and provides for minimization o f disturbance, advance notification to owners, compensation o f all right holders at full value independently assessed, and right o f negotiation and appeal. Inno case are residences or current economic activities or livelihoods affected. In Ahwaz there i s expropriation of an unused agricultural plot o f 67 ha from 13 owners, with compensation currently being negotiated, and two small- undeveloped urban plots for pumping stations from private owners. All other land i s public land expropriated by transfer with compensation from other public organizations. Full documentation i s available to support the plants, and a Bank social scientist has visited the sites and confirmed the findings o f the local social scientist. The project therefore complies with the requirements o f OP 4.12. F. Sustainabilityand Risks 1. Sustainability: The sustainability o f the project would be ensured through: (i) implementation o f agreed upon reforms that cover governance, tariff setting, institutional and regulatory framework, demand management etc.; (ii)thelocallevel,strengtheningthecapacityofindividualWWCs,inordertooperateonacommercial at basis and implement a tariff scheme that will ensure, gradually, full cost recovery; (iii) at the national level, strengthening the capacity o f the NWWEC for its role in advising and guidingthe WWCs, and in monitoring their performance; and (iv) increasing the participation o f the private sector in operation and maintenance andother routine activities. 26 2. Critical Risks (reflecting the failure o f critical assumptions found inthe fourth column o f Annex 1): Risk Risk RiskMitigation Measure Rating From Outputsto Objective That the WWCs will generate sufficient Agreement has beenreachedwith Government revenues and buildup capacity to pay for their on key indicatorsincluding financial ones. O&M (including water meter maintenance) and S Government's commitment will ensure adequate part o f capital Expenditures. tariff increases. That the WWCs will properly benefit from TSU will be staffed with competent experts; in actions to be taken incapacity building M addition, a comprehensive training programwill help raise WWCs capacity. That an adequate tariff scheme will be See Above implemented. S That an efficient project management capacity See Above can be established; and that cokracts wiil be M awarded to well aualified contractors. That the sector will implement reforms Agreement has been reached with Government according to agreed upon strategy on sector reforms (institutions, tariffs, etc.,) that S will be implemented inthree phases within the coming 3 years. These reforms are linked to future Banklending. Procurement o f works, goods and services Thisis a generic andcontroversial issuebetween the GO1and the Bank which i s being addressed M by obtaining an exemptionbythe GO1inorder to use Bank procurement guidelines for the first year o fimplementation until a general mocurement framework i s ameed unon. From Components to Outputs That local sources o f financing will be made Local fundingis modest and Government i s available as needed and that connections and committed to significantly contributeto pertinent connection fees will be collectedpaid M financing the investmentprogram o f the project, for as projected especially the wastewater component. Overall RiskRating M RiskRating- H(HighRisk),S (SubstantialRisk),M lodestRisk),N(Negligib1e or Low Risk) 3. PossibleControversialAspects: Bank Procurement and financial procedures: The implementation o f on-going projects has been hampered by MPO's reluctance to apply Bank guidelines procedures systematically. The Bank i s currently working with the authorities on a framework that will cover all fiduciaries aspects. In addition, in the context o f the proposed project, assurances were obtained that all procurement packages will be carried out inaccordance to the Bank guidelines. It was agreed duringnegotiations (see paragraph 6 o f minutes of negotiation) that the Government will issue an approval to that effect, n o later than July 31, 2004 to cover procurement packages for the first year o f the project, until an agreement i s reachedbetween the Government and the Bank on a general framework. MPOnot contributing financially to the projects. 27 G. M a i n Loan Conditions: 1. Conditions of Effectiveness: (a) Each o f the Ahwaz and Shiraz Subsidiary Loan Agreements has been authorizedand executed on behalf o f the Borrower; (b) Each of the Ahwaz and Shiraz Project Agreements has been authorized; (c) T S U has been established within each o f the WWCs with competent staff, particularly: Project Manager, Procurement and FinancialManagement specialists; and (d) NWWEC has employed a Project Manager, an engineer, a procurement specialist and an environmental specialist with adequate qualitifacationand experience. 2. Other [classify according to covenant types used inthe Legal Agreements.] Having dated covenants in the loan agreements that will include main targets agreed upon with Government particularly, workmg ratio, 0.75 by end o f project, UFW to reach 27% by end o fproject and accounts receivable /collection ratio to reach4 monthsby end o f project (see Annex 13) H. Readiness for Implementation H1. a) The engineering design documents for the first year's activities are complete andready for the start o fproject implementation. 0 1. b) Not applicable. 2. The procurement documents for the first year's activities are complete and ready for the start o f project implementation. H3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory quality. 04. The following items are laclung and are discussedunder loan conditions (Section G): I. CompliancewithBankPolicies 1. Thisproject complieswith all applicable Bankpolicies. 02. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bankpolicies. bbv-Joseph Saba Country Director 28 Annex 1: Project Design Summary ISLAMIC REPUBLIC OFIRAN AHWAZ AND SHIRAZ WATER SUPPLY AND SANITATION PROJECT Hierarchy of Objectives Key Performance Indicators Data Collection Strategy Critical Assumptions Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) 1. Initiate policy dialogue on the 1. Changesto take place inthe Progressreporting in 1. Government will deliver reformprogram; and processoftariff approvals; and conjunctionwith implementation commitments on itsrelated to adjustmentsintariff structures o f recommendations made inthe tariff approvals andtariff and levels and institutional and agreed upon sector reforms in adjustments. regulatory framework. particular Sector Note, which focus on: - Regulatoryframework; - Institutions; - Tariffs; and - CapacityBuilding 2. Initiate targeted lending inkey 2. Compliance with socio- - EnvironmenVHealth Issues 2. That the govemment social and environment areas. economic, health and commitment instrengthening the environmental criteria. capacity of sector institutions and prioritization of sector investments and implement agreed upon sector strategy reforms. Project Development Outcome / Impact Indicators: Project reports: (from Objective to Goal) Objective: (a) to enhance the quality o f life - Increasein the number of The development o f adequate (a) That the demand for intheproposedcities, Ahwaz population connectedto progressand monitoring connections will be sustained and Shiraz, particularly inpoor wastewater collection and systems. and that a health programi s areas by: (i) improvingaccess to disposal services. adopted. satisfactory water supply and significantly increasingcoverage - Decreasein water related o f sanitation services in diseases. significant proportions; and (ii) improving environmental, hygiene, andhealth conditions, - Increaseinquantitiesof as well as promoting, as well as treated effluents to beused in promoting reuse of treated irrigation. effluents. @) to strengthenand develop the - Generation o f sufficient (b) That there will be WWCs capacity o f Ahwaz and Shiraz revenuesto cover O&M and commitment to capacity building Water andWastewater reasonableportion o f capital and that the WWCs will develop Companies (WWCs) and assist investmentcosts. adequateO&M capacity. the latter inimprovingtheir efficiency, substainability and - Decrease UfWfrom41% in to financial autonomy, and 27% infive years. (c) to initiate sector reforms, - Initiate study on tariff (c) That a new tariffscheme is particularly with respectto restructuring andon tariff studies and proposed inthe 4th institutional arrangements, the adjustments FYDP. regulatory framework, demand management, as well as preparea sanitation strategy. - Target ofworking ratio to reach 0.75 by end o fproject. 29 Hierarchy of Objectives Key Performance Indicators Data CollectionStrategy Critical Assumptions Output from each Component: Output Indicators: 'roject reports: from Outputs to Objective) (a) For Water Supply: - Increaseinwater production l e development of adequate Aat an efficient project - capacity by 12,000 m3/d and brogressand monitoring nanagement capacity can be water production transmission ystems. stablished; and that contracts and distribution facilities in 60,000 m3/dinAhwaz and vi11be awarded to well qualified Ahwaz; Shiraz, respectively. ;ontractors. - water zoning distribution and storage facilities in Shiraz; (b) For Wastewater: - Increaseo fnumbersof house - wastewater connections, by 23,000 and collection, 50,000 in Ahwaz and Shiraz, treatment and disposal facilities respectively. inAhwaz; - wastewater collection, treatment and disposal facilities inShiraz; (c) Provision o f operation and - Establishment o f efficient fiat the WWCs will develop maintenance equipment and financial, technical idequate capacity inoperation water meters. environmental and procurement mdmaintenance. systems inthe TSU o fthe WWCs andNWWEC. - Reach an UfW o f27% by the end o f the project inthe two cities. Also decrease inA/R to 4 months (d) Capacity building, TA, - Seminarsandworkshops for That the WWCs will develop training and consulting services. WWCs and other sector capacity inareas o ftechnical, institutions on the following procurement, financial topics: technical, procurement, management, environment, and financial management, utility management. environment and utility management. Project Components I Sub- Inputs: (budget for each Project reports: (from Components to Outputs) components: component) (a) Rehabilitatiodextension of The development o f adequate That local sources o f financing the existing water supply progressand monitoring system: will be made available as networks in: and ofreporting. needed, and that connections and 0 A h W Z - US$77.06 million pertinent connection fees will be 0 Shiraz - US$44.4 million achievedipaid for as projected. (b) Extension o fwastewater collection anddisposal facilities in: 0 Ahwaz - US$ 157.4 million 0 Shiraz - US$ 154.06 million (c) Provision o f operation and - US$2.3 million consumer water meters for WWCs. (d) Capacitybuilding, TA, - US$31.86 million training and consulting services 30 Annex 2: Detailed Project Description ISLAMIC REPUBLICOFIRAN A H W A Z AND SHIRAZWATER SUPPLY AND SANITATION The project consist of the following four components, details of the breakdown o f components 1 and 2 are presented in Annex 2A, (Costs include physical and price contingencies, figures in parenthesis are the amounts to be financedby Bank Loan): Project Component 1-US$121.41 million(US$61.74 million) Rehabilitation, improvement and expansion of water systems and facilities This component will provide funds to improve water services in Ahwaz and Shiraz based on their comprehensive development plans. This component i s dividedinto the following sub-components: 1.a Water Resources -US$18.98 million(US$ 9.49 million) InAhwaz, this component will finance the rehabilitation of the Emergency Water Treatment Plant and Water Treartment Plants 1and 2, as well as the expansiono fWater Treatment Plant 2. InShiraz, thiscomponentwill finance the dnlling of 17wells. 1.b Water Supply- US$102.43 million (US$52.25 million) InAhwaz and Shiraz, This component will finance the rehabilitation and expansion of water networks including transmissionlines, as well as the construction o fnewreservoirs and new pumpingstations. Project Component 2 - US$311.46 million (US$183.39 million) Rehabilitation, improvement and expansion ofwastewater svstems and facilities This component will provide funds to improve wastewater services inAhwaz and Shiraz based on their comprehensive development plans. This component i s divided into the following sub-components; details of the breakdown o fthese subcomponents are presented inAnnex 2a: 2.a Wastewater trunk mains- US$121.59 million (US$64.00 million) InAhwaz, this component will provide financing for the construction of the remaining segments of the Eastem and Western trunk mains 60 km, which are the main wastewater conveyors to the two wastewater treatment plants inthe two zones. In Shiraz, this component will provide financing for the construction of the remaining segments of the Emergency Zone trunk main and the Long-term Zone trunk main, which are the main wastewater conveyors to the two wastewater treatment plants. 2.b Laterals and interceptors- US$89.43 million (US49.64 million) InAhwaz, this component will finance the construction o f 266 kmof laterals and interceptors as well as the construction o f 16pumping stations. InShiraz, this component will finance theconstructionof740kmoflaterals andinterceptors. 2.c House connections-US$20.29 million (US$10.15 million) About 23,000 and 50,000 house connections will be implemented under the Project inAhwaz and Shiraz. 31 2.d Wastewater treatment plants and outfalls -US$80.14 million (US$59.60 million) In Ahwaz, this component will provide financing for the rehabilitation ofthe wastewater treatment plant in the west of Ahwaz (Choneibeh), as well as the construction of the first module of the wastewater treatment plant inthe east o f Ahwaz. In Shiraz, this component will provide financing for the outfall of the Emergency and the Long-term treatment plants as well as the construction o f the first and second modules o f the Long-term treatment Plant. Project Component 3 -US$2.31million (US$1.85 million) Provision o f operation and maintenance equipment and consumer water meters for WWCs- US$ 2.31 million (US$1.85 million). Project Component 4 - US$31.86 million (US$29.31 million) Capacity building, Technical Assistance (TA), training and consulting services, which will include: 0 Establishment o f TSUs at the NWWEC and at eachWWC- US$5.09 million (US$4.69 million). 0 Provision o f TA and consulting services for institutional and capacity building including training o f NWWCs staff. This would includethe following studies: - US$2.79 million (US$ 2.56 million). o Optimization o f Sector Institutions. The purpose o f the study i s to clarify institutional responsibilities and accountabilities so as to derive the full benefits from the existing legal framework. The study will also focus on analyzing WWCs' activities and propose ways by which WWCs will be provided greater investment and financial autonomy. o Demand Management Programs in Water and Wastewater Companies, including leak detection exercises. This study will aim at helping WWCs identify and implement policies and instruments that will reduce consumers' losses and wastage. In order to enable them to do so, it i s necessary to make a series o f decisions both relating to the tariff and subsidy policies and to how the WWCs will manage the demand (Annex 13a). o Development o f National Sanitation Strategy and Action Plan for sanitation and Hygiene inIran. The purpose ofthis assignment is to assist the Government of Iran(GOI) inthe development o f national sanitation strategy that would increase the effectiveness and efficiency o f sector investments. This will be done by providing an overall policy framework to guide decision-making and resource allocationwithin the sector. o Capacity Building Program. It i s designed to strengthen the capacity o f sector institutions, particularly WWCs and the NWWEC inpriority areas such as: governance, financial and customers' management, operations and administration, and environmental health impact 0 Provision o f consulting services for engineering design, construction supervision, and any other technical studies that will be identified during the course o f project preparation. This component also includes the cost o f D-B-0contract, its design and supervision- US$19.04 million (US$ 17.51 million). 0 Environmental Management Plan (EMP), including mitigation measures and monitoring activities to be implemented during design, construction and operation. The plan covers key issues such as water quality and quantity, treated effluent, industrial discharges, health and safety as well as sludge re-use and disposal. Technical assistance and institutional strengthening to all concemed parties (WWCs, DOE, Ministry o f Health and Medical Education and Ministry o f Agriculture and Jihad) are also incorporatedinto the EMP- US$4.94 million (US$4.55 million). 32 Ahwaz Project component cost (Bank Financing) US$ million Rehabilitation,improvementand expansionofwater systems and 77.06 facilities (39.44) Water resources: this sub-component includes the rehabilitation o f the three 16.20 existingwater treatment plants bythe constructiono fpre-sedimentation (8. IO) units as well as improvingthe filter bedsinto dual media layers, provisionof activated carbon and ozonation inTreatment Plant 1and 2. Moreover, extension o fTreatment Plant 2 will be implemented to increase its capacity from 4.05 m3/sto 5.2 m3/sand extend the intake 20 minsidethe river to ensure withdrawing acceptable water quality. Inlight o f the lack o f sufficient local experience with such technologies, a design and construct contract whereby services from international experience i s acquired i s being considered for the improvement and expansion o f Treatment Plants. This component also includes renovation and replacement o f various mechanical and civil processing units and installation o f flow meters and data loggers at the inlets and outlets o ftreatment plants 1&2. Water Supply: This sub-component includes the following works: 60.86 (31.34) Laying o f 10 kmsteel transmission pipelines from the water treatment plants 1and 2 to the storagereservoirs, diameter ranges from 700- 2000 mm. Rehabilitation and extension o f the water networkwith diameters ranging from 200-600 mmwith a total lengtho f 266 km. Constsuctionof five concrete squarereservoirs of 50,000 m3 capacity each inHasirAbad areaas well as constructionofrequiredpumpingstations. Rehabilitation,improvementand expansionofwastewater systemsand 157.40 facilities (92.78) Construction o f 60 kmo f concrete trunk mains ineast and west o f Ahwaz, 89.52 out of which 2.6 kmo fWestern trunk main with size 1200 mmand 3.5 km (44.76) o fthe eastern trunk main with size 1600 mmwill be constructed as tunnels. The easterntrunk main will collect wastewater from the easternbasinand transfer itto the proposednew treatment plant, while the westem trunk main will collect the wastewater from the western basin andtransfer it to the existing Choneibeh treatment plant. Construction o f 162 kmo f PE laterals and interceptors and 16lift and pump 23.10 stations. Works under this sub-component will cover an area of 1465 ha (I6.48) Construction o f 23,575 additional house connections. 5.75 (2.88) This sub-component includes the following works: 39.03 Rehabilitation and expansion of the existing treatment plant at the west of (28.67) Ahwaz, Choneibeh, to meet its design capacity of200 P.E. This will be done byreplacing various mechanicalparts, repairing o f concrete parts, adding a new unitthat will enable treating a flow o f 54,575 m3/dand providing sludge dryinglagoons and storage facilities. Construction o f first two modules ofthe treatment plant with a capacity o f 522 P.E, treating a flow o f 102,000 m3/d.The proposedtreatment process i s activated sludge with nitrification and de-nitrification. As this treatment plant i s proposedto be constructed as a DBO, its design will be finalized after tendering. 33 r- az Project component cost (Bank Financing) US%million Rehabilitation, improvementand expansion ofwater systems and 44.35 facilities (22.3 0) 1A Water resources: this sub-component includes the drilling and equipping 2.78 o f 17new wells tapping Karstic water resources. Total water abstracted by (1.39) these wells amounts to 82,000 m3/d. 1B Water Supply: This sub-component includes the following works: 41.57 - Laying of 34 kmGRP transmissionpipelines feeding distribution (20.91) system and transmitting water from wells to reservoirs. Diameters range between 500-1200 mm. - Rehabilitation and extension o fthe water network including installation ofpressure reducing valves. Diameters range between 200-400 mmwith a total length o f 235 kmo fPEpipes. - Construction o f four concrete reservoirs Sonboleh (7500m3), Abeverdi (300 m3),R8 (20,000m3), and R20 as well as construction o f two pumpingstations. Rehabilitation, improvementand expansion ofwastewater systems 154.06 and facilities (90.61) 2A Construction o f 95 kmo f concrete trunk mains inthe emergency and long- 32.08 - term areas. Diameters range between 500- 1200mm. (19.25) 2B Construction of 740 kmo f PElaterals and interceptors. Works under this 66.33 - sub-component will cover an area o f 5496 ha (33.17) 2 c Construction o f 50,000 additional house connections. 14.54 (7.27) 2D This sub-component includes the following works: 41.11 - Construction o f two modules with a total capacity o f 100,000 m3/d in (30.93) the long-term zone. To optimize the efficiency o fthe treatment plant, each module i s designed to be capable o f operation infour independent streams. However, as this treatment plant i s proposedto be builtunder DBO contract. Its design will be finalized during the - tendering process. Construction o f 20 kmoutfalls to discharge treated effluent for emergency plant and long-termtreatment plants as well as sludge storage site. 34 Annex 3: EstimatedProjectCosts ISLAMICREPUBLICOFIRAK AHWAZ AND SHIRAZWATER SUPPLY AND SANITATION ProjectCost by Component Ahwaz Project Component Total Local Foreign U S $ US$ US$ million million million Investments Water CivilWorks RehabilitationandUpgradingofWater TreatmentPlants Treatment Plant 1 1.59 0.80 0.80 Treatment Plant 2 3.10 1.55 1.55 Urgent WTP 0.14 0.07 0.07 Sub-total 4.84 2.42 2.42 Expansionof Water TreatmentPlant2 Expansion 5.14 2.57 2.57 TransmissionLineto WTP2 1.31 0.79 0.52 Additional capacity for Intake 0.63 0.38 0.25 Sub-total 7.08 3.73 3.35 ConstructionofNew Reservoirs Reservoir 1 2.76 1.80 0.97 Reservoir2 2.76 1.80 0.97 Reservoir3 2.76 1.80 0.97 Reservoir4 2.76 1.80 0.97 Reservoir5 2.76 1.80 0.97 Sub-total 13.81 8.98 4.83 ConstructionofNew Pumping Station 2.11 1.27 0.85 RehabilitationofWater Network 15.24 9.90 5.33 Distribution Lines 3.62 2.35 1.27 SupplyLines 3.81 2.48 1.33 Sub-Total 50.51 31.13 19.38 DetailedDesignWater 0.61 0.12 0.49 DBO Preparation 0.57 0.11 0.46 ConstructionSupervision(3%) 1.52 1.21 0.30 Sub-TotalWater 53.20 32.58 20.62 Wastewater CivilWorks EastTrunk Main 35.49 17.74 17.74 West Trunk Main 28.49 14.24 14.24 Laterals 4.50 3.15 1.35 House connections 3.52 2.82 0.70 PumpingStations 11.58 6.95 4.63 ConstructionofEastTreatmentPlant CivilWorks 8.87 4.44 4.44 Electrical & MechanicalEquipments 13.31 2.66 10.65 Sub-total 22.18 7.10 15.08 RehabilitationandExpansionofWest Treatment Plant 5.41 2.70 2.70 Sub-Total 111.17 54.71 56.46 DetailedDesignSewerage 1.28 0.26 1.03 DBO Preparation 1.11 0.22 0.89 ConstructionSupervision(3%) 2.67 2.14 0.53 Sub-TotalWastewater 116.23 57.32 58.91 35 Operations and MaintenanceEquipment 1.00 0.20 0.80 Sub-Total Investments 170.44 90.10 80.33 Studies Environmental Monitoring System 2.53 0.51 2.02 Studies 0.50 0.10 0.40 Leak detection 0.20 0.04 0.16 Sub-Total Studies 3.23 0.65 2.58 Institutional Strengthening Capacity Building 0.50 0.10 0.40 Training 0.50 0.10 0.40 Sub-Total Institutional Strengthening 1.00 0.20 0.80 Technical Support Unit 1.80 1.44 0.36 Sub-Total Technical Support Unit 1.80 1.44 0.36 Total Baseline Cost 176.46 92.39 84.07 Physical Contingencies 20.01 10.78 9.22 Price Contingencies 56.47 49.99 6.48 Total Proiect Cost 252.94 153.16 99.78 Proiect Component Total Local Foreign U S $ U S $ U S $ million million million Investments Water CivilWorks Transmission Lines 13.85 9.00 4.85 Construction o fNew Reservoirs Reservoir 8 1.40 0.91 0.49 Reservoir 10 2.60 1.69 0.91 Reservoir 18 0.24 0.16 0.08 Reservoir 20 0.70 0.45 0.24 Sub-total 4.94 3.21 1.73 Network Distribution Lines 1.43 0.93 0.50 Supply Lines 5.57 3.62 1.95 Rehabilitation o f Water Network 3.33 2.17 1.17 DrillingofWells 1.78 1.16 0.62 Sub-total 12.11 7.87 4.24 PumpingStations 0.32 0.19 0.13 Sub-Total 31.22 20.28 10.94 Detailed DesignWater 0.47 0.09 0.37 Construction Supervision (3%) 0.94 0.75 0.19 Sub-Total 32.63 21.12 11.51 Wastewater CivilWorks TrunkMainEmergencyZone 3.34 1.33 2.00 TrunkMainLongTerm 20.82 8.33 12.49 Laterals 14.29 10.00 4.29 Interceptors 29.48 20.64 8.84 36 House connections 9.01 7.21 1.80 Treatment Plant Constructiono f outfall of emergency treatment plant 4.17 1.46 2.71 Constructionof Sludge Storage at Emergency WWTP 1.43 0.50 0.93 Constructionof outfall o fLong Term Zone 5.12 2.56 2.56 Treatment Plant for LongTermZone FirstModule 9.40 4.70 4.70 Treatment Plant for LongTermZone SecondModule 8.45 4.23 4.23 Sub-total 28.57 13.45 15.13 Sub-Total 105.50 60.95 44.55 DetailedDesign Sewerage 1.26 0.25 1.oo DBOPreparation 1.15 0.23 0.92 Construction Supervision (3%) 2.48 1.98 0.50 Sub-Total 110.38 63.41 46.97 Operations and Maintenance Equipment 1.oo 0.20 0.80 Sub-Total 144.01 84.74 59.27 Studies Environmental Monitoring System 1.76 0.35 1.41 Studies 0.50 0.10 0.40 Leak detection 0.20 0.04 0.16 Sub-Total 2.46 0.49 1.97 Institutional Strengthening Capacity Building 0.50 0.10 0.40 Training 0.50 0.10 0.40 Sub-Total 1.oo 0.20 0.80 Technical Support Unit 1.80 1.44 0.36 Sub-Total Technical Support Unit 1.80 1.44 0.36 Total Baseline Cost 149.27 -- 86.87 62.40 Physical Contingencies 14.89 8.97 5.92 Price Contingencies 49.94 45.44 4.50 Total Proiect Cost 214.10 141.28 - 72.82 Ahwaz and Shiraz Total Baseline Cost 325.73 179.26 146.47 Physical Contingencies 34.90 19.75 15.14 Price Contingencies 106.41 95.43 10.98 Total Proiect Cost 467.03 294.43 172.60 Front-end fee 2.79 2.79 Total FinancingRequired --- 469.82 294.43 175.39 37 Project Cost by Category Ahwaz Total Local Foreign U S million U S million US million Works 234.47 143.69 90.77 Goods 1.15 0.30 0.85 Services 16.74 9.02 7.73 Training 0.58 0.15 0.43 Total Proiect Cost 252.94 153.16 - 99.78 Total Local Foreign U S million US million U S million Works 198.40 133.13 65.27 Goods 1.15 0.30 0.85 Services 13.97 7.70 6.27 Training 0.58 0.15 0.43 Total Proiect Cost - 214.10 141.28 - 72.82 Ahwaz & Shiraz Total Local Foreign U S million U S million U S million Works 432.87 276.83 156.04 Goods 2.3 1 0.60 1.71 Services 30.71 16.71 14.00 Training 1.15 0.30 0.85 Total Project Cost 467.03 294.44 172.60 Front-endFee 2.79 2.79 Total Financing Required 469.82 294.43 175.39 38 s q 5 s Bl s s 10 0 0 0 0 0 0 0 2 f N w s 9 4 P Z:: I I 0 0 0 0 0 0 0 2s 2 - o c - * w O N ? 0) -. -. - 0 e 0 0 0 f 2 0 0 9 0 o q q 0 0 02m 0 d 0 0 x 0 9 3.rg s 8 I f 2 2 Z 0 0 0 0 0 0 N .: d d - 0 m0 m c oh O hm N( r D w m 0 0 0 0 0 (D 0 : 2 - N 0 0 0- q N O o O C r - 0 a r 9 0 0 0 0 0 0 r m 0 N N * * 0 0 0 0 m 0 0 m w,2o E zVI 0 0 0 0 0 ;; r w - 0 N rr F " c 0 -- 0 0 0 0 .. O N C I e m o * - (D O N - rm c * h F N - 0 m m h c 0 0 m - 0 0 0 N 0 0 0 0 0 0 x 0 (D oOvi*NcVI e m * 0 0 0 m - 0 N h - 7 0 0 0 0 0 0 2 E: - 0 v i o o o c o 0 r o o Y ) o 0 0 0 0 0 0 0 8 3 8 1 8 O O O O O O w 0 0.