Document of The World Bank FOR OFFICIAL USEONLY ReportNo: 29601-CO PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHE AMOUNT OFUS$70.0 MILLION TO THE REPUBLIC OF COLOMBIA FOR A WATER AND SANITATION SECTOR SUPPORTPROJECT INSUPPORTOFTHEFIRST PHASEOFTHE WATER AND SANITATION SECTOR SUPPORT PROGRAM FEBRUARY 15,2005 FINANCE,PRIVATESECTOR, AND INFRASTRUCTURE COLOMBIAAND MEXICO COUNTRYMANAGEMENT UNIT LATIN AMERICAANDTHECARIBBEANREGION This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective January 31,2005) Currency Unit = Colombian Peso (CO$) C0$2576.5 =US$ 1 US$0.000388 = CO$ 1 FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS ACODAL Colombian Association of Sanitary and EnvironmentalEngineering (Asociacidn Colombianade ZngenieriaSanitaria y Ambiental) APL Adaptable ProgramLoan CAR Autonomous Regional Corporation(CorporacidnAutdnoma Regional) CAS Country Assistance Strategy CAT Associative Work Cooperatives (CooperativaAsociativa de Trabajo) CFAA Country Financial Accountability Assessment CQ Consultants' Qualifications CRA Water Regulatory Commission (ComisidnReguladoradeAgua) DAPSBA Directorateof Potable Water and Basic Sanitation (Direccidn deAgua Potabley SaneamientoBasico) DDSS Directorateof Sustainable Sector Development (Direccidnde Desarrollo Sectorial Sostenible) DNP National PlanningDepartment (DepartamentoNacional de Planeacidn) EL4 Environmental Impact Assessment FINDETER Colombian RegionalDevelopment Bank (Financiera de Desarrollo Territorial) FM FinancialManagement FMR FinancialManagement Report FNR National Royalties Fund(FondoNacional de Regalias) FONADE Colombian Fundfor Development Projects (Fondo Financier0 de Proyectos de Desarrollo) IBRD InternationalBank for Reconstruction and Development ICANH Colombian Institute of Archaeology and History (ZnstitutoColombiano deAntropologia e Historia) ICB InternationalCompetitive Bidding ICV Quality of Life Index (indice de Calidad de Vida) IDU Colombian UrbanDevelopment Institute (ZnstitutodeDesarrollo Urbano) INCODER Colombian Institutefor Rural Development (ZnstitutoColombiano de Desarrollo Rural) IRR InternalRate of Return ISA International Standardsof Auditing Vice President: David de Ferranti Country Managermirector: Isabel Guerrero Acting Sector Director: JohnHenry Stein Acting Sector Manager: JosC Luis Irigoyen Task Team Leaders: David Sislen / MenahemLibhaber FOROFFICIAL USEONLY LCR Latin America andthe Caribbean Region LCS Least Cost Selection M&E Monitoring and Evaluation MAVDT Ministry of Environment, Housing, and Regional Development (Ministerio de Ambiente, Vivienda,y Desarrollo Territorial) MDG MillenniumDevelopment Goal NBI Unmet Basic Needs (NecesidadesBdsicas Znsatisfechas) NCB National Competitive Bidding NDP NationalDevelopment Plan NGO Non-Government Organization NPV Net Present Value O&M Operation andMaintenance OP OperationalPolicy PAL Labor Adaptation Program (Programa de Adaptaci6n Laboral) PME Utility ModernizationProgram (Programa de Modernizaci6n Empresarial) POI Works and Investment Plan (Plan de Obras e Znversio'n) PSP Private Sector Participation PVC PolyvinylChloride QBS Quality Based Selection RAS 2000 Technical Norms for the Water and Sanitation Sector (ReglamentoTkcnico del Agua Potable y el SaneamientoBdsico de Colombia) S A L Structural Adjustment Loan SBD Standard BiddingDocument SIIF NationalIntegrated Financial Information System (SistemaZntegrado de Znformacidn Financiera) SOE Statement of Expenditure SSPD Superintendency of Public Enterprises (Superintendenciade Sewicios Pu'blicos sss Domiciliarios) Single Source Selection SUI UnifiedInformation System (SistemaUnico de Znformacidn) TA Technical Assistance TAL Technical Assistance Loan UNDP United Nations Development Programme This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed (withoutWorld Bailk authorization. COLOMBIA Water and SanitationSectorSupportProject CONTENTS Page A. STRATEGICCONTEXTAND RATIONALE .................................................................. 1 1. Country and sector issues .................................................................................................... 1 2. Rationale for Bank involvement.......................................................................................... 4 3. Higher level objectives to which the project contributes..................................................... 4 4. Poverty Impact..................................................................................................................... 5 B . PROJECTDESCRIPTION .................................................................................................. 5 1. Lending instrument.............................................................................................................. 5 2. Program objective and Phases ............................................................................................. 6 3. Project development objective and key indicators .............................................................. 8 4. Project components.............................................................................................................. 9 5. Lessons learned and reflectedinthe project design .......................................................... 12 6. Alternatives considered andreasons for rejection .................................................................... 13 C. IMPLEMENTATION ............................................................................................................ 13 1. Partnership arrangements (if applicable) ................................................................................ 13 2. Institutional and implementation arrangements ....................................................................... 13 3. Monitoringand evaluation o f outcomes/results ................................................................ 16 4. Sustainability ..................................................................................................................... 17 5. Critical risks and possible controversial aspects ............................................................... 17 6. Loadcreditconditions and covenants .................................................................................... 19 D APPRAISAL SUMMARY . .................................................................................................. 19 1. Economic and financial analyses....................................................................................... 19 2. Technical............................................................................................................................ 20 3. Fiduciary............................................................................................................................ 20 4. Social ................................................................................................................................. 21 5. Environment ...................................................................................................................... 21 6. Safeguard policies.............................................................................................................. 21 7.Policy Exceptions and Readiness............................................................................................... 23 Annex 1:Country and Sector or Program Background .......................................................... 24 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies ..................37 Annex 3: ResultsFramework and Monitoring ......................................................................... 38 Annex 4: Detailed Project Description ...................................................................................... 42 Annex 5: Project Costs ................................................................................................................ 51 Annex 6: ImplementationArrangements .................................................................................. 52 Annex 7: Financial Managementand DisbursementArrangements ...................................... 54 Annex 8: Procurement ................................................................................................................ 60 Annex 9: Economic and FinancialAnalysis .............................................................................. 64 Annex 10: SafeguardPolicy Issues ............................................................................................. 85 Annex 11:Project Preparationand Supervision ...................................................................... 96 Annex 12: Documentsinthe Project File .................................................................................. 98 Annex 13: Private Sector ParticipationBidding Methodologies ........................................... 101 Annex 14: Statement of Loans and Credits ............................................................................. 106 Annex 15: Letter of Development Policy ................................................................................. 108 Annex 16: Summary SocialAssessment .................................................................................. 118 Annex 17: SampleSubproject Technical Analysis ................................................................. 128 Annex 18: Country at a Glance ................................................................................................ 131 Annex 19: Map ........................................................................................................................... 133 COLOMBIA WATER AND SANITATIONSECTOR SUPPORT PROJECT (lSt -Adaptable ProgramLending) PHASE ProjectAppraisal Document Date: February 10,2005 TeamLeader: DavidN.Sislen / Menahem Libhaber Country Director: IsabelM.Guerrero Sectors: General water, sanitation andflood Sector ManagedDirector: John Henry Stein protection sector (100%) Themes: Pollution management and environmentalhealth (P);Other urban development (SI Project ID: PO82973 Environmentalscreening category: Category B Lending Instrument: Adaptable Program Loan Safeguard screening category: Requires US$ m Date Date APL 1 70.0 75% 23.4 I 93.4 05/01/2005 4/30/2009 Loan Government of APL 2 70.0 70% 30.0 100.0 05/01/2009 4/30/2012 Colombia Loan APL 3 70.0 70% 30.0 100.0 05/01/2012 4/30/2015 Loan TOTAL [XILoan [ ]Credit [ ] Grant [ ]Guarantee [ ] Other: For LoansICreditdOthers: LoanCurrency: UnitedStates Dollars Amount of Loan: US$70.0 million Proposedterms: Fixed Spread Loan (FSL) in United States Dollars with a 15.5 year maturity, including 7.5 years of grace with commitment-linked repayment schedule, and custom principal repayment. The front-end fee will be 1% of principal amount, payable up-front, less any waiver. Grace period (years): 7 years] Years to Maturity: 15.5 years Commitment fee: 0.85% of the undisbursedbalance for the first four years, standardcharge of 0.75% on the undisbursed balance thereafter beginning 60 days after signing, less any waiver Front-end fee on Bank loan: 1% of principal amount, payable up-front, less any waiver FinancingPlan(US$ m) Source Local Foreign Total LOCAL COUNTERPART FINANCING 20.40 3.00 23.40 IINTERNATIONALBANKFOR 55.00 15.00 70.00 RECONSTRUCTIONAND DEVELOPMENT Total: 75.40 18.00 93.40 Borrower:Governmentof Colombia Responsible Agency: Ministry of Environment, Housing, and Territorial Development ~ Contact person: Dra. LeylaRojas, Director, Directorate of Water Supply and Basic Sanitation Address: Ministerio de Ambiente, Vivienda, y DesarrolloTerritorial, Calle 37 No. 8,40 BogotB, D.C Colombia Tel.: +571-332-2424 Fax: +571-288-9892 E-Mail: lrojas@minambiente.gov.co Annual I Cumulative I 8.00 17.00 8.00 II25.00 II 1: 40.00 I 60.00 I 70.00 I 70.00 1 70.00 I 70.00 I 70.00 1 Project implementation period: Start -May 15,2005 End-April 15,2009 I Expectedeffectiveness date: May 1, 2005 Expectedclosing date: April 30, 2009 Does the project depart from the CAS incontent or other significant respects?Ref. PAD A.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? Ref. PADD.7 Have these been approved by Bank management? I s approval for any policy exception sought from the Board? ]Yes [ IN0 Does the project include any critical risks rated "substantial" or "high"? Ref. PAD C.5 [ ]Yes [XINO Does the project meet the Regionalcriteria for readiness for implementation?Ref. PAD 0.7 [XIYes [ ] N o Project development objective Ref. PAD B.2, TechnicalAnnex 3 The Project aims to improve the provision of water supply and sanitation services in Colombia in a financially efficient and sustainable manner through the provision of capital investment subsidies for poverty-focused coverage expansion and service quality improvement. The Project will (a) scale-up the involvement of the private sector in medium-size cities through the introduction of performance-based management arrangements with specialized operators; (b) support service-improvement related investment through targeted capital grants in small- and medium-size cities, and in some high poverty peri-urban areas of large cities served by public utilities; and (c) deliver appropriate water supply and sanitation investments inColombia's underserved ruralareas. Project description[one-sentence summary of each component] Ref. PAD B.3.a, TechnicalAnnex 4 Consistent with the scope and objectives, the Project would have two components: Component 1: Municipal Water Supply and Sewerage Infrastructure Component ($92.2 million, including $68.8 million of Bank financing), to finance investments in the rehabilitation and constructiodexpansion of primary and secondary water and sewerage networks; investments in water treatment plants, pumping stations and main collectors, wastewater treatment infrastructure including treatment plants and discharge infrastructure; and construction and implementation supervision at the municipal level through independent supervision consultants ("interventores"). The Component would finance two types of subprojects: (a) infrastructure investment subprojects, which would be accompanied with technical assistance for utility reform; and (b) modernization subprojects, which would involve financing of both investment and the introduction of private sector management for local utilities. The Component would finance design improvement as needed through external consultants, including final designs, associated environmental and social assessments (also known as "preinvestment" activities) as well as operating expenses for the Colombian Fund for Development Projects (Fondo Financiero de Proyectos de Desarrollo) FONADE, which would act as a project management agency of the operation (see Section C, Institutional and ImplementationArrangements). Component 2: Program Management, Benchmarking, Monitoring and Evaluation Component (US$ 1.2 million), to finance consultant services and equipment to strengthen the capacity of the MAVDT to implement and supervise the Project at the central level and provide technical assistance to the participatingmunicipal utilities. Activities to be financed under this Component include: Supply and installation of information technology equipment to allow for the regular and efficient monitoring of utility performance and programimplementation; 0 Technical assistance and training to the MAVDT, for Project implementation, monitoring and financial management; and Other operating expensesfor the MAVDT and, particularly, DAPSBA. Which safeguard policies are triggered, if any? Ref. PAD 0.6, TechnicalAnnex 10 The Project's key safeguard policy issues relate to the possible impacts of the civil works to be constructed by the municipalities, and the related wastewater disposal and water intake. Specifically, the project's safeguard-related procedures must ensure that subprojects comply with national environmental laws and regulations as well as Bank environmental and social safeguard policies, that any cumulative impacts are addressed, that environmental and social impacts are managed through application of appropriate guidelines, that appropriate oversight mechanisms are established, that project benefits are extended in a culturally appropriate manner to indigenous populations who live within the areas (if required), that any land acquisition and resettlement of people i s done in an acceptable manner, and that adequate procedures are in place for the protection of cultural property. These issues are addressed through an Environmental Framework, an Indigenous Peoples Framework and a Resettlement Framework, each of which i s outlined below. At the time of appraisal, a sample of representative subprojects is known, but the list i s neither finalized nor comprehensive. The list of eligible subprojects will evolve and grow during the first year of project implementation. When the situation exists where details of subprojects to be financed are not known at the time of appraisal, Frameworks are developed to ensure compliance with national laws andBank policies. The Project will trigger (a) Environmental Assessment (OP/BP/GP 4.01); (b) Cultural Property (OPN 11.03, being revised as OP 4.11); (c) Natural Habitats (OP/BP 4.04); (d) Involuntary Resettlement (OP/BP4.12); and (e) IndigenousPeoples (OD 4.20, beingrevisedas OP4.10). The Project will deal with each Safeguard Policy as described below: O.P. 4.01. In accordance with OP 4.01, an Environmental Assessment was undertaken by a local consultant to identify the potential impacts associated with the types of subprojects envisioned for the Project, and develop appropriate mitigation measures to offset those impacts. During preparation, the following analyses/studies were undertaken: (a) an update of the institutional and legal context of the existing water sector environmental assessment (originally completed in 2000); (b) diagnostic and environmental analysis of the solid waste management sector; (c) environmental analysis of rural water and sanitation; and, (d) a rapid environmental assessment of all the subprojects expected to be includedin the Project, with in-depth analysis of a sample of subprojects. Results from the EA have been used in the development of the environmental management framework. Financing of subprojects will be subject to the environmental and social screening, assessment, monitoring and supervision procedures set forth in the Safeguards Policy Issues annex (Annex lo), including: (a) environmental and social screening of subprojects, including environmental classification; (b) subproject typology; (c) definition of required environmental work; (d) development of guidelines for good environmental and social practices; (e) implementation of required environmental work; and subproject monitoring. O.P.N. 4.11. Colombian Law 397 (1997) linked cultural patrimony to the Environmental Impact Assessment (EM) process in the country; and Decree 833 (2002) detailed the regulations requiring that projects that require an environmental license must also consult with the Ministry of Culture on the possible existence of archeological areas in the subproject area, and, in the affirmative case, to develop protection plans and incorporation of any necessary restrictions and obligations within the environmental license. However, this requirement will not apply to most of the subprojects, as the subprojects do not require environmental licenses (due to their limited size andlor scope). Therefore, the Project has adapted and will apply existing Good Practice Guidelines for screening of subproject locations and chance find procedures. O.P. 4.12. The Resettlement Framework provides the necessary background to ensure that any subprojects that might involve either land acquisitionor resettlement of any people will comply with both national law and the Bank's OP. Though no resettlement i s expected duringthe Project, as subprojects are considered for financing, a screening mechanism will identify those that require further consideration of resettlement issues. Again, as all subprojects are not known at the time of Appraisal, the framework describes the general context for the sector, the objectives and principles of any resettlement to be caused by the project, the legal context, the process for the preparation of a resettlement plan, the content of a plan, the process for its execution, the requiredinstitutional organization and, finally, the financing of the plan. Any resettlement plan will be submitted to both the MAVDT and the Bank for review and clearance. O.D. 4.20. The Indigenous Peoples Framework provides the necessary background to ensure that any subprojects that might affect indigenous peoples will comply with national law and the Bank's OP. As subprojects are considered for financing, a screening mechanism will identify those that require further consideration of indigenous peoples issues. Specifically, during the screening of subprojects, DAPSBA will assess whether an opportunity exists for indigenous peoples to be beneficiaries of the subproject, or if they will in any way be negatively affected by the proposed subproject. If so, an Indigenous Development Plan will be prepared by the municipality, and submitted to the MAVDT for their review and clearance. The Plan will also come to the Bank for its no objection. The content of an Indigenous Plan, general guidance on the approach for Plan development, institutional arrangements and monitoring requirements are outlined inthe framework. O.P. 4.37 and O.P. 7.50. The Project i s not expected to finance any investments which either (a) trigger the Bank's policies on safety of dams or (b) have an appreciatively negative impact on downstream water quality in neighboring countries and thus does not trigger the applicable Bank policies. The environmental assessment checklist includes both issues, and any subproject presented to the MAVDT which triggers either set of issues would require ex ante approval by the Bank and relevant Bank policies would be applied. Public consultation. The subprojects that are included duringthe first phase of the Program(the proposed Project) resulted from extensive public consultation activities. In conjunction with the 2002-2006 NDP, the Government has identified a medium-term investment program to expand coverage and improve service quality in both urban and rural areas. Capital investment resources were allocated at the departmental level to address needs within each department. These needs were identified through the ecently completed participatory public consultation process known as the Audiencias Pu'blicas which dentified investment priorities in the water and sanitation sector. In addition to the existing public funds allocated to the sector (including intergovernmental transfers from Ley 715, direct investments by the Ministry of Environment, and programs managed by FINDETER, and FONADE), approximately US$ 120 million has been allocated for investment in the water and sanitation sector under the NDP and Audiencias Pu'blicas. While these Audencias Pu'blicas did not specifically address the environmental aspects of the subprojects, they gave ample opportunity for any civil society groups, affected people and NGOs to voice concerns. Significant, non-standard conditions, if any, for: Ref. PAD C.7 Boardpresentation: NIA Loadcredit effectiveness: 1.Presentationof a final Operational Manual,satisfactory to the Bank. 2. Finalization of the inter-institutional agreementbetween MAVDTandFONADE 3. Satisfactory implementation of the financial management system Covenants applicableto project implementation: NIA A. STRATEGICCONTEXTAND RATIONALE 1. Countryandsector issues Despite major improvements in the delivery of urban water and sanitation services over the last decade, Colombia faces significant challenges in meeting its sector development needs. Service deficiencies persist - potable water and sanitation coverage expansion rates are insufficient, especially in rural areas, service quality i s highly variable and plagued by rationing and intermittent supply, less than half of all water supply outside of major urban centers meets reasonable quality standards, sewerage facilities in poor areas are woefully inadequate and less than 10% of municipally generatedwastewater i s subjected to any kind of treatment, with only half of the existing installed wastewater treatment capacity being operational. Rural water supply and sewerage coverage i s poor (52% and 15% respectively, when restricting the definition to household water and sewerage connections only) and, at historic levels of effort in service expansion, universal access goals (taking into account demographic growth) would not be reached for another 30 years. Inorder to meet its sector development needs, the Government's strategy for the sector aims to achieve the following objectives: Maximize the efficiency and impact of Government's support to the sector. The Government estimates that US$ 1.2 billion is needed to meet the regional and urban-rural service coverage Millennium Development Goals over the next 5 years and a further US$ 1.0 billion estimated to address investments in maintenance and rehabilitation of the networks. Ongoing fiscal constraints, affordability issues and deficiencies in the design and functionality of the current fiscal transfer system from the national Government to municipalities make such a challenge daunting. Although recent reforms in the regulatory system and the planned allocation of fiscal transfers to support the sector through Ley 715 would theoretically ensure sector financial sustainability in the medium- term, the current political and social climate and the relatively recent nature of these reforms mean that the benefits of these changes will take some time to materialize. In order to address urgent investment needs and ensure achievement of the MDGs, the Government i s aiming to increase both outside financing of the sector and internal cash generation at the utility level for investment, accompanied by operational improvements and efficiency gains to consolidate the reforms undertaken and ensure financial sustainability in the medium-term. Not surprisingly, investment needs for water supply and sewerage are concentrated in poor rural and peri-urban areas and wastewater treatment infrastructure (which often suffer from a disconnect between those who bear the financial cost of investment, operation, and maintenance and those who reap the economic and environmental benefits of improved environmental health) i s most pressing. Inrural areas, historic rates of coverage expansion are extremely low compared to what i s needed to meet universal access. Inorder to make this target achievable with the 2010 to 2020 window, the average annual coverage expansion rate inrural areas would need to increaseby 50% for ruralwater and 100% for sanitation. Improve internal cash generation. performance and management of water companies. The poor service quality in Colombia i s primarily the result of the low price-low quality equilibrium at which many utilities deliver water supply and sanitation. Although Law 142 from 1994 establishes the target tariff in cost recovery levels, many municipalities, particularly small and medium-size and in mral areas where most of the population are in Strata 1, 2 and 3, are not able to apply cost recovery tariffs given social affordability concerns. While in larger municipalities major tariff increaseshave taken place in recent years, a 2001 survey by the Superintendencia de Sewicios Pliblicos Domiciliarios indicated that out of the 1,742 providers analyzed, only 298 had completed the tariff studies needed to bring the tariffs up to cost recovery levels. Understanding the need to consider 1 affordability constraints, the regulatory body has issued transitory norms that allow the service providers to apply the tariff increases in a phasedmanner (a "transition period") until2005 to reach the legal target tariff. Inthe meantime, tariffs often remain well below operation and maintenance cost-recovery levels, political interference in utility operation i s widespread, and the management capacity to deliver high quality service lacking. Until cost recovery levels are met nationwide, improving performance, while maintaining affordability for Colombia's poor, i s a key sector need, especially in rural areas where efforts to increasecoverage are constrained by the limited funding as much as by poor management. Increase subsidies to the poor. While cross subsidies are an inherent aspect of the nationally-set tariff structure and have proven an effective mechanism for supporting service expansion in large urban areas, given the unfavorable structure of demand and the fact that the sector i s still far from reaching the legally established tariff parameters, the cross-subsidy scheme presents a large deficit of US$161 million per year, equivalent to 20% of sector turnover. It i s estimated that even if convergence with the legal parameters could be fully achieved, a significant structural deficit would remain. Therefore, the current cross-subsidy scheme has proven an insufficient tool to expand service delivery in many areas or provide sufficient financing in municipalities with predominantly poor populations, where the underlying imbalance between contributors and beneficiaries i s greater. The Government's strategy to address the latter - the establishment of municipally financed "Solidarity Funds" -has been, in large part, ineffective. As of 2002, only 54% of municipalities had established such funds, and of those only 5% were allocating resources to these funds. The current cross-subsidy mechanism also ails from poor effectiveness (some estimates indicate that up to 90% of the resources leak away to households above the poverty line) due to deficiencies in the stratification system. While the current cross-subsidy mechanism would benefit from a major reform to solve the structural problems mentioned above, the Government's approach to provide direct capital grants - with provisions to ensure sustainability - would represent a step towards increasing support for investment inpoorer areas where the cross-subsidy scheme i s currently dysfunctional. Make investment sustainable and efficient. Overall performance indicators for the 59 largest utilities show reasonable levels of efficiency, with similar performance across public and private operators. The improvements in service quality which have resulted from the involvement of the private sector inutility operation in some large- and medium-size cities is reflectedin the highquality investment. Smaller utilities, on the other hand, present very weak operational and financial indicators and quality of service remains deficient outside the major urban centers. The extreme atomization of service providers outside the large urban areas has led to substantial loss of scale economies, and contributes to the weak management and precarious financial viability of the smaller operators. In the face of the Government's efforts to provide investment incentive through capital subsidies, the challenge i s to ensure that Government resources are used with efficiency - avoiding the problems of "white elephants", "gold-plating", and overdimensioning which have plagued previous sector investment efforts - and that Government-financed investments included are financially sustainable, both to ensure their proper maintenance and medium-term viability and to ensure that they do not become a future financial liability which mightundermine the overall position of the utility. Reduce sector fraymentation. rationalize resource transfers, and immove the overarching sector institutions. In addition to issues with the regulatory and supervising agencies (Comisio'n Reguladora de Agua, CRA and the Superintendencia de Sewicios Pu'blicos Domiciliarios, SSPD), the water and sanitation sector i s characterized by dispersion in efforts to provide incentives for good sector investment. There are many institutions in the sector, overlapping functions, and varying "rules of the game" for providing financing for locaI needs. There i s a clear needto enhance coordination and harmonize the sector financing approach and scale-up the capacity of those agencies directly involved in sector management. 2 Develop a rural water policy and explicit rural investment promams. In contrast to other infrastructure sectors, there i s no explicit policy approach to promote rural access to water and sanitation, beyond the fiscal transfers and the general legal framework. Although Government programs such as the Microempresas Comunitarias have proven useful tools to improve management and operation of rural utilities, the poor performance of rural utilities in raising coverage suggests that such a well-defined and targeted rural water policy might be necessary to address the significant efforts neededto keep up the pace in increasing coverage expansion rates and to reduce the discrepanciesincoverageratios between urban and rural areas. The Government's medium-termstrategy to improve access and the quality of services has 4 key tenets: A major investment prorrram with clear and transparent subsidies. Inconjunction with the 2002- 2006 National Development Plan (NDP), the Government has identified a medium-term investment program (the Program) to expand coverage and improve service quality in both urban and rural based on poverty- and technically-weighted criteria - to be utilized based on the outcomes of the areas. The Program would provide capital investment resources- allocated at the departmental level recently completed participatory public consultation process known as the Audiencias Pliblicas. In addition to the existing public funds allocated to the sector (including intergovernmental transfers from Ley 715, direct investments by the Ministry of Environment (MAVDT), and programs managed by FINDETER, and FONADE), approximately US$ 120 million has been allocated for investment inthe water and sanitation sector under the NDPandAudiencias Pliblicas. A deepened and broadened approach to improving utility performance. The benefits of private sector participation (PSP) in the delivery of water supply and sanitation services in Colombia are well documented and PSP remains the core of the Government's approach in larger and medium- size urban agglomerations. Nonetheless, because a sizeable percentage of Colombia's population continues (and will continue in the future) to rely on publicly-provided water throughout much of the country, the Government has developed a targeted strategy to (a) continue the so-called "modernization" program to introduce private sector operators where feasible; and (b) improve the financial and technical performance of publicly-run utilities in small- and medium-size localities where PSP i s not likely to be adopted in the short-term. The Government has committed to build- upon the experience of the "modernization" approach through a national benchmarking program to define explicit utility performance measures and directly linking the provision of Program subsidies to the achievement of basic indicators. The capital grant scheme designed by the Government aims to facilitate the establishment of a dialogue between sector institutions and municipal utilities and for the latter to receive much neededtechnical assistance to improve performance while creating an incentive for smaller municipalities to commit to makingoperational improvements. Clear and transparent "rules of the game" for investment. Program implementation arrangements, particularly the direct oversight by MAVDT's Directorate for Potable Water and Basic Sanitation (DAPSBA) and the development of a harmonized and publicly disseminated set of procedures for the Program, has been designed to mitigate the risk of political capture of the public consultation processto ensure the efficient use of grant transfers. An intemation of sector management.The Government has articulated a policy approach to consolidating DAPSBA as the key coordinating institution for sector development. The so-called Ventanilla Unica approach establishes a uniform approach to analyzing and financing sector investments by various involved agencies. The Ventanilla Unica does not aim to establish a single window for resource transfers, which internationalexperience has shown to be risky inthat it could create a bottleneck, but to coordinate publicly funded sector investments in a more rational way across the 17 institutions involved in sector 3 investment, regulation, and management. The Programdesign aims both to improve DAPSBA and, more generally, the MAVDT, from a technical and managerial perspective and enhance their sector and environmental monitoring capacity and better articulate the role of DAPSBA as an inter-agency coordinator. 2. Rationale for Bank involvement The Bank i s uniquely positioned to support the Government's Program. First, the Bank i s a natural partner given the Program's linkages to the Bank's ongoing engagement in water sector reform, which developed the very model for least-cost subsidy private sector participation which the Government aims to scale-up. Second, the Program i s fully consistent with the Bank CAS" stated objectives of "Achieving Sustainable Growth" and "Improving Infrastructure Services" and further represents a rapidly-scalable model for providing investment financing to middle-income countries like Colombia with a proven track record of sector performance. The CAS contemplated a Specific Investment Loan for US$ 125 million in FY 2005. Based on the Government's budget andthe needto address water and sanitation investments in a phased and incrementalmanner consistent with the Audiencias Pliblicas, the Government requested that an APL be utilized, with an initial phase of US$ 70 million. Third, the operation would support the Government's efforts at public sector reform through the design and implementation of a new mechanism for transferring grant resources to local utilities, linking investment with reform, and establishing transparent and uniform rules for grant-based financing throughout the public sector. Fourth, the Bank's broad international experience, especially as regards institutional reform and development in the water and sanitation sector, as well as policy development expertise andexperience inthe design of institutional regimes for infrastructure service provision, allows it to respond quickly to the Government's request to support Program implementation and to support the development of an umbrella program which could accommodate future sources of financing (both credit and grant). 3. Higher level objectives to which the project contributes The Project contributes to four key higher-level objectives: Achievement of MDG coverage goals for water supplv and sanitation. The Project will help achieve the relevant Millennium Development Goal (MDG) targets for access to water supply and sanitation in both urban and ruralareas. Environmental Improvement. As a large-scale program of investments in water supply, sanitation, and wastewater treatment, the Project will directly improve the environment, includingambient water quality. Health. The operation will directly improve health outcomes in the Project areas. The health benefits of safe water supply and sanitation services are well-documented; reductions in incidences of water-borne disease (particularly diarrhea and other gastrointestinal illnesses, cholera, typhoid, and hepatitis B, among others) are expected to result from improved infrastructureand service quality. Poverty Reduction. The operation will reduce poverty through the provision of assets to the poor; water and sanitation delivery is a core public service, and investment in service delivery infrastructure through the operation will benefit almost exclusively Colombia's poor. Discussed by the Boardon January 16,2003. 4 Public Sector Efficiency. Bank-support will also contribute to improving the quality of public institutions through operational reforms to public service delivery enterprises and, as such, enhance the capacity of the Government at all levels to provide public goods. 4. PovertyImpact Colombia's national tariff system incorporates a built in poverty-focused cross subsidy, with the poor (Strata 1, 2 and 3) paying below cost-recovery tariff levels, populations in Stratum 4 paying cost-recovery tariffs, and the wealthy (Strata 5 and 6) paying up to 120% of the cost-recovery tariff'. The project i s significantly targeted to poor beneficiaries - it i s expected that 90% of investment beneficiaries will be poor (defined as Strata 1, 2, and 3) with the majority of those being in Strata 1 and 2. Though the investments which emerged in the Audiencias Pliblicas were not explicitly intended to be pro-poor, for a sample of subprojects analyzed during preparation, nearly all expected beneficiaries were poor. The investments assessed predominantly benefit poor populations for a number of reasons: first, the Program i s focused on rural areas and small- and medium-size cities, which themselves are disproportionately home to Colombia's poor; second, since poverty classification in Colombia i s in part based on quality of public services, investment to improve basic water and sanitation service naturally tends to benefit those with deficient levels of service; and third, the department-level allocations of Audiencias Ptiblicas resources were based, inpart, on levels of poverty and basic investment need. The Project is expected to have three key poverty impacts: 0 New Connections. It i s expected that the proposed Project would bringnew water and sanitation connections to an unservedpopulation of 284,0003, all of who are classified as Strata 1and 2. 0 Investments for Improving Service Quality. Of the total direct beneficiaries of Phase I investments, the Government estimates that approximately 200,000 are inStrata 1, 2, and 3. 0 Institutional Develoument through Operational and Financial Imurovements. Though some investments will have system-wide benefits (including improved system pressure, reduced physical losses, etc.) and many of the operational and financial performance improvements which are expected to result from improved water service providers are not targeted directly at the poor, per se, experience in Colombia and throughout the region indicates that the poor -those unserved and underserved -will most benefit from improved systemic performance. B. PROJECTDESCRIPTION 1. Lendinginstrument The proposed operation would be structured under an Adaptable Program Loan (APL) comprising individual Sector Investment Loans (SILs). An APL approach will provide a framework for implementing the comprehensive medium-term investment Program designed by the Government to achieve the Recent analytical work by the Bank has pointed to deficiencies in the stratification system (primarily its susceptibility to politicization and misclassification of non-poor as poor in order to receive subsidized services). Policy analysis i s currently beingundertaken by DNP, in coordination with MAVDT, to assess the performance of water subsidies. Inthe coming years, it i s expected that some reforms to the tariff and subsidy mechanisms will likely occur, and any such reforms would be incorporated into design of subsequentphases of the APL. Impact data for the four-year Project are based on expected subprojects utilizing the first year program as an indication; becausethe operation is demand-driven and programmatic in nature, they are estimates which would be refined and revisitedduring implementation. 5 provision of efficient and sustainable municipal water, sewerage, wastewater treatment, and, potentially in future phases of the Program, in solid waste services4,throughout the country. The APL would allow the Government to take a phased approach to planning and identifying funding sources while building the necessary institutional, monitoring, and oversight capacity. The adaptive nature of the Program would support a learning environment for the application of an efficient financing policy for sector investments in the years to come, and support the umbrella approach to accommodate other donors and/or financiers as appropriate. The programmatic approach allows for the gradual geographic expansion of the program and application o f the Government's Program throughout the country in a demand driven manner by providing investment incentives to municipalities that are willing to reform and coupling the transition with adequate institution buildingat all levels. 2. Programobjective and Phases Promam Objective. The overarching objective of the Program would be to improve access to water supply and sanitation services throughout Colombia. The Program is based on the principle of linking investment grants to reforms; by providing capital investment subsidies in connection with institutional reforms at the local level, the Program also supports the.Government's sector policy agenda, which includes an effort to strengthen the institutionalcapacity and financial sustainability of service providers. Promam Phases.The operation supports the existing medium-term Government Program through a series of Sector Investment operations. Such an approach would enable the strengthening of sector management capacity and the articulation of a comprehensive sector policy framework and rapid scalability on the part of the Bank throughout the life of the APL. The APL will be implemented in three Phases to coincide with the 10-year Government Program - Phase Ifor 4 years (2005-2008); Phase I1for 3 years (2008- 2011); and Phase I11for 3 years (2011-2013). Phase I(the proposed Project) would total approximately US$ 93.4 million, of which the Bank would finance approximately US$ 70 million. Because of the evolving policy and legal framework regarding solid waste service provision, Phase I(the Project) includes only financing for water supply, sanitation, and wastewater treatment investment. As prior conditions for the first operation, the MAVDT has identified the 37 first year subprojects (23 in urban areas and 14 rural projects) with municipal water and sewerage enterprises (including some regional utilities) and the associated tariff and institutionaYoperationa1reforms to advance towards full cost recovery and sustainable service provision. The first year's investment program has been reviewed and a sample of subprojects satisfactorily appraised, as have relevant policy reforms, including the legal instruments which establish the Ventanilla Unica. At Appraisal, the team reviewed the draft Operational Manual and a final Operational Manual, satisfactory to the Bank, will be finalized prior to Effectiveness. Additionally, the Government has provided the Bank with the relevant safeguards requirements, including a Resettlemenaand Acquisition Policy Framework, Indigenous Peoples Framework, and Environmental Assessment Framework, which will be utilized for all Program investments. Works proposed are typical for the sector: construction and rehabilitation of diversion and retention infrastructure, water treatment facilities, primary and secondary water supply networks; sewer network rehabilitation and expansion (primarily main collectors and pumping stations); rehabilitation and expansion of existing wastewater In terms of solid waste, the needs are great, and although many intermediate-size cities have seen marked improvements in service quality in recent years in terms of street cleaning, collection, and transport, solid waste management services have disproportionately benefited the wealthy and left many of the poor unserved and underserved. Less than one-quarter of all municipal solid waste i s properly disposed of and the public-goods nature of solid waste services requires public support for investment in the constructionof sanitary landfills and the rehabilitationof existing disposal sites. 