Document of The World Bank FOR OFFICIAL USEONLY ReportNo: 39570-HN PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT INTHEAMOUNT OF SDR19.8 MILLION (US$30 MILLIONEQUIVALENT) TO THE REPUBLIC OF HONDURAS FORA WATER AND SANITATION SECTOR MODERNIZATION PROJECT MAY 18,2007 Sustainable Development Department Central America Country Management Unit LatinAmerica and CaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. CURRENCYEQUIVALENTS (ExchangeRateEffectiveMay 17,2007) CurrencyUnit = SDR SDR0.65876 = US$l US$1.51801 = SDR1 FISCALYEAR January 1 - December31 ABBREVIATIONSAND ACRONYMS AMDC Alcaldia Municipal del Distrito Central (Municipality of Tegucigalpa) AMHON Asociacibn de 10s Municipios de Honduras (Honduras Municipalities Association) APL Adaptable ProgramLoan CAS Country Assistance Strategy CATS Consultorias deApoyo a la Transferencia de 10s Sewicios (Services Transfer Support Consultants) CONASA ConsejoNacional deAgua Potabley Saneamiento(National Council for Water and Sanitation) COSUDE Swiss Agency for Development andCooperation CQ Consultant's Qualifications cso Civil society organizations EIRR Economic Internal Rate o f Return ENHPM EncuestaNacional de Hogares de Propositos Multiples (National Household Survey) ERSAPS Ente Regulador de 10s Sewicios de Agua Potable y Saneamiento (Water and Sanitation Sector Regulator) FAD Fondo de Ayuda a1Desarrollo FHIS Fondo HondureAo deInversibn Social (Honduran Fundfor Social Investment) FIRR Financial Internal Rate o fR e m FM Financialmanagement FMA Financialmanagement assessment FMAR Financial Management Assessment Report GDP Gross domestic product GIC Grupo Interinstitucional de Coordinacibn (Interagency Coordination Committee) GoH Government o f Honduras GPOBA Global Partnership for Output-Based Aid HIPC Heavily IndebtedPoor Country IDA InternationalDevelopment Association IDB Inter-American Development Bank IFR Interim financial report INE Instituto Nacional de Estadisticas IPSAS InternationalPublic Sector Accounting Standard ISA International Standards on Auditing J M P Joint MonitoringProgram LPS Lempiras (Honduras' currency) M&E Monitoring andevaluation MDGs Millennium Development Goals MDRI Multilateral Debt Relief Initiative NDF Nordic Development Fund NGO Nongovernmental organization NPV Net PresentValue NRW Non-Revenue Water O&M Operationand Maintenance OBA Output-Based Aid PAHO Pan-American Health Organization PDO Project development objective FOROFFICIAL USE ONLY PEMAPS Plan Estratkgico de Modernizacidn del Sector de Agua Potabley Saneamiento (Strategic Plan for Modernization o fthe Potable Water and Sanitation Sector) PHRD Policy and HumanResourcesDevelopment Fund(TrustFund) (Japan) PIR Rural Inffastructure Project PIUS Project Implementation Units PNAPS Plan Nacional deAgua Potabley Saneamiento (National Drinking Water and Sanitation Plan) POA Project annual work PPIAF Public-Private Inffastructure Advisory Facility PPP Public-Private Partnerships PROMOSAS Proyecto de Modernizacidn del Sector Agua y Saneamiento (Water and Sanitation Sector Modernization Project) PRRAC Programa Regional de Reconstruccidn Para Ambrica Central (Central America Regional ReconstructionProgram) PRS Poverty Reduction Strategy PRSP Poverty Reduction Strategy Paper RMS Results Management System SANAA Sewicio Autdnomo Nacional de Acueductos y Alcantarillados (National Autonomous Water and Sewer Service) SDR Special Drawing Rights SEFIN Secretariat o f Finance S I L Specific investmentloan SOE Statement o f Expenditures SWAp Sector Wide Approach T A Technical assistance TORS Terms o freference UAP UnidadAdministradora de Proyectos (Project Administration Unit) UEPEX UnidadesEjecutoras de Prbtamos Externos (External Loans ExecutionUnit) UNDP United Nations Development Programme wss Water Supply and Sanitation Vice President: PamelaCox Country Director: Jane Armitage Sector Manager: John H.Stein Task Team Leader: Gustavo Saltiel This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. REPUBLICOF HONDURAS Water and SanitationSector ModernizationProject CONTENTS Page I STRATEGICCONTEXTANDRATIONALE . .................................................................. 1 A . Country and sector issues .................................................................................................... 1 B. Rationale for BankInvolvement.......................................................................................... 3 C. Higher-level objectives to which the project contributes .................................................... 4 I1. PROJECTDESCRIPTION .............................................................................................. 4 A . Lendinginstrument.............................................................................................................. 4 B. Project development objective and key indicators .............................................................. 4 C. Project components.,............................................................................................................ 5 D. Lessons learned and reflected inthe project design.......................................................... 11 E . Alternatives considered andreasons for rejection............................................................. 13 I11. IMPLEMENTATION ..................................................................................................... 14 A . Partnership arrangements .................................................................................................. 14 B . Institutional and implementationarrangements ................................................................ 14 C . Monitoring and evaluation of outcomes/results ............................................................... -17 D . Sustainability ..................................................................................................................... 17 E. Critical risks andpossible controversial aspects ............................................................... 18 F. Loadcredit conditions andcovenants ............................................................................... 21 I V . APPRAISAL SUMMARY .............................................................................................. 21 A. Economic andfinancial analyses....................................................................................... 21 B. Technical ........................................................................................................................... 22 C. Fiduciary............................................................................................................................ 23 D . Social ................................................................................................................................. 24 E. Environment ...................................................................................................................... 25 F. Safeguard policies. . .............................................................................................................. 26 G .Policy exceptions and readiness ........................................................................................ 26 Annex 1: Countryand Sector or ProgramBackground .......................................................... 27 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies ..................32 Annex 3: ResultsFrameworkandMonitoring ......................................................................... 35 Annex 4: DetailedProjectDescription ...................................................................................... 42 Annex 5: ProjectCosts................................................................................................................ 56 Annex 6: ImplementationArrangements .................................................................................. 57 Annex 7: FinancialManagementandDisbursementArrangements ..................................... 65 Annex 8: ProcurementArrangements ....................................................................................... 72 Annex 9: EconomicandFinancialAnalysis ........................................................... .................78 A Annex 10: SafeguardPolicyIssues ............................................................................................. 85 Annex 11:ProjectPreparationandSupervision ...................................................................... 89 Annex 12: Documentsinthe ProjectFile .................................................................................. 91 Annex 13: Statementof Loansand Credits ............................................................................... 92 Annex 14: Countryat a Glance .................................................................................................. 93 Annex 15: IBRD Map No. 35484 ................................................................................................ 96 REPUBLIC OF HONDURAS HONDURAS WATER AND SANITATION PROGRAM PROJECTAPPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSUW Date: May 18,2007 TeamLeader: GustavoSaltiel Country Director: Jane Annitage Sectors: Water supply (100%) Sector Managermirector: JohnHenry Stein Themes: Other public sector governance (P);Decentralization (P) Project ID: P103881 Environmental screening category: Partial Assessment Lending Instrument: Specific InvestmentLoan [ ] Loan [XICredit [ 3 Grant [ 3 Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 30.00 Proposed terms: The Recipient is subject to IDA lending on hardenedterms (10 years of grace Total: 35.00 0.00 35.00 Borrower: Governmentof Honduras Tegucigalpa Honduras Responsible Agency: FinanceSecretariat (SEFIN) Centro de Tegucigalpa,Edificio de la Se Frentea QuinchanLeon, Septimopiso. Tegucigalpa Honduras despacho@sefin.gob.hn FY 8 9 10 11 12 13 14 0 0 4nnual 2.00 4.00 6.00 7.00 7.00 6.00 3.00 0.00 0.00 Cumulative 2.00 6.00 12.00 19.00 26.00 32.00 35.00 35.00 35.00 Project implementation period: Start End: Expected effectiveness date: October 30,2007 Expectedclosing date: October 30, 2013 Does the project depart from the CAS incontent or other significant respects? Re$ PADA.3 [ ]Yes [XINO Does the project require any exceptions fiom Bank policies? Re$ PAD D.7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 I s approval for any policy exception sought fiom the Board? [ ]Yes [ IN0 Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [XIYes [ ]No Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [ ]Yes [ IN0 Project development objective Re$ PAD B.2, TechnicalAnnex 3 The proposed project development objective is to improve the sustainability , efficiency and reliability o f Honduras's water supply and sanitation (WSS) services in the participating municipalities through implementing the Strategic Plan to Modernize the WSS Sector (PEMAPS). The specific objectives are to: 0 Establishand strengthen municipal service providers and support good governance in WSS services provision through increasing transparency and accountability; 0 Reinforce the national sector actors (ERSAPS, CONASA, SANAA)to fulfill their new roles a necessity for successful decentralization o f the services; 0 Reduce non-revenuewater inselected areas o f Tegucigalpa to provide immediate impact on the service quality. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 Component 1: Support to mid-size municipalities to create autonomous service providers and invest in efficiency, rehabilitation and expansion o f service delivery. Cost US$21.2 million (IDA US$ 17.2 million): this component will finance a combination o f TA, efficiency improvements and larger-scale investments in order to support the decentralization and deconcentration of water and sanitation services to autonomous, municipal service providers. Component 2: Tegucigalpa Non Revenue Water Reduction. Cost US$4.5 million (IDA US$ 4.1 million): this component will finance the design and implementation o f a performance-based non-revenue water reductioncontract inTegucigalpa. Component 3: Institutional strengthening o f national and regional sector institutions, Cost US$7.7 million (IDA US$ 7.3 million): this component will finance the institutional strengthening o f and TA to national institutions o f the water and sanitation sector, as well as severancepayments for entrenched workers o fthe national water utility. Component 4: Project Management (US$2.2m): This component will finance the cost of salary, travel and general operating costs of the project implementation agency, as well as monitoring and evaluation activities. Which safeguardpolicies are triggered, ifany? Re$ PAD 0.6, TechnicalAnnex10 - --- Physical Environmental Assessment Natural Habitats Cultural Resources Indigenous People Significant, non-standardconditions, if any, for: Re$ PAD C.7 Boardpresentation:No Board conditions Loadcredit effectiveness: EffectivenessConditions (a). An Inter-institutional Agreement has been signedbetweenSEFIN, SANAA, ERSAPS, and CONASA defining the framework for the interagency collaboration. (b) The Operational Manual has beenissuedby Honduras and approvedby the Bank. Covenants applicable to project implementation: DisbursementCondition: For Expenditure Category 4 (Sub-Components 1B and 1C-municipal efficiency improvement and investments), for each eligible municipality (not for the whole component): signature of an agreement between SEFIN and the eligible municipality consistentwiththe model provided inthe Operating Manual. For Expenditure Category 5 (Sub-Component 3B / Severance payments): the Recipient has submittedto the Bank an analysis preparedby independent consultants: (i) describing the severance payments regime applicable to SANAA; (ii) demonstrating its compliance with all relevant local laws, regulations, and collective bargaining agreements; (iii) defining the amount of such payments per worker, based on an analysis that demonstrates the productivity and fiscal sustainability of the investment; and (iv) demonstrating that satisfactory oversight arrangementsare inplace. I.STRATEGICCONTEXTANDRATIONALE A. Countryand sector issues Honduras i s the second-largest country in Central America, with 112,492 square kilometers o f land and a population o f about 7.4 million in 2005. Per capita income i s US$1,170.' Honduras has one o f the highest incidences o f poverty and inequality in the western hemisphere and Hurricane Mitch in 1998 made it worse. After this massive loss o f life and assets, Honduras embarked on a very ambitious Poverty Reduction Strategy (PRS) in consultation with civil society and other donors, agreeing to a set o f actions aimed at reducing the incidence o f extreme poverty by half by 2015. Overall, the income o f 50 percent o f Hondurans remains below the poverty line. Poverty and inequality are widespread. Roughly one-half o f the population resides inrural areas. Extreme poverty, while declining nationally, has actually increased in rural areas by about 10 percent (although this i s mainly attributable to the devastating effects o f Hurricane Mitch). Honduras reached the Heavily Indebted Poor Country (HIPC) Completion Point inApril 2005 and benefitedfrom the Multilateral Debt Relief Initiative (MDRI)inJuly 2006. Honduras's external debt will remain sustainable over the medium- term if fiscal deficits andrates o f growth are maintainedat their current levels. In 2005 Hondurans elected JosC Manuel Zelaya as President in the seventh successive peaceful, democratic change o f government since 1982. The Zelaya administration has made poverty reduction its top priority, endorsing the current Poverty Reduction Strategy Paper (PRSP). The four pillars identified by the President for his administrative mandate (January 2006 to January 2010) are: 0 Equitable economic growth for employment generation; Good governance through state modernization and civic participation; Environmentalprotection and risk management; and Development o f human capital. Like many other developing countries, the Government o f Honduras recognizes the limits o f the centralized government system. The recent drive toward decentralization started in 1990 with a municipal law that conferred local service delivery responsibilities and fiscal autonomy to the country's 298 local governments, and established a fiscal transfer o f 5 percent of the annual budget to the municipalities. The trend toward decentralization was further reinforced inthe PRSP, which underscored the role o f the local government inits poverty reduction strategy. Sector Issues In2001, only 81 percent o fthe Honduran population had access to potable water and 68 percent had access to sanitation. Understandably, rural coverage i s significantly lower Atlas methodology. 