- - V I N VI0 0 i d w ::2 m * o N N -z 2 : h me o VI " V I N 2: 1 - 9 0 0 0 a c - m 01 o o o o o o c m m - v i o vi I a m m 0 0 0 0 0 0 O o r r h O h 0 0 c O N h 0-- )0 0 0 0 m h 0 I E 0 0 0 0 0 0 O O O O O O 0 0 0 0 0 0 0 m 0 0 0 0 0 02 1 Y 8 8 8 8 8 8 E:zF:8 :8 6 2 a 0 0 0 0 0 0 O O O O O O 0 0 0 0 1 0 0 0 0 0 0 m m m r N O 0 0 0 0 0 0 r C o N m O N o m m 0 0 0 Y) 0 0 0 0 0 0 O O O O r O r 0 0 c t 0 0 0 0 0 0 C C O N * O Ln0 0 Y) 0 0 0 0 0 0 O O O O r O c 0 0 L 0 0 0 0 0 0 O O O O r O r 0 0 r 2c xo 2r z r 0m (0D D O O O ~ N- N e 0 0 0 0 0 * - 0 7 Nm 0 0 Y) 0 0 0 0 0 0 0 0 0 0 0 0 R Annex 4(a): Cost BenefitAnalysis Summary ISLAMICREPUBLICOFIRAN AHWAZ AND SHIRAZWATERSUPPLYAND SANITATION Methodology: The economic analysis carried out for this Project, which follows the cost-benefit approach, deals separately with each o f the two cities and with the water and wastewater components. Since the Project period is relatively short (2004-2009), the analysis covers a longer period (2004-2027), which coincides with the planning horizon o f the water and wastewater development programs. Bothbenefits and cost are therefore projected for this longer period. Water investmentcomponents: Benefitsofwater components Without the Project a large number o f households would not be connected to the water distribution system and supply capacity would fall short o f an ever-expanding population. In this hypothetical situation some households would be deprived o fpipe water and would need to rely on altemative sources of supply. The major benefit o f the Project i s therefore to avoid the cost o f altemative supply, in addition to the more hygienic nature o fpipe water as opposed to water sought from other sources. The altematives to the project are the purchase of water from vendors or o f bottled water. The cost that would be avoided thanks to the project is the cost o f water purchased from vendors and the cost o f installing, operating and maintaining household storage tanks. These benefits are estimated for the additional population that would be deprived from pipe water if the project i s not implemented. It is important to stress that they should be considered as a minimum value o f the true benefits since they omit the hygiene, quality and commodity advantages o f access to potable pipe water. An additional benefit, which i s partially taken into inthis analysis, is that households will also generally consume muchlarger quantities o f water under the Project, given the greater accessibility and lower cost o f pipe water as opposed to vendors' water. Thus, with the project newhouseholds would avoid the cost o fvendors' water, which is muchhigher than the price they would the WWC. They will also avoid the cost o f purchasingand maintaining water tanks. Cost ofthe Project The Project gives rise to two cost components, the investment cost and O&M cost. These outlays are adjusted so as to reflect economic as opposed to commercial values. Starting with the breakdown between expenses in local and foreign currencies, taxes are deducted and the local components deflated by an exchange conversion factor so as to allow for a premium on foreign exchange over its official value. In the absence o f estimates on the shadow exchange rate for Iran, a 10% premium i s assumed and a sensitivity analysis i s introducedfor this value inthe simulations. Regarding O&M cost, expenses are detailed for operating the treatment plants, broken down into energy, chemicals and labor. Economic prices are used instead o fprices paidby WWC, particularly for energy for which the real cost i s much higher than paid cost and labor which receives wages inthe public sector that are considered higher than its opportunity cost. For energy we use Iran's export price o f electricity while for labor we assume, inthe absence o f estimates for the shadow price o f labor, a 20% difference between the latter and the actual wage. 55 Wastewater investment components: Benefits: The wastewater network is very underdeveloped inboth cities. Ground water, environment as well as health are threatened by the use o f absorption wells and the discharge o f wastewater in open ditches and canals. Furthermore, as the population grows an increasingnumber o f households would have to incur costs associated with digging and maintaining absorption wells. Given these pecuniary and non pecuniary effects, the project i s expected to generate the following benefits: (i) avoidance o f cost o f absorption wells and their maintenance; (ii) reduction inwater-borne diseases and intheir associated costs o f hospitalization, medication, loss o f workdays and school days; (iii)reuse o f treated wastewater in irrigation with the associated increase in agricultural value-added; (iv) general improvements in the conditions o f immediate neighborhoods and the environment in general with the associated improvement inthe quality o flife. The present analysis focuses on the types o f benefits that can be quantified. This excludes benefit (iv), which i s very difficult to quantify and takes the health benefit partially into account only because the information available on water-borne diseases underestimates their real incidence among the population inthe two cities. The first type ofbenefit [(i)] i s estimated following the same methodology as for water wells. This cost also turns out to dominant other benefit components. The health benefit i s estimated on the basis o f the number o f water-bome disease cases provided by the local health department and makes use, alternatively o f the health results o f the socio-economic assessment. It is also based on estimates o f the proportions o f hospitalized versus external patients, duration o f the sickness, cost o f hospitalization and external care and on assumptions concerning the opportunity cost o f labor (applied to the number o f work days missed). Finally, the value o f treated wastewater reused inirrigation i s estimated on the basis o f information (collected for the Feasibility Studies) provided on water requirements, yields, crop prices and estimates o f differences inyields between irrigated andrain-fed agriculture. Estimatingthe IRRofthe Project water componentsfor Ahwaz and Shiraz The different steps and results obtained by applying this methodology are shown intables (1) and (2) o f this annex respectively for Ahwaz and Shiraz. Most o f the information used i s provided inthe feasibility studies that have been implementedfor the two cities. Row (1): The connected population i s the staring point for estimating the benefits o f the project. Ahwaz is already at 100% connection rate and the number of beneficiaries o f the Project will be the same as the additional number o f inhabitants (Row 2) Row (3): Annual increase in the number o f connections. Without the Project new households (new subscribers) would purchase storage tanks. Therefore, the new connections will equal the number o f new tanks that wouldbe installedeachyear. This number grows with the population. R o w (4): Per capita water consumption per day. According to projections (Feasibility Studies), this quantity will stay constant at 160 liters inAhwaz and increase from about 140in2004 to 150 1in2027 in Shiraz. Rows (5) and (6): Annual cumulative increase in water consumption with and without the Project: The quantity in the situation without the Project represents the total quantity o f water that new households would have to purchase from water vendors. This quantity will grow each period, as the number o f households that would be denied the benefits o f pipe water will increase. Obviously, per capita consumption will in this case be lower than if these households had access to WWC water. The present 56 analysis makes the assumption that they would buy only 75% o f what they would consume if they were connected. Rows (7-a) - (7-c): Cost o f alternative source o f water without the project: expenses on purchases o f water from water vendors account for the bulk o f this cost while the other two components, cost o f storage tanks and maintenance, have minor values. Regional information collected in the Feasibility Studies provides estimates o f over one U S dollar (9000 Rials) per cum purchased from vendors. Rows (8) - (10): Unadjusted and adjusted costs o f the Project: Costs are estimated at constant 2003 values. Therefore, they do not take into account any price adjustment components. However, capital cost includes contingencies. As previously stated, shadow prices for foreign exchange and labor are used so as to reflect the opportunity cost for each o f these two inputs. As tables (1) and (2) show, total cost i s dominated by capital cost ininitial years and by O&M cost as additional water supply increases. Estimates o f IRR: For Ahwaz the IRR is estimated at 32% and NPV at over US$93 million in the base scenario in which the cost values are those estimated inthe Feasibility Studies and the benefits are based on a price for vendors' water equal to US$1.07. IRRremains relatively higheven iftotal cost increases by 20% over initial projections (25% and NPV equal to US$94 million). Assuming a 20% cost increase and a decline o f benefits inthe same proportions as compared to the base scenario still yield a relatively IRR, equal to 18%. For Shiraz, the return i s even higher, reaching 48% in the base scenario and declining to 25% in the case combining an increase in cost and a decline in benefits by 20%. (Table 5) Other sensitivity analysis involving shadow prices show relatively highvalues for IRR. Thus, the Project water components largely pass the economic profitability test. EstimatingIRRfor the Projectwastewater components: Tables (3) and (4) show the steps followed in estimating IRR and NPV for wastewater, respectively for Ahwaz and Shiraz. The approach i s similar to that used inthe analysis o f the water components. The base scenario i s based on the results o f the socio-economic assessment carried out for the Project, which estimates the incidence o f diarrhea at about 7.5% o f the population, and on the assumption that the new sanitation system would result inthe avoidance of 10%o f the total number o f cases o f diarrhea. Estimated IRRis inthis caserelatively low for Ahwaz, equal to 8.5%. For Shiraz, IRRis muchhigher, equal to 42% (NPV equal to US$42 million). Since the new infrastructure will be built for a period much beyond the 20027 horizon, an alternative scenario is considered using the same assumptions as in the first but extending cost-benefit analysis until the year 2052. IRR rises for Ahwaz in this case to 13%. It also increases for Shiraz. Raising cost by 20% or reducingbenefits inthe same proportions as compared to the base scenario still yields an IRR for Shiraz in the range o f 16 to 18%, but very l o w values for Ahwaz, ranging between 2.5 and 3.5% (Table 5). It should be recalled that these values do not take into account the significant improvements inliving conditions that the Project i s likely to generate. Even though the values o f IRR are much lower for wastewater than for water, particularly in the case o f Ahwaz, they basically pass the test o f economic profitability. For Ahwaz, the adjustment o f the number o f diseases raises IRRto an acceptable level. Still the estimates are conservative ones, given that they do not include any value for the expected improvements inthe environment and inthe quality of life in general (less smells, cleaner recreational areas, etc.) 57 Table-1- CostBenefit Analysis ofthe ProjectWater Componentfor Ahwaz Year 2004 2005 2006 2007 2008 2009 2012 2017 2027 A- Benefitswith proiect (1) Population (all connected) 1024383 1059213 1095224 1135854 L176810 1219242 1355941 1607699 2177727 (2) Incrementalcovered population 33683 33683 34830 36012 40630 40955 45547 52036 63151 (3) Annual increase in number o f connections 4250 4370 4494 5184 4278 4376 4684 4377 4587 (4) Per capita water consumptionper day (l/c/d) 160 160 160 160 160 160 160 160 160 (5) Annual cumulative increase inconsumption with the project (million m3) 2.880 5.246 7.691 10.648 13.049 16.355 25.838 42.454 74.433 (6) Annual cumulative increase inconsumption without the project (million m3) 2.160 3.934 5.768 7.986 9.787 12.266 19.378 31.841 55.825 (7) Total cost of alternative water provisionwithout the project or benefits (million US$) 2.33 4.23 6.20 8.57 10.53 13.18 20.81 34.18 59.89 (7-a) Expenses on water purchasesfrom vendors (million US$) 2.31 4.2 6.2 8.6 10.5 13.1 20.8 34.1 59.8 (7-b)Cost ofwater storage tanks (inmillionUS$) 0.01 0.01 0.01 0.01 0.03 0.03 0.04 0.04 0.03 (7-c) Maintenance cost of tanks (inmillionUS$) 0.00 0.00 0.00 0.00 0.01 0.01 0.02 0.03 0.05 B- Cost of proiect (8) Total adjusted cost 0.7 7.1 16.8 24.3 12.4 4.9 8.6 8.6 25.4 (9-a) Unadjustedinvestment cost 2.87 11 14.27 10.99 5.92 4.44 2.88 3.18 0 (9-b) Total adjusted investment cost 0.5 7.3 17.2 24.5 10.8 1.9 5.0 3.3 0 (10) Total adjusted O&M cost 0.2 0.6 1.3 2.3 2.8 3.1 4.1 5.7. 8.2. (11) Project net economic benefits 1.7 -2.9 -10.5 -15.7 -1.9 .. 8.3 10.5 25.6. 51.7 ~ 58 Table-2- Cost Benefit Analysis of the Project Water Component for Shiraz Year 2004 2005 2006 2007 2008 2009 2012 2017 2027 A- Benefits with project (1) Population (all connected) 1263282 1292853 1323117 1354088 1383618 1413791 1508315 1662106 1935591 (2) Incrementalcovered population 28895 29571 30263 30972 29529 30173 32190 32616 27101 (3) Annual increase in numberofconnections 8625 8605 9123 9448 8486 8738 9538 10133 16123 (4) Per capita water consumptionper day (1) 140.5 141.5 142.5 143.5 144 144.5 146 148 150 (5) Annual cumulative increase inconsumption with the project (million m3) 3.595 7.337 11.229 14.570 16.837 19.160 27.286 40.134 62.972 (6) Annual cumulative increase inconsumption without the project (million 2.696 5.502 8.422 10.928 12.628 14.370 20.465 30.100 47.229 (7) Total cost of alternative water provision without the project or benefits (million US$) 2.39 4.71 7.15 9.25 10.67 12.13 17.25 25.33 39.81 (7-a) Expensesonwater purchases from vendors (million US$) 2.25 4.6 7.0 9.1 10.5 12.0 17.1 25.1 39.4 (7-b) Cost ofwater storage tanks (inmillionUS$) 0.10 0.10 0.11 0.11 0.10 0.11 0.12 0.12 0.19 (7-c) Maintenancecost of tanks (inmillionUS$) 0.04 0.02 0.03 0.03 0.04 0.05 0.08 0.12 0.26 B- Cost of moiect (8) Total adjusted cost 0.8 13.5 13.2 6.8 5.1 2.3 4.2 5.2 8.0 (9-a) Unadjustedinvestment cost 0.6 14.1 13.2 5.5 3.4 0.0 1.4 1.2 1.5 (9-b) Total adjusted investmentcost 0.5 12.6 11.8 4.9 3.0 0.0 1.2 1.o 1.4 (10) Total adjusted O&M cost 0.3 0.9 1.5 1.8 2.1 2.3 3.0 4.2 6.6 (11) Projectnet economic benefits 1.6 -8.8 -6.1 2.5 5.6 9.9 13.1 20.1 31.8 59 Table 3- Cost Benefit Analysisof the Wastewater Component for Ahwaz Year 2004 2005 2006 2007 2008 2009 2012 2017 2027 A- Benefitswith proiect (1) Populationconnected 414692 447647 487933 554298 610490 666683 835260 1196129 2177720 (2) Incremental coveredpopulation 32122 32955 40286 66365 56192 56192 56192 72174 98159 (3) Total numberofhouseholds 4715 4715 4715 4760 4706 4706 4706 4717 4719 (4) Per capitawastewater dischargedin network per day (l/c/d) 258 257 257 254 253 252 249 251 232 (5) Annual cumulative increase in water discharge with the project (million m3) 38.9 41.9 45.7 51.4 56.3 61.2 75.8 109.7 184.1 (6) Total benefits 9.9 10.2 10.6 11.2 11.6 12.1 13.5 16.5 23.0 (6-a) Total cost of alternative discharge without the project or benefits (millionUS$) 5.40 5.51 5.62 5.76 5.84 5.96 6.29 6.89 7.98 (6-b) Additional value oftreated water inirrigation 2.11 2.27 2.47 2.79 3.05 3.31 4.11 5.94 9.96 (6-c) Health Benefit 2.4 2.5 2.5 2.6 2.7 2.8 3.1 3.6 5.0 B- Cost of proiect (7) Total adjusted cost 3.2 27.7 32.7 34.6 29.3 7.7 4.8 7.1 11.4 (7-a) Unadjustedinvestment cost 1.69 28.41 33.33 34.65 28.28 4.16 4.2 0.3 1.3 (7-b) Total adjusted investmentcost 1.5 25.7 30.2 31.5 25.7 3.8 0.2 1.1 1.5 (8) Total adjusted O&M cost 1.7 2.0 2.5 3.1 3.6 3.9 4.5 6.0 9.9 (lo) Projectnet economic benefits 6.7 -17.5 -22.0 -23.4 -17.7 4.4 8.7 9.3 11.5 60 Table 4- Cost Benefit Analysis of the Wastewater Componentfor Shiraz Year 2004 2005 2006 2007 2008 2009 2012 2017 2027 A- Benefitswith project (1) Population connected 190446 259871 332444 408269 463469 520709 704666 1084435 1944858 (2) Incremental covered population 69425 72573 75825 55200 57240 63359 80481 88048 (3) Total number of households 259042 267647 276770 286218 294704 303442 331241 379268 522811 (4) Per capita wastewater discharged innetwork per day (Vc/d) 145 231 232 234 235 236 240 246 250 (5) Annual cumulative increase involume of water discharge with the project (million m3) 10.079 21.902 28.176 34.870 39.720 44.854 61.729 97.371 177.468 (6) Total benefits 13.9 14.8 15.6 16.5 16.5 17.2 19.4 23.1 34.4 (6-a) Total cost of alternative discharge without the project or benefits (million US$) 10.27 10.47 10.93 11.31 11.06 11.39 12.43 13.86 20.13 (6-b)Additional value of treated water inirrigation 0.55 1.19 1.52 1.89 2.15 2.43 3.34 5.27 9.60 (6-c) Health Benefit 3.0 3.1 3.2 3.3 3.3 3.4 3.6 4.0 4.6 B- Cost of project (7) Total adjustedcost 1.5 19.8 32.7 31.0 29.0 5.8 3.9 11.6 9.7 (7-a) Unadjusted investment cost 0.8 20.5 34.4 31.7 29.1 2.9 0.0 6.5 0.0 (7-b) Total adjusted investment cost 0.8 18.6 30.9 28.6 26.2 2.6 0.0 5.9 0 (8) Total adjusted O&M cost 0.8 1.2 1.8 2.4 2.9 3.2 3.9 5.7 9.7 (9) Project net economic benefits 12.3 -5.0 -17.1 -14.5 -12.5 11.4 15.5 11.5 24.7 61 Table 5- SensitivityAnalysis SHIRAZ AHWAZ WATER (a)- Base Scenario 48% 32% (b)-Total cost higherby20% 35% 25% (c)- Total benefits lower by 20% 33% 23% (d)- Cost higher andbenefits lower by 25% 18% 20% WASTEWATER (a)- Base Scenario 42% 8.5% (b)- Total cost higherby20% 18% 3.6% (c)- Total benefits lower by 20% 16% 2.6% (d)- Cost higher andbenefits lower by 9% 20% Tariff Policy: The current system comprises connection rights, subscription fees and water consumption tariffs in addition to the house connection fees, which are directly borne by the customer. These fees are set and revised on a periodic basis by the National Economic Council, which i s chaired by the President o f the Islamic Republic o f Iranand includes several government departments. Connection rights for water are currently based on dwelling size and a city adjustment coefficient which depends on several factors the most important o f which are the cost o f water supply and population density. [The formulas for calculating connection fees are very similar across the WWCs. For Ahwaz the following formula was applied in the year 2002: Y = (0.0015X2 + 1000)*1.91*a*X, where Y i s the connection fee, X i s the size o f the dwelling and a i s the city coefficient which depends on population density and the relative cost o fwater supply.] Average connection fees are about US$310 for the whole country and the minimumfee i s approximately equal to US$l50. Ahwaz has a lower average fee, estimated at about US$200 in 2002. For wastewater, the connection fee i s the same as that for water with a few exceptions such as the cities o f Rasht and Anzali inGuilan province where the wastewater fee i s set at 90% o f that for water. These fees have been regularly increasedinthe last five years, at the rate o f 10% annually in all these years with the exception o f the year 2000 in which the fee was increased by 15%. In addition to connection fees, the WWCs charge the customer the full cost for house connection which averages about US$50. Regardingwater consumption, the current system i s based on a fixed fee that depends only on the size o f the connection pipe and on the type o f customer (household or other types), and on a volumetric charge based on increasing block-tariffs. The fixed fee, or the subscription fee, i s about 2,000 Rials (25 U S cents) for most domestic customers. For the variable fee the current tariff structure is based on complex formulas. The formula used i s the same for all WWCs and there i s no volumetric charge if consumption falls below 5 cum per month. Above this minimum, prices increase with the level o f consumption and generally vary across companies. The average volumetric tariff for the country stood at about 6 U S cents in2002 and it varied from 2 cents for monthly consumptionbelow 20 cum, to about 4.5 cents and 12.5 cents respectively for 20-40 and for more than 40 cum of monthly consumption. A year earlier (2001), the average price paid inthe bracket 0-20 was only one cent and the corresponding volumetric bill didn't exceed 18 cents against 48 cents in2002. Tariffs and water bills are low even if when related them to income and they are extremely l o w by comparison with tariffs practicedinrecent years in other countries with similar and even lower per capita 62 income than Iran, as table-6 clearly illustrates. Tariffs inJordan, Tunisia and Yemen are between five and fifteen times higher than inTehran and several times higher than the averagetariff in all of Iran. Amman Tunisia Sanaa Algiers Damascus Cairo Tehran All Iran (Yemen) Average 0.62 0.32 0.26 0.22 0.06 0.06 0.04 0.01 Pricekum(US%) Average rates have been increased in proportions varying between 23 and 8% since 1999, the lowest increasebeingrecordedin2003. This moderate increase, which i s expected to be the same in2004, i s far below the inflation rate, which has averaged about 16% in recent years. The Economic Council differentiates between what it considers as low consumption, which varies from one city to another and lies in the range o f 20 to 25 cum per month, and higher consumption. Tariffs for the second category have beenraised by at least twice as much inrelative terms than tariffs for the first category (Table-8). 1999 2000 2001 2002 2003 2004 Volumetric normal tariff Below the 0% 10% 10% 10% 5% 5% minimum Above the 25% 30% 20% 15% 10% 10% minimum Average 20% 23% 17% 14% 8% 8% increase Connection fee 10% 15% 10% 10% 10% 10% Subscription 25% 25% 25% 10% 10% 10% However, new measures introduced in the system have given conflicting signals as to the direction the tariff structure i s taking. Onthe one handtariffs have beenraised ingreater proportions for lower than for higher consumption brackets. Inaddition to the regular increases, the Council introduced since 2001 a penalty or surcharge for consumption exceeding a certain volume varying across cities inthe range o f 18 to 25 cum per month (24 cum for Ahwaz and 20 cum for Shiraz). This penalty was set for the year 2002 at 100% of the tariff given by the formula for consumption above the cut-off volume. It has been raised to 150% in 2003 and is expected to be further increased to 200% in 2004. These changes are thus widening the tariff gap between low and highconsumptionbrackets. On the other handthe decision has been taken to set lower bound and upper bounds for tariffs, defined with respect to average cost. In2002 the lower bound was set at one fourth o f average cost and the upper bound at three times the average cost. This adjustment explains the significant increase in the average tariff for the low consumption category of 0 to 20 cum per month between the years 2001 and 2002 (Table 5). The Council raised the lower bound to one third and reduced the upper bound to 2.5 of average cost in 2003. These changes reduce tariff differences between consumption brackets and therefore work inthe opposite direction of the first measuresof tariffincreases. Moreover, and inspite ofthese increases, revenues from water sales, and from wastewater when applicable, barely cover operation and maintenance cost inmost cases. The workmg ratio for Ahwaz WWC is estimated at 96% and 90% respectively for the budget years 2001-2002 and 2002-2003 while that for Shiraz it has been estimated at 107% and 92% for the same 63 years. These ratios are currently significantly above the ratio o f 75% targeted for the end o f the project period. The rate structure i s needlessly complex for both volumetric rates and connection fees. Volumetric tariffs are based on complex formulas that differ across consumption brackets and WWCs. Because of this complexity the tariff structure lacks transparency. Moreover, the structure is such that rates increase by more than threefold when consumption rises from 20 cum or less to slightly higher volumes. This sharp change may not be an issue under the existing system in which tariffs are generally low but deserves to be reviewed under a new framework inwhich tariffs would be based on costs and rebalanced between consumption brackets. It i s important to stress in this regard that 15 to 20 cum o f water consumed per month represents non negligible quantities which should not be associated with low income households under a cost-based tariff system. The system i s even more complex and less transparent for connection rights.Given these complexities and inappropriate targeting, reform i s needed inorder to address the mainobjectives ofcostrecovery, efficiency, transparency andequity. Regarding sewage bills they are currently levied and collected only in city neighborhoods where a network exists based on the water bills (70%). Since these services have been very limited, or practically non-existent, the need has not yet been felt by the WWCs to assess the costs involved. As these services develop costs should be assessed separately from water so as to evaluate the appropriateness o f the existing tariff structure. All these shortcomings point to the needfor a consistent and comprehensive tariffreform. Aware o fthis need, the Government has appointed a worlung group to that effect. According to members of this group, the proposed reform will be in line with the objectives set inthe draft Fourth Development Plan (2005-2009), which are simple and transparent tariff structures and full cost recovery for water supply and wastewater services. Since most urban households are already connected to the water network and only a few are connected to a sewerage network that i s yet to be constructed in most cases, the issues o f willingness to pay and affordability o f connection rights may arise. In order to ease the burden the government has facilitated household access to bank credit for this purpose. For water consumption, a guiding objective is to gradually narrow the block rate spread, which i s too wide under the existing system, to move ultimately to a unique cost-based tariff system and to provide income subsidies to the poor. This implies that the tariff reform, along with significant improvements in productivity and in the management o f these companies, should aim at reducing this ratio towards the 75% target. The principles stated inthe Fourth Development Plan are soundand go inthe right direction o f an efficiency based tariff policy. Guided by these principles, a comprehensive and consistent reform should replace the inconsistent piecemeal approach o f recent years. 64 Annex 4(b): Socioeconomic Survey: Analysis of Willingness to Pay and Results ISLAMIC REPUBLICOFIRAN AHWAZ AND SHIRAZWATER SUPPLY AND SANITATIONPROJECT The poor sanitation situation and the unsuitable quality of potable water in Ahwaz have constituted a threat to public health. Inboth cities, Ahwaz and Shiraz, wastewater i s improperly discharged into open canals, streets and surrounding areas, especially inthe eastern section of Ahwaz. Inaddition to creating an unpleasant sight, this action has caused the spread of many water-bome infectious diseases (diarrhea, conjunctivitis, hepatitis A andB,paratyphoid, typhoid, dysentery). Giventhese poor conditions it is important to assess how the inhabitants perceive and value the project. Several information-gatheringtechniques have been used inthis SA to obtain socio-economic data and in particular to: gauge the attitudes of residents towards current and proposed water and wastewater services; elicit the willingness to pay of households of different socio-economic backgrounds for improvements in sanitation and water supply services that will be brought about by the newproject; and identify potential problems that could disrupt the development and execution o f the project, explore any potential negative results that could impact vulnerable section o f the population, determine mechanisms for addressing community concems, and guide on- going monitoring procedures. The mainapproaches/techniquesusedconsisted of: A sample survey of about 800 households stratified by income and wastewater connections, to obtain basic socio-economic information and data on willingness to pay (WTP) and potential affordability of increasedpayments for water supply and wastewater disposal; Focus group discussions with local residents in different parts o f the city to enhance the data obtained from the household survey and to promote community participation inthe design and implementationo f the project; and Stakeholder interviews with government and non-government agencies. The willingness survey involved about 800 households located inthree different areas o f each o f the two cities of Ahwaz and Shiraz, which are distinguished according to the price o f land. Barring data on income distribution, the survey uses the price of land as a proxy o f income or standard of living.The three areas thus defined are low-income, middle-income and high-income areas and the sample includes inthe case of Ahwaz respectively 390,280 and 130households. Regardingwillingness to pay for the project sanitation services, a distinction i s made between connection fees and volumetric fees and a second distinction i s made between households already connected to the sewerage network and those which are yet to be connected. The first category of households was randomly assigned a proposed additional connection fee equal to 25%, 50% or 75% o f the average connection fee currentlycharged by the city WWC. The second category of households i s divided inthree sub-categories according to income level (price o f land). The low-income sub-category i s randomly assigned 25%, 50% and 75% of average connection fee; the middle-income sub-category i s assigned between 100% and 150% o f average fee while the high-income sub-category i s assigned the higher 65 proportions of 175%, 200% and 225%. Interviewedhouseholds were asked to declare whether they would pay the proposed amount for connection or not. The interviewer explained, on the basis of the questionnaire, that connection fees were neededto cover capital cost. The second contribution requested from households is a volumetric bill, which is supposed to cover the operation and maintenance of the sewerage network. The amounts proposed inthe survey are chosen as proportions of latest bills.Fivepercentages, 75%, loo%, 125%, 150%, or 200%, were randomly assigned to households and converted in nominal values. Again, the question is closed, households are asked to state their willingness or unwillingnessto pay the proposed amount. Data provided by Ahwaz Water and Wastewater Company (AWWC) showed that 72% of all consumers were already connected and paid monthly fees, and the remaining customers (28%) were not connected. Inthe caseof Shiraz only 10% ofthe populationis already connected. For Ahwaz, 50% o f the inhabitants were located inthe poorer areas, 35% in the middle class zones, and 15% in higher income level zones. These percentages were then considered in allocating questionnaires into three income groups and two categories (connected and not-connected). For this purpose, first the total number of households was divided into connected and not- connected categories using the above percentages. As a result 580 questionnaires were allocated to connected households and 223 to unconnected ones. The next stage involved calculating the total number o f households living inthe poor, middle and high-income areas of the city and dividingthese by the required number of questionnaires to provide the sampling interval for eachincome group (Table 1). These were obtained separately for connected and unconnected consumers. When these were applied to the AWWC consumer lists, the initial list of sample households was obtained. Table- 1: DistributionofquestionnairesperincomegroupsinAhwaz Income group Lower Middle Higher Total Numberof questionnaires 391 283 129 803 I Percentage I 49% I 35% I 16% I 100% I Monthly income averages about US$360 among households of the sample. About 20% o f these households declared that their revenue i s below US$175 per month while almost 50% put their revenue in the range of $175 to US$375. Differences in income level across groups are not large, implyingthat the breakdown of the city in zones according to the price of land does not adequately match income distribution. Households were requested to state whether they were willing to pay a randomly assigned amount for connecting to a new sewerage network, an additional amount for an improvement in the network (rehabilitation and treatment) for those who are already connected, and an absolute amount for households that are not connected yet. They were also requested to state their willingness to pay for operation and maintenance o f the sewerage network as well as for improvements in the water system throughrehabilitation o f the network and other actions such as the change inwater intake inAhwaz from a wastewater-polluted intake to another upstream intake. The additional connection fee that was put forward inthe survey varied betweenthe equivalent of US$32 and US$96 for connected households and between US$32 and US$288 for non connected households. For the first category o f households the proportion o f a positive response varies between 42% and 49% (Table-2-a). These are relatively low positive response rates but it should be recalled that what i s 66 requested from these households inthe survey i s an additional payment since they or former owners had already paid connectionfees. Table-2-a- Willingness to pay results for wastewater connection fees in Ahwaz (Connected households) Connectionfee Additional connection (% of averagefee) fee (inUS$) Percentage ofrespondents Willing to pay Notwilling to pay 25% 32 43.5% 56.5% 50% 64 42% 58% 75% 96 49% 51% InShiraz the constructionofthe sewerage network is still inearly stage andonly 10% ofthepopulationis connected. The current average connection fee i s estimated at about US340, which i s muchhigher than in Ahwaz. The survey methodology and the WTP questionnaire are the same inbothcities. Regarding WTP o f an additional fee for the minority of households that are already connected, the results show that positive responseproportionsbetween33 and almost 50% (Table-2-b). Considering that these households are askedto pay new additional fees, these proportions are not low. Table-2-b- Willingness to pay results for wastewater connectionfees in Shiraz (Connected households) Connectionfee Additional connection (% of average fee) fee (inUS$) Percentageofrespondents Willing to pay Not willing to pay 25% 85 43.8% 56.2% 50% 170 48.3% 51.7% 75% 255 33.3% 66.7% For the second category of Ahwaz households, the non-connected ones, the amounts requested are new connection fees, varying between 32 and US$96 in the low income area, 128 to US$192 in the middle- income area and 224 to US$288inthe high-income area. The positive responserates are surprisinglylow, varying inthe range o f about 12to 54% (Table-3-a). 