6 treatment and disposalfacilities; technical assistance (TA) to support sector reform, Programmanagement and the strengthening of participating local water companies; and equipment and staff training for upgradingthe monitoring and control networks. There are four expected outcomes for Phase I. First,there should be a marked increase in water supply and sewerage service quality and coverage in the participating municipalities. Second, in the case of wastewater treatment, the quality of receiving water bodies in participating municipalities will be improved through the adequate treatment and appropriate disposal of wastewater. Third, a comprehensive institutional arrangement for coordinating sector investments will be established. Fourth, the municipalities participating in APL Phase Iwill have taken steps to improve financial viability and accountability and strengthen implementation capacity. In each participating municipality, the National Government, FONADE, and territorial entity (usually the municipality) would enter into an agreement, the Convenio de Apoyo Financiero (Financial Support Agreement), which would establish, among other things, the requirements for enterprise reform and the technical and financial support to be provided by the Government to achieve it. The local government would enter into an agreement with the local urility or service provider which would identify their respective subproject execution responsibilities and institutional reform commitments, and this letter ("carta de compromiso y ejecucidn") would be signed and attached to the Convenio de Apoyo Financiero. Water companies that meet their obligations for institutional improvement established by the Ventanilla Unica would be eligible for further investment support in subsequent Phases of the Program. The Ventanilla Unica classifies municipal water enterprises based on their current level of institutional development and requires a related level of institutional and/or operational reforms. For municipalities which elect to enter into operation arrangements with the private sector (the so-called "modernization" approach), prior conditions for inclusion inthe Programwould include agreement by the local authorities (mayor and municipal council) on (a) restructuring and reorganizing the provision of services through the establishment of a legally independent entity and signing an initial agreement (Convenio de Asistencia Tbcnica) with the MAVDT and (b) contracting initial studies for PSP incorporation which would, among other issues, would review existing tariffs and identify needed tariff reforms to be introduced during the tenure of the operator. For water companies which already include private sector management or in which modernizationi s not foreseen, subproject eligibility requirements include: 0 The subproject will have met all technical, financial, economic, institutional, and safeguards screening criteria established through the Ventanilla Unica mechanism (including the Guide for Eligibility of Subprojects) to ensure appropriate investments, including technical norms and environmental procedures requiredby Colombian law (e.g. Article 93 of Law 812 de 2003) 0 The service delivery enterprise and local municipality would be utilizing all of its Law 715 transfers for sector investments and would be supporting subproject investments with proceeds fram tariffs, local contributions, and, in the case that they are available, transfers from Law 715, to ensurethat Government subsidy resources are used exclusively to fill the investment gap while ensuring affordability APL Phase I1is estimated at US$ 100.0million with Bank financing of US$ 70.0 million. Investments to be financed would be similar to those outlined for APL Phase Iin additional municipalities (particularly in rural areas), as well as further investment for service expansion in some municipalities included in Phase I, will likely include the introduction of investments in integrated solid waste management, and which also emerged as a priority local need during the Audiencias Phblicas. Phase I1 i s expected to broaden and deepen the Program approach while puttinga specific emphasis on investments and policy reforms in Colombia's rural areas, which suffer the most dramatic investment needs, and Phase I11i s expected to focus primarily on investments in wastewater treatment and disposal. 7 Triggers for Phase 11. During the Mid-Term Review of Phase I,a comprehensive evaluation would be made to determine the degree to which Phase Iobjectives will be met. Lessons learned from experience duringthe implementation of the first Phase will be incorporated into Phase I1design. Consistent with the Government's policies, municipalities which participate in Phase Iwould only be eligible for continued financing (usingLoan or non-loan proceeds) inthe future ifthey have met all institutional and operational reform goals defined during the Phase I.Triggers for going ahead with Phase 11, in addition to 80% commitment and 50% disbursement of the Phase Iloan, would be: 0 Successful incorporation of PSP for those municipalities under the Programa de Modernizacidn Empresarial (PME or "modernization") program and enrollment of smaller municipalities into the Institutional Strengthening Programs e Successful implementation of subprojects financed under APL Phase I e Satisfactory progress in the collection and reporting of initial operational and financial performance data for participating utilities through the utility benchmarking system5 Satisfactory institutional performance by the MAVDT in terms of Program management, supervision, and oversight Phase III. third phase will consolidate the support provided in prior phases. Additional investments The identified as part of the subsequent NDPwill be canied out and asset expansion (especially in wastewater treatment and solid waste) will be continued in additional municipalities across the country in accordance with studies conducted under Phases Iand 11. Exit Strategy. The exit strategy for the Bank in the case of poor Program performance would be built around (i) evaluation of progress on key indicators at the Mid-Term Review and (ii) failure to meet an the Phase Iand Phase I1triggers for disbursements, improvements in efficiency performance and physical investment. The key indicators at Mid-Term Review would likely include the increase in water supply, sewerage, and integrated solid waste management coverage (measured by civil works disbursements and network coverage rates), and improvement in the overall sector's financial viability (measured by the number of local water companies likely to meet their commitments to institutional reform as established inthe ConveniosdeApoyoFinanciero). 3. Project development objective and key indicators The Project aims to improve the provision of water supply and sanitation services in Colombia in a financially efficient and sustainable manner through the provision of capital investment subsidies for poverty-focused coverage expansion and service quality improvement. The Project will (a) scale-up the involvement of the private sector in medium-size cities through the introduction of performance-based management arrangements with specialized operators; (b) support service-improvement related investment through targeted capital grants in small- and medium-size cities, and in some high poverty peri-urban areas of large cities served by public utilities; and (c) deliver appropriate water supply and sanitation investments inColombia's underserved ruralareas. Inconcrete terms, itis expectedthat duringthe firstphaseoftheAPL,theProjectwillhave: (a) improved the quality of potable water supply to 900,000 people, the majority of them in Strata 1, 2, and 3; (b) improved access to sewerage services for 695,000 people, also predominantly poor; and (d) improved the institutional and operational profile of 60 public water companies and brought private sector management to 10 utilities. The expected outcomes of the three phases of the APL, which represent the 10 years of The Sistema Oinco de Znformacidn, or SUI, within the Superintendency of Domestic Public Services 8 Program implementation, include addressingthe water supply, sewerage, wastewater treatment, and solid waste service needs in 300 municipalities, representing 4.2 millionpeople. 4. Project components Components Indicative % of Bank- % Bank- costs Total financing financing (US$M) (US$M) 1.Municipal Water Supply and Sewerage 92.2 98% 68.8 100% Infrastructure Component 2. ProgramManagement, Benchmarking, 1.2 2% 1.2 100% Monitoringand EvaluationComponent Total project costs 93.4 100% 70.0 100% Front-end fee 0.4 0.0 Total financing required 93.8 70.0 The key elements of the proposed operation are: (i) expansion of water and sewerage networks and adequate treatment of source water along with enhanced operation and management of municipal water and sewerage utilities (both publicly and privately operated); (ii) investments for municipal wastewater treatment; and (iii) introduction of private sector management and/or technical assistance for institutional reform at the local level. In subsequent phases, the proposed APL Program would aim to expand and consolidate the results of the first phase through fundingfurther investment and modernization processes and may include the financing of solid waste management solutions which emerged as a sanitation priority during the Audiencias Pdblicas. In all cases, the first-phase Program content has been subject to the Audiencias Pdblicas model which vetted priority projects through a demand-driven participatory exercise. The overarchingProgram approach to assessingand financing subprojects i s as follows: For municipalities in which the provision of the services currently involves private sector participation, the Program will provide capital subsidies to the reformed utilities directed to benefiting the poor. Investments would be limited to those not envisaged at the time of inception of the private sector participation, mainly resulting from increased population growth due to intemal displacement from violence-prone areas. For small- and medium-size municipalities or regional utilities interested in moving to a private sector participation (PSP) model, the Program aims to continue and expand the current Programa de Modernizacidn de Empvesas (Utility Modernization Program) supported by the Bank under the ongoing Water Sector ReformAssistance Project. Annex 13 summarizes the "modernization" approach. Financing for PSP will seek to support institutional improvements of utilities through facilitating the incorporation of PSP in the management and operation of water and sanitation services by providing capital subsidies based on the principle of minimum subsidy and technical assistance for institutional strengthening and reform processes. The Program will follow eligibility criteria and procedures established under the ongoingLoan 7O77-CO6. The operation will utilize the agreedupon bidding documents and financial models to which the Bank gave its No Objection for Loan 7077-C0, though the details of the financial models used for the negative concession I least subsidy approach may evolve during implementation to introduce greater flexibility in resource-constrained circumstances. 9 For medium and small urban areas with publicly operated services where PSP i s not a viable option inthe immediate-term, the Program would finance targeted investments following a detailed viability analysis (covering technical, financial, institutional, socio-economic and safeguard issues) as a prerequisite for its financing. The Program would also support the construction of wastewater treatment facilities, providing funding to those municipalities included in the priority list, based on compliance with a series of eligibility criteria, real needs assessment and adequacy of the investment in the light of expected environmental impact, appropriate treatment, and financial and institutional capacity for operation and maintenance. Infrastructure investment in wastewater treatment facilities would be limited to that necessary to achieve treatment levels taking into account the assimilating capacity of the receiving water body. In addition to the demonstrated capacity to maintain any investment, preconditions for financing under the Program include pre-existing treatment of source water and 80% sewerage service coverage, consistent with the RAS. Regardless of whether Program resources finance investments in water, sewerage, or wastewater treatment, participating municipal enterprises would take part in a series of Government programs for institutional development and capacity building, to ensure financial sustainability and recovery of operating & maintenance costs. Specific institutional reforms have been established and municipal water companies which fail to meet their obligations would be restrictedfrom access to Ventanillu Unica grants inthe future, regardless of the source of financing. In rural areas, the Program will finance the rehabilitation and construction of basic water and sanitation systems, generally including water sourcing through wells and extraction infrastructure, along with supporting delivery and treatment infrastructure and septic and latrine disposal investments. Participating communities which do not meet the requirements to be considered as having a sufficient level of institutional development would enter into the Government's ongoing programs for institutional reform- Fortalecimiento Institucional (focused towards small utilities) and Microempresas Comunitarias (addressed at community based service providers) - which are being successfully implemented and focus on demand-driven investment, intense community participation, and cost recovery of operation and maintenance expensesthrough tariff revenues and municipal and financial contributions. Consistent with the scope and objectives above, the Project would have two components: Component 1: Municipal Water Supply and Sewerage Infrastructure Component ($92.2 million, including $68.8 million of Bank financing), to finance investments in the rehabilitation and constructiodexpansion of primary and secondary water and sewerage networks; investments in water treatment plants, pumping stations and main collectors, wastewater treatment infrastructure including treatment plants and discharge infrastructure; and construction and implementation supervision at the municipal level through independent supervision consultants ("intewentores"). The Component would finance two types of subprojects: (a) infrastructureinvestment subprojects, which would be accompanied with technical assistance for utility reform; and (b) modernization subprojects, which would involve financing of both investment and the introduction of private sector management for local utilities. The Component would finance design improvement as needed through external consultants, including final designs, associated environmental and social assessments (also known as "preinvestment" activities) as well as operating expenses for the Colombian Fund for Development Projects (Fondo Financier0 de Proyectos de Desarrollo) FONADE, which would act as a project management agency of the operation (see Section C, Institutional and Implementation Arrangements). Operatingexpenses for FONADEwould be financed with Government resources. Investments would be financed with a combination of direct grants from the Government to local territorial entities and municipal and utility own-sources, including internally generated resources for investment through tariffs, other municipal transfers (earmarked and otherwise), including Law 715. Project-financed subsidies would reflect the important institutional and policy reforms championedby the Government, which has established the Ventanilla Unica system and designed screening procedures and 10 criteria to focus Government grants exclusively on viable and sound subprojects. Component 1 would have two subcomponents: 0 Subcomponent 1A - Infrastructure and Municipal Utility Reform and Development (US$ 84.2 million) 0 Subcomponent 1B- Supervision and Technical Assistance (US$ 8.0 million) Eligibility Criteria. Duringimplementation, the Bank would carry out a semi-annual appraisal of the work program, based on the subprojects prepared and deemed viable by the MAVDT. The guiding principles for subproject evaluation and eligibility, as codified in the Reglamento de la Ventanilla Unica and its associatedguides, include: Institutional reforms for participating water companies to improve their levels of operational performance. The demand-driven approach of the Audiencias Pu'blicas has led to a number of cases of municipalities requesting the introduction of a private operator to manage service delivery; inthose cases, the comprehensive approach of PSPwould serve to dramatically improve utility performance. Inother cases, water companies would enter into the Government's programs for institutional reform and be provided customized technical assistance to reach agreed-upon operational and managementperformance targets. Suburoiect financial and economic analysis, to ensure the efficierdt use of Program resources and to reduce overdimensioning of investment. Technical feasibility studies would ensure that the subproject proposed i s sound from an engineering and design standpoint and the least cost solution adopted among different alternative options. Detailed financial analysis would ensure that funds will be sufficient to cover O&M costs and depreciation. Environmental and safeguards analysis, consistent with Colombian legislation and World Bank procedures. A needs assessment, consistent with the RAS 2000, basedon a prioritization of water supply, then sewerage, and then wastewater treatment. Municipalities would not be eligible to receive funding for sewerage infrastructure untilthey meet basic coverage target for water supply (80% coverage with reasonable service quality) or for wastewater treatment without meeting basic needs for water supply and sewerage (80% of the population). The component would also include activities to strengthen and bring utilities to reasonable levels of management, operational efficiency and financial viability and, for the majority of municipalities not participating in the "modernization" initiative, to facilitate future PSP by makingutilities more attractive for private management. Technical assistance for the strengthening of municipal water utilities would be provided through the MAVDT's existing institutional reform programs as well as through targeted technical assistance by consultants hired by MAVDT. Institutional Strengthening activities would be focused on five main areas: (a) tariff structuring studies; (b) network cadastre and customer databases and related system development; (c) programs for reduction of non-revenue water and leakage control; (d) commercial management technical assistance, including strengthening of billing and collection functions; and (e) corporatization and enterprise establishment for municipalities in which service i s currently being provided directly by a department of the municipality. The component would finance some goods and consulting services to support the institutional reform agenda as well as consultant services and operating costs for strengthening local capacity to monitor Program implementation, including local technical supervisors (intewentores). 11 Consulting firms might be hired by the MAVDT to support the provision of TA (Fortalecimiento Znstitucional and Microempresas Comunitarias) and especially in providing TA support to medium size utilities. Component 2: Program Management, Benchmarking, Monitoring and Evaluation Component (US$ 1.2 million), to finance consultant services and equipment to strengthen the capacity of the MAVDT to implement and supervise the Project at the central level and provide technical assistance to the participating municipal utilities. Activities to be financed under this Component include: Supply and installation of information technology equipment to allow for the regular and efficient monitoring of utility performance and programimplementation; Technical assistance and training to the MAVDT, for Project implementation, monitoring and financial management; and 0 Other operating expenses for the MAVDT and, particularly, DAPSBA. DisbursementCategory % Bank Category 1-Infrastructureand MunicipalUtility Reformand Financing us$ 100% $61,900,000 Development Category 2 -SupervisionandTechnical Assistance 100% $ 6,900,000 Category3 -ProgramManagement, Benchmarking, Monitoringand 100% $ 1,200,000 Evaluation Total $70,000,000 5. Lessons learned and reflected inthe project design Project design reflects the Bank's experience in the preparation and implementation of environmental management and urban water supply and wastewater treatment projects throughout the world, and specifically borrows on the lessons learned from the design of operations involving the financing of local infrastructure and reforms to institutional arrangements for local service provision in the wastewater sector, particularly in Colombia. Some of the critical lessons learned and applied inthis Project's preparation include: The need for clarity in terms of institutional roles and responsibilities among the multiple stakeholders at the Central Government and local levels; The need for a clear and transparent institutional structure when passing resources between levels of government; The need for enhanced public consultation in design and public information during implementation of major infrastructure; The importance of integrating Project activities within a broader context of sectoral reform, with a focus on regulatory and legal issues; The need for effective coordination with other donors working inthe sector; and The need to accompany investment with appropriate reform measures at a utility level to ensure institutional and financial sustainability of the investment 12 6. Alternativesconsideredandreasonsfor rejection Inaddition to the phasedAPL approach, other options considered during identification included (a) a standard Investment Loan with subprojects identifiedex-ante and subject to the appraisal of the Bank; (b) a non-APL Sector Investment Loan in a single phase; and (c) a country-system based sector-wide approach (SWAP). The proposed design was selectedbasedon its fit to the medium-term program of the Government, capacity for rapid scalability, clear performance triggers for continuing Bank support and identifiable exit points, and implementation simplicity through established sector institutions and practices. Duringpreparation, the Bank also discussed- and expresseda preference for -a more focused approach for addressing specific investment needs with direct poverty-targeting. The technical judgment that a more focused operation would reduce implementation risks and maximize poverty-reduction impact was carefully balanced with the political economy realities, namely the Government's strong support for the Audiencias Pu'blicasand desire to maintain a "boots on the ground" presencethroughout the country. The selected approach was determined to be the most acceptable design, in part because of the opportunity to engage with a broad selection of local utilities and advance the institutional reform agenda while delivering needed investment. Such a model allows for Government to address local needs in small municipalities which might otherwise be left behind and provides a structure within which smaller municipalities can undertake reforms. A series of options were also considered as regards the flow of funds and Project disbursement arrangements, including direct transfers to municipalities for subproject execution. The proposed model, using financial-intermediary management of program resources, was chosen because of its minimal fiduciary risks and greater ability to respond to the rigidities inherent in the Colombian budget management and execution system. C. IMPLEMENTATION 1. Partnershiparrangements(ifapplicable) Phase Iof the APL would be entirely financed by the World Bank loan and municipal contributions for investment, operation, and maintenance of subprojects. During preparation, the Bank was closely involved with the Government inthe design of the overarching Ventanilla Unica approach, which, among other things, has established a consistent sector-financing framework which will allow for the simple incorporation of other external financing sources at any point inthe future. 2. Institutionalandimplementationarrangements The Project has been designed to be implemented based on the existing sector institutions and the evolving arrangements for channeling Government grant resources for capital investment to local service providers through the Ventanilla Unica. The Program will be implemented by the MAVDT, with fiduciary support from the Colombian Fund for Development Projects (FONADE). Specifically, the MAVDT will be responsible for policy matters and overall Program management while FONADE, with its established in-house implementation and supervision capacity will be responsible for day-to-day operational support for Component 1, including the basic fiduciary aspects, and for the contracting of Intewentores. At the local level, execution will be managed by territorial entities (usually municipalities) and their corresponding local utilities with the participation of independent supervisory consultants. The implementation arrangements are consistent with other Bank engagement in the sector, particularly the ongoing Water Sector Reform Project. As part of the Government and Bank strategy for investment projects, the operation does not include a project-specific implementation unit but instead leverages the 13 staff and structures within sector institutions. Within the MAVDT, the Financial Planning and Multilateral Programs Group (Grupo de Planeacio'nFinanciera y Programas Banca Multilateral) would be responsible for inter-agency coordination as regardsProgramimplementation.. MAVDT, as the key technical implementing agency, would enter into an agreement with FONADE for fiduciary support, would manage and supervise Project implementation, reporting, disbursements, and procurement for the Project. Implementation and supervision of subprojects financed would be managed by local water utilities and mayors in coordination with independent interventores, who would be hired by and report to the MAVDT through FONADE, so as to ensure their autonomy and independent reporting. The hiringof these consultants will be financed with Loan proceeds through FONADE, which has greater internal capacity to handle the contractual arrangements with the consultants. The hiring procedures will conform to the Bank procurement guidelines. For investments in the expansion and rehabilitation of water supply and sewerage networks, and water supply and wastewater treatment and disposal infrastructure, FONADE, under MAVDT/DAPSBA supervision, oversee the management of capital grants which will pass from the Special Account to FONADE with MAVDT's authorization. Local water companies and/or municipalities would be responsible for managing procurement processes for all nationally procured contracts and shopping, as applicable, with FONADE acting as a fiduciary intermediary, disbursing directly to contractors and service providers based on contracts entered into with municipal authorities. At the onset of subproject approval, the national entities (FONADE and MAVDT) would enter into a tripartite agreement with the relevant territorial entity, which would concurrently sign an agreement with the local utility or service provider (in the case that water supply and sanitation services are provided by a utility). When local utilities and mayors choose to foster the introduction of private management, DAPSBA will take a lead role in structuring the private engagement and in managing the social aspects related to PSP. In the last two years, DAPSBA has successfully played the role of a promoter of PSP, with 11medium-size utilities entering into new arrangements for management and operation with operators. While financing requests to the Ventanilla h i c a are supposed to be accompanied with complete design and finalized feasibility studies, many of the mayors andthe public utilities do not always have the capacity to completely prepare subprojects. If,duringthe revision of a subproject by DAPSBA, it i s found that meaningful improvements in one or various aspects (technical or others) are needed, the MAVDT may hire "preinvestment" consultants to undertake the work of improving the subproject. In such cases, private consultants would be hired to review final designs and, as has been the case in the subprojects studied duringpreparation, to the fine-tune technical solutions to ensure that they meet the economic, financial, and engineering criteria established by the Ventanilla Onica. Municipalutilities, within the context of the institutionalrestructuring spearheadedunder the Project, will remain responsible for investing and managing local water and sewerage systems and will ultimately be responsible for all aspects of local utility management, including tariff setting, billing and collection. The subproject screening criteria have been designed to ensure that (a) subprojects are technically, economically, and financially sound based on an agreed-upon methodology for financial and economic assessment; (b) water companies are technically, financially, and institutionally capable of managing subproject implementation or agree to put in place the needed institutional reforms to place them on a path towards sustainability; (c) that financial arrangements, including any tariff changes which might be applicable, are agreed-upon prior to subproject appraisal and codified in the Convenio de Apoyo Financiero; and (d) that all safeguard approaches are followed as defined inthe OperationalManual. Detailedimplementationarrangements are attached inAnnex 6. Financial Management and Audit Arrangements. A number of options were considered during Project preparation to address the inherent complexities of fiduciary oversight for the operation. These include (i) 14 the financing scheme for the project, under which most expenditures will be for municipal subprojects; (ii) factthatnoprojectcoordinationunitwillbecreatedforprojectmanagement,butinsteadthe the project will be managed by staff within the MAVDT and (iii) important weaknesses in the use financial intermediaries for financial management known as trustees (``ftduciurius") found in the existing project. These issues have been considered in the FM design of the project. See Annex 7 for a complete discussion of financial managementand disbursements. The MAVDT has recently undergone an internal restructuring process, which has improved its financial management capacity. The various previous institutions congregated today under the new MAVDT are under an accelerated integration process that requires an effort to improve their coordination and communication systems. The current financial planning, accounting and financial management structure of the new Ministry i s based on the support provided by different groups, and institutional capacity, including internal control and auditing processes, are undergoing a strengthening process in order to manage projects financed by the Bank. The financial management group at MAVDT i s expected to complete this process prior to Effectiveness. FONADE, a Government development fund, will enter into an interadministrative agreement with the MAVDT to provide administrative and financial support to the Project and will be responsible for all payments directly to providers, contractors and consultants for Component 1, based on compliance with the agreements signed with sub-national governments and the payment orders presented. FONADE will also handle the contracting of interventores for Component 1B of the Project. For Component 2, payments will be made to contractors and consultants hired by MAVDT from a bank account of the Ministry. FONADE will primarily have a reporting function to MAVDT but may provide financial management, disbursement and procurement support to MAVDT as well. The relative roles of FONADE and MAVDT will be spelled out in an inter-institutional agreement, a draft of which has been presented to the Bank and which will be finalized as a condition of loan Effectiveness. Inaddition, the Project Operational Manual, which will include procurement, disbursement, financial management and internal control MAVDT procedures and processes, i s under preparation and will be finalized prior to Effectiveness. During implementation, the MAVDT's financial management capacity will be strengthened with the support of technical staff from the Bank. As their internal capacity evolves, the Bank and Government might discuss the devolution of some responsibility for fiduciary management to the Ministry,subject to evaluation and the No Objection of the Bank. This approach will contribute to not only support project implementation, but also create an adequate financial management environment at the MAVDT. The project financial statements audits will be conducted in accordance with International Standards of Auditing (ISA) by an independent auditor and on terms of reference acceptable to the Bank. The Bank's F M S will annually clear the terms of reference. The project incorporates the Bank's new policy on eligibility for Bank financing. This policy was approved by the Bank's Board of Directors on April 13, 2004. To implement the policy, the Country Financing Parameters for Colombia were approved by the LCR RegionalVice President inMay 2004. Bank Loan proceeds will be disbursed in dollars to a special account at the Bunco de la Repliblicu (Colombia's central bank). From this special account, funds will be converted into Colombian pesos and transferred to an account held by the Ministry in a public commercial bank (in pesos) for the MAVDT's accounting purposes and 100% of these funds will then flow to two bank accounts (in pesos), one managedby the MAVDT and the other by FONADE, for resources transferred by the MAVDT based on each institution's disbursement needs, both held intheir respective commercial banks. 15 The Project would be eligible for retroactive financing of investments up to US$ 14 million for eligible expenditures incurred after the Appraisal of the Project. 3. Monitoringand evaluation of outcomes/results The Project has been designed to be adaptable both during implementation and in future phases of the APL basedon a series of continuous monitoring andevaluation activities. Specific design elements of the operation include: 1. Regular monitoring of urogress and investment indicators. Monitoringof implementation will be both quantitative as well as qualitative. In the case of "modernization," a significant amount of learning-by-doing has already taken place and the MAVDT has ample experience in the structuring and negotiation of PSP transactions. Nonetheless, experience in Colombia and elsewhere has clearly shown that the introduction of private operators i s complex and subject to adaptation during implementation. Some of the core quantitative indicators of progress, in terms of both inputsand impacts, that will measuredduringimplementation would include: 0 Number of utilities to undergo "modernization" (PSP) 0 Number of subprojects with public utilities supported by the Project 0 Number of rural subprojects supported by the Project 0 Total population which obtained access to andor benefited from improved water supply and sanitation service 0 Number of poor beneficiaries / percentage of beneficiaries who are poor 0 Effectiveness of the institutionalreform program as reflected in improved operational and management performance (usingunaccounted-for-water as a proxy) 2. Close monitoring of implementation cauacitv and Prorrram management. The institutional capacity of the MAVDT has suffered in recent years as a result of (a) the consolidation of the former Ministry of Economic Development and the Ministry of Environment into a large "super- ministry" and the more recent change to a matrix structure within the MAVDT; (b) complications inbudget execution as a result of the rigidities of the Colombianbudget system; and (c) pressure to reduce the public sector wage bill and the reliance on a large number of short-term consultants. The Bank recognizes the need to support the MAVDT in program implementation through regular, on-site supervision of its institutional capacity. Regular and periodic supervision will be complemented by an initial diagnosis and evaluation of operational capacity six months after Effectiveness to reduce the risks of the Programgoing off-track. 3. Monitoring of suburoject costs. design. and technical effectiveness to ensure that the technical screening criteria for subprojects inthe Ventunilla Unica remains sensible and functioning; and 4. Financing. within the Proiect components, for suuuort to the national water utilitv benchmarking system. While an information system to capture and track the performance of water utilities already exists (the Sistema Uinco de Znformacidn, or SUI, within the Superintendency of Public Enterprises), it lacks reliable information and i s generally not available to either policy makers or the public. Experience has shown that the accountability of elected officials and public service providers i s paramount in improving the quality of services. Among the challenges being faced by the MAVDT are to make reliable data on the performance of utilities easily available to the public and to establish a system which measures utility performance while taking into account important regional differences within Colombia (i.e. between interior highland cities and the Caribbean coast). During implementation, the MAVDT will support the SUI through the 16 provision of relevant information as well as activities to publish and disseminate utility performance reports. 4. Sustainability Like most of the developing world, the key issue to enhancing the sustainability of water and sanitation service provision in Colombia is to move towards greater cost recovery for municipal service providers Table 3: CriticalRisksa d Controversial Aspects ~~~ Risk Mitigation Overarchingmacroeconomic / fiscal constraints The Programhas been assignedfiscal space ( c u p remain key risk inColombia. fiscal) and i s strongly supported by national authorities. The rigidities inthe planningand execution of the There has been ex-ante agreement, during Government budget, inthe context of limitedfiscal preparation, on (a) the fungibility of program space, create a riskof difficulties during resources within Departments, allowing for viable implementation. and ready subprojects to be financed more easily; and (b) the consideration of funds havingbeenfully committed at the time of signingof the Convenio de Apoyo Financiero, allowing them to be executed through the future fiscal year (vigenciafiscal). The Programi s national, and demand-driven, with There i s a highlevelof Government commitment many subprojects throughout the country, and as to the Audiencias Pablicas approach, and the suchis susceptibleto implementationdifficulties operation includes financing for strengthening of resultingfrom the Ministry staff "being spread too internal capacity for Program management. In thin." There are ongoingimplementation addition, the approach leverages FONADE's in- difficulties with other Bank operations -including house capacity to manage day-to-day reporting and operations inthe water sector -and as such there i s fiduciary tasks. Inaddition, all consultants hired to the risk of limited technical capacity inthe Ministry provide program management support will be hired to implement the Program and ensure successful under one-year contracts. Implementation capacity coordinationefforts across the sector. remains a significant risk, and though the Bankwill make additional efforts to support the MAVDT's institutional capacity, there i s limited fiscal space for significant increases inthe MAVDT's technical staff. The primary difficulty in other ongoing sector 17 operations relates to the availability of expenditure authority (cup0fiscal). With theAudiencias Pliblicas completed and The Reglamentode la Ventanilla h i c a has the subprojects agreed upon, there i s the riskthat, statutory designation of a law, and the clear and duringimplementation, the Ministry would find transparent rules of the game for financing and itself unable to (a) negotiate the redimensioning or utility reform are codified therein. modifyingthe engineering and/or technology of subprojects or (b)require local utility reform. For those municipalities which enter into the The successful experience with PSPthroughout modernization program, PSPin service provision Colombia will help mitigate this risk.Inaddition, is, by its nature, politically charged. PSP i s also the Government has committed Programresources inherently risky given the multiple stakeholders and to strengthenthe MAVDTand DAPSBAteam as complexity of concession transactions; it is regards communication and outreach. possible, and likely, that of the many PSP transactions foreseen to be financed through the Project, some may be unsuccessful. For municipalities which choose not to participate The Ventanilla Onica creates an important inthe modernization program, there is ariskthat incentive to meeting institutionalreformobjectives the institutional development programs and by limitingfuture access to grant financing for non- targeted technical assistancefail to deliver long- performers. Institutional reforms are codified in the ,term institutional reform. convenio signed with the Government and represent a bindinglegal obligation on part of the local authorities. Ongoing support and supervision for institutionalreforms will be provided by DAPSBA consultants financed under the Project (though budget restrictions limitthe amount of program supervision available). Nonetheless, such a riski s genuine andthere are limitedinstruments to force unwillingutilities and localauthorities to reformin a sustainable manner. The design of Bank support, through an expandable there is the risk that future administrations may not and scalable APL gives the Bank the ability to support the transparent infrastructure financing support deepening of the sector investment amroach and also movides clear exit Doints. In addition to the risks outlined in Table 3, the Project supports the financial and institutional reform of service providers, which often includes such controversial reforms as (i) increasesin tariffs and (ii) labor force reduction. These are almost inevitable components of the modernization approach but will likely be includedas part of the water company reforms which will emerge duringimplementation, though many of the more dramatic changes would occur duringthe second phase of the APL. Tariff increases: Reaching agreement with the mayors of participating municipalities regarding tariff increasesto reach sustainable levels of cost recovery and, where applicable, to improve the attractiveness of municipal utilities for private operators, i s a core aspect of institutional reform. Tariff increases are always controversial and unpopular. Consistent with ongoing practice in Colombia, mitigation measures will be implemented through public information campaigns, community participation and consultation events, and contact with community representatives, NGOs, municipal councils and politicians to explain andpromotethe project concepts andjustify the tariff increases. 18 Labor force reduction: One source of inefficiencies in ailing public utilities i s a higher than required number of employees. Reductions in the number of employees in some utilities in the participating municipalities are expected and will be a controversial issue. This issue, and the related mitigation measures, i s discussed inAnnex 16, Summary SocialAssessment. 6. Loadcredit conditions and covenants The presentation of the final Operational Manual, satisfactory to the Bank; the finalization of the inter- institutional agreement with FONADE; and the satisfactory implementation of the financial management system are conditions of loanEffectiveness. D. APPRAISAL SUMMARY 1. Economicandfinancialanalyses Economic. The Project i s expected to generate significant economic benefits, including difficult-to- quantify environmental and health benefits. An economic analysis has been undertaken for a sample of subprojects (3 rural and 3 urban) included in the first-year program. The results of the economic analysis demonstrate that (a) the subprojects are economically beneficial and have high positive economic returns and (b) the methodology codified inthe Ventanilla Unica guidelines is sufficient to screen out subprojects which are not economically viable. The Ventanilla Unica approach, which the Bank has found satisfactory, utilizes full economic analysis for large subprojects (with more than 250,000 beneficiaries or of values greater than US$ 2 million) and a simplifiedeconomic analysis, assessinginvestment unit costs to ensure the positive economic impact of subprojects, for all others. Net Present Values (NPVs) of analyzed subprojects are substantially positive with economic internal rates of return above 15 %. In coordination with the social assessment approach, stakeholder analysis has been completed to assess the distributive impact of costs and benefits. One urban subproject analyzed, the construction of a sewerage collector in Los Patios, did not have significant quantifiable economic benefits and was returned to the technical consultants for further design modifications. The Los Patios investment included the collection of currently dispersed discharged wastewater to a single point, the site of a planned future wastewater treatment facility. While the investment has some incremental economic benefits due to increased land values in the populated areas where wastewater i s currently discharged within the city, the important benefits would only accrue with the construction of the treatment facility, financing for which was not included in the assignation of resources from the Audiencias Pliblicas. During implementation, the subproject will be redesigned to either (a) include financing for wastewater treatment or (b) to reassign resources for a more economically viable system investment. In addition, during preparation, two other rural investments were analyzed and deemed to be nonviable because initial design investment costs exceeded the maxima established under the economic analysis methodology. These investments to subprojects were returned for redesign. Details of the economic analysis undertaken during preparation are presentedinAnnex 9. Financial. Detailed financial analysis has been completed in cooperation with the MAVDT (DAPSBA) and the Ventanilla Unica for a sample of first year subprojects and implementing municipal service providers and was reviewed by independent consultants during Project preparation. In addition, the guidelines and methodologies for financial analysis which will be applied to all Program investments have been finalized in coordination with the Bank (see Annex 9 for details and the summary financial analyses of water companies reviewed duringpreparation). The complete assessments are included in the Project files. 19 2. Technical The MAVDT's expertise inthe area of water and sanitation sector investment and institutional reform, the abundant experience in Colombia - in large part due to the ongoing Bank engagement inthe sector - and the involvement of accredited internationalexperts who have reviewed the solutions proposed for the first year investments, provide sufficient guarantee as to the technical soundness of the proposed investments to be financed under the Project. Furthermore a least-cost analysis has been carried out as part of subproject eligibility of the options available to achieve the Project objectives. During Project preparation two main activities were carried out to confirm the technical viability and appropriateness of proposed solutions. First, a peer review technical team comprising consultants with considerable international experience in Latin America and elsewhere was convened to review seven subprojects in Honda (Tolima), Puerto Carreiio (Vichada), Los Patios (Norte de Santander), Usme (Cudinamarca), San Sebastian (Magdalena), Sincelejo (Sucre) and Curumani, Corregimiento de San Roque (CBsar), local legislation, and the Ventanilla Unica procedures for Project preparation and evaluation. Their recommendations were used to refine the overall Program objectives, scope and approach, as well as the specific environmental, social, and financial criteria used in subprojects design. Second, feasibility analysis and alternatives evaluation studies were performed on the sample of subprojects, which were evaluated from a technical, financial and environmental point of view. The reports for these two activities are available inthe Project files. 3. Fiduciary A Financial Management (FM) assessment took into account the challenges presented by MAVDT's capacity gaps and the design of the project which includes grants to territorial entities (namely municipalities). It involved ensuring that project design allows for an appropriate level of transparency, facilitating oversight and control while also supporting smooth implementation. The conclusions of the FM assessment are that: (i) design should be tailored to support the mainstreaming of project FM management to the MAVDT, and the Ministry's financial management capacity i s crucial since no specific project implementation unit will be established; (ii) the principal FM risk of weak Ministry FM capacity has been mitigated by involving the "Fondo Nacional de Desarrollo" (FONADE) as an intermediary in the disbursement process to make payments to project providers and contractors and by providing financial management support basedon implementation agreements.FONADEi s a government development fund which will provide fiduciary and execution support to the project. It i s critical that the MAVDT's financial management and procurement teams be completed and strengthened soon since the Ministry will be responsible for the preparation of project consolidated financial management statements and supervision of FONADE's support. The financial management unit has employed an additional accountant to contribute to manage project financial affairs, but an additional disbursement specialist and an internal control specialist should be contracted for within the Ministry, which handles other projects in addition to those financed by the Bank. An additionalupdate of FONADE's financial managementassessment was performedduringpreparation. FONADE's financial management assessment showed that the institution i s capable of managing project execution and supporting the MAVDT's fiduciary efforts with low risk. Nevertheless, the Project represents new challenges to FONADE, and some efforts will likely be needed to strengthen its institutional capacity as regards on internal control, financial management systems and disbursements to manage project financial management and procurement needs. If necessary, such efforts will be undertaken by FONADE with their own resources and direct Bank supervision as well as training by Bank staff during implementation will support such capacity enhancement. During implementation, 20 periodic revision of the implementation arrangements will be built into the regular supervision so as to allow for adjustments to be made interms of the institutional arrangementfor Programmanagement. 