1 than urban coverage. According to the Pan-American Health Organization, 23 percent o f contagious diseases inHonduras are waterborne. The Government o f Honduras's (GOH) Poverty Reduction Strategy ranks expanding water and sanitation services as a priority. However, drinking water and sanitation arejust two o f several pressing needs competing for scarce government resources. Central problems inthe water and sanitation sector are intimately linkedwith the lack o f strong governance and scarcity o f financial resources. A central issue and concern of the Government is governance. The Water Supply and Sanitation (WSS) sector institutions find themselves locked ina vicious cycle from which it is difficult to escape. This spiral combines weak performance incentives, low willingness o f customers to pay cost-recovery tariffs, and insufficient funding for maintenance, ultimately leading to a deterioration o f assets and a squanderingo f financial resources. The downward cycle attracts further political interference and regenerates the downward trend with increased velocity. The vicious spiral i s largely a consequence o f ineffective policies and lack o f transparency, coupled with the monopolistic nature o f the sector. Water is politically sensitive and the government has found it difficult to effectively balance the tradeoffs between affordability and expansion o f coverage to poorer communities, with the sector's need for financial viability. Policymakers pursue multiple unaligned objectives, often leaning toward the attainment o f the short-term political interests. Users have had little opportunity to hold utilities accountable. Customer orientation can help depoliticize and balance the accountability framework o f utilities and help prevent political capture. The National Autonomous Water and Sewer Service (Servicio Autdnomo Nacional de Agua y Alcantarillado, SANAA), has historically managed and provided water supply services in approximately 30 rural and urban centers. Municipalities provide sanitation services-and insome cases water supply services-through direct municipal provision. Water is rationed in most cities-two times a week or even less in the summer-under SANAA management. The situation is no better inthose municipalities that are directly managingtheir WSS. In 2003, Honduras passed the Drinking Water and Sanitation Sector Framework Law (Ley Marco del Sector Agua Potable y Saneamiento)that mandates the decentralization o f SANAA and the transfer o f assets to the municipalities by October 2008. The Ley Marco requires municipalities to set up autonomous service providers, but does not describe the managementmodel o f such a service provider. This law also established the sector planningbody, the National Council for Water and Sanitation (CONASA), and the Water and Sanitation Sector Regulator (ERSAPS), which should assist inproviding more effective governance o f the sector. The GoH has also prepared (with World Bank and Public-Private InfrastructureAdvisory Facility [PPIAF] assistance) the Strategic Plan for Modernization o f the Potable Water and Sanitation Sector (PEMAPS) and the National Water and Sanitation Plan (PNAPS), which seek to implement the organization and reform o f the sector, as mandated in the 2003 Drinking Water and Sanitation Sector Framework Law and its Millennium 2 Development Goals. This plan already has wide acceptance in Honduras and provides direction to donor interventions inthe sector. Decentralization (to the local level) and deconcentration (to autonomous service providers) should improve services by makingproviders more accountable to consumers. However, the reforms are a large task given limited capacity at the municipal level. Municipalities are looking to the few good practices o f management o f services such as Puerto CortCs and San Pedro Sula, as examples of creating an autonomous and accountable service provider. Designingand implementing good municipal management models that are accountable to their customers and function in a transparent manner is keyto improving service. After decentralization o f service delivery, SANAA i s expected to remain as a technical assistance agency supporting small service providers and serving as CONASA's technical secretariat. The regulatory, planning, and operational functions are to be fully transferred from SANAA to the separate specialized institutions o f ERSAPS and CONASA, and to the municipalities-promoting good governance. Since these institutions are new, they are relatively weak. Inaddition, one o fthe major issues withthe re-engineering o f SANAA i s the amount o f the severance payments necessary to release the employees that will no longer be necessary as the municipalities take on their own services. With 57 percent of SANAA'Sconnections, the most significant transfer o f services from the national utility to municipalities will be that o f Tegucigalpa. This i s a complex and politically charged process that deserves special attention because o f its political significance inthe overall implementation o f the sector vision. The Tegucigalpa Transfer is one o f the 19 projects in PEMAPS and represents 41 percent o f its total costs. The Tegucigalpa Transfer has a decisive influence on the execution o f 12 o f the other 18 PEMAPS projects-specially the re-engineering o f SANAA, which would fail without this particular transfer. Given the level of progress inpreparation, it is unlikely that the transfer inTegucigalpa will take place by October 2008. B. Rationalefor BankInvolvement The Bank i s well-positioned to assist GoH in improving the institutional framework in the sector and in strengthening utilities based on: (a) its global experience in water and sanitation sector reform, poverty targeting, and its ability to integrate across these diverse and related topics and interests (including government, donors, and civil society); (b) its comprehensive analytical work and presence in Honduras, including the development o f PEMAPS, PNAPS, and Output-Based Aid (OBA) Water and Sanitation Facility, and its support o f the Tegucigalpa Transfer o f Services. Inrecognition o f these assets, GoH has requested Bank support to implementPEMAPS. Although there are many donors in Honduras, the Bank's involvement has been and would be comprehensive, focusing on implementing GOH's overall strategy (the PEMAPS) in the form o f institutional reform, decentralization, and strengthening o f municipalities in addition to infrastructure works. The preparation o f the Strategy and 3 National Water Plan united numerous and diverse key players-including the donor community-to discern key issues for transforming the sector and implementing the Water Sector Framework Law. Its implementation could continue to do so with the widely accepted PEMAPS, providing the basis for harmonization of donor efforts inthe sector. The current Administration has endorsed PEMAPS and indicated both its willingness to implement it in the coming years and its interest in additional Bank assistance to progress inthe sector modernization process. C. Higher-levelobjectivesto which the project contributes This project will support three o f the four Strategic Objectives laid out in the Country Assistance Strategy. Strategic Objective 1(Accelerating Equitable Economic Growth and Employment Generation) will be supported by an enabling environment that develops and strengthens service providers, thus helping Honduras become more competitive. Strategic Objective 2 (Strengthen Governance through State Modernization and Participation) will be supported by fostering transparency and access to information, improving the effectiveness and transparency o f public spending, and fostering decentralization and increasing professional capacities in the water sector. Strategic Objective I11 (Strengthen Environmental Protection and Risk Management) will be supported by the development o f autonomous and efficient water and sanitation service providers that will be in a better position to carry out the investments needed to reduce water pollution from the discharge o f untreated wastewater. 11. PROJECTDESCRIPTION A. Lendinginstrument The proposed credit in the amount o f SDR 19.8 million (US$30 million equivalent) is designedas a specific investmentloan (SIL), combining investment and TA financing. The project can be seen as a first step in a Sector Wide Approach (SWAP), although without co-financing at this juncture. The project will build on the commitment o f all donors to the PEMAPS and the centrality o f the project in the sector going forward. Specific sectorwide activities will be financed (see Sub-Component 3A). B. Projectdevelopmentobjectiveand key indicators The project development objectives are: (a) to improve the sustainability, efficiency, and reliability o f the Recipient's WSS services in eligible municipalities; and (b) to improve the performance of the Recipient's national WSS sector institutions in the exercise of their respective roles inconformity withthe WSS Sector Framework Law. 4 The success o fthe project will be measured usingthe following sets o f indicators: (a) The improvement in the sustainability, efficiency, and reliability o f the Recipient's WSS services inEligible Municipalities will be measuredthrough: Sustainability: Cost recovery level measured as the ratio o f total revenues to total operative cost. Efficiency: Revenues per volumetric unito fwater produced. Reliability: Hours o f service per day. (b) The improvement in the performance of the Recipient's national WSS sector institutions in the exercise o f their respective roles in conformity with the WSS Sector Framework Law will be measured for each institution: SANAA: Number of systems transferred2 to the municipalities. ERSAPS: Number o f design proposals o f autonomous service providers approved by ERSAPS. CONASA: CONASA issues the new financial policy o fthe sector. C. Projectcomponents Projectcomponents The proposed operation would assist the GoH in implementing the Strategic Plan for the Modernization o f the WSS Sector (PEMAPS) through activities at the national and municipal level. The project will support municipalities with urban population between 40,000 and 300,000 to adopt autonomous service provider models by providing a combination o f free technical assistance for creating the service providers, short-term efficiency improvement measures, and investment funding3once services are transferred (Component 1). The project will finance efficiency improvements in Tegucigalpa to provide immediate impact on the service quality, while the transfer from the national utility to the municipality is being discussed (Component 2). Institutional strengthening actions will help fortify and establish the national sector actors (Component 3). Component 4 will finance project management activities. The following paragraphs provide further details on the project's components and sub- components. More details are provided inAnnex 4. Amounts show total component costs with loan proceeds inparentheses. providersand investinefficiency, rehabilitation,and expansion of service deliverv- Component 1:Support to medium-sizemunicipalitiesto create autonomous service Cost US$21.2million(IDA US$17.2 million) The component will support the implementation o f the Ley Marco and the PEMAPS in medium-size cities through a combination o f technical assistance for reforms and 'Asattested by a notary act. 3Portions of it based on performance 5 investments for infrastructure. This "learning-by-doing" approach i s expected to lead to service improvements-and thus will help to build solid public and political support for decentralization. The component will provide incentives for reforms, given that municipalities will have to substantially implement some reforms in order to receive support for investments for rehabilitationand expansion. Municipalities with an urban population between 40,000 and 300,000 inhabitants, that intendto transfer their water supply or sanitation services to a municipal service provider as mandated by the Ley Marco are eligible to participate inthis c~mponent.~Groups o f adjacent municipalities with smaller urban populations who unite to establish an aggregated service provider to serve a total urban population between 40,000 and 300,000 inhabitants can also participate. This component uses a demand-based stepped approach to support municipalities during all reform steps. Hence, it i s important to understand the proposed stepped approach as well as the various sub-components. The paragraphs below describe the project by outlining (a) the stepped approach, and (b) the sub-components. More details are provided inAnnex 4. Steppedapproach Figure 1 presents the stepped approach for medium-size municipalities. In Step 1, municipalities receive TA focused on designinga management model. Once the proposed model has been sent to and reviewed by ERSAPS (the regulator), municipalities qualify for Step 2 assistance including support to provide the service providers with tools (institutional and operational), and start improving the efficiency o f service provision. Once services' are transferred, municipalities move to Step 3, and qualify for investments insystem rehabilitationandexpansion. It is expected that approximately 6 to 9 municipalities will participate in Component 1. While most will enter the process at Step 1, some might have already reached the qualification criteria to enter at Step 2 or even Step 3. However, not all municipalities entering at Step 1are expected to reach Step 2 or Step 3. This will create a certain degree o f competitionamong the municipalities. Figure 1:Stepped Approach 4 According to the 2001 Census, cities within this population bracket are: Choloma, Choluteca, Comayagua, Danli, El Progresso, La Ceiba, La Lima, Puerto Cortes, and Siguatepeque. In addition, an associationofmunicipalities aroundVillanueva has also announced some potential interest. Either Water Supply or Sanitationis sufficient. 6 I --7 Sub-Component $A'TA to transfer preparationand implementation .__ _- I T------ - I Sub-Component 1B Support to tool municipal unit, service provider and improve efficiency_.... ^__I_ ..I_._r---- " ..... 7 Sub-component 1B: Support to tool service provider and improve efficiency (total US$6.1million, IDA US$5.5million) Once a municipality has successfully6 identified and designed a management model, the municipality can start obtaining support in implementing the CATS' recommendations and creating the municipal WSS institutions and the service provider, as planned for in the Ley Murco. This sub-component will finance activities such as the rehabilitation or construction o f offices and the acquisition o f basic management tools. This sub-component will also support rapid efficiency gains, including: 0 Technical (such as leak detection, network sectorization, meter installation) 0 Commercial (billing and collection, reductiono f non-revenue water). Municipalities and service providers will be free to propose activities o f their choice within a maximum investment amount as long as they are consistent with the CATS recommendations. Sub-Component 1C: Investment for system rehabilitation and expansion (total US$ll.4million, IDA US$&0 million) As a complement to the efficiency improvements reached under Sub-Component 1Bythis sub-component will finance investments in infrastructure after the service providers start operating the system. This sub-component would enable service providers to expand and improve services. Investments funded underthis component would include rehabilitation, connectionto and expansion o f water supply and sewer networks, on-site sanitation facilities, and wastewater treatment systems. Water supply investments can include coverage extension, rehabilitation o f existing networks, tanks and treatment plants, and the development o f newwater production capacity. Piped sewerage investment can include rehabilitation and expansion o f standard, small-bore, and condominia1 systems. On-site sanitation investment will focus on creating supportive conditions for on-site solutions. Wastewater treatment investments will include simple treatment systems such as stabilization ponds, artificial wetlands, and communal septic tanks. Investments are limited to an agreed list o f facilities and terms o f implementation (see Annex 4). Service providers will have the freedom to decide which investmentsthey would like to execute within the master plan. Investments outside o f the master plan would need to be justified by an economic analysis. Sub-Component 1C i s designed using a "matching contribution" incentive scheme where municipalities or service providers must provide co-financing to obtain grants (in the forms o f services, works, and goods). The ceiling of investments a municipality can receive will be determined by a formula taking into account the number o f connections andthe performance ofthe service providers (see Annex 4). The Ley Marco stipulates that the regulator (ERSAPS) has to approve the design of the management model. 