67 Table-3-a- Willingnessto pay resultsfor wastewater connectionfees inAhwaz (non-connectedhouseholds) Connectionfee Connection fee Percentageof respondents (% of average fee) (inUS$) Willing to pay I Not willing to pay I Low-income area: I I I I 25% 32 33.3% 66.7% 50% 64 11.8% 88.2% 75% 96 43.2% 56.8% For the second category of Shiraz households, the non-connected ones which account for 90% o f all households, the amounts requested are new connection fees, varying between 85 and US$255 inthe low income area, 340 to US$510 inthe middle-income area and 595 to US$765 inthe high-income area. The positive responserates are inthe range of about 32 to 52%, which are higher than inAhwaz, even though the amounts requested aremuchhigher inShiraz (Table-3-b). Table-3-b-Willingnessto pay resultsfor wastewater connectionfees in Shiraz (non-connectedhouseholds) Connection fee Connectionfee (% of average fee) (inUS$) Percentageof respondents I Willing to pay I Not willing to payI Low-income area: 25% 85 35.3% 64.7% 50% 170 33.6% 66.4% 75% 255 31.8% 68.2% Middle-income area: 100% 340 41.5% 58.5% 125% 425 48.1% 58.9% 150% 510 32.0% 68.0% High-income area: 175% 595 52.5% 47.5% 200% 680 48.7% 51.3% 225% 765 44.4% 55.6% All households of the survey were also requestedto payrandomly assignedpercentages oftheir water bill in order to cover the O&M expenses on the new sewerage system (Table-4-a for Ahwaz). The 68 corresponding average amounts vary from US$3.4 in the sub-sample to which a 75% proportion of the water bill i s assigned, up to US$7.2 for the sub-sample that i s requested to pay 200% of its water bill. The positive response rates are much higher than for connection fees, even if they all fall in a range below 50% Table-4-a-Willingness to pay resultsfor wastewater O&Mfees inAhwaz (all households) Percentage of Average monthly current fee amount ineach Percentageofrespondents bracket (inUS$) Willing to pay Not willing to pay 75% 334 43% 57% 100% 498 40.8% 59.2% 125% 593 48.3% 51.7% 150% 5,4 45% 55% 200% 772 45.2% 54.9% For Shiraz, the contribution to O&M of the sewerage system, which is requested in the survey, varies between 150 and 200% o f the monthly bill, which goes for the sample households form US$5.5 to US$6.7. WTP proportions do not exceed50% of the number o fhouseholds (Table-4-b-b). Table-4-b-Willingness to pay resultsfor wastewater O&MfeesinShiraz (all households) I Perc Percentage of Average monthly curmlL current ~fee amount ineach Percentageofrespondents C C - bracket (inUS$) Willing to pay INot willing to pay 75% 5.5 44.2% 55.8% 100% 731 47.8% 52.2% 125% 5,7 49.0% 51.O% 150% 539 45.7% 54.3% 200% 637 44.9% 55.1% Finally, households expressedtheir willingness to pay for expenses on improvingthe water supply system in Ahwaz, through the rehabilitation of worn out pipes and the transfer of the water intakes. The additional amount requested varies between 1.9 andUS$4.5 depending on the income level as defined in the sample. The percentages of positive responses are above 50% for the middle and high-income areas and about 45% in the low-income area. (Table-5). Results for Shiraz are similar to hose of Ahwaz, although the positive responseproportions are somewhat lower. 69 Table-5- Willingnessto payresultsfor improvementsinthe water supply network inAhwaz (allhouseholds) Percentageof Average monthly .onthly Income group current water bill amount inieach Percentageofrespondents I I bracket (inus$) UIatiKGL 1111US$) Willingto pay Not willing to pay Low-income 25 - 75 % 179 44.9% 55.1% Middle-income 100- 150% 398 55.6% 44.4% High-income 175 -225% 455 55.1% 44.9% WTP for connection, for covering O&M expenseson sewerage as well as for investment inimproving the water supply system are positively correlated with the level of education of the head o f the household, meaning that the higher his education, the more the head of the household i s willing to pay for the new services. This relationship holds at varying acceptable degrees of statistical significance for the three types o f services (connection and discharge o f wastewater and improvement o f the water system). As expected, the correlation between WTP and the level of income i s also positive, although its statistical significance i s weaker for connection fees than for use of the network. Generally, the results of the survey have shown low levels of WTP, even though the payments requested inthe survey were moderate. The relatively low levels ofincomeinAhwaz maypartly explainthe lack of strong positive response, but other social attitudes may also be at play. It i s believed that all matters outside the house or the ownership of a person are the responsibility of the government. This includes matters such as provision of electricity, water, health, etc. This insufficient interest infinancial contributionto the new services does not implythat the citizens do not appreciate the importance of new sanitation services. On the contrary, according to the results o f the rapid appraisal section of the questionnaire, 78% o f the respondents inAhwaz have mentioned the project as beingcritical, 10%have statedthat people should not pay for the project, 21% have accepted to pay if the fees are not too high and if they can be paid by installments, and finally, 14% have agreed to pay unconditionally. The rest of the respondents have emphasized the fact that they are already paying taxes, so they don't see why they should pay more. The respondents were also somewhat skeptical towards the implementation of the project by government organizations. This was especially due to previous promises and commitments made which were not materialized and left such projects unfinishedin some cases. That i s why 26.7% o f respondents insisted on rapid implementation of the project. About 30% of respondents, despite their agreement with the idea o f the project, were distrustful of project implementers and expressedconcerns that the project might be mismanaged or deviated from its main goals. The Focus Group Discussion results give a similar feedback, although they show more readiness among low-income groups living inpoor districts to pay for improvement of water and wastewater services, as health problems are more critical inthose neighborhoods. However, these groups believed that financing the project was the responsibility o f the government. Such attitude has been cultivated by the promises made by the Government in the past to provide such services free o f charge. Changes inthese attitudes may be already talung place butmajor shifts will take time to materialize. Affordability: The water bill i s not currently an issue since the average price o f water does not exceed five U S cents per cum both inAhwaz and Shiraz. Given average consumption volume and a subscription fee o f 25 cents (2,000 Rials) for most households, the average monthly water bill does not exceed US$1.5. 70 Given an average monthly income o f US$360 for the sample o f households surveyed in Ahwaz, this water bill accounts for about 0.4% o f income. Even if we assume that households tend to overstate the level of their income for social reasons, the water bill should not account for more than 0.7-0.8% o f average income. Adding the sewerage component, which i s set at 70% o f the water consumption bill, will only add an extra US$0.87. Thus, inthe current tariff system, the average household pays about US$2.4, subscription fee included, or about 0.67% o f the average income declared in the survey. The water and wastewater bill represents similar income shares among low-income households. 71 Annex 5: FinancialAnalysis Summary ISLAMICREPUBLICOFIRAN AHWAZ AND SHIRAZ WATER SUPPLY AND SANITATION I. ProjectFinancialCost-BenefitAnalysis The financial analysis compares the project costs with the project benefits. All costs and benefits are expressed in current terms and are incremental in nature, valued as the difference between the costs/benefits "with the project"and "without the project". The analysis was carriedout over the period o f the average expected life o f the investments o f 25 years. The detailed financial analysis o f each WWCs inthis Annex presents the present values (PVs) o fthe financial flows andthe NPVs and FRR for Ahwaz and Shiraz, respectively. For the financial benefits, the WWCs will have the increased sales revenue due to the ability to meet increased demand at a higher tariff implemented to meet the financial targets agreed to and the cost savings due to reductions in water losses. On the cost side, the WWCs will have the outlays for the project's capital cost and capital investments beyond the project periodestimated inthe feasibility studies, the increased salary and utility costs due to the project and the increased maintenance spending as estimated inthe financial forecast. 11. FinancialAssessmentofthe Water andWastewater Companies(WWCs) This Annex presents a detailed assessmento fthe two WWCs, including the impact on the tariffbased on different scenarios for the financing of the investment costs and level o f cost recovery achieved. The analysis below deals with the past, current and future financial performance o f the WWCs. The financial year for the WWCs ends on March20. Pastand CurrentPerformanceof Ahwaz Based on audited accounts for the past four years, Ahwaz WWC has been incurring significant net losses which are projectedto continue inthe year ending March 20, 2004. Operatingincome before depreciation and interest has been positive resulting in a worlung ratio (operating expensesloperating revenue) below 1. However, spending on maintenance has been insufficient in the past (on average 1.5% o f gross fixed assets, whereby industry standard i s around 2.5-3%), which makes the achieved working ratio of 0.75 underestimated. Depreciation represents a significant expense to the WWC, reaching 26% o f total revenue in2002l03. The financial performance o f the company is further aggravated by highwater losses resulting ina much larger need for water to pass through the system than i s billed for. Water losses were as high as 46% in 1999100 and have come down to about 37.7% in 2002103. Of the water that passes through the system, only about 74% i s estimated to be paid for in 2003104. At the end o f 2002103, the accumulated accounts receivables equaled 12months o fbillings. FutureFinancialPerformanceofAhwaz WWC Projections to assess Ahwaz's future financial position and performance have been carried out for the period 200415-2013114. The projections have been prepared based on assumptions summarized in this Annex. Detailedassumptions are recorded inthe Project Files. 72 The projections for the future financial performance have been anchored by the financial targets agreed between the Government of Iran and the World Bank during their sector strategy discussions in September 2003. These financial targets comprise the following: Working ratio of 0.75 by the financial year 2008/09 (operating expenses excluding depreciation and interesdoperating revenue). Labor productivity reaching 3 by project completion (expressed as number of staff per 1,000 water connections). Accounts receivables reduced to 4 months by 2008/09. (During appraisal, more analysis will be done to identifymeasuresto reach agreedupontargets i.e., actionplanfor arrears, write-off etc.,). Unaccounted for water to reach 27% by 2008/09. The targets aim to gradually improve the financial and operational performance of the WWC by achieving cost recovery of O&M, and part of capital investment. Meeting these targets will require increases in the water tariff, but will also depend on simultaneous improvements in collection performance and a significantreduction inwater losses. The analysis considers a base scenario whereby the financial targets agreed are achieved under the following financing arrangement (Illustrated in Table-1 below): Part of water supply investment i s financed by a loan. The rest o f water supply and all wastewater investment are financed by connection fees and grants from the Government. The analysis shows that, through 31,500 new water connections and 22,300 new wastewater connections, Ahwaz would be able to contribute 166 billion Rials (US$19.7 million) to the financing o f the project from new connections. This is based on a water charge (connection and installationfee) o f 2.3 millionrials and a wastewater charge of 2.76 million rials). Connection BankLoanto BankLoanto Government fees Government Government Grant passedto WCC as a passedto WCC to WCC Loan as a Grant Water Yes Yes No Yes Wastewater Yes No Yes Yes Technical Support Unit, No No Yes Yes Capacity Building, Training and Studies A second scenario which analysis the impact on the tariff if full cost recovery is to be achieved has also been included. As illustratedinTable 2 below, the base and the reference scenarioshave different impact on the performance of the Ahwaz WWC. Inthe base scenario, the tariff increase inyear 2004105 would be significant and would reach 84%. After this year it would fall to about 32% and then lie around 15% during the rest of the project implementation period. However, a net deficit would be incurred to the company becausewhat remains from the revenues once operating expenses are coveredi s still insufficient to cover depreciation and financial charges. The net accumulated deficit would amount to US$7.9 million over the period 2004105-2013114. 73 Table 2: Ahwaz Tariff Increase Requirements I I2004/05 2005/06 2006/07 I I I2007/08 I2008/09 Total 1 Working ratio 0.90 0.85 0.83 0.8 0.75 Deficit (US$ m) -7.9 Increase intariffrequired ("A) 84.8% 32.5% 14.2% 18.0% 19.6% Average: 31.5% Increase intariffrequired (%) 100.6% 21.6% 22.1% 21.1% 15.1% Average: 32.9% for full cost-recovery An important issue i s that in both cases Ahwaz would generate a positive cash flow position. This i s achieved in part by an overall improvement in the collection performance from the current rate o f about 74% to 90% by the end o f the project implementation period (2008109) while simultaneously making provisions for doubtful revenue o f its billings and writing o f f arrears. Given the age o f some o f the accounts receivables listed above, it would seem likely that some write-offs should take place (see Table 3 below). It has been agreed that a detailed Action Plan be prepared and implemented during first 2 years o f project execution. This action plan will identify the necessary measures to increase the collection o f billings, including arrears but also, where appropriate, write-off consumer debts that are unlikely to be collected. This effort will be done inparallel to reducingthe accounts receivables to agreed 4 months by 2008109. Table 3: Ahwaz Accounts Receivables as of 2002103 Consumer category Receivable (bn rials) Number of days outstanding Domestic 37.6 255 Tndustrv 2.3 69 Commercial 15.7 357 Government 15.7 525 Public 11.2 196 Military 0.26 201 Other 9.8 390 92.6 Assumptions for proiections of financial Derformance of Ahwaz WWC The analysis i s based on actual audited results for the years 1999100-2002103 and company estimates for 2003104. The projections cover the years 2004105-2013114. The project implementation period is 2004105-2008109. Key Assumptions for financial statements Water demand i s assumed to be increasing at the average rate of 1.5% per year as of 2004105 (Source: company). Water connections are assumed to be increasing at the rate of 3% per year as o f 2004/05 (source: company), adding 31,500 new water connections between 2004105 and 2008109. Sewerage connections are assumed to be increasing at the rate o f 3% per year as o f 2004105 (source: company), adding 22,300 new connections between2004105 and 2008109. 74 Water tariff Base scenario: i s assumed to be increasing as required to meet the financial targets agreed to between the Government o f Iran and the World Bank (by 2008109 a working ratio o f 0.75, accounts receivables reduced to 4 months, labor productivity o f 3 staff per 1,000 connections and unaccounted for water reduced to 27%.) The water supply components are assumed to be provided partly as a loan to the company. The Government i s assumed to cover in grant form the cost o f water components not covered by the Bank loan or connections fees as well as the cost o f the sanitation components not covered byconnection fees. Sewerage charge the charge for disposal o f wastewater i s calculated as a coefficient o f the water sales and varies with consumer category. InAhwaz, consumers with a connection pay for this service regardless if there is a waste water treatment plant inoperation or not (Source: company, audited accounts) Water losses include technical and non-technical losses and were 37.72% in 2002103 (source: company). Losses are estimated to be have been reduced to 35.6% in2003104 andare estimatedto reduce gradually towards 27% by2008/09 as agreed between the Government o f Iran and the World Bank (Source: strategy discussions) Water resources 90% are assumed to come from the KarounRiver and 10% are from wells. Water Production comprises water requirements to meet demand plus losses. Reduces over lifetime o fproject as losses are reducedfaster than demand grows. Water cost Ahwaz pays a water right to the regional water board for both the Karoun and the wells. The cost was 22.0 rialslm3 in 2002103 and i s assumed to increase at the rate o finflation (Source: NWWEC) FinancialStatement Domestic inflation is assumed to be 16% per year as o f 2003104 Revenues there are 4 sources o f revenues for the company: water sales, water fixed subscription fee, disposal o f sewerage and sewerage fixed subscription fee Subscription fees water: 43,800 rialslsubscriber; sewerage: 40,943/subscriber (source: company). The fee is assumed to increase by 10% per year (source: Government law limitingutilitytariff increases to 10%) Salaries are assumed to increase with the rate of inflation, 16%per year Project salaries project i s assumed to require an additional workforce o f 340 people at a cost o f 6,062 million rials. (Source: feasibility study). It i s assumed that they are hired gradually over 2004105 (50%) and 2005/06 (100%). The salary cost i s assumed to increase with the rate o f inflation 75 Electricity assumed to vary according to production volume and the tariff, 40 rialsfkwh in 2003/04, is assumed to increase by the rate of inflation, 16% per year (Source: NWWEC) Project electricity additional electricity requirements due to project are estimated at 89 kWh per person in Ahwaz. The additional electricity needs are expected to mature gradually reaching 100% in 2007/08. (Source: feasibility study). Tariff o f 40 rials/kWh in 2003/04 i s assumed to increase by 16% per year (Source: NWWEC) Chemicals assumed to vary according to production volume and increase by the rate o f inflation Project chemicals additional chemicals due to the project are estimated at a value o f 1,119 million rials (Source: feasibility study) and are expected to reach 100% by 2007/08 and the cost increases by the rate o f inflation thereafter Maintenance assumed as a percentage of gross fixed assets (GFA) and assumed to increase gradually towards 2.5% of GFA by 2008/09 (Source: industrypractice) Subcontracting this is for meter reading and assumed to increase with the rate o f inflation (Source: NWWEC). Other costs include rental o f buildings, utility services for administration, vehicles, etc. Assumed to increase at 5%. NWWEC an administration fee is paid to the NWWEC. Assumed to increase by 25% during the project implementationperiod (2004/05-2008/09) to contribute to the expected increased cost o f the NWWEC as it enhances its regulatory function. Assumed to increase by 5% per year after 2008/09 Provisions Include the writing-off o f 40% o f its 2004/05 current account receivables over a five-year period (8% each year) and (considered bad debts) and a provision for doubtful collection o f current billings equivalent to all non collected billings o fthe current year. Depreciation the current charge i s based on the straight line methodology and assumed to continue. To this charge, the project assets are added which are assumed to depreciate over 25 years on average Financial charge comprises interest payments on borrowings. The only debt assumed to be serviced i s the World Bank loan to the Government o f Iran, which has been passed onto the WWC at the cost o f borrowing. An average interest rate o f 5.35% has been assumed in the projections based on a 10-year forecast o f LIBOR and the World Bank spread. A commitment fee o f 0.75% less a 0.5% waiver, i.e. 0.25% on the undisbursed amount i s applied (source: World Bank Financial Products Group). It is assumed that the front-end fee o f 1%o fthe loan amount will be bome by the Government. Profit tax The WWCs are exempt taxes (Source: NWWEC) 76 Sources and Applicationsof Funds Internal sources comprise net operating income before financial charges with the depreciation charge addedback. External sources comprise connection fees, borrowings and grants from the Government. Capital investments comprise the total o f capital investments undertaken by the company including the Project. During the project implementation period (2004/05- 2008/09), it i s not expected that the company will undertake any other capital investment. Taxes Taxes are exempt Debt service comprises interest charges and repayments on borrowings. Working capital i s the annual change in currents assets (less cash) and current liabilities Balance Sheet Gross fixed assets represent the previous years gross fixed assets plus the work inprogress as it i s completed Work inprogress represents the project as it i s implemented starting in2004/05 LTinvestments represent investments in other companies and intangible assets (i.e. rights). Estimatedto remain constant Net Account receivables represent previous years receivables and the portion o f current years billings not collected less the provision for doubtful revenue (from arrears and current billings). Installments it is assumed that 70% o fthe consumers will pay for their connection over a 3 year period. Inventory represents spare parts, chemicals, etc. Connectionfees assumed to accumulate as new consumers connect to the water supply and sewerage network. Connections fees comprise the connection right and the installation fee. (source: NWWEC) Retained earnings/ represents accumulatedearnings/losses incurred by the company Losses Longterm debt current long-term debt represents a loan taken by the NW&WWC on behalf o f Ahwaz to finance capital investment. Government support represents support from the Government to finance capital investments. WorldBank Loan the total project cost i s US$252.9 million (including US$7.2 million for studies, technical support unit, training and capacity building.) Connection fees are estimated to cover US$19.7 million, leaving US$233.2 millionto be 77 financed by the Government with support from the World Bank loan. The Bank loan i s assumed to partly cover the cost of the water supply components not covered by the connection fees and the institutional support program. The cost of water components not covered by the Bank loan or connections fees as well as the cost of the sanitation components not covered by connection fees: Connection fees: US$19.7 million Bank Loanto Govt passedas Loanto Company: US$43.8 million Bank Loan to Govt passedas Grant to Company: US$105.2 million Govt support inthe form o f Grant to Company: US$83.7million Total: US$252.3 million Account payables assumedto decrease in terms o f period of time taken to pay suppliers (water rights, electricity, chemicals, subcontracting and other costs) to arrive at 90 days on averageby the end of the project implementationperiod (2008/09) Past and current performanceof Shiraz Like Ahwaz, Shiraz has incurrednet lossesthe past four years based on its audited accounts and a loss i s also estimated for the year ending March 20, 2004. The working ratio in the past has been very weak with operating expenses before depreciation and interest reaching as high as 1.17 in 2001/02 but came down in 2002/03 to 0.92 due to a significant increase inrevenue as a result o f a large tariff increase that year. The working ratio for 2003/04 i s expected to be below 1but to have deteriorated from 0.92 to 0.98. The situation would have been even worse had Shiraz been spending sufficiently on maintenance. Maintenance spending as a percentage of gross fixed assets was as low as 0.29% in 2002/03 when the industry standard calls for 2.5%-3%. Depreciation represents a significant expense to the WWC, for example in2002/03 the depreciation charge accounted for 16%of total revenue. Water losses have averaged about 30% in the past. Collection performance has been very good in the past but i s estimated to have deteriorated in 2003/04 possibly as an effect due to the increased tariff in 2002/03. The good collection performance of the past has resulted in relatively manageable accounts receivables, which reached 5.6 months at the end of 2002/03. FutureFinancialPerformanceof Shiraz WWC Projections to assess Shiraz's future financial position have been carried out for the period 2004/5-2013/14. The assumptions for the projections are summarized below and a detailed record o f the assumptions i s kept inthe Project Files. The projections have been undertaken with the financial targets outlined above inthe section covering Ahwaz that have been agreedbetween the Govemment o f Iran and the World Bank. Likewise, an analysis has been undertaken to assess the tariff required for full cost recovery as inthe case of Ahwaz. The analysis shows that, through 38,000 new water connections and 50,000 new wastewater connections, Shiraz would be able to contribute 323 billion Rals (US$38.5 million) to the financing o f the project from new connections. This is based on a water charge (connection and installation fee) o f 3.6 millionrials and a wastewater charge of 3.5 millionrials). The tariff increasesrequired differ in the different scenarios (see Table-4 below). Inthe base scenario - which targets the tariff increase requiredto meet the working ratio target o f 0.75 by 2008/09 - the tariff increase i s very significant in the year 2004/05, about 70% and would be greatly reduced thereafter to average about 34% duringthe project implementationperiod. A net deficit o f US$10.4 million would be incurred. Inthe second scenario (achieving full cost recovery), the tariff increase in2004/05 would reach 78 88%, but the average increase foe the project implementation period would only be 2.4% greater than in the base scenario. 2004105 2005106 2006107 2007108 2008109 Total Working ratio 0.90 0.85 0.83 0.8 0.75 Deficit (US$ m) -10.4 Increase intariff required(%) 70.4% 22.6% 18.3% 31.6% 30.8% Average: 33.6% Increase intariffrequired (%) for 88.4% 14.7% 30.5% 33% 24.2% Average: 36.% fullcost-recovery InShiraz, the collection performance has been relatively good inthe past with overall collection rates reaching as highas 90%. The collection performance i s reported to have deteriorated in2003/04 possibly as an effect due to the increased tariff in 2003/04. Based on the company-audited statements, the accumulated accounts receivables equaled about 24.7 billion rials (US$2.94 million) in 2002/03. The largest debtor i s the domestic consumer (50%), followed by the government (16%). The arrears from the domestic category average about 76 days and the government's arrears average 430 days (See Table-5 below). Table 5: ShirazAccountsReceivablesas at 2002/03 Consumer category Receivable(bn rials) Number of days outstanding Domestic 10.1 76 Industry .009 67 Commercial 3.6 111 Government 4.3 431 Public 2.1 422 Military 3.3 193 Other 1.3 328 24.7 To meet the financial targets agreed upon to, an overall improvement inthe collection performance from the current rate of about 75% to 90% by 2005/06 while simultaneously making provisions for doubtful revenue of its billings and writing off arrears i s required. Given the age o f some o f the accounts receivables listed above, it would seem likely that some write-offs should take place. It has been agreed that a detailed Action Plan be prepared which will identify the necessary measures to increase the collection of billings, including arrears but also, where appropriate, write-off consumer debts that are unlikelyto be collected. It is important to note that underboth scenarios analyzed, Shiraz would have to make extra efforts to manage its workmg capital inorder to avoid negative cash flow certainyears. Assumptions for proiectionsof financial performanceof Shiraz WWC The analysis i s based on actual audited results for the years 1999/00-2002/03 and company estimates for 2003/04. The projections cover the years 2004/05-2013/14. The project implementation period is 2004105-208/09. Key Assumptionsfor financialstatements Water demand i s assumed to be increasing at the average rate o f 1.3% per year as of 2004/05 (Source: company) 79 Water connections are assumed to be increasing at the rate of 2.5% per year as of 2004/05 (Source: company), adding 38,000 new connections Sewerageconnections are assumedto reach 75,000 by 2008/09 by increasing by 10,450 connections per year untilthat year. After 2008/09, the increasewill slow to 5 %per year (Source: feasibility study) Water tariff Base scenario: i s assumedto be increasing as required to meet the financial targets agreed to between the Government o f Iran and the World Bank (by 2008/09 a worlung ratio of 0.75, accounts receivables reducedto 4 months, labor productivity o f 3 staffper 1,000 connections and unaccounted for water reducedto 27%.) The water supply components are assumedto be provided partly as a loan to the company. The Government i s assumed to cover in grant form the cost of water components not covered by the Bank loan or connections fees as well as the cost o f the sanitation components not covered byconnection fees. Sewerage charge the charge for disposal of wastewater i s calculated as a coefficient of the water sales and varies with consumer category. Water losses include technical and non-technical losses and were 32% in2001/02 (source: company). Losses are assumed to have improved to 30% in 2003/04 and then reduce gradually towards 27% by 2008/09 as agreed between the Govemment of Iran and the World Bank (source: strategy discussions) Water resources 80% come from wells and 20% from river sources Water Production comprises water requirements to meet demand plus losses. Increase very slowly as demand i s growing faster than the reductioninlosses. Water cost Shiraz pays a higher price for the water from the dam than from its own wells. The cost for water from the river was 285 rialdm3 in 2002/03 and 19.92 rialdm3 for water from the wells. The cost i s assumed to increase at 20% for the water from the dam and 10% for the water from the wells (Source: NWWEC) Financial Statement Domestic inflation i s assumedto be 16%per year as o f 2003/04 Revenues there are 4 sources of revenues for the company: water sales, water fixed subscription fee, disposal of sewerage and seweragefixed subscription fee Subscription fees water: 43,993 rialshbscriber; sewerage: 3l,l85/subscriber (source: company). The fee is assumed to increase by 10% per year (source: Government law limitingutilitytariff increases to 10%) Salaries are assumedto increasebythe rate o f inflation(Source: NWWEC) 80 Project salaries project i s assumedto require an additional workforce of 340 people at a cost of 5,006 million rials. (Source: feasibility study). It i s assumedthat they are hired gradually over 2004/05 (50%) and 2005/06 (100%). The salary cost is assumedto increasewith the rate of inflation Electricity assumedto vary according to production volume and the tariff, 40 rialsfkwh in2003/04, is assumedto increasebyinflationeachyear (Source: NWWEC) Project electricity additional electricity requirements due to project are estimated at 280,100 kWh/day. The additional electricity needs are expected to mature gradually reaching 100% in2007/08. (Source: feasibility study). Tariff o f 40 rialsfkwh in2003/04 is assumedto increasebyinflation every year (Source: NWWEC) Maintenance assumedas a percentage of gross fixed assets (GFA) and assumedto increase gradually towards 2.5% of GFA by 2008/09 (Source: industrypractice) Other costs include rental of buildings, utility services for administration, vehicles, etc. Assumedto increase at 5% as of 2004/05. NWWEC an administration fee is paid to the NWWEC. Assumed to increase by 25% duringthe project implementationperiod (2004/05-2008/09) to contribute to the expected increased cost of the NWWEC as it enhances its regulatory function. Assumed to increaseby 5% per year after 2008/09 Provisionfor Include the writing-off o f 20% of its 2004/05 current account receivables Accounts receivable over a five-year period (4% each year) and (considered bad debts) and a provision for doubtful collection o f current billings equivalent to all non collectedbillings of the current year Depreciation the current charge is based on the straight line methodology and assumed to continue. To this charge, the project assets are added which are assumed to depreciate over 25 years on average Financial charge comprises interest payments on borrowings. The only debt assumed to be serviced i s the World Bank loan to the Government o f Iran, which has been passed onto the WWC at the cost o f borrowing. An average interest rate of 5.35% has been assumed in the projections based on a 10-year forecast o f LIBOR and the World Bank spread. A commitment fee o f 0.75% less a 0.5% waiver, i.e. 0.25% on the undisbursed amount i s applied (source: World Bank Financial Products Group). It i s assumed that the front-end fee of 1%ofthe loan amount will bebornebythe Government. Profittax The WWCs are exempt taxes (Source: NWWEC) Sources andApplications of Funds Internal sources comprise net operating income before financial charges with the depreciation charge addedback. External sources comprise connection fees, borrowings and grants from the Government. 