4. Social The Project will have a strongly positive impact on the environmental and social conditions faced by the poor in the small- and medium-size participating municipalities and rural areas covered by the Project. The Project i s expected to bring environmental health benefits to over 2.5 million people (approximately 6% of the population) including reduction inmorbidity and mortality related to water quality through the proper treatment of drinking water and management of wastewater. Immediate health improvements (which would especially benefit children who are often particularly susceptible to water-borne diseases) would include reductions ingastrointestinal illnesses, cholera, typhoid, andhepatitis B, among others. 5. Environment The Project's key safeguard policy issues relate to the possible impacts of the civil works to be constructed by the local utilities, and the related wastewater disposal and water intake. Specifically, the project's safeguard-related procedures must ensure that subprojects comply with national environmental laws and regulations as well as Bank environmental and social safeguard policies, that any cumulative impacts are addressed, that environmental and social impacts are managed through application of appropriate guidelines, that appropriate oversight mechanisms are established, that project benefits are extended in a culturally appropriate manner to indigenous populations who live within the areas (if required), that any land acquisition (which would be financed with borrower counterpart resources) and resettlement of people is done in an acceptable manner, and that adequate procedures are in place for the protection of cultural property. As part of Project preparation, these issues have been addressed through an EnvironmentalFramework, an Indigenous Peoples Framework and a Resettlement Framework, each of which i s outlined below. At the time of Appraisal, a sample of representative subprojects i s known, but the list i s neither finalized nor comprehensive. The list of eligible subprojects will evolve and grow during the first year of project implementation. When the situation exists where details of subprojects to be financed are not known at the time of appraisal, Frameworks are developed to ensure compliance with national laws and Bank policies. The objectives and content of these frameworks i s described in general below, and indetail in separate annexes. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OPBP 4.04) [XI [I Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [XI 11 Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI [I Forests (OPBP 4.36) [I [XI Safety of Dams (OPBP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [I [XI ~ * By supporting theproposed project, the Bank does not intend to prejudice thefinal determination of the parties` claims on the disputedareas 21 The Project will deal with each Safeguard Policy triggered as described below: O.P. 4.01. In accordance with OP 4.01, an Environmental Assessment was undertaken by a local consultant to identify the potential impacts associated with the types of subprojects envisioned for the Project, and develop appropriate mitigation measures to offset those impacts. During preparation, the following analysedstudies were undertaken: (a) an update of the institutional and legal context of the existing water sector environmental assessment (originally completed in 2000); (b) diagnostic and environmental analysis of the solid waste management sector; (c) environmental analysis of rural water andsanitation; and, (d) a rapid environmentalassessment of all the subprojects expected to be included in the Project, with in-depthanalysis of a sample of subprojects. Results from the EA have been used in the development of the environmental management framework. Financing of subprojects will be subject to the environmental and social screening, assessment, monitoring and supervision procedures set forth in the Safeguards Policy Issues annex (Annex lo), including: (a) environmental and social screening of subprojects, including environmental classification; (b) subproject typology; (c) definition of requiredenvironmental work; (d) development of guidelines for good environmental and social practices; (e) implementation of required environmental work; and subproject monitoring. O.P.N. 4.11. Colombian Law 397 (1997) linked cultural patrimony to the Environmental Impact Assessment (EM) process in the country; and Decree 833 (2002) detailed the regulations requiring that projects that require an environmental license must also consult with the Ministry of Culture on the possible existence of archeological areas in the subproject area, and, in the affirmative case, to develop protection plans and incorporation of any necessary restrictions and obligations within the environmental license. However, this requirement will not apply to most of the subprojects, as the subprojects do not require environmental licenses (due to their limited size andor scope). Therefore, the Project has adapted and will apply existing Good Practice Guidelines for screening of subproject locations and chance find procedures. O.P. 4.12. The Resettlement Framework provides the necessary background to ensure that any subprojects that might involve either land acquisition or resettlement of any people will comply with both national law and the Bank's OP. Though no resettlement i s expected duringthe Project, as subprojects are considered for financing, a screening mechanism will identify those that require further consideration of resettlement issues. Again, as all subprojects are not known at the time of Appraisal, the framework describes the general context for the sector, the objectives and principles of any resettlement to be caused by the project, the legal context, the process for the preparation of a resettlement plan, the content of a plan, the process for its execution, the required institutional organization and, finally, the financing of the plan. Any resettlement plan will be submitted to both the MAVDT and the Bank for review and clearance. O.D. 4.20. The Indigenous Peoples Framework provides the necessary background to ensure that any subprojects that might affect indigenous peoples will comply with national law and the Bank's OP. As subprojects are considered for financing, a screening mechanism will identify those that require further consideration of indigenous peoples issues. Specifically, duringthe screening of subprojects, the MAVDT will assess whether an opportunity exists for indigenous peoples to be beneficiaries of the subproject, or if they will in any way be negatively affected by the proposed subproject. If so, an Indigenous Development Plan will be prepared by the municipality, and submitted to the MAVDT for their review and clearance. The Plan will also come to the Bank for its no objection. The content of an Indigenous Plan, general guidance on the approach for Plan development, institutional arrangements and monitoring requirements are outlined inthe framework. 22 O.P. 4.37 and O.P. 7.50. The Project is not expected to finance any investments which either (a) trigger the Bank's policies on safety of dams or (b) have an appreciatively negative impact on downstream water quality in neighboring countries. The environmental assessment checklist includes both issues, and any subproject presented to the MAVDT which triggers either set of issues would require ex ante approval by the Bank and relevant Bank policies would be applied. Public consultation. The subprojects that are includedduringthe first phase of the Program (the proposed Project) resulted from extensive public consultation activities. In conjunction with the 2002-2006 NDP, the Government has identified a medium-term investment program to expand coverage and improve service quality in both urban and rural areas. Capital investment resources were allocated at the departmental level to address needs within each department. These needs were identified through the recently completed participatory public consultation process known as the Audiencias Pliblicas which identified investment priorities in the water and sanitation sector. In addition to the existing public funds allocated to the sector (including intergovernmental transfers from Ley 715, direct investments by the Ministry of Environment, and programs managed by FINDETER, and FONADE), approximately US$ 120 million has been allocated for investment in the water and sanitation sector under the NDP and Audiencias Pliblicas. While these Audencias Pliblicas did not specifically address the environmental aspects of the subprojects, they gave ample opportunity for any civil society groups, affected people and NGOs to voice concerns. 7. Policy Exceptions andReadiness The operation complies with all applicable Bank policies. 23 Annex 1:Country and Sector or ProgramBackground COLOMBIA:Water and SanitationSector Support Project 1.CountryandSector Context Sector Background Overview. Colombia, with a population of about 45 million inhabitants, has made impressive progress in guidelines - which include private wells in the case of water supply and septic tanks and latrines in the expansion of water and sanitation services in urban areas in recent years. According to United Nations case of sanitation - access to safe water and sanitation services has become virtually universal, especially in large urban areas of Colombia during the last decade. Using stricter definitions of household connections to water and sewerage, the current level of access inurban areas would be 97% for water and 90% for sewerage, which still compares impressively with higher income countries like Argentina (70%) and the rest of the region. Rural coverage (broadly defined) is much lower (53% for water and 57% for sanitation), with these levels shrinking to 52% and 15% respectively when the definition i s restricted to household water and sewerage connections. Although there has been substantial progress over in the expansion of urban and rural coverage recent years, there remain significant discrepancies inthe coverage ratios in large urban areas and in peri-urban and rural areas, where efforts must be more than doubled in sanitation expansion and increased by 25% in water to achieve universal access by 2020. However, the increase incoverage rates masks shortcomings inthe quality of service. Although the overall performance indicators for the 59 largest utilities show reasonable levels of efficiency and service levels, in smaller municipalities water rationing and intermittent supplies are common in most water supply systems. Only slightly less than 50 percent of all drinkingwater outside the major urban centers i s beingproperly treated and, as a result, the drinkingwater quality in many systems is substandard (one of the main reasons for this is that almost a thirdof the smaller municipalities, althoughequipped with water treatment plants, do not make the necessary purchases of chlorine for water disinfection due to their weak technical capacity as well as cash flow problems that restrict the availability of resources to purchase basic production inputs). Sufficient pressure in the water supply systems is often lacking, adding to the risk of bacterial contamination. Sewage collection systems do not have sufficient hydraulic capacity to handle wastewater flows, especially in poor neighborhoods, resulting in ovefflow problems and direct health and environmental impacts. The share of wastewater receiving any kind of treatment i s about lo%, which i s low for a middle income country such as Colombia. Regarding continuity of service, two thirds of households report access to a 24-hour water service in large urban areas. Insmaller municipalities, lack of systematized information makes it difficult to assess general service quality, but widespread anecdotal evidence - as well as the sample utilities analyzed in detail under the preparation of this Project - show that the continuity of the services inthe servedareas under evaluation i s far from being 24 hours. Context of Decentralization. Colombia has had a highly decentralized framework for the provision of water and sanitation services since the 1986 the Decentralization Law, which transferred the responsibility for operating and managing the water and sewerage systems to the municipalities, and decentralization has been a major force in shaping the water and sanitation sector's structure. Colombia now comprises 1,091 municipalities and over 1,300 registered water and sanitation service providers in urban areas, including municipal departments, utilities (public, private and mixed) and other authorized organizations and some 12,000 community based organizations providing service in rural areas. The market i s geographically concentrated with the 40 largest municipal utilities serving 70% of the urban population, equivalent to 55% of the national population. The extreme atomization of the remaining service providers has led to substantial loss of scale economies, and contributes to the weak management and precarious financial viability of the smaller operators. 24 Kev Institutions. The Ministry of Environment, Housing and Regional Development (MAVDT) i s now responsible for the water and sanitation sector policy at the national level. Within the MAVDT, the Directorate for Potable Water and Basic Sanitation (DAPSBA) oversees the sector, formulates sector policies, and plans sector development. The Departamento Nacional de Planeacidn (DNP) i s responsable for designing and monitoring the policies, plans, programs, studies, and investment projects for the water and environment sectors, including supporting decentralization and institucional reform efforts. The Water Regulatory Commission (CRA) promotes competition among service providers, controls monopolies, defines tariff-setting methodologies based on standard formulas and on investment plans submitted by the operating companies, and sets quality-of-service and technical standards to be followed by utilities. The Superintendency of Public Enterprises (SSPD) is responsible for monitoring and supervising the adequacy and efficiency of utility operations, establishing uniform accounting systems, supervising the administration of subsidies, and monitoring the general administration of public service companies. Environmental regulationi s handled by Autonomous RegionalCorporations (CARS). Legal Framework. The national Constitution of 1991 confirmed the right of municipalities to provide water and sanitation services, including the power to grant concessions or other forms of private sector participation. The Constitution provided the legal framework and established the grounds to introduce more aggressive reforms in the water sector by clearly separating service provision and policy making, and by allowing PSP in the infrastructure sector. Law 142, enacted in 1994, i s one of the most complete examples of utilities legislation inthe region and the water and sanitation sector, along with the provision of other utilities, i s regulated though this framework law, although to date there has been no additional sector-specific law developed. Law 142 emphasizes efficiency of service provision through the introduction of competition and the promotion of PSPinthe sector. Among the key elements of the law i s the creation of the Superintendence for Public Services and the definition of the functions of the Regulatory Commissions, the Comisidn Reguladora del Agua in the case of the Water and Sanitation Sector. Another key element of the Law i s the promotion of cost recovery tariffs for the utilities, and establishes limits on the extent of cross-subsidization between customers. The law also establishes immediate liberalization of all utility services, including those traditionally regarded as natural monopolies, and explicitly exonerates service providers from any requirement to hold a concession from the conceding authority. As stated above, the water and sanitation sector does not have any sector legislationbeyond Law 142/94, and this legal vacuum has made it even more difficult to establish general standards and performance criteria that could apply to the large number of decentralized utilities across the country. The Government i s now contemplating the issuance of a new Water Law to enhance the policy environment as regardswater resources management, particularly. Sector Policv Framework. The Government's policy for the sector i s very much focused on improving the institutional and financial capacity and sustainability of service providers, an important tenet of which has bee the promotion of PSP. There has been significant experimentation with private participation, with more than half of the 26 largest utilities, equivalent to 13% of the urban market, operating with some degree of private sector involvement through various types of models, mainly mixed capital, concession and management contracts. The performance of all these utilities has improved. Colombia has pioneered the mixed enterprise model for private sector participation in the water sector, whereby the municipal government remains a significant (usually controlling) share of the utility; the private sector i s represented 'on the Board and takes a leading role in operation of the company and investments are co-financed between the public and private sector to varying degrees. In spite of a favorable Government policy, private sector participation in the water sector i s still not widespread and i s far lower than has been expected, in part as a result of security problems which deter foreign operators and investors and in part as a result of the inherent complexities of carrying out PSP processes, which require strong political commitment at the local level, Government technical assistance and financial support in order to be successful. 25 Sector Issues.The main outstanding sector issues inthe country are the following: 0 Poor Utility Performance. The main reason for poor utility performance, particularly in small municipalities (less than 50,000 inhabitants), i s inadequatemanagement capacity, often a result of political intervention in management, political nomination of managers, and their frequent replacement for reasons not related to performance. Poor utility performance i s reflected in the low quality of service provided and in inadequatecommercial systems, low billing and collection, and inadequate maintenance. Coverage rates do not reflect the real quality of service; a better performance indicator i s the effective water service coverage, which takes into account continuity of service and water quality, in addition to physical coverage. The effective water service coverage in Colombia, which reflects coverage of 24 hours per day with water quality that complies with drinking water standards, i s shown in Table 1. These data indicate that (i) utility performance in the country, on average, i s less than satisfactory; (ii) utility performance in mediumand small municipalities is deficient; and (iii) are great disparities between major there cities and the rest of the country, with larger utilities presenting reasonable operational indicators of efficiency and smaller utilities presenting very weak operational and financial indicators). Major Cities MediumCities SmallMunicipalities NationalAverage 82% 46% 27% e 50% ?? 0 Large Regional and Urban - Rural Disparities in Service Coverage. Whereas access to water and sanitation in urban centers has become practically universal, in the rural areas there is still a long way to go, with 53.1% coverage for water and 57.9% for sanitation, and 52% and 15.2% respectively when the definition i s restricted to household water and sewerage connections (though networked service i s not always appropriate in rural areas). The Atlantic Coast (Caribbean region), Orinoquia and Amazonia regions present the lowest coverage rates for both services. 0 HighInvestment Needs. Total investment requiredfor investments inthe services inthe next five - years (2004-2008) i s estimated at US$ 2.1 billion or approximately US$ 420 million per year. These figures include investment in wastewater treatment and maintenance of existing assets, as well as investments needed to reach the Millennium Development Goals for the sector. Consequently, there i s a need for maximizing the efficiency and impact of Government's support to the sector, in addition to increasing cash generation from utilities and attracting private sector investment. 0 Limited Subsidies to the Poor. Cross subsidies are part of the design of the tariff structure in Colombia and have proven to be an effective mechanism for income redistribution in large urban areas. However, as the number of municipalities in which the entire population classified in the lower income strata has grown, the cross subsidy mechanism has become less effective. Given the unfavorable structure of demand and the fact that the sector is still far from reaching the legally established tariff parameters, the cross-subsidy scheme presents a large deficit of US$161 million per year, equivalent to 20% of sector turnover. Therefore, the current cross-subsidy scheme has proven an insufficient tool to expand service delivery in many peri-urban areas or provide sufficient financing in municipalities with predominantly poor populations, where the underlying imbalance between contributors and beneficiaries i s greater. A specific mechanism, Solidarity Funds, was proposed to allow a better service to low-income groups while helping utilities achieve financial sustainability by providing an additional direct subsidy to the service provider. 26 However, as these funds are supposedto be financed with municipal resources, fiscal constraints at the local level have inhibited their rollout. As of 2002, only 54% of municipalities had established such funds, and of those only 5% were allocating resources to these funds. The current cross-subsidy mechanism also ails from poor effectiveness (90% of the resources leak away to households above the poverty line) due to deficiencies in the stratification system. The Government has commissioned a detailed study of the current cross-subsidy mechanism and stratification system to define the reforms needed to solve the structural problems mentioned above 0 Low Wastewater Treatment Coverage. Only about 10% of the wastewater generated in the country undergoes any kind of treatment and only half of installed wastewater treatment capacity i s operational. This i s a result of deficient maintenance that leaves plants inoperative, and also to the fact that some plants are located in municipalities that still lack the necessary sewerage infrastructure for wastewater collection. The remaining 90% i s discharged without any treatment, contaminating a significant part of the natural water resources. Contributions from the central government for water quality control are normally assigned as a result of difficult negotiations between regional and central authorities and there i s no clear mechanism for financing municipal wastewater treatment plants. 0 Weaknesses inthe Regulatorv System. The regulatory and supervising agencies (CRA and SSPD) have regulation and monitoring oversight responsibility for over 1,300 service providers in the country. This situation makes the regulatory activity costly and inefficient. Large utilities serving over 6 million inhabitants like Bogota are regulated in the same way as those serving 2,000 inhabitants. The result has largely been one of paralysis, with the large fringe of smaller utilities lacking the capacity or inclination to engage in regulatory processes, and the central agencies themselves lacking the manpower to interact meaningfully with such a large number of service providers. In addition, many of the smaller utilities are in such a precarious condition, that it i s questionable whether regulation i s even an appropriate intervention, as opposed to technical assistance or outright liquidation. Current regulation i s based on tariff setting formulas that were designed to provide incentives for efficient services, but have not been fully successful in promoting efficiency. Tariff levels are, in most cases, still too low due to political considerations that override sector incentives, and although significant progress has been made in setting tariffs to cost-recovery levels, the process i s far from complete and in practice, the application of the tariff increases was uneven. The largest utilities have made substantial progress, now charging reference tariffs within about 10% of the cost recovery benchmark, and making substantial progress towards the rebalancing of the cross-subsidy system. However, in the smaller utilities, there has been greater reluctance to embrace the goal of financial sustainability. This i s due to politicization of the Boards of the municipal utilities, which are often presided by the local mayor, and which have the ultimate power to set tariffs even if obliged to do so within the regulatory framework laid down by the CRA. Furthermore, a number of new legal measures taken in 2003 to increase the subsidy limit for Stratum 1 households from 50% to 70% of the tariff, and subsequently outlaw any future real increases in the tariffs of Strata 1 and 2 households, have effectively undermined the process of rebalancing of the cross-subsidy framework, makingthe goal of cost recovery ever more distant. The existing regulatory and legal frameworks do not provide sufficient comfort to potential private investors and constitute an obstacle to the efforts of consolidating the reform initiated in 1994. 0 Limited Coordination Among Central Government Agencies. There are many institutions in the sector, some with overlapping functions in certain areas. Under such circumstances, coordination efforts are a must. Utilities frequently complain about the large amount of information requested by the government, and about the costs associated with generating it. As i s described in the next 27 section, the establishment of the Ventanilla Unica Program, key component of the Government's strategy for the sector, aims at addressingthis issue. 0 Lack of a national rural water policv and no explicit rural investment programs. In contrast to other infrastructure sectors, there i s no explicit central policy scheme to promote rural access to water and sanitation, beyond the fiscal transfers and the general legal framework. Although Government Programs such as the Microempresas Comunitarias have proven useful tools to improve management and operation of rural utilities, the poor performance of rural utilities in raising coverage suggests that such a well defined targeted rural water policy might be necessary to address the significant efforts needed to keep up the pace in increasing coverage expansion rates andto reduce the discrepancies incoverage ratios between urbanand ruralareas. Despite the need for improvements, the water and sanitation sector in Colombia i s relatively advanced as compared to many of its Latin American neighbors. Inparticular, the sector i s characterized by: 0 An Adeauate Sector Policv Framework. The Government of Colombia has been a pioneer in adopting good sector policies in the water sector. The decentralization policy was enacted long ago, and promotion of PSP i s a key sector policy. These are advanced policies, which provide opportunities for improvements in sector performance. The Government has also steadily provided financing to the sector and continues to do so. 0 Satisfactorv Service in the Large Cities. The water and sewerage services in five of Colombia's largest cities (Bogoth, Medellin, Cartagena, Barranquilla, Bucaramanga), which serve a population of about 12 million inhabitants, are good, though efficiency improvements are still needed. The exception i s Cali, which i s currently undergoing a crisis in the water and sewerage services. 0 Successful Performance of Utilities with PSP. Private sector participation i s not uncommon among the largest utilities, and takes place within the framework of a distinctive mixed enterprise model. There has been significant experimentation with private participation, with more than half of the 26 largest utilities, equivalent to 13% of the urban market, operating with some degree of private sector involvement (Figure 2.6). Colombia has pioneered the mixed enterprise model for private sector participation in the water sector, whereby: the municipal government remains a significant (usually controlling) share of the utility; the private sector i s represented on the Board and takes a leading role in operation of the company; and investments are co-financed between the public and private sector to varying degrees. The experience with the privatized utilities (Cartagena, Barranquilla, SantaMarta, Tunja, Monteria, Palmira, Girardot, Riohachaand more) i s encouraging. The performance of all of them has greatly improved, customer satisfaction i s high and they provide good examples for resolving the water sector problems. Consequently, PSP i s emerging as a methodology that tends to be adopted by mayors who are interested in improving the water sector performance. Government Strategy Inrecent years, the Government has implementeda modernization and reform program for the water and sanitation sector to address the issues described above. Current strategy and policy for the sector i s outlined in the 2002-2006 National Development Plan (NDP), and aims to consolidate the reform undertaken and to create the financial, institutional and monitoring conditions to ensure investment in sector needs and the modernization of utilities to improve efficiency levels and performance. Government's strategy i s basedinthe following actions: 28 incorporatiny the private sector into the management and operation of public water utilities where technically, financially and institutionally feasible; increasing financial support to publicly run utilities to address the high structural sector investment needs through a national investment program based on direct subsidies from the Government for capital expenditure, to extend assets to the poor inboth urban andruralareas, with the goal of achieving sector self-sustainability inthe mediumterm; implementing, as a prior condition for accessing financial support. institutional strengthening and technical assistance programs to promote utility modernization and efficient management; rationalizing the institutional framework at the national level to improve coordination in the sector and fight sector fragmentation, ensuring access to finance from utilities; and strengthening the regulatory framework for the sector and enforcing mechanisms to ensure the application of tariff regulation and the use of Law 715 transfers. Incorporating the Private Sector. The benefits of PSP in the delivery of water supply and sanitation services in Colombia are well documented and PSP remains the core of the Government's approach in larger urban agglomerations. There has been significant private participation in the sector, mostly under the concession or mixed enterprise models. The successful experiments in Barranquilla and Cartagena in the early 1990s prompted widespread experimentation, and there are currently around 100 private operators serving 15%of the urban population. Privateparticipation i s also occurringthrough outsourcing activities in the three main cities (BogotB, Medellin and Cali), where public enterprises remain in charge of providing the services. In Bogota for instance, the public utility has used BOT contracts for the construction of water and sewage treatment plants, and recently awarded management contracts for the operation and billing of services in five zones of the distribution network. As part of the policy to encourage this type of reform, the Government designed a Program for Utility Modernization (Program de Modemizacidn Empresasrial- PME), aimed at facilitating the incorporation of the private sector inthe management and operation of the water and sanitation services in the utilities of participating territorial entities and at providing financial support to these utilities, while ensuring provision of services to the poor. A World Bank study7 shows that since the operator took over in Cartagena, 95% of new connections were in households classified as Strata 1 and 2 (i.e. the poorest). In Barranquilla, the corresponding figure was 86%; in Tunja 79%; and in another private utility, Santa Marta, over 50%. The implementation of this Program i s being supported by the Bank through the ongoing loan Water Sector Reform Assistance Project (CO-7077) which supports key PSP transactions, targeting improvement of efficiency and expansion of water and sanitation services in medium-size cities or regional associations of municipalities (with populations of up to about 300,000 inhabitants) and small municipalities (with populations of upto about 12,000 inhabitants). Increasing Financial Support through a National Investment Proaam. Achieving the financial self- sustainability of the sector i s a core objective of Government's strategy. The National Development Plan 2002-2006 focuses on promoting the concept that financing of sector utilities will be mainly based on income generated by collection of bills as well as by incorporating private investors, where feasible (approximately half of the expected subprojects would incorporate the introduction of private management). Municipalities can subsidize the tariff of low-income customers or subsidize part of the investments using the revenue transfers of Law 715 and existing public funds allocated to the sector. As part of the efforts to increase the available financing sources for the sector, Law 788 of 2002 additionally established a tax rebate scheme as an incentive to investment by regional utilities. Only when the aforementioned resources are proved insufficient, given affordability constraints, to cover investment Colombia: Expanding Services to Low-Income Areas comparing private and public water utilities, (Sotomayor, 2001) 29 needs and effectively provide services, can the Government make available to individual municipal utilities, under strict eligibility conditions, additional resources from the national budget to finance specific investments and help solve structural problems, at all instances working with the utility towards the goal of eventually achievingfinancial self-sustainability. Consistent with the objectives outlined above, Law 812 of 2003, which adopted the NDP, established the 2002-2006 medium-term national financial commitments to the sector. The Government will provide capital investment grant resources to be utilized based on the outcomes of the recently conducted participatory public consultation processknown as the Audiencias Pliblicas (August 2003). As part of this process, departmental and regional investment needs where examined and evaluated by a technical committee based on poverty- and technically-weighted criteria, resulting in fund allocation at a departmental level. Approximately US$ 135 million has been allocated for investment in the water and sanitation sector under the umbrella of the Audiencias Pliblicas. Implementation arrangements for accessing these funds, particularly the direct oversight by the MAVDT and the development of a harmonizedand publicly disseminated set of procedures, along with the use of financial intermediaries for fiduciary management, has been designed to mitigate the risk of political capture of the public consultation process to ensure the efficient use of grant transfers. The Government has designed a mechanism to centralize all publicly funded' investments in the sector, including the allocations deriving from the Audiencias Pliblicas, through a Program called Ventunillu Unica (to be financed under the proposed APL), managed by the Directorate for Water and Sanitation (Direccidn General de Agua Potable y Suneumiento Busico) within the MAVDT. This Program will channel and manage all funds assignedby the Government to the sector. Implementing Institutional Strengthening and Technical Assistance Pronams. The Government i s currently implementing a policy effort to improve the institutional development and financial and technical performance of publicly-run utilities in small- and medium-size localities (both urban and rural) where PSP i s not likely to be adopted in the short-term. The Government has designed two different Programs, Fortalecimiento Institucionul and Microempresa Comunituria, which aim to bring utilities to reasonable levels of management, operational efficiency and financial viability and pave the way for private sector participation by improving the productivity of utilities and strengthening of management and administrative systems. For the purposes of the Program, municipal water enterprises would be categorized into three categories based on their level of institutional development and financial performance (see Annex 9 for details] and participation in the Government's Program would be contingent upon institutional strengthening efforts (concurrent or ex-ante) basedon the existing capacity of the utility. Rationalizing the Institutional Framework and Improving Sector Coordination. Coordination at the national level has been fostered through the strengthening of the MAVDT, consolidating DAPSBAas the key coordinating institution for sector development and the creation of an umbrellaProgramfor managing national financial support to the sector, the Ventunilla Unica. The Ventunilla Unica (described below) establishes a uniform approach to analyzing and financing sector investments by various involved agencies, to coordinate sector investments in a more rational way across the different institutions involved in sector investment, regulation, and management. The Program design aims to improve DAPSBA (anf more generally, the MAVDT) from a technical and managerial perspective, enhance its sector and environmentalmonitoringcapacity, andbetter articulate its role as an inter-agency coordinator. Supporting the Public Sector Reform Agenda. The Program supports the Government's public sector reform agenda aimed at rationalizing and streamlining the activities of public sector institutions thus ~ Refers to publicly provided grant resources and not credit funds provided through, for example, FINDETER. 30 maximizing their efficiency and allowing them to focus intheir core policy responsibilities. Inparticular, andinrespect to the water and sanitation sector, the Project institutional arrangementshave been basedon the evolving structure of the institutions involved in sector administration and will support public sector reformby the following: 0 A harmonization and standardization of eligibility rules and procedures for the channeling of central government subsidies to the sector through the Ventunillu Unica approach, which will reduce the number of instances and institutions participating in the funding process and improve the efficiency of the entire process. 0 The elimination of the use of Project Implementation Units (PIUs) within the MAVDT, which often become unnecessarily large and semiautonomous structures that prevent the necessary capacity from being built within the Ministry itself and results in a loss of institutional memory when the Project has beencompleted. 0 The use of FONADE as a project management agent will help to reduce the moral hazard inherent intransfer of funds to local governments by puttinginplace a solid governance structure, and will bring a higher level of transparency and accountability to the operation, providing comfort to the Bank, Government, MAVDT and local governments alike. Small-scale providers. Small-scale service providers (both public an private) play an important role in Colombia with more than 1,700 local entities providing service in small municipalities and over 4,600 in rural areas. The Project will support the Government's strategy for these specific types of providers, which i s basedinthree different programs: 0 Microempresas Comunitarias (community based micro-enterprises): Targeted at municipalities and rural areas of less than 5.000 inhabitants, this program aims to establish community based micro-enterprises (local or regional) that can effectively respond to consumer demands, recuperate investment costs and operate with reasonable levels of efficiency. The main objectives of the program are: (i) to achieve community ownership; (ii) reduce political interference in to service provision; (iii) take advantage of economies of scale for procurement of goods and to services, amongst others; and (iv) to support a social handling of public services and the development of microenterprises. 0 Fortalecimiento Znstitucional: Targeted at urban and rural areas of less than 12.000 inhabitants with poor management capacity, this program aims to implement a business-like approach in those service providers through a combined strategy of providing technical assistance and training. During project implementation, the MAVDT will provide technical assistance to small public operators to assist them in obtaining the knowledge and experience required for managing a water utility. The MAVDT has prepared a package of technical assistance for the small entrepreneurs which provides information, training and software for financial and commercial (billing and collection) management, operational performance in aspects such as unaccounted for water reduction, metering, service coverage, labor efficiency etc. 0 Operator-Constructor model: Targeted at small municipalities with populations of up to about 12,000 inhabitants, which decide to incorporate a private operator through a simplified process. The differentiation with PSP processes in larger municipalities i s made specifically to reflect the conditions in small municipalities (from the private sector's standpoint, the business is different in the two size ranges of municipalities, and the required type of operator i s different inboth) and i s possibly the most significant innovation of the Colombian approach to PSP. Through competitive 31 bidding, small- and medium-size construction companies, possibly in association with small consulting firms, will compete for the construction and/or rehabilitation of the water supply and sewerage systems in a small municipality and the winning bidder commits to operate the systems for a period of 10-15 years from the date of signing the contract. The winning bidder will receive trainingin management of water utilities as well as written material and management software. Certification of small operators will also be undertaken by MAVDT two years after the initiation of the activity of each operator. Inthis manner, the Program will help to convert the constructors to operators. The Ventanilla UnicaProgram (to be supportedby theAPL) Proa-am Objectives. The Ventanilla Unica Program was defined by the Government to channel capital grant resources from the national budget to support solving structural deficits by financing investment subprojects. The Program aims to support an inter-agency arrangement to analyze subproject viability and provide the green light for accessing complementary grant resources. Traditionally, the management of national resources for water and sanitation projects had been handled though up to seventeen different institutions, including DNP, FNR (Fondo Nacional de Regalias),INCODER, the CARS,and FINDETER (the latter for management of loan resources). The existence of such an atomization of the sector resulted in delays and lack of information about financing sources as well as a lower quality in the process of project design, approval and implementation, putting at risk the financial sustainability in the medium to long term. The Program provides harmonized selection and fund allocation criterion to coordinate resources from different financing entities and to monitor subproject implementation and supervision, for improved efficiency in fund allocation and better subprojects quality control. The Program's specific objectives are: (i)achievefinancial, socialandenvironmentalsustainabilityforthewaterandsanitationsector;(ii) to to define social and economic impact goals that will allow monitoring of targets and strengthen the monitoring capacity of the implementation of Government's sector policy in urban and rural areas; (iii) improve inter-institution coordination in sector financing; and (iv) to ensure equality and efficiency in fund allocation. The resources to be made available for financing of subprojects through the Ventanilla Unica will come from National Government's transfers from the national budget to the MAVDT and to other sector institutions (AudienciasPliblicas, FONADE, FNR, etc.). The proposed APL will support the financing of this Program (with Phase Isupporting the investments identified in the National Development Plan for 2002-2006). The adaptive nature of the Program will support a learning environment for the application of an efficient financing policy for sector investments, whereby municipal governments decide whether or not to participate in the Program based on a clear understanding of the rules of engagement. This will include willingness by local governments to require users to meet their financial obligations and assume responsibility for sustaining and making effective use of their improved services. The programmatic approach will allow for the gradual application of the new policies throughout the country by providing investment incentives to municipalities that are willing to reform, and by coupling the transition with adequate institution buildingat all levels. The Ventanilla Unica approach aims at solving these problems and also to provide the Government with a tool to track the investment made in the sector and monitor the achievement of sector goals andtargets, to measure the impact of national policy in the sector. The Ventanilla Unica represents the following advances: 0 The consolidation of a single framework for presentation of projects, to achieve more efficiency and agility in handling of financing requests, rather than having multiple windows or "doors to knock on" with different eligibility and presentation requirements. 32 0 Harmonization of criteria for eligibility, viability and resource allocation nationwide. 0 More efficiency, efficacy and equality in fund allocation, given a transparent and accurate knowledge of total nationalbudget funds allocated to the sector. 