8 Component 2: Tegucigalpa Non-RevenueWater Reduction - Cost US$4.5 million {IDA US$4.1 million) The component will support a perfonnance-based service contract with a private company to reduce technical and commercial losses in a limited geographic area o f the municipality o f the Metropolitan District. In addition to the contract itself, this component will finance the design and supervision o f the contract. The component will conclude with an evaluation of the performance-based contract and its outcome. This component aims to improve, inthe short term, the operative situation o f the WSS service provider in Tegucigalpa. By freeing up water production capacity, continuity of service delivery could be improved and water supply services expanded. International experience shows that good financial paybacks are possible with well-designed Non- Revenue Water (NRW) reduction programs. A performance-based service contract provides an efficient means to achieve significant improvements in operational and financial efficiency, thereby creating immediate benefits and fostering a positive dynamic to support further reform. Based on typical unit costs elsewhere, it i s expected that NRW will be reduced considerably in a service area of approximately 200,000 people in Tegucigalpa at the end o fthe project. The component will be implemented by the Unidad Administradura de Pruyectus (Project Administration Unit, UAP). SANAA will initially provide the technical supervision inthe understanding that this role will be transferred to the municipal service provider ifandwhen services are transferred. ComDonent 3: Institutional strengthening of national and regional sector institutions-Cost US$7.7 million(IDA US$7.2 million) Decentralization and other reforms change or establish the functioning of the national sector institutions. This component will provide support for the water sector planning entity (CONASA), the regulatingagency (ERSAPS), andthe national utility (SANAA) to fulfill their new roles in a timely, efficient, and transparent manner. Activities under this component are derived from the PEMAPS. Sub-Component3A: Technicalassistance to national institutions (total US$3.1million, IDA US$3.1million) The sub-component will provide assistance to the strengthening o f CONASA as a sector planningentity, through the creation of a specific PEMAPS unit. The PEMAPS unit will work closely with the CATS to strengthen local institutional arrangements. As such, the PEMAPS unit will act as the oil needed for good governance and transparency in the project. This will include Training o f Trainers in the areas of management models. The support will include a national communication program supporting both the visibility o f the sector and the project itself. Among others, the component will finance planningtools for CONASA, and the development o f a sector financing policy aimed at guaranteeing the long-term sustainability o f the sector. Inthe latter part o f the project, the component will finance a status review and update of the PEMAPS and a review o f municipal management models. 9 This Component will also support SANAA indefining and adapting to its new role under the Ley Marco as atechnical assistance agency. The subcomponent will also strengthen ERSAPS (the regulatory agency). Support will focus on defining and implementing its new relationship municipal oversight units- working closely with the regulatory experts in the CATS in Component 1. Also, ERSAPS' capacity to gauge management models will be enhanced. Sub-component 3B: Severancepayments (total US$3.3 million, IDA US$3.0 million) SANAA is overstaffed. It's total number o f staff expressed per thousand connections is 10.4, while the regional average i s 3.1.' The transfer o f services to the municipal level offers an opportunity to increase the efficiency o f service delivery by rationalizing the number o f staff and by improving the capacity o f staff through selection. The Ley Marco stipulates that all staff that will be retrenched or that change employers during transfer of services will receive severance payments. This sub-component will fund severance payments for the estimated 200 SANAA staff retrenched inthe course of decentralization o f WSS services to the participating municipalities. The severance payments will be grounded in an analysis o f relevant laws, regulations, and collective bargaining agreements that determine the payment o f statutory termination benefits and o f ex gratia severance payments that i s being carried out with Policy and Human Resources Development Fund (PHRD) financing. The component will also finance a study on rationalizationstaffing o f SANAA duringand after decentralization. A complete justification and risk analysis of the payment o f severance is included inthe fullproject description inAnnex 4. Sub-component 3C: Preparatory activities for Tegucigalpa transfer (total US$1.3 million, IDA US$l.l million) Tegucigalpa represents by far the largest city where water supply services are managed by SANAA, and the only city inwhich SANAA manages sanitation services. While the project does not finance the transfer itself, this sub-component will support preparatory activities for the transfer o f service delivery from SANAA to the Municipality o f Tegucigalpa (AMDC). This support will include activities such as updating inventories, installing consumer and asset management systems, and planning the transfer process. These activities are incontinuation o fthe Bank's engagement through a PPIAF grant, and will be closely coordinated withthe Inter-AmericanDevelopment Bank (IDB), which has also been involved inupstreamactivities. Component4: Proiectmanagement-Cost US$1.6 million(IDA US$1.5 million) This component will finance the cost o f salary, travel, and general operating costs o f the project management unit. Inaddition, this component would also finance monitoring and evaluation (M&E) activities, audits, and other project management activities on governance and transparency and strengthening o f the implementing agencies, through participation in training and study tours, purchase o f vehicles and equipment, and upgrading o fthe working environment. Regionalaverage fiom 2005 review ofthe Associationof Water and SanitationRegulatoryEntitiesof the Americas (ADERASA). 10 Estimates of Project Costs, by Component (US$ m) Component IDA Borrower Municip. TOTAL Component 1: Support to medium-size $17.2M $0.6M $3.4M $21.2M municipalities to create autonomous service providers and invest inefficiency, rehabilitation, and expansion of service delivery Component 2: Tegucigalpa Non-Revenue $4.1M I $0.4M $4.5M I Water ReductionProgram I NA $7.7M Component 4: Project Management Total $30M $1.6M $3.4M $35 M Annex 4 contains a more detailed table with costs by sub-component. Project Financing (US$ m) Institution Amount IDA 30.0 GOH 1.6 Municipalities of Honduras 3.4 TOTAL 35.0 D. Lessonslearnedand reflected inthe project design The project design incorporates lessons learned horizontally, from other similar projects inLatinAmerican countries, andvertically, from earlier projectsinHonduras. Lessons learned in the Region Importance of the policy context of WSS projects. While the ultimate objective o f most water and sanitation projects is to provide quality water and sanitation services to the beneficiary population, this objective cannot be reached by brick-and-mortar solutions only. Experience has shown the importance o f a well-structured sector, with clearly defined institutional responsibilities and financing mechanisms, to ensure a long- term impact of infrastructure investments. Countries such as Chile, Colombia, and Mexico have found very different solutions to the same problem-but all point to the importance o f taking into account the policy dimension of WSS services in order to 11 achieve dramatic service improvements. Within the project, one component will therefore focus on strengthening the national sector institutions inthe functions that the framework law gives them, and implementing the long-term vision for the sector developed within the PEMAPS. Need to involve all key stakeholders. The water and sanitation sector is characterized by a multitude o f institutional, civil, and private actors exerting various functions (investment, regulation, policymaking, service provision, and so forth). Coordination and consultation i s o f paramount importance inthe sector. Contradicting financing policies or community participation policies, for example, can undermine the effectiveness o f an innovative project. Several countries have attempted to improve this situation through the creation o f coordination bodies which, inthe case o f Honduras, i s CONASA. Component 3 will include activities to continue the consensus-building and role assignation exercise developed under the PEMAPS. Component 1 will include activities to consult on sector reform at the local level and empower local institutions (municipalities, civil society groups, and service providers) to make their voice heard and to interact with national institutions. Lessonslearned in the country Lessons from previous studies, Bank-assisted projects, and partner activities have yielded the following lessons: (a) the Bank may need to mediate the many, sometimes conflicting interests o f diverse government institutions; (b) various Bank interventions must also be harmonized and coordinated with support o f other donors; (c) ad hoc devolution o f services to municipalities, privatization, and incentive structures may result in unsustainable coverage gains; (d) experience from the passage o f the 1990-91 Municipal Law shows the need to promptly develop and apply the legislation's tools in order to visibly demonstrate benefits o fthe modernization; and (e) attractive financing rules at the municipal level are key to ensure buy-in o f the municipalities inthe process and success o fthe stepped approach. The work done by the Bank team with the Government, and with other stakeholders duringpreparation of the PEMAPS, shows the importance o f steady Bank engagement in the sector, especially for the implementation o f the sector modernization process. Bank assistance during the initial stages o f the reform allowed the previous Administration to develop a shared vision about the sector and put together a clear strategy that has been endorsed by the current Administration. The Government values the association with the Bank particularly for its current work as an "honest broker" and its capacity to bring state-of-the-art knowledgeto the policymaking process. The project will closely coordinate with two ongoing Bank projects with water supply and sanitation components in Honduras-the Rural Infrastructure Project (PIR) and the Barrio Ciudad Project-and benefit from the implementation experience gained in those projects. In particular, the Barrio Ciudad project, the geographic scope o f which partly overlaps with this project, will be an excellent complement to this project's focus on service providers, since it finances small WSS works at the neighborhood level, using a similar implementationmechanism(matchinggrantsandmunicipal execution conditional on procurement capacity). The Bank has been coordinating and will continue to 12 coordinate its work with the IDB, which has several ongoing operations in the WSS sector, to avoid duplication o fwork. E. Alternativesconsidered andreasonsfor rejection Continuing Assistance through Analytical and Advisory Activities (AAA). The breadth of issues that demand urgent attention and sustained support required to work with key actors to install sound policies and programs exceed what different types o f AAA could hope to provide. TA to reforms without investment will not improve services. The Honduran authorities have expressed a willingness and desire to borrow for this purpose, despite fiscal constraints. The engagement o f the Bank through the development of the PEMAPS inthe past two years has created a sound basis for an investmentproject closely alignedwiththe PEMAPS implementation. Use of an Adaptable ProgramLoan (APL). The APL would provide a framework for implementing a comprehensive medium-term investment program designed to achieve the provision o f efficient and sustainable water and sanitation services throughout the country. However, giventhe uncertainty about the scope o f the overall program and the ensuing outcomes, developing the APL would require a lengthy process, delaying implementation o f urgent reforms. Implementation of the entire project by CONASA. Although CONASA is, by mandate, the sector planning entity and could have been a logical implementing agency, its current status as a committee without a legal identity, funding, and staff would have made it difficult to entrust CONASA with the implementation o f the complete project. Rather, the team thought the project should seek to strengthen CONASA while the project i s being implemented, giving it the technical leadership of the national component without overburdening itwith fiduciary responsibility. Complete alignment of the project with the ongoing Inter-American Development Bank (IDB) project. The IDB is currently financing a project with goals and structure similar to this project. The IDB project has encountered some implementation difficulties (for example, lack o f interest o f municipalities, slow disbursement). This i s mainly due to the fact that funds are lent only to the municipalities (the operation proposed here envisions grants). Given the large needs o f the sector, it was agreed that the present project would best be designed as a complement to the IDB project, rather than as an augmentation o f it. Therefore, the national component's TA activities o f this proposed project complement the IDB's activities. The municipal component will work largely outside o f the municipalities where the IDB i s currently working. It uses matching contributions to make participation attractive to municipalities. Historically, IDBhas been the leading donor inthe sector, but since 2004 the GoHhas requested the World Bank to join the IDB and other donors intheir efforts to assist with implementing the institutional changes required by law and PEMAPS. Both institutions have been and presently are actively coordinating interventions in Honduras' water sector so as to achieve synergies and reduce duplication o f efforts. Implement the new WSS project through the Fondo HondureAo de Inversidn Social (Honduran Fund for Social Investment, FHIS). This was the option originally recommended by the team, given the experience o f this institution in 13 implementing Bank projects and also the emphasis o f the project on municipal investments. However, during the Review Meeting and as a result o f fiduciary problems that FHIS i s currently undergoing, the Meeting advised the team to propose different implementation arrangements. 111.IMPLEMENTATION A. Partnershiparrangements Many donors are present in Honduras, but most o f them focus on pilot interventions. Bilateral donors often do not have the Bank's capacity and experience to cover the totality o fthe sector needs, while nongovernmentalorganizations (NGOs)usually finance isolated system components (like tanks, pumping stations, latrines, and so forth). The development o f the PEMAPS has provided the donors with an opportunity to come together under one national framework plan. The PEMAPS provides a basis for shared commitment among the donor community upon which the project can build. The project can be seen as a first step in a Sector Wide Approach (SWAP), although without co-financing at this juncture. The SWAP will build on the donor commitment to the PEMAPS and the centrality o f the project in the sector. Donor coordination is ongoing and will be rigorously pursued in specific areas o f strengthening o f CONASA through the establishment o f a highly professional PEMAPS unit and support to the transfer o f services in Tegucigalpa. Donor coordination will be pursued through the existing Mesa Sectorial. This i s a group composed o f government, civil society, and donor representatives that strategizes on how to implement necessary actions to meet sectoral goals, and takes a lead role in coordinating, disseminating, and developing the sector by integratingthe national, municipal, and local perspectives. Inparticular, itisworth mentioningthat the Bank hasbeenworking closely withthe IDB, which has several ongoing WSS projects in the country, and with the Swiss Agency for Development and Cooperation (COSUDE), which is currently providing support to S A N M C O N A S A in its hture role under the Ley Marco, and will coordinate with the Spanish Fondo de Ayuda al Desarrollo (FAD) on Component 2 (Non-Revenue Water reduction). More details on these collaborations are included inAnnex 2. B. Institutionalandimplementationarrangements The following institutional and implementation arrangements are the results o f a long process o f evaluation o f the capacity o f several institutions to participate technically in the process and to assume fiduciary roles. Many different alternatives were evaluated, some o f which are presented in the above "Alternatives considered" section. The arrangements proposed are deemed a good balance between using the technical capacity of existing sector institutions, ensuring that fiduciary processes are conducted to the satisfaction o fthe Bank, and minimizing implementationchallenges, 14 The Republic o f Honduras will be the borrower o f the proposedcredit. The Secretariat o f Finance (SEFIN) will be responsible for the execution o f the proposed project and as such will be the Program's Executing Entity. The overarching approach to project implementation would be to use existing capacity in the Honduran institutions involved, rather than creating a new Project ImplementationUnit. In addition, the implementation arrangements warrant a sound project governance structure with checks and balances included invarious areas. SEFIN has requested that implementation responsibility fall on the Unidad Administradora de Proyectos (Project Administration Unit, UAP)' given its previous experience with multilateral financing in the water and sanitation sector. The UAP was created as a consolidated Project ImplementationUnitwithin SEFIN to manage financial resources from the International Development Association (IDA), the IDB, and the Nordic Development Fund (NDF), among others, to assure timely implementation o f projects using the fiduciary capacity o f SEFIN, which would involve several institutions or agencies ininnovative areas. UAP has been managing 18 projects so far, including two IDAprojects. Under this arrangement, other participating agencies (ERSAPS,CONASA, and SANAA) fulfill mostly technical roles, while coordinating with the UAP on the flow of funds, procurement o f works, goods and services, financial reporting, and other required activities. SEFIN, operating through the UAP, will be acting as the project coordination unit and will serve as permanent link between the Bank and the Government. With respect to this Project, the UAP will be assisted by professional staff with qualifications and experience acceptable to the Bank according to the Project's Operational Manual. In particular, the UAP will be strengthened on the sector, technical staff side. The Bank will co-finance the salaries and other operational recurrent costs required for the operation o f the UAP from loan proceeds. In order to avoid unnecessary turnovers in the personnel affected to implement the project, both in UAP and in the agencies in charge o f the various components, the financial agreement will make it necessary for any change o f key staff to be made only if satisfactory to the Bank. This clause will apply not only to UAP staff, but also to key implementing staff in other agencies, in particular the PEMAPS unit. The project would also count on the high-level support of the ad hoc Grupo Interinstitucionul de Coordinacidn (GIC), comprising SEFIN, SANAA, CONASA, the Asociacidn de 10s Municipios de Honduras (Honduras Municipalities Association, AMHON), and the water sector regulator (ERSAPS). The GIC would monitor project progress and ensure institutional coordination. Table 1 summarizes the responsibilities o f various agencies in the project. UAP will be responsible for the fiduciary and safeguards aspects o f the whole project, with the exception ofparts o f Component 1 to be executed by the municipalities. UAP will also be providing the technical supervision o f Component 1, with CONASA and ERSAPS support. SANAA will be responsible for the technical supervision and corresponding * The UAP was created by MinisterialAgreement 0271 of2004. 