81 Capital investments comprise the total o f capital investments undertaken by the company including the Project. During the project implementation period (2004/05- 2008/09), it i s not expected that the company will undertake any other capital investment. Taxes Taxes are exempt Debt service comprises interest charges andrepayments on borrowings. Working capital i s the annual change in currents assets (less cash) and current liabilities Balance Sheet Gross fixed assets represent the previous years gross fixed assets plus the work inprogress as it i s completed Work inprogress represents the project as it i s implementedstarting in2004/05 LT investments represent investments in other companies and intangible assets. Estimated to remain constant Account receivables represent previous years receivables and the portion o f current years billings not collected. Collection performance i s assumed to improve to reach the target o f accounts receivables representing 4 months o fbillings Installments it is assumed that 70% o fthe consumers will pay for their connection over a 3 year period Inventory represents spare parts, chemicals, etc. Connection fees assumed to accumulate as new consumers connect to the water supply and sewerage network. Connections fees comprise the connection right and the installation fee. (Source: NWWEC) Retained earnings/ represents accumulated earnings/losses incurredby the company losses Longterm debt current long-term debt represents a loan taken by the NWWEC on behalf of Shiraz to finance capital investment (Source: NWWEC) Government support represents support from the Government to finance capital investments. (Source: NWWEC) World Bank Loan the total project cost i s US$214.10 million (including US$6.3 million for studies, technical support unit, training and capacity building.) Connection fees are estimated to cover US$38.5 million, leaving US$175.7 million to be financed by the Government with support from the World Bank loan. The Bank loan is assumed to partly cover the cost o f the water supply components not covered by the connection fees and the institutional support program. 82 Connection fees: US$38.5 million Bank Loanto Govt passedas Loan to Company: US$25.1 million Bank Loanto Govt passedas Grant to Company: US$102.1million Govt support inthe form of Grant to Company: US$48.4 million Total: US$214.2 million Account payables assumedto decrease interms of period of time taken to pay suppliers (water rights, electricity, chemicals, subcontracting and other costs) to arrive at 60 days on average by the endof the project implementationperiod (2008/09). 83 b 4-r 2 Y m E e h M P E 0 .3 L Q k Y 8 Q B 43 0 Y m 8 k I N E B 6 s m m k 6 c, 8 0 , , . , , I . I I , , , , , , , , 5 , , , , , , , - p e E n E Q) W Q E m & Q) 1 k .I MI E H h a a k c, Q) B ec 0 c, m Q) k d L 3 3 3 m 3 3 - H 5E p E Q) 3 t; .I k 3 m 0 E 3 ,g I e! 8 a m m I u) u) n E Annex 6(a): ProcurementArrangements ISLAMICREPUBLICOFIRAN AHWAZ AND SHIRAZWATER SUPPLY AND SANITATION General 1. Procurement in the Islamic Republic o f Iran i s governed mainly by the "By-laws on Government Transactions". Inprinciple, this law governs all public sector entities including state owned enterprises. The provisions of these laws allow decentralization in conducting public procurement by the public entity. Although there are no provisions by law for a central procurement organization, the MPO in the Ministry o f Economic Affairs and Finance (MEAF) conducts a central role in public procurement. It regularly issues documents on public procurement that are followed by the public entities. These include regulations, circulars, biddingdocuments, standards for technical specifications and unit prices. These last two are mainly for civil works and consultants. More importantly i s the system for qualifying contractors and consultants. The MPO categorizes all contractors and consultants according to their capacity and specialization. Public entities can invite bidders from among the recommended lists o f these qualified contractors and consultants The entities on these lists will be determined according to the size o f the contract and the capacity o f the contractors and consultants, takmg into consideration their on-going commitments. Recruitment o f international consultants i s always subject to the approval o f the MPO. A draft procurement law i s in its final stages o f being approved. However, the Bank has not reviewed this yet. The major issues that face projects financed by the Bank i s the unfamiliarity o f the MPO and other government entities o f the Bank procurement guidelines and procedures, and consequently not accepting to apply these procedures or allow their precedence incases o f conflict with those o f the Bank. 2. The Bank intends to conduct a Country Procurement Assessment Review (CPAR) in FY04. A Public Expenditure Review (PER) mission was conducted in2003 with participation o f procurement and financial management senior staff and consultants. This has resulted in a good preliminary assessment of the public procurement environment in Iran. This assessment has not been considered as a substitute for the CPAR, but it helped identify some critical issues that need to be addressed under Bank financed projects. These issues were further supported by observations from TTLs, PS and PAS involved in projects in Iran. A dialogue has been initiated between the Bank and the Iranian Government, and in particular MEAF with the objective o f reaching a framework agreement on fiduciary issues in World Bank projects in Iran. The Bank has conducted a mission to address this subject in mid December 2003. The outcomes of this mission will be a Memorandum o f Understanding that will set the steps towards reaching a framework agreement to ensure adequate procurement and implementation arrangements for Bank financed projects inIran. 3. In the interim, the MEAF will provide, on behalf o f the Govemment, a one-year (renewable) exemption for all procurement to be conducted under the project. This exemption will ensure that all procurement will be carried in according with the loan agreement provisions. The procurement packages that will benefit from this exemption are all those listed inthe first year procurementplan. Use of BankGuidelinesandStandardBiddingDocuments 4. Procurement o f Goods and Works will be carried in accordance with the Bank's Guidelines for Procurement under IBRD and IDA Credits (January 1995 and revised in January and August 1996, 128 September 1997 and January 1999). For ICB o f works and goods the standard biddingdocuments (SBD) of the Bank will be used. These will be: Procurement o f Works, Procurement o f Smaller Works, Supply and Installation of Equipment (to be used for the construction and installation o f wastewater treatment plants with the appropriate modifications) and the SBD for the procurement o f Goods. For procurement under National Competitive Bidding (NCB), agreement should be reached on a standard bidding document, in Farsi, that will be acceptable to the Bank to be used for the procurement o f works. The agreement on this document will be under the framework that will be reached as indicated under paragraph 2 above. The draft o f this document will be prepared by the NWWEC and submitted to the Bank for review by end o f May 2004, with a final draft to be ready by end o f July 2004. The agreed procedures for NCB should ensure that all bidding opportunity will be advertised with a reasonable time for submission o f bids (not less then thirty days), evaluation criteria will be clearly stated in the bidding documents, pricing o f bids will be based on unit rates proposed by the bidders and not on offering discounts (or increase) on unit rates, a one envelope system will be used, a public bid opening in which the prices o f bidders are read out will be promptly conducted after the deadline for submission o fbids and award will be to the technically responsive bidder who has offered the lowest price and had the required qualifications. For all evaluation reports, the Bank standard evaluation report form for the Procurement of Goods or Works will be used, to be simplified incase o fNCB procedures. 5. Procurement o f Services will be carried out in accordance with the Guidelines: Selection and Employment o f Consultants by World Bank Borrowers (January 1997, revised in September 1997, January 1999 and M a y 2002). The standard Request for Proposal (RFP) for Selection o f Consultants and the standard forms o f contracts will be used for all contracts above US$lOO,OOO equivalent. A simplified version o f the standard RFP and contracts will be used for contracts below US$lOO,OOO equivalent. Selection o f individual consultants will be carried by comparison o f CV's and using simplified contracts, acceptable to the Bank. For the evaluation o f firms, the Sample Form o f EvaluationReport for Selection of Consultants will be used. One issue that will be discussed and agreed under the framework agreement for procurement arrangements i s the applicability o f the Consultant Guidelines to all Bank financed assignments under the project and that all eligible consultants can apply to participate in the procurement process without any restriction. Advertising 6. A General Procurement Notice (GPN) will be published online in the United Nations Development Business (UNDB), dgMurket and in at least in two local newspapers o f nationtal circulation. The GPNwill provide a description o f the Project and will list all contracts for the works and goods that will be procured under ICB, and consultants' services estimated at more than US$lOO,OOO. Specific Procurement Notices (SPN) for all pre-qualifications, ICBs and NCBs for goods and works will be published in at least two national newspapers. For the construction and installation o f new treatment plants and contracts for works estimated to cost more the $5 million), the SPN will also be published online in the dgMurket and UNDB. For all requests for Expressions o f Interest (EOI) estimated to cost more then $100,000, publicationwill be online inthe dgMurket, UNDB and inthe nationalpress. ProcurementCapacity 7. The preparation mission has conducted a preliminary assessment o f the procurement capacity o f the four water and wastewater companies that were the subject o f the feasibility studies. The contracting departments in these companies have considerable experience in local procurement, and in particular procurement o f works. However, they have no exposure to intemational procurement, nor howledge of 129 Bank procedures in relation to procurement o f large works and selection and employment o f consultants. Weak knowledge of English language represents also a considerable obstacle. 8. The capacity of the contracting departments in the two companies will be strengthened to enable them to handle the procurement activities under the proposed loan. This will be achieved by recruiting a procurement officer in each o f the TSUs that will be established for the each WWCs and a senior procurement officer for the NWWEC. In addition, the WWCs should recruit and/or nominate from the existing staff, candidates to be trained on the Bank procurement guidelines, procedures and use o f StandardBiddingDocuments (SBDs). 9. The main procurement function o f the TSUs in the WWCs will be to conduct national and local competitive bidding for works and the selection o f consultants for the related design and supervision service. For the procurement o f large contracts under ICBs and recruitment o f consultant firms, these TSUs will be supported by the experts recruited within the NWWEC to ensure efficiency, accumulation o f experience and avoid duplications o f efforts. WWCs/TSUs will use local consultants for engineering design and construction supervision for routine works, but would need international expertise for more complex works such as wastewater treatment works. 10. It is critical that the NWWEC and the WWCs should select and recruit qualified procurement experts July 2004. The pre-appraisal mission has provided sample TORSfor the assignments o f these officers. These recruits should be trained on Bank procurement procedures prior to the effectiveness o f the loan. Such training can be carried by arranging training o f these recruits in an institution that delivers training on Bank procurement according to the Bank procedures, or alternatively to arrange for a training workshop to be delivered inIran. The second alternative may be more cost effective and more acceptable to the Iranian Government. ProcurementPlan 11. The procurement plan for the first year i s detailed in Annex 14. This plan contains the programmed activities for water and wastewater networks in the two cities at an estimated value o f US$81 million, and for technical assistance packages at an estimated value o f US$22.43 million. The packaging for the remaining water and wastewater networks will be re-programmed duringthe first year of the project after the consultants for the design o f these networks are recruited.. Each company will update the plan for all the procurement activities under its sub-components. The Senior Procurement Officer in the NWWEC will be responsible for consolidating these plans. Procurement o f all works, goods and services will be undertaken in accordance with this plan as approved by the Bank. This plan has to be updated quarterly. ProcurementImplementationArrangements 12. The procurement for each company will be handled by the T S U o f each company with support from the TSU inthe " W E C for all ICBs for works and consultancy assignments estimated to cost more than US$lOO,OOO. 13. The procurement arrangements for works are as follows: (i) Works for the water network: estimated at US$121 million o f the overall project cost to include rehabilitation and expansion o f water treatment plants, construction of new transmission lines, construction of reservoirs, building and equipping pumping stations, drilling and equipping 130 wells in addition to the rehabilitation and expansion of the secondary distribution network. Due to the nature of the works and the gradual building up of the network, a sizable portion o f these sub-components will be bidunder NCB procedures. For any contract requiringtunneling with a value more then $10 million, a pre-qualification process of contractors will be carried. All contracts over $5 million will be procured under ICB procedures. Rehabilitation and expansion o f the existing network (laterals) will be done in small packages under NCB procedures that will be distributedover the five years of the project. The main procurement packages will be launched during the first two years of the project. (ii)Worksforthewastewaternetwork:estimatedatUS$246millionoftheoverallproject.This cost includes construction of outfalls for the WWTPs, construction of main trunks, laterals and interceptors, building and equippingpumping stations, in addition to the installations o f house connections. The majority of contracts for the trunks and pumping stations will be carried under ICB procedures. For any contract requiringtunnelingwith a value more then $10 million, apre- qualification process will be carried. All contracts over $5 million will be procured under ICB procedures. Addition of house connections will be done in small packages under NCB procedures distributed over the five years of the project. (iii)ConstructionandInstallationofNewWastewater Treatment Plants: the estimatescost is US$66 million for the two new WWTPs in the two cities and the rehabilitation of Ahwaz western WWTP. The construction of the new WWTPs will be conducted under ICB procedures while conducting pre-qualification to determine the qualified contactors that will be invited for the two bids. The biddingdocuments will be based on the SBD for the "Supply and Installation of Equipment" modified to fit the specific requirements under the project. Due to the considerable time for design and construction, the schedule for this sub-component i s on the critical path and should be launchedprior to loan effectiveness. The rehabilitation o fthe Ahwaz western WWTP will be done usingNCB procedures. 14. Consulting Services, Technical Assistance and Training. The main packages under this component are as follows: (0 Supervision services for water and wastewater works: the estimated value o f the assignments for the supervision for water and wastewater works i s US$15.30 million. These will be packaged to the extent possible and the selection will be mainly usingthe Least Cost Selection (LCS) method for assignmentsestimated to cost less then $200,000 while the Quality and Cost based Selection Method (QCBS) will be used for the other assignments. Preparation o f TORS and long listingprocess for the supervision of works to be executed inthe first year for the two cities should commence prior to the loan effectiveness. (ii)DesignandSupervision ofWWTP: these canbetwo orpossiblyonecontract torecruita consultant to design and supervise the construction, installation and operation of the two new WWTPs. The long listing process should be launched at the earliest time possible as this component i s on a critical path. It i s important to launch the requests for expression o f Interest promptly. The method of selection to be used i s QCBS. The estimated value for this sub- component is 2.59 US$ million. (iii)Environmental MonitoringSystem, Studies inthe sector and technical assistanceonleak detection measures will be programmed during the first year o f the project. The methods o f procurement to be used will be QCBS for values above $100,000 and selection based on 131 Consultants Qualifications (CQ) for values less then $100,000. The estimated value for this sub-component i s US$ 6.5 million. Strengthening the WWCs and Training: this sub-component includes several specialized training activities and targeted technical assistance for the water companies. The methods o f selection to be used will be LCS for training estimated to cost less then $200,000 and CQ for the technical assistance for values below $100,000 and QCBS for the remaining assignments. The estimated budget for these activities i s US$2.3 million. Project Management: this component i s estimated at US$ 5.0 million and targeted to recruit individual consultants and firms to assist in the management o f the project at the water companies. The methods o f selection will be CQ for values o f assignments estimated at less then $100,000 inthe case o f firms and comparison o fCVs for individual consultants. 15. Equipment for LeakDetection: this component is relatively small (US$ 2.16 million) and aims at acquiring equipment that will assist the companies inthe detection o f leaks and the maintenance o f the distribution and collection systems. Procurement will be done according to ICB, NCB using a bidding document and procedures acceptable to the Bank and shopping methods inaccordance with the provisions o fparagraphs 3.5 & 3.6 o fthe Guidelines. 16. Goods and Works. Procurement o f goods and works will be carried out using the following methods: International Competitive Bidding will be used for contracts o f works estimated at US$5,000,000 and above, andfor contracts o f goods estimated at US$500,000 and above. National Competitive Bidding, including national advertisements, bidding documents that are acceptable to the Bank, and public bid openings will be used for contracts o f works estimated to cost less than US$5,000,000 equivalent per contract, and for contracts o f goods estimated to cost less than US$500,000 equivalent per contract. The aggregate value o f contracts that will be awarded under this procedure will not exceed US$300,000,000 equivalent for works, and US$2,000,000 equivalent for goods. Shopping may be used for goods estimated to cost less than US$lOO,OOO equivalent per contract. The request for quotations shall be inwriting and addressed to at least three suppliers. The request for quotations will contain the following: technical specifications, delivery time, payment conditions- and any other information that may assist the suppliers in preparing competitive offers. The aggregate value o f contracts that will be awarded under this procedure shall not exceed US$500,000 equivalent. Direct Contracting will be used for the specialized procurement of goods when NCB and Shopping methods would not be efficient and economical, and for works o f an emergency nature. Direct Contracting would follow the requirements inparagraph 3.7 o f the Guidelines for Procurement under IBRDLoans and IDA Credits. 17. Consultant Services: The following procurement methods for selection o f consultants will be used: (i) QCBS will be used for selection of consultant services with value o f contracts estimated at more than US$200,000 equivalent for the assignments for supervision services for tunnels and main trunks, design and supervision o f WWTP, environmental monitoring system, Studies in the sector technical assistance on leak detection measures and strengthening the WWCs; (ii) LCS will be used for supervision services and training estimated to cost less then $200,000 (iii)Selection Based on Consultant's 132 Qualifications will be used for assignments estimated at less than US$lOO,OOO equivalent per contract for the technical assistance on leak detection measures, strengthening the WWCs and project management; and (iv) Selection of Individual Consultants will be used in accordance with paragraphs 5.1 to 5.3 o f the Guidelines. In exceptional cases, and wherever justified in the context o f the overall interests of the Project, single-source selection of consultants for services estimated to cost less than $50,000 equivalent per contract may, with the Bank's prior agreement, be procured in accordance with the provisions o f paragraphs 3.8 through3.1 1o f the Consultant Guidelines 18. For assignments for consultant firms estimated at less than US$lOO,OOO equivalent, the short list may be comprised entirely o f national firms, provided at least three qualified local firms are available and competition including foreign consultants i s not justified. However, international firms will not be excluded from consideration, ifthey have expressed interest. 19. The thresholds for procurement methods and prior review are indicated in Table B. The total value o f contracts subject to prior review i s estimated at US$234 million. All other contracts will be subject to post-review and procurement audit on a random basis by the Bank. Procurement files will be maintained for review by the Bank'ssupervision missions. Overall Procurement RiskAssessment 20. Based on the existing information on the overall environment for procurement and in particular the approach to procurement under Bank financed projects and the procurement capacity assessment o f the companies, the overall procurement risk assessment i s judged to be high.The measures for mitigating these risks will be through the framework agreement that will be reached between the Bank and the Government on the fiduciary arrangements for Bank financed projects, reachingan agreement on standard bidding document that will used for procurement o f works under NCB, providing training to the procurement officers inthe companies and preparingfirst year biddingpackages. 21. The NWWEC has recruited two consulting firms for the preparation o f the first year design and bidding documents for the water supply and wastewater networks to be funded from the Companies' budgets. The deliverables o f these two firms will be the design and bidding documents for the works under the first year procurement plan. Frequencyof Procurement Supervision 22. Bank supervision missions will be carried out every four months for the first year and every six months thereafter. Two ex-post review audits will be done during the first year and from thereon at least once a year. The ex-post review missions will be supported by a national consultant. 133 Table A: ProjectCosts by Procurement Arrangements for the Project (US$million equivalent) -~ Procurement Methods Total Cost (includmg Expenditure Category ICB NCB Other N.B.F. contingencies) reatment Plants Sub-Total Works 2. Goods 0.00 2.3 1 Leak DetectionEquipment 1.15 1.15 0.00 (0.92) (0.92) (0.00) (0.00) (1.85) 0.00 0.00 31.86 0.00 31.96 ServicesITraining (0.00) (0.00) (29.31) (0.000 (29.31) Total 171.26 263.92 31.86 0.00 467.03 (110.15) (136.84) (29.31) (0.00) (276.21) Front-end fee (FEF) 2.79 Totalwith FEF 171.26 263.92 31.86 0.00 469.82 (110.15) (136.84) (29.31) (0.00) (279.00) Note: ICB: IntemationalCompetitiveBidding,NCB: National CompetitiveBidding, Other: IntemationalShopping,National Shopping, Direct Contracting, NBF: NotBank Financed. Figuresinparenthesisare the amounts to be financed by Bank Loan. 134 StrengtheningWSC 0.58 0.58 1.17 Training 0.58 0.58 1.15 ProjectManagement 5.09 5.09 Total 18.95 0.00 0.00 6.08 1.16 5.68 0.00 31.86 Note: QCBS: Quality and Cost Based Selection; QBS: Quality Based Selection; SFB: Selection under a Fixed Budget; LCS: Least Cost Selection, CQ: Selection Basedon Consultant's Qualifications; Other: Selection of individual consultants; N.B.F:Not Bank Financed 135 Table B: Thresholds for Procurement Methods and Prior Review (all values in US$) Expenditure Contract Procurement 1Contracts Subject to :ategory Value Method Prior Review 2. Goods >500,000 ICB All Contracts <500,000 NCB All contractspriorto Loaneffectiveness. Firstcontract to be awardedper eachcompany regardless ofvalue < 100,000 Shopping Firstcontract to be awarded per eachcompanyregardless ofvalue Direct Award All Direct Award Contracts. - Firms > 100,000 QCBS, LCS, All TORs, short lists, RFPsandcontracts. :100,000 QCBS, LCS & All TORs. CQ All contracts priorto Loaneffectiveness. Firstcontract for eachmethodof selection per company Individual Individual All TORs. Consultants consultants Short List, selection report & contract for all selectedprior to Loan selection effectiveness. Short List, selection report & contract for all consultants exceeding US$50,000 equiv. Firstcontract to be awardedper eachcompany regardlessofvalue Direct Award All Direct Award Contracts. Value of contracts subject to prior review are estimated at a cost US$28 million 136 Annex 6(b): FinancialManagementandDisbursementArrangements ISLAMICREPUBLIC OF IRAN AHWAZ AND SHIRAZ WATER SUPPLY AND SANITATION PROJECT DisbursementArrangements. The Loanwill be disbursed during Project implementationover a period of five years. Managing the project funds and all related financial transactions, including preparation and submission o f disbursement applications with summary sheets, and/or statements o f expenditure and supporting documentation will be the responsibility o f respective WWCs and the NWWEC. However payments made for expenditures prior to the Loan signature date but after May 1,2004 inan aggregate amount not to exceedthe equivalent o f U S $10,000,000 will be reimbursedto the WWCs and NWWEC uponpresentation of a withdrawal application. The allocation o f Loanproceedsby expenditure category are summarized inthe table below: Table C: AllocationofLoanProceeds Category i Amount oftheLoan Allocated (US%) YOofExpendituresto beFinanced (1) Treatment Works a) Ahwaz Water 6,550,000 100% of foreign expenditures and b) Ahwaz Wastewater 23,300,000 50% of local expenditures c) Shiraz Wastewater '1 ~ 23,510,000 (2) Civil Works, I a) Ahwaz Water I 22,830,000 b) Ahwaz Wastewater 50,250,000 100% of foreign expenditures and 80% of local expenditures c) Shiraz Water i ~ 17,700,000 d) Shiraz Wastewater 44,970,000 ~ (3) Goods and Equipments 100% of foreign expenditures, 100% ~ i) Ahwaz 980,000 of local expenditures (ex-factory ~ ii) Shiraz 980,000 cost) and 80% o f localexpenditures ~ for items procured locally 88% of local expenditures for services o f consulting firms and individuals domiciled within the territory o fthe borrower and 95% for foreign expenditures. (5) ProjectManagement Cost" 90% of all expenditures upto a) Ahwaz 1,660,000 December 31,2005 and 75% o f all b) Shiraz 1.660.000 expenditures thereafter I , (6) g o n t Endfee 2,790,000 Amount due under Section 2.04 o f the LoanAmeement (9) Unallocated 61,400,000 I Total 1, ~ 279,000,000 * The term "project management cost" means expenditures - - - unci r the Project incurred by the WWCs in relation to ofice support, ofice supplies, communications, but excluding salaries of oficials of the Borrower. The NWWEC TSUcost will be shared equally between the two WWCs. 137 Documents for Withdrawals The borrower has indicatedofficially that the transaction based disbursement method will be used for this project. Use of Statements of Expenditures(SOEs) (same as procurementthresholds) Duringimplementation, SOE will be used for all expenditures for: (i) Treatment works under contracts costing less than US$5,000,000 (ii) works under contracts costing less than US$5,000,000 equivalent each; (ii) goods under contracts costing less than US$500,000; (iii)services under consultant firms contracts costing less than US$lOO,OOO equivalent each and under individual consultant contracts costing less than US$50,000 equivalent each; and (iv) the project management costs, under such terms and conditions as the Bank shall specify by notice to the Borrower. The supporting documentation would be maintained by the W W C and made available for review by Bank supervision missions