0 Better alignment of financing programs with other type of programs managed by DAPSBA such as the Institutional Strengthening Programs for the improvement of utility management and efficiency gains, as well as with modernization andPSP programs. Guidelines for financing of subproiects under the Program. A detailed description of the functioning of the Ventanilla Unica i s articulated in the Documentode Ventanilla Unica which will be approved by the Government by Decree prior to Effectiveness and which will form an integral part of the Operational Manual. As part of Project Preparation, and largely based on the Documento de Ventanilla Unica, a Program Operational Manual for the proposed APL is under preparation and its finalization, satisfactory to the Bank, i s a condition of loan Effectiveness. The Operational Manual covers all aspects and guidelines for Program implementation, including subproject appraisal methodology and procedures to mainstream social and environmental safeguardpolicies for the entire Program, as well as instructions for document flows, standards for progress reports, and procurement and disbursement procedures. The OperationalManual also provides detailed guidelines for the internal benchmarking system supported by the project, which will provide key information on improvements on performance indicators. The Government's strategy i s to initiate the Program in the areas identified as priorities during the participatory Audiencias Pliblicas process and to expand in a programmatic manner according to different priorities. The Program will finance subprojects identified in the Audiencias provided that: (i) the municipal utility complies with regulatory and sector national rules and legislation; (ii) the municipal utility makes available detailed viability and subproject design studies to ensure that subprojects meet appropriate design standards (to reduce overdimensioning); (iii) the subproject analysis determines that there i s technical and economic rationality and viability; (iv) subproject complies with technical national norm- RAS - and other technical environmental regulations from MAVDT and national legislation; (v) the utility i s contributing to financing the subproject with proceeds from tariffs, local contributions, transfers from law 715 and available loan financing and (vi) the utility i s complying with efficiency standards or committing to reform and improvements through the signature of a tri-partite Convenio de Apoyo Financier0 with the MAVDT andthe regional or municipal authority and enrolling into one of the TA programs for institutional strengthening. The Program will follow a strategy of promoting PSP but not discouraging the public utility from trying to become more efficient. PSP in the provision of the services, albeit the main strategy supported by the Government, may be considered unfeasible in some municipalities given the small size, high investment needs, low level of institutional development or political and public opinion opposition. The institutional strengthening component will support these municipalities across the country in achieving higher efficiency targets within an agreedtimeframe. Program Components. The key investment elements of the Program are: (i) expansion of water supply and sewerage infrastructure and networks; (ii)investments in appropriate wastewater treatment and disposaVdischarge of municipal wastewaters; and (iii) institutional strengthening for improvement of utility performance and Program Management. A detailed description of the Project's components i s provided inAnnex 4. The types of subprojects to be financed underthe Programwill be: (i) Subprojects for expansion of water and sewerage networks and adequate treatment of source water along with enhanced operation and management of municipal water and sewerage utilities (both publicly and privately operated); 33 (ii) Subprojects for the construction of municipal wastewater treatment and discharge infrastructure; and (iii) "Modernization" and Institutional Strengtheningprograms. Insubsequent phases, the proposedAPL Programaims at expanding andconsolidatingthe results of the first phase through: (i) asset expansion; (ii) development of wastewater treatment levels; further further (iii)improvement of sector management through the establishment of financially viable regional water and sewerage companies with significant participation of the private sector; and (iv) increasing overall sector monitoring capacity through the consolidation of the nationalbenchmarking information system. Subproject Analysis: Eligibility. Viabilitv and Prioritization Criteria. The candidates to participate in the Program will be municipalities and/or other territorial entities through their utilities at a regional or municipal level (utilities with PSP inthe provision of the services may also be eligible for participatingin the Program under specific arrangements). The utility, in order to be eligible for accessing the funds, will have to comply with the eligibility criteria outlined in the Documento de Ventanilla Unica and in the Program's Operational Manual, namely regulatory (and, in particular, tariff levels) and legal issues (permits, municipal agreements, proof of ownership and/or land usage permission etc.) and other legal, documentalandpresentational requirements. The subproject analysis will contain a detailed study and assessment of the subproject viability in the following areas: Institutional - assessing utility preparedness in terms of its ability to contribute to capital cost, management and operation capacity and financial viability. Inthis context, an assessment of water supply and sewerage operations is also included to ensure that they meet reasonable efficiency standards. Recommendations for management and efficiency improvements will be drawn from this analysis and incorporated in the Convenio de Apoyo Financier0 to be subscribed between the MAVDT, FONADE, and the municipality or regional authority. Financial -assessingthe financial soundness ofthe subproject andinstitution,bothinterms of project implementation and financial sustainability, taking into account all sources of financing (municipal resources, direct Government transfers, tariff revenues and Program's funds) and evaluating that funds will be sufficient to cover O&M costs and depreciation. Technical - engineering and design studies complying with the technical norm as established in the national norm for the water and Sanitation Sector (RAS 2000) and in the OM, including a least-cost and alternative investment analysis for each subproject considered, justifying the proposed subproject design and how it best suits the services needs. Economic assessingthe economic soundness of the subproject on the basis of a cost-benefit analysis (or - least cost analysis inthe case of small investments). Environmental and Social - assessingthat environmental licenses, environmental assessments and action plans and other environmentaland social safeguards are inplace as requiredby national Law in Colombia and the Program's Operation Manual agreedupon with the Bank. Depending on the above assessments, the corresponding subproject will be deemed viable, conditionally viable (depending on the utility's willingness to undertake the reform measures and other recommendations arising from the assessment of the project's viability) or not viable (where a given subproject, according to the professional criteria of the evaluator, i s not viable and no adjustments can be 34 made to it that would make it viable). The professionally based appraisal mechanism under technical and transparent criteria should diminishthe risk of `white elephants' and over dimensioned projects. The Government has adopted the prioritization criteria outlined in the technical norms for the water and sanitation sector (RAS 2000), which ranks investments in the sector in terms of their urgency and sensitivity. Priority would be given to investments in potable water supply infrastructure and service; investments in sewerage would only be financed in the case of 80% coverage of an existing water supply system; and investments in wastewater treatment and discharge would be contingent upon existing sewerage systems covering at least 80% of the population. Tripartite Financial Support Agreement and Institutional Strengthening Promam Enrollment. For municipalities that have not undertaken a modernization process to include a private operator in the operation of the systems, project participation would be contingent upon enrollment in one of the two programs for institutional strengthening developed by the MAVDT. Most Colombian water and sanitation utilities have ample opportunity to improve their productivity and thereby reduce the cost of management and operations. These programs have been designed as enhancement programs establishing time-bound targets for efficiency improvements in utility management and operations. The municipal or regional authority, the MAVDT and FONADEwill sign a tripartite funding agreementoutlining a time framework and milestones to reach pre-determined performance targets and improvements. The territorial entity would agree with the local utility on execution and performance improvement arrangements and in the case of publicly-managed utilities, would enter into a side agreement ("carta de compromiso") which would be signed at the same time as the Convenio de Apoyo Financiero. Targets may include a review of tariff and subsidy policies, adequate staff training, incorporation of the demand-driven approach to water and sewerage expansion, unaccounted-for water reduction, overall improvement of productivity and efficiency, upgrading of administrative and management systems, updating the utility' s medium term vision, and/or eventually incorporatingPSPinthe provision of the services. The tripartite funding agreement between MAVDT, the territorial entity (including local municipalityhes) and FONADEwill define their mutual obligations for the duration of the Project. A draft model for this tripartite funding agreement has been reviewed by the Bank before Appraisal. These agreements will include monitorable annual or semi-annual targets for institutional performance, bill collection performance, and operational efficiency improvements. These performance targets will be used to track and evaluate progress madetowards these objectives. National Benchmarking System. Efforts for improving efficiency and productivity will benefit from the introduction of a nation-wide benchmarkingsystem, which would allow national utilities to compare their performance with other utilities in Colombia and other countries. A system for benchmarking utilities exists within the Superintendenciade Sewicios Publicos, but lacks reliable and transparent information. The proposed APL will support the population of the databasefor benchmarkingand monitoring of utility performance and such a system will assure the transparency and accountability required for proper benchmarking of operator performance and will allow comparisons between private and publicly run utilities. Sector competition and benchmarking of public and private operator performance will enhance incentives or operational improvements. The MAVDT's Organizational Structure and Process for Approval of Subproiects. Subprojects will be submitted for appraisal by regional or municipal authorities to DAPSBA. The flow of decision-making and subproject approval under the Programlays within the followingbodies inthe MAVDT: DAPSBA's Management. Overall responsibility within the MAVDT for the implementation of the Ventanilla Unica Program. 35 Technical Committee. This committee i s composed by the Director of DAPSBA, the coordinator of institutional strengthening programs for municipalities and utilities, the coordinator for solid waste management, the coordinator for water resources management, and the coordinator for investment control, monitoring, and evaluation. The technical committee will approve the financing of subprojects that have been appraised and deemed viable, based on the background information presented to justify the subproject, recommend a financing plan for the subproject based on available resources and determine conditions and modifications to the subproject design precedent to accessing the funds and other conditions and agreements to be included in the FundingAgreement. This assessment and recommendations is then taken to the Interinstitutional Committee for final approval. Interinstitutional Committee. This committee will be chaired by the Viceminister of Environment and includes DAPSBA's Director, and a Coordinator from the Technical Committee (con voz y sin voto) as well as the President, Director or main decision agent of other sector institutions that will contribute funds for the financing of the subproject (FNR, FONADE, etc.). This committee will prioritize the financing of subprojects and will make the final decision on allocating Program funds. Proiect Supervision and Monitoring. During Project supervision, the Bank will appraise the subprojects proposed for financing under the Program on an annual basis. All procedures for subproject preparation and the criteria for subproject appraisal have been defined ex-ante and included in the Program's OperationalManual, which the Bank has reviewed and found to be satisfactory, Detailed engineering and technical designs for the sample subprojects in the first year of the Project, including environmental and social assessments, financial models, and tariff schedules agreed-upon with municipal officials, have been completed prior to loan Appraisal. DuringProject supervision, the Bank will conduct an annual appraisal of subsequent work program to ensure compliance with the guiding principles for subproject evaluation andeligibility. In addition, during the implementation of the Program, MAVDT will contract an independent Project Management Entity (Zntewentoria) for supervising subproject construction and implementation (including procurement) under the overall supervision of MAVDT. Fund disbursements will be made from MAVDT in line with subproject status reports to be submitted by the Project Management fihn. Institutional and Implementation Arrangements. Territorial entities (usually municipalities), through their local utilities, will be responsible for the implementation of the subprojects with the support from DAPSBA.Similar to the successful approach used inthe PMEunder the Water Sector ReformCO-7077, it is proposed that MAVDT will receive Project funds and channel these funds to municipalities participating in the Program. MAVDT, as the key technical implementing agency, would manage and supervise subproject implementation, reporting, procurement, and disbursements, in cooperation with the respective authorities andwater utilities, supported by DNP's Department for Water and Sewerage. Municipal authorities will be responsible for investing and managing the services. As such, they will ultimately be responsible for all aspects of local utility management, including tariff setting, billing and collection. As indicated above, the MAVDT will ensure that (a) subprojects are economically and financially sound based on an agreed-upon methodology for financial and economic assessment; (b) the municipalities and/or utilities are technically, financially, and institutionally capable of managing subproject implementation; (c) that financial arrangements, including any tariff changes which might be applicable, are agreed-upon prior to subproject appraisal and codified in the tripartite Financial Support Agreement between MAVDT, the corresponding municipality, and FONADE; and (d) that all safeguard approachesare followed as defined inthe OperationalManual. 36 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies COLOMBIA: Water and SanitationSector SupportProject Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financedprojectsonly)' Implementation Development Bank-financed I Progress(IP) IObjective(DO) Water Supply & Sanitation 2512-CO :FourthBogotiWater Supply Water Supply & Sanitation 3336-CO:MunicipalDevelopment Project, Component E, Water Utilities Water Supply & Sanitation 4507-CO: CartagenaWater Supply, S S SewerageandEnvironmental Regulationinthe Water andSanitation IDBFinanced,Water Supply& Sanitation I NationalWater Plan, US$ 60 million, I I underpreparation,aimedat supporting all the regionsof the country andexpectedto beeffective in2002 HS:Highly Satisfactory; S: Satisfactory; U: Unsatisfactory; HU:Highly Unsatisfactory 37 Annex 3: ResultsFrameworkandMonitoring COLOMBIA: Water andSanitationSectorSupportProject ResultsFramework OutcomeIndicators Use of OutcomeInformatioi Improve the provision of water 1.2 million consumers (especially supply and sanitation services in the poor) receive improved access Colombia ina financially efficient to reliable and safe water supply and sustainable manner. and sanitation services. IComponent One: Component One: ComponentOne: Scale-up the involvement of the 10 new private sector transactions Public dissemination on the benefit, private sector in medium-size cities using "modernization" framework of PSP (domestic and international) through the introduction of performance-based management Scale-up o f PMEprogram arrangements with specialized operators Outreach to local officials for furthi use of PME in subsequent Program phases Support service-improvement Improved water supply services Measure efficiency o f direct grant I related investment through targeted benefiting 900,000 consumers Ventanilla Unica approach for fine. capital grants in small, medium, and tuning of Phases I1and I11of large urban areas served by public 164,000 new consumers connected Program utilities to urban water supply networks Outreach / "marketing" for greater Improved sewerage services sector investment I benefiting 695,000 consumers 120,000 new consumers connected to urban sewerage networks Deliver appropriate water supply Basic water and sanitation services Design of sector policies for and sanitation investments in improved for 20,000 beneficiaries in bridging urban-rural service gap. Colombia's underserved rural areas. 20 rural areas Improve the institutional and 40 utilities enter into programs of Measure effectiveness o f operational performance of public technical assistanceI institutional performance improvement progran utilities through targeted technical reforms and adjust their implementation an assistance and performance-related design over time. measurement. Unaccounted-for-water (losses) reduced by 5% in municipalities which enter into programs for institutional development Collection ratios improved by 5 percentage points in municipalities which enter into programs for 38 institutional development ComponentTwo: ComponentTwo : ComponentTwo: The MAVDT has developed The MAVDT has established Continuous evaluation and redesign sufficient institutional capacity, sufficient internal institutional of institutional strengthening and including Program-related staff, to capacity (yes I no) project management activities effectively implement the Project. 80% of subprojects, on an annual basis, are being implemented according to schedule 39 d U C 0 8 0 3 c`1 Q8 Q 0" c`1 2 8 0 8 8 2 4 I 4 I c c n Ecn n 00 8 19 \ 8 0 w \o 00 $ \o \ 0 0 2 8 2 4 z Annex 4: DetailedProjectDescription COLOMBIA: Water and SanitationSector Support Project 1.Project ComponentsandFinancingArrangements The first phase of the APL will support the Government's Program through a sector investment loan to be implemented through DAPSBA within the MAVDT. The loan will finance subprojects for investments in water supply, sewerage and sanitation infrastructure, and wastewater treatment and discharge infrastructure and related technical assistance for institutional strengthening, with DAPSBA acting as the technical implementing agency, facilitating subproject evaluation, preparation and implementation. DAPSBA will have overall technical responsibility for Project implementation (including procurement). T a b l e 1: Indicative Subproject Financing" by Department For Phase Iof the APL Bank Investment Financing Counterpart Total Cost (US$ Department Type'' (US$million) Financing million) Antioquia WS&S 3.57 0.88 4.45 Huila WWT 2.14 0.27 2.41 Magdalena WS&S 3.29 3.29 Meta WS&S 1.82 0.38 2.20 N.de Santander WS&S 2.31 0.10 2.41 N a r i i i n WS&S 5.00 II 4.96 II 9.96 hnind in I wsas I 1.43 I - I 1.43 1 Santander ws, s, &WWT 1.59 2.60 4.20 Sucre WS&S 2.44 1.10 3.54 Tolima WS&S 0.50 0.3 1 0.81 Valle WS&S 0.72 0.72 Vichada WS&S 0.92 0.92 TOTAL\ 68.80 I 22.33 I 91.13 I Table 1identifies the departmental summary of subprojects preliminary selected as candidates to participate in the overall Program under the proposed Project (Phase Iof the APL), though the actual composition of Phase Iinvestments will be determined on a annual rolling basis during lo Subproject allocations include investment and supervision, institutional strengthening (including pre- investment work as needed), and regional technical assistance costs l1WS = Water Supply; S = Sewerage; WWT =Wastewater Treatment 42 implementation based on the viability of subprojects. Overall investments for Phase Ihave been estimated on the basis of the investment proposed for these municipalities. A sample of subprojects, (Table 2), have been evaluated and appraised as part of Project preparation. During preparation, two other rural investments were analyzed and deemed to be nonviable because initial design investment costs exceeded the maxima established under the economic analysis methodology. These investment subprojects were returned for redesign. Table 3 shows municipalities which have presented DAPSBA with proposed subprojects which include project engineering and technical designs, and thus have been selected to participate in the first year of Project implementation. Economic, financial, institutional, social and environmental analysis of the sample subprojects are includedin Section D and the related annexes of this document. 2. Detailed Descriptionof Projectcomponents The Project i s structured with two components: 1. Municipal Water Supply and Sewerage Infrastructure Component (US$ 92.2 million, including US$ 68.8 million of Bank financing, for Phase Z of the APL), with two subcomponents. Subcomponent I A Infrastructure and Municipal Utility Reform and Development (US$84.2 - million), to finance: Investments in the rehabilitation and constructiodexpansion of primary and secondary water and sewerage networks; Investments inwater treatment plants, pumping stations and main collectors; Wastewater treatment infrastructure including treatment plants and discharge infrastructure; Activities to strengthen and bringutilities to reasonablelevels of management, operational efficiency and financial viability and potentially facilitate private sector participation. Technical assistance for the strengthening of municipal water utilities would be providedthrough the existing Programs defined by DAPSBA, Fortalecimiento Institucional y Microempresas Comunitarias,and though customized technical assistance basedon existingand projected levels of utility institutionaldevelopment as described in Annex 1. "Modernization" subprojects to involve the private sector inmanagement of local utilities; and Finalized engineering designs and environmental and social assessments for investments duringthe Programand superviseProject investments proposed to be financed under this subcomponent are those typical for the sector: water and sewerage primary and secondary network rehabilitation and expansion, and main collectors, includingtunnels, underwater passages and pumping stations as might be required for hydrological functioning); rehabilitatiodexpansion of existing water treatment facilities and pumping stations for water distribution and sewerage, distribution pipes, valves and household connections, replacemendrefurbishment of water meters, systematic leak detection and repair, and installation of operational control centers. Preliminary estimates are that the Government will support are that "modernization" efforts will be financed in 22 municipalities`* andor groups of l2The municipalities which requested modernization during the Audiencias Pu'blicas were: Luruaco y Repel611 (Atlfintico); Manati Candelaria Santa Lucia, Campo de L a Cruz Y Suan (Atlhtico); Palmar de Varela (Atlhtico); Pioj6, Juan de Acosta TubarAY Usiacuri (Atlfintico); Magangue (Bolivar); San Juan De 43 municipalities for a total of approximately US$33 million, (based on the Audiencias Ptiblicas) though the number of subprojects which will be financed with loan resources will be determined as the Program i s implemented. Subcomponent I B - Supervision and Technical Assistance (US$ 8.0 million), to finance activities relatedto enterprise development and reform, includingequipment, technical assistance, trainingandstudies to: 0 Hire construction andimplementation supervision at the municipal level through independent supervision consultants ("intewentores"); 0 Contract private sector consulting firms who would support, on a fee-for-services basis, the strengthening of subproject design; and 0 Support DAPSBA oversight of Program implementation through the provision of technical assistance. Consulting firms might be hired by DAPSBA to support the provision of TA (Fortulecimiento Znstitucuional and Microempresas Comunitarias) and especially in providing TA support to medium size utilities. 2. Program Management, Benchmarking, Monitoring and Evaluation Component (US$ 1.2 million for Phase Z of the APL), tofinance consultant services and equipment to strengthen the capacity of DAPSBA to implement and supervise the Project and provide technical assistance to the participatingmunicipal utilities. Activities to be financed under this Component include: Design and implementation of an institutional framework for monitoring and evaluating subproject execution and utility performance. The strengthening of the existing sector utility benchmarking database within would be a key input to monitor and evaluate the impacts of the Program and effectiveness of Government resources to improve water supply and sanitation services and foster institutional development; and Goods and technical assistanceto ensure the capacity of the DAPSBA at the central level for Program implementation, evaluation and monitoring, including financial management, and including the financing of technical consultants to strengthen the capacity of the MAVDT to review the viability of proposed subprojects and to manage the safeguards aspects of the operation, particularly social and environmental issues. Nepomuceno, San Jacinto, Carmen de Bolivar (Bolivar); Santa Rosa De Lima, San EstanislaoDe Kostka, Villanueva Y Soplaviento (Bolivar); CeretB, Sahagdn, Cienaga de Oro y San Carlos - Regional ERAS (C6rdoba); Chima, Purisima, Momil, San Andres de Sotavento Y Lorica (Cordoba); Maicao (Guajira); Riohacha(Guajira SanAndres (San Andres y Providencia);); and San Onofre (Sucre). 44 Project Description Urban/ # of Appraisal cost Rural Beneficiaries Results13 Honda (Tolima) $185,000 Water Supply Urban 62,382 Viable Puerto Carreiio $105,000 Water Supply Urban 9,000 Viable (Vichada) Los Patios (N.de $266,200 Sewerage Urban 73,600 Viable,with Santander) wastewater treatment plant to be financedunder APL I1 San Sebastiiin $103,5 10 Water Supply Rural 1,352 Viable (Magdalena) Salg6r (Atl6ntico) $467,500 Sewerage Rural 1548 NotViable,to be Collection redesigned Tocaima $412,900 Sewerage Rural 1440 NotViable,to be (Cudinamarca) Collection redesigned Corregimiento de $65,360 Water Supply Rural 4,780 Viable Chocho (Sucre) Corregimiento San $362,430 Water Supply Rural 2,49 1 Viable Roque (Cesar) The financing of investments would be based on combination of municipal sources (including revenues from collection of tariffs, credit, resources from Law 715 and other), and direct subsidies from the Ventunillu Unicu Program (financed by the proposed Bank loan, Central Government budgetary transfers as counterpart contributions and funds from other publicly funded sector institutions such as FNR). l3With the exception of the proposed subproject in Puerto Carreiio, detailed analysis during preparation determined necessary changes to subproject design, including other alternatives and reducing subproject scope, inorder to be consideredviable. 45 c\1 r: d it 0 2 - 00 0 d 3 T 0 8 0 d v! d v! 6 0 0 13 L r, tl VI e8 $s 5 e 5 I m 2 0 0 8 m 3 Y 8 2 2 \o 8 2 d3. 0 0 0 8 0 0 0 % m 8 2 W 3 3 -6 Q .-mC m 0 a 1 U - W 9 n0 -2m U 8- 3 .-c a a, F a Y 0 ?a c) H .I 48 U a .I I F m a .I .Y sa 0 v, Annex 5: ProjectCosts COLOMBIA:Water andSanitationSector SupportProject Project Cost By Component and/or Activity US $million Total Bank Financing 1. MunicipalWater SupplyandSewerage InfrastructureComponent $92.2 $68.8 1A. InfrastructureandMunicipalUtility Reform $ 84.2 $ 61.9 and Development 1B. Supervision and TechnicalAssistance $8.0 $6.9 2. ProgramManagement,Benchmarking, MonitoringandEvaluationComponent $1.2 $1.2 Total Baseline Cost $93.4 $ 70.0 Physical Contingencies Price Contingencies Total ProjectCosts $93.4 $70.0 Front-endFee §i0.4 !Ti 0.0 Total FinancingRequired $93-8 $70.0 Component 1: MunicipalWater Supply & Sewerage Total Counter Infrastructure Cost part (US$) (US$) Bank Financing (US$) Total Y1 Y2 Y3 Y4 1.A. Infrastructure and Municipal UtilityReform and 84.23 22.33 61.90 15.23 16.63 15.90 14.14 Development 1.A.1 Infrastructure 81.63 22.33 59.30 14.21 16.01 15.42 13.66 l.A.2 Municipal UtilityReform & Development 2.60 0.00 2.60 1.02 0.62 0.48 0.48 1.B Supervisionand Technical Assistance 7.97 1.08 6.89 2.33 1.65 1.57 1.35 1.B.1 Supervision (interventorias)& TA 6.89 0.00 6.89 2.33 1.65 1.57 1.35 1.8.2 FONADE 1.08 1.08 0.00 0.00 0.00 0.00 0.00 Component 2: ProgramManagement, Total Counter Bank Financing (US$) Benchmarking& M&E cost part (US$) (US$) Total Y1 Y2 Y3 Y4 Consultants 0.94 0.00 0.94 0.22 0.23 0.24 0.26 Coordinator (') 0.13 0.00 0.13 0.03 0.03 0.03 0.04 Consultants('1 0.81 0.00 0.81 0.19 0.20 0.21 0.22 AdministrationCosts 0.07 0.00 0.07 0.03 0.02 0.02 0.02 Office equipment 0.03 0.00 0.03 0.02 0.00 0.01 0.01 AdministrationCosts 0.04 0.00 0.04 0.01 0.01 0.01 0.01 Travel Expenses & per diems 0.20 0.00 0.20 0.05 0.05 0.05 0.05 Total 1.21 0.00 1.21 0.29 0.29 0.31 0.32 51 Annex 6: ImplementationArrangements COLOMBIA:Water and SanitationSector SupportProject Borrower and Executing Agencies: The Borrower would be the Government of Colombia. Implementation of the Project, as well as overall Program management, i s the responsibility of a the Ministry of Environment, Housing, and Urban Development's Directorate of Water Supply and Basic Sanitation (Direccidn de Agua Potable y Saneamiento Basico, DAPSBA). The executing agency of each investment subproject will be the local municipality (through its utility should a utility exist), in some cases managed by a private operator. The MAVDT will control andmonitor the performance of the execution of each subproject and will ensure compliance with Bank and national guidelines and policies. The MAVDT will enter into an interinstitutional agreement with the Colombian Financial Fund for Development (FONADE), which will be responsible for managing Project resources for Component 1. As a project management agent, FONADE will be responsible for issuing payments to service providers and contractors engaged in the implementation of subprojects. DAPSBA will provide overarching policy guidance and technical oversight to FONADE and will supervise the implementation of subprojects and manage all the technical assistanceactivities through a team of consultants, financed in part using Loan proceeds. The Government team has valuable experience in designing and implementing water sector policy, structuring PSP transactions, and managing the fiduciary and safeguard aspectsof Bank operations. See Annex 7 for detailed project financial management arrangements. Under the proposed Project, the approach would build upon DAPSBA's experience to handle project evaluation and financial management with the support of the Bank, which will appraise DAPSBA's work program and related subprojects on an annual basis. All procedures for subproject preparation and the criteria for subproject appraisal have been defined ex-ante and included in the Program's OperationalManual and Ventanilla Unica Manual, which the Bank has reviewed and found to be satisfactory. Detailed engineering and technical designs for the sample subprojects in the first year of the Project, including environmental and social aspects, and financial models have been completed prior to loan Appraisal. During Project supervision, the Bank will conduct an annual appraisal of the work program to ensure compliance with the guidingprinciples for subproject evaluation andeligibility. Legal Agreements: The Loan Agreement will be signed between the Bank and the Government. After screening proposed subprojects and determining them to be eligible for Programfinancing, the Government will enter into a tripartite Financial Support Agreement (Convenio de Apoyo Financiero) between MAVDT, FONADE, and the local territorial entity (usually the municipality), The territorial entity would agree with the local utility on execution and performance improvement arrangements and would enter into a side agreement ("carta de compromiso y ejecucion") which would be signed at the same time as the Convenio de Apoyo Financiero. The Financial Support Agreement would: (i) the works to be financed; (ii) describe stipulate the commitment of the municipality to use the appropriate procurement guidelines for executing the works; (iii) establish the funding obligations of the municipality and service provider (contribution of Law 715 transfers and own-source revenues including tariff income or other sources); and (v) specify any additional conditions and issues associated with the contribution of investment funds by the Government, including the specific institutional reform targets for improving the financial and operational performance of local service. Procurement: For the implementation of civil works, purchase of goods or services (other than consulting services) financed wholly or partly by Bank funds, the implementation agencies will adhere to the Bank procurement guidelines. Works, goods and those will be procured in 52 accordance with the Banks "Guidelines for Procurement under IBRD Loans and IDA Credits" committed to provide, project implementation agencies may use other procurement procedures... dated May 2004. When using their own funds for financing investments which they have Consulting services, either wholly or partly financed by IBRD will be procured in accordance with the Banks "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 For any contract to be financed under the Loan and implemented in the participating cities and municipalities cities, the executing agency of each investment subproject (i.e., the utility of each municipality, whether under public or private management, shall use the Standard Bidding Documents of customized formats previously agreed and cleared with the Bank. A procurement capacity assessment of DAPSBA has been carried out and the overall procurement risk was assessed as average. DAPSBA will be responsible for providing procurement training for each of the individual subproject executing agencies and will monitor their performance and provide N o Objection to each procurement process to ensure that they comply with the procedures agreed with the Bank, including the selection of independent subproject supervisors (intewentores) under Component 1to be executedunder the guidance and supervision of FONADE. Monitoringand evaluation arrangements: Monitoringand evaluation (M&E) activities will be carried out on both an ongoing and periodic basis. Project-specific M&Ewould be undertaken by the Bank and by qualified consultants hired by the Bank. During implementation, participating utilities will submit summary reports to DAPSBA, following formats established in the OM. DAPSBAwill submit the Bank consolidated progressreports onthe performance of the project at the end of each semester ending April 30 and October 30. The Bank would carry out at least two full supervisionmissions andone partial supervision mission a year. At the same time, DAPBSA will use the disaggregated performance data to populate the utility benchmarking information system (SUI). Project's Operational Manual: The Operational Manual i s an essential tool for Project implementation. It has been designed to maintain the institutional memory of the Project throughout its implementation and therefore includes all relevant information regarding the project and procedures to guide DAPSBA (detailed information on subproject evaluation, reviews and approval, instructions for document flows, standards for progress reports, procurement and disbursement procedures, operational agreements between the participating agencies, and a detailed description of DAPSBA functions) as well as FONADE. The Operational Manual i s a complement to the Documento de la Ventunillu Unica, which has the statutory standing of law, and which establishesthe criteria for financing of any local investment, regardless of the funding source, while the Operational Manual applies exclusively to investments financed under the Project. The Operational Manual is currently under preparation and its completion i s a condition of LoanEffectiveness. 53 Annex 7: FinancialManagementandDisbursementArrangements COLOMBIA: Water andSanitationSector SupportProject Country Issues. A Country Financial Accountability Assessment (CFAA) was delivered to the Government in June 2004. The critical issues affecting projects include the tight fiscal situation, budget and administrative processes that can cause delays in implementation, and the national chart of accounts which extends to subnational levels of government. At the project level, the Bank is currently engaged with the Government to improve project financial management by (i) improvingthe operation of Special Accounts andrelated mechanisms for receiving and managing cash - especially, loan funds; (ii)decreasing the incentives to employ international cooperation agencies to manage project funds; and (iii) improving and streamlining the accounting and reporting requirements agreed upon in November 2002 between the Bank and the country's Accountant General andAuditor General's office. Financial Management Assessment. A Financial Management (FM) assessment took into account the challenges presentedby MAVDT's capacity gaps and the design of the project which includes grants to subnational governments. It involved ensuring that Project design allows for an appropriate level of transparency, facilitating oversight and control while also supporting smooth implementation. The conclusions of the FMassessment are that: (i) FMdesign should betailored to support the mainstreaming of project management to the MAVDT, and the Ministry's financial management capacity i s crucial since no specific project implementation unit will be established; (ii) principalFMriskofweakMinistryFMcapacityhasbeenmitigatedbyinvolvingthe the "Fondo Nacional de Desarrollo" (FONADE) as an intermediary in the disbursement process to make payments to project providers and contractors and by providing financial management support based on implementation agreements-. FONADE i s a government development fund which will provide technical and administrative support to the project. It i s critical that the MAVDT's financial management and procurement teams be completed and strengthened soon since the Ministry will be responsible for the preparation of project consolidated financial management statements and supervision of FONADE's support. The financial management unit has employed an additional accountant to contribute to manage project financial affairs, but an additional accountant and disbursement specialist should be contracted for within the Ministry, which handles other projects in addition to those financed by the Bank. The financial management unit had employed an additional accountant to contribute to manage project financial affairs, and an additional disbursement specialist and an internal control specialist shouldbe contracted by the Ministry. MAVDT's main financial management responsibilities.The MAVDT, through the Financial Planningand Multilateral Programs Group, will be the Bank's direct counterpart responsible for financial managementissues. Its responsibilities include the preparation of consolidated financial statements and reports accordingly to "Resolucidn 380 (the national regulation regarding how projects should manage bookkeeping and financial reports in accordance with the Government's Public Financial Systems) or any modified version that might apply in the future; disbursement arrangements with the Bank and the government financial authorities; external audit arrangements; supervision of FONADE financial management and disbursement support at the locallevel; among others. FONADE's financial management main responsibilities. FONADE's support will allow DAPSBA and MAVDT to focus on their core competency, water sector policy and overall Program management, with FONADE playing a limited role in implementation and execution. 54 The Ministry will have full responsibility on policy and technical matters including overall financial management, procurement and project supervision. FONADEwill be responsible for all project payments directly to providers, contractors and staff based on compliance with the agreements signed with sub-national governments and the pace of subproject execution. While its role i s primarily to provide administrative services and information to MAVDT, FONADE may also provide some forms of financial management, disbursement and procurement support to the project. Staff from MAVDT would be overseeing and supervising the work of FONADE as regards financial management and procurement. An additional update of FONADE's financial management assessment was performed during preparation. FONADE's financial management assessment showed that the institution i s capable of managing project execution and supporting the MAVDT's fiduciary efforts with low risk. Nevertheless, the Project represents new challenges to FONADE, and in the case that strengthening of its institutional capacity of FANDEi s required, FONADEwould be responsible for doing so with their own resources and such activities will be supported through regular Bank supervision. FZow of Funds and Infomation. A number of entities will be involved in project implementation, oversight, and financial management. For Component 1, all subproject expenditures will be made by FONADE for activities carried out at the municipal level, under MAVDT's centralized responsibility for financial management. MAVDT will be responsible for implementing all project components, and for preparing the information required by "Resoluciijn 380" (Financial Monitoring Reports). Bank Loan proceeds will be disbursed indollars to a special account at the Banco de la Repliblicu (Colombia's central bank). From this special account, funds will be converted into Colombian pesos and transferred to an account held by the Ministry in a public commercial bank (in pesos) for the MAVDT's accounting purposes and 100% of these funds will then flow to two bank accounts (in pesos), one managed by the MAVDT and the other by FONADE, for resources transferred by the MAVDT based on each institution's disbursement needs, both held in their respective commercial banks. These accounts will only beused for managing resourcesrelated to project implementation. Information Systems. The project will not require a new information system to be established: The DAPSBA has already acquired and information system, "Stone" which incorporates project accounting and complies with "Resolucio'n 380". Even though the Stone i s not linked with the national government's integrated financial management system (SIIF), it provides a comprehensive and integrated tool for project implementation and can work in parallel to the SIIF, with the possibility to effect automatic transfers of information to that system. Written Procedures. Project financial procedures will be documented in an Operational Manual, which will define the roles and responsibilities of all entities involvedin Project implementation. An advanced draft of this manual will be submitted to the Bank before loan negotiations and should include, among other financial procedures: (i)accounting policies and procedures, including basis of accounting and chart of accounts; (ii) the reporting requirements from the municipalities to FONADE; (iii) formats of the consolidated Financial Monitoring Reports for the program; (iv) internal controls including criteria and procedures for processing payments and transfers; (v) records management; and (vi) audit arrangements. 55 Financial Reporting. The MAVDT will prepare biannual Financial Monitoring Reports (FMRs) in accordance with Colombia's "Resolucio'n 380", which specifies accounting and report formats for all Bank-financed project^.'^ The preparation of these reports could rely heavily on the information provided by the municipalities, depending on how transfer will be finally structured, who will be managing most project funds, as well as handling most project (especially civil works) procurement and monitoring. The MAVDT will therefore need to agree on the format of reporting from the municipalities, so that it can prepare consolidated reports for project management and distribution to the various stakeholders, including national control entities and the Bank. Retroactive Financing. The Project would be eligible for retroactive financing of investments up to US$ 14 million for eligible expenditures incurred after the Appraisal of the Project. Audit. The financial statementsof the project will be audited annually by an auditor acceptable to the Bank. The project financial statements audits will be conducted in accordance with International Standards of Auditing (ISA) by an independent auditor and on terms of reference acceptable to the Bank. The F M S will clear annually the terms of reference, regardless of the terms of contracts concluded with the auditors (one year or several year contract). Inaddition, to ensure the proper use of subproject resources, a technical audit of 10% of subprojects will take place on annualbasis andbeused as partof project supervision and monitoring. Financial ManagementAction Plan. A FinancialManagement action plan has been agreed upon with the Government. The priority items are the strengthening of MAVDT's financial management groups andto finalize and document audit and internal reporting procedures. Disbursements New Eligibility Policy. The project incorporates the Bank's new policy on eligibility for Bank finan~ing.'~ This policy was approved by the Bank's Board of Directors on April 13, 2004. To implement the policy, the Country Financing Parameters for Colombia were approved by the LCR RegionalVice President inMay 2004. Table 1: Disbursement Categories DisbursementCategory I I - . %Bank Financing us$ Category 1-Infrastructureand MunicipalUtility Reformand 100% $ 61,900,000 Development 100% $6,900,000 Category3 -ProgramManagement, Benchmarking, Category 2 - Supervision andTechnical Assistance 100% $ 1,200,000 Monitoringand Evaluation Total $70,000,000 SpecialAccount and ExecutionAccounts. Resources will be transferred from the World Bank to a Ministry of Finance Special Account at the Government's Central Bank in dollars. The MAVDT will managean account inColombianpesosalso at the CentralBankinaccordance with the Operational Manual, Loan Agreement, and other Project documents. These funds will flow l4 the time ofappraisal, the Bank was involvedindiscussions with the government to revise Resolution At 380. The new rules/guidelines are expected to be in place prior to loan effectiveness, and thus will be a plicable to this project. `!See OP 6.00, Bank Financing. 56 through MAVDT's public commercial bank account (see Flow of Funds section above) to two execution accounts, in pesos, one held by MAVDT and the other one by FONADE, for their respective components. While there i s no specific authorized allocation under report-based disbursements, the project will be expected to request only the amount required for planned cash needs for a six month period, which may be requestedwith the FMR submission or subsequent to it. Disbursement Mechanisms and Documentation. The MAVDT i s eligible to use the report-based disbursement system. Additional efforts will be made during project implementationto strengthen the financial management institutional capacity of the MAVDT and, as appropriate, FONADE. The Bank will disburse to the Government based on report-based disbursement requests sent by the DAPSBAMAVDT. The following describes the disbursement approach for the main activities: 0 For the water and sewerage and wastewater treatment and management municipal or departmental subproiects, Bank financing will be based on a six month financial management plan including expected disbursements by FONADE for the subprojects of the participating municipalities and departments. Once the "convenio" i s signed it will establish the full amount of the agreement commitments and the way payments will be made, e.g. based on deliverables. In each FMR, the estimated cash amount required from the loan account for the period from the reporting date (e.g. March 31) through the following 6 months period (e.g. April 1 - September 30) would be calculated in a forecast. The government would be able to request a disbursement up to this amount, and after review by the Bank's task team and the Loan Department, the Bank would advance the approved amount to the special account and then through a transitory account in the name of MAVDT inthe Central Bank, to be converted into Colombian pesos to allow for accounting and budgetary registration in the country's integrated FM system (SIIF), and then transferred to MAVDT's account in a public commercial bank (in pesos) for accounting purposes, and 100% of these funds would then flow to two execution bank accounts (in pesos), one managed by the MAVDT and the other by FONADE, according to each institution's disbursement needs. FONADE's resources will be transferred by the MAVDT to make payments from FONADE's execution bank account in pesos to the relevant providers or contractors. The Bank loan will finance 100% of the grant component of subprojects, including taxes, which are eligible for financing under the Bank`s Country Financing Parameters for Colombia. Sub-national governments' contributions to subprojects will be financed on a parallel basis by participating communities. 0 For proiect management activities, disbursements will follow report-based disbursement Bank procedures. Consultants and providers will be paid either from MAVDT's execution account in pesos. The more detailed mechanisms to be used to request payments and provide support documentation, between FONADE, the Ministry,and the Bank will be the following: Step 1 Disbursement based on forecast: MAVDT, based on information from FONADEand - other sources, presents a forecast of cash needs for the next 6 months, within the FMR. The Bank disburses inUS dollars. 