15 administrative and operational aspects in Component 2. CONASA, SANAA, and ERSAPS will be responsible for the technical leadership o f Component 3. UAP would also provide overall monitoring o f the implementation o f the Project. It will develop timely and credible information mechanisms regarding the project activities, especially the financial statements on the Project as a whole, the justification of expenditures, and the withdrawal requests to the Bank. Moreover, it will implement transparency and governance mechanisms for the project, including the capacity building in each implementation agency to comply with the Law o f Transparency and Access to Information. The project team will review the implementation arrangements two years after the project's effectiveness to determine whether the conditions exist for the WSS sector institutions to take on more implementation responsibilities. Table 1: Overview ofProjectImplementationArrangements Component Technical With Support Procurement Management I Supervisiona fromb of Funds 1- support to municipalities I I 1A- TechnicalAssistance -Toolingandefjcie ...................................... ......................................... 3A - TechnicalAssistance 3B -SeverancePayments a. Technical Supervision includes preparing TORS and bidding documents, reviewing the inputs of consultants, andso forth. b. Support means the following institutions will be asked to prepare or reviewdraft TORSand inputs fiom consultantsbut will notbemakingthe final decision. c. Dependingon the capacity o f the municipality, as defmedby the OperatingManual. Annex 6 contains more details about the component-by-component implementation arrangements. 16 C. Monitoringand evaluation of outcomeshesults The project-level monitoring and evaluation (M&E) framework will track progress in implementation, measure intermediate outcomes, and evaluate project impacts. The framework outlines key performance indicators, data collection methods, a timetable for collection, and responsible agencies. This framework will be used to supervise and monitor the implementation o f the project. The UAP has monitoring and evaluation capabilities so it can assume this coordinating role. The methodology for monitoring will be in line with the Law o f Transparency and Access to Public Information that was approved by the GoH inDecember 2006. This law obliges public institutions to make effective mechanisms o f transparency and to combat corruption and illegal activity in public policy matters. The UAP will build capacity in each implementation agency and establish accountability mechanisms to move toward compliance with the Law o f Transparency and Access to Information under the scope o f the project. The following tools are to be used for monitoring and evaluation o fthe project: 0 Progress Reports. A mechanismfor annual progress reports will be established for describing the main achievements o f the project. 0 Results-based Monitoring and Evaluation. This tool will include information on results such as actual use o f the services, user satisfaction, and affordability o f the services, among other indicators. The main sources o f information for this results- based M&E will be: (a) a baseline and follow-up, statistically non-representative household survey, (b) participatory focus group discussions, and (c) consumer satisfaction surveys. The UAP will be responsible for the overall management and implementation o f the Project Monitoring and Evaluation Framework. This will include maintaining the databases, managing the flow o f information, and producing periodic monitoring reports. It will be directly responsible for the Progress reports and the results-based M&E. The consultants hired for the project will have a key role in providing timely monitoring reports with operational data. The social team inthe UAP will be responsible for carrying out focus group discussions and participatory exercises, contracting and supervising the midterm and final surveys, and conducting the evaluation reports. Bank supervision teams will provide technical assistance for the implementation o f the tools and for the designand analysis o fthe information. D. Sustainability The question o f long-term sustainability inthe provision o f WSS services i s at the core o f the Government's strategy, expressed through the PEMAPS and the Ley Marco. The project supports the implementation o f this strategy, ensuring alignment with the Government's vision. 17 Component 1: The activities under this component are designed to create autonomous municipal utilities and to strengthen the financial, technical, and commercial capacity o f the participating utilities and are thus designed with sustainability. The overall level o f investmentsforeseen under Component 1is fairly small, thus reducingthe likelihood that operation and maintenance o fthe relatively small works would exceed the capacity o f the utilities. Inaddition, the risk o f poor sustainability o f the investments at the local level i s mitigated by the implementation o f a series o f TA activities included under the same component. Component 2: This component has similar considerations as Component 1. Component 3: The WSS sector i s in the midst o f a reform process where new national institutions are being created while another already existing institution has an altered mandate. The project seeks to strengthen these institutions intheir new roles in order to help them tackle the challenges o f the sector inan efficient manner. All activities planned are being closely coordinated with already existing initiatives, especially those related to implementation o fthe PEMAPS. E. Criticalrisksand possible controversialaspects The overall risk rating for the project has beendeterminedto be Substantial. This i s an innovative project that offers significant rewards in terms o f developing a more efficient water supply and sanitation sector, but carries a substantial level o f risk, especially given the overall country risks inHonduras. The key project risks and their mitigation measures are provided in the following risk matrix: Risk RiskMinimizationMeasure@) IRating To PDO: Project implementationdelays. Project incorporateslessons learnedfiom other Bankprojects, including division of clear responsibilities among all key stakeholders; capacity building at all levels of project implementation; monitoring and evaluation to detect early- warning signals; and a focus on improved coordination among national sector institutions and between the local and the national level. At the local level, risks will be mitigated by S first focusing on TA for reforms; the period up to the transfer of services will be used to prepare master plans, designs, specifications, and tender documents so that procurement can start immediately following participant eligibility for access to fmancing. Vested interest groups delay The pace of WSS reform in Honduras has picked up implementationofreforms considerably in the past year. At the national level this is prescribedby law. spurred on by the presidential benchmarks that provide M incentives for SANAA to decentralize. Several municipalities will have created an autonomous service provider even before project effectiveness. The overall mitigation for the possible 18 Risk RiskMinimization Measure@) Rating delay of reforms is to combine reforms with investment in order to create rapid service improvements and improve the financial basis of the new service providers. To further mitigate this risk at the national level, the Bank is working closely with SANAA, CONASA, and ERSAPS, and with the MesaSectorial,"inorder to bring invarious stakeholderswho are more interested in increasingthe efficiency of the sector. The project will also have a coordination group (Grupo Interinstitucional de Coordinacidn). The severance payment included in Component3 will mitigate the risk of opposition from labor union and entrenched high-ranked officials in SANAA. The project will stay engaged in the transfer of service delivery in Tegucigalpa, but no unrealistic assumptions are made onthe timeline ofthis transfer. Lack oftransparencyinthe The project has identified a clear strategy to address projectimplementation, transparency-related concerns. First, the Bank team, jointly including: (a) the captureof with government officials, has developed an objective projectbenefitsby politically methodology for a stepped approach with clear measurable influentialstakeholders; benchmarks that must be met to move to the next step. (b) failure to apply a consistent Second, the technical and economic merit of investmentswill approachto the selectionof be assessed through municipal master plans. Third, civil municipalitiesandinvestment society organizations (CSOs) and consumer representatives projects,and, as a resultofthe will be involved in the reforms, thus providing a S above; (c) financingof counterweight to clientelistic interests. Fourth, mechanisms technically andeconomically for improving communication and access to information will suboptimalinvestments. be designedand implementedduring the process to guarantee transparency and enable consumer and civil society participation in the decisionmaking process. Fifth, a project implementation unit with extensive experience in implementation of Bank-financed projects will ensure that accounting, fmancial management, and procurement proceduresare consistentwith the Bank's requirements. Lackofcooperationbetweenthe The project relies on several "technical" agencies to support implementingagency (UAP) and the implementing agency (UAP). An interinstitutional the technicalagencies (SANAA, agreement will be signed among those various agencies that CONASA, ERSAPS). will define the roles and duties of each of them and the processes for collaboration. Inaddition, incentiveshave been provided since every one of these agencies is also a beneficiary of the project (SANAA through Components 2 M and 3B and Cy ERSAPS and CONASA-including the PEMAPS unit-through Sub-Component3A). The project is supportingthem inexercisingtheir legalmandate, rather than adding responsibilities they would not otherwise have had. Finally, the UAP will also be strengthenedwith a few high- level sector specialists that will act as back-up and oversight o f the technical agencies. To Component 1: Disinterest o f The stepped approach has been designed in order to provide :he municipalitiesto participate incentives for a transfer process that is already mandated by hthe steppedapproach. the Ley Marco. Contrarily to other ongoing projects (Barrio- M Ciudad, IDB), this project will extend grants, not loans, to municipalities, hence providing more attractive financing rules. A municipal counterpart funding requirement will 19 Risk RiskMinimizationMeasure(s) Rating ensure that the municipalities commit to the process. A strategic communication campaign will also be included in Component 3 and should help promote the project, among others. To Component 1: Low capacity The proposed stepped approach is a way o fmitigatingthe risk and an unevenpace o f reform at of unevenpace o f reform implementation among the local level. municipalities. The approach is to open the first stage o f the project to all municipalities inthe targeted population bracket, M butto focus on a smaller numberofmunicipalities inthe second andthird stage, given the relatively small amount o f investment available. To Component 1: Weak A significant effort has been made to put in place the implementation capacity at the appropriate capacity and support structures (including local level could directly affect ongoing support to municipalities and municipal service the quality ofinvestments providers by the CATS) to mitigate such risks. Procurement S financed under the operation. has been centralized and an experienced PIU has been selected to assist in execution o f the project. The quality o f investment will be a key focus o f Banksupervision efforts. To Component 2: Badtrack The NRW reduction program will be implemented through record o f SANAA on non- the performance-based contractingofa fm. M revenue water will continue. To Component 3: SANAA The component will focus on empowering CONASA and remains de facto lead institution ERSAPS. It will be implemented by a ringfenced PEMAPS insectordueto reluctance of unit in the CONASA Secretariat. Other donors will be high-ranking officials in SANAA encouraged to support this unit, which should develop into a S to let go andweak capacity o f center o f excellence for the sector. The World Bank will stay CONASA and ERSAPS. engaged in dialogue considering the transfer o f services to AMDC (Tegucigalpa). To Component 4: Administrative The current President and administration will be in place ~~~ changes/ staff turnover after through the end o f 2009, meaningthe project will be in full elections hamper project implementation by the time the government changes. The risk implementation. o f high staff turnover that may affect project implementation will be mitigated by the use o f legal clauses against S unnecessary project staff changes in the loan agreement. The project will also address the lack o f continuity through intensive dialogue with the new authorities at the central and decentralized levels to minimize disruptions. Overall Financial Management See detailed action plan inAnnex 7. Risk. S Overall Procurement Risk. See detailed action plan inAnnex 8. S Overall Project Risk S 1=Highrisk. S = Substantial risk. M=Modestrisk. N=Negligible or low risk. Ratings are post-mitigation. a. The MesaSectorial is a group composed ofgovernment, civil society, anddonor representatives that strategizes on how to implement necessary actions to meet sectoral goals and takes a lead role on coordinating, disseminating, and developing the sector by integrating the national, municipal, and local perspectives. 20 F. Loadcreditconditionsandcovenants EffectivenessConditions: (a) An Inter-institutional Agreement has been signed between SEFIN, SANAA, ERSAPS, and CONASA definingthe framework for the interagency collaboration. (b) The Operational Manual has been issued by Honduras and approvedby the Bank. DisbursementCondition: For Expenditure Category 4 (Sub-Components 1B and 1C-municipal efficiency improvement and investments), for each eligible municipality (not for the whole component): signature o f an agreement between SEFIN and the eligible municipality consistent with the model provided inthe Operating Manual. For Expenditure Category 5 (Sub-Component 3B / Severance payments): the Recipient has submitted to the Bank an analysis prepared by independent consultants: (i) describing the severance payments regime applicable to SANAA; (ii)demonstrating its compliance with all relevantlocal laws, regulations, and collective bargaining agreements; (iii) defining the amount o f such payments per worker, based on an analysis that demonstrates the productivity and fiscal sustainability o f the investment; and (iv) demonstrating that satisfactory oversight arrangements are inplace. IV.APPRAISALSUMMARY A. Economicandfinancialanalyses Economicanalysis: The project is based on a framework approach where specific sub-projects are not pre- defined. Rather, they will be identified based on the demand from the municipalities and technical assistance, and capacity-building activities will be provided to participating municipalities. The economic and financial analyses focuses on Sub-Components 1B and 1C (US$17.5 million) and 2 (US$4.5 million), which account for 63 percent o f total project cost. Consultants hired for the development o f the municipal water and sanitation efficiency improvement plans (Sub-Component 1B) and consultants hired for the development o f master plans (Sub-Component 1C) will be responsible for conducting financial and economic feasibility studies, and to ensure that all proposed interventions will be at least economically feasible. Cost-benefit analyses will be used to assess the economic feasibility o f the proposed plans. The Operational Manual will contain the methodology and detailed information on the development o f the economic analysis for the investments to be financed by the project. The economic analysis principles to be applied are discussed below. Annex 9 contains more detailed explanation on the methodology to be applied for assessing economic costs and benefits. 