upon request, documentation relating to SOEs would be retained for up to one year from the date the Bank receives the audit report for the fiscal year inwhich the last withdrawal from the loan account was made. Special Account (SA) As the different portions o f the loan, depending on the channeling modality, will be subject to different regulations and controls, and to facilitate project implementationand make timely payments o f the Bank's share o f eligible expenditures to contractors, suppliers, consultants and others, each WWC will open two U S Dollars SAs, after receiving the Central Bank (CB) approval, at a commercial bank. The SAs that will deposit the funds channeled as budget transfers to the WWC will have an authorized allocation o f US$4 million and an initial deposit o f US$2 million, while the SAs that will deposit the funds channeled inthe form o f liability being will have an authorized allocation o f US$2 million and an initial deposit o f US$1 million. The full allocationmay be claimed when disbursements and special commitments, financed from the budget transfer funds, reach US$15 million while the full allocation may be claimed when disbursements and special commitments, financed from the liability funds, reach US$7 million. The fifth SA managed by the NWWEC will have an authorized allocation o f 0.5 million and an initial deposit o f US$ 5250,000. The full allocation may be claimed when disbursements and special commitments reach US$I.5 million. The Replenishment o fthe SA would follow Bank's procedures, and a Bank's statement o f SA transactions would support all replenishment applications. The minimum amount for applications regarding direct payments and special commitments would be 20% o f the respective authorized allocations to the SAs. Requests for replenishment each o f the SA will be submitted on a monthly basis. Also local accounts will be opened for the project counterpart funds and will be replenishment as per local procedures. The SA statements will be part o f the project financial statements, which will be audited annually by independent extemal auditors acceptable to the Bank. FinancialManagement Executive Summary and Conclusion The Ahwaz (A), Shiraz (S) Water and Waste Water Companies (WWC) and the National Water and Waste Water EngineeringCompany (NWWEC) (E), supported by Technical Support Units (TSU) will be responsible for managing the project funds and all related financial transactions. The WWC operates as private sector entities and the systems inplace are based on the principles and procedures o f the trading law o f The Islamic Republic o f Iran. Part o f the loan proceeds will be channeled to the WWCs inthe form o f budget transfers, while the balance will be transferred in the form o f liability where the repayment o f the capital and all cost associated with the interest and commitment fees wouldbe the responsibility o f the 138 WWC. The part of the project made available to the water companies on budget transfer basis will be implemented through the regulations governing the national budget processes. All payments, under this part o f the project, will be subject to the govemment laws, regulations and controls. While the flow o f the funds channeled on lending basis to the companies will be subject to the policies, procedures and controls inplace at the water companies. The technical assistant component ofthe project will be implementedby the NWWEC which operates as a private sector entity and collects fees from the W W C across the country. In the absence of a Country Financial Accountability Assessment and being the first project to be implementedby these two WWCs and the NWWEC, the financial risk i s rated high.Certain activities are required prior to declaring the project effective so to reduce this risk and allow easy flow o f project funds and the generation o f reliable project reports on timely basis. The two WWCs and the N W W E C financial management arrangements were reviewed and the findings can be summarized as follows: Ratingm Comments 1. ImplementingEntity A: Satisfactory These two WWCs havenever implementedBank-financedprojectsand are not familiar withBankrequirements,proceduresandguidelines. However, S: Satisfactory they operateas privatesector entitiesandhave inplace systemsdesignedto follow on their operationsandto generate year-endfinancial statements that E: Satisfactory are auditedby independentextemal auditors. Training about bank rules, regulationsand guidelines will be deliveredto the companiesandthe TSUs. 2. FundsFlow A: WC-Satisfactory GF-Satisfactory Part of theprojectfunds will be channeledas budgettransfers (GF) through the centralgovemmentbudget.Inorder for the grant budgettransfers to S: WC-Satisfactory disburse, two budgetaccountsmustbe openedby the MPO and aframework GF-Satisfactory agreement shouldbe signedto allocate the projectfunds. While the funds channeledinform of liability (WC) to the WWCs will follow the applicable E: EC-Satisfactory rules andregulationsat the WWCs. 3. Staffing A: Satisfactorywith limitations The two WWCs have inplace fully staffedfinancial departmentsthat follow onthe day-to-day financialtransactions. Inadditionafinancial officer (FO) S: Satisfactorywith within theTSU will behiredto follow only on the projectaccountsincluding limitations the SpecialAccounts managementandpreparetheprojectreports.The limitation of the staffingis not beingableto communicateinthe English E: Satisfactorywith language.To overcomethe communicationlimitations the FOto berecruited limitations for the TSUs shouldhavethe languageskills. 4. AccountingPolicies A: Satisfactorywith andProcedures limitations The Proceduresinplace are basedonthe lawsapplicableto the IRIprivate andpublic sector. HoweveraFinancialOperationsManualshouldbe S: Satisfactorywith preparedto introduceanddefinethe projectfinancialactivitiesdetailingthe limitations informationanddocumentsflow relatedto the project, definethe relation betweentheTSU FO, the FC andthe WWC financialdepartment andto E: Satisfactorywith identify the monthlyreportsrequired limitations 5. Controls A: Satisfactory Two signaturesare requiredfor the GF andfor the WC funds. The expendituresare authorizedby differentdepartmentswithin the WWC and S: Satisfactory are subject to the financial Controllerverification. Clear segregationof duties andresponsibilities. E: Satisfactory 6. Flow o f information A: Satisfactory The flow of information is defined inthe WWC procedures.Also the betweenthe different financialinformationisprovidedto the NWWEC on semi annualbasis. WWC departmentsand S: Satisfactory Howeverthe project financial informationwill bemadeavailableon with theNWWEC quarterlybasisthus allowing theNWWEC to consolidatethe figure and issue the project overallFMR. 7. IntemalAudit A: Satisfactorywith 139 limitations The Intemal auditors at the WWC reports to the water company manager who receive their reports. They act on the manager request to investigate S: Satisfactory with certain activities. The intemal audit i s limited in scope and does not follow limitations written procedures. E: Satisfactory with Limitations 8. Extemal Audit A: Satisfactory The WWCs applicable laws state that the accounts and financial statements should be audited yearly by an extemal independent auditor. Inaddition to S: Satisfactory the entity audit, theproject accounts will be audited by extemal auditors acceptable to the Bank, and a separate audit opinion will be issued. E: Satisfactory 9. Reporting and A: Satisfactory with The two WWCs are equipped with accounting systems that are capable o f Monitoring limitations generating year-end financial statements. However, it was observed that the accounting systems require enhancement to become capable o f generating S: Satisfactory with timely project reports. To overcome this limitation inthe project reporting limitations the NationalEngineering Company, who overview and monitor the operations o fthe WWCs inthe country, has proposed to open a cost center E: Satisfactory with withinthe present accounting system. This cost center will be configuredto Limitations report on transactions relatingto the project including the source and use o f funds and the activities financed through these sources. 10. Information Systems A: Satisfactory with limitations The configuration o fthe accounting system will allow generation o f timely S: Satisfactory with project reports. limitations E: Satisfactory with Limitations 11. Risk Management Unsatisfactory The present FM system inplace at the WWCs does not reply hlly to the project needs. A system configuration i s required for project report generation, a financial officer has to be engaged and a project Financial Operations Manual has to be prepared. Applyng the previous actions would reduce the project financial risk. Overall Financial Satisfactory Managementrating This assessment showed that despite being owned by the government the WWCs and the NWWEC operate as private sector entities and follow the principles and procedures as definedby the trading law of The Islamic Republic of Iran. The companies issue year-end financial statements that are audited by external independent auditors. The control environment was found to be adequate however the financial system requires enhancement to become capable o f generating timely project reports including the Financial Monitoring Reports (FMRs). WWCs &NWWECCurrent FinancialManagement Practices and IT System The two WWCs, beingAhwaz and Shiraz, and the NWWEC were visitedandthe financial systemswere reviewedby examining the respective accounting systems, accounting policies andprocedures, budgeting systems, assets management procedures, reporting systems capabilities, staffing, intemal controls policies andprocedures, internal auditing and external auditing arrangements. The systems inplace are capable of following on the project fimds to be channeled through Special Accounts (SA) which would be opened by each WWC and the NWWEC. However the accounting standards followed by the WWCs and the auditing standards applied by the WWCs external auditor's, specially the presentation o f the auditor opinions, are not in conformity with International Accounting Standards (IAS) and International Standards of Auditingrespectively. Inorder to adhere to the IAS, staff will be required to attend training. 140 Training programs will be designedand deliveredwithin the scope of the project. To allow proper project reporting, the accounting systems will be enhanced to become capable of generating quarterly project reports as requiredbythe Bank inthe form of Financial Monitoring Reports (FMRs). The WWCs & NWWECEnhancedArrangements The WWCs and the NWWEC systems are characterized with acceptable controls, however, to avoid the risk of not being able to generate timely reports for project management and monitoring purposes, the accounting systems will be enhancedthrough the creation of a new cost center that will recordthe project transactions and accounts. This configuration will be finalized and tested prior to the end of June 2004. Also, financial officers will be hired, within the TSUs at eachWWC and at the NWWEC, to follow on the project accounts and generatethe project individual financial reports and the quarterly FMRs.The current laws requires that two accounts be opened within the government budget and a framework agreement signed, inorder to reduce the risk of the project not beingable to disburse the funds channeled on budget transfer basis and as counterpart funds to the WWCs. As the enhanced procedures that will follow on the project accounts are not reflected in WWCs regulations and inorder to ensure the accuracy and completenessof the project accounts andto define the relation between all departments involved with the project implementation thus facilitate the flow of information related to the project, the financial officers, assistedby an external financial consultant, will prepare the project Financial Operations Manual, integratingthe applicable laws and outlining the project arrangements by detailing: The Financial Officer's responsibilities within the WWCs financial departments and his relationshipwith the MEAFfinancial controller; The insertion of the Project inthe Development Budget and the framework agreementto be signedbetween MPO andthe WWCs. The project accounting system The project chart of accounts and accounting principles, practices and methods the project will follow. This chart of account should reflect the classification o f WWCs classifications, ifapplicable, for easy reconciliation; The budgetingprocess; The reconciliationprocedures, timingand output betweenthe two systems; The request for funds from the MEAFandthe replenishment of the project SAs The document flow; The frequency and forms of the financial reports; Banking arrangements, others Flow of Fundsand Controls As the differentportions of the loan, depending on the channeling modality, will be subject to different regulations and controls, and to ensure that funds are available for project implementation, five U S $ Special Accounts will be opened in addition to the accounts for the counter part financing. Each water company will prepare and follow on the project withdrawal applications and direct payment requests relating to its activities, while the NWWEC will manage the fifth SA which will be used to finance the 141 TA activities with scope to cover the two WWCs. The flow o f the project funds will depend on the channeling modality. All invoices, either for advance payments or for incurred expenses will be subject to applicable controls and procedures. These invoices will be approved by the appropriate implementing department and will be honored through payments signed by the MEAF controller if financed from the budget transfer funds. In turn, the MEAF will transfer the counterpart funds to WWCs after the MPO opens the required budget lines. Deposits into and payments out o f the $ SAs, to pay contractors/suppliers/consultants, will be made in accordance with the provision of the Loan Agreement. The following charts describe the project flow o f funds. 142 A: FUNDS CHANNELEDONA BUDGETTRANSFERSBASIS CASH& DOCUMENTS FLOW CHART WWcs, Invoice and Budget Control I.---- L Il3RD I+-""--] WWC _ _ _ _ Accounting Entry I Loan Account Financial Controllers t_ Cost Center sc II I I I I DP S A R Request I I I I I funds j II I II I I I Negotiating Financial Mon: I Reports I I MinistryofEconomic, (FMRs) and Finance --------- Counterpart Funds Bank leplenishment Statement! Itimes/ year Special Account Special Account WWC AHWAZ WWC SHIRAZ Contractors Suppliers Consultants Counterpart Funds Counterpart Funds AHWAZ DP: Direct Payment SAR: Special Account Replenishment SC C: Special Commitment Confirmation _ _ _ _ _ _:Document Flow B: FUNDS CHANNELEDAS LIABILITIES CASH& DOCUMENTS FLOW CHART WWcs, Invoice and Budget Control I I I Accounting EntryProjt LoanAccount ------------ Center L sc I I I I I I I I I I I I DP S" I I Bank I I I I IStatements I I I I I I I I I I I I I I I I Transfer I I I Request I I ! 1 I frommain I I I I Negotiating wwc I I account I Financial Moni I I Reports I I I I I (FMRs) I I I I I I I I I I I Special Account Special Account wwc AHWAZ WWC SHIRAZ I Contractors I Suppliers Consultants Counterpart Funds Counterpart Funds AHWAZ 144 Projectreports puarterlv: EachWWC and the NWWEC will generate the Financial Monitoring Reports relating to its part of the project and submit them to the Bank as part o f the project progressreport, or separately. These reports are made up of: FinancialReports: to include acashflow statement, beginning andendingproject cashbalances and an expenditure report comparing actual and planned expenditures in addition to the SAs reconciliation statements. Also, a narrative report explaining all variances that exceed 15% when compared to plan and the proposed corrective actions should be included as an annex to the financial reports. Physical Progress Reports: to include narrative information and output indicators linlung financial informationwith physicalprogress. ProcurementReports:providinginformation on the procurement ofthe, goods, works, services, training and selection of consultants showing procurement performance against plan, including informationon all authorized contract variations. These reports should be remittedto the Bank within 45 days from the end of the period. The proposed reports format andpresentationhave been discussedand agreedupon with the Borrower. Annual:. 1) Audited ProjectFinancial Statements(PFS) will be submittedto the Bank. PFS, will include: (i)Statementofsourcesandutilizationoffunds,indicatingfundsreceivedfromvarioussources,and project expenditures. (ii) Appropriate schedules classifying project expenditures by component and activity, showing yearly and cumulative balances. (iii) AccountsReconciliationStatementsandStatementofExpenditurespaidusing Special SOEsprocedures. 2) Audited Entity Financial Statements (EFS) will be submitted to the Bank too. EFS will include the respective: (i)IncomeStatement (ii)BalanceSheet (iii)CashFlowStatement (iv) The attachednotes AuditingArrangements Each o f the two companies and the NWWEC will issue a separate audit report as they are independent entities with no financial relation whatsoever between them. Accordingly, each of the WWCs and the NWWEC will remit to the Bank not later than six months after the end o f each year, the project audit report covering the part implemented by the respective company. The extemal audit reports shall encompass all project related activities and shall be in accordance with internationally accepted auditing standards e.g., Intemational Standards on Auditing (ISA). The annual audit report of the project accounts 145 shall include an opinion on the project financial statements. Also, the audit report shall include a separate opinion on the different SAs transactions reconciling opening and year-end balances. In addition to the audit reports, the auditor will prepare a "management letter" identifying any observations, comments and deficiencies, in the system and controls, that the auditor considers pertinent, and shall provide recommendations for their improvements. The external independent auditor should be acceptable to the Bank and his TOR will be prepared and submitted for the Bank's no objection, at least nine months prior to the end o fthe project fiscal year. Also, each o f the WWCs will remit to the Bank not later than six months after the end of each year, the W W C entity audit. DisbursementArrangements To ensure that funds are readily available for project implementation at the two companies, four SAs in U S Dollars will be opened at a commercial bank as per the Central Bank instructions and will be operated by the respective WWCs. A fifth SA will be opened and managedbythe NWWEC.Initially, an advance for the equivalent o f about six months expenditures will be transferred to each o f the SAs upon effectiveness o f the Loan and receipt o f signed withdrawal applications. The SAs that will deposit the funds channeled as budgettransfers to the WWC, will have an authorized allocation o f US$4 million and an initial deposit o f US$2 million, while the SAs that will deposit the funds channeled in the form o f liability will have an authorized allocation o f U S $2 million and an initial deposit o f 1 million. The full allocation may be claimed when disbursements and special commitments, financed from the budget transfer funds, reach US$15 million while the full allocation may be claimed when disbursements and special commitments, financed from the liability funds, reach US$7 million. Whde the fifth S A managed by the NWWECwill have an authorized allocation o f 0.5 million and an initial deposit o f $250,000. The full allocation may be claimed when disbursements and special commitments reach US$1.5 million. Replenishment applications will be prepared and submitted to the Bank by the appropriate company. Authorized signatories, names and corresponding specimens o f their signatures will also be submitted to the Bank. RiskAnalysis The following summarizes the risk assessment findings for the project: Risk Comments InherentRisk 1.Country FinancialManagement Risk H The CFAA report for The Islamic Republic o f Iranis in the process o fbeing prepared. 2.Project FinancialManagement Issues M The WWCs have not implemented Bank financed projects in the past and the systems in place, after enhancement will be capable to follow on the project activities and funds. H ~~ 3.Counterpart Funds It is a must that the MPO commits to opening two accounts for the project within the central budget to facilitate flow o f budget transfers funds. Also the WWCs have to generate from its resources the counterpart funds to use for the liability financing. OverallInherentRisk H ControlRisk 1.Implementing entity Mto H The WWCs have not implementing Bank-financed projects inthe past. 2.Funds Flow H The flow o f funds requires the opening o f the two accounts within the central government budget and the signature o f a framework agreement with each o f the W C S 146 3.Staffing IAn experienced staff should be hired to follow on the project accounting while Financial Controller will sign all project payments. 4.Accounting Policies and procedures M Upon finalizing the project's Financial Operations Manual, well-defined financial policies and procedures will be inplace. However the control policies applicable to the WWCs will be used to follow on the project accounts. 5.Intemal Audit H 6.Extemal audit M Extemal audit will be carried-out by an independent auditor acceptable to the Bank. There was no capacity assessment for the audit profession to determine capability to perform audits as per ISA 7.Reporting and Monitoring H With the enhancement of the accounting system, the project will be able to report on the basis o f the FMRs. 8.Infonnation systems M The two WWCs are equipped with networks and accounting systems to follow on the day to day activities and generate year-end financial statements. Overall ControlRisk Mto H The strengths that provide basis o freliance on the project financial management system include: (a)- The centralization o f all payments by the WWCs and the enhancement o f the accounting system for the generation o fthe FMRs. (b)- The laws, controls andregulations applicable to the public sector and to the WWCS that will be applied for the project activities and funds. BankSupervision The requirements for Bank supervision will intensify initially in order to ensure that the financial arrangements are implemented. The first supervision mission after effectiveness will take the form o f a launch workshop where a seminar on Bank rules, regulations and guidelines will be presented. The project will be supervised every four months for the first eighteen months, then every six months thereafter. Bank supervision missions will consist of visits to the two WWCs, the NWWEC and MPO to review financial management practices, procurement methods, payment procedures and documentation, inadditionto fieldvisits to the project sites andother agencies concerned. Engage the central TSU financial officer Condition o f effectiveness Configure the accounting software Prior to June 2004 Open the project budget accounts Immediately 147 Financial MonitoringReports (FMR) Quarterly Reports Financial Report 1-A Project Sources andUses ofFunds 1-BUses ofFundsbyProjectActivity 1-C Special Account Reconciliation Statement Progress Reports 2-A Output Monitoring Report (Unitof Output by Project Activity) Procurement Reports 3-A Procurement o f goods (Not subject to prior review) 3-B Procurement ofWorks (Not subject to prior review) 3-C Selection of Consultants (Not subject to prior review) 148 Annex 7: Project Processing Schedule ISLAMICREPUBLIC OF IRAN AHWAZ AND SHIRAZ WATER SUPPLYAND SANITATION PROJECT ProjectSchedule Planned Actual I Timetakento preparethe project (months) FirstBankmission(identification) I July 26,2002 July 26,2002 Appraisalmissiondeparture February 6,2004 I February 13,2004 1 Negotiations March29,2004 April 12, 2004 PlannedDateof Effectiveness September 30,2004 Preparedby: Preparationassistance: Bankstaffwho worked onthe Droiectincluded: ~ Name Specialty Mohammed Benouahi Task Team Leader Anna Bjerde Sr. Financial Analyst Imad Saleh Sr. Procurement Specialist Robert BouJaoude Sr. Financial Management Specialist Hiba Tahboub Sr. Procurement Specialist John-Keith Rennie Sr. Social Scientist 1 I ~ Jan Janssens PromamManager Peter Kolsky I Sr. Water and Sanitation Specialist MohammedDalil Essakali I Professional Associate, Engineer I Environmental Stlecialist I ~ RandaNemer MohamadLahouel Economist (Consultant) Parviz Piran Social Scientist (Consultant) HassanAhmadi Sanitary Engineer (Consultant) Mouna Couzi ProgramAssistant Zalua Chummun ProgramAssistant Dr.Kolahi Phvsicianand Health SDecialist (Consulant) 149 Annex 8: Documents in the Project File* ISLAMIC REPUBLIC OF IRAN AHWAZ AND SHIRAZ WATER SUPPLY AND SANITATION PROJECT Project ImplementationPlan PIP details are inthe Project Files. B. Bank Staff Assessments C. Other Detailed financial analysis of scenarios 2, 3 and 4. Procurement Implementation Schedule. *Including electronic files 150 Annex 9: Statement of Loans and Credits ISLAMIC REPUBLIC OF IRAN AHWAZ AND SHIRAZ WATER SUPPLY AND SANITATION PROJECT Closed Projects 40 IBRD/IDA * Total Disbursed(Active) 42.19 o f which has beenrepaid 0.00 Total Disbursed(Closed) 1,807.99 ofwhich has beenrepaid 1,724.26 Total Disbursed(Active + Closed) 1,850,171,681.86 o f which hasbeenrepaid 1,724,255,787.17 Total Undisbursed(Active) 388.87 Total Undisbursed(Closed) 0.00 Total Undisbursed(Active + Closed) 388,868,574.96 Difference Between Active Last PSR OriginalAmount in Expectedand Proiects SupervisionRating US$ Millions Actual Disbursements ' Pr;p Develoament Imalementation Frm Project Name Obiectives Progress YearIBRD IDA GRANT Cancel. Undisb. Orig. Rev'd IT69943 IR-2nd PrimaryHealthCare &Nutrition U U 2000 87 83.97569 41.642356 IR-EARTHQUAKEEMERGENCY po80802 RESPONSE S S 2003 180 180 6.6666661 PO74499 IR-EnvironmentalManagement Supp. Prog. S S 2003 20 19.3 -0.2 PO69946 IR-TehranSewerage S S 2000 145 105.5929 42.459552 Overall Result 432 388.8686 90.568575 151 ISLAMICREPUBLICOF IRAN STATEMENT OFIFC's HeldandDisbursedPortfolio (InUSDollarsMillions) Held Disbursed FYApproval Company LoanEquity Quasi Partic Loan Equity Quasi Partic ApprovalsPendingCommitment Loan Equity Quasi Partic 2003KLC 3 2 0 0 Total PendingCommitment: 3 2 0 0 152 Annex 10: Countryat a Glance ISLAMICREPUBLICOFIRAN AHWAZ AND SHIRAZWATER SUPPLY AND SANITATIONPROJECT M. East Lower- I POVERTY and SOCIAL 8North middle- Iran Africa income Developmentdiamond* 2002 Population,mid-year (millions) 65.5 306 2,411 Lifeexpectancy GNI per capita (Atlas method, US$) 1,720 2,070 1,390 GNI (Atlas method, US$billions) 112.4 670 3,352 T Average annual growth, 1996-02 Population(%) 1.5 1.9 1.o Laborforce (%) 4.8 2.9 1.2 GNI Gross per primary Most recentestimate (latest year available, 1996-02) capita nrollment Poverty(% ofpopulationbelownationalpoveffyline) 21 Urbanpopulation (% of totalpopulation) 65 50 49 Lifeexpectancyat birth (years) 71 69 69 I infant mortality (per 1,000live births) 30 37 30 Child malnutrition(% of children under5) 11 11 Access to improvedwater source - Access to an improvedwater source (% ofpopulation) 98 88 81 I illiteracy (% ofpopulation age 15+) 15 35 13 Gross primaryenrollment (% of school-agepopulation) 117 95 111 Iran, lslamicRep. Male 120 98 111 Lower-middle-incomegroup Female 113 90 110 KEY ECONOMICRATIOSand LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios* GDP (US$billions) 124.8 93.1 114.1 107.5 Grossdomestic investmenVGDP 15.9 35.4 29.3 31.1 Trade Exportsof goods and services/GDP 16.4 15.2 28.1 26.8 Grossdomestic savingdGDP 20.4 30.0 35.8 34.5 I Gross national savingdGDP 19.5 31.4 35.2 35.5 T Currentaccount balance/GDP 4.6 -7.8 4.4 3.7 Domestic Investment Interestpayments/GDP 0.1 0.1 0.2 0.2 savings Total debffGDP 6.6 17.3 6.3 6.8 Total debt service/exports 5.4 4.9 8.1 7.4 1 Presentvalue of debVGDP 5.9 Presentvalue of debffexports 25.1 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) I - Iran, IslamicRep. GDP 1.8 3.5 4.8 6.3 5.8 GDP oer caDita . . -1.2 2.0 3.4 4.7 4.5 Lower-middle-incomegroup STRUCTURE of the ECONOMY (% of GDP) AgriCUltUre 20.2 23.9 18.6 15.2 industry 37.1 29.2 37.7 38.9 2o Manufacturing 9.6 14.3 16.3 13.9 o Services 42.7 46.9 43.6 45.8 -20 I Privateconsumption 61.5 59.6 51.0 51.4 - 4 0 1 Generalgovernmentconsumption 18.1 10.4 13.2 14.1 -GDI +GDP Importsof goods and services 11.9 20.7 21.5 23.3 1982-92 1992-02 (average annualgrowth) Agriculture 4.3 3.8 4.7 I Industry 3.0 -2.2 7.5 10.5 Manufacturing 6.5 5.6 10.0 11.0 15 Services -0.5 7.8 4.8 5.1 0 Privateconsumption 1.9 3.4 5.1 6.3 -15 1 Generalgovernmentconsumption -3.7 3.3 1.1 - Grossdomestic investment 1.2 4.7 3.0 12.0 Exports +Imports Importsof goodsand services -0.7 -8.9 4.1 11.2 153 Iran, Islamic Rep. PRICES and GOVERNMENT FINANCE I 1982 1992 2001 2002 Domestic prices Inflation(%) 1:: I (% change) 140 Consumer prices 18.2 25.8 11.7 15.0 30 ImplicitGDP deflator 14.6 25.0 8.8 21.1 Government finance "I (% of GDP, includescurrentgrants) Current revenue 7.1 26.5 27.6 97 98 gs 00 01 Current budget balance .. -6.2 9.0 4.8 GDPdeflator +CPI Overallsurplusldeficit -5.7 -12.5 1.o -2.5 TRADE I 1982 1992 2001 2002 (US$millions) Exportand importlevels(US$ mill.) Total exports (fob) 20,452 19,868 23,716 25,761 __,___ Oil and gas 20,168 16,880 19,339 20,755 Textiles 662 Manufactures 1,227 2 0 , m Total imports(cifl 12,552 23,274 21,600 26,450 Food 1,932 i 0 . m Fueland energy 1,000 400 625 643 Capitalgoods 15,829 I 0 96 Export price index (1995=100) 112 75 w 70 71 1 97 98 99 01 Importprice index (1995=100) 49 62 58 59 Exports =imports O2 Terms of trade (1995=100) 230 121 120 120 BALANCE of PAYMENTS 1 r5T 1982 1992 2001 2002 (US$ millions) Current accountbalanceto GDP (%) I Exports of goods and services 20,961 20,427 26,020 28,439 Importsof goods and services 15,613 29,057 21,586 25,954 Resource balance 5,348 -8,630 4,434 2,485 Net income 385 130 225 294 Net current transfers 0 1,192 376 1,250 Current accountbalance 5,733 -7,308 5,035 4,029 Financingitems (net) -846 7,132 -9,976 -8,345 Changes in net reserves -4,887 176 4,941 4,316 Memo: Reservesincludinggold (US$millions) .. 