57 Step 2 - Funds arrive at FONADE: After passing through the Special Account in the Central Bank and the MAVDT execution bank account in a public commercial bank, the MAVDT will transfer resources to FONADE's execution bank account ina commercial bank. Step 3 - Reporting of Expenditures: Within the same FMR in which the cash needs are projected, the MAVDT reports expenditures in the Sources and Uses of Funds statement and other FMR reports. These statements report the expenditures made by FONADEbased on their reporting to the Ministry, consistent with the main components and activities of the project (e.g. by type of subproject). This will be supported by a "desglose de pagos por convenio" i.e. a list of total payments made under each component/ disbursement category for each subproject, in a table which could include other information like total expected subproject cost, amounts pending (equal to total cost minuspayments to date), convenio number, etc. This schedule will therefore have one line for each city, separated into "completed projects" and "projects under execution." The schedule should be provided after the appropriate FMR summary report; probably as Report R-2. This report will be used as a justification of expenditures made by FONADE during the period and will facilitate the review of expenditures with the original supporting documentation when needed by the Bank or external auditors. For the Bank's loan accounting purposes, the FMR reports would include a report which shows total expenditures (payments made by FONADEplus other payments, if any) bv disbursement cateaorv, multiplied by the appropriate disbursement percentage. Step 4 ReportingbetweenFONADE and MAVDT - 0 The MAVDT proceeds to assess completion of technical requirements and verifies that contracts and agreements conditions were fulfilled and provides FONADE with the requiredclearance; 0 FONADE prepares the payment arrangements directly to providers or contractors and will inform sub-national governments that the payment process has been completed. 0 FMRs and disbursement documentation will be prepared by MAVDT based on consolidated information providedby FONADEandthe Ministry itself. The Bank will monitor funds flow processes, especially to ensure that funds do not sit in the transitory accounts for more than 2 businessdays. Report-Based Disbursements. As explained above, loan withdrawal applications will be supported by financial monitoring reports. The loan agreement will allow for traditional disbursements (via SOEs) shouldproblems arise with the report-based modality. 58 ACTIVITIES FINALPRODUCT RESPONSTBLE COMPLETIONDATE The MAVDT financial 0MAVDT has hired one MAVDTFMGroup Effectiveness management group disbursement specialist strengthening is required responsible to work for World Bank projects. *The information system i s implemented and operating properly. Staff received the required training. The Operational The operational manual FM MAVDTFMGroup Effectiveness Manual, Financial component is completed and Management component includes all new inplace arrangements and procedures for the implementation of the financial information system The MAVDT Internal 0 MAVDT hired one internal MAVDTFMGroup Effectiveness control systems inplace control specialist responsible to work for World Bank projects. *The MAVDT internal control system has been completed and integrated into the project operational manual 59 Annex 8: Procurement COLOMBIA: Water andSanitationSector SupportProject General. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category are described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutionalcapacity. ProcurementofWorks Civil Works contracts procuredunder this project, would include: infrastructure and other related works. The procurement will be done usingthe Bank's Standard BiddingDocuments (SBD) for all International Competitive Biddingand National SBD agreed in advance with the Bank when applying NationalCompetitive Bidding(NCB) procedures. Procurement of eligible civil works contracts, financed fully or partially by the Bank, and estimated to cost US$5,000,000 (equivalent) or above per contract, should be procured following International Competitive Bidding (ICB). Civil works contracts estimated to cost between US $5,000,000 and US $50,000 equivalent should be procuredthrough National Competitive Bidding (NCB) procedures. Small civil works contracts estimated to cost less than US $50,000 equivalent per contract, may be procured via shopping under lump-sum, fixed-price contracts awarded on the basis of quotations obtained from at least three qualified domestic contractors in response to a written invitation. The invitation shall include a detailed description of the works, including basic specifications, the required completion date, a basic form of agreement acceptable to the Bank, and relevant drawings, where applicable. The award shall be made to the contractor who offers the lowest price quotation for the required work, and who has the experience and resources to complete the contract successfully. Contract not financed fully or partially under the loan may be procured following the local law procedures. Procurementof Goods Goods contracts to be procured under this project would include construction materials; lab equipment and other equipment for water sector operation (such as water pumps, water meters pipes, etc.); computers, software and office equipment. Goods contracts estimated to cost US $250,000 and up will be procured under International Competitive Biddingprocedures usingBank Standard BiddingDocuments; contracts estimated to cost more than US $50,000 equivalent but less than U S $250,000 equivalent, may be procured usingNationalCompetitive Bidding(NCB) procedures. The procurement will be done using Bank's Standard Bidding Documents for all ICB and National Standard Bidding Documents agreed with the Bank. Under NCB, all the following 60 special provisions agreed with the Colombian Government for procurement under Bank-financed loans, grants and credits will apply: (a) All bidders, irrespective of whether they are foreigners or Colombians, will be treated equally and, particularly, no preference will be granted to any bidder or group of bidders for bid evaluation purposes. Bidders shall be allowed to submit their bids by hand or through the post office or private mailing services. There shall not be any requirement for any bidder to show evidence of the bidder's registration in any public registry, chamber of commerce or similar entity, whether in Colombia or elsewhere, or to appoint a representative domiciled in Colombia, unless and until such bidder i s awarded the corresponding contract. (b) Bids shall be opened in a public meeting to which bidders and their representatives shall be allowed to attend if they so wish. Date, time and place for the opening meeting shall be set forth in the biddingdocuments. Bid opening shall coincide with, or take place promptly after, the final date and time of the period for bid submission stipulated inthe biddingdocuments. (c) Eachbid shall be evaluated andthe corresponding contract awarded to the responsive bidder who meets appropriate technical and financial standards of capability and whose bid has been determined to be the lowest evaluated bid. Such determination shall be made exclusively on the basis of the specifications, conditions and evaluation criteria stipulated in the biddingdocuments. If any factor additional to the amount or amounts of each bid i s to be considered in bid evaluation, such factor or factors and the quantified manner on which they will be applied for purposes of determining the lowest evaluated bid shall be precisely stipulated in the bidding documents. For purposes of bid evaluation and comparison, the only bid amount or amounts to be used as a factor shall be the bid amount or amounts as quoted in the corresponding bid, includingcorrectionof arithmetic errors. (d) The provisions of paragraph 2.46 of the Guidelines shall fully apply and, more specifically, bids shall not be disclosed to persons other than the persons officially charged with the task of comparing and/or evaluating the bids while they are performing their official duties, without the corresponding bidder's written authorization. Moreover, bidders shall not be required to provide such authorization as a condition to be entitled to bid. This confidentiality requirement shall apply until the award of contract i s notified to the successful bidder. Thereafter, confidentiality of the bids shall be limited to those bid portions for which confidentiality has been specifically requestedby the bidder inquestion. Contracts for goods which cannot be grouped into larger bidding packages and estimated to cost less than US$50,000 per contract may be procured using shopping (Nationalhtemational) procedures basedon a model request for quotations satisfactory to the Bank Selectionof Consultants Firms.Consultants contracts with firms will include support and other studies; works design and supervision; training services and workshops; and specialized technical expertise. Short lists of consultants for services estimated to cost less than $350,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 61 Most contracts for firms are expected to be procured using Quality and Cost Based Selection Method (QCBS). Consultant assignments of specific types as agreed previously with the Bank in the Procurement Plan may be procured with the use of the following selection methods: (i) Selection under a Fixed Budget (SFB), for works supervision contracts; (ii) Selection Based on Consultants' Qualifications (CQS), for contracts estimated to cost below U S $200,000 equivalent); and, exceptionally, (iii)Single Source Selection (SSS), under the circumstances explained inparagraph 3.9 of the Consultants' Guidelines. Individuals. Individualconsultants will be hiredto provide technical advisory and project support services and selected inaccordanceto Section V of the Guidelines. OperatingCosts Operational costs will include reasonable expenditures to carry out the project such as travel and per diem costs for official project staff and personnel commissioned under the project; rentals; utilities; project vehicle fuel; communications (including Internet connectivity); maintenance of facilities, equipment and vehicles; consumable materials and supplies; and logistics and project support services. Assessmentof the involvedagencies'capacityto implement procurement Project Management Arrangements. The Project will be implemented by the MAVDT, particularly through MAVDT's DAPSBA, with local execution by water companies in coordination with municipal mayors and independent supervisory consultants. Any procurement process financed under the Loan (whether they are subject to Bank's prior review or not) will have to be reviewed by DAPSBA (bidding documentshequest for proposals, evaluation report and winning bidproposal), to be considered eligible for financing. DAPSBA will complete its high-capacity core staff with consultants experienced in Bank-funded procurement that will be involved inthe internal procurement review process. Procurement assessment of the imulementation agency. A Procurement Capacity Assessment of the implementation agency responsible for procurement was madeby the PAS (JosB M.Martinez) duringthe August 2004 mission (updated October 2004). Based on the fact that currently DAPSBA has core procurement and other staff experienced in procurement under Bank Guidelines, the overall Programrisk for procurement i s currently coded as AVERAGE. This assessment, based on the above assumption, and also on the assumption that our Guidelines will be the ones to be applied in program procurement activities, can be revised and upgraded on an as-neededbasis. Specific issues about increasing DAPSBA's capacity to manage procurement activities were discussed with DAPSBA staff in charge of the future project implementation activities. During Appraisal, a draft procurement plan including Bank-funded contracts for civil works, goods and consulting services for the first 12 months of project implementation was reviewed, as was the existing monitoring and control system of procurement activities. During implementation, the filing of procurement documentation will be fully consistent with Bank requirements, and relevant staff to be involved inprocurement activities funded by the Loan will receive training on the new 2004 Guidelines prior to LoanEffectiveness. 62 Procurement Plan. The Borrower, at appraisal, developed a General Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on November 19, 2004 and i s available at the MAVDT. It will also be available in the Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Consistent with new Bank policies, all procurement related information would be included in the Procurement Plan and the Loan Agreement would make reference to the Procurement Plan. Procurement Plans for Participating Municipalities/Cities where the contract amounts are expected to reach not less than US $1 million annually will be reflected in the Procurement Schedule of the Loan Agreement. Frequency of Procurement Supervision. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended 1 supervision missions annually to visit the field to carry out procurement consultation and post review of procurement actions. Prior Review All ICB Contracts estimated to cost US$ 5,000,000 equivalent and above for works and US $250,000 equivalent and above per contract for goods and non-consultingservices, and all direct contracting for goods and non-consulting services will be subject to prior review by the Bank. Selection of consultants (firms) for assignmentsestimated to cost above US $200,000 equivalent, and any single source contract will be subject to prior review by the Bank. Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US $350,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of Paragraph 2.7 of the Consultant Guidelines. Contracts with individual consultants estimated to cost US$ 50,000 equivalent and above will be subject to the Bank's prior review. Prior review will also be required for the first NCB contract and first shopping contract financed under the loan. 63 Annex 9: Economic and Financial Analysis COLOMBIA:Water and SanitationSector Support Project Economic Analvsis A cost benefit analysis was conducted based on a selection of sample subprojects which were subjected to financial, economic and distributive analyses.To determine the net incrementalcosts and benefits, "with" and "without" project scenarios were constructed. The "with" project situation assumed that all targets expected with the investment subproject would be met. The "without" project situation assumed that the performance and indicators of the utility would remain unchanged. On the basis of these scenarios, the incrementalfinancial benefits and costs of the proposed investment programs were assessed. The stream of financial flows was then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flows of costs and benefits. The study consisted of financial, economic, distributive, sensitive and risk analyses. A similar methodology will be applied to municipalities interested in participating in the Project to establish subproject eligibility in terms of economic feasibility. Only economically viable municipal project will be eligible for Programfinancing. Sampleselection For the purposes of economic analysis, five projects were analyzed in detail. The sample included threeI6 projects located in rural areas and two located in urban areas. They were chosen as representative of water and sanitation problems inColombia as follows: Inv Costs Area Locality System Main Objectivesof theproject (thousand US$) Pto Carreno Water Supply To increasewater supply for current 108.30 Urban 1 customers Honda17 Water Supply To increasecoverage from 84% to 324.76 100% San Sebastian Water Supply To increasecoverage from 70% to 90% 120.39 Corregimiento Water Supply Source water and distribution 4 de Choco network 67.58 Corregimiento Water Supply Source water, treatment, and deSanRo ue distribution infrastructure 374.16 l6 An initial sample of subprojects as analyzed, and two rural projects were determined to be nonviable because of high investment costs. They were rejected and returned to local authorities for redesign. l7 The original subproject design envisaged a total investment of US$ 191,500 for source water works to bring water from the River Medina to the Municipality of Honda to address summer shortages and guarantee supply for future service expansion. Consequent redesign to include the Municipality o f Mariquita resulted in an increased subproject cost. The economic analysis results using the revised subproject costs are reflected in Table 3. The financial analysis was completed based on the original subproject design. 64 Scenarios To identify the incremental costs and benefits resulting from each project, "with" and "without" project scenarios were constructed. The "with" project scenario considered the proposed would continue unchanged - in other words, current performance, coverage, unaccounted for investment plan and its associatedtargets. The "without" project scenario considered the service water (UFW) levels and other operational indicators. Investments neededto keep these indicators unchanged are considered inthe flow of costs inthe "without" project scenario. Assumptions The primary source of data was the projects prepared by municipalities, and presented for approval to the MAVDT. Investment Costs include project preparation, physical contingencies and supervision. Both the "with" and "without" project scenarios included connection costs generated from population growth, but only the "with" project scenario included the connection costs generated from larger coverage, when applicable. The "with" project scenario also included all subproject costs plus replacement costs of meters and electromechanical equipment. There are some costs which are paid by customers and not by the utility, such as in-house connection. These costs were considered as economic costs. Operation and maintenance (O&M) included the cost of labor, chemicals, power, and all administrative costs. O&M costs for the "without" project scenario were based on current unit costs. O&M costs for the "with" project scenario included all the operating costs generated with the subproject and efficiency gains that are expectedto be achieved. Labor costs were calculated as the number of employees per 1,000 water connections (labor efficiency) times the number of connections times the average cost per employee. Chemicals and energy were calculated based on projected water production volumes and unit costs. Other costs were calculated as percentage of direct costs. The opportunity costs of raw water were assumedequal to zero. The implementation schedule of each project varies from 1to 3 years depending on the type of project. Coverageinthe "without" subproject situation remained constant. Inthe "with" project situation, it increased according to subproject targets. In all subprojects of the sample, the coverage is expected to increase when the subproject i s implemented, with the exception of Puerto Carreiio, where water coverage remains the same in both situations. The project in Puerto Cmeiio will improve water supply for current customers. Per capita water consumption i s calculated as the weighted average of the current consumptionof metered and non-metered households. In Puerto Carreiio the consumption per household month will increase from 24.2 m3/hh/month (without project situation) to 30.1 m3/hh/month (with project situation). In Honda the consumption will decrease from 23.2 m3/hh/month, to 21.7 m3/hh/month after the project is implemented. Water and Sewage billed for metered customers i s calculated as the volume of water billed times the tariffs for both services. For non-metered customers i s calculated as number of connections times the flat fee charged to these customers in each service. 65 Unaccountedfor water is defined as water not billed over water supplied is projected according to targets on the project. Incremental Costsand Benefits Costs and benefits associatedwith the "with" and "without" project scenarios are projected for 20 years, that is, during the implementation period and until the full impact of the projects i s obtained. The cash flows were discounted using a discount rate of 12 percent which i s estimated to be a proxy of Colombia's opportunity cost of capital. Benefits from the water supply projects include the reduction or elimination of intermittent water supplies, water quality improvements, and service coverage increases. Benefits from sewerage include a reduction of water pollution levels and service coverage increases. Economic Evaluation The economic viability is assessed measuring the flows of costs and benefits in shadow prices, which aggregates all benefits and costs to the entire economy. Under an economic perspective, benefits have been measured through willingness to pay measured using hedonic prices and revealed preferences methods. The flow of financial costs i s transformed into economic costs through the use of conversion factors and willingness to pay measured with hedonic prices, and revealed preference methods, and then discountingthese cash flows usinga discount rate of 12%. Estimation of Economic Costs The main costs considered include: (i)the incremental operation and maintenance costs and investment costs required to achieve the proposed targets; (ii) the costs of connection for water and sewerage services as additional costs to customers (this i s normally borne by customers and does not appear on utility financial statements); and (iii) transaction costs related to sector reform. For the estimation of economic costs, shadow prices were used to capture the effects to the economy of the use of goods and resources by the project. To convert market prices into shadow prices, conversion factors were used for the main inputs of the project: skilled and unskilled labor, domestic and imported inputs (pipes, equipment, and pumps) which are subject to different duties. Accordingly, both investment and operating costs were also classified in these categories.' Item ConversionFactor Labor Unskilled 0.680 Skilled 0.811 Domestic Inputs 0.870 Imported Inputs 0.756 Energy 1.ooo l8The conversion factors used in this analysis were calculated by Econometria , a Colombian consultant company, as part of the economic analysis for the Water Sector Reform Assistance Project in 2000The World Bank. See Project Appraisal Documentfor the Republic of Colombia for the Water Sector Reform AssistanceProject. 2001. Calculations of the conversion factors are availableinproject files of this Project. 66 Once all financial costs were converted into economic costs, incremental costs were calculated basedon the comparison of the "with" and "without" project scenarios. Estimation of EconomicBenefits The mainbenefits of the project include: (i) inwater and sewerage service coverage; (ii) increases reduction or elimination of rationing and intermittent water supplies; and (iii) reduction of water pollution levels. Economic benefits are assumed equal to the willingness to pay (WTP) for water supply and sewage disposal services. The WTP was estimated using two methodologies. For urban projects, a revealed preferencesmethodwas usedthrough the estimation of a water services demand function. For rural projects, it was calculated using a hedonic prices method through the estimation of property values. Revealed Preferences Method This method was used through the calculation of a demand function, which explains the relation between water consumption and a series of social and economic variables of the household, and some characteristics of the service supplied. The demand function was estimated using the "Quality of Life Survey" Encuesta de Calidad de Vida (ECV) completed by the Colombian Statistic Department (DANE) in 1997. The survey was done in 58 municipalities of the country and incorporated 2,469 households; the sample included different markets and with them different price structures, considerable group of socioeconomic characteristics, and other technical and environmental variables. The survey did not directly report volume consumed and its associate tariff, but the household monthly bill. Then consumption was estimated basedon 1997 tariffs. In the modeling process it was found significant differences in the mean and the variances of income, between municipalities under and above 1,000 meters above sea level. As a result, two demand functions were specified at a national level, one for municipalities located at an altitude of up to1,000 meters above sea level and one for municipalities located above the same attitude. Such a differention effectively incorporates a temperature variable into the model. Different dummy variables were introduced to correct the heterogeneity of the observations, obtaining homogeneity in consumption for each of the observational units (Atlantic, Central, Orinoquia, Pacific, Oriental regions, Antioquia, and Bogota). As a result the model presents significant coefficients for the dummies: Oriental region and Antioquia for the model for the cities above 1,000 meters. Bothfunctions were specified with constant elasticity. For municipalities below 1,000 meters altitude (1) C = e3959 NO27 y0,OS p0.26 (14.8024) (7.0985) (3.5479) (-6.8895) Where: C : Metered water consumption in m3permonth N : Household size Y : Disposable income, calculatedas the residual income after substracticting thefixed costsfor water and sewerage. P : Instrumental variable that represents the marginal price of the services, calculated as the arithmetic mean of the tariffs for the two highest blocks of consumption ( known as complementary and luxurious). 67 This specification was made through a sample of 989 households and the coefficients of all explanatory variables were significant at a 99% level of confidence (the values of t statistic of the coefficientes are shown in parenthesis), and no statistically significant collineality was present. For all other municipalities the following specification was obtained: (21.602) (10.845) (4.428) (-11.966) (-2.737) (-4.982) Where: C : Metered water consumption in m3per month N : Household size Y : Disposable income, calculated as the residual income after substracticting the fixed costs for water and sewerage. P : Instrumental variable that represents the marginal price of the services, calculated as the arithmetic mean of the tariss for the two highest blocks of consumption ( known as complementary and luxurious). eRegl:Dummy for the Oriental region, being (1)if the municipality is from the region and (0) if it is from another region. eReg2:Dummyfor theAntioquia department, being (I)if the municipality isfrom the region and (0) if it isfrom another region. This function was specified basedon a sample size of 1,480households and again all explanatory variables were significant at a 99% level of confidence (the values of the t statistic of the coefficients are shown inparentheses), andno statistically significant collineality was present. Estimating of economicbenefits using the demandfunction The demand function explains the relation between water consumption and a series of social and economic variables of the household, andcharacteristics of the service provided. In the "without" project situation, information about the characteristics of the service supplied (type, level, quantity, and quality) and its associated prices was provided in each municipality. Then usingthe tariff levels expected inthe case the project was not implemented (without project scenario) the consumptionlevel was estimated and projectedfor that scenario. Usingthe information from surveys applied in the project area (characteristics of the household, of the service supplied and its associated prices, and willingness to pay) the consumption levels from alternative sources are estimated for the households that will not have access to piped services if the project i s not implemented. Using the proposed tariffs under the project, the consumptionlevels for this group of consumers was estimated for the with project scenario. The economic benefits of the project for each household are represented by the area under the demand curve defined for the range between the consumption level "with" and "without" the project, and the resource savings if as a result of the project the consumers will substitute the use of more expensive sources. The analysis was made for three groups of consumers: (i) currently connected households and non-connected households that will have access to the service even if the project is not implemented; (ii) households that without project will not have access to a good quality service; and (iii)households that will not be connected, even if the project i s implemented. The first group will have economic benefits only if in the with project situation tariffs are expected to decrease (as a consequence of increase efficiency, for example), and will consume more at a lower price, or if without the project, rationing i s expected, so their 68 consumption will be reduced in that scenario. The second group will be the main beneficiary as it will be able to substitute alternative (more expensive) sources for reliable piped water and they will also be able to increase consumption. The third group will not have economic benefits nor costs to the project in either scenario. The size of the group was determined using the project design presented by the municipalities, as well as the household and population projection. The addition of the incremental benefits from each consumer group determines the gross benefit of the project. The estimation of economic benefits i s considered conservative as: (i) the quality of service for all sources of water supply was assumed similar, although it i s expected the service quality will improve and as a consequence consumption could increase; (ii) for the customers not connected to the system in the without project scenario, incremental benefits are explained by the reduction on the cost of the water, and not to the service quality; and (iii) although some estimation on impact on health were investigated using information available in the Ministry of Health, these were very difficult to quantify, thus conservatively were not included in the analysis. Other benefits such as possible impact to the local economy via increased industriaVtourism opportunities were also not included inthe analysis. Hedonic Prices Method With the hedonic models is possible to examine the contribution of different attributes to prices for ho~sing'~,including the contribution of environmental quality. Property values depend on physical attributes of the dwelling (such as number and size of rooms, access to water and sewerage networks, condition of the house). Since each house differs slightly from others, the influence of the various factors on its price can be broken down statistically, provide sufficient observations are available. Hedonic techniques allow the measurement of the effects that each attribute has on the property value, holding other factors constant. In essence, the technique estimates the implicit prices for various attributes, which together make up the sale price. These prices can be useddirectly to estimate the impact of marginal changes. A hedonic prices function was estimated using information from the "Quality of Life Survey" Encuestu de Culidud de Vidu (ECV) done by the Colombian Statistic Department (DANE) in 2003. The house lease was estimated as a function of the characteristics of the house (size, condition, location, and material), access to public services (water, sewerage, gas, telecommunications), quality of water service (water quality and continuity). The results concerning water and sewerage service are as follows2o: 0 Access to piped water: It is estimated as a function of number of days having the service. From one day of service to two days of service, the willingness to pay i s Col$ 3,865 (US$ 1.321) per household-month. From two days of service to three or more days with good service, the WTP i s Col $ 16,252 (US$5.5) per household-month. 0 Improvement in water quality. Especially better taste of water, the WTP i s Col$ 22,328 (US$ 7.6) per household-month. *'Thistechniquei l9 s also used for wage levels EconometriaConsultores. "Evaluacion Socioeconomicade ProyectosUrbanos y Rurales de Acueducto y Alcantarillado en Colombia". Junio 2004. Bogota, Colombia ''The exchange rate used was Col$2,930/US$ which was the averagerate inColombia during 2003 69 0 Access to sewerage network. Estimated as the difference between property value of dwelling with access to both services (water and sewerage) and the property value of houses with access to water service alone. The WTP i s Col$21,048 (US$7.2) per household-month. The value used for benefit calculation dependedon the project. For instance, if a project aims to improve continuity of the water supply, increasing continuity from one day to four days of permanent service, the WTP to be usedwould be US$6.8 per household per month (US$ 1.3 plus US$5.5). Results of the economic analysis The results of the economic analysis show that all projects are economically feasible and so they will have a positive impact in the economy. One subproject analyzed, the construction of a sewerage collector in Los Patios, did not have significant quantifiable economic benefits and was returned to the technical consultants for further design modifications. The Los Patios investment includedthe collection of currently dispersed discharged wastewater to a single point, the site of a planned future wastewater treatment facility. While the investment has some incremental economic benefits due to increased land values in the populated areas where wastewater i s currently discharged within the city, the important benefits would only accrue with the construction of the treatment facility, financing for which was not included in the assignation of resources from the Audiencias Pliblicas. During implementation, the subproject will be redesigned to either (a) include financing for wastewater treatment or (b) to reassign resources for a more economically viable system investment. Initial analysis of two other rural projects (Salgar and Nocaima) during preparation revealed generally negative NPVs, primarily as a result of high unit costs of initial designs, reflecting a known tendency to overdesign and overdimension small investments. These subprojects were deemed to be not viable (consistent with the Ventanilla Unica methodology) and have been returned to local authorities for redesign. The Ventanilla Unica utilizes a simplififed economic analysis for small investments based on unit costs, which were calculated during preparation22. Table 4 identifies unit costs to be utilized for evaluation of small investments. 22 More details on unit costs are in the project files. The results of the study done for the Ministry are shown in: Pablo Roda. Estimacion de lndicadores Economicos a partir de 10s Criterios de Elegibilidad,en 10s Proyectosde Acueducto y Alcantarillado que Cursanpor Ventanilla Unica. Julio 2004. 70 Table 4: Maximum Unit Cost per Connectionfor Small investment^^^ Project Type Location and Population Costper connection flJ.T.R/mnn 1 I - Metropolitan Area 81.0 UrbanAreas with more than 100,000 78.8 inhabitants I UrbanAreas with more than 70,000 Water Treatment Plant inhabitantsbut less than 100,000 76.5 inhabitants UrbanAreas with less than 70,000 74.3 inhabitants Other Areas 74.3 Water System (include WTP d Metro olitan Areas 594.0 Other Lrban Areas 600.8 pipes) Rural Areas 675.0 Sewerage Coverage (sewage Metropolitan Areas 810.0 collection) Other Urban Areas 675.0 Rural Areas 450.0 Sewage Treatment Plant Areas with more than 250,000 inhabitants 585.0 Areas with less than 250,000 inhabitants 135.O FinancialAnalysis Obiective. A financial analysis of a sample of utilities was undertaken to (a) determine the eligibility level of the utilities today, inorder to identify additional actions which needto be taken by the utilities along with the approved project and (b) to determine the utilities' performance in the future accordingto targets set with the project. Methodolorrv. During project preparation, a detailed analysis of a sample of three utilities was carried out regarding the specific subprojects and financial targets to be reached. The assessment included: 0 Analysis of the financial status inthe last two years 0 Determination of eligibility level today 0 Preparation of financial projections (base scenario) 0 Sensitivity analysis The sample of utilities analyzed consisted of : SEPPCA (Puerto Carreiio); EMPREHON(Honda); y EMPATIOS(Los Patios). The main characteristics of the tree utilities analyzed are presented in Table 5. Table 5: Main Characteristi 1 1 i:g1 Utility Name Municipality IDepartment Operator I Sewerage coverage ~ SEPPCA PuertoCarreiio Vichada Private 11,065 84% 93,389 EMPREHON Honday I Mariquita Tolina Public 51,038 73% 5; 572,299 LosPatios I Santander I Public 57.852 84% 65% 453,175 23Resultsare preliminary and will be finalized and reconfirmed during Appraisal. 71 Financial situation of the three utilities in the last two vears. The performance of the utilities varies. Puerto Carreiio, which has been operated by a private operator since 2002, shows better financial and operating indicators than either Honda or Los Patios which are municipally operated. As Table 6 shows, Puerto Carreiio has a billing collection rate close to 80%, unaccounted for water of 38%, accounts receivable of 60 days, and meters 87% of consumers. Other indicators are less positive - total liabilities are almost twice the equity, however 70% of total debt corresponds to shareholders' loan and monies received in advance to operate the service. On the other hand, Honda and Los Patios show generally poor results, a function of political intervention and inadequate management capacity. In both locales, the continuity of service i s less than 10 hours per day, unaccounted for water higher than 45%, and accounts receivable greater than 5 months of billing. lities in the Sal de, 2003 Honda Los Patios Puerto Carreno Financial Indicators BillingCollectionrate n.a 50% 79% Account receivables comparator (months) 5.6 13.3 2.0 Income/Operatingcosts (including depreciation) 67% 162% 169% OperatingIncome 1.48 0.62 0.59 Working ratio 1.44 0.45 0.58 Current ratio 1.23 6.64 4.75 Debt Indicators Total Liabilities/Equity 2.0 0.07 1.98 Total LiabilitiedAssets 0.67 0.06 0.66 Total LiabilitiedOperatingIncome 1.19 0.24 1.43 Current Liabilities/Total Liabilities 0.56 0.74 30% Current liabilities/Assets 0.38 5% 20% Accounts Payable to Employees/Operating Income 16% 1% 3% I Operating Indicators Metering n.a 78% 87% Unaccounted for water (%) 67% 45% 38% Labor Efficiency n.a 4.4 9.1 Personnel cosdoperatingcost n.a 90% 60% Continuity of service (hours) n.a 10 n.d Water Coverage (%) 73% 84% 84% SewerageCoverage (%) 57% 65% 6% Honda and Los Patios have severe commercial and operational inefficiencies, which directly affect cash shortage. In Los Patios, for instance, tariffs are higher than operating costs but the company does not exercise sufficient effort to collect bills and punishcustomers who do not pay. As a result, the percentage of bill collection is close to 50% and accounts receivable is greater than a full year of billing.InHondathe situationis similar -though tariffs are, infact, lower than operating costs. High Personnel Costs. For all the utilities of the sample, the ratio of personnel costs to operating costs i s greater than 60% and the number of employees per thousand connections i s greater than 72 4. In the case of Honda, the ratio of debt to number employees is high; this liability corresponds to 16% of operating income. Throughout Colombia, debt has been an entry barrier of private operators. Continuity of Service. There i s no continuity in the water supplied. The number of hours of service varies among utilities, but all of them show some kind of shortage. This situation i s obviously a function of high losses - given the fact that some utilities have losses of more than half of water produced. Eligibility Criteria. The financial analysis of current situation show important differences in management capacity and quality of service provided. Some companies need to implement a reform program in management basics; others are in a more advanced level and need to invest in operational improvement; while others can carry out investment programs without any additional reform. As a result, the operation seeks to link subproject financing to additional institutional reform programs consistent with the level of development of the utlity. Three levels will be defined according to (a) billing collection rate, or accounts receivable comparator (depending on available information) and (b) the ratio of operating income to operating costs. The variables are defined as follows: BillingCollection Rate: CI BI Accounts Receivable Comparator: ( 3 x 1 2 Operating Income to Operating costs: - oc BI where: AR is Accounts Receivable BIis BilledIncome C Ii s Collected Income from operation BIis BilledIncome for operation OC is Operating Costs (including depreciation and provisions) The values of the selected indicators will be taken from the financial statements of the previous year and the classification will be accordingto the financial allocation criteria outlined Table 7. In the casethat no information is available, the utility will be classifiedinlevel 1 Indicador Level I Level 2 Level 3 Billing Collection Rate or e 50% 2 50% 2 70% Accounts Receivable Comparator (months) > 6 1 6 1 4 Ratio of Operating Income to Operating c 0.8 2 0.8 2 1 costs The utility will be classified takingas a reference the indicator with the poorest results. That is, if the values are ranked in two different levels, the utility will be allocated in the lower level. 73 Consistent with this classification, some additional institutional strengthening will be defined and implementedalong with the subproject, as follows: (i)For utilities classified as Level 1, the lowest development stage in which the management capacity of the utility i s at a bare minimum, it i s likely that the utility has not even complied with current regulation. The companies in this level will implement targeted reform programs to strengthen the management capacity to be eligible to finance the approved investment project. (ii) Level2utilities,whicharelikelytocomplywithsomebutnotallthecurrent For regulation, additional effort will be madeto improve operational indicators, which will be implemented along with the approved investment project. (iii) 3utilitieswillnotberequiredtoundertakeinstitutionaldevelopmentactivities Level inorder to receive subproject financing; the subproject will befinanced as it is approved. The framework for allocating the utilities in their corresponding level and the procedure for investment and supervising the project is presentedinTable 8. I Development Table 8: Institutional DevelopmentLevels,InvestmentFinancing, and Monitoring Indicators I Level Investment Components Monitoring Indicators Reform program Indicators defined inthe reformprogram Level 1 Approved Investment 0 Targets to be reached with the approved Project project Operational 0 Indicators defined inthe operational Level 2 Strengthening strengthening program Approved investment Targets to be reached with the approved Proiect moiect Level 3 Approved investment Targets to be reached with the approved Project project Monitoring Indicators. Monitoring indicators will be defined for each utility according to the development level in which i s classified and the investment programs to be implemented and will be codified inthe ConveniodeApoyo Financiero. MonitoringIndicators for each level include: Level 1: 0 Billing collectionimprovement 0 Cost recoveringimprovement 0 Decreaseof current liabilities 0 Improvement inbilling procedures 0 Targets to be reached with the approved investment project Level 2: 0 Metering improvement both incoverage and efficiency 0 Unaccounted for water, 0 Labor efficiency, 0 Billingprocedures improvement 0 Targets to be reached with the approved investment project 74 Level 3: 0 Targets to bereachedwith the approved investment project Following Stages. A municipality selected in Phase 1 will be eligible for continued financing under the Programcontingent on its satisfactory performance. Application of the Utilities of the Sample in their respective level. Applying the methodology to the utilities of the sample, Honda and Los Patios would be classified in Level 1, while Puerto Carreiio would be considered Level 3. Indicator Honda Los Patios Puerto Carreiio Billing collection rate (%) n.d 50% 79% Accounts Receivable Comparator (months) 5.3 13.3 2.0 Ratio Operating Income to Operating costs 0.67 1.6 1.7 Eligibility Level 1 1 3 As a result, Puerto Carreiio could start the investment project once it is approved while both Honda and Los Patios would enter into the Government's program for institutional reform in conjunction with the approved project. Financial Projections (Base Case) Based on the historical data and 2004 estimates, financial projections were prepared for the three utilities for years 2004-2010. The projections were prepared on a conservative estimate considering only the benefits which stem directly from the investment programs. The base case scenario does not include additional performance improvements. The financial projections and financial ratios are presentedbelow. Main Assumptions. The main assumptions for the financial projections are summarized below. 75 ps Domestic Inflation 2004: 5.5%; 2005: 4.5%; 2006: 3.5%; 2007 and thereafter 3.0% Revenue: Maintain current level in Colombia Pesos (inflation adjusted) Volume billed Based on last year consumption per connection Personnel Costs: 0 Number of Employees Calculated basedon labor efficiency indicator e Salary per Employee Maintain current level in Colombia Pesos (inflation adjusted) Operation and Maintenance Costs: Unit cost of electricity Based on last year data. 0 Unit cost of chemical Basedon last year data. materials Water Production Volume Based on estimated demand and water losses Income Tax 25 % on net income InvestmentPrograms Based on approved subproject (see below) Debt Financing As estimated bv utilities The investment project, the financing plan, and the targets included in the financial projections reached are outlined inTable 11. Table II:SubprojectInvestw nt Details Puerto Carreno Honda L O S F tios US$ % Ticpi- US$ % Investmentand Financing Plan Investment 438,876 100% 163,697 100% 234,427 100% Transfers (Law 715) 311,139 71% 0% 225,608 96% Transfer National Government 108,302 25% 163,697 100% 8,819 4% Internal Cashflow 19,435 4% 0% 0% Targetswith investment I I v project 2003 2010 Water Coverage 84% 84% Sewerage Coverage 6% 20% 47% I 47% 65% 65% Others Improve quality Improve quality of water service of water service SensitivityAnalysis A sensitivity analysis was conducted to assess the impact of changes in utilities' operational performance. As explained above, the base case scenario does not include additional performance improvements beyond those to be reached with the subproject. The sensitivity analysis shows the benefits if there are some gradual improvements in efficiency. This analysis will help to design the reform programfor utilities in Level 1or the operational strengthen plan for utilities in Level 2. 76 The variables chosen for this analysis are: operating costs, bill collection rate, labor efficiency, and unaccountedfor water. The impact is measuredon additional cash available duringthe period 2004-2009, net income at 2010, and 2010 levels of the financial indicators selectedfor eligibility. Table 12. SelectedResults of the SensitivitvAnal is (US$) Operating Accounts Labor costs Receivable ej'iciency UFW -IO%p.a comparator improvement -I%p.a +I0%p.a +lo% n a Puerto Carreso (Additional subsidy required) or additional cash available 2004 - 2010 (US$) 18,013 9,508 19,352 3,000 Net Income 2010 (US$) 58,272 50,746 66,942 53,509 Accounts Receivable Comparator (months) 2010 2.3 1.2 2.3 2.3 Operating Income/Operatingcosts 2010 2.0 1.8 2.2 1.8 Honda (Additional subsidy required) or additional cash available 2004 - 2010 (US$) 291,635 109,146 n.a 239,383 Net Income 2010 (US$) 187,514 95,341 n.a 237,053 Accounts Receivable Comparator (months) 2010 5.6 3.0 n.a 5.6 OperatingIncome/Operatingcosts 2010 0.75 0.7 n.a 0.8 Los Patios (Additional subsidy required) or additional cash available 2004 - 2010 (US$) 76,964 216,800 87,615 3,769 Net Income 2010 (US$) 162,385 136,078 191,937 138,674 Accounts Receivable Comparator (months) 2010 13.3 7.1 13.3 13.3 OperatingIncome/Operating costs 2010 1.73 1.59 1.91 1.61 The most effective way to improve financial performance in Puerto Carreiio i s increasing labor efficiency and thus reducing personnel expenditures. Currently there is about 9 employees per 1,000 connections, and personnel costs account for 60% of operating costs; if there i s a 10% improvement per year, labor needs would be about 4 employees per year by 2010 and there would be additional cash of US$ 19 thousand in the period 2004-2010, which corresponds to two months of billing. InHonda, the most effective way to improve financial performance is by decreasing operating costs, which are higher than operating income by some 48%. With a 10% decrease per year, there will be additional cash of US$ 291 thousand in the period 2004-2010, which i s almost twice the total investment to be financed by the Government. 77 InLos Patios, the variable with most impact on financial performance is bill collection rate. With 10%improvement per year there would be additionalcash of US$218 thousand, which equals to 92% of total investment. This improvement would mean an improvement of 5 months of billing collection period. 