21 Sub-Component 1B (efficiency improvement): Any eligible investment in efficiency improvement will have to be part o f the efficiency improvement/master plano f the utility requesting it, in which case it would already have been evaluated for its economic feasibility. In case the proposed investment was not part o f the efficiency improvement, the municipality will need to present its economic feasibility study based on the methodology specified under the Project Operational Manual. Investments that are not economically feasible will not be eligible for funding. During project preparation 3 potential sub-projects were evaluated. The results are presented inAnnex 9. Sub-Component IC (investments): Any investmentunder this component will have to be justified as part o f a master plan approach to WSS services development. Inthe process o f appraising a national OBA fund for water and sanitation investments, a sample o f projects was assessed. The methodology used for assessing the economic feasibility o f those sub-projects will be used for assessing those to be financed through this proposed project. The results and methodology are ready, and are presented inAnnex 9. Component 2 (NRW campaign in Tegucigalpa): Component 2 will focus on Non- Revenue Water reduction campaigns. The design o f such campaigns will be based on a strategic diagnostic that identifies the actions that lead to the best results for the money available. Economic and financial analysis will be an inherent part o f this strategic diagnostic, hence ensuring that only actions that make economic and financial sense are funded. Financial analysis: As part o f the efficiency improvement/master plans, financial models will be used to project the cash flows o f the proposed plans. The work done as part o f the OBA facility and the preparation o f this proposed project show that many o f the eligible sub-projects may be financially unfeasible. However, it i s important to clarify that according to OP 10.04, sub-projects that are financially unfeasible may be eligible for World Bank/IDA financing as long as they are economically feasible. The financial analysis, however, i s important for the utilities to take control o f their own financial performance, to prioritize investments, and to see the impact o f proposed interventions on their own financial health. Project funding will be used only to finance economically feasible interventions that were prioritized by the municipalitiesthat will be co-financing these investments. B. Technical The project is designed on a demand-based approach. Therefore, the exact sub-projects will be defined during project implementation. The technical assessmento f the project is based on the following principles: The sub-projectswill be part of a master plan. The project will finance the preparation of a master plan in each city that participates and does not have a recent master plan. In cites that already have a master plan, the planwill be revised andupdated as needed. This master plan will ensure that individual works fit into a larger vision and efficiently contribute toward lasting improvement inservice quality and coverage. 22 Project design and supervision will be supervised centrally to ensure quality standards are met. UAP, which will be the implementing agency for the execution of Component 1, will be strengthened on the technical aspects through the integration o f a high-level technical specialist and other technical professionals, as needed. SANAA, which will be technically supervising Component 2, has traditionally been strong on the technical side. This will ensure that project designs and supervision are executed in a satisfactory manner. The individual investments amounts are limited. While the project includes about US$12 million o f investments, this amount will be divided between 3 to 5 cities and 5 to 6 years. It is not expected that large sub-projects will be executed, so the risk o f overwhelming local implementing capacity i s limited. All technologies considered for water supply, sanitation, and wastewater treatment are well established. Type o f works and technologies used will not differ substantially from typical ones used in similar contexts (small towns). These will include traditional pipe laying, connections, simple water treatment plants, and so forth. Condominia1 or other types o f low-cost technologies may be used insituations where deemed appropriate. Insuch cases, the Bankwill provide all neededtechnical support, based on its experience in other Latin American countries (for example, Bolivia, Brazil, and Peru). When required, wastewater treatment plants using well-established, low-cost waste stabilization pond or artificial wetlands technologies will also be financed. When land costs or topography make waste stabilization ponds unfeasible, alternative technologies will be considered. C. Fiduciary Procurement: A Procurement capacity assessment o f the proposed arrangements was carried out to determine if the procurement arrangements are acceptable to the Bank. A detailed assessment i s provided in Annex 8. A summary o f the conclusions is included below. SEFIN requested that implementation responsibility fall on the Unidad Administradora de Proyectos (UAP) given its previous experience with multilateral financing inthe water and sanitation sector. The assessment reviewed the capacity o f the UAP to carry out procurement. The assessment looked into (a) organization, (b) facilities and support capacity, (c) staffing, (d) professional experience, (e) record-keeping and filing system, (f) procurement planning and monitoring/control systems used, and (g) capacity to meet the Bank's procurement reporting requirements. The assessment also considered the capacity o f alternative proposed agencies such as FHIS to implement procurement for Component 1, SANAA for Component 2, and CONASA for Component 3. The findings ledto rejecting the use ofthese agencies for project implementation, andembracing the UAPinstead. 23 The procurement o f goods and works under Component 1 will be executed by the municipalities under supervision from the UAP and in accordance with the procurement plan, provided that its capacity is deemed sufficient. A rigorous evaluation framework will be usedto determine the municipalities' capacity to implement the works, based on the analysis conducted prior to the Barrio Ciudad project and the Rural Infrastructure Project (PIR). When the municipalities' capacity i s found to be insufficient, the UAP will be implementing the works inclose technical coordination with the municipality. Inboth cases, UAP will be (co-)signing the contracts and managingthe flows o f funds. Inaddition, the procurement capacity assessmenthas identifieda series ofrisk-mitigating measures incorporated into the design o f the project and the procurement management implementation arrangements. Financial Management. A Financial Management (FM) review o f the proposed arrangements was performed in line with the guidelines issued by the Financial Management Board on November 3, 2005, to determine if the FM arrangements are acceptable to the Bank. A financial management assessment report (FMAR) i s included inAnnex 7.A summary ofthe conclusionis includedbelow. Since the UAP has ongoing experience managing externally financed projects, it has in place a basic administrative structure and FM systems, which puts it ina good position to take over the financial management functions o f the proposed project. However, the FM capacity assessment (FMA) has identified project-specific actions in order to strengthen the FM capacity of the UAP and to enable it to effectively carry out the financial activities o fthe proposed project. Importantly, the project i s expected to use country systems (SIAFI and UEPEX) for accounting and reporting purposes, because these systems would provide adequate information for monitoring specific project expenditures. No additional system i s expected to be needed. Inaddition to the use o f country systems (SIAFI), the project will use a single treasury account to make project payments. D. Social The implementing agency, UAP, currently has insufficient capacity to carry out and supervise the activities related to social impacts. Therefore, the UAP will incorporate a social science professionalto take on this role. This individual would supervise the social framework, the indigenous peoples' policy framework, and rapid social assessments as described below. As mentioned, the target population for Component 1 will be defined during implementation, thus the universe o f municipalities has been based solely on the delimitation o f city size. Accordingly, a broad environmental and social framework has been prepared, which describes demographic and institutional characteristics o f Honduras. This framework has contributed to the project design's social strategy focused on ensuring meaningful participation o f key stakeholders including civil society 24 organizations, community representatives, indigenous and ethnic leaders, and municipal governments. In terms of Component 1 physical interventions, the pertinent social safeguard instruments have been prepared. The project foresees targeting a geographically diverse set o f municipalities, raising the probability o f working with the country's heterogeneous indigenous and ethnic communities. For that reason, the Government has prepared an Indigenous Peoples Framework, also referred to as an Ethnic Communities Policy Framework, in reference to the inclusion o f both native indigenous groups and Afro- Honduran communities. Given the nature and scale o f the water and sanitation works to be implemented inurban areas, a proposed sub-project will be considered ineligible if it involves (a) the involuntary taking o f landresulting in (i) relocation or loss o f shelter; (ii) of assets or loss access to assets; or (iii) loss o f income sources or means o f livelihood, whether or not those affected must move to another location; or (b) the involuntary restriction o f access to legally designated parks and protected areas resulting in adverse impacts on the livelihoods o fthe displaced persons. In addition to social safeguards, the project will also be carrying out a rapid social assessment per city, once the municipalities have been identified. This assessment will include (a) an inclusion strategy, (b) desk review, (c) participatory focus groups, and (d) socioeconomic and consumer satisfaction surveys. These steps are further described in Annex 10. The project will also develop some capacity in the implementation agencies to set up transparency and governance mechanisms to move toward compliance with the Law o f Transparency and Access to Information. Training programs for municipal officials and civil society representatives will be delivered. They will focus on integrated approaches to water and sanitation planning based on stakeholder engagement. Upon completion o f this activity, the project will work with these newly trained municipal officials to carry out participatory governance meetings with local citizens and organizations, with the aim o f considering the feasibility and advantages o f different possible management models andproviding relevant citizen feedback. These activities will be part o fthe TA provided bythe CATS inComponent 1. E. Environment Giventhe nature o fthe works to be financed by this project, no significant or irreversible environmental impacts are foreseen. Therefore, the project is classified as Category B according to World Bank Operational Guidelines. Since individual sub-projects and locations have not yet been identified, the project has developed a Framework for Environmental and Social Management that builds on the smaller-scale Honduras OBA Water and Sanitation Conceptual Framework for Environmental and Social Management. This operation's Framework will include all relevant Honduran laws, World Bank environmental safeguards, and procedures for reviews needed to ensure that the project 25 will meet Bank and Honduran guidelines for environmental protection. This Framework for Environmental and Social Management was originally prepared by FHIS and has been modified by UAP to reflect its (UAP's) role as the current implementing agency. This project will not finance works on any existing or future dams. F. Safeguardpolicies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) 1x1 [I Natural Habitats (OP/BP 4.04) [XI [ I PestManagement(OP 4.09) [I [XI Physical Cultural Resources(OPBP 4.11) [XI [ I Involuntary Resettlement(OP/BP 4.12) [ I [XI Indigenous Peoples(OP/BP 4.10) [XI [ I Forests(OP/BP 4.36) [ I [XI Safety o f Dams(OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP 7.60) [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI The implementing agency, SEFIN's UAP, already has in-house environmental and water engineers (one of each) and atechnical specialist. The project will add additional capacity interms of a specialist who will be responsiblefor the project's environmental and social needs. Other consultants may be hired to provide additional environmental capacity as needed. The Framework for Environmental and Social Management and Indigenous People's Policy Framework were releasedto the InfoShop May 2, 2007 and were made available in-country on May 8,2007. G. Policy exceptions and readiness This project complies with all applicable Bankpolicies. 26 Annex 1: Country and Sector or Program Background HONDURAS:Water and SanitationSector ModernizationProject Country Issues Honduras is the second-largest country in Central America, with 112,492 square kilometers of land and a population of about 7.4 million in 2005. Per capita income is US$1,170.9 The capital of Honduras is Tegucigalpa, located in the highlands, and the most important cities are San Pedro Sula, on the northern coast, which is highly industrialized, and Choluteca on the southern coast, which is an agricultural center for diverse products such as shrimp, meat, and dairy products. The country has a diversified economy, based on international trading of agricultural commodities and manufactures, which makes it the most open economy in Central America: exports plus imports amountedto 106percent of gross domestic product in2005. Honduras has one of the highest incidences of poverty and inequality in the western hemisphere, and Hurricane Mitch in 1998 made it worse. After this massive loss of life and assets, Honduras embarked on a very ambitious Poverty Reduction Strategy (PRS) in consultation with civil society and other donors, agreeing to a set of actions aimed at reducingthe incidence of extreme poverty by halfby 2015. Overall, the income of 50 percent of Hondurans remains below the poverty line. Poverty and inequality are widespread. Roughly one-half of the population resides inrural areas. Extreme poverty, while declining nationally, has actually increased in rural areas by about 10 percent (although this is mainly attributable to' the devastating effects of Hurricane Mitch). Honduras reached the Heavily Indebted Poor Country (HIPC) Completion Point inApril 2005 and benefited from the Multilateral Debt Relief Initiative (MDRI) in July 2006. Honduras's external debt will remain sustainable over the mediumterm if fiscal deficits and rates of growth are maintained at their current levels. Total external public debt fell from around 70 percent of GDP in 2000 to 52 percent in 2005 (before MDRI), while external debt service fell from 8.2 percent of exports in 2003 to an estimated 4.4 percent in 2005. Under those circumstances, the economy can withstand temporary external shocks such as those involving the terms of trade or adverse weather conditions. However, if the fiscal balance is allowed to deteriorate and growth falls significantly below4.5 percentper year, the debt burdenwould becomeunsustainable again. In 2005 Hondurans elected Jose Manuel Zelaya as President in the seventh successive peaceful, democratic change of government since 1982. The Zelaya administration has made poverty reduction its top priority, endorsing the current Poverty Reduction Strategy Paper (PRSP). The four pillars identifiedby the President for his administrative mandate (January 2006 to January 2010) are: Atlas methodology. 