2,860 17,468 20,968 Conversionrate (DEC, local/US$) 84.5 713.8 5,819.0 7,950.0 EXTERNAL DEBTand RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) 1 Compositionof ZOO2 debt(US$ mill.) Total debt outstandingand disbursed 8,236 16,084 7,214 7,345 IBRD 467 133 380 380 I A: 380 IDA 0 0 0 0 Total debt service 1,172 1,071 2,168 2,168 IBRD 86 32 101 101 IDA 0 0 0 0 Composition of net resource flows Officialgrants 6 55 Officialcreditors -70 49 Privatecreditors -200 1,170 Foreign direct investment 500 750 Portfolioequity 0 0 0 0 World Bank program Commitments 0 432 0 0 A - IBRD E Bilateral Disbursements 0 114 31 31 B IDA - D Other multilateral - F Private -- Principalrepayments 50 26 65 65 C IMF - G-Short-term Netflows -50 88 -34 -34 Interest payments 36 6 36 36 Nettransfers -86 82 -70 -70 154 AdditionalAnnex 11:EnvironmentalAssessment ISLAMICREPUBLICOFIRAN AHWAZ AND SHIRAZWATER SUPPLYAND SANITATIONPROJECT A. OVERVIEW The proposed project covers the rehabilitation and expansion ofthe waster supply andwastewater system inAhwaz and Shiraz citiesinorder to copewith growingdemands. Ahwaz, the capital of Khozestan province is located at approximately 875 kmfrom Tehran. The present population i s about 950,000 and i s projected to reach 2.2 million by the year 2027. Ahwaz i s one of the most important economical centers of the Islamic Republic of Iran as it i s locatedinan oil-rich region and hosts a number o f large industries. The Karoon River, the largest river in Iran, flows along Ahwaz and dividesthe city into two separate drainage zones. At present, 99% and 63% of the population are connected to public water supply and sanitary sewerage, respectively. Areas without wastewater either use seepage pits or discharge their wastewater in open channels, rivers or inopen grounds creating wastewater pools, polluting the soil and water resources, and creating healthhazards. To improve the wastewater situation, the existing wastewater treatment plant that was constructed in 1977 has been recently rehabilitated and put into operation. This treatment plant, which i s based on tertiary activated sludge with nitrification, denitrification and chlorination, serves the westerndrainage zone but can only treat the wastewater generatedby 140,000 persons. The pollution o f the Karoon Riveris a major problem and apriority issue not only for Ahwaz but also for the whole province. The discharge of untreated municipal and industrial effluents, the drainage from agricultural lands, and the uncontrolled discharge o f solid wastes directly into the River and its tributaries have considerably degraded the water quality of Karoon. Available treatment facilities have provedto be insufficient to produce adequate drinking water quality. At present, water from well fields i s being transferred around 70 km and blended with the river water in order to reduce the concentration o f contaminants and make it treatable. However, the maximum water that can be obtained represents less than 10% o f Ahwaz water demand and as such cannot improve the degraded water quality to acceptable levels. Consumers are switching to new sources o f hnking water (15-20 liter deposit-refund containers) or taking measuresto reduce the contamination of the drinhng water (filtering andboilingtap water). The poor water quality is largely contributing to highdiarrhea prevalence that reaches 50% duringpeak months. Out of the total gastro-enteritis cases inIran duringthe year 2000, 10% were reported inAhwaz, which accounts for only 1.5% o f the total population o f the Islamic Republic of Iran but where there is acute pollution o f both ground water and surface water. Furthermore, estimates o f water production and consumption rates indicates a very highpercentage o f unaccounted for water (around 40%) as a result of the poor conditions o fthe existing distributionnetwork. Shiraz is the capital ofFars province and is located at approximately 925 kmto the south ofTehran. The present population i s about 1,200,000 and i s projectedto reach 1,950,000 by the year 2027. Shiraz has a richhistorical heritage and i s close to Persepolis, the most important archeological site o fthe country. It is estimated that about 99% of the inhabitants of Shiraz are currently connected to the city's water supply network. Water quality monitoring indicates that the water supply is of acceptable quality and in compliance with national and WHO standards. Chemical, physical and bacteriological analyses are 155 conducted on a daily basis at various points including water sources, storage reservoirs and distribution network. The major problems raised by the Water and Wastewater Company i s the high percentage o f unaccounted for water (around 30%) and the need to rehabilitate a considerable portion o f the network. Rehabilitation o f the network has been initiated but i s proceeding at a very slow rate due to limited financial resources. Other problems identified by the Water and Wastewater Company are the relatively low water quality o f Alluvial ground water sources that have highlevels o f hardness and nitrates, and the insufficient water pressure insome zones o f the distributionnetwork. Similar to other cities, wastewater collection, treatment and disposal are the main environmental concern inShiraz. At present only 8% o fthe population is connected to the wastewater collection system. Dueto the high water table and low soil permeability, the use o f existing seepage pits has been unsatisfactory causing groundwater contamination. A great part o f the wastewater i s discharged inthe seasonal rivers o f the city or in open drainage channels that run along the roads adjacent to the residential areas. Duringthe dry periods, the channels become open wastewater collectors emitting noxious odors, attracting mosquitoes and affecting the health o f the residents. The wastewater collected by the existing sewers i s conveyed along Khoshk River that divides the city in two parts and ultimately discharges in Maharloo Lake. The impact o f wastewater onpublic health i s consideredto be less than that experienced inother cities yet water related diseases such as cholera and gastro enteritis are being reported by the health centers o f the city and have been attributed mainly to the irrigation o f raw eaten vegetables with untreated wastewater. It was also reported that around 21 wells have been decommissioned due to contamination, mainly in areas where groundwater i s relatively high.Inorder to improve public health conditions and to reduce the contamination o f the water resources, the Water and Wastewater Company has started implementing a wastewater system for the whole city. B. Project Objectives and Components The objectives o fthe proposed Water and Sanitation Project are: (a) enhance the quality o f life in the proposed cities, Ahwaz and Shiraz, particularly in poor areas by: (i) improving access to satisfactory water supply and significantly increasing coverage o f sanitation services; and (ii) improving environmental, hygiene and health conditions as well as promotingreuse o ftreated effluents; (b) strengthen and develop the capacity o f Ahwaz and Shiraz Water and Wastewater Companies (WWCs) and assist the latter in improving their efficiency, sustainability and financial autonomy; and (c) initiate sector reforms, particularly with respect to institutional arrangements, the regulatory framework, demand management, as well as prepare a sanitation strategy. The Project o f a total cost o fUS$469.82 o f which Bank financing i s US$279.00 millionwill consist of: 0 Rehabilitation, improvement and expansion o f the water systems and facilities (Bank financing US$61.74 million) 0 Rehabilitation, improvement and expansion o f the waste water systems and facilities (Bank financing US$183.39 million) 0 Provisiono f Operation and Maintenance equipment (Bank financing US$1.85 million) 156 0 Technical assistance and consultant services (which include the implementation of EMPs (Bank financing US$29.3 1million). C. Project Description The requiredworks for water and wastewater will be completed over four phases, with phase one from 2003 to 2007, phase two from 2008 to 2012, phase three from 2012 to 2017 and phase four from 2018 to 2027. The proposedWater and Sanitation Project will cover works to beincludedinthe first phase (2003 to 2007). Ahwaz: Water supply: At present 99% of the City's population i s served by the water supply network. The total water demand o f the city i s 4.53 m3/s and i s expectedto reach 6.4 m3/s by the year 2027. Karoon River i s the main source o f water for the City of Ahwaz. Over the past 30 years, average and minimumflows in the river were 700 and 170 m3/s respectively, which by far exceeds the total water demands o f the year 2027. The deterioration of water quality in the river i s a major concem. Existing conventional water treatments plants have proved to be inadequate in providing a treated water quality that would meet drinking water standards. Water quality analyses over the past 20 years clearly show that the river water does not meet potable water standards and requires additional treatment mainly for eliminating odor and taste, and reducing dissolved solids prior to its use, hence additional treatment processes are proposed. In addition and to meet the water demand of the year 2027, an increase inthe capacity of existing facilities (treatment plants, storage reservoirs and distribution network) is needed. As part of the proposed project, the following water works will be executed: Rehabilitation o f the three existing water treatment plants by the construction o f pre- sedimentation units and the addition of dual media layers, ozonation and activated carbon in Treatment Plants 1 and 2. In addition to the renovation and replacement of various mechanical and civil processing unitsand installation of flow meters and data loggers at the inlets and outlets of the Treatment Plants 1&2. Moreover, extension of Treatment Plant 2 will be implemented to increase its capacity from 4.05 m3/sto 5.2 m3/s and extend the intake 20 minside the river to ensurewithdrawing acceptablewater quality; Layingo f 10 kmsteel transmission pipelines from the water treatment plants 1and 2 to the storage reservoirs, diameter ranges from 700- 2000 mm; Rehabilitation and extension of the water network with diameters ranging from 200-600 mmwith atotal lengthof266 km; Construction of five concrete square reservoirs o f 50,000 m3 capacity each inHasir Abad area as well as construction of requiredpumpingstations. Wastewater: Presentwastewater volume generatedinthe city o f Ahwaz i s 99,400 m3 /d (29,300 m3 /d in the westem zone and 70,100 m3 /d inthe eastern zone) and i s expected to reach 504,400 m3 /d (203,900 m3 /d in the westem zone and 300,500 m3 /d inthe eastem zone) by the year 2027. Ahwaz wastewater plan proposes that sewage generated in the westem zone will be conveyed to the existing Choneibah wastewater treatment plant, while sewage generated in the eastern zone will be conveyed to a new wastewater treatment plant. The Choneibah wastewater treatment plant will be rehabilitated and its capacity will be increased to reach 204,000 m3 /d by the year 2027. The proposed new wastewater treatment plant inthe eastem zone i s based on activated sludge process plus nitrification, denitrification and chlorination. The plant will be constructed in 3 phases to reach a capacity of 300,500 m3 /d by the year 2027. As part of the proposed project, the following wastewater works will be executed: 157 Construction of 60 kmof concrete trunk mains ineast and west of Ahwaz, out of which 2.6 km of Western trunk main with size 1200 mm and 3.5 kmof the eastern trunk main with size 1600 mm will be constructed as tunnels. The eastern trunk main will collect wastewater from the easternbasin and transfer it to the proposed new treatment plant, while the western trunk main will collect the wastewater from the western basin and transfer it to the existing Choneibeh treatment plant; Construction of 162 km o f PE laterals and interceptors and 16 lift and pump stations. Works under this sub-component will cover an area of 1465 ha Rehabilitation and expansion o f the existing treatment plant at the west of Ahwaz, Choneibeh, to meet its design capacity of 200 P.E. This will be done by replacing various mechanical parts, repairing o f concrete parts, adding a new unit that will enable treating a flow of 54,575 m3/das well as providing sludge lagoons and storage facilities. Construction of first two modules of the treatment plant with a capacity o f 522 P.E, treating a flow of 102,000 m3/d. The proposed treatment process i s activated sludge with nitrification and de-nitrification. As this treatment plant i s proposed to be constructed as a DBO, its design will be finalized after tendering. Shiraz: At present 99% ofthe City's population is servedbythe water supply network. The total water demand of the city i s 288,600 m3/day and i s expected to reach 474,400 m3/day by the year 2027. The current water demands are supplied from surface and ground water resources. Surface water i s provided from the Douroudzamdam located 100kmnorth-west o f Shiraz. The quantity of water that i s currently transferred from the Dam i s about 71,700 m3/day, representing 25% of the present water demand o f the city, and i s being increased by the Fars Regional Water Board to reach 155,500 m3/day by the year 2005. The existing water treatment plant utilizes a conventional water treatment scheme which includes: flocculation, sedimentation, filtration and chlorination. The remaining supply o f the city's water i s provided from 69 ground water wells, which supply 261,800 m3/day. Out of the total number o f operating wells, there are 16 wells that are located in the Alluvium aquifer inside the city while the others are located in the Karstic aquifer. Wells located in the alluvium aquifer supply only 40,600 m3/day of extremely hard water and will be soon put out o f service. As part of the proposed project, the following water works will be executed: Dnlling and equipping of 17 new wells tapping Karstic water resources. Total water abstractedby these wells amounts to 82,000 m3/d; Laying of 34 km GRP transmission pipelines feeding distribution system and transmitting water from wells to reservoirs. Diameters range between 500-1200 mm; Rehabilitation and extension o f the water network including installatiop o f pressure reducingvalves. Diameters range between 200-400 mmwith a total length of 235 kmo f PE pipes; Construction o f four concrete reservoirs Sonboleh (7500m3), Abeverdi (300 m3), R8 (20,000m3), and R20 as well as constructionof two pumping stations. Wastewater: Shiraz i s divided into two major drainage zones, referred to as Emergency Drainage Zone and Long Term Zone with drainage areas o f 6,760 and 15,315 hectares, respectively. The Present generatedwastewater volume i s around 206,600 m3 /d (64,500 m3 /d inthe emergency zone and 139,100 m3 /d in the long-term zone) and is expected to reach 363,850 m3 /d (115,750 m3 /d inthe emergency zone and 248,100 m3 /d inthe long-term zone) bythe year 2027. 158 The wastewater management systemhas been designed for the year 2027 and includes around 3000 kmo f collection mains and trunk lines and two secondary treatment plants referred to as the Emergency plant and the Long Term plant. The necessity for two treatment plants i s not related to the urgency o f implementing treatment works, but rather to the fact that the city i s divided into two drainage zones. Both treatment plants are based on the use o f activated sludge with effluent disinfection by chlorination. The Emergency treatment plant has an ultimate capacity o f 123,500 m3 /d ,whereas the Long Term plant has an ultimate capacity o f 266,000 m3 /d. Treated effluent o f both plants will be reused for irrigation, whereas the generated sludge o f the plants will be re-used as a fertilizer. At present trunk lines are being laid inthe two drainage zones especially where wastewater is flowing in open streams. The land for the Emergency treatment plant (75 ha in area) has been acquired and the construction of the first phase works has commenced. A full EA was not performed prior to the construction of the Emergency wastewater treatment plant. Consequently and as part o f the EA study o f the proposed Shiraz Water and Sanitation Project, a post review was undertaken with respect to the sitting, engineering design, technical and environmental performance as well as any potentialrisks related to the operation o f the WWTP. Under the proposed project, the following wastewater works will be executed: Construction o f 95 km o f concrete trunk mains in the emergency and long-term areas. Diameters range between 500- 1200; Construction o f 740 km o f PE laterals and interceptors. Works under this sub-component will cover an area o f 5496 ha; Construction o f 50,000 additional house connections; Construction o f two modules with a total capacity o f 100,000 m3/d in the long-term zone. To optimize the efficiency o f the treatment plant, each module i s designed to be capable o f operation in four independent streams. However, as this treatment plant i s proposed to be builtunder DBO contract. Its designwill be finalized duringthe tendering process; Construction of 20 km outfalls to discharge treated effluent for emergency plant and long- term treatment plants as well as sludge storage site. D. ProjectEnvironmentAssessment The proposed project has been reviewed, environmentally screened and classified as Category A consistent with the provision of Operational Policy OP 4.0 1 "Environmental Assessment". Preparation o f the project was comprehensive, encompassing an assessment o f issues concerning environment, cultural heritage and land acquisition. For each city, an environmental assessment (EA) including a detailed archeological assessment, a resettlement action plan and a social assessment were prepared by local consulting firms withthe assistance o f International firms. The environmental assessment reports including environmental management plans (EMP) were prepared for the two cities incompliance with the requirements o f the Govemment of the Islamic Republic o f Iran as well as the Procedures o f the World Bank, including Operational Policy OP 4.01 "Environmental Assessment" and Operational Policy Note OPN 11.03 "Cultural Property". The reports covered three major areas: Project description, legal andregulatory framework, and baseline conditions; Analysis o fimpacts and design altematives; and 159 Environmental Management Plan. The EA reports have been reviewed and commented on by the Bank at various stages of preparation. Prior to appraisal, the reports will be made available at the Info Shop and a number o f locations in Iran including: Department of Environment, Ministry of Energy, and WWCs. The Executive Summary has beenprepared inbothEnglishandFarsi and will be distributedto the ExecutiveDirectors ofthe Bank. The preparation process for the Environmental Assessment included public consultations, which were carried out at various stages. The consultations involved line ministries, city authorities, provincial Departments of Environment, operating water and wastewater companies, local communities, NGOs and the public. This process was complemented by additional consultations undertaken inpreparation o f the RAP and SA. The EA executive summaries in English and Farsi, were distributed to all concerned stakeholders. Public hearings were held in Ahwaz and Shiraz on October 28th, 2003 and January 4th, 2004, respectively and were attended by a large number of people including representatives o f most ministries, Ahwaz Governor, Ahwaz MP, local communities, NGOs, contractors, consultants, university professors and medias. The public did not have any restriction on the implementation o f the project; on the contrary all presents welcomed the project, requested its initiation the soonest possible and asked for additional activities to solve pollutionproblems. E. Summary ofMainEnvironmentIssues The EA assessment indicatedthat the execution of the project will have positive environmentalimpacts in terms of reducing pollution o f natural resources, will generate significant economical, social and public health benefits, and will enable the government to enforce existing environmental regulations and standards. The project will extend andrehabilitate water networks to ensure 100%water supply coverage, to provide good quality water on a continuous basis, to cater for population growth and to reduce unaccounted for water. Thus the project will provide controlled water supply to the households and will reduce overdraft of the aquifer. It will improve health conditions of the population by providing them with adequate water quantity and quality from sustainable sources. The provision of wastewater collection and treatment facilities will have a strong positive effect on the overall environment and the public health conditions in both cities. There will be improvement o f the water quality inthe streams andrivers that flow throughout the cities. A major benefit o f the project i s the protection o f groundwater resources from contamination by untreated sewage. As a result, economic benefits will occur in terms o f increased water volume o f good quality, increased tourism activities especially inShiraz, and lower medical costs associatedwith treatingwater-borne diseases. There will be considerable benefits to the farmers who are presently usingpollutedwater or raw wastewater The wastewater treatment facilities will also provide an opportunity to better control industrial discharges through pretreatment and connection to the collection system as stipulated inthe Iranian law. Finally it i s worth noting that the design o f the treatment plants has taken into consideration the use of their by- products (treated effluent and generatedsludge) with the aim o fprotectingthe environment and the scarce water resources. This will generate significant economic, social and health benefits and will enable the Government to enforce the law that prohibits the use o fraw wastewater for irrigation. A summary ofmajor potentialenvironmental issues is given inthe following sections. 160 Supply of Adequate Water Quantity and Quality: Water quantity and quality should meet water demand as well as allowable drinking water standards set by the Iranian Government and WHO. Among the parameters of concern are the bacteriological contamination of the water, the concentration level of nitrate, the presence of nitrite and the concentration o f heavy metals. Ahwuz: Projected water demandfor the year 2027 i s 6.4 m3/s, which represents only 3% o f the minimum Karoon flow reportedover the last 30 years and 0.9% of the mean annual flow of the river. Furthermore, and in order to ensure adequate water supply, treatment plants have been designed to meet maximum daily demand and storagereservoirs have been providedto supply 50% ofthe peak daily consumption. In addition, the rehabilitation of the water distributionnetwork and the routine operation andmaintenance of the system including the control of illegal connections will reduce the unaccounted for water to acceptable limits. The proposed advanced water treatment process can ensure good quality water that would meet national standards and WHO drinking water standards. This process will ensure the elimination o f bacteriological contamination, as well as the removal o f taste, odor, turbidity, and solids. Based on the quality o f raw water (Ref. Table 1) and the proposed treatment processes, treated water will meet drinkmg water standards. Duringproject implementation, a continuous monitoring program would be implemented to ensure that drinlung water i s in compliance with the required standards. The monitoring program will cover biological andphysicalparameters as well as heavy metals andpesticides residues. Shiruz: Geological and hydro geological studies, geophysical logging, test pumping and water quality analyses were undertaken to assess the water quantity and quality of the underground water. Based on these studies, the safe yield of the ground water was found to be about 1,556,000 cudd, which i s by far above the projectedmaximumwater demand (664,363 cudd) for the year 2027. The water balance for the study area during the first phase was prepared on the basis o f the population figures (1,240,592 for the year 2003 and 1,360,895 for the year 2007), the maximum water demand (403,644 c u d d and 452,858 c u d d for the years 2003 and 2007 respectively) and the yield of wells and the treatment plant capacity at Douroudzam dam (Table 2). The water balance indicates that the total water resources will by far exceedthe water demand o f the project area duringthe first phase. Water quality analyses o f surface and ground water are summarized in Table 3. The analyses indicate that the water quality i s chemically acceptable. The concentrations of all chemical parameters are below the maximum allowable standards set by the Iranian Government, WHO and CEE. Bacteriological analyses of well water could not be obtained, however available analysis of water quality in existing storage reservoirs indicates the absence o f bacteriological contamination and confirm the efficiency o f the chlorination system. The provision o f a wastewater network for collecting and diverting the generated wastewater to a treatment plant will certainly eliminate potential bacteriological contamination o f ground water. Inaddition, the proposed project will finance the regular monitoring o f water quality. Quality of Treated Effluent The treated effluent should be o f acceptable quality so that it canbe safely discharged into water bodies or re-used for irrigation. This means that the effluent quality should meet the standards for discharge into water bodies and the WHO guidelines for agriculture re-use. One o f the major parameter of concern i s the level o f nematodes eggs, which should be less than 1 egg per liter for water used in irrigation. The other major concern i s the concentration level o f nutrients such as ammonia, nitrate and phosphate which could result in algal growth inthe receiving water bodies. The level o f heavy metals i s also o f concern 161 and could have adverse impacts on agnculture and water bodies. Regular monitoring o f these variables will be requiredto ensure strict adherence to the prevailing standards. Existing and proposed treatment plants, in both cities, are based on the activated sludge process plus chlorination. In addition, the existing and proposed wastewater treatments in Ahwaz are provided with a nitrification-denitrification process. Activated sludge can ensure a treated effluent o f acceptable quality for discharge in receiving water bodies and/or re-use in agnculture. This process will result in the removal o f nematodes to less than one percent o f the concentration in the raw wastewater entering the treatment plant. Therefore the presence o f nematodes in the treated effluent will be directly related to their concentration inthe raw wastewater. Analyses conducted on raw wastewater (ref. Table-4) indicated the presence o f nematodes but at very low levels. As soon as the wastewater treatment plants start operating, monitoring o f nematodes in the influent and effluent will be conducted. An allocation for the installation o f filters for the removal o f nematodes has been made in case the treated effluent does not meet the required standards with respect to nematodes. Ahwaz: The discharge o f treated effluent from Chouneibeh wastewater treatment plant into Karoon River occurs mostly inwinter. Duringthat period, the treated effluent will not be chlorinated in order to avoid the formation o f halogenated compounds (trihalomethanes) in the river. Moreover, the existing outfall from the treatment plant, discharges treated effluent at the bank o f the river. An extension o f the outfall to the inside o f the river, in order to ensure proper mixing, will be implemented as part o f the project. By the year 2027, the treatment plant capacity will be 2.36 m3/s, which represents 1.18 % and 0.34% o f the minimumand mean annual flow o f Karoon, respectively. Analyses o f water quality before and after discharge o f treated effluent indicated that water quality inKaroon would not be affected by the discharge o f treated effluent. On the contrary, several parameters in the treated effluent are at lower concentrations than those o f the river. The only parameter that could slightly affect the water quality of Karoon i s the electrical conductivity o f the treated effluent, which i s relatively high and i s related to the high value present in the raw sewage as a result of ground water infiltration into the sewage. The implementation o f the collection network will certainly limit ground water infiltration and i s expected to result in decreasing electrical conductivity in both raw wastewater and treated effluent. During the operation phase, continuous monitoring o f raw wastewater, treated effluent as well as water quality o f Karoon River before and after the discharge point will be undertaken. Under emergency conditions and in case the treated effluent does not meet the standards for discharge, the effluent will be re-routed and discharged in the sludge lagoons that will be constructed at 6.5 km from the treatment plant site. An emergency pipeline connection has been provided from the discharge outlet to the station that pumps the sludge to the lagoons. Treated effluent from the proposed eastern treatment plant will be discharged in a concrete channel that runs for a distance o f 5 km after which it will flow in Maleh Stream that discharges in Shadegan wetland which i s located at a distance o f 80 km. The channel runs along agricultural areas and has adequate capacity to accommodate the generated effluent by the year 2027. At present, the channel receives most raw wastewater but once the project is operational, the channel will only receive the treated wastewater which can be re-used for agncultural purposes. The implementation o f the project will have no negative impact neither on the quantity o f water discharged to the wetland nor on the water quality o f the wetland. Indeed water discharged from Maleh (run-off plus treated wastewater) represents only 5% o f the total water discharged to the wetland. Under no project, raw wastewater i s discharged to Maleh and i s used for irrigation during the summer while under the proposed project, treated wastewater i s discharged and/or i s used for irrigation. Interms o f quantity, almost the same quantity will be used for irrigation and will not reach the wetland in summer. However when water is not used for irrigation, less pollution loads will be discharged to the wetland. 