78 m 3 b h i : c 4 u, b 1 2% 3 9 $3 c, 3 3 3 W 3 W N 2 2: 3 d 3 ~. 3 W 1 % z W W d- 62 c, r I r W Z I 2 0" 3 00 I 3 Q Q\ 3 I 2 xted Resu i: Puerto C rreiio 2004 r010(US$) OP Cashflow Cash Accounts Income/ from flow after Netprofit Additional receivable op costs operations Subsidies 2010 Cash 2010 2010 Base Case (255,805) 163,636 178,970 2.3 1.9 Upside Operating Costs -10% (237,792) 181,649 58,276 18,013 2.3 2.0 BillingCollection improvement +10% (246,297) 173,144 50,746 9,508 1.2 1.8 Labor efficiency improvement +10% (236,453) 182,988 66,942 19,352 2.3 2.2 Unaccountedfor water (-1% 1 pa) (252,805) 166,636 53,509 3,000 2.3 1.8 Table 18: SensitivityAnaly: i Selected Results: Hol; a 2004-2010 (US$) I I Cashflow Cash I from flow after Netprofit operations Subsidies 2010 Base Case 211,990 375,687 95,341 Upside Operating Costs -10% 503,626 667,323 187,514 291,635 5.6 0.7 BillingCollection improvement +10% 321,137 484,834 95,341 109,146 3.0 0.7 A- Labor efficiency improvement +lo% n.a Unaccountedfor water (-1% n.a pa) 451,374 615,070 237,053 239,383 II 5.6 I1 0.8 Table 19: Sensii iity Analysis ;elected Rc ults: Los Patios 2004-2010 (US$) OP Cashflow Cash I Accounts Income/ from flow after receivable o p costs operations Subsidies 2010 2010 Base Case 207,276 441,703 136,078 13.3 1.59 Upside OperatingCosts -10% 284,240 518,667 13.3 1.73 BillingCollection improvement +10% 424,075 658,502 7.1 1.59 Labor efficiency improvement +lo% 294391 529,318 13.3 1.91 Unaccounted for water (-1% 211,044 445,472 13.3 1.61 84 Annex 10: Safeguard Policy Issues COLOMBIA: Water and Sanitation Sector Support Project Background The project's key safeguard policy issues relate to the possible impacts of the civil works to be constructed by the municipalities, and the related and water intake and wastewater disposal investments. Specifically, the Project's safeguard-relatedprocedures must ensure that subprojects comply with national environmental laws and regulations as well as Bank environmental and social safeguard policies, that any cumulative impacts are addressed, that environmental and social impacts are managed through application of appropriate guidelines, that appropriate oversight mechanisms are established, that project benefits are extended in a culturally appropriate manner to indigenous populations who live within the areas (if required), that any land acquisition and resettlement of people is done in an acceptable manner, and that adequate procedures are in place for the protectionof cultural property. These issues are addressedthrough an Environmental Framework, an Indigenous Development Framework and a Resettlement Framework, each of which i s outlined below. At the time of Appraisal, a sample of representative subprojects i s known, but the totality of subprojects will evolve during implementation. When the situation exists where details of subprojects to be financed are not known at the time of Appraisal, Frameworks are developed to ensure compliance with national laws and Bank policies. The objectives and content of these frameworks i s described in general below, and in detail in separate annexes. The Project aims to improve the provision of water supply and sanitation services in Colombia in a financially efficient and sustainable manner through the provision of capital investment subsidies for poverty-focused coverage expansion and service quality improvement. The Project will (a) scale-up the involvement of the private sector in medium-size cities through the introduction of performance-based management arrangements with specialized operators; (b) support poverty-focused investment through targeted capital subsidies in small, medium, and large urban areas; and (c) deliver appropriate water supply and sanitation investments in Colombia's underserved rural areas. The Project will be wholly implemented through the Ministry of Environment, Housing and Regional Development and municipal water companies locatedthroughout the country. Environmental Framework Inaccordancewith OP 4.01, anEnvironmentalAssessment was undertaken duringpreparationto identify the potential impacts associatedwith the types of subprojects envisioned for the Project, and to develop appropriate mitigation measuresto offset those impacts. Duringpreparation, the following analyses/studies were undertaken: (a) anupdate of the institutional and legal context of the existing water sector environmental assessment (originally completed in 2000); (b) diagnostic and environmental analysis of the solid waste management sector; (c) environmental analysis of rural water and sanitation; and, (d) a rapid environmentalassessment of all the subprojects expected to be included inthe Project, with in-depth analysis of a sample of subprojects. Results from the EA have been used inthe development of this environmental management framework. The main activity of the Project i s to support the construction and rehabilitation of water supply and sanitation infrastructure. These subprojects will be subject to the environmental procedures set forth below, including: 85 1. Environmental and social screeningof subprojects 2. Environmental Classification 3. Subproject Typology 4. Definitionof requiredenvironmental work 5. Developmentof Guidelines for GoodEnvironmental and Social Practices 6. Implementation of requiredenvironmental work 7. Subproject monitoring Additionally, so as to ensure adequate implementation of the environmental procedures outlined here, the project includes specific capacity building activities and institutional arrangements. These elements are described inthe following sections, and presentedinthe following flowchart. STEP2 TYPOLOGY - Bastdon miling,assignaubpmjst to uilc of following types: TYPE1 Nozddiuond euvuMlmentaiw soadwwk ~ -Bc nq- TYPEn. Addiuond measuresncdtobc includedintbe managm"gho TYPEHI. Funhereovironmmtalar socialassessmentwork Is reqU8quind 1 STEP4 -APPLY GOODPRACTICEGUIDELINES Chancefind procedures * Constructionguidehes . Operationalguidehnesfor wastewater treatmentplants * Sludgemanagementguidelmes Guidellnes for ciuzenparticipationin modermzauon STEP5 -IMPLEMENT GUIDELINESAND PLANS - STEP 6 -MONITORING AND SUPERVISION Implementallacuntiesinennronmntal andsocial Revlew classificauonsystemandnutigation measures Refineenwonmental andsocialscreeningand . managementplansandguidelines * evaluationprocedures Techcal assistanceto municipahues Momtonngandreponmgof mdxaton * Cumulativeimpacts Momtonngandreponmgof inQcaton AuQt 10%O SUbpIOJKtS f Environmental Screening of Subprojects SteD 1:Proiect Screening and TvDoloev The EA reviewed 106 subprojects which are thought to be representative of the types of subprojects that the project will finance. These were classified the types of civil works to be implemented, as enumerated in Table 1. The impacts of each type of project are distinct, but none presents a highenvironmental risk due to their size and the ability to mitigate most negative impacts by applying good design standards, as well as good construction and operation practices. No Category "A" projects, nor projects negatively affecting indigenous peoples24or requiring 24Some projects are to benefit indigenous people. At least 3 of the 106 identified are focused to solve potable water availability in indigenous areas; and 2 are designed to address sanitation needs. In Afro- Colombian areas (Department of Choco) one subproject is to solve potable water availability. 86 involuntary resettlement were identified in this initialproject screening. As the exact subprojects that will be financed are not yet known, inclusion of different subprojects, or more detailed screening and analysis of these 106 subprojects, might trigger either policy, therefore, Frameworks were produced to handle this eventuality. Table 1:PreliminaryEnvironmental ClassificationOf LikelySubprojects Subproject Type of Subprojects bnvironmental Classification Urbanwater supply 28 B Urban water sewerage 22 B Urbanwater supply and sewerage 6 B Urbansewerage with wastewater treatment dant 4 B All subprojects will be evaluated for their eligibility through a screening mechanism call the "Ventunillu Unicu." The Ventunillu Unicu enumerates the required technical, economic, environmental and social information and eligibility criteria, and the Project Operational Manual provides detailed guidance on the analysis process and frameworks. All subprojects are designed and proposed by the local authorities in collaboration with municipal water enterprises. Each subproject will be sent to DAPSBAfor their review and assessment against the criteria set out in the Ventunillu Unicu. DAPSBA will receive, as part of the technical and financial feasibility study, the relevant environmental and social data neededto screenthe project, including: 1. maps of project locationat various scales; 2. environmentaland social baseline data; 3. licenses; 4. permits; 5. concessions; and, 6. monitoring plans with indicators. Based on the completed information, DAPSBA will screen the proposed sub-project for its potential environmental and social impacts, compliance with national laws and norms, and compliance with Bank policies, using an environmental and social checklist (see Table 2, below). 87 Table 2: Draft Environmentaland Social Checklist es or No Comments Administrative Criteria Ifapplicable (based on Decree 1180of 2003), attach EnvironmentalLicense. When applicable, attach water concession (for diversion or capture) or, for disposal, the Discharge Permit (Permisode Vertimiento) - Are there other relevant permits or licenses? Which? Attach the certification of the responsible authority as regards locatiodconstruction permission as foreseen inthe Plan de Ordenamiento Territorial (POT) The independent supervisor (interventor) has certified that the subproject meets all obligations under the RAS 2000. The independent supervisor (interventor) has certified that the subproject meets all obligations under NSR 98,where applicable. Ifthesubproject requireslandacquisitionor use of rights of way, there i s legal evidence of landownership and/or permissionfor landuse by owners or a Resettlement Planhas been submitted. I Ifsubproject beneficiaries areindigenous peoples, there are indigenous peoples living in the are of the subproject's influence, or the construction of works will cross or impact an indigenous reserve, the Indigenous Peoples' Plan i s attached. The technical and financial obligations requiredby the Environmental License (through the PMA), Resettlement Plan, and Indigenous Peoples' Plan have beenprepared andhavebeenbudgeted inthe municipal budget. Monitoringand Evaluation Plan attached with acceptableindicators. I . Screeninv Criteria OperationalPolicies - OP 4.01 Will the subproject have significant If"Yes", acompleteEAandpriorreview by or unique environmental impacts? See OP the Bank 4.01 incontinuation, below. OP 4.01 Ifthe subproject will not have If"Yes", preparationof aEnvironmental significant impacts, will it have limited or site- Action Plan(EMP) which enumeratesthe specific impacts?See OP 4.01 incontinuation, obligations defined inthe concession and below. permissionandprior review by DAPSBA. 88 I lOP4.04 Does the subproject have the I hf "Yes", a complete EA and prior review by potentialto cause a significant change ina he Bank natural habitat or nationalimportance (directly or indirectly)? See OP 4.04 incontinuation, below. OP 7.50 Does the subproject appreciably If"Yes", alettermustbe sent to affected change downriver water quality of an governments, per OP 7.50. international waterway? OP4.37 I s any subproject located If"Yes", adamsafety assessment mightbe downstream o f large, existing dams? required, per OP 4.37. OP 4.10 Will indigenous peoples be affected Ifsignificant, completion of anIndigenous by the subproject? Ina significant way? Peoples' Planconsistent with framework. OP 4.11Are there known archaeological or If"Yes", consultations withthe Colombian historic sites or other areas of cultural Instituteof Archaeology and History (ICANH) patrimony inthe area of influence of the and the preparation of a planto address chance subproject? Is there are riskthat the subproject finds. will damage or destroy physical cultural property? OP4.12 I s there land acquisitionor If preparationofanabbreviated "Yes", acquisition of rights of way? Resettlement andLandAcquisition Action Plan consistent with relevant framework. OP4.01 I s the subproject area vulnerable to natural disasters (located in a flood zone, near a volcano, inan area of seismic activity, or on the coast and vulnerable to hurricanes)? I s there a risk that the subproject will modify levels of subterraneanwaters-by changing recharging patterns, pavement, or extraction? Could the subproject affect the quality of ground water? Could the subproject affect the quality of surface waters, rainwater discharge, or through solid waste disposal? Willthe project generateany hazardouswaste (such as sludge) which requires special handlingand disposal? Could the subproject affect the quantity of river, lake or catchment waters? I I Are there multiple users of the source of potable water or body of discharge? Are there watersheds inthe subproject area which require protection? Are there known land use or tenancy conflicts inthe subproject area? OP 4.04 89 )oes the subproject areainclude: protectedareas; areas with endangered species; areas with grasslands; wetlands; or other areas of biological importance? Step 2: Proiect Tv~oloev All subprojects will be classified according to a typology, defined based upon the nature and scope of the activity, the compliance with national law, triggering of Bank Safeguard policies, the adequacy of the environmental and social management plans, as well as the resulting environmental risk. Based on the screening, DAPSBAwill categorize projects as follows: Type I- No additional environmental or social work required. Screening does not reveal any issues not covered in permits, concessions, etc.; PMA (including monitoring indicators) i s adequate; all negative impacts can be mitigated by applying good practice guidelines. Type I1 - Additional environmental measures need to be included in the environmental management plan. Screening does not reveal any issues not covered in permits, concessions, etc.; but submitted PMA (or monitoringindicators) is inadequateand mustbe expanded. Type I11 Further environmental or social assessment work i s required. Screening revealed - environmental and/or social issues that need further analysis before the project can be accepted; Plans (environmental, resettlement and/or indigenous) needto be elaborated. For Type I1subprojects, the eligibility of the subproject will depend upon the submission of a revised Plan(s). For Type I11 subprojects, the results of the expanded environmental and social analyses will determine whether the subproject i s eligible for financing. For instance, if the subproject would negatively affect a critical natural habitat or indigenous community, it will not be considered for financing. Step 3: Define scope of additional environmental or social work (ifrewired) The following matrix presents the type and scope of environmental and social work necessary for each project category. The specific details for required work will be included in the environmental and social checklist for each subproject. At this stage, if resettlement, indigenous peoples, and/or cultural property are affected, DASPBA would enumerate the additional work required. 90 Table : Matrix of Environmental and Social Work for Eligible Subprojects Project Type Environmental andsocial work (DAPSBA and/or Municipality) Type 1 Apply managementplans developed by subproject. Apply good practice guidelines. Monitor at subproject initiation, duringimplementation, and upon completion. Specify what additional environmental measures needto be included inthe Type I1 Management Plan(s) to make it (them) eligible for financing. Review the revisedManagement Plan(s). Apply revised Management Plan(s). Apply good practice guidelines. Monitor at the beginning, and every six months up to completion Type 111 Specify terms of reference for the additional analyses. Review Management Plan(s). For any projects involving indigenous peoples, resettlement or significant environmental impacts, the analyses and plans must come to the Bank for prior review. Undertake public consultation activities consistent with the Bank's OP 4.0 1 Apply Management Plan(s). Apply good practice guidelines. Monitor at the beginning, and every other month up to completion. Step 4: Preparation of Good Practice Guidelines Each subproject will follow good practice environmental guidelines. Versions of these guidelines exist, and will be adapted to the Project by the environmental and social specialist in the PMU. Said guidelines were financed by the World Bank during the preparation and implementation of earlier operations and include the GuiasAmbientales para el Manejo de Obras de Acueducto y Alcantarrillado and are available through the MAVDT. The objective of these guidelines i s to ensure compliance with all Bank policies, and to define the best environmental practices for each type of expected subproject andor activity. These guidelines will build upon existing Government andor World Bank documents, and are included as part of the Operation Manual. Many of such guidelines were developed during the preparation of the ongoing Bank-financed operations in the water sector, including the Manual Ambiental de Construccio'n de Obrus de Acueducto y Alcunturilludo (from the Cartagena Water Supply, Sewerage and Environmental Management Project, CO-45070)and the Manual de Zmpacto Urbano (from the Water Sector Reform Assistance Project, CO-7077) and only need to be updatedladapted to this project. As of today, the EA identified five types of guidelines: Chancefind procedures - Law 397 (1997) linked cultural patrimony to the EL4 process in the country; Decree 833 (2002) detailed the regulations requiring that projects that require an environmental license must also consult with the Ministry of Culture on the possible existence of archeological areas in the project area, and, in the affirmative case, to develop protection plans and incorporation of any necessary restrictions and obligations within the environmental license. However, this requirement will not apply to most of the subprojects, as the subprojects do not require environmental licenses (due to their limited size and scope). Therefore, the Project will adapt the existing Good Practice Guidelines for screening of subproject locations and chance find procedures. Construction guidelines - The subprojects are small scale, but should follow good construction practices such as proper solid waste disposal, signage, traffic control, oilhazardous material 91 containment, revegetation, erosion control, etc. Again, these guidelines exist both in the Ministry and at the Bank; the Project will adapt them. Operational guidelines for wastewater treatment plants - Small wastewater treatment plants require careful monitoring to avoid any negative impacts on the surrounding water ways, groundwater, neighbors, odor management, and sludge disposal locations. Sludge management guidelines - Subprojects involving sewerage and treatment plants will involve sludge management. The sludge i s domestic, therefore not hazardous, but its proper management i s important to avoid negative impacts, including contamination of nearby waterways and land, odor control, etc. If the screening of subprojects indicates that the sludge mightbe hazardous (from industrial sources), consultation with the Bankenvironmental specialist will be required, as this might affect the environmental rating of the project. Cartilla Publicadapor Guide / Procedures for Cultural Property and Chance Finds: Instituto Colombian0 de Antropologia e Manual de ProcedimientosGeneralespara la Presewacidn Historia, ICANH del Patrimonio Arqueoldgico en 10s Proyectosde Impacto Ambiental BestPractices for Construction: (Guia de Manejo IDU Ambiental para el Desarrollo de Proyectos de (www.idu.gov.co/otros-serv/guia-mane Infraestructura Urbana en BogotaD.C.) jo-ambiental-htm) Pollution Preventionand Abatement Handbook World Bank Good practice guidelines for construction QAT -World Bank Step 5: ImplementEnvironmentalWork Subproject proponents are responsible for complying with environmental work requirements set forth in the subproject environmental and social management plans. Subproject proponents may request technical assistance to build their capacity to implement environmental mitigation measures where necessary. Proponents are responsible for monitoring and reporting of environmentaland social impacts, following the monitoring plan submittedfor approval. Step 6: EnvironmentalandSocial Monitoring Ongoing monitoring must be undertaken to determine whether the classification system and mitigation measures are adequate at all subproject cycle stages (i.e. environmental checklists, management plans, visits and reports, and other tools included in the Operational Manual). If necessary, monitoring results will be used to refine the required environmental and social screening and evaluation procedures. Environmental monitoring will pay special attention to identifying and mitigating cumulative environmentalimpacts. Subproiect monitoring bv municipalities. Environmental monitoring procedures vary according to the potential subproject impacts. Each subproject will present an environmental and social impact monitoring plan, with specific indicators, as part of their information to be considered for financing. DAPSBA, in part through their deconcentrated department-level staff, will assure subproject compliance with defined mitigation measures by requiring the municipalities to 92 regularly submit simple monitoring reports which will be handled by the municipal enterprise in coordination with the interventor, or independent supervisor who will be hired under the operation to monitor and supervise subproject implementation. Documentation. DAPSBA will summarize the screening and monitoring outcomes for each subproject in a standard format. This format should include sufficient project information to enable monitoring, such as data on project type, location, affected area, beneficiaries, environmental categorization, type of environmental work necessary, indicators, and ongoing monitoring results as reported by the municipalities. All of these data should be maintained by DAPSBA. Cumulative Impacts Monitoring. Small subprojects may not have any significant impact when evaluated individually, but when looked at in the context of the watershed, multiple projects, or synergies with other projects, can cause significant adverse cumulative impacts. The project will avoid this through screening of possible cumulative impacts, and regular monitoring of such impacts at the Project and regional level. Cumulative impact monitoring will be conducted by DAPSBA and will comprise data collection as to the number, type, location, and area of subprojects funded in each municipality, as well as other projects (identified in the screening process) that are not funded by the project, but that could impact or be impacted by the subprojects. These data should be used to identify the potential for yielding cumulative impacts, selecting sites for field visits to verify such impacts, and recommending if and how environmental procedures should be modified to prevent such impacts (i.e. whether changes are warranted for subproject classification, required environmental work, capacity building needs, etc.). Where necessary, the resulting recommendations will be integrated into the environmental procedures for all subprojects. Monitoring:and supervision by DAPSBA. Subprojects that are Type I,11: If the environmentalhocial specialist in DAPSBAjudges it to be necessary, s/he will undertake site monitoring of a subproject during the screening, before implementation begins, in order to verify the adequacy of proposed mitigation measures or recommend additional ones. Periodic monitoring reports will be submitted to DAPSBA, the frequency of which depending on the project type (see Table 3), to verify compliance with site- specific management plans. Again, if the environmentallsocial specialist judges it to be necessary, she will make site visits during project construction and operation to verify compliance with the management plans. DAPSBA should monitor these to identify capacity building needs or improvements to environmental management requirements. If necessary, additional mitigation measures may be identified duringsubproject monitoring. Subprojects that are Type 111: For all Type I11projects, the environmentalhocial specialist in DAPSBA should undertake site monitoring during the screening, before implementation begins, in order to specify the additional aspects that need to be covered inthe environmental and social analyses, verify the adequacy of proposed mitigation measures, andor recommend additional ones. Monitoring reports should be send every six months to DAPSBA. In addition, DAPSBA will undertake site monitoring of each subproject at least every six months. As with all monitoring, special attention will be paid to ensure that subproject activities are consistent with subproject-specific managementplans. Inorder to promote "best practices" nationwide, identify lessonslearned, capacity buildingneeds, inadequate mitigation measures, and/or cumulative impacts (at the regional or project level), DAPSBA will undertake annual site monitoring of a sample of subprojects. DAPSBA will be 93 responsible for undertakingcumulative impact monitoring, as discussed above. Where necessary, DAPSBA will modify the environmentalprocedures for all subprojects to ensure they adequately identify, minimizeand mitigate subproject-related impacts. Cauacity Building The Action Plan presentedin the EA identifies specific capacity buildingneeds within the sector to ensure adequate environmental and social management within the Ministry. The bulk of capacity building activities are being supported through policy-based and technical assistance instruments, though the Project contains specific financing to increase the capacity of DAPSBA interms of environmentalandsocial specialists for day-to-day Projectoversight and supervision. During implementation, as they gain experience in screening and monitoring the subprojects, DAPSBA will identify additional capacity buildingneeds to guarantee adequate implementation of the environmental procedures (including application of environmental management plans, development andapplicationof sufficient mitigation measures, etc.). Institutional Arrangements DAPSBA will include adequate capacity for the following functions: 1) undertaking the environmental and social screening of subprojects; 2) review and clearance of the submitted analyses, plans, monitoring plans, and indicators, and making recommendations for additional analyses and measures, if required; 3) elaborating terms of reference for any additional environmental and social analyses, and providing technical assistance in their elaboration; 4) developing good practice management guidelines; 5) providing support to municipalities for any environmental and social issues; 6) ensuring the consistent adequate application of environmental and social procedures across regions; 7) contracting experts to provide additional environmental and social training and support, when needed; 8) identifying potential cumulative impacts and determining necessary mitigation actions; 9) monitoring the quality of reporting from the municipalities, and developing measures to solve any environmental and social problems that arise; 10) monitoring a random sample of subprojects; 11) establishing links with other institutions to strengthen environmental capacity within each municipality; 11) coordinating with the Institute of Archaeology and History (ICANH), when subprojects might have an impact on cultural heritage; 12) working with environmental agencies to facilitate environmental licensing procedures, where necessary; and, 13) promoting environmentally and socially sustainable projects ingeneral. As enumerated above, the EA identified specific capacity-building needsfor DAPSBA to be able to undertake these tasks. Recommendations include such activities as modernizing and systematizing the processes for determining the eligibility, viability and monitoring of the subprojects; training all staff in environmental management and norms; and, conducting specific monitoring of sectoral policies. The Project will include funding for the institutional capacity buildingof DAPSBA. Mechanisms for participation and uublic consultation The subprojects that are included within this Project all resulted from extensive public consultation activities. Audencias Pliblicas were held in departmental capitals where municipalities presented subprojects and helped to determine the investment priorities in the water and sanitation sector. In conjunction with the 2002-2006 National Development Plan (NDP), the Government has identified a medium-term investment program to expand coverage 94 and improve service quality in both urban and rural areas. Capital investment resources are allocated at the departmental level to address needs within each department. These needs were identified through the recently completed participatory public consultation process known as the Audiencias Pu'blicas. In addition to the existing public funds allocated to the sector (including intergovernmental transfers from Ley 715/01, direct investments by the Ministry of Environment, and programs managed by FINDETER,and FONADE), approximately US$120 million has been allocated for investment in the water and sanitation sector under the NDP and Audiencias Pliblicas. While these Audencias Pu'blicasdid not specifically address the environmental aspects ' of the subprojects, they gave ample opportunity for any civil society groups, affected people and NGOsto voice concerns. Consultation of government agencies and beneficiaries (at the municipal level) i s being undertaken as part of the development of the Ventanilla Unica guidelines. The frameworks form part of these guidelines and the Project Operational Manual. The frameworks will be made publicly available on the DNPwebsite and inthe Bank's InfoShopon October 15,2004. Indigenous Peoples Framework The Indigenous Peoples Framework provides the necessary background to ensure that any subprojects that might affect indigenous peoples will comply with national law and the Bank's OP. As subprojects are considered for financing, a screening mechanism will identify those that require further consideration of indigenous issues. Specifically, during the screening of subprojects, DAPSBA will assess whether an opportunity exists for indigenous peoples to be beneficiaries of the subproject, or if they will in any way be negatively affected by the proposed subproject. If so, an Indigenous Development Plan will be prepared by the municipality, and submitted to DAPSBAfor their review and clearance. The Plan will also come to the Bank for its no objection. The content of an Indigenous Plan, general guidance on the approach for Plan development, institutional arrangements and monitoring requirements are outlined in the framework. ResettlementFramework The Resettlement Framework provides the necessarybackground to ensure that any subprojects that might involve either land acquisition or resettlement of any people will comply with both national law and the Bank's OP. As subprojects are considered for financing, a screening mechanism will identify those that require further consideration of resettlement issues. Again, as all subprojects are not known at the time of appraisal, the framework describes the general context for the sector, the objectives and principles of any resettlement to be caused by the project, the legal context, the process for the preparation of a resettlement plan, the content of a plan, the process for its execution, the required institutional organization and, finally, the financing of the plan. Any resettlement plan will be submitted to bothDAPSBAand the Bank for review andclearance. 95 Annex 11:Project Preparationand Supervision COLOMBIA: Water and Sanitation Sector Support Project Planned Actual PCNreview 12/16/2003 1211612003 InitialPID to PIC 1211612003 1211612003 InitialISDS to PIC Appraisal 9/27/2004 10/3/2004 Negotiations 10/4/2004 2/2/2005 BoardRVP approval 1111612004 31192005 Planned date of effectiveness 5/1/2005 Planneddate of mid-termreview 411512007 Planned closing date 4/30/2009 Bank staff and consultantswho worked on the project included: Name Title Unit David Sislen Task TeamLeader LCSFU MenahemLibhaber Task Team Leader LCSFW Patricia L6pez Martinez Financial Analyst LCSFW Kirsten Oleson Environmental Specialist LCSEN LuisM.Schwarz FinancialManagement Specialist LCOAA Juan D. Quintero Safeguards Specialist LCSEN JosephFormoso Disbursement Officer LOAG3 Jean Roger Mercier Environmental Specialist ESDQC Taimur Samad Urban Specialist LCSFU ElenaCorrea Social Specialist LCSEO Luz Maria Gonzalez FinancialAnalyst Consultant Jaime Roman Procurement Specialist LCOPR Jose Martinez Procurement Specialist LCOPR Mariana Montiel Counsel LEGLA Daniel Boyce FinancialManagement Specialist LCOAA Oscar Alvarado MunicipalEngineer SASE1 Jeannette Estupinan FinancialManagement Specialist LCOAA EfraimJiminez Procurement Specialist LCOPR Jairo Arboleda Civil Society Specialist LCCCO Albert0 Chueca Resident Representative LCCCO Silvia Delgado ProgramAssistant LCSFU Cristina Velazco-Weiss Language ProgramAssistant LCSFW Andreas Rohde Peer Reviewer ECSIE Jonathan Halpem Peer Reviewer EWDWS John Henry Stein Sector Manager LCSFW Krishna Challa Sector Leader LCSFP Anna Wellenstein Sector Leader LCSFP Manuel Felipe Oliveira EnvironmentalSpecialist Consultant Juan Manuel Garcia Economist Consultant Pablo Roda Economist Consultant 96 Fabio Castrelldn Engineer Consultant MarthaLucia Moreno Engineer Consultant Angela Monterrosa InstitutionalSpecialist Consultant 97 Annex 12: Documentsinthe Project File COLOMBIA:Water and SanitationSector Support Project Documents Relatedto Environmental Assessment/ SafeguardIssues 1. Resumen Visitas, Junio 16Del 2004, ManuelFelipe Olivera 2. Diagndstico General de 10s Residuos S6lidos EnColombia, Manuel Felipe Olivera 3. Impactos GenCricos de 10s Proyectos Registrados ante El MAVDT en Acueducto, Alcantarillado y Residuos S6lidos. ManuelFelipe Olivera 4. Analisis Ambiental del Inventario Sanitario Rural, Manuel Felipe Olivera 5. Analisis Ambiental de UnaMuestra de Proyectos Financiables, Manuel Felipe Olivera 6. Indigenous Peoples Framework, Ministry of Environment, Housing, and Regional Development 7. Resettlement and Land Acquisition Framework, Ministry of Environment, Housing, and Regional Development 8. Manualde Guias Ambientales para el Manejo de Obras de Acueducto y Alcantarillado Documents Related to Economic. Financial, and InstitutionalAnalyses 9. Estimaci6n de Indicadores Econ6micos a Partir de 10s Criterios de Elegibilidad en 10s Proyectos de Acueducto y Alcantarillado que Cursan por Ventanilla Unica, Pablo Roda 10. Evaluaci6n Econdmica de Proyectos Urbanos y Rurales de Acueducto y Alcantarillado en Colombia, EconometriaS.A. 11. Analisis Financieray Econ6mica, LuzMariaGonzalez 12. Evaluaci6n institucional de las empresas prestadoras de 10s servicios pdblicos de acueducto y alcantarillado que administrarh, operarh y harh mantenimiento de 10s proyectos de Honda- Mariquita, Puerto Carreiio y Los Patios, Martha LuciaMoreno Documents Related to Technical and EngineeringAnalysis of Suburoiects 13. Reglamento TCcnico del Agua Potable y el SaneamientoBBsico de Colombia (RAS 2000) 14. Ampliaci6n acueducto regional de Honda - Mariquita (Tolima) y la inspecci6n de Puerto Bogotamunicipio de Guaduas (Cundinamarca), Fabio Castrell6n 15. Mejoramiento planta de tratamiento y ampliaci6n tanque de almacenamiento de agua potable del municipio de Puerto Carreiio, departamento del Vichada, Angela Monterrosa 16. Construccidn emisario finalplan maestro de alcantarillado del municipio de Los Patios, Norte de Santander, Manuel Omar Alvarez 98 Ventanilla Unica Documents andAssociated Guidelines 17. Esquema General de Operaci6n De L aVentanilla Unica para la Financiacih de Proyectos de Agua Potable y SaneamientoBBsicoque Requieren de Recursosde la Nacidn 18. Guia de Interventoriade Proyectos a Financiar a TravCs del Programa Ventanilla Unica 19. Guia de Elegibilidad y Viabilizacih de Proyectos a Financiar a TravCs del Programa Ventanilla Ijnica Documents Relatedto "Modernization" / Private Sector Participation 20. Elaboracidn de 10s estudios para el establecimiento de 10s planes de obras e inversiones de acueducto y alcantarillado requeridos en ciudades intermedias del Pais, Ingetec S.A. 21. Elaboraci6n de 10s planes de obra e inversiones requeridos en 10s sistemas de acueducto y alcantarillado requeridos en esquemas regionales del Pais, Hidrotec S.A. 22. Formulacidn, Promocidn y Venta de Esquemas de Vinculacih de OperadoresEspecializados a la Prestacih de 10s Servicios de Acueducto y Alcantarillado entre Seis y Diez Ciudades Intermedias del Pais, Capital Corp-Hytsa. 23. Formulacidn, promoci6n y venta de esquemas de vinculacih de operadores especializados a la prestacidn de 10s servicios de acueducto y alcantarillado entre tres y cinco empresas regionales del Pais, Flemings-Corficolombiana. 24. Formulacih, Promoci6n y Venta del Esquemade Vinculaci6n de Operadores Especializados a la Prestacih de 10s Servicios de Acueducto y Alcantarillado en la ciudad de Popaydn, Selfinver-Chemonics 25. Elaboraci6n de 10s estudios conducentes a la Formulaci6n y puesta en marcha de 10s esquemas de participacibn de pequeiios y medianos empresarios de servicios de acueducto y alcantarillado-PYMES - en tres grupos objetivos, Sedic S.A. 26. Elaboraci6n de 10s estudios conducentes a la Formulaci6n y puesta en marcha de 10s esquemas de participacibn de pequeiios y medianos empresarios de servicios de acueducto y alcantarillado - PYMES - en seis capitales de departamentos y municipios intermedios del Pais, Silva Carreiio y Asociados. 27. Elaboracih de 10s estudios conducentes a la Formulacih y puesta en marcha de 10s esquemas de participacih de pequeiios y medianos empresarios de servicios de acueducto y pais, REN- JosC Mora. alcantarillado -PYMES- en cuatro municipios intermedios de 30,000 a 70,000 habitantes del 28. Consultoria para la estructuracih de esquemas Constructor - Operador para la participacih de pequeiios y medianos empresarios de servicios de acueducto y alcantarilIado - PYMES en el departamento de Cdrdoba, Ingetec S.A. 29. Consultoria para la estructuracih de esquemas Constructor - Operador para la participacih de pequeiios y medianos empresarios de servicios de acueducto y alcantarillado - PYMES en el departamento de Tolima, Hidrotec S.A. 99 30. Estudio del consumo y estimaci6n de una funci6n de demanda de agua potable, Econometria S.A. 31. Evaluaci6n socio-econ6mica de proyectos de acueducto y alcantarillado: analisis costo- beneficio, EconometriaSA. 32. Evaluaci6n del impacto social, EconometriaS.A. 33. Financial Analysis of a sample of water utilities, Luz Maria Gonzfilez. 34. Pliegos modelo de licitacidn, contrataci6n de obras y operaci6n de 10s sistemas de acueducto y alcantarillado del municipio pequeiio. 35. Modelo de Documentos de licitacidn para un contrato de operaci6n de 10s sistemas de acueducto y alcantarillado en la ciudadintermedia. 36. Modelo de PSP en empresas de acueducto y alcantarillado en ciudades intermedias en Colombia, Fernando Troyano 37. Modelo Constructor-Operador para participaci6n privada en municipios pequeiios, Fernando Troyano. 38. Modelo Financier0 Estfindarpara Anfilisis de procesosde ParticipacidnPrivada en Empresas de Acueducto, Econ6micaConsultores. 39. Plande acci6n y estrategia regulat6riapara el sector de acueducto y alcantarilladoen Colombia, Fernando Troyano. 40. Comportamiento de empresas de agua y alcantarillado frente a la expansi6n de 10s servicios a fireas de bajos recursos: el cas0 de Cartagena, Barranquilla, Tunja, Bogota, Medellin y Manizales, EconometriaS.A. 41. Diseiio de una formula de asignaci6n de subsidios a 10s proyectos de acueducto, Econ6mica Consultores. 100 Annex 13: Private Sector ParticipationBiddingMethodologies COLOMBIA: Water and SanitationSector SupportProject Ina number of municipalities, the Programwould support the "modernization" approach -the introduction of a new private operator into the management of the municipal enterprise - in a manner wholly consistent with the ongoing Bank-financed operation, C0-707725. Such subprojects would likely take place in medium size cities or regional associations of municipalities (populations of up to about 300,000 inhabitants) and in small municipalities (populations of up to bout 12,000 inhabitants) by facilitating the incorporation of the private sector in the management and operation of the water and sanitation services in the utilities of participating cities and municipalities and by providing financial support to these utilities, while ensuring provision of services to the poor. Based on experience in the LCR region and in Colombia, it i s assumed that once the private sector gets involved in managing the utilities, the level of the water and sanitation services will improve, the services will become more efficient and more reliable, the coverage of the services will expand and the access of poor consumers to the services will increase. Such subprojects reflect the Government's policy to provide assistance to utilities which choose to incorporate the private sector in managementand operation of the water and sewerage services, since the PSP approach i s believed to be the best way to improve the performance of the water utilities and the level of service which they provide to the customers. Those municipalities which, through the Audiencias Pciblicas, have chosen the modernization approach, have entered into discussions with MAVDT regardingtariff increases which will elevate the tariffs to a level which will cover at least operation, maintenance and depreciation cost, and as higher than that as socially and politically possible. PSP, in the case of "modernization", i s defined as transferring full management and operation responsibility to the private sector and provision of investments by the private sector inan amount which is compatible with the agreedlevelof tariffs. In the past, the tendency in PSP in the water sector has been to reach an agreement on a full concession, under which the concessionaire commits to provide all the investments required during the contract period. However, under the conditions in medium size cities and small municipalities in Colombia, it has proven difficult to reach full concession agreements, and the stock of infrastructure backlogs high investment needs (often with low tariffs) has led to an approach by which the first step i s to reach an agreement with the municipal authorities of cities which choose to participate in the program in regard to the maximum acceptable tariffs increase. Inmost medium size cities (and certainly inall small municipalities), even with tariffs increased to the maximum affordability level, it i s not possible to finance all the works required in the next 10-30 years (the contracts period range). As a result, the private sector which will be hired to manage a utility will invest up to a level that can be recovered from tariffs, whereas the rest of the investments needs to be provided by direct grants through the Ventanillu Unicu. 25The operation will utilize the agreed upon bidding documents and financial models to which the Bank gave its No Objection for Loan 7077-C0, though the details of the financial models used for the negative concession I least subsidy approach may evolve duringimplementation to introduce greater flexibility in resource-constrained circumstances. 101 The "modernization" approach includes: (i) technical assistance to utilities to prepare and carry out the processes of incorporating the private sector in the management of the water and sanitation services; (ii) to mayors in convincing the main actors (mainly municipal support councils, Governors and state governments, business community, community representatives community organizations and NGOs) to accept PSP in the utilities; and (iii) financial support to cover a portion of the requiredinfrastructure investments which the private sector cannot provide. The concepts and the methodology of the project were developed inthe framework of component E, the Water Utilities Modernization Component, of the Municipal Development Project (Loan 3336-CO) and continuedinthe ongoing Water Sector ReformAssistance Project, CO-7077). Two different mechanisms were developed to support: (i) medium size cities with populations of up to about 300,000 inhabitants; and (ii) small municipalities with populations of up to about 12,000 inhabitants. The differentiation resulted from the fact that from the private sector's standpoint, the business is different in the two size ranges of municipalities, and the required type of operator i s different inboth, Le., for mediumsize cities only an experienced operator with proven credentials in operating utilities of comparable size can be hired, while for small municipalities proven experience in operating comparable systems i s not required, but rather the capacity to operate them. The cut off number of 12,000 was selected because it defines reasonably well the limit between the two types of municipalities and because it coincides with an administrative division in Colombia. For both types of municipalities, model biddingdocuments have been developed, which include the terms of reference (buses de la Zicitucidn), specifications, and draft contract. For each municipality, engineering and financial consultants will be hired to prepare the required investment program (Plan de Obrus e Znversidn - POI) and the financial projections of the new privately managed utility, respectively. The MAVDT, in cooperation with the municipal authorities, would then incorporate the investment and financial data in the model bidding document and will produce a specific set of bidding documents for each participating municipality. Medium size cities: The operators for medium size cities must be private companies or joint ventures which have proven experience in operating similar size water and sewerage systems and are financially solid institutions which can mobilize the required funds for investment. The contract for the medium size cities, which defines the proposed model, i s denominated "operation contract". The investment commitment of the private operator of each city will depend on the level of tariffs agreed upon with each mayor. Inone extreme, under which the tariffs can support only operation, maintenance and depreciation, it would be a management contract (operation without investment), in the other extreme under which the tariffs can support all the investments, it would be a full concession (operation plus commitment to provide all the required investment), while in most cases it i s expected to be an operation contract under which the operator would commit to provide part of the required investment while the rest will have to come from the public sector, either the government or the municipality or both. In practical terms, in medium size and small municipalities in Colombia, the Government would have to provide such funds because the financial conditions of the municipalities prohibit them from providing meaningful contributions. The basic principle of the operation contract i s that it only commits the operator to provide an investment compatible with the level permittedby the authorized tariff. The rest of the investment i s the responsibility of the public sector and it will be attempted to provide, under the project, the amount of support requested by the private operator. However, funding restrictions might limit the availability of funds for each city, in which case the public sector would commit to provide an investment at a level which will at least ensure that the rate of return to the private operator of the 102 entire transaction will be attractive enough26. This will be done by defining in the bidding documents a cap on the amount which the public sector will provide. The cap value will be derived from the financial model ensure the achievement of the adequate rate of return. The operation contract stipulates the investment program over time (the POI) required to bring the system to optimal conditions, as proposedby the winning bidder, and includes the commitment of the operator to finance and construct the part of it which corresponds to him according to his proposal. When public funding i s required, its use and allocation will be derived from the POI, MEDandthe municipalauthorities willreachanagreement with the operator regardingthe works andor goods of the POI, which be financed by the government subsidy. The criterion for selection of the winning bidder i s simple and transparent; the contract would be awarded to the bidder who requests from the public sector the lowest capital investment subsidy in order to complete the works of the POI and bring the system to the optimal state, as well a operate and maintain the water and sanitation system. No operation subsidies are involved andthe maximum amount that the government i s ready to pay (the subsidy cap) will be stipulated in the biddingdocuments. The performance indicators targets (metus del contrato)will be stipulated in the draft contract which forms part of the biddingdocuments, will be compatible with the subsidy cap and will also ensure an adequate service to the poor. Each proponent will submit his own POI, which may be differentthan the POIproposed by the engineering consultant, since the POI reflects the technical proposal and it i s advisable to let the private sector introduce its own ideas and innovations. Each bidder will provide in his proposal a detailed annual scope of works and related dollar amount which he commits to carry out each year. The winning bidder will commit that after receiving from the government an agreed set of works whose value i s equivalent to the amount of subsidy which he requested, he will attain the target indicators value along time, as stipulated in the contract, Le., the operator will commit to attain the target indicators correspondingto the total level of investments provided (private pluspublic investments). The yearly work program can be changed in mutual agreement with the mayor but the operator would have to comply with the total amount of the annual investment program. The amount which the public sector has committed to provide will not be made available to the operator, for hisdiscretionaluse, but will be rather usedto finance partof the infrastructure works stipulatedin the POI, which will be proposed by the operator (Le., works considered by him as highpriority works) and approved by the municipal authorities and DAPSBA. In this form, the private operator will not receive a financial contribution from the government, but rather the right to operate additional infrastructure which is owned by the municipality, and whose value i s equivalent or close to the amount of the subsidy which he requested in his proposal. Under the project, the Government, in effect, finances additional infrastructure for the city. Ineach city, the works financed by the government will be designed by the private sector managed utilities and the executing agency of each subproject will be the privatized water utility of the city. In this manner it will be assured that the infrastructure provided by the government will be totally satisfactory to the private operator andwill meet his requirements. Ifthe total amount requiredfor financing the works and goods as a result of the biddingprocesses will be higher than the amount committed by the Government, the private operator will provide the balance. If the required amount will be lower than the that committed by the government, the remaining government committed fund will be used to finance additional works. The supervision and control of the PSP contract will bethe responsibility of the contracting agency, i.e., the municipality, which may hire an individual consultant or a consulting firm, on a full or partial time assignment, to carry out that task and determine if the performance targets are achieved by the operator. The duration of the 26The value of the rate of return for each case will take into account the specific risks of the municipality in question and may vary in the range of 15% to 25%. 