27 Equitable economic growth for employment generation; 0 Good governance through state modernization and civic participation; Environmentalprotection and risk management; and Development o f humancapital. Like in many other developing countries, the Government of Honduras (GOH) recognizes the limits o f the centralized government system. The recent drive toward decentralization started in 1990 with a municipal law that conferred local service delivery responsibilities and fiscal autonomy on the country's 298 local governments, and established a fiscal transfer o f 5 percent o f the annual budget to the municipalities. The trend toward decentralization was further reinforced inthe PRSP, which underscored the role o f the local government inits poverty reduction strategy. Sector issues In2001, only 81percent ofpeople had accessto potable water and 68 percent hadaccess to sanitation. Understandably, rural coverage is significantly lower than urban coverage. According to the Pan-American Health Organization, 23 percent o f contagious diseases inHonduras are waterborne. The GoH Poverty Reduction Strategy ranks expandingwater and sanitation services as a priority. This strategy is supported by the United Nations Development Programme's (UNDP's) recently released Millennium Development Goals (MDGs) Report for Honduras, which calls for a significant increase in access to water and sanitation services for the poor. Drinkingwater and sanitation arejust two o f several pressing needs competing for scarce government resources. Central problems in the water and sanitation sector are intimately linked with the lack o f strong governance and scarcity o f financial resources. Investment needs exceed the GOH's financial capacity, thereby requiring additional support in the form o f donations, diverse subsidies, and/or loans. Some implications of thisproblemare: The aforementioned low service coverage vis-a-vis GOH's development goals andMDGs; 0 Infrastructurewith insufficient capacity to meet total demand; 0 Centralized management with insufficient resources to meet municipal needs; 0 Incomplete works, mainly due to lack o f resources; 0 Current project portfolios with extended development and executiontimelines. A central issue and concern o f the Government is governance. The Water Supply and Sanitation (WSS) sector institutions find themselves locked ina vicious cycle from which it is difficult to escape. This spiral combines weak performance incentives, low willingness o f customers to pay cost-recovery tariffs, and insufficient finding for maintenance, ultimately leading to a deteriorationo f assets and a squanderingo f financial 28 resources. The downward cycle attracts further political interference and regenerates the downward trend with increased velocity. The vicious spiral i s largely a consequence o f ineffective policies and lack o f transparency, coupled with the monopolistic nature o f the sector. Water i s politically sensitive and the Government has found it difficult to effectively balance the tradeoffs between affordability and expansion o f coverage to poorer communities, with the sector's need for financial viability. Policymakers pursue multiple unaligned objectives, often leaning toward the attainment o f short-term political interests. Users have had little opportunity to hold utilities accountable. Customer orientation could help depoliticize and balance the accountability framework o f utilities andhelp prevent political capture. The National Autonomous Water and Sewer Service (Servicio Autdnomo Nacional de Acueductos y Alcantarillados, SANAA) has historically managed and provided water supply services in approximately 30 rural and urban centers. Municipalities provide sanitation services-and in some cases water supply services-through direct municipal provision. Water is rationed in most cities-two times a week or even less in the summer-under SANAA management. The situation is no better inthose municipalities that are directly managing their WSS. Two good practice examples o f how services can be improved when autonomous service providers are established are Puerto CortCs and San Pedro Sula. In 2003, Honduras passed the Drinking Water and Sanitation Sector Framework Law (Ley Marco del Sector Agua Potable y Saneamiento), which mandates the decentralization o f SANAA and the transfer o f assets to the municipalities by October 2008. The Ley Marco requires municipalities to set up autonomous service providers, but does not describe the management model o f such a service provider. This law also established the sector planning body, the National Council for Water and Sanitation (CONASA), and the Water and Sanitation Sector Regulator (ERSAPS), which should assist inproviding more effective governance o fthe sector. Decentralization (to the local level) and deconcentration (to autonomous service providers) should improve services by makingproviders more accountable to consumers. However, the reforms are a large task given limited capacity at the municipal level. Municipalities are looking to the few good practices o f management o f services such as Puerto Cortez and San Pedro Sula as examples o f creating an autonomous and accountable service provider. Designing and implementing good municipal management models that are accountable to their customers and function in a transparent manner i s key to improving service. Table 2 provides an overview o f the current institutional and operational situation o f the medium-size cities o f the country. 29 Table 2: Summaryc IInstitutioia1and Ope rational SituationinMedium-sizeCities La Ceiba El La Lima Choloma Comayagua Choluteca Danli Puerto Siguatepe Progress0 Cortez que Water SANAA SANAA Municipal Municipal SANAA Mixed SANAA Mixed SANAA Services Department Department Company Company Managed By: Ongoing Ongoing Complete Ongoing Complete Ongoing ationProcess Status NA 40% NA 75% 65% 95% 96.5% 70% Coverage Level (water) Current 38% NA 10% 50% Coverage Level (sewer) Number of 15,000 12,800 NA NA 9,832 Water Connections Number of 9,500 NA NA NA 6,039 Sewer Connections Unaccounted 60% NA 65% NA 30% -for-Water Water 479 lcd NA 480 lcd NA 375 lcd Availability Total 22.6 2.2 .445 22.26 4.115 Income (25.2) (3 .o> (23.59) (10.876) (Expenses) MLPs 3ank ftom ut lity data, to 1: 5 confirmed wing implementation. After decentralization o f service delivery, SANAA i s expected to remain as a technical assistance agency supporting small service providers and serving as CONASA's technical secretariat. The regulatory, planning, and operational functions are to be fully transferred from SANAA to the separate specialized institutions o f ERSAPS,CONASA, and the municipalities-promoting good governance. Since these institutions are new, they are relatively weak. Inaddition, the structure o f CONASA as a council instead o f an agency i s a challenge to its ability and purpose to provide direction to the sector. There is a need to strengthen CONASA to effectively assume its responsibilities. Simultaneously, there is a need to re-engineer SANAA and strengthen it in its new role to support CONASA technically. One o f the major issues with the re-engineering o f SANAA is the 30 issue o f the amount o f the severance payments necessary to release the employees that will no longer be necessary as the municipalitiestake ontheir own services. The HonduranFundfor Social Investment(Fondo HondureAo de InversidnSocial, FHIS) has also been making investments in the sector over the past five years as part o f the Government's efforts to buildcapacities at the municipal level inthe WSS sector. The GoH has prepared (with World Bank and Public-Private Infrastructure Advisory Facility [PPIAF] assistance) the Strategic Plan for Modernization o f the Potable Water and Sanitation Sector (PEMAPS) and the National Water and Sanitation Plan (PNAPS), which all seek to implementthe organization and reform o f the sector, as mandatedinthe 2003 Drinking Water and Sanitation Sector Framework Law and its MDGs. This plan already has wide acceptance inHonduras and provides direction to donor interventions in the sector. With 57 percent of SANAA'Sconnections, the most significant transfer of services from the national utility to municipalities will be that o f Tegucigalpa. This is a complex and politically charged process that deserves special attention because o f its political significance inthe overall implementation o f the sector vision. The Tegucigalpa Transfer is one o f the 19 projects in PEMAPS and represents 41 percent o f PEMAPS' total costs. The Tegucigalpa Transfer has a decisive influence on the execution o f 12 o f the other 18 PEMAPS projects-specially the re-engineeringo f SANAA, which would fail without this particular transfer. Currently, the Transfer process is not progressing rapidly enough to meet the October 2008 deadline. Again, the high and still unconfirmed issue o f the severance payments for SANAA i s also a major issue to be resolved for this specific transfer. While loss reduction can improve services in Tegucigalpa in the short term, water scarcity in the capital will require high-cost solutions to sustain and expand services inthe long run. In December 2006, the GoH approved the Law of Transparency and Access to Public Information that governs the national public policy activity. This law obliges public institutions to create effective mechanisms that promote transparency in order to combat corruption and illegal activity in public policy. The law offers an opportunity to strengthenWSS sector institutions and represents an important framework for promoting transparency within the government and effective participation from stakeholders in project activities. However, significant work i s still necessary to meet the new requirements since this law was recently approved. More transparency and citizen participation in the water sector can help to promote better service delivery. The supply o f information and demand for transparency in the water sector in Honduras need to be strengthened. 31 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies HONDURAS:Water and SanitationSector ModernizationProject This proposed Bank project builds on earlier work that the Public-Private Infrastructure Advisory Facility (PPIAF) and the Bank have done in helping develop the Plan Estratkgico de Modernizacibn del Sector de Agua Potable y Saneamiento (Strategic Plan for Modernization of the Potable Water and Sanitation Sector, PEMAPS), the Plan Nacional de Agua Potable y Saneamiento (National Drinking Water and Sanitation Plan, PNAPS), and the preparation of Tegucigalpa for the transfer of services. Inaddition, the new Output-BasedAid (OBA) for Water and Sanitation Facility, financed by the Global Partnershipfor Output-BasedAid, will provide subsidies for new or improved water and sanitation household connections. Also, the Japanese Government has provided support to the development of this proposed Bank operation through the Policy and Human ResourcesDevelopment grant to preparethe studiesnecessaryto formulate this project. The OBA Water and Sanitation Facility inHonduras is a US$4.6 million grant that seeks to improve the access of low-income households in rural and peri-urban communities to water and sanitation services through one-time subsidiesfor increasedconnections andor improved water quality received. Municipalities, juntas de agua, and private companies or other potential implementersmust apply to the facility for inclusion and must obtain funding (bridge financing-before receiving the subsidy) to finance works and activities necessary to create the connections andor improved water quality. Subsidies will be released only upon a verified already agreed-upon output. The Facility supports the Ente Regulador de 10sServicios de Agua Potable y Saneamiento (Water and Sanitation Sector Regulador, ERSAPS) in its institutional role as regulator since it i s responsible for verifying the outputs. Since this donation has just been approved and should have a signed grant agreement very soon, it has not yet started implementation and so there are no ImplementationProgressor Development Objective ratings yet. Current Bank projects still under implementation in Honduras that include water components include the Barrio Ciudad and Rural Infiastructure Projects. Both projects seek to increase or improve access to water and sanitation services among work in other sectors but Barrio Ciudad focuses on urban poor communities while the Rural Infrastructure Project (PIR) focuses on rural areas. Both projects also seek to improve municipal capacity for service delivery and promote decentralization, as does the proposed Proyecto de Modernizacibn del Sector Agua y Saneamiento (Water and Sanitation Sector Modernization Project, PROMOSAS). Barrio Ciudad and PIR's current Implementation Progress and Development Objective ratings are both (for each project) moderately satisfactory. The Honduras Sustainable Coastal Tourism Project, also a Bank project, closed in December 2005. This project focused on managing the environmental impacts of tourism on the North Coast (which has implications for water resource management) by increasing municipal capacity to sustainably manage impacts on the North Coast and supporting an enabling institutional environment. By strengthening local governance 32 institutions, this project also supported decentralization. This project's Implementation Completion Report ratedthe project as highly satisfactory. Other related Bank projects include the Natural Disaster Management Mitigation Project for US$12.6 million, the Copan Valley Development Tourism Project for US$13.7 million, and the LandAdministration Project for US$26 million. Many donors are active in Honduras and the Water Supply and Sanitation (WSS) sector i s no exception. Other donor projects include: the Inter-American Development Bank's (IADB's) PotableWater and Sanitation Investment Program Loan, the Swiss Agency for Development and Cooperation's support to CONASA, the SpanishFund for Assistance and Development's support to the Servicio Autbnomo Nacional de Acueductos y Alcantarillados (National Autonomous Water and Sewer Service, SANAA), and the Japanese Government's support to Tegucigalpato alleviate its current water woes. As mentioned inthe "Partnership Arrangements" section, the Bank is coordinating efforts in the sector with the other major donor, the IDB, to provide consistent and complementary technical advice and financial support for the reform process. The IDB currently has the Potable Water Supply and Sanitation (WSS) InvestmentProgram Loan (US$26 million) to provide assistance to utilities in small and medium-size municipalities, and an additional, US$30 million financing was recently decided. The IDBhas also committed limitedfunds (US$2 million) for studiesinTegucigalpa. On the other hand, the Bank project will be more comprehensive and promote the long- term sustainability of the modernization process by providing institutional strengthening assistance to the national agencies initiating the sector's reform and specific investments for selected projects. There is agreement that once a decision about reform in Tegucigalpa is made, bothbanks will develop consistent assistance for the process. Other IDB projects include the Program for Potable Water and Sanitation for US$26 million, the Natural Resources River Basin Management US$25 million project, the Lempa Trinational Watershed Management Project for US$3.3 million, and the Stage I1 Environmental Managementofthe Bahia Islands Project for US$12 million. The Central American Bank for Economic Integration has five loans. The first is the Modernization of the Comayaguela Valley River Basins for US$12.8 million, the second i s the Tegucigalpa Groundwater Water Supply Project for US$13.6 million, the third i s a US$750,000 project for the Amapala Desalination and Drinking Water Project, and the last two are bothBasic Infrastructure projects for Tela Bay for US$6 million. Other projects include the Nordic Development Fund's US$2 million Water and Sanitation Program with the Fondo HondureAo de Inversibn Social (Honduran Fundfor Social Investment, FHIS), and the Organization of the Petroleum Exporting Countries' (OPEC's) Sula Valley Flood Protection project and its Potable Water and Sanitation investment with FHIS, each for US$5 million. Finally, Kuwait has a Coyolar Dam and Irrigation SystemImprovementProject for US$7 millionwith the Secretaria de Recursos Naturales y Ambiente (SERNA). 33 The Bank team is in contact with the Swiss Agency for Development and Cooperation (COSUDE), which i s currentlyproviding support to SANMCONASA inits future role under the Ley Marco and expects to coordinate interventions more extensively during project implementation. The SpanishFund for Assistance and Development has given a large (US$27.3 million) loan to SANAA to improve the operation of Tegucigalpa's water network. Among other activities, this loan will finance the establishment of network plans, leak-reduction activities, the creation of a SCADA (Supervisory, Control and Data Acquisition) system, and the installation of macro- and micro-meters. The loan will also rehabilitate the water network for two Tegucigalpa neighborhoods. SANAA'SUnidad Ejecutora del Proyecto de Optimizacidn Operativa de Tegucigalpa will implement this loan expected to start mid-to-late 2007. Inaddition, this unit will also implementthe leak-reduction component of PROMOSAS inTegucigalpa, making it possible for the Bank to buildon the results of the Spanish loan. Other Spanish projects include the US$5.3 million Construction of Canal Calan and the US$2.7 million Water Supply and Operation of Maintenance of the Sewer System, also with SANAA. In another effort to improve Tegucigalpa's serious water situation, the Japanese Government has designed an emergency drinking water project that finances the replacementof water trunks and other urgent leak-reductionmeasures. Finally, Italy has two related projects in Honduras. The first is a Water and Sewer Infrastructure Project for US$26.4 million and the second is an Aqueduct Construction Project for Nacaomefor US$24 million. 