162 Shiraz: treated effluent from both treatment plants will be discharged into concrete channels that run along agricultural areas and ultimately discharge into Maharloo Lake which covers an area o f around 200 hectares with an average water depth o f 40 cm. The lake water i s brackish with high levels o f salts (average NaCl 188 g/l) and metals including iron, cadmium and lead. Hence, the lake water will not be affected by the discharge o f treated effluent. The discharge o f the final treated effluent to Maharloo Lake will occur mostly in the winter season, since in the summer the effluent will be used for irrigation. In view o f the treated effluent quality, which will be in compliance with the prevailing standards for discharge to water bodies, and the dilution effects o f the rainy season, no adverse impacts are envisaged on the lake. Infact, the environmental state o f the lake i s expected to improve in comparison to the base condition due to improved water quality o f the discharging rivers. Moreover, the implementation o f the project will not cause any changes in the salt balance o f the lake since the wastewater flows represent a very small fraction (around 1%)o fthe total flows that enter the lake throughrainfall and drainage. Sludge Quality Generated sludge from wastewater treatment plants, inAhwaz and Shiraz, will be usedby farmers as soil conditioner or fertilizer. In such case, the sludge quality will have to comply with the FAO, EU and WHO guidelines for the use o f sludge in agriculture including the limit o f less than one intestinal nematode egg per 100 gm o f dry solids and the limits on the concentration o f heavy metals. The adopted treatment processes, the one year storage period, and the control o f industrial discharges to the sewage system would ensure that the WHO nematode standard and EUand FA0 guidelines on the level o f toxic substances would not be exceeded. The use o f sludge will be restricted to cereals and in case o f non- compliancewith the required standards; the sludge will be disposed inthe existing landfills. Moreover, national guidelines for sludge re-use would be developed in coordination with line ministries (Ministry of Energy, Department of Environment, Ministry o f Agnculture Jihad, Ministry o f health and Medical Education, etc.) and concerned stakeholders. These guidelines would set out good standards o f practice and monitoring and define roles and responsibilities. Training workshops on re-use o f treated sludge will be also provided to all concemed stakeholders. SolidWastes Generated solid wastes from water and wastewater treatment plants, screenings and gnt from the inlet works as well as dned sludge from water treatment plants will be collected and disposed by the WWCs in the existing landfill sites which are located outside the cities. Considering, the quality o f raw surface water and the water treatment processes, the level o f toxic substances inthe sludge generated from water treatment plants can not exceed the EU limits with respect to the concentration o f heavy metals. Nevertheless and as an extra precaution, WWCs will ensure that dried sludge will not be mixedwith other types o f waste but will be located in a specific cell and signs will be posted notifying o f the special waste contaminations. Dischargeof Industrial Effluents In Ahwaz, around 57 industrial facilities are located within the project area o f which 11 are o f significance with respect to their impacts on wastewater quality and quantity. Similarly, a number o f medium and small industries are located within Shiraz project area, however only 5 industries are o f significance. Although some facilities have already installed pretreatment units, several industries discharge their effluent without any treatment. The discharge of untreated industrial effluents can affect the performance o fthe wastewater .treatment plants, resulting ina lower quality treated effluent. The project will only provide connections to industries that do not discharge toxics, which may affect the performance of the wastewater treatment plants. The discharge o f industrial effluents will be subject to 163 the approval of both the Director of the treatment plant and the director of the DOE. The project will ensure that the industrial effluent discharges are pretreated to levels which comply with the World Bank Environmental Guidelinesmentioned inthe "Pollution Prevention and Abatement Handbook", talung into consideration the achievable reductions at the treatment plants for all important parameters o f concern. The DOE has promulgated standards for industrial discharges to surface water. Moreover under the World Bank funded sewage project for Tehran, standards for industrial effluent discharge into sewage systems are being developed in close coordination with DOE and other concemed line ministries. The standards include the following industrial sectors: food, textiles, tanneries, pulp and paper, metal, pharmaceutical and electronic industries as well as general standards for the remaining industrial sector. The project will ensure compliance with these standards, when applicable and the promulgation of a national law for the discharge of industrial effluents to sewage networks. For those industries for which their industrial water will not be pre-treated, and/or will not be connected to the network, DOEregional branch will require that each polluting industrial establishments will prepare a compliance action plan (CAP) which will address the major pollutants, the type of pre-treatment required and the investments, and monitoring costs for the pre-treatment facility. Operational permits for those industries will be subject to the implementation of the CAP as yearly monitoredby the WWCs and enforced by the DOE. The project EMP will include the preparation o f CAPSfor the 11most important industrial facilities in Ahwaz and the 5 significant industries inShiraz. Archeological and Historical Sites Shiraz has many recorded archeological and historical sites. The implementation of the water and sanitation project will not require the demolition of any known historical sites, nor will it directly affect any known archeological sites. Onthe contrary, the project will have a positive environmental impact, as itwill eliminate the uncontrolledflows anddischargesofwastewater adjacentto historical sites. The sitting of all the project works was selected in close coordination with the Cultural Heritage Organization following several site visits so as to ensure that these facilities are remotely located from the archeological and historical sites as well as from areas where there i s potential o f finding archeological remains. Duringfinal designs, further site inspections will be conducted by surveyors and archeologist to check the construction drawings in the field. Construction activities that are close to existing archeological or historical sites will be identified, and special protection and constructionprocedures will be developed to mitigate any potential impact on these sites. Moreover, chance find procedures were developed and will be used by the WWC, Cultural Heritage Organization, contractors and supervision engineers in case unanticipated archeological materials are encountered during the course of the constructionactivities. Duringconstruction, there are potential indirect impacts on existing archeological sites due to vibration from drilling and compacting equipment; loss of amenity due to dust, noise and visual intrusion. Good construction practices, including special procedures to be adopted in areas in close proximity to archeological sites would mitigate most impacts to acceptablelevels. The long-term permanent impact o f the project on the existing archeological sites will therefore be positive due to proper collection o f wastewater, reduced incidence of flooding, improved amenity and aesthetic quality of the city, which would outweigh any temporary adverseimpacts. Other Issues The general disruption during construction will be mitigated by coordinated planning o f construction activities. This will include coordination with all concerned authorities prior to the start o f the construction activities. Other adverse construction activities will be mitigated through the adoption of 164 Good Practice Environmental Procedures. Odors from the wastewater treatment plants will be minimized by careful planning and implementation of the plant operation and maintenance. Regular odor emission monitoring from the wastewater treatment plants will be implementedto mitigate any non-compliance by taking appropriate operating measures. Impacts arising from the potential occurrence o f earthquake will be mitigated through (i)following Iranian and International seismic design requirements as well as (ii)developing and implementing emergency preparedness plans which would cover activities to be implemented before, during and after earthquake occurrence. F. EnvironmentalManagementPlan(EMP) MitigationMeasures Mitigation measures have been identified to ensure that the defined objectives o f the project are achieved whilst preventing and reducing any adverse environmental impacts. The mitigation measures are to be executed by the construction contractor (construction phase) and the operators o f the facilities (operation phase) with supervision by the WWCs. Inaddition, the following measures will be implemented: The final design process will detail and finalize construction drawings and tender documents of the project components. This process has incorporated final review o f the designs by environmental specialists to ensure that all required environmental issues are properly addressed and tender documents include specific provisions concerning environment, health, safety as well as the use o f archeological chance find procedures in the event that unknown archeological andor historical sites are encountered during the course o f construction. Moreover, the Bank will review all construction contracts to ensure that the required mitigation measures have been incorporated inthe biddingdocuments. Pre-tender conferences will be held to brief pre-qualified contractors on the effective implementation o f mitigation measures. All pre-qualified contractors will be called to a pre-tender conference at which environmental, health and safety issues will be outlined. Cultural heritage issues in Shiraz will be also addressed. The contractors will be briefed on: (i) chance find procedures, (ii) procedures to be special adopted inthe vicinity o f sites defined as requiringprotection, (iii)penalties for non-compliance, and (iv) coordinationwith concerned authorities. Liaison arrangements will be established between the public, contractors, and the Project Management Unit. A procedure will be established to allow the general public to lodge complaints at the Project Management Unitabout excessive disturbance. MonitoringPlan Monitoringo f construction activities will have to ensure that mitigation measures o f construction impacts are being implemented properly, while monitoring o f operation is to ensure that no unforeseen negative impacts are arising. Proposed monitoring requirements during the construction and operational phases have been identified and included parameters to be monitored, location, frequency as well as responsible agency. Duringconstruction, the monitoring programwill include dust andnoise. Monitoringo fthe water supply will includebiological, physical and chemical parameters as well as heavy metals andpesticides residues. Duringthe operation o f the wastewater system, monitoring will include data on BOD, COD, suspended solids, phosphates, nitrates, salinity, heavy metals, fecal coliform andnematodes eggs. The treated sludge will be monitored for nematodes, Coliforms and toxic metals. Soil and agncultural products will be monitored for significantpollutants includingheavy metals, Coliforms and nematodes. 165 The WWCs will develop and supervise the implementation o f monitoring programs for raw water, treated water, surface water, raw wastewater, treated effluent and sludge and industrial discharges to the sewage. WWCs will also provide advisory services to industries. The regional DOESwill establish formal programs for monitoring and controlling discharges to the environment from wastewater treatment plants and industries, treated sludge, surface water, and soil including actions to be taken in case o f non-compliance. DOE will also develop a system for the enforcement o f standards related to industrial discharges. Activities to be implemented by DOE will be conducted in close coordination with the World Bank funded Environmental Management Support Project. The Ministry o f Health and Medical Education will establish a program for monitoring drinlung water quality and the occurrence o f water-borne diseases. A public hygene education campaign will be also conducted by the Ministryincluding videotapes, TV programs and distribution of leaflets. The Ministry of Amculture Jihad will establish and implement formal programs for monitoring the quality o f soil and agricultural products on a pilot area including actions to be taken in case o f deterioration in quality. The Ministrywill develop education programs and awareness campaigns on best agricultural and irrigationpractices. 'Ifsignificant adverse impacts are identified by the concerned organizations, appropriate mitigation measures will be taken and arrangements for amendments o f the EMP will be made. The Ministry o f Energy will have the overall responsibility to ensure that adverse impacts are maintained to acceptable levels and corrective actions are taken when required. A project monitoring report will be prepared on the effectiveness o f the EMP once every 6 months and willbe sent to the WorldBank after review and approval o fDOE. InstitutionalStrengthening The institutional arrangement and capacities o f the organizations in-charge with the implementation and management o f the proposed project were reviewed with the intention o f providing technical assistance and proposing their reinforcement. Training programs will be designed and implemented with the assistance o f local and international experts and will include: WWCs, TreatmentPlant Operators, Municipalities as well as Furs and Khozestan DOE: At the initiation o f the project, a training workshop will be provided to the staff o f the WWCs, Ministry of Energy, Municipalities and the two regional DOE to raise environmental awareness and to clarify the specific environmental requirements related to the project. A two-day workshop will then be provided and will cover the following topics: - Effective implementationo fmitigation measures - Project supervision - Sampling and analysis - Monitoringand evaluation WWCs, Municipalities, Khozestan and Furs DOE and Line Ministries: A two day workshop will be provided to the staff o f WWCs, Municipalities, and representatives of 166 line ministries to strengthen capacities in the application of treated effluent and sludge re- use. Laboratory Staff: A one-week training workshop will be provided to strengthen capacities insamplingandanalysis methods, environmental monitoring, quality assuranceand quality control as well as safety procedures. Staff at Water and Wastewater Treatment Plants: A one day training workshop on occupational health safety and earthquake emergency preparedness procedures will be provided. Workshops and awareness campaigns will be also implementedto raise awarenesso f farmers, NGOs and local communities; these would include: Local NGOs, communities andfarmers: Training would be provided through 1 or 2 days workshop for local NGOs, communities and farmers, focusing on public awareness and on re-use of treated wastewater and sludge for agricultural purposes. Awareness campaign and pamphlets: two awareness campaigns will be conducted; pamphlets in Farsi will be distributed to all farmers highlighting the adverse health and public safety impacts resulting from the use of untreated effluent; and measuresto be taken when usingtreated effluent and sludge. A public hygiene education campaign will be also conducted bythe Ministry of Education. An assessment of analytical capacities of the laboratories at the two existing water treatment plants in Ahwaz, at Chouneibah existing western wastewater treatment plant and at Emergency wastewater treatment plant which i s under construction has been conducted; additional requiredequipments were also identified and will be supplied as part of the proposed project. For the proposed Eastem Wastewater Treatment Plant and Long-Term Zone wastewater treatment plant, fully equipped laboratories will be provided as part o fthe construction contracts. Technical assistance will be provided to the DOE to set up baseline data on existing environmental conditions and to develop a quality assurance and a quality monitoring program as well as an enforcement programfor industrialdischarges. These activities will be implementedinclose coordination with the on- going World Bank Environmental Management Support Project. Similarly, technical assistance will be provided to the Ministry of Health and Medical Education to set up baseline data on the occurrence of water bomdiseases andto develop a monitoringprogram for their occurrence. Cost Estimate The cost of the Environmental Management Plan during construction (mitigation measures including additional treatment and monitoring) will be bome mostly by the contractor (construction phase) and the Supervision Engineer who will make the necessary provision as part of their contracts. During the operation phase, mitigation measures and monitoring activities will be implemented by the operator of each facility. A total amount o f 4.9 million dollars will be allocated for the implementation o f the environmental management plan as detailed inTable 5 and will be included inthe project cost. It should be notedthat the total cost does not include: Cost of additionaltreatment incorporatedinthe design o f the project; Cost o f mitigating negative construction impacts (included in the construction contract cost); 167 Cost o f mitigation measures and environmental monitoring o f the eastem wastewater treatment in Ahwaz and the long-term wastewater treatment plant in Shiraz (included inthe constructionand operation and maintenance contract cost); Cost o f setting up a new laboratory at Ahwaz eastern wastewater treatment plant and Shiraz long-term wastewater treatment plant (included in construction cost);Cost o f Environment and Safety Officer at eachTSU (included inTSUs cost). 168 Table 1: Average Raw Water at Ahwaz Existing Intakes over OneYear Period Parameter Unit Intakesto WTPl and WTP2 Turbidity NTU 247-290 PH 8 - 7.9 EC p/cm 1690- 1700 TS 2114- 2165 TDS mg/l I 1050- 1067 TSS mg/l I 364 -380 Hardness mg/l I 393 -395 so4 mgll 249-273 c1 mg/l 253 -265 0.074-0.1 3.3 -4.45 NH4 mg/l 0.3 0.4 - PO4 mg/l 0.047-0.048 Fe mg/l 0.024-0.026 COD I mg/l 11- 12 33 -35 Ca I mg/l 98 -99 K mg/l 1.8- 1.9 Zn mg/l 0.039 Cd mg/l 0.002 Pb mg/l 0.007 mg/l Hg 0.001 169 r 0 ry 2 1c1 Y) + "i + 0 /3 I a 7 g, ry 2 4 ur 1'1 + I- % ! ! P Table 3: Water Quality Analyses for Surface and Groundwater Resources in Shiraz Nitrites (mg/l) 0 0 0 WHO 0 Nitrates (mg/l) 4.7 7.79 17 WHO 50 Ammonium (mg/l) 0.08 0.06 Iranian ST.055-0.5 Hardness (mg/l) 215 90 410 Iranian ST 500- Alkalinity (mg/l) 185 172 228 TDS (mg/l) 327 360 575 WHO 1000 Electrical 486 460 900 Conductivity( pmho/cm) Total Coliforms (MPN/100 ml) 8 0 WHO 0 Table 4: Influent and Effluent Data for Wastewater Treatment Plants Parameter Unit Raw Wastewater Treated Wastewater West Treatment Plant: BOD ss mg/l 225 <25 mg/l 215 <40 Coliforms MPN/100ml 5 io5 < 1000 Nematodes 1 egg/liter 18 24 <40 <27 Technical and cost effective Unaccounted for Water (UFW) ("A) management Labor Productivity (#staff per 1000connections) <6 <3 Substantial deterioration o f surface and groundwater NA quality Environmentalhealth impact Evidence o f waterborne diseases, e.g. typhoid fever, NA cholera 2003104 2005 2006 2007 2008 2009 Ahwaz WR 85 35 33 30 29 27 UFW 35.5 90 85 83 80 75 ` BillCollection (months) 410 212 142 106 75 46 Shiraz WR 98 90 85 83 80 75 UFW 301. 28 28 27 27 27 BillCollection (months) 235 140 159 163 130 119 189 ProposedImplementationSchedule 1 Phase 1 v v v (first stage investment operation) Phase 3 (proposed APL) NJ3:Phase 1and Phase 2 include the cities ofAhwaz, Shiraz, Rasht, Anzali, Sari and Babol 190 AdditionalAnnex 13a: Terms of Reference:DemandManagementProgram ISLAMIC REPUBLICOFIRAN AHWAZ AND SHIRAZWATER SUPPLY AND SANITATIONPROJECT Background 1. Costs to provide water supply and wastewater services for Iran's population have escalated in recent years. The cheapest water sources such as nearby rivers and aquifers are fully used and more distant sources are now often necessary to consider. At the same time the costs o f collecting, treating and disposing o f wastewater have risen. The combination o f tapping ever more distant or deeper water sources and meeting the country's demand for environmental protection has resulted in growing pressure to raise tariffs to consumers and to require higher subsidies from local and central government budgets. Inorder to reduce such pressure for higher tariffs and subsidies it i s necessary to make certain that water and wastewater companies plan, invest and operate in the most economical fashion possible. The experience from the well managed water and wastewater companies in Iran and abroad shows that the cheapest way o f balancing supply and demand i s through demand management programs. Such programs comprise a series o f policy reforms, investments, operational improvements, and incentives to encourage consumers to adapt their level o f demand so that each consumed cubic meter i s wisely used and is not wasted. Inso doing investment and operating costs for wastewater are also reduced since the volume o f wastewater i s also kept to the minimumnecessary. Objectives 2. The objectives o f the demand management program inwater and wastewater companies (WWC) are to identify and implement the policies and investments that will encourage consumers to reduce losses and wastage so that their benefits from consuming each cubic meter are at least equal to the costs, including those to properly manage the resulting wastewater. Decisionsrelatedto Sector Policy 3. The single most important reform to encourage consumers to consume economically i s to show them what each cubic meter o f consumed water costs and to allow them to decide how much water they wish to consume at that cost. Inorder to enable them to do so it becomes necessary to make a series o f decisions, both relating to the tariff and subsidy policies inthe sector, and relating to how the water and wastewater companies will manage demand. The first four decisions require a political support from the highest level in Iran since they concern tariffs and subsidies, and how WWCs should be managed. These fundamental decisions are: To decide that consumers shouldpay the full costs o ftheir consumed water. To decide on a system o f government subsidies to help those classified as poor to pay the full costs o ftheir water consumption. To provide consumers with a signal how much water they are consuming which means that reliable meteringbecomesnecessary. To improve the capability o f WWC and to give WWC incentives to accurately meter consumption o f each consumer and bill and collect user charges that reflect the volume of consumed water. 191 Decision One: "Each Consumer ShouldPay the FullCosts o f Water Consumed" 4. In order to make the payment o f tariffs acceptable there must be agreement on how the costs o f water will be calculated in each system each year in an open and transparent fashion. It i s proposed that the cost o f water should be calculated usingthe following method: The necessary levels o f water consumption and production should be projected over the next 15 years into the future; All the costs necessary to meet demand should be estimated for eachyear. The costs should be expressed in constant prices o f the year for which the calculation i s made and include both water supply and wastewater; The costs should be expressed as an average cost per cubic meter o f water o f consumption. This average cost will be the result o f dividing the sum o f discounted operations and maintenance costs and investment costs over the 15 years by the sum o f the discounted quantities o f water consumed each year. The discounting i s necessary to make costs that occur indifferent years comparable to each other. It i s recommended to use a discount rate o f 10%per year. The costs o f water and wastewater that each consumer should pay must be adjusted each year by multiplyingwith (l+inflation rate) in order to maintain the user charges inconstant prices. DecisionTwo: "The Poor Should Receive Government Subsidies to Help Pay" Decision One may result inuser charges that will be highinrelation to the income o f the poor. A system o f government subsidies will become necessary to help them pay for the full costs o f water supply and wastewater. Such subsidies should be financed by the central government budget and not by other consumers in order to give incentives to WWCs to serve wealthy and poor consumers equally well. (Experience shows that ifutilities are forced to cross-subsidize poor consumers with what they can make wealthy pay over and above cost they tend to provide better service to the wealthy and poorer service to the poor.) It i s recommended that a decision be adopted what percentage o f consumers that will be eligible to receive government subsidies. It is also recommended that a central government decision be adopted how eligible consumers will be identified. (One simple way o f identifying eligible consumers is to include only those households that consume below a minimummonthly volume o f water, necessary to meet the most important needs.) Finally, it is recommended that those households that have been declared as eligible to receive subsidies should receive subsidy vouchers that are good for paying for water and wastewater services. DecisionThree: "Each Water Connection Should be Metered" The principle should be that the water consumption should be metered at the level o f an individual connection ("abonnt"). This i s necessary because consumers without meters have no incentiveto save water. DecisionFour: "WWC ShouldHave Incentives and Ability to Collect Revenue" 7. Inorder to give WWCs the incentive to collect revenue, based on accurate meter readings, they should be authorized to bill and collect revenue on the basis o f metered consumption only. Further, they 192 should be allowed to keep and use the collected revenue freely to pay for the costs o f operations and maintenance and of investment. This principle o f financial autonomy should be "freedom with responsibility" and will force WWCs to provide good service (or else consumers will refuse to pay for tariffs) and efficient service (or else consumers will also refuse to pay because costs become too high). Decisionsrelatedto the DemandManagement at the WWC Level 8. Once sector policy has been decided that will give them the incentives and tools to manage demand the WWCs have a number o f decisions to how to actually make use o f their authority to manage demand. There are at least six decisions and actions that WWC can make to manage demand starting with metering: Decision Five: "Meter Productionand Consumption" 9. Inorder to get the correct signals where demand is the WWCs must meter productionaccurately and meter each consumer. No substitute exists for good metering data, starting with each production point, continuing with strategically placed district meters in the distribution system and ending with metering the consumption o f each abonnt. Precise meter readings will indicate which are the consumers and the scope for consumption and the cumulative share o f the number o f abonnts will be as indicated in the table below (withthe number o f subscribers sorted by descending consumption: Table: Cumulative Sharesof Subscribersversus Cumulative Share ofTotalConsumption Cumulative Share o fTotal Cumulative Share o f Total Comment Number o f Subscribers Consumption 0% 33% The single largest abonnt i s unaccounted water 30% 80% The 30% largest abonnts usually consume two thirds o f total cinsumption 100% 100% I The smallest abonnCs consume one third o ftotal consumptionI 10. The table shows that unaccounted water (the difference between total production and the sum o f all individual consumption meter readings) i s the single largest "subscriber" (although unwelcome). Unaccounted water is explained by many factors, such as leakage, illegal and unregistered subscribers, imprecise meters, and mistakes or collusion by WWC personnel worlung with metering, billings and collections. Common to all these factors i s the fact that consumption is wasteful andthis i s why efforts to identify and reduce the different sources o f unaccounted water i s the highest priority in demand management. The priority order o f reducing wastage and marginal consumption i s then first to attack unaccounted water, then concentrate on the 30% largest subscribers, and finally proceed with medium- size and smaller consumers. Decision Six: "Control the Consumption o f Government Subscribers 11. Government subscribers constitute a common source o fwastage since such clients are often lax in paying for their water consumption. Failure to pay inturn creates the common misunderstanding that such clients are not obliged to control wastage. However, wastage can be reduced if government abonnis are given an incentive to consume economically. The easiest way to provide such an incentive is to provide a non-fungible item in their government budget earmarked for payment o f water supply and to allow the 193 government client to receive part o f the cost savings in case their consumption turns out lower than historical levels. Decision Seven: "Reduce Both Commercial Losses and Technical Losses" 12. Unaccounted water comprises both the "commercial" losses that result from missingconnections, misrepresented consumption levels and errors in the W W C commercial system and "technical" losses such as leakage in the distribution system, overflowing storage reservoirs, and meter inaccuracies. It i s difficult to say whether "commercial" or "technical" losses are more significant. What i s certain, however, i s that experienced operators typically try to first reduce commercial losses before attacking technical losses. The reason i s that less investment i s necessary to reduce commercial losses although more management know-how and better information systems are necessary. Decision Eight: "Educate and Help Subscribers to Reduce On-site Wastage'' 13. It is common to findthat consumers who have become used to heavily subsidized or free water have adopted wasteful habits in their homes, such as keeping taps open or tolerating lealung appliances and the like. Such wastage occurs after the meter and will not appear as "unaccounted" water. However, it offers an opportunity to save water. The strongest incentive for consumers to reduce such wastage i s their obligation to pay higher tariffs for their water consumption. However, public acceptance o f higher tariffs and demand management is better if the W W C offers its subscribers free or subsidized help in locating and fixing leakage in their homes. Simple and cheap repairs can reduce consumption substantially and earn the collaboration and good will o f consumers. In the end, the best form o f demand management i s what well-educated consumers themselves undertake to consume at economical levels. Decision Nine: "Make the Tariff Structure Simple and Understandable" 14. Tariff structures in Iran are quite complex and not easily understandable for consumers. The original intent for introducing different consumer categories and progressive tariffs where the average tariff increases with higher consumption level may have been to shift the tariff burden to those categories who are intuitively most able to pay such as industry, commerce or large domestic consumers. Experience proves however that the original intent i s often distorted to the extent that the burden o f paying tariffs i s shifted to increasingly fewer abonnCs while increasingly more are subsidized through cross-subsidies. Such unequal sharing o f total costs can easily encourage those abonnCs who are subsidizing the others to collude with the personnel o f WWC to report and pay less than actual consumption levels. Too high tariffs can also encourage cross-subsidizers to drill their own wells and stop being clients o f the WWC. Either way, inefficiency results and the scope for demand management are reduced. It i s better then to make the tariff structure simple and easily understandable, either by having a simple unit rate per cubic meter consumed, equal for all consumers or possibly a lifeline tariff. The latter comprises two parts: one fixed monthly charge for a minimum, life-line amount of water (inthe order o f 5 m3 monthly) and then a constant unit charge for all consumption above the life-line amount. Such simple tariff structures provides the strongest incentives for WWC to meter and collect and for consumers not to waste water or use water that does not produce benefits for them. Decision Ten: "Educate Politicians, WWC Managers and Staff, and Consumers" 15. The final decision ina demand management program for the water supply and wastewater sector inIranwill have to be a wide program o f education to explain the necessity o f demand management and to show which reforms and investments that can be expected to produce efficient and equitable patterns of consumption. Such education must be continuous and be conducted indifferent settings in order to reach the intended beneficiaries with precise messages. 