103 operation contracts would be in the range of 20-30 years, which is the time required to recover investments in this type of contracts. A clause of tariff revision once every five years will be included in the draft operation contract. If the authorized tariff level would be sufficient to cover all the investment program (with no need for receiving support from the public sector), the contract would then be awarded to the bidder who offers the highest reduction in the authorized tariff (i.e., the lowest tariff). Additional detailed regarding the proposed model for medium size cities are presented inAnnex 15 to the Project Appraisal Document of Loan CO-7077. The financial analysis of the proposed privately managed utility i s an essential tool for preparing the PSP process. The financial model which will be used in the future by the consultants, for preparation of the concession documents and by the MAVDT staff to conduct the quality control of the consultants' work, has been will be deemed satisfactory top the bank and i s currently in use by the MAVDT.27 Small municipalities: Contracts with private operators in small municipalities would be so- called "Constructor-Operator" contract. The concept of incorporating the private sector in the management of utilities of small municipalities with populations of up to 12,000 inhabitants i s perhaps the most significant innovation of the Colombian approach to PSP. Inthe past, common perception suggested that it would be impossible to bring private management to small utilities, because the private sector would not have interest in utilities which serve less than 300,000 inhabitants. However, experience shows that in Colombia and in other countries there are successful small-size private operators in the water and sanitation sector, managing utilities without any Government support. The basic assumption of the "constructor-operator" concept i s that big operators have interest in managing utilities of large and mediumsize cities, while small utilities attract small operators. The concept of the "constructor-operator" model in small municipalities i s that through competitive bidding, small- and medium-size construction companies, possibly in association with small consulting firms, will compete for the construction and/or rehabilitation of the water supply and sewerage systems in a small municipality and the winning bidder will have to commit to operate the systems for a period of 10-15 years from the date of signing the contract. No experience in operation of water systems i s required from the bidders. It i s assumedthat constructioncompanies that have the capacity to construct the systems, also have the technical and management capacity to operatethem after minimal training, since the involved systems are quite small and simple. The winning bidder will receive training in management of water utilities as well as written material and management software. Certification of small operators will also be undertaken by MAVDT two years after the initiationof the activity of each operator. In this manner, the Program will help to convert the constructors to operators. The required qualifications of bidders will be: (i) technical - experience in construction of works of similar size and complexity and availability of an operation and management team; (ii) financial - submission of audited income statements of the last three years, as well as proof of availability of working capital; and (iii) - submission of documents of registration as a legal legal entity. It i s expected that this type of contract will be attractive for both the municipal governments andthe constructioncompanies. The Constructor-Operator must first calculate the construction cost of the works he i s required to construct, and then the ten-years operating cost, bearing in mind the income to be generated by user tariffs and the portion of that income which he can contribute to construction, while still ''The operation will utilize the agreed upon biddingdocuments and financial models to which the Bank gave its No Objection for Loan 7077-C0, though the details of the financial models used for the negative concession I least subsidy approach may evolve during implementation to introduce greater flexibility in resource-constrained circumstances. 104 maintaining reasonable profits during the operation period. The residual construction cost, i.e., the difference between the value of the works and the contribution to construction cost from future income, will be contributed by the Government as a "construction cost contribution" in a form of an investment subsidy to the population of the small municipality. The municipality will also be requested to contribute a portion of the subsidy from Law 715 resources. As in all concession contracts, the commercial risk will be bome by the operator. Also, since the small municipalities suffer a significant backlog in infrastructure and the population does not have the capacity to finance this backlog through tariffs, the Govemment subsidy needs to be highenough so as to finance most of the works, while only a small portion can be financed from tariffs and Law 715 funds. The bidding process for selection the Constructor-Operator i s a process of selecting a private operator, in which the selection criterion of the winning bidder i s the lowest subsidy that i s required to construct, operate an maintain the specified water and sewerage infrastructure in the municipality. The Constructor-Operator model i s basically a concession tailored for small municipalities, in which the Govemment finances, in the form of a subsidy, most of the required water and sewerage infrastructure investment in the participating small municipalities. The model i s similar to that of the operation model in medium-size cities, with three differences: (i) in small municipalities the operator is also the constructor, and this was required for the creation of the operators market; (ii) the level of Government subsidy will most probably be grater (in terms of percent of total investment) in small municipalities; and (iii) the duration of the contracts in small municipalities i s 10-15 years while the duration of the contracts inmedium-size cities is 20-30years. The proposed process for incorporating the private sector into the utilities of small municipalities i s a simplified process, which reflects the conditions in municipalities of that size. The procedures followed traditionally for incorporating the private sector in the management of the services, in addition to being lengthy and cumbersome, are inappropriate for small operators with limited resources. Model bidding documents have been developed for the Constructor-Operator model. They are based on standard documents for procurement of small works, in which appropriate modifications have been introducedand to which the operation contract has been attached, so that altogether they provide the documents for a concession model. The contract (construction plus operation) will be awarded to the bidder which requests the lowest amount for constructing the water and sanitation infrastructure works and commits to manage and operate the utility in accordance with the terms of the contract, for a period of ten years from the date of signing it, while charging the tariffs stipulated in the contracts. This i s equivalent to the lowest subsidy that i s required to construct, operate and maintain the specified water and sewerage infrastructure in the municipality. Additional detailed regarding the proposed "Constructor-Operator" for small municipalities are presentedinAnnex 16 of the Project Appraisal Document of LoanCO-7077. Duringproject implementation, the MAVDT will provide technical assistance to small operators to assist them in obtaining the knowledge and experience required for managing a water utility. The MAVDT has prepared a package of technical assistance for the small entrepreneurs which provides information, training and software for financial and commercial (billing and collection) management, operational performance in aspects such as unaccounted for water reduction, metering, service coverage, labor efficiency etc. The financial analysis of the proposed privately managed utility i s an essential tool for preparing the PSP process. The financial model which will be used for preparation of the "Constructor- Operator" documents and have been deemed satisfactory to the Bank. 105 Annex 14: Statementof Loansand Credits COLOMBIA: Water and SanitationSector SupportProject Differencebetween expected andactual Original Amount inUS$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd ~~ ~ PO77757 2004 CO: CUNDNARCA EDUCATION 15.00 0.00 0.00 0.00 0.00 14.85 -0.15 0.00 QUALITY IMPROVE PO74138 2003 CO-Higher Education ImprovingAccess - 200.00 0.00 0.00 0.00 0.00 190.91 11.66 0.00 PO74726 2003 Colombia-BogotaUrbanServices Project 100.00 0.00 0.00 0.00 0.00 92.26 2.26 0.00 PO41642 2002 CO PRODUCTIVEPARTNERSHIPS 32.00 0.00 0.00 0.00 10.00 17.93 -4.07 -0.39 PO57692 2002 CO 2nd MagdalenaMedio Project(LIL) 5.00 0.00 0.00 0.00 0.00 0.20 -0.30 0.00 PO57369 2002 CO Judicial Resolution ImprovementPi. 5.00 0.00 0.00 0.00 1.10 2.63 1.93 0.00 PO65937 2002 CO WATER SECTOR REF 40.00 0.00 0.00 0.00 0.00 36.14 19.64 0.00 ASSISTANCE PROJECT PO69964 2001 CO- HumanCapitalProt.-CashTransfers 150.00 0.00 0.00 0.00 0.00 76.33 -73.67 0.00 PO63317 2001 GEFCO-HIGH ANDES 0.00 0.00 0.00 15.00 0.00 13.23 7.23 0.00 PO40109 2001 CO PUBLIC FINANC. MANAGEMENT 35.47 0.00 0.00 0.00 0.00 28.18 -7.29 0.00 PROJECTI1 PO44140 2000 CO CARTAGENA WTR SUPPLY & 85.00 0.00 0.00 0.00 0.00 57.89 50.89 0.00 SEWERAGEENV. PO50578 2000 CO RURAL EDUCATION 20.00 0.00 0.00 0.00 0.00 13.30 11.95 0.00 PO57326 2000 CO SIERRA NEVADA SUSTAINABLE 5.00 0.00 0.00 0.00 0.00 2.15 1.oo 0.00 DEVELOPMEN PO68762 2000 CO- COMMUNITY WORKS (MANOS A 100.00 0.00 0.00 0.00 0.00 72.98 72.98 0.00 LA OBRA) PO06861 1998 CO URBAN INFRASTRUCTURE 75.00 0.00 0.00 0.00 26.00 6.10 32.10 -3.23 PO40102 1997 CO REG.REF.TA 12.50 0.00 0.00 0.00 0.00 1.94 1.94 0.00 PO06894 1996 CO SANTAFE I(Water/Supply) 145.00 0.00 0.00 0.00 0.00 23.73 23.73 0.00 Total: 1,024.97 0.00 0.00 15.00 37.10 650.75 151.83 - 3.62 106 COLOMBIA STATEMENTOF IFC's HeldandDisbursedPortfolio InMillions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2002 BCSC 0.00 7.00 0.00 0.00 0.00 7.00 0.00 0.00 2002 Bavaria 70.00 0.00 30.00 145.00 70.00 0.00 30.00 145.00 1969/85/88/93/95 CFdel Valk 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 CHMC 3.21 9.68 0.00 0.00 0.93 4.02 0.00 0.00 1974101 CementosCaribe 4.05 0.00 10.00 10.36 4.05 0.00 10.00 10.36 1963168/69/90 Coltejer 6.02 0.00 0.00 0.00 6.02 0.00 0.00 0.00 1995199 Cofinsura 25.00 0.00 25.00 0.00 0.00 0.00 25.00 0.00 2002 Inversura 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 2002 Omimex Oil 30.00 0.00 5.00 0.00 10.70 0.00 5.00 0.00 1987 PRODESAL 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 1977189192194196 Promigas 3.75 0.00 0.00 4.17 3.75 0.00 0.00 4.17 0194195 Promisan 0.00 0.20 0.00 0.00 0.00 0.20 0.00 0.00 2002 Proteccion 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 1996 Proyectos 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 2002 SIG 25.29 0.00 50.00 0.00 2529 0.00 50.00 0.00 1999 Surenting 0.00 5.10 0.00 0.00 0.00 2.50 0.00 0.00 2001 Tolcemento 3.33 0.00 0.00 7.11 0.00 0.00 0.00 0.00 Total portfolio: 170.65 52.57 120.00 166.64 120.74 44.31 120.00 159.53 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2001 CHMC 0.00 0.02 0.00 0.00 2004 CaribbeanCoal 0.03 0.00 0.00 0.00 2004 CartonesAmerica 0.02 0.00 0.00 0.00 2003 DAVIVIENDA I 0.00 0.00 0.01 0.00 Total pendingcommitment: 0.05 0.02 0.01 0.00 107 Annex 15: Letterof DevelopmentPolicy COLOMBIA:Water and SanitationSector SupportProject Translation OriginalDocumentinSpanishinProjectFiles - libertady Orden Ministeriode Ambiente,Vivienday DesarrolloTerritorial Bogota, November25,2004 Mr. JAMES D. WOLFENSOHN President The World Bank Washington, D.C. Dear Mr. Wolfensohn: The Government of Colombia would like to express its appreciationfor the World Bank's support in recovering the confidence and stabilizing Colombia'seconomy as reflected in the access to international security markets and in the quality and timeliness of access to credits from multilateral organizations -such as the one you chair- to finance the development of our economy. This show of confidence has been essential to carry out an ambitious reform program, a good part of which has already been approved by the Colombian Congress. One of them - the subject matter of this letter - relates to the programs to modernize and update the water and basic and environmental sanitation sector. From an economic perspective, drinking water can be profoundly characterized as an economic assee'. It is thus necessary to make an optimum allocation of the resources that are assigned to finance projects in this sector, including environmental sanitation projects. On the other hand, the rapid growth of cities in Colombia during the last 30 years, due --among other causes- to various political, economic and social factors, has led to increased water demand and generation of liquid and solid waste by Colombian Municipalities. This makes it necessary to adjust the mechanisms that were used to allocate the Nation'sresourcesassignedto cover this demand. 28 "Laaglomeracio'ndepoblaciones humanas define lafrontera divisoria entre el agua recurso (bien libre) y el aguapotable sewicio (bien econdmico).Esta distincidn conceptual contribuye a explicar la evolucidn discontinua de las condicionesfundamentales deprestacidn del sewicio ... (Human population " conflomeratesdefine the dividing line betweenwater as a resource (free asset) and drinking water supply (economic asset). This conceptualdistinction helpsexplain the discontinuous evolution of service provision.. .".CUERVO, Luis Mauricio. ElAgua potable como bien mayor. In: Revista de la Comisi6nde Regulaci6n de Agua potable (CRA). No 2. p. 135 -160. According to Cuervo, this shift has been determinedby factors such as scarcity, population concentrationsand density, among others. 108 Law 142 of 1994, the Regime of Residential Utility Services, mentions the need to establish agile financing mechanisms for drinking water, basic and environmental sanitation projects and the responsibilities assigned to the Ministry of Environment, Housing and Territorial Development include those of identifying the amount of subsidies from Central Government and the criteria for resource allocation. Consequently, the Directorate of Drinking Water, Basic and Environmental Sanitation has been developing the tasks of allocating resources and supervising sectorial investment plans and programs with central government resources; identification of other sources of financing, streamlining and optimization of the existing ones and support in related negotiations designed to allow the sector's companies to compete adequately for such resources, with the aim of providingfinancial support to the entities that supply residential utility services. In developing the policy established by the current Administration, the Ministry of Environment, Housing and Territorial Development, through the Directorate of Drinking Water, Basic and Environmental Sanitation, has structured a scheme to bring the Nation's financial support to drinking water, basic and environmental sanitation projects through the "One-stop Shop" program for those territorial entities which require funds from the National Budget, in accordance with the guidelines set down in Law 142 of 1994 and with a view to guaranteeing the attainment of the targets that the National Development Plan has set in the area of drinkingwater and basic sanitation. Within this context, the Government of Colombia is working to obtain and mobilize resources under favorable conditions for the country, with the aim of supporting adjustments in the public sector policies, implementing institutional changes and mitigating the immediate adverse effects of the fiscal adjustment that is currently being implemented. This document describes the background and the context within which the World Bank's Water and Sanitation Support Credit for Colombia was conceptualized and developed. The policies included in this operation resulted from a extensive exchange of ideas between the Bank`s and the Government's teams, includingthe Ministry of Finance and Public Credit, the National Planning Department (DNP) and the Ministry of Environment, Housing and Territorial Development. This dialogue led to the design of a program that will allow the Government to finance investment projectsfor the expansion, rehabilitation and/or construction of Drinking Water and Basic Sanitation projects (rural and urban) within the framework of the Single Window integrated system that aims to support the achievement of the sectoral goals outlined in the National Development Plan for 2003- 2006 and the consolidation of operational performance and technical capacity of local service providers. The amount of the investments that a program of such a magnitudewill require led us to consider the alternative of a credit program using an APL instrument, a phased program of sectoral investment projects. POLICY OBJECTIVES The National Development Planfor 2003 - 2006 was approved by Law 812 of 2003 and received the denomination "Towards a Community State", establishing the following objectives in terms of residential utilityservices: 109 Continue to foster the participation of the private sector, the workers and the solidarity sector in residential utilityservices and promotingthe participation of users in the capital of the companiesthrough the social capitalizationfunds. Consolidate the regulatory frameworks and the development of privatizations and concessions in the construction, operation and maintenanceof infrastructure. Establish measuresto increase service efficiency and quality Adjust the tariff and subsidy schemes to provide incentives for investment, cost- recovery, avoid the transfer of inefficiencies to users and generate incentives for investment in regionalschemes. Support integrated management plans and final disposal of solid waste and the massificationof water and sewerage systems. The same law, in the chapter on Environmental Sustainability, establishes the Integrated Water Management Program including plans to be implemented for the integrated management of microbasins comprising nearly 500,000 hectares and the establishment of close to 120,000 hectares of protection plantations, especially in water supplying areas. The National Development Plan sets out the conditions for investment of resources from the General Tax Sharing System transfers, in the drinking water and sanitation sector, as follows: harmonization with the project priorities contained in the Sector's Technical Rules, being part of the investment programs of legally established service providers, being contemplated in municipal or district development plans and being under the surveillance of the Superintendence of Residential Utility Services. The Ministry and the Autonomous Regional Environmental Corporations will support the creation of regional companiesfor drinkingwater and basic sanitation programs. SECTOR POLICY Access by the population, especially the poor, to good quality utilities29,is reflected in poverty reduction and an improvedquality of life. Improving the quality of water for human consumption and sanitation services reduces the risks to which the population is exposed in terms of water-borne diseases, reduces school absenteeism caused by acute diarrheaand contributesto economic growth. The policy is intended to generate a social management for the sector and a suitable and in-depth management of issues such as the cost of the service, the lag in investments, the capital intensive cost, the collection periods, the dismantling of subsidies,the lack of management, political interference and an integrated management of water resources-among others. The main objective of this sectorial policy is to guarantee the availability of drinking water and basic and environmental sanitation to improve the population's quality of life and 29This policy only makesreference to drinking water, sewerage and street cleaning services. 110 provide incentives for economic development and growth, under principles of equity and environmental sustainability. For that purpose and in the process of developing the public hearings program3' fostered by the National Government, the PND has established the Single Window facility as the Ministry of Environment, Housing and Territorial Development's instrument to be used to receive, evaluate and follow up all projects in the drinking water and basic sanitation sector which request financial support from the Nation. It is within this context and in the framework of the PND that the General Sector Policy has been set, under principlesof equity, environmentalsustainabilityand efficiency. The institutionalpolicy focuses on the modernization and strengthening of the providers of utility services of drinking water, sewerage and solid waste, on the basis of economies of scale and the development of projectsof a regional scope. The environmental policy is oriented towards an integrated and sustainable management of water resources, granting priority to human consumption requirements, an adequate management of solid waste and wastewater and the regulation of supply basins. The technological policy is designed to promote technologies to generate quality, coverage and continuity in the supply of services, the creation of instances and mechanisms for the exchange of knowledge and successful technological processes that may be applied and replicated in the sector. The financial policy focuses on the optimization and integrated management of the resources available for the execution of sector projects at the various territorial, institutionaland business levels. The social policy seeks to generate a forum for social participation and concertation, strengthen democratization procedures in the supplier companies and generate community basic services companies. Specificobjectives of the sectorial policy: Increase the population of beneficiaries and improve the quality of water and basic sanitationservices in urban and rural zones. Focus government actionsto guaranteeaccess to water and basic sanitation services by the lower income population,at affordablecosts according to their payment capacity. Provide incentivesfor efficiency in the provisionof services by the supplier companies. Coordinateand promotetechnical assistanceand training actions in the sector. 30Public Hearings are the result of a participatory and democratic process for the allocation of National investment resources, addressing regional needs in strategic issues such as: i)Basic residential utility services, ii)Education, iii)Health. For the case of the projects submitted by the regions for water and sewerage, they shall be subject to the guidelines established in the One Stop Shop scheme which guarantee their sustainability through time. 111 Promotethe integratedmanagementof water resources and the protectionof the basins that supply municipal and rural water supply services. THE DRINKINGWATER AND BASIC SANITATION SECTOR In Colombia, the drinking water and basic and environmental sanitation sector faces challenges that stem from the country's domestic conditions, with a large number of Colombians facing serious deficiencies in the supply of drinking water, the collection of excreta and the treatment of solid waste, in spite of the significant progress made in these fields in the last few years, especially in urban zones; these challenges are also the result of the global goals and commitments established for the sector in the current millennium, e.g. reducing by half the number of people without access to drinking water and reducing by two thirds the mortality of children under age five, which in many cases is due to deficient sanitary and environmental condition~.~' The Ministry of Environment, Housing and Territorial Development, through the Directorate of Drinking Water and Basic and Environmental Sanitation has initiated a plan that places special emphasis on the provision of water, sewerage and cleaning utility services in rural areas, with the purpose of increasing coverage rates, meeting the millenniumgoals to which the country committedat the Johannesburg summit. In this sense, in its management the Directorate of Drinking Water and Basic and Environmental Sanitation has given the greatest importance to the rural sector, where the indicators of greatest deficiency of residential utilities32can be found (nearly 56% of the localities have drinking water coverage; 3.8% have a drinking water treatment plant installed and of these only 65% are in operation; the coverage of sewerage services is below 5%.) In general, each of the challenges mentioned above are being addressed by the Directorate of Drinking Water and Basic and Environmental Sanitation as guidelines to orient its actions in the short, medium and long term. INSTITUTIONALARRANGEMENTSAND BACKGROUND Colombia's most significant recent reforms of the legal arrangements that regulate service provision have their origin in the rules established in the Political Constitution of 1991. The new PoliticalConstitution reassertedthe right of local governments to provide drinking water and sanitation services, as well as their power to grant concessions or other type of participationto private companies in the provision of water and sewerage services. Society's new fundamental legal framework has enabled very ambitious reforms, such as establishing the separation of service supply from policy making, and allowingfor private sector participationin the area of infrastructure. 31Other global Millennium Goals are the following: incorporate the principles of sustainable development into national policies and programs and revert the loss of environmental resources; by the year 2020, improve considerably the life of at least 100million slumdwellers; reduced by half the percentage of people with incomes below US$1per day; stop and begin to reduce the incidence o f paludism and other serious diseases. 32Ibidem. 112 Within this new legal institutional arrangements,Congress approved the new Regimefor the Provision of Residential Utility Services -Law 142 of 1994- establishing the general framework for the provision of utility services, giving rise to in depth institutional transformations in terms of regulation, control and surveillance, based on principles of efficiency, competition and decentralization. The Law sought to consolidate the companies that provide utility services by applying a policy of business modernization and the involvement of specialized operators to guarantee the efficient rendering of services and contribute with capital to the investments. The sector's new legal and regulatory framework gives pre-eminence to efficient service provision, by introducing a competitive system and promotingprivate participation in the sector. The organization structure adopted is based on the separation of functions. The National Government is responsiblefor the functions of policy-making, regulation and control, and the municipalities are responsible for ensuring the provision of services. The general framework is defined in Law 99 of 1993, which set up the institutional structure for the protection of the environment. Together with other public services, this law creates an institutionalstructure comprising three parties in which the Ministry of Economic Development (MDE) is responsible for policy-making and the area of regulation has been divided between the Drinking Water and Basic Sanitation Regulatory Commission (CRA) and the Superintendence of Residential Utility Services (SSPD). In the case of the first of these, it is responsiblefor promoting competition between service providers, overseeing monopolies, establishing the methods to set tariffs for water services under the approved criteria, setting regulatory principles and methodologies and controlling non-competitive practices; the SSPD, in turn, supervises compliance with the regulations, closely oversees the operation of the general administration of utility service companies and addresses consumer claims. The Directorate of Drinking Water and Basic Sanitation of 'the former Ministry of Economic Development, currently operating within the Ministry of Environment, Housing and Territorial Development, formulates the sector policy, providestechnical and institutionalassistance to the territorial entities and/or the service supply companies, designs and coordinates sectorial technological investigation programs and promotes special drinking water and basic sanitation programs. The area of environmental regulation is the responsibility of the Regional Autonomous Corporations(CAR). In the years after the passing of Law 142/94, efforts have focused on the adoption and enforcement of new regulatory principles: i) achieving financial self-sufficiency; ii) redistribution of charges and subsidies, Le. limiting the application of charges to the degrees of success. higher income grou s' iii) determination of the operation objectives, with different 8 Between 1993and 2002, water supply coverage34in urban zones has advances from an average of 75% to 96% in the large cities and metropolitan areas (Bogota, Cali, Medellin, Barranquilla), to 90% in provincial capitals and towns with over 70 thousand 33Taken from: Libhaber, Menahem and Vivien Foster, 2003. Water Supply and Sanitation inUrban Areas. InMarcel0 M.Giugale, Oliver Lafourcade, Connie Luf,Editors -2003 Colombia,fundamentos Econdmicosde la Paz.World Bank. Ed.Alfaomega 34Nominal water supply coverage: subscribers that have a connection to the distribution networks without taking into account the continuity or the potabilization levels. 113 inhabitants and 88% in the rest of the urban area. However, 2.5 million people still lack water supply, and 40% of the municipalities are below the national average (92Y0 of water supply coverage.)35 In sewerage, urban coverage increasedfrom 64% in 1993to 82% in 2002, which means that 5.8 million people still lack this service. The most critical situation is found in provincialcapitals with under 100thousand inhabitants,where over 5% of the population lacks adequate wastewater management.36 Quality of service, measured in terms of continuity of supply, has increased during the last few years, from 19.5 hours per day in 1992, to over 21.6 hours in 2000 and water losses in the systems have been reduced in the large cities by over seven percentage points and close to ten in provincial capitals, over the same period.37 Notwithstanding the above, the companies continue to exhibit inefficiencies in their management: in general terms, the quality of water for human consumption is not satisfactory; of the total water supply entities, in urban zones, 355 lack treatment systems and those that do, present operational inefficiencies in their use, due to the underutilization of the installed capacity, out of service components and design defi~iencies.~~In terms of residential wastewater disposal, 93% of the discharges are untreated. In the rural zone the situation is more critical: in a sample of 18,145 rural sites3', in 770 municipalities of 22 provinces (a sample that is representative of the country), it was determined that the water supply at the national level was 56.3%, although the World Bank indicates that only 40% of the 12 million inhabitants had water supply by the year 2000.40With regards to water quality, only 3.8% of the locations have drinking water treatment plants, of which 65% are in operation. In terms of wastewater management and disposal, the coveragewith individual solutions amounted to 29% and the sewerage coveragewas a mere 5%. Cleaning services comprising street sweeping, cleaning of public areas, collection and transportation of solid waste, have been satisfactory in the main and intermediate large cities, and acceptable in medium and small municipalities. In some intermediate cities, one or more companies are competing for the profitable users and segments, in a free competition regime, which has created financial difficulties for the companies that serve the poorer users. In solid waste final disposal, on the basis of 1,086 municipalities, 565 open dumps have been identified, 350 municipalities reported having landfills, of which over half may be wrongly classified, 32 municipalities dispose into water bodies, 5 use incineration as a complementary method and 44 carry out some type of reuse. In 35 The greatest deficiency i s found in provincial capitals with under100thousand inhabitants and inthe municipalities with 30 to 70 thousand people. 36 The most critical situations are found in Puerto Inirida, Mitu,Puerto Carreiio and San Andres. Over 300 municipalities --30% of the total-have less than 60% sewerage coverage and cities such as Florencia, Monteria, Buenaventura and Maicao, among others, where service coverage is below 50%. 37 Politica Pu'blica en el Sector de Agua Potable y SaneamientoBdsico en Colombia. Ministerio de Desarrollo Econdmico, September 2001. 38Politica Pu'blica en el Sector deAgua Potable y SaneamientoBdsico en Colombia. Ministerio de Desarrollo Econo'mico,September, 2001 39 Source: Rural SanitationInventory (2000-2002) - MAVDT. 40 Libhaber, Menahem et a1,ibidem. Page 370 114 general terms it may be stated that 75% of the country's municipalities have an inadequate final disposal. During the last few years, the scheme for the supply of water and basic sanitation residential services has been the subject of great controversy, mostly focusing on tariff issues, leaving aside the consideration of extremely important matters4' without which the sustainability of the sector is affected. On the other hand, the supply of these services has began to include the environmental variable as a sustainability factor and guaranteeing water resources in the long term; in the last years environmental and sector standards were developed, improving the efficient use of water resources and leading to decreased consumption4* as well as instruments for the management of municipalwastewater and the protectionof the major water sources; however, many actions are still pending and they need to be addressed by all the stakeholders The Single Window (VentanillaUnica) Facility The Single Window Facility is a mechanism designed by the National Government to receive and process all the sectorial projects that request financial support from the Nation, unifying the requirements of the various National, Provincial and Municipal instances for the investment of public funds in the drinking water and basic sanitation sector. It is designed to simplify the procedures and achieve efficiencies by establishing adequate and fast mechanismsin the applicationof investment resources. With the aim of ensuring a correct execution of resources within the framework of the defined principles and guidelines, the Single Window program is supported by the technical, legal and administrative-financial areas of MAVDT, legitimizing a coordinated managementto ensure an adequate and rapidflow of information. Once the project has received a final allocation of resources, duly supported by the corresponding approval minutes, it is necessary to carry out the activities detailed in the Operations Manual for program execution. This is the mechanism that would be used to apply to the resources obtained from the World Bank credit. These procedures have been analyzed and approved by the missions involved in the preparation of the program, with the members appointed by the Bank for this program. Programsand Projects The Single Window Program will finance infrastructure projects for medium and small urban areas, with services supplied by public companies; the program will finance investments in the water and sewerage systems on a minimum subsidy basis, once the project has obtained the necessary technical, economic, financial, institutional and environmental feasibility. Those companies that fail to comply with the minimum criteria ~~ 41Coverage, quality and long term service continuity, supply efficiency and investment management. 42According to MAVDT and DAF'SBA calculations, inthe last six years residential consumption has decreased 37%, to average household monthly consumptions of 17m3. 43State, Environmental Authorities, service suppliers and the community at large. 115 required for project execution and commissioning,will have to go through an institutional strengthening program that may be included in one of the following MAVDT programs, with the aim of guaranteeing the long term financial sustainability and feasibility of the supplier entity. The programs are: Business Modernization Proaram - PME: The main objective of this Program is increasing the levels of coverage and quality of drinking water and basic sanitation services, by creating or consolidating autonomous service providers, operating under business management arrangements, ensuring increasing indicators of efficiency and productivity,as well as the quality of investments,through private sector participation. Business Strenathenina Proaram: The main objective is to create a business culture in the existing supplier entities (public, private or mixed) in the smaller municipalities and rural areas of the country, by using a combined strategy of training and assistance, with the purpose of ensuring the continuity, quality and coverage of these services throughout the country. Communitv ComDanies Proaram: The objective of this program is to promote the participation of community based micro-businesses of a local or regional scope in municipalitiesor locations with less than 5,000 inhabitants, with the capacity to respond effectively to consumers demands, recover their investment costs and operate with high efficiency indicators. TRANSPARENCY, EVALUATION, AND CONTROL In a context of serious fiscal restrictions, the Government of Colombia has decided to modernize the public administration and adjust the institutional organization to achieve the objectives of the National Development Plan (PND) with effectiveness, efficiency and transparency. This implies incorporating new practices to involve citizens in the various stages of public administration, as well as strengthening the managerial tools to orient public management towards the attainment of results to improve the population's living conditions. Currently, the information on the operation and impact of the major policies and programs is poor, and as a consequence, decisions to extend, suspend, replace or modify a program, which usually accompany a change of administration, are not based on factors linked to their failure and/or success. Such a situation leads to policy decisions using imperfect information, something that increases the costs of state actions in an exaggerated manner, decreases the Government's impact and credibility, while restricting the agencies learningand strengthening. On the other hand, the lack of a wide and adequate mechanism to disseminate results has limited the scope of the National System of Evaluation of Public Management Results (Sinergia) and has prevented its operation as such. At the same time, it has prevented using such a system to implement a continuous feedback with the agencies subject to evaluation and state interventions,while it has reduced the system's potential as an instrumentfor social accountability. 116 Therefore, the National System of Evaluation of Public Management Results (Sinergia) will be added a component of focused evaluations and will implement a dissemination mechanism on the results of the evaluation and compliance with sectorial targets. Establishing the institutionalconditions to secure periodical impact evaluations of social programs has essential implicationsfor the processes of policy planning, development, adjustment and budgeting of public funds. Impact evaluations make it possible to determine and quantify the effects of programs on their beneficiaries, while establishing whether the interventions are the most efficient ones in relation with other actions towards which investments have been made. Thus, they become tools for the allocation of public resources to programs that are effective and efficient in terms of poverty reduction and the development of human and social capital, and for an ongoing feedback of results into the policy planning, budgeting, formulation and execution cycles and public investment programs. Consequently, the Government will seek to establish mechanisms to reinforcethe conduction of periodicalevaluations. To conclude, by articulating the follow-up, focused evaluations and dissemination components, the National Development Plan seeks to consolidate the National System of Evaluation of Results, turning it into a tool to increase effectiveness and transparency in public management, improve the efficiencyof expenditure, modernize the civil service, improve the design of government policies and programs and involve citizens in the various management stages. Finally, the Government is committed to the program that is presented in this document and welcomes the support and financial assistance of the World Bank. The Government thanks the Bank's Board for their prompt consideration of a Credit in Support of the Water and Sanitation Sector for up to US$ 70 milliondollars. Cordially, SANDRA SUAREZ Minister of Environment,Housing and Territorial Development 117 ~ i n i ~ tde~Ambiente,Vivienda y DesarroilrsTerritorial ~ r s Despacho%inktra RephblicadeCalarnbta Bogota, 2 - Se JA D. HN Presidente BANCOMUNDIAL t el acceso a 10s mercad licos de vatores nidad de acceso a 10s c pa, tiene que ver con !as programas de ble, sanearrriento b a s h y ambientat Desde una perspectiva emn6mica, el agua potable tiene profundas caractarisficasde iere de una asi a de 10s recursas quidos y sblidos por parte La Ley 142 de 1994, del Ministeriode Ambiente,Vivienda y DesarroiloTerritorial Despachahlinistra RqdiblicadeColarnbia Ministeriode Ambien as de inversiBndel &as fuentss de En desarrollo de la polka estabtecida por el actual Gobiemo, el Ministerio de adelantandoactuafmente ocumento 3e describen to8 antecedentes y el wntexto sobre el cual se das en esta operacidn, os Ptibiico, el Departamento equipos del Banco y el objetivo es Sinanciar prestadores. Elmantode las invarsianes que unpmgrama darianos hace taje de un program de cr6 un instrumento programaen Sases de pro ~ i t i ~de Ambiente, 0 3 ~ ~ ~ ~ Vivienda y CIesarralloTerritorial DespachoRllinistra KepirbhcadeCaiombra I,OBJETlVOSDE POL/TICA j.1. Nacional de Desar 9 Cantinuar con la social. olidar 10s mams regulatorios y ef desarrollo de privatizaciones ' s en la construccicjn,operacibn y mantenimiento de fa a. iii) eeer medidas para aumentar la eficiencia y ad del 0 iv) Ajustar el esquema regional@$. v) lncentivar el buenuso de 10s recursm locales. 6n final de residuos 2.2 3.3. en las ccrales 5e SistemaGeneral ~ i ~ de Ambiente, Yivienda~y Desarrdlo Torritarial i ~ ~ ~ r i DespachoMinistra RepubticadeCoimtna Ministeria y las Corporaci apoyaran la creacibn de empresas reg ra programas de q u a table y saneamienfo bhsico. calidad de vida. crecimienta econrimico 6. La politica, busca dark un 8. Para tal fin, y en desarrollo del programa de Audiencias Publicas3impulsado por el Gobierno Nacional, niita Onica coma el cual se recibe,evai agua potabley saneamiento efrciencia. y ~ ~ ~ ~ lde~10s~ ~ m i ~ n prestadores de 10s servicios ~ ~ ~y residuosn ~ ~ ~ sblidos, EI partirde economias eetos de inter& mgional. t se orienta al man ible del recursa hidrico ecesidades para el Iardenamientode al famento de tetecnologias que g ra se urienta a la ~ p ~ ~ m jyzalamanejo~integrai de IQS ~ i ~ es para la ejecucibn de proyectas daf or en 10s distintos nivelss ucionalesy empresariales. 14. La po//tica se orienta a la de concertacian y participacibn ci a, a1 fortabcimi cratizacidn de las y a la ganeraGion de servicios pObliGos s especificosde la politicadel s 15. Aumentar la poblaciibn neficiada y mejorar !a clalidad en ia p ~ s t s de acueducta y saneamienta basica en las zonas 16. Focalizar las acciones del Estado para garantizar el accesa de servicies de acueducto y saneamienta btisico en la poblilcibn de menos in sos, con costas acordes con su capacidad de pago 17. lncentivar la eficiencia de la cI6n de 10s servicios por parte de !as ~tmpresas prestadoras 18.Coordinary pramovsr ones de asistenciatdcnica y capacitacidnen el se del recurso agua y la pr~teccicinde fas cuencas nicipalesy vxedales ~~nister~u de Ambient@,Vivienda y DesarrolloTerritorial Despacho Ministra RepubficadeColmbla ritorial, a traves de la Direcci6n e Agua Potabie y Sane special enfasisa la pres Niciospublicosde a ras paraque el pais aleance 22. Enest@contexto,la 6n de AguasuPatablsy Saneamiento B taj a resaltariencia de gestitjjn, en et sector r se 10s senricios piibiicos domicliarias' coberturade abastedmientode agua agua potable y de ellas solo el ervicicsde alcantarillado es menor 23. Engeneral,cada unode 10s retos antes rdacionadosest& siendo asumidospor la Direccidn de Agua Potabis y eamiento B&siw y Ambiental C O ~ Oguias para orientar su gestibnen el corta, nQy k g 0 P k Q . Idem. opC i l . 24. En Colombia, ias refarmasrecientesmas $ ~ ~ ~ ~ fdel~entomoades institucianes i t j ~ R de refomas muy icie, la eiaboracibn nuevo RBgimen de 6n de Sewicios Do permiti6 establecer de un sistema co sector. 