34 Annex 3: Results Framework and Monitoring HONDURAS:Water andSanitationSector Modernization Project Methodology and Objectives The project-level monitoring and evaluation (M&E) framework will track progress in implementation, measure intermediate outcomes, and evaluate project impacts. The framework outlines key performance indicators, data collection methods, a timetable for collection, and responsible agencies. This framework will be used to supervise and monitor the implementation o f the project. The Unidad Administradora de Proyectos (Project Administration Unit, UAP) has monitoring and evaluation facilities and it can assume this coordinating role. The methodology for monitoring will be in line with the Law o f Transparency and Access to Public Information that was approved by the Government o f Honduras (GOH) inDecember 2006 and that governs the national public policy activity. This law obliges public institutions to create effective mechanisms o f transparency and to combat corruption and illegal activity in public policy matters. The UAP will establish accountability mechanisms in the different participating institutions to comply with the Law o fTransparency andAccess to Informationunder the scope o fthe project. Tools and Data The tools to be used for the monitoring and evaluation o fthe project are the following: 0 Progress Reports. A mechanism for annual progress reports will be established for describing the main achievements o f the project. They will include complete information on contracts, procurements, disbursements, detailed information on the project's financial status, inputs, number o f beneficiaries, and other outputs, and a range o f additional operational indicators to track project status. These reports will be produced by the UAP and they will be used by the Interagency Coordination Committee and the World Bank. 0 Results-based Monitoring. The main sources o f information for this Results- based M&E will be: (a) Baseline and Follow-up Household Survey. The survey will use a non-representative household sampling methodology. This survey will be designed mainly to collect information for the design and economic analysis o f the master plans; in particular, it would assess the benefits o f the interventions that are relevant for that evaluation. Additional indicators that allow measuring the overall performance o f the project should also be included; (b) Participatory Focus Group Discussions: The household surveys will be complemented by participatory focus groups in project communities. Focus group discussions with beneficiaries inproject communities will be held inorder to build a profile o f the project impact; and (c) Consumer satisfaction surveys: Sample consumer satisfaction surveys o f beneficiaries in urban areas will be used to determine the 35 status o f project implementation in the urban area. Consumers will also be quizzed on their perceptionof the transparency o f sector agencies. InstitutionalArrangements The UAP will be responsible for the overall management and implementation o f the Project M&E Framework. This will include maintaining the databases, managing the flow o f information, and producing periodic monitoring reports. It will be directly responsible o fthe Progress reports and the results-based M&E. Monitoring the progress toward Millennium Development Goals (MDGs) and nationalsectoralgoals: Since Honduras is an International Development Association (IDA) country and this i s a water and sanitation operation, the project will comply with IDA14 Results Management System (RMS), and therefore World Health OrganizationLJnited Nations Children's Fund (UNICEF) Joint Monitoring Program (JMP) definitions of improved drinking water" and improved sanitation services" will be used. The GoH has two instruments to monitor with reasonable frequency the country's progress toward the water supply MDG (halving the percentage o fthe population without access to safe drinking water). The first one is the Sistema de Informacidn de la Estrategia para la Reduccidn de la Pobreza (SIERP) (http://www.sierp.hn), which systematically monitors the indicators o f the Country Poverty Alleviation Strategy. The water supply and sanitation MDGs are included among those indicators. The source o f information for the system i s the National Household Survey (Encuesta Nacional de Hogares de Propositos Multiples, ENHPM), which is taken biannually by the Instituto Nacional de Estadisticas (INE). The second instrument i s the Sistema de Gerencia Basado en Gestidn por Resultados, which i s carried out by the GoH. This system builds on the MDGs andthe sectoral goals. There are four objectives to achieve by 2010 in the water and sanitation sector: (1) increase to 89 percent the population with access to water, (2) increase to 74 percent the population with access to drinking water, (c) achieve 80 percent coverage in sanitation, and (4) achieve 35 percent o f sewerage systems with installedpurification. The first three indicators have a baseline already computed in 2005, and a system to monitor them i s already defined. Importantly, CONASA/SANAA, with financial support from ACDI (Canada International Development Agency) and with technical assistance from the World Bank, is developing an information system for the sector that will provide quality information on sectoral investments and will enable measuring progress toward the water supply and sanitation MDG. 10 Piped water into dwelling, plot, or yard; public taplstandpipe; tube wellhorehole; protected dug well, protectedspring, rainwater collection. I' Flush or pour-flush to: piped sewer system, septic tank, pit latrine; ventilated improved pit latrine, pit latrine with slab, compostingtoilet. 36 The preliminary assessmentofthe capacity o fthe country to measure progress toward the water supply and sanitation MDG indicates that the indicators are reasonably monitored. The project will work with N E and the National Government to ensure that the MDG monitoring system remains in place and properly working, and to ensure the indicators' definition is inline with JMP standards. The matrix that follows provides a results framework for measuring project outcomes. ResultsFramework Use of Project Outcome Information 0 To assess the extent to recovery (ratio total income/total which the project operativecost equalto one). effectively contributedto improvingthe water WSS services inEligible supply and sanitation Municipalities; and (b) to 20% the ratio ofrevenuesper services and supporting improve the performanceofthe volumetric unit ofwater produced. 5 ofthe participating WSS utilities national institutions. 0 To prepareapossible their respectiveroles in service per day) by 6 hours or more follow-up operation. Framework Law. are transferredto the municipalities. 0At least 6 designproposalsof autonomous service providers create autonomous service providers and invest in efficiency, rehabilitation, and 0To assess whether project design is producing intendedinstitutional results and determine any the implementingagency inorderto changes for further enter this component. advisory support, training, 0At least 10,000 additional people and other technical with accessto improved sanitation assistance. 0To inform the ongoing Improved customerrating ofwater process of strengthening supply and sanitationas expressed in institutional arrangements increaseby TBD(*)bpercent in at the municipal level. 0To showcasethe potential 37 municipalitiesreducelevels ofNon- for NRWreductionand RevenueWater (includingapparent spur further investmentsby losses, real losses, andunbilled GoHandother donors. authorizedconsumption)by 10 percentagepoints. ~ ~~~ Component 2: Tegucigalpa Non-Revenue Water ReductionProgram ReducedNon-RevenueWater in Non-RevenueWater (including To assess whether service area of200,000 people apparent losses, real losses, and projectdesignis inTegucigalpa. unbilledauthorizedconsumption) producingintended reducedby 15 percentagepoints in resultsanddetermine any service area. changes for further Ratiooftotalincome/m3producedin investments. targetedareaincreases by 20%. To showcase the potentialfor NRW reductionandspur further hvestmentsby GoH andother donors. To pilot andtest performance-based contractingas an instrumentto reduce NRW. Component 3: National and RegionalInstitutional Strengthening Improveinstitutionaland ~~ The 3 sector agencies (SANAA, e To assess whether technical capacityat the national CONASA, ERSAPS)have project designis levelreinforcingthe sector substantiallycompliedinapplying producingintended actors (ERSAPS, CONASA, the Ley de Transparenciay Acceso a institutionalresults and SANAA) to fulfill their formal la Informacidn. determine any changes roles. SANAA I Tegucigalpahas complied for further advisory with legalrequirementsfor transfer support, training, and to municipality. other technical assistance. e To informthe ongoing process of strengthening institutional arrangements at the nationalandregional levels. Component 4: Project Management Effectiveprojectmanagementin Cumulativepercentageof To monitor project placeto ensure quality project disbursementtargetedaccordingto implementationand implementation. disbursementplanis met. provide early warning about implementation capacity. a. At leasthavingimprovedsanitat n as per JMP definition. - - b. The percentage will be determined-after baseline survey is taken approximately six months after expectedeffectivenessdate. 38 Q 3 3 v) v, d d d v, L /r m m m d m m m m Ir m Iy $ ? N vi 5 N Pr N t 0 d I 3 E d 22. Annex 4: DetailedProjectDescription HONDURAS:Water andSanitationSector ModernizationProject The project development objectives are: (a) to improve the sustainability, efficiency, and reliability o f the Recipient's WSS services in eligible municipalities; and (b) to improve the performance o f the Recipient's national WSS sector institutions in the exercise of their respective roles inconformity with the WSS Sector Framework Law. The success ofthe project will be measuredusingthe following sets of indicators: (a) The improvement in the sustainability, efficiency, and reliability of the Recipient's WSS services inEligible Municipalities will be measuredthrough: Sustainability: Cost recovery level measured as the ratio of total revenues to total operative cost. Efficiency: Revenues per volumetric unito f water produced. Reliability Hours of service per day. (b) The improvement in the performance of the Recipient's national WSS sector institutions in the exercise o f their respective roles inconformity with the WSS Sector Framework Law will be measured for each institution: SANAA: Number o f systems transferred12to the municipalities. ERSAPS: Number o f design proposals o f autonomous service providers approved by ERSAPS. CONASA: CONASA issues the new financial policy o f the sector. Projectcomponents The proposed operation would assist the Government o f Honduras (GOH) in implementing the Strategic Plan for the Modernization o f the WSS Sector (PEMAPS) through activities at the national and municipal level. The project will support municipalities with urban population between 40,000 and 300,000 to adopt autonomous service provider models by providing a combination o f free technical assistance for creating the service providers, short-term efficiency improvement measures, and performance-based investment funding once services are transferred (Component 1). The project will finance efficiency improvements in Tegucigalpa to provide immediate impact on the quality o f service, while the transfer from the national utility to the municipality i s being discussed (Component 2). Institutional strengthening actions will help fortify and establish the national sector actors (Component 3). Component 4 will finance project management activities. The following section provides further details on the project's components and sub-components. Amounts show total component costs with loan proceeds inparentheses. l2 As attested by a notary act. 42 Component 1: S u ~ ~ o tot medium-size municipalities to create autonomous service r providers and invest in efficiencv, rehabilitation, and expansion of service delivery - Cost US$21.2 million (IDA US$17.2 million) The component will support the implementation o fthe Ley Marco andthe PEMAPS inmedium- size cities through a combination of technical assistance for reforms and investments for infrastructure. This "learning-by-doing" approach i s expected to lead to service improvements- andthus will helpto build solid public and political support for decentralization. The component will create a number of good practices as a basis to scale-up at a later date. The component will provide incentives for reforms, given that municipalities will have to substantially implement some reforms and have completed relevant and quality master plans in order to receive support for investments for rehabilitationand expansion. Municipalities with an urban population between 40,000 inhabitants and 300,000 inhabitant^,'^ that intend to transfer their water supply or sanitation services to a municipal service provider as mandated by the Ley Marco are eligible to participate in this ~omponent.'~Groups of adjacent municipalities with smaller urban populations who unite to establish an aggregated service provider to serve a total urban population between 40,000 and 300,000 inhabitants can also participate. This component uses a demand-based, stepped approach to support municipalities during all reform steps. It will finance investments in municipalities that are not pre-defined. Hence, it i s important to understand the proposed stepped approach and the various sub-components. The paragraphs below describe the project by outlining (a) the stepped approach, and (b) the sub- components including key inputs and outputs and how they address sector issues. Steppedapproach Figure A4.1 presents the stepped approach for medium-size municipalities. All municipalities within the targeted population bracket that intend to transfer their services can participate inthe p r ~ j e c t .In Step 1,municipalities receive technical assistance focused on designing the service ' ~ provider's structure and responsibilities. Once the design proposal has been sent to and reviewed by ERSAPS (the regulator), municipalities qualify for Step 2 assistance including support to provide the municipal supervision units and the service providers with the fundamental tools to conduct its activities, and start improving the efficiency o f service provision. Once services16are transferred, municipalities move to Step 3. In Step 3, municipalities qualify for investments in system rehabilitation and expansion. It is expected that approximately 6 to 9 municipalities will participate in Component 1. While most will enter the process at Step 1, some might have already reached the qualification criteria l3According to the 2001Census. l4The cities within this population bracket are: Choloma, Choluteca, Comayagua, Danli, ElProgresso, La Ceiba, La Lima, Puerto Cortes, and Siguatepeque. In addition, an association o f municipalities around Villanueva has also announced potential interest. l5Municipalities will signal their intention to create an autonomous service provider in the spirit o f the Ley Marc0 b a letter to the Implementing Agency inorder to enter this component. "Either water supplyor sanitation is sufficient. 43 to enter at Step 2 or even Step 3. Holliever. not all ~ ~ ~ ~ e~n t~~ r~at nStepl Iare expected s ~ ~~ ~ t i e to reach Step 2 or Step 3. This will create a certztin. degree of c o n . ~ p e t i ~~~ ~ I ~the: ~ ~ ? n ~ ~ ~ ~ n itics.~ p ~ l i c FigureA4.l: Stepped Approach -...... ons ofthe entirqEO ttc 44 Sub-Component 1A: Sub-Component 1B: Sub-Component 1C: Technical Assistance for Support to Tool Municipal Investment for Rehab Transfer Preparation Unit and ServiceProvider, and Expansion and Improve Efficiency Eligible Technical assistanceto Goods / works to establish Water supply: Expenditure municipalities and service service provider. Coverage extension, providers. Goods /works to establish rehabilitation o f Preparation o fbusiness municipal supervision and existing networks or plans and master plans. control unit. plants, increase in Design and supervision o f Technical and commercial water production works o f Component 1C. efficiency improvement capacity. investments(including Sanitation: On-site design / supervision if improved sanitation (as needed). per Joint Monitoring Programdefinition), pipedsewerage (standard, small-bore, and condominial). Wastewater treatment: Simple treatment systems such as stabilization ponds, artificialwetlands, and communal septic tanks. Ceiling of Not applicable (services US$50,000 plus U S 1 0 Using formula based on Investments provided centrally through per connection before number o f connections Financed the ConsultoresdeApoyo a autonomous service andperformance. la Transferencia de 10s provider starts operating. Servicios [CATS]). US$5 per vear and connection after autonomous service provider starts operating. Financing N o municipal matching No municipal matching Water supply and Arrangement funds. funds. sewerage: Municipality and pays one-third o ftotal Municipal I cost o f works. Participation On-site sanitation and wastewater treatment: Municipality pays 20% I o fworks.' a. municipalities at choose to extend coverage through on-site sanitation, the 'roiect will focus on financing - activities, eqkpment, and works that allow the utility to promote such a technology (forlexample, multifamily septic tanks, tankers to empty septic tanks, sludge-processing facility, and so forth). Direct subsidies to on-site sanitation facilities construction will be supported only ifit i s established that this can be done ina sustainable manner. Sub-component 1A: TechnicalAssistancefor transfer preparation (total US$3.7million, IDA US$3.7million) Sub-Component 1A will consist of providing technical assistance to the participating municipalities while they design the new service provider and plan and implement the services transfer process (whether from SANAA or from a municipal department). 