194 AdditionalAnnex 13b: Terms ofReference:Optimizationof Water Sector Institutions ISLAMIC REPUBLICOFIRAN AHWAZ AND SHIRAZ WATER SUPPLY AND SANITATIONPROJECT Background 1. Institutional arrangements in Iran's water and wastewater sector are dnven by the government's desire to increase decentralization. At the central level policy and control over the sector's investment budget are vested with the Ministry o f Energy through its Vice-Ministry o f Urban Water and Wastewater Affairs, the Management & Planning Organization and the Economic Council. The Vice-Ministry is assisted in carrying out its normative duties through the National Water and Wastewater Engineering Company (NWWEC). 2. At the regional level there are Regional Water Boards (RWBs) responsible for capturing and transmitting raw water that i s then treated and distributed by Provincial or City Water and Wastewater Companies (WWCs). Inthe case o f Shiraz the water i s also treated by the Regional Water Board and sold to the Shiraz WWC as bulk supply. Inthe case o f the capital o f Tehran, a separate company, the Tehran Sewerage Company, was established in 1992 to manage and implement the sewerage investment programs and operate the sewerage system. It i s unlikely that this separation o f water supply and wastewater services will be replicatedin any other cities or regions inview o fthe advantages o fplanning, implementing and operating the two services together. 3. The state-owned WWCs are able to manage their day-to-day operations with a measure o f autonomy where Managing Directors can make most decisions on operations and staffing within the limits o f the centrally authorized staffing levels and with some flexibility to provide extra compensation to well performing employees. However, the WWCs do not control their own investment programs and, therefore, have limited scope to improve investment and operating efficiency and the level and quality o f service. Moreover the WWCs have to follow an organizational model developed by the NWWEC and cannot select a model that would be more appropriate for their particular situation. 4. The de jure institutional arrangements are reasonable given the size and diversity o f the country. However, there is a need for formalizing and sharpening the de facto responsibilities o f the Central Govemment, the Regional Water Boards and the WWCs. Due to the lack o f financial autonomy o f the WWCs and o f the RWBs investment efficiency and standards of operations and maintenance have suffered. What i s required i s to match accountability for providing water supply and wastewater services with the necessary autonomy, incentives andtools to comply with the duties. Greater clarity inthe rights to use water resources i s also necessary to allow the WWCs to plan ahead, including contracting with private operators and to attract private investment financing. Objectivesof Study 5. A two-part study is proposed to clarify institutional responsibilitiesand accountabilities inorder to derive the full benefits from the existing legal framework. The first part o f the study should map the complex arrangements, authority and responsibilities o f the stakeholders inthe water sector, including but not limited to: - The Economic Council - The Management & Planning Organization 195 - The Ministryo fEnergy - The Ministryo f HealthandMedical Education - The Department ofEnvironment - The National Water andWastewater Engineering Company - RegionalWater Boards - ProvincialWater and Wastewater Companies - City Water and Wastewater Companies - Municipalities 6. The second part of this study should describe in detail the institutional arrangements, tasks and responsibilities o f all the main components of the organization of WWCs in selected cities and/or provinces. A clear and transparent organization with effective autonomy for the institutions will form the basis for efficient operations and will be the main driver for further development and balanced decisions for preparation and implementationo fnew programs. SuggestedScopeof Study The first part of the study should strike a proper balance between description and analysis of the existing legal framework. The dejure authority under the legislation shouldbe described and analyzed interms o f de facto decision-malung and quality o f the decisions. One aspect that could explain the quality o f the decisions i s the amount and quality of data and information on which decisions are made. A second aspect that helps explain where the de facto decision-making authority i s the funding and recuperation o f operations and maintenance costs, and of investment costs, respectively. The two key aspects o f information and fundingcould help explain how water and wastewater projects are identified and selected among several competingprojects; how and by whom projects are prepared; how they are implemented; and how they are finally operated and maintained. Inthis context, the congruencebetween existing legislation andpolicies and adopted decisions shouldbe examined in order to identify the need for possible amendments to either the existing legislation and/or the strengthening of the sector regulation. The transparency of decisions and the use ofpublic hearings to buildpolitical support should be documented, where applicable, and the contents and form of contracts (such as between Regional Water Boards and WWCs related to the quantities and quality o f raw water supplies) between the different sector agencies should be exemplified and assessed. In this respect, it is important to describe how the use of scarce water resources i s optimized, either within a river basin, or within a confined groundwater aquifer. The legally mandated and actually paidextraction charges of raw water should be documented. 9. The secondpart of the study should focus on WWCs that play a key role inproviding the water and wastewater services of a quality that i s mandated. Under the assumption that water and wastewater services are best providedby specialized and professional WWCs the study should suggest ways inwhich the WWCs couldbe provided greater financial and investment autonomy. Inthe beliefthat cashoperating surpluses offer the most secure source of financial revenue for operations, maintenance and investment costs the study should propose how WWCs could be given sufficient incentives to manage efficiently in order to maximize their operating cash flows. 10. The second part of the study should also identify and evaluate different options for Public- Private-Partnerships (PPP) that could be considered by individual WWCs inorder to raise the efficiency and quality of project implementation and particularly operations and maintenance. The legal feasibility of differentPPP options shouldbe analyzed and confirmed. Analogously, the financial feasibility o f PPP without relying on government subsidies should be evaluated. Finally, the political support in favor of PPP should be gauged, both at the level of the central government and at the WWCs. Inthis respect, the 196 objectives and expectations o f both WWCs and other sector agencies in contracting with private firms should be clarified. The WWCs are likely to expect that private operators will transfer knowledge and bring international best practice to the sector. It is also likely that both the WWCs and the Central Government expect private operators to either bring investment financing or strengthen their operating cash flows in a way that would facilitate private, non-recourse borrowings in order to accelerate investments. ExpectedReports 12. Three reports are expected. The first would be a short progress report to be written during the field mission and that should list collected legislation and other relevant documentation. The second draft report should be produced within two months o f the completion o f the field mission. It should be submitted to the Ministry o f Energy for their comments on the basis o f which the third and final report should be produced within one month upon receipt o f the comments from the Ministry of Energy. 197 AdditionalAnnex 13c: TermsofReference:CustomerHealthEducationProgram ISLAMICREPUBLICOFIRAN AHWAZ AND SFXIRAZWATER SUPPLYAND SANITATIONPROJECT Background 1. The customer o f water supply and wastewater services i s the most important link in the chain to provide safe water and adequate sanitation. A population that is better educated as to safe hygiene practice i s able to compensate for the eventual inadequacies o f the public water supply and sanitation system such is the case when consumers will always boil water before ingesting it. By the same token, well-educated customers are able to make optimal use o f improved water supply and wastewater systems. Knowledgeable consumers are also best placed to monitor the quality of services and demand improvements and put the provider o f water supply and wastewater services under scrutiny and pressure to correct for any inadequacies that may result. Conversely, when continued unsanitary hygiene practices could negate many o f the benefits that new investments in a water supply and wastewater project may bring. For this reason it becomes essential to match the water supply and wastewater project being under preparation with a customer health education program, first inthe two project cities o f Ahwaz and Shiraz, and later inother cities as well. Objectives 2. The objectives o f the assignment are to design and implement a pilot health education program for the beneficiaries o f the proposed IranWater Supply and Wastewater Project. The pilot program should be based on existing or collected information on hygiene practices of the project population and initially targets those population segments where the incidence o f water and sanitation-related disease i s the highest. Scope of Work 3. The assignment comprises three distinct components: A survey to identifypractices o fwater consumptionand o fhygiene practices inthose areas and among those population segments where the incidence o f wtiter and sanitation related disease i s the highest; The design of a customer health education program; and The implementation o f the health education program on a pilot basis. 4. The survey of present water drawing and sanitationpractices should be sufficiently large to be statistically significant. It should not only map present practices but should also attempt to identify the historical sources o f health education for those included in the survey. The survey should assess the population's understanding of the links between better health and the level and quality o f water service and sanitation. The survey should also attempt to quantify the incidence o f water and sanitation related disease and the associated burden and cost o f health care. It will be key to map the population's level o f satisfaction o f on-site sanitation systems and to evaluate the motives and willingness to pay for collective wastewater collection and treatment system. For the same reason it is important to identify and quantify the present costs o f on-site sanitation systems, including the collection and disposal of septic tank sludge. 198 Inorder to optimize the costs ofthe survey and maximize its usefulness it is likely that collaborationwith a Non Governmental Organization (NGO) or academic institution will provejustified. 5. The design of the customer health education program should build on the results o f the survey and be keyed to cost efficiency and sustainability. To this end the design should identify the present modes and sources o f health education, such as schools, religious institutions, and health care facilities and build and improve and possibly introduce health education to disseminate and sustain safer and more hygienic water use and sanitation practices. It i s likely that elementary school cumcula will prove to be central to disseminate and inculcate better health education. The design phase should include the preparation o f educational pamphlets or the like, and possibly the use of media such as radio and television. 6. The implementation of the health education program on a pilot basis should aim at maximum cost efficiency and sustainability as well. For this reason it will likely prove o f advantage to conduct the pilot program through a NGO, through the existing education channels, and in collaboration with religious institutions. The pilot should include a simple system o f monitoring to permit a subsequent evaluation of the program's effectiveness. If possible, the pilot program should dovetail with the implementation o f the Bank-financed water supply and wastewater investment program so as to increase the motivation o f the target populationto modify its water use and hygiene practices. 199 Additional Annex 13d: Terms of Reference: National Sanitation Strategy and Action Plan for Sanitation and Hygiene ISLAMIC REPUBLICOFIRAN AHWAZ AND SHIRAZWATER SUPPLYAND SANITATIONPROJECT Purposeof consultancy The purpose o f this consultancy i s to assist the Government o f Iran in the development of a National Strategy and Action Plan for Sanitation and Hygiene'. The Strategy i s intended to increase the effectiveness and efficiency o f the investments o f the government and people o f Iran through the provision an overall policy framework to guide decision-makmg and resource allocation withinthe sector. The Action Plan will present a realistic programme o f specific, affordable and concrete actions to implement the Strategy. The Strategy and Action Plan shall consist of: The clear identification o f institutional, financial, technical and capacity issues; The development o f altematives to address these issues; A range o f analyses o f these alternatives (e.g. SWOT analyses for institutional feasibility, sensitivity analyses to test the robustness o f altemative financial approaches, etc.); and Recommendations based on these analyses. Background About 92% o f the urban population o f Iran is connected to public water supplies. By contrast, only 16% i s connected to public sanitary sewerage and only part o f the sewage i s treated before disposal The remarkably high water supply connection rates o f 92% are not matched by connection rates to sanitary sewerage which only average 16%, creating an environmental hazard. In Teheran, only 15% o f the population i s connected to a sanitary sewerage system although the bulk o f collected wastewater i s being treated. The remainder i s discharged untreated and constitutes a major source o f pollution and public healthrisk. Five major cities lack a sewerage system altogether. Most households use traditional seepage pits causing a threat to groundwater contamination. In a number o f cities without sanitary sewerage, households resort to discharging their sewage through the open rainwater drains. The rural situation i s different, but hardly better. At least one in five rural homes in Iran does not have access to basic sanitation'. Research literature in Iran (http://~~~.irvl.net/lRAN32.HTM) confirms that the diarrhoeal disease caused by poor water and sanitation contributes to malnutrition, a major public healthproblem with long-term consequences for health andproductivity. '"Sanitation" inthis document refers to the physical systems(e.g. sewers, septic tanks, latrines, treatment works) for the safe management o fhumanexcreta. "Hygiene" refers to the related humanbehaviors that promote health (e.g. washing hands with soap after defecation and before preparing food, safe handling o fwater inthe home, etc.) * Surveys and estimates o frural sanitationcoverage between 1994and 1999indicate that between40% and 80% o f the ruralpopulation have access to improved sanitation. Inreviewing these data, the WHO/UNICEF Joint Monitoring Programme for Water and Sanitationestimated ruralcoverage at 74% 200 In this context, the Iranian govemment is undertaking a number o f initiatives to improve water and sanitation in both rural and urban areas. Inparticular, the Government o f Iran i s planning to invest the equivalent o f 11 billion U S dollars to improve sanitation and water supply services over the coming six years. Loans from the World Bank are being sought to finance approximately 10% o f this amount. One o f the Bank loans being considered will, among other objectives, enable the prioritized extension o f sewerage services in six towns, with a goal o f improving both health and the quality o f life o f urban residents. These funds must be used strategically to maximize public health benefits, and the Govemment o f Iran (GoI) wishes to review and update the institutional, financial, and technical framework for these and other investments inurban and rural sanitation and hygiene. Strategy developmentProcess Sanitation and hygiene involve many stakeholders working in a variety o f institutions. At the ministerial level, these will include the Ministry o f Energy, the Ministry o f Economic Affairs and Finance, the Ministry of the Interior, The Ministry of Housing and Urban Development, the Ministryof Health, the Management and Planning Organization, the Environmental Protection Organization, and the Ministry o f Education. A similarly broad range o f governmental stakeholders will exist at provincial and community levels. Other key stakeholders include: international organizations and agencies, including UNICEF, UNDP, and WHO; the private sector; international and local NGOs; universities and research centers; Community-Based Organizations, etc. The strategy must reflect the needs and concerns o f this broad range o f stakeholders if they are to put its guidance in practice. Accordingly, the strategy will be developed in a consultative and participatorymanner to ensure the broadest possible ownership. 3.1 Sequence of strategy development A. Project Inception. Consultants shall prepare, (under appropriate guidance andreview from the Bank and local authorities and experts,) 1. an initial outline o f topics and issues for a national sanitation strategy, which highlights the questions to be addressed by such a strategy and 2. a process by which the sanitation strategy may be developed in close coordination with all major stakeholders B. Inaugural Workshop, at which the consultants will present the strategy outline, issues, and process for review, comment, and debate by various stakeholders. The outline should present leading options to address the substantive issues. C. Development of a draft strategy based on the guidance o f the inaugural workshop, field work throughout Iran, and discussions with sector specialists, community representatives, govemment authorities, members o f the private sector and other stakeholders. The strategy must address the diversity o f geographic, environmental, social and cultural conditions in Iran, and may well propose different approaches in different regons to contribute to the overall goals. Informal review and comment should be sought on preliminary drafts o f the strategy before the validation workshop. The strategy must address capacity constraints within the sector, and how they may be reduced. D.Validation workshopfor the draft strategy. The completeDraft Strategy shouldbe circulatedto the relevant stakeholders at least two weeks before the workshop. The workshop will review the key issues ofthe strategy andthe options available to address them. E. Developmentof a draft actionplan. The purpose o f the action planis to translate the strategy, (as revised at the validation workshop) into actions, which can increase the effectiveness and efficiency o f 201 investments in sanitation and hygiene. The action plan may include proposed capital investment plans, institutional rearrangements, promotional campaigns, and/or policy revisions. The action plan must include activities to increase sector capacity to address the challenges o f sanitation and hygiene. Informal review and comment should be sought on a preliminary draft o f the action plan well before the validation workshop (see below). F. Finalvalidationworkshop for the Draft Strategy and Action Plan. The complete Draft Strategy and Action Plan should be circulated to the relevant stakeholders at least two weeks before the workshop. The workshop should review the final strategy (as revised in light o f the preceding workshop) and the concrete proposals o f the Action Plan. The workshop should foster debate and discussion, with the clear purpose o f strengthening the final Draft Strategy and Action Plan. G. Submission of the Final Draft Strategy and Action Plan, incorporating feedback from the second workshop. 3.2 Overall approach The documentation and workshops for the strategy and action plan should highlight: The clear identification o f institutional, financial and technical issues; The development o f alternatives to address these issues; A range of analyses of these alternatives (e.g. SWOT analyses for institutional feasibility, sensitivity analyses to test the robustness o falternative financial approaches, etc.); and Recommendationsbasedon these analyses. Draft documents prepared along these lines should provide the basis for discussion and validation at the three stakeholder workshops outlined above. It is anticipated that the consultant will use the following methods in developing a draft Strategy and Action Plan: Review of existingtechnicalstudies on environmentalhealth and sanitation inIran. Review of existingpolicies and practiceson sanitation,hygiene, environmental health, and wastewater management in Iran at national, provincial and municipal levels. Inparticular, are there sanitary surveys designed to permit the review o f neighborhoods and communities to determine the suitability o f their sanitation and wastewater management? I s there a "tool" in existence, which would permit a local government to conduct a survey to classify neighborhoods as to their suitability or unsuitability for on-site sanitation, and to observe the extent to which on-site sanitation i s failing or not failing? Are their existing percolationtest standards, and how helpful are these? Interviews with sector professionals and managers in water and sanitation agencies, provincial and municipal governments, health departments, and other related ministries and government departments, such as environment and rural development Field visits to study the most acute problems, and to learn o f proposed approaches to address these problemsvisit the proposedtowns visit rural areas/schools as well. 202 Consultations (both formal and informal) with major stakeholders from a variety o f sectors. These will include workshops with participation from such sect.ors as health, urban development, rural development, water resources, etc. Team composition Itisproposedthat a five-person team canbestaddressthe needs o fthe task: International expert in sanitation and hygiene as team leader, to coordinate the work, and bringintemational experienceto bear on the problem. International expert on finance and economics, familiar with the costing and financing o f sanitation and hygieneprograms, and the financial implications o fpublic policy. Local specialist in environmentalhealth, familiar withboththe problems on the ground and the ways and means by which policies and practices may be effected inthe GoI. Local specialist in urban sanitary engineering, familiar with the planning and implementation o f sanitary investments ininfrastructure. Local specialist in rural community health, familiar with the status and nature of rural public healthpromotion. It is anticipated that the first three consultants will do the bulk o f the work, with support from the urban sanitary engineer andrural community health specialist. 203 AdditionalAnnex 13e: CapacityBuildingProgram ISLAMIC REPUBLICOFIRAN AHWAZ AND SHIRAZWATER SUPPLY AND SANITATIONPROJECT Background 1. The ultimate sustainability o f the Ahwaz and Shiraz Water Supply and Sanitation Project i s contingent on a sequence o f reforms and their effective implementation. First, the appropriate sector development goals must be clearly formulated and benefit from explicit political support from the highest level. An example would be the adoption o f the general principle that revenue from consumer tariffs plus government subsidies in both water supply and sanitation should cover the costs o f operations and maintenance, and replacement (OMR). Second, the project reforms must be accompanied by the necessary instruments of implementation such as laws and executive decrees to enable effective implementation. Third, institutional reforms are required to create the sense o f accountability with service providers and give them incentives to implement, operate and maintain the project facilities inan efficient and sustainable fashion. Fourth, the capacity o f the service providers and o f those agencies or units that monitor and regulate the service providers must be built. Failure to ensure the success o f each link inthe chain to prepare, implement and operate the project will reduce overall program effectiveness and sustainability or even cause the project to fail. 2. At the presenttime only the first linkinthe chain o freformhas been forged. A general agreement on principles o f sector development resulted from the September 2003 discussions betweenthe Bank and the Ministry o f Energy. However, the second step to provide the necessary instruments is still largely pending. Similarly, the third step to reform institutional accountability and incentives can only be taken once the institutional study has been conducted and its conclusions have been adopted and internalizedby the relevant Iranian agencies and ministries. Finally, the capacity building has only been identified in general terms and mustnow be detailed for the two project cities Ahwaz and Shiraz and for the NWWEC. It is expected that Ahwaz and Shiraz be the precursor for similar capacity buildingprograms inthe four project WWCs inPhase 2 o f the Bank's sector assistance and subsequently for other WWCs. Capacity BuildingPriorities 3. A number o fpriority areaswhere capacity mustbe strengthened havebeen identified(See Annex 13.)The priorities relate to four areas: A. The minimumcriteria for the participation o fWWCs inthe programregarding Governance Financialmanagement Commercial management Efficient operations and administration Environmental healthimpact B. The development and upgradingo f the regulatory capacity o fNWWECregarding Coverage o f service provision 0 Quality o f service provision Efficiency o f service provision 204 C. The capacity to analyze the economic costs and benefits o f project investments including butnot limitedto areas such as Demandprojections 0 Least-cost analysis 0 Economic cost benefit analysis D. The capacity o f individual WWCs to analyze tariffs, costs and subsidies with a view to achieve cash flow equilibrium by a given time horizon with respect to 0 Calculation o f economic and financial costs o f service Design o f the average tariff level and structures Design o f level and targeting o f subsidies and manner o f administration Design o f public awareness and consumer educationprograms ProposedProgramImplementation 4. The capacity building must begin as early as possible during project implementation and may actually precede the plannedBoard presentation inthe case o fwater supply and wastewater tariffs (where a workshop on water supply and sanitation pricing policies with the World Bank Institute (WBI) i s planned) It i s expected that the WBI will play the leadrole in guidingthe capacity buildingfor which the NWEECwill be well placed to assume the main responsibility on the client side. To the extent possible all training materials should be available in Farsi. It i s similarly proposed that training materials be available over the Internet for reasons o f cost efficiency and individual client convenience. The WBI i s already the repository o f a number o f training modules that could be updated and adaptedto F a r i g 5. A special effort will be made to achieve a multiplier effect through implementingthe program by or with the participation o f training institutions, such as universities and technical institutes. The incorporation o f selected sections o f the capacity building training materials into the standard curricula should be encouraged in order to modemize the education o f direct relevance to the sector. The substantial period o f professional isolation for sector staffjustifies this kind o f broader upgrading o f the relevance and modes o f academic andpractical training. Monitoring andEvaluationof the CapacityBuilding program 6. The entire capacity buildingmust be continuously monitored and evaluated inorder to adapt it to the specific needs o f the WWCs and the NWWEC. Program implementation should be monitored in terms o f number o f trainees, volume o f training as measured in trainee days, and costs of individual events, comprising all relevant costs and the form o f financing. It must also be noted that the capacity buildingprograms will also benefit the entire sector since training materials will be developed ina format that permitseasy dissemination. The WBI already has training modules inthe following areas that are o fdirect relevance to the Irancapacity building program: (1) economic cost-benefit analysis;(2) demand forecasting; (3) least cost analysis; (4) elements of finance; (5) tariffanalysis; (6) procurement o fworks; (7) procurement o fgoods; (8) user o f consultants; (9)planning for maintenance; (IO) institutional analysis; and (11) reducing unaccounted water;. 205 \D 0 N # Y AdditionalAnnex 15: OrganizationalCharts of Ahwaz and ShirazWWCs and NWWEC ISLAMICREPUBLICOFIRAN: AHWAZ AND SHIRAZWATER SUPPLY AND SANITATIONPROJECT CHART NO 1- Organizationof Ahwaz WWC GeneralAssembly ManagingDirector t t t t t t Protection& Public Control& internal Security & Confi. Mgr.Legal affairs Office of City- Safetyofficer Traini aud. & evaluation affairs & Contracts ~ ~ ~ ]+I + Dpty. Fin. & Dpty.Income Dpty. Eng. & DPtY. Dpty. Water & & Cust.Aff. 4 Dev. 1 + Planning& WastewaterOp Magt.Impvt. Mgr.for Accounting& & Compu. Qualityof Center W.&W.W. Employs 4 I Eng. & Human Plants affair. ExpansionFo Reso.& Effic. Water 4 1Commercial I Mgr.Water Subscriber Budgetand Mgr. I Gov. Credits Network Eng. & ExpansionFo 4 wastewater major & Assurance Mgr I I 4 4 - T l Customer r l Warehouse Contactsand Mgr.W.W. Admissions PriceAnalyst affairs Water and .I Wastewater I Specialist Control $7 Research 208 1I CHART NO 3- Organization of NWWEC DeputyMinistero fEnergy & ManagingDirector I----'- ------, I I I I I ;;StatuofMartyrs I Security& Bureaufor L T Management & Public Relations Executivesfor o f t h e & m w Contidentd Affairs & Advisors & Special& I I A f f k Inspections Public Training Important Plans I-------------' Operations Self-Sfliiency I I General Bureaufor Accounts Assemblies Research& - Technical stud& Water & Bureau Technology Wastewater Sanitation Finuzcidl The Industrial Admitistration Control Self-SufIkiency CustomerAff& &Wastewater h P Operation I &:%I. H 1 1 I . Water supply & Impmving Organizations& Consumption Distribution Wastewater Management Resmes P h I I l l I Operations Collection and Treatment Plam Unaccountedfor Water 210