26. Le estructura funeiones, el Go regulacibny control, y efaboracihn de las pol! son competencia de la A); y las funeiones Servieios Publjcos ar la ~ ~ & 3de 5 fomento a la de 10s monopalios, el de Ague Potable y Sanea 0, adscrita al ministerio de a y Dssarralla Territorial, formula la politica sectorial, asiste t4cniea e i n s ~ i t ~ ~ ~ ~ na~tasmentidades l ~ R ~ s Mitristeriode Ambiente,Vivienday DesarrolloTerritorial Dmpacho Ministra RephblicadeColombia UfadQreS:i) el togro 5 esfuerzos se han subsidios, es decir con un manejoadecuadode [assrguas residua\es.ra $t3 La calidad del servicio, medido coma la continuidad de la prestacibn, se ha incrementadodurante 10s. Ottimas 8170sde $9.5 horasdiarias en 1S92, a m&sde 21.6 haras en e\ 2000 y las pe das de agua en las sistemas se he disminuida en las grandes ciiidades etz m& de siete puntos p ~ r ~ ~ ny~cere8 lde~diez en las u a ~ 0, en igual perlodo" encias en su gestibn: en isfactofia;del total de las inadecuada. Uinisteriode Ambiente, ~ i y i ~ n dy aDesarrulloTerritorial Dsspachotdiinistra RepirblicadeCotomkia 35. Durante 10s iiltimos ailas, el asqusma de prestacirin de la$ sewi Q ha sido objeto sgadas al tema tarifario dejando i ~ ~ osin ~IQS ~ wales, la~ ~ ~ s ' ~ variable ambien 37. La Ventan apoyo financier0 a la N instancias nacional inversibn. 38. Can el fin de garantizar la corrects leje i6n de 10s fectlmos en el marca de (os principiosy lineamientosdefinidos, el prog areas tkcnica, legel y admin -financier8del de Ventanilia ifnica se soporta en !as legitimando un manejo coordinadoque assgure el a y rdpido flujo de cibn, royedo cuente con la asig definitiva de recursos,debidamente e detallenen el ManualQpt;rativaondiente iFjndel programa. el acta de aprobacikn se deben adetantar las del eje 40, Es a travQs de ssfe me edio del cual se ha concebida apficar [os recursosque via crhdito, se el Banco Mundial, P su VBZ han las Misiones de prepa con 10s mi@ ~ ~ i ~ Ambiente,~$ ~r ~~iye~Desarrola Territorial de i ~ ~ ~ d a DespachoMinistra RepBblicadt!Colombia B. Programasy Prsyeclos sbercin vincula iabiiidadde laantidad prestadora en et largopfazo: 0 central de est@ ii) n y asistencia, a efectos de estos sewicies en el iii) inversidny operar conaltas indicesde eficiencia. aEVALUACI~MY 42. En un contexta de g restricciones fiscalales Nacional se ha est0 modsmizar la g mparencia tos o was p&cticas que n del Estado, asi c itblica hacia el I eraci6n un esquema de difusidn de 10s resultados de la evaluacidn y del mplimiento de 10s compromisossectoriales. 46. El establecimiento de candiciones institmionales que garanticen la reali peri6dica de evaluaciones de impact0 deificacion, irss pmgramas sociales tiene implica farmulacibn, ajuste de politicas y s mttoalimenten peribdicade las evaluacionas. Uinisterio de A ~ ~Vivienda~y Desarrollo~Territorial ~ nDespacho , ~ Ministra ~ ~ deCafombia I ~ ~ I c ~ se presanta en millones. Cordialmente, enda y DesarrolloTe de PlaneaciiZtn Financirra y Programas Banca Annex 16: SummarySocial Assessment COLOMBIA:Water andSanitationSectorSupportProject Introduction As part of its effort to improve the living conditions of a large number of poor inhabitants, the government of Colombia has embarked upon a reform of its water and sanitation sector, with the purpose to extend water supply and sewerage networks to mediumand small size municipalities, as well as to ensure quality and continuity of water supply services in order to reduce public health risks, especially for children. To accomplish this objective, the government proposes to involve financially sound specialized private operators in the management and operation of the water and sewerage services, so as to guarantee efficient systems operation and to develop new investment programs. The Colombia Water and Sanitation Sector Support Project (the Project) aims to improve the provision of water supply and sanitation services in Colombia in a financially efficient and sustainable manner through the provision of capital investment subsidies for poverty-focused coverage expansion and service quality improvement. The Project will (a) scale-up the involvement of the private sector in medium-size cities through the introduction of performance- based management arrangements with specialized operators; (b) support poverty-focused investment through targeted capital subsidies in small, medium, and large urban areas; and (c) deliver appropriate water supply and sanitation investments in Colombia' s underserved rural areas. The Project will be wholly implemented through municipal water companies located throughout the country. The Project's social benefits are focused on increasing coverage of water and sanitation services in impoverished areas. Statistics show that in Colombia, about 10 million people lack access to piped water supply and about 15 million lack connection to sewerage systems. The effective4 water supply coverage in the country i s 38% for main cities and 27% for minor municipalities. Only 30% of municipal water supply systems include water treatment plants and only a small portion of about 10% of the wastewater generated in the country i s treated. Service deficiencies persist - potable water coverage i s insufficient, service quality i s highly variable and plagued by rationing and intermittent supply, less than half of all water supply i s treated, and sewerage facilities in poor areas are woefully inadequate - and less than 10% of municipally generated wastewater i s subjected to any kind of treatment. Rural water supply and sewerage coverage i s poor; only 52% of the population i s connected to a public water supply system and less than one quarter have access to basic sewerage infrastructure. The Project has direct linkages to the Bank's ongoing work in Colombia, which supported the development of the model for least-cost subsidy private sector participation which the Government aims to scale-up. The Project also dovetails with the broad sector reform agenda in which the Bank remains an active player. The project targets municipalities throughout the nation. All subprojects will be evaluated for their eligibility through a screening mechanism call the "Ventanilla Unica." The Ventanilla Unica Program was defined by the Government to channel capital grant resources from the national budget to support solving structural deficits of regional utilities by financing investment subprojects. The subprojects that are included within this Project all resulted from extensive Measured by the percentage of hourslyear with service. 118 public consultation activities. Audencias Pciblicas were held ineach municipality to determine the investment priorities in the water and sanitation sector. In conjunction with the 2002-2006 National Development Plan (NDP), the Government has identified a medium-term investment program to expand coverage and improve service quality in both urban and rural areas. Capital investment resources are allocated at the departmental level to address needs within each department. These needs were identified through the recently completed participatory public consultation process known as the Audiencias Pciblicas. In addition to the existing public funds allocatedto the sector (including intergovernmental transfers from Ley 715, direct investments by the Ministry of Environment, and programs managed by FINDETER, and FONADE), approximately US$ 120 million has been allocated for investment in the water and sanitation sector under the NDPandAudiencias Pciblicas. The main focus areas of the Social Assessment include: (1) socio-economic condition in project areas; (2) current level of water and sewerage services; (3) expected project impact; (4) socio- economic burden of water cost before and after project; (5) experience regardingthe performance of private water operators with respect to services in low income neighborhoods; (6) consensus building and community participation strategy; and (7) mitigation measures for labor force reduction and tariff increases. Socio-Economic Conditions in Colombia InColombia, residentialareas are classified into 6 socio-economic strata, with stratum6 beingthe highest income area and stratum 1the lowest. The classification i s updated annually by DNP and i s used for calculation of tariffs for public services, for calculations of government transfers to municipalities and for additional purposes. Residents of areas classified as 1,2 and 3 are considered low income population. Populationin strata 1,2 and 3 i s a commonly usedand easy to measure indicator of low income population inColombia. More accurate indicators of poverty are the unsatisfiedbasic needs (NBI) indicator and the quality of life index (ICV). The Program will be implementedon a national scale. Data on poverty and coverage of water and sewerageservices are provided in Table 1. When measured in terms of NBI, about 25% of the Colombian population is living inpoverty and about 8% i s living inmisery. % of Population % of Population % of Access to % of Access to Department Livinginpoverty* Living inMisery* Water Sewerage (1997) (1999) (1999) (1997) NationTotal 25.4 7.7 83.3 70.0 Data for the social assessments of the project result from numerous studied undertaken during project preparation, including the environmentalassessment and economic assessment. Current Level of Water and Sewerage Services: Coverage and Continuity Approximately 84% of the urban population of about 28 million were connected to water supplies in 1997, as compared to 79%, the averagefor the LAC region. About 75% were either connected to public sewerage or had individual septic tanks in 1997. Rural coverage was lower with about 44% of the 11 million rural population connected to public water supply and only about 25% connected to sewerage systems. However, the increase in coverage rates masks shortcomings in the quality of service. Water rationing and intermittent supplies are common in most water supply 119 systems. Only slightly less than 50 percent of all drinking water i s treated and, as a result, the drinking water quality in many systems is substandard. Sufficient pressure in the water supply systems i s lacking, adding to the risk of bacterial contamination. Sewage collection systems do not have sufficient hydraulic capacity to handle wastewater flows, especially in poor neighborhoods, resulting in overflow problems. The share of generatedwastewater receiving any kindof treatment is about 5%, which is low for a middleincome country such as Colombia. Water, where and when available, i s drawn by households who can afford to built a storage tank or install a pump which draws directly from the supply line. A pump owner deprives ten surrounding households from receiving water. Purchase of bottled water i s widespread and the associated costs form part of the daily household expenses. Small private providers fetch water from contaminated water courses and distribute it to consumersusingdonkeys for transportation. A significant amount of the household budget is spendon buying water from altemative providers and it is usually the low income segments of the population that depends most on alternatives water supply sources. As usual, women and children suffer most from the burden of the lack of a reliable public water supply system. Households do not consider the water to which they have access as safe for drinking. As a general practice, water i s boiled before use, thereby increasing its costs. Water supply i s considered to be the most unreliable services, trailing far behind the electricity and telecommunication services, which receive a high rating in terms of service reliability. Water and sanitation sector conditions have been highly variable since 2000. Especially worrisome i s the health impacts of the poor service provision, which has remainedunchanged-if not deteriorated -as measuredby levels of morbidity and mortality in the EAS.Inurban areas, 33 of 133 water enterprises reviewed do not meet their obligations under decree 475 of 1998 (which functioning. The needs in rural areas are particularly acute - the health impacts of low service sets potable water quality levels). In rural areas, of 220 treatment plants surveyed, only 66% are levels are dramatic (62% of the rural population reported being illfor periods between 2 and 30 days in 2003, compared with 56% of the urban population, and 48% report not having the financial resources to resolve their illness, compared with 38% of urban respondent~)?~ environmental pressure on watersheds which is affecting biological diversity and water quality; and qualitative and quantitative deterioration of surface and ground water sources. The high priority given to sector investments duringthe Audiencias PLiblicas no doubt reflects widespread perception of the need to resolve such issues. Expected Project Impact on the Water and Sewerage Services and on Their Provision to Inhabitantsof Low IncomeAreas Subproject execution i s expected to generate a strongly positive social impacts which would include (a) public health benefits, particularly on morbidity and mortality related to improved quality of drinking water, decontamination of source water through the appropriate management and, in some cases, treatment of wastewater and (b) the efficient use of water resources, particularly those subprojects with system management and consequent improvements in administrative and operational efficiency of service providers. Such positive impacts are expected to benefit some 2.5 million people, equivalent to 6% of the national population. Expected direct project benefits include improvement of the water and sanitation services in terms of coverage, continuity, water quality, water loss reduction, treatment of wastewater and more. Indirect project benefits include improved public health and reduction in water borne 45DANE.ENCV. BogotB, 2003 120 diseases, improvement in living conditions, urban development and a new and efficient allocation of the municipal budget (currently, municipalities are financing the inefficiencies of the water utilities such as high expenses for overstaffing, high water losses and more). Nonetheless, the project might also generate negative social effects like increase in tariffs and possible lay-offs of utility employees. The project's strategy and design establish specific mechanisms to ensure that low income neighborhoods will benefit from the project investments and that the level of water and sanitation services in these neighborhoods will improve. This would be achieved by including in the operation contracts targets for water and sewerage coverage in low income neighborhoods andby identifying the specific locations of the low income areas to which the services will be extended. Socio-Economic Burden of the Water Cost Before uroiect. Ina small sample of municipalities, on average, 8.1% of the household income i s spent on purchase of water. The expenses on purchase of water may be as high as 10.5% for the lower socio-economic strata and 6.8% for the higher strata. The cost of water depends significantly on to the water supply source available. In general, the cost of the water distributed by the existing public supply network i s significantly lower than the cost of water provided by alternative suppliers (bottled water, water trucks). InMaicao, amediumsizemunicipality inthe Caribbeanregion, the existingwater supply service i s provided only to 36% of the population. In the poorer neighborhoods of the city this coverage i s only 30% while in the wealthiest areas it reaches 63%. The socio-economic impact of this low coverage i s tremendous. Currently, the spending on water, a basic human necessity, consumes up to 19% of the income of the poorer households and up to 16% of the income of wealthier households. consumers from all socio-economic strata in this municipality have to buy bottled water and water delivered by trucks, the cost of which averages US$ 2.90 per m3 compared to a cost of less than US$ 0.30 per m3 delivered through the existing public supply network. The average household water consumption from the existing water supply network does not exceed 10m3 per month because of insufficient supply, and a similar volume has to be bought from alternative suppliers to obtain 20m3 per month, considered an adequate average household monthly consumption. Inother municipalities, where the level of water services i s higher, the cost of water i s significantly lower. After uroiect. Consideringthe project targets with respect to improvingthe coverage andthe level of services, as well as the subsidy policy applied under the project, it i s expected that its impact on the household expenses on water will vary, depending on the pre-project level of services and the specifics of subproject content. In the case of "modernization" subprojects, where dramatic impacts on service quality are expected in the near-term, if the current service i s extremely poor and forces households to buy water from alternative suppliers, it i s expected that the social impact of the project will be remarkably positive for all the socio-economic strata: water consumption will increase and the expenses on purchase of water will decrease. In subprojects which involve more gradual improvements in the quality of service provision, such benefits are expected to be more modest, though there are expected to be significant immediate impacts of improved services through expanded infrastructure. If the current service already reaches a reasonable coverage rate and quality, the project's social impacts are also expected to be positive, however, it would provide different benefits to different socio-economic strata: the poor, who in general receive currently services of lower quality, will benefit from improved services while the wealthier will continue to receive good services. For consumers in all the socio-economic strata, in both scenarios the monthly expenses on purchase of water after the project (i.e., the monthly water 121 bills) will not exceed, on average, 8% of monthly household income and in most cases it will be lower than that (inthe range of 4 to 8%). Percentage of Expenses on Water Purchase inRespect to Household Income In an analysis completed for Loan CO-7077, detailed percentages were estimated for the changes in monthly percentages of incomes spent on water. These data remain valid, and show the impacts to some of the most vulnerable segments of the population and has thus been utilized to estimate the trends for this Project, as well. Tables 3, 4 and 5 provide data on the percentage of the monthly expenses on water in respect to household income for the different socio-economic stratabefore and after project implementation. The monthly expenses on water before project include expenses on all water sources (water supplied by the public utility, trucked water, bottled water etc.), while the expenses after project are practically those paid to the private operator, i.e., the monthly water bill. The bills after project implementation were estimated on the basis of the tariffs agreedupon with the mayors of the municipalities of the sample duringpreparation. Municipality Percentage of Water BillinRespect to Household Income 1 2 3 4 to 5 Average Nataga 5.5% 5.0% 5.9% 5.9% Cumaral 6.0% 6.0% 5.0% 5.5% Quibdo 4.4% 2.7% 1.7% 2.7% ERAS 9.7% 7.8% 4.9% 5.4% 8.0% Maicao 6.5% 6.5% 5.6% 6.4% Sincelejo 6.9% 3.8% 2.2% 4.9% 4.0% Note: Based on a consumptionof 20 m3 per month inall strata 122 Worth noting i s the fact that the increase of tariffs and monthly bills charged by the utilities i s higher than the increaseinthe real expenses for purchaseof water since the real expensesinclude payments to all providers, including alternative providers. Water TariffsRequiredto Obtainthe SameService TargetsWithout Subsidy IfthesubsidypolicyproposedundertheProgramwouldnotbeapplied,anadditionaltariff increase would be required in order to achieve the same service targets proposed by the project. The additional tariff increase required in this case would range from 5% to 130%, depending on existing tariffs, grant amounts, and existing service quality. The average monthly bill per strata in the "with project" case for the two scenarios: (i) subsidy policy applied; and (ii) project project subsidy policy not applied, i s presented in Table 9. The additional tariff increase vary for each municipality and can be moderate or significantly high, according to the additional investments required. 1 Table5: MonthlyWater Billper StrataWith andWithoutProjectSubsidyPolicy, for the I It can be noted that without the project subsidy policy, the monthly bills, especially for the low income stratawill increaseto levels which will present a meaningful economic burden. Experience Regarding the Performance of Private Water Operators with Respect to Services in Low IncomeNeighborhoods The performance of many public water utilities in Colombia i s less than satisfactory, as reflected in low coverage rates of water and sewerage and low quality of services, particularly inthe poor areas. Critical financial constraints, excessive labor force and administrative failures of the public service providerscontribute to this problem. Participation of private operators may offer a remedy. The first private operation in a large city began in Cartagena in 1995. Barranquilla followed soon the route of PSP. Today, the private sector i s operating water supply and sanitation services in 47 municipalities in Colombia (14 large to medium size and 33 small municipalities). Duringthe next 123 three years, additional municipalities are expected incorporate the private sector inthe management andoperation of their water services. The common perception of the population is that the private sector's only interest is profits and therefore it provides a better service to wealthy areas and neglects low income poor neighborhoods. However, during the last five years, the municipalities operated by the private sector have experienced significant increase in the coverage of the water and sewage services, includingin low income areas. Total water coverage inCartagenawent from 68% to 86%, in Barranquilla from 89% to 94% and in Tunja from 89% to 98%. Increases in coverage rates occurred also in low income areas (defined as strata 1and 2 neighborhoods). With respect to provision of services to the poor, the private operators performed as well as the utility of Medellin (EPM), which i s the most efficient public utility in Colombia, and better than utilities of BogotB and Manizales, which are of the best public utilities inthe country. The main reason for the satisfactory performance of private operators i s the need to expand the number of consumers, in order to reduce the impact of fixed costs. This leads to three behavioral patterns of the private sector that benefit the poor: 1. Generally, at the beginning of the project, services coverage for the poorest strata households i s lower than that of the rest of the population. Necessarily the lowest strata mustbe served inorder to increasethe size of the water market. 2. Private operators are better able than public operator to provide short-term investment in new connections supported by marketing and commercial strategies focused on capturing new clients. 3. Public operators often postpone investment in new connections in lower strata population, particularly in those subnormal or illegal neighborhoods, whereas, private operators design strategies like common connections, incentives for long-term payments for connection, etc. Indeed, experience in Colombia shows that private operators provided alternative water supply solutions to irregular settlements. They are also providing free water to localities which in the short term have not yet received a legal status and do not receive regular service. Publicly owned water utilities do not provide water to irregular settlement, justifying that approach by legislation which prohibits such action before the settlement i s legalized. ConsensusBuildingand Community ParticipationStrategy Community participation i s considered a key element in the strategy to ensure the sustainability of the Project. It can contribute to the project success, although by itself it does not guarantee the success. Lack of community participationmay constitute a threat to the project interms of timing and transaction costs. Because of the diversity of the communities involved, the mechanisms of participation must be tailored for each case to fit local conditions. Community participationfulfills three purposes: 1. Achieving community consensus regarding the lack of coverage and the poor quality of water and sanitation services; 2. Promoting the project and the advantages of private participation, providing information about positive effects and mitigation measures aiming at avoiding negative effects, thereby providing a process through which the community can resolve questions and doubts about the project; 124 3. Promoting and strengthening community oversight of private sector participation in order to ensure the sustainability of the process. The preceding project designed a community participation strategy with six steps. This has been adapted to the existing project where private sector participation i s envisaged. For subprojects where PSP i s not sought, public participation i s ensured through the environmental assessment process, possible indigenous peoples and/or resettlement plan development process. It i s important to note that the Audencias Ptiblicas have already ensured that the community has been involved in project design. For projects which include "modernization", community participation would include steps outlined inTable 6. Table 6: Community Participation in"Modernization" Subprojects PSP Promotion. The MAVDT presents informationabout the projectto the municipality's mayor and staff, to representativesof the municipalcouncilandto the public water companystaff.; Institutional Inthose municipalitiesinwhich an agreementbetweenthe Ministry andlocal authoritiesis agreement reached, consultingservicesare hired for preparingengineering studies (investmentprogramsfor mediumsize cities anddetaileddesignsfor small municipalities).Throughthe media, the communityis informedaboutthe agreement, the studiesandthe consultationprocessdesignedto involve all the key stakeholders. Diagnosisand A diagnosisof the water and sanitationservicesat the municipalleveli s preparedinvolving the alternativesfor the communityandlocal leadersinseveralevents, which createsconcreteopportunitiesto carry out a development of the consultationprocesswith respectto the communityneedsandthe impactof the project.This project. allowsthe communityto become familiar with the project. Duringthis processthe municipal authoritiesare the mainsponsor of the participationprocess, while the MAVDT acts as an advisor andcoordinator. Selectionof the Once the possibletechnicalandfinancial alternatives to undertakethe servicesreform are operationalalternative identified, anagreement with local authoritiesandcommunity representativesregardingproject's anddefinition of the conditions,such as investmentrequirements,financing sources, tariffs, and mitigation plans for terms of the contract utility employeeslay-offs is established. The communityhas the opportunityto express its perceptionsabout the process andresolveany doubtsinorder to promotetheir support of the projectandits approvalby the municipalauthorities.This phase will successfully conclude when the proposedreformobtains afavorable public opinion. Without such support, mayors will be reluctantto proceedwith the reform.Inmediumsize cities, the projectdoes not seek aformal support from the communities, becauseof the largenumberof consumers. However,in small municipalities,the discussionof the communityneeds andthe projectproposals andimpacts benefitsfrom a muchcloser contactwith the community members andlocal leaders.Nevertheless, evenin small municipalities,aformal approvalfrom communitieshas not beenconceivedas a target for the participatorystrategy, since the willingness to pay is relatedto the service improvement,which intum, will come gradually,so it is consideredthat support to the projectwill increasewith time, after the take over by the privateoperator of responsibilityfor the provision of the services,andthe approachof obtaininga formal up-front community approvalas acondition of eligibility is not consideredadvisable. Public bidding At this step, the community,representedby municipal authoritiesfrom the executive and legislativebodies,overseesthe public bidding processinorderto accomplishclearness, responsibilityand sound economic principles.Suitable information mechanismsare designedfor communitvoversight: Transition from public The objectivei s to achievethe community support for the new operator. Openforums, work to private operator meetingsandperiodicalbulletinscanbe effectivetools. Also, promotionof Developmentand Social ControlCommitteesinsidethe privateutility mustbe accomplished as amechanism requiredby nationallaw inorder to guaranteecommunity participationinthe water and sewage servicesoperation. Private Operation During the phaseof operationandmanagementof the systems by the privatesector, public participationwill take the form of creationandoperationof the "veeduriaspopulures", public committeeswhose task is to act as independentpublic reviewersof the performanceof the private operators, and will provideinformation to the public, as meansof ensuringutility accountabilityto consumers. These committees act inaccordancewith Law 134of 1994(Mechanismsof Participation,article 100).The project will ensure financial andtechnicalsupport to promotethe creationandenforcementof these committees. 125 Mitigation Measures for Labor Force Reductionand Tariff Increases Impacts on labor and tariffs may imply risk for the PSP processes.The number of employees of the water utilities will most probably decrease in order to reduce labor redundancy, thereby resolving one of the main causes of utility inefficiency. Tariffs will rise to cover costs of improved water and sanitation services. Both issues require mitigation mechanisms, focused on offsetting adverse consequences of unemployment and consumers dissatisfaction with higher tariffs. Labor Issues Water utility institutional reform - and especially in the cases of subprojects which include the introduction of a private operator under the "modernization" approach - would likely involve reduction in labor force aimed at improving efficiency. In Cartagena the ratio of employees per 1000 connections descended from 15 to 2.4 as a result of the PSP reform; in Barranquilla from 5.4 to 3.4 and inTunja from 5 to 3.746.The project aims to support the reform of 2-3 medium size water utilities and about 25 small municipalities. The estimated total number of employees in medium-size utilities i s between 300 to 500 while 100-150 workers are employed in the small municipalities target by the project. In the worst case scenario, the number of employees in the medium-sizeutilities mightbe reduced by half under private operation, whereas it i s not expected to be reduced in small municipalities. The labor problem associated with the project i s not concentrated in one city but spread over a large area. Also, the reduction in the number of employees will not take place in the same time in all the effected utilities, but will rather spread over a period of 3-4 years. Several mitigation measures will be incorporated inthe project in order to ease the labor problem. First, voluntary separation programs will be offered to all participating municipalities (medium and small). Secondly, two other strategies will be implemented: (i) Labor Adaptation Promam (Pronrama de Adautacidn Laboral PAL,) i s suitable for all size municipalities. It focuses on the treatment of individual employees needs. It i s part of the municipal administration and the public operator responsibilities to insure that mitigation measures be incorporated. The PAL program i s based on individual counseling aimed at identifying employment alternatives, psychological support , retraining and providing information on other alternatives such as the establishment of workers association enterprises or cooperatives. PAL, requires participation of specialized private operator human resources as social workers, psychologists, training experts; it can be developed with the assistance Colombian NGOs which have relevant expertise (nearly 50 of them are available in the country). The estimated cost of such support attain US$ 162 per employee involvedinthe PAL,. (ii) Associative work cooperatives (Cooperativas asociativas de Trabaio. CAT)47, This strategy i s suitable for medium and large utilities with enough employees for the constitution of a cooperative (with more than 25 members). The project will 46 Internationalstandard indicates 2 employees per 1000connections. In small municipalities this standard is not appropriate. 4' Associative work cooperatives are one of the two alternatives of Organized associative work (the other are associative work enterprises), recognized by the Colombianlaw as a mechanismto create flexible work market and as an alternativeto unemployment. CAT do not imply a direct labor contract with the private operator and are suitable for outsourcingactivities. 126 encourage the constitution of CAT which can carry out some activities of water supply and sanitation such as construction, maintenance and operation. Tariff Increase Mitigation Private operation implies higher tariffs when water and sewage services need to be improved. Cross subsidies are part of the design of the tariff structure in Colombia and have proven to be an effective mechanismfor income redistributioninlarge urban areas ("GustoSocial y Desiguuldud: Logros y Extruvios", C. Velez, DN", 1996). However, since there are so many municipalities in which the entire population i s classified as residing in low income areas, the cross subsidy mechanism loses it's effect. To overcome this problem, Law 142 created a specific mechanism, the Solidarity Funds, to allow better service to low-income groups while helping utilities maintain their financial resources, by providing an additional direct subsidy to the service provider. However, Solidarity Funds managementis the responsibility of the municipalities and these funds are supposed to be financed from municipal public resources. Due to budget shortfalls, the municipalities do not have available resources and the solidarity funds concept has not been put to practice, i.e., inmost cases these funds have not yet been constituted. Although the project will induce tariff increases, those will take into account the willingness and capacity to pay. The existing cross subsidy tariff systems effective in Colombia will apply in the municipalities participating in the project and will ease the burden on the poor. In addition, the project has been designed in such a manner that residents of low income areas (Strata 1,2 and 3) will receive as a subsidy the benefits generatedby the project investments. This subsidy policy would be very significant for small municipalities, in which the government will be financing a major portion of the investments. Inregard to house connection costs, private operators will be encouraged and will have their own incentives to provide soft term financing to consumers in low income areas. In certain cases, when warranted, financing for house connections might be providedby the project. The above mechanism can be supported with an educational programfor the community, focused on demonstrating that service improvement justifies higher tariffs. An emphasis should be made on the creation of a collective conscience that there i s no better option, and that alternative water sources are even more expensive than the cost resulting from the new tariffs. The educational program must be developed by the private operator through a multidisciplinary group interacting closely with community leaders and organizations previously identified. The private operator of Barranquilla, has a very positive experience on this matter. 127 Annex 17: SampleSubprojectTechnicalAnalysis COLOMBIA: Water andSanitationSector SupportProject A sample of urban and rural subprojects was reviewed during preparation. A technical review was performed, consistent with the guidelines of the Ventanilla hica, to assess alternative design solutions and ensure the technical viability and appropriateness of the proposed subprojects. This annex details the urban subprojects reviewed, Honda (Tolima), Puerto Carreiio (Vichada) and Los Patios (N.de Santander). Honda, Expansion of the Regional Water Supply Subproject to Honda, Mariquita and PuertoBogoti Subproiect Description. The public utility Emprehon i s leading a project whose objective i s to increase the capacity of water supply to the municipalities of Honda, Mariquita and Puerto Bogota through the development of a new water supply source, the Medina river. An important part of the works have already been constructed andthe objective of the subproject i s to complete the works. Currently, the two municipalities use water from other sources which are insufficient to satisfy the demand during the dry season, and the subproject i s aimed at eliminating restrictions duringthat season. The additionaldemand is estimated at 250 l/s in2004 and 314 Us in2014. The total length from the intake at the Medina river to the water treatment plant at Honda (which has the capacity to treat the additional flow of water) is 17,400 m. The pipeline i s a PVC pipe of varying diameter (12" to 18"). The intake structure is a conventional one based on a small dam a lateral intake. The diverted water i s passed through a grit chamber for removal of sand, after which it enters to the gravity pipeline. The subproject i s designed to benefit a population of about 62,400, providing an additional flow of 180 Us, which, although insufficient to cover all the future demand, i s a step in the right direction. Future supply needs may be addressedduringsubsequent phases of the Program. The estimated subproject cost i s about US$185,000, including works and supervision. Those cost will be updated when the additional studies resulting from the technical analysis will be completed. The technicalreview undertakenas part of project preparation revealedthat: 0 It was necessary to define the level of financial participation of the municipalities of Mariquita and Puerto BogotA. 0 It i s necessary to verify the hydraulic capacity of the new system, takinginto account the demand of the three municipalities. 0 As part of subproject conditions the three municipalities would be required to initiate a water losses reductionprogram. 0 It i s necessary to carry out a detailed survey of the constructed woks so as to be able to undertake a reliable hydraulic review. 0 Taking into consideration that about 80% of the work has already been constructed, efforts should be directed to appropriate utilization of the constructed pipeline. If the 128 review will demonstrate that the installed pipeline cannot withstand the pressure which will be developed in the system, it might be required to install pressure reduction structures, which might cause reduction of flow, but would enable safe use of the constructed infrastructure. As part of the subproject review, additional studies are beingundertaken to inspect the existing portion of the pipeline, estimate the hydraulic capacity of the intake and the pipeline, and update the estimated cost of the subproject. The involved utilities will be required to undertake institutional improvement steps which would include as a minimum, the implementation of a water loses reduction program. PuertoCarrefio,Improvementof the Water Treatment Plantand expansion of the Capacity of the mainStorageReservoir Subproiect Description. The water and sanitation services in Puerto CarreHo are provided by a private operator, SEPPCA S.A. E.S.P., which assumed responsibility for the provision of the services over two years ago and i s operating a water supply system which consists of an intake from the Orinoco river, a water treatment plant, and a distribution network, serving a population of about 9,000. The operator i s also operating the sewerage network, which was mostly constructed by the operator and is still under expansion, and a wastewater treatment plant which was also constructed duringthe operator's tenure. The water i s pumped from the intake structure to a 1,500 m3raw water storage tank at the treatment plant by a pumpingstation which consists of 4 pumps, each with the capacity to supply all existing demand. Two pumps are electrical and two operated by diesel motors. The operators prefer to use the diesel motors which are less costly. The water treatment plant i s a conventional rapid filtration plant, and treated water i s stored in a 540 m3 storage tank from which it i s distributed to the consumers. A bulk water meter i s installed on the 10" outlet pipe of the storage tank, recordingthe volume of water produced. The objective of the proposed works i s to increase the water service continuity from 7 to 24 hours. The proposed works include: (i) increase of the volume of the raw water tank to 2,500 m3; and(ii) increaseof the treated water storage tank to 790 m3. The estimated cost of the Puerto CmeHo subproject i s about US$ 105,000, including civil works and supervision. Part of the investment was found to be unrelated to the subproject objective and the budget will be adjusted during the studies recommended under technical evaluation of the project. Results of Subproiect Evaluation. The operator was found to be well organized, fully understanding its obligations and having clear objectives for improving the services. They intend to comply with their contractual targets much earlier than the date prescribed in the operation contract, The evaluation demonstrated that the requested increase in storage volume will provide only a short term solution, and the operator needs to carry out a modeling of the supply system based on field measurements of flows and pressures, and establish the additional storage volume required and the time frame in which it needs to be provided. The evaluating consultant recommended to combine the increase in storage volume with actions for reducing the water losses in the system. The required storage volume was based on the assumption that the unaccounted-for-water index will be reduced to 25%, as recommended by the RAS. However, if this level will not be reached, a larger storage volume will be required. The operator was 129 requested to submit structural designs for the proposed increase in the volume of the storage tanks. Los Patios, Construction of the Main Conveyance Pipelineto the Wastewater Treatment Plant Subproject Description. The municipality of Los Patios, with a population of about 74,000, i s located in the Department of Norte de Santander, on the Bank of the Pamplonita river, a short distance upstream of the Department's Capital city, Cucuta. It discharges about 0.1 m3/sraw wastewater to the river whose average flow i s about 3.5 m3/s,of which Cucuta uses 1.6 m3/sas its main water supply source. The water and sanitation services are operated by the municipal public utility EMPATIOS and the sewerage coverage in the municipality i s about 75%. The sewerage network drains to a final interceptor which discharges the raw wastewater to El Recreo creek, which inturn drains to the Pamplonitariver. The proposed subproject consists of extending the final interceptor by 830 meters of a 30" pipe which would convey the wastewater to the treatment plant site. Under the Departmental allocation determined at the time of the Audiencias PLibZicas, fundingwas insufficient to include the treatment plant itself. The municipality i s concurrently lookingfor other sources to finance it. Although the proposed subproject does not have easily quantifiable immediate benefits other than the environmental improvement of the El Recreo creek (and consequently, its benefits were not estimated) its i s the first stage of a an important and urgently needed environmental project. At the first stage, the subproject will result inthe clean up of ElRecreo creek, and inthe future, with additional investments, it will benefit a population of about 700,000 inhabitants of Cucuta. The estimated cost of the Los Patios subproject i s about US$ 266,200, including civil works and supervision. Results of Subproiect Evaluation. It was found the proposed subproject i s an important step towards completion of the wastewater disposal system of Los Patios. It was recommended to re- evaluate the design flows, which seemed to be excessive. The option of connecting the wastewater of Los Patios to the sewerage network of Cucuta was studies and found to be nonviable due to the limited hydraulic capacity of the Cucuta network. An alternative route for the pipeline was identified by the consultant, which could reduce the amount of excavation and earthwork, but would require additional geophysical studies. The recommendations of the consultant were transmitted to the Municipality of Los Patios, which realized the geophysical studies related to the alternative route and i s now preparing the design for that route. The updated budget will be finalized on the basis of the new route. The Municipality has initiated the process of purchase of land for the treatment plant and i s exploring financing sources for that plant, one of which mightbe the Regional Environmental Corporation, CORPONOR, with support from the Department of Norte de Santander. 130 Annex 18: Country at a Glance COLOMBIA: Water and Sanitation Sector Support Project Latin Lower- POVERTY and SOCIAL America middle- Colombia & Carib. income Development diamond' 2002 Population,mid-year(millions) 43.7 527 2,411 Lifeexpectancy GNIper capita (Atlas method, US$) 1,830 3280 1,390 GNI (Atlas method, US$ billions) 80 1 1,727 3,352 Average annual growth, 1996-02 T Population PA) 18 15 1.0 Laborforce PA) 2 6 2 2 12 GNI Gross per primary M o s t recent estimate (latest year avallable, 1996-02) capita enrollment Poverty (?Aof populahonbelownafionalPOvertyline) Urbanpopulation (%oftotalpopulation) 76 76 49 Lifeexpectancyat birth (pars) 72 71 69 L Infantmortality (per 1,OOOlivebirths) 8 27 30 Chiid malnutntion pAof childrenunder51 7 9 11 Access to improved water source Access to an improvedwater source (%ofpopulation) 91 86 81 Illiteracy(%ofpopulation age E+) 0 11 0 Gross pnmaryenrollment (% 0f school-agepopulation) lt2 0 0 111 -Colombia Male 10 0 1 111 Lo wr-middle-incomegroup Female lt2 P8 1n KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios. GDP (US$ billions) 39.0 492 82.4 822 Gross domestic InvestmentIGDP 205 16.7 149 Exports of goods andsewiceslGDP n.9 7.7 8.4 Trade Gross domestic savingslGDP 163 187 15.3 Gross national savingslGDP 0 6 184 14.3 T Current account balancelGDP -8 4 t8 -2.2 -22 InterestpapentslGDP 18 2 6 3.0 2 4 Total debt1GDP 264 35.1 44.5 Total debt servicelexports 27.8 380 36.1 Present value of debtlGDP 45.6 Presentvalue of debtlexports 215 5 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) GDP 4 0 2.0 14 15 0 4 -Colombia GDP per capita 1.9 0 1 -03 -0.1 -11 Lowr-middle-income group STRUCTURE of the ECONOMY 1982 1992 2001 2002 1 Growth of Investment and GDP (%) I (%OfGDP) Agriculture 8.3 15.8 0.0 20 industry 31.8 35.0 29.9 .. 0 Manufacturing 21.8 8.8 16.3 " -20 Services 48.9 49.3 57.1 .40 Private consumption 72.8 71.8 63.6 General government consumption n.9 9.5 211 Imports of goods andservices 152 15.0 8.0 -GDi -GDP 1982-92 1992-02 2001 2o02 (average annualgrowth) Growth of exports and imports (%) Agriculture 3.5 -1.4 0.1 20 Industry 5.0 0.7 -0.1 io Manufacturing 4 2 -2.1 -0.8 .... 0 Services 3.5 3.4 2.1 '' -io 2 Private consumption 2.9 1.5 19 .20 Generalgovernmentconsumption 4.8 9.6 0.3 .... -30 Gross domestic investment 1.0 -2.9 9.6 Imports of goods and Sewices 2.9 3.1 11.2 -Exports d l m p o r t s 131 Colombia ~ ~~ PRICES and GOVERNMENT FINANCE I 1982 1992 2001 2002 1 Domestic prices Inflation( O h ) I (%change) 25 Consumer prices 24.6 25.1 6.5 6.0 20 Implicit GDP deflator 24.6 23.6 7.6 7.0 15 10 Government finance 5 (%of GDP, includescurrentgrants) Current revenue u.7 0.3 U.6 97 98 99 w 01 Current budget balance 3.0 -5.0 -3.7 Overallsurpiuddeficit -19 -6.1 -4.6 -GDPdefiator -CPI a...; TRADE 1982 1992 2001 2002 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 3264 7263 2,309 11,903 Coffee 1,562 1259 764 991 Petroleum 215 1,396 3,083 3,037 Manufactures 837 2272 5,606 6,156 Total imports (cif) 5,478 6,627 2,834 0,026 Food 303 450 1,578 1,161 Fueland energy 659 344 m9 233 Capital goods 2,048 2255 4,468 4,528 Exportprice index(S95=W0) 9 63 243 96 97 98 99 00 01 02 Import price index(S95=WO) 8 69 209 I mkports olmports Terms of trade (S95=WO) 115 91 116 BALANCE of PAYMENTS L------ 1982 1992 2001 2002 (US$ millions) Current account balance t o GDP ( O h ) Exports of goods andservices 4,785 9257 14,932 14,439 Imports of goods andservices 7,052 8262 15,840 16,077 Resource balance -2,267 994 -908 -1,639 Net income -1,184 -1,852 -2,975 -2,525 Net currenttransfers 771 1,734 2,094 2,335 Current account balance -3,280 676 -1,789 -1,828 Financingitems (net) 2,930 450 2,956 1,323 Changes innet reserves 350 -1,326 -1166 505 Memo: Reselves includinggold (US$ millions) n245 0,649 Conversion rate (DEC, locaVUS$) 64.1 6810 2299.8 2,504.2 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) :omposition of 2001 debt (US$ mill.) Total debtoutstanding anddisbursed 0,306 77277 36,699 IBRD 1,346 3,195 2,006 A: 2,006 IDA 20 U 7 G:3,738 B:7 Total debt service 1,491 4,008 6297 16RD 187 959 365 IDA 1 1 1 Compositionof net resourceflows Official grants 2 89 86 Official creditors 403 -4u 1,083 Private creditors 856 -Q 13P Foreign direct investment 386 729 2,328 Portfolio equity 0 0 -43 F World Bank program 24,369 Commitments 738 466 636 Disbursements 277 262 368 A. IBRD E- Bilateral B IDA . D Othermltilateral - F. Private Principal repayments 93 681 233 C-IMF 0 -Short.te 132 Annex 19: Map COLOMBIA: Water andSanitationSector SupportProject 133