45 When municipalities request TA from this component, teams o f consultants (Consultorias de Apoyo a la Transferencia de 10s Servicios, CATS) will be hired by the UAP inconjunction with the municipalities. CATS will (a) helpmunicipalities identify an appropriate management model; (b) prepare the legal, financial, technical, and social instruments required to implement them; (c) assist in planning the systems transfer process from SANAA to the municipalities (when relevant) and service provider creation; (d) plan the efficiency improvement measures under Sub-Component 1B; and (e) coach new service providers in their new task. A consulting team would typically be led by a senior sector specialist and include a business and financial analyst, an engineer, and a social and communication specialist. The TA will include support mechanisms to improve governance in municipal water management, to promote transparency and access to information, and to ensure civil society and consumer participation throughout the decentralization process. The CATS, with support from CONASA, will also assist the municipalities in setting up a municipal WSS policy committee and developing a municipal WSS policy. Inaddition, the CATS, with support o f ERSAPS, will assist municipalities in setting up a municipal unit to supervise the autonomous service provider and define tariffs (Unidad de Supervisidn y Control). Particular attention will be given to the design o f management models that reflect the needto establish local accountability mechanisms and channels between the consumers and the newly formed service provider. The project will draw on the experience o f the Asociacidn de 10s Municipios de Honduras (Association o f Municipalities o f Honduras, AMHON) and the outcome o f ongoing activities in this field inthe country.'8 This would help to promote a change in attitude and behavior among consumers, providers, and municipalities toward more participatory processes toward better governance, transparency, and accountability inthe water sector. As the service provider design is reviewedby the regulator and moves toward its establishment, the type o f services the CATS provide will evolve to other areas, such as the improvement o f commercial practices, the implementation o f effective management systems, the financial and technical planning o f operations and maintenance, and so forth. At this stage, the CATS will also help the service provider establish a business plan to implement its responsibilities under the municipal WSS policy. In addition, the project will finance the revision or preparation of a master plan for the service provider. This master plan will include activities aimed at improving efficiency, service quality, and coverage levels, and will include a financial and economic analysis to ensure the soundness o f the various activities being proposed. Only activities that make economic sense and for which financing can realistically be expected will be integrated in the master plans. Finally, this sub- component will also finance the design and supervision o f works conducted under Sub- component 1C. This sub-component is administered centrally by the UAP and consists o f consultant services provided through the CATS and others. There is no pre-established maximum investment amount for each city. l8The "Consumer Accountability in Urban Water Supply Delivery" study, funded by the World Bank Water Anchor; and the "Gobierno Abierto y Participativo," funded by World Bank Institute and the Bank-Netherlands Water PartnershipProgram(BNWPP). 46 Sub-Component 1B: Support to tool service provider and improve efficiency (total US$6.1 million, IDA US$5.5million) Once a municipality has su~cessfully'~ identified and designed a management model, the municipality can start accessing this sub-component to obtain support in implementing the CATS' recommendations and creating the municipal WSS institutions (supervision unit and policy committee) and the service provider, as plannedfor inthe Ley Marco. This sub-component will finance activities such as the rehabilitation or construction o f offices, the acquisition o f basic management tools, such as office inventory, acquisition of a commercial system, information systems, vehicles, equipment, and so forth. Other activities such as communication campaigns are also possible. This sub-component will also finance rapid efficiency gains. Whenever possible, the investments will be executed in a manner to encourage the municipality to experiment with innovative, cost- effective approaches (performance-based contracts, outsourcing o f non-core activities, and so forth). The following types o f investments are included: 0 Technical (such as leak detection, network sectorization, meter installation) 0 Commercial (billing and collection, reduction o fNon-Revenue Water). The investment ceiling for a given city will be US$50,000 plus US$10per connection before the services are transferred to the autonomous service provider, and US$5 per connection per year after the services are transferred to the new service provider. Municipalities and service providers will be free to propose efficiency improvement activities o f their choice within these maximuminvestmentamounts as long as they are consistent with the CATS recommendations (interms oftechnicalandeconomic viability). Sub-Component 1C: Investment for system rehabilitation and expansion (total US$ll.4 million, IDA US$&0 million) As a complement to the efficiency improvements reached under Sub-component lB, this sub- component will finance investments in infrastructure after the service providers start operating the system. This sub-component would enable service providers to expand and improve services. It will serve as an incentive for municipalities to create autonomous service providers as suggested inthe Ley Marco and the PEMAPS, instead o f assuming the operation o f the services directly. Investments funded under this component would include rehabilitation, connection to and expansion o f water supply and sewer networks, on-site sanitation facilities, and wastewater treatment systems. Water supply investments can include coverage extension; rehabilitation o f existing networks, tanks, and treatment plants; and the development o f new water production capacity. Piped sewerage investment can include rehabilitationand expansion o f standard, small- bore, and condominia1 systems. On-site sanitation investment will focus on creating supportive conditions for on-site solutions (acquisition o f municipal tankers to empty septic tanks, sludge l9The Ley Marco stipulatesthat the regulator (ERSAPS)has to approve the designofthe managementmodel. 47 treatment facilities, and so forth) and will subsidize on-site solutions only when it i s deemed appropriate. Wastewater treatment investments will include simple independent treatment systems such as stabilization ponds, artificial wetlands, and communal septic tanks. Investments are limitedto an agreed list of facilities and terms o f implementation. Service providers will have the freedom to decide which investments they would like to execute within the master plan. Investments outside o f the master plan would need to bejustified by an economic analysis. Sub-Component 1C i s designed using a "matching grant" incentive scheme where municipalities or service providers must provide co-financing to obtain grants (in the form o f services, works and goods, rather than in monetary form). The total amount a municipality can receive, in the form o fworks and goods, will be determinedby the following formula: where Irepresents total incentive ceiling (excluding municipal counterpart funding), Crepresents the number of connections served by the service provider (water supply + sewerheptic tanks connections2'), G represents general incentive value (US$30 per connection), B represents investment bonus value (US$3 per connection each), and n represents the number o f additional bonuses obtained for the current incentive payment. Additional investment bonuses can be earned for: 0 Everytypical activity outsourced (billing and collection, meter reading, and so forth, one bonus for each activity); 0 Every 10 percent or fraction thereof o f operation and maintenance (O&M) cost recovery above 80 percent (for example, 95 percent cost recovery earns 2 bonuses); 0 Reaching 90 percent metering; Incorporating additional municipalities in the service provider (one bonus per additional municipality); Every6 hours or fraction thereof of service provision a day above 12hours (for example, 20 hours earns 2 bonuses). Everymunicipality can receive anew incentive investment after 2 years or after 75 percent o fthe previous incentive has been invested, whichever happens last. Municipalities will be free to propose an investment program for an amount not higher than the total incentive payment, provided that every activity is included inthe master plan (TA for the preparationo fmaster plans i s provided under Sub-Component 1A) or otherwise economically justified in conformity with the operating manual. The design and supervision costs will be financed out o f Sub-Component 1A andwill not be counted as part o fthe incentive amount. 2o Only septic tanks financedby the municipalityherviceprovider qualify. 48 Component 2: Tegucigalpa Non-Revenue Water Reduction - Cost US$4.5 million (IDA US$4.1million) The component will support a performance-based service contract with a private company to reduce technical and commercial losses in a limited geographic area o f the municipality o f the Metropolitan District (Alcaldia Municipal del Distrito Central [AMDC] ,or Tegucigalpa). This component aims to improve, in the short term, the operative situation o f the WSS service provider inTegucigalpa. By freeing up water production capacity, continuity o f service delivery could be improved and water supply services expanded. The component will use the results of an operational improvement campaign by SANAA with bilateral Spanish financing to identify possible pilot sites with highlosses, plannedto start inlate 2007. Based on typical unit costs elsewhere, it is expected that Non-Revenue Water (NRW) will be reduced considerably ina service area o f approximately 200,000 people inTegucigalpa at the end o fthe project. International experience shows that good financial paybacks are possible with well-designed NRW reduction programs. A performance-based service contract provides an efficient means to achieve significant improvements in operational and financial efficiency, thereby creating immediate benefits and fostering a positive dynamic to support further reform. While a utility remains under public management, it uses the private sector's skills and incentives to carry out such work. In that regard, performance-based service contracting has considerable potential in situations where introducing the private sector through deeper forms o f Public-Private Partnerships (PPP) such as a concession, lease, or management contract i s not considered a politically viable option. Theperformance-based NRW contract will be anopportunity to showcase innovative approaches to leak-reduction campaigns. Compared with other approaches to reduce losses (for example, the Spanish-financed activity includes classical, input-based, leak-reduction actions), it will permit a testing o f the relevance and effectiveness o f performance-based contracting intackling the large operational challenges encountered in Tegucigalpa. In addition to the contract itself, this component will finance the design and supervision o f the contract. The component will conclude with an evaluationo fthe performance-based contract and its outcome. The component will be implemented by UAP. SANAA will initially provide the technical supervision with the understanding that this role will be transferred to the municipal service provider if and when services are transferred. The Non-Revenue Water Reduction program will give the municipal service provider a head start inimproving services. This will help increase the goodwill toward a transfer o fthe services and improve the financial basis o fthe utility. Component3: Institutionalstrengtheningof nationalandregionalsector institutions-Cost US$7.7million(IDA US$7.2 million) The institutional framework for WSS in Honduras consists o f the water sector planning entity (CONASA), a regulating agency (ERSAPS), and a national utility (SANAA). Decentralization and other reforms change or establish the functioning o f each o f these agencies. This component 49 will provide support for each of these agencies to fulfill their new roles ina timely, efficient, and transparent manner. Activities under this component are derived from the PEMAPS. Sub-component 3A: Technical Assistance to national institutions (total US$3.1 million, IDA US$3.1 million) The sub-component will provide assistance to the strengthening o f CONASA as a sector planningentity, through the creation of a specific PEMAPS unit attached directly to CONASA (andhoused inits Secretariat inSANAA). The PEMAPS unitwill oversee the implementation of the PEMAPS. Among others, the component will finance preparation of the policy and legal instruments to clarify CONASA's governance structure, mandate, and financing, and the development of a sector financing policy aimed at guaranteeing the long-term sustainability o f the sector. Inthe latter part o f the project, the component will finance a status review and update o f the PEMAPS. The PEMAPS unit will work closely with the CATS to strengthen local institutional arrangements. As such, the PEMAPS unit will act as the oil needed for good governance and transparency in the project. This will include Training o f Trainers drawing on national and international experts inthe areas o f management models, including stakeholder participation and legal arrangements. The support will include a national communication program, including awareness and education campaigns about sector needs and options, promotion of social accountability and building trust between government and civil society, and information for sector stakeholders regarding the future o f the sector. Legal support will include advice to municipalities on transfer o f assets, service provision agreements with service providers, and establishment o f autonomous providers. All these activities will be linked to municipal-level activities in Component 1 in order to promote a sound institutional framework grounded in a broad-based stakeholder dialogue on the decentralization process inthe water sector. Some years into the project, a review o f municipal management models will be funded to further steer national and local policies. This sub-component will also support SANAA indefining and adapting to its new role underthe Ley Marco as a technical assistance agency. Among others, the sub-component may finance studies helping to define the demands for technical assistance and an optimal business model for SANAA to provide this assistance. These activities are a continuation of on-going studies financed by the Swiss Development Agency (COSUDE) as well the PHRD grant associated with the preparation o fthis operation. The sub-component will also strengthen ERSAPS (the regulatory agency). ERSAPS' present capacity does not suffice to fulfill its role o f settingtariffs, "vetting" municipal service providers, and supporting municipal oversight units for the larger number o f service providers after decentralization. Support will focus on defining and implementing its new relationship with municipal oversight units-working closely with the regulatory experts in the CATS in Component 1. Also, ERSAPS' capacity to gauge management models will be enhanced. Finally, this sub-component will also finance donor coordination activities, among others, through the sector's donors table, in order to continue progressing toward a harmonization o f support to the country's WSS sector. These activities will build on the PEMAPS as a common platform o f the government and the donors, and can be seen as part o f the development o f a Sector Wide Approach (SWAP) approach to aid inHonduras. 50 Sub-component 3B: SeverancePayments (total $3.3 million, IDA $3.0 million) Context The Honduras Country Assistance Strategy (CAS) identifies the lack o f restructuring of public utilities and o f professionalizing public institutions as an obstacle to improving services, and it identifies professionalizationo f the public sector as one important action to enhance governance. It recognizes that while an updated and improved legal framework to govern human resource management inthe Honduran public sector i s needed, the passage o f new legislationmay not be feasible. The CAS thus focuses on executive measures focusing on pilot institutions and key functions. SANAA i s overstaffed. Its total number o f staff expressed per thousand connections i s 10.4, while the regional average i s 3.1." The transfer o f services to the municipal level offers an opportunity to increase the efficiency o f service delivery by rationalizing the number o f staff per thousand connections andby improving the capacity o f staff through selection. However, there is a cost associated with this because the Ley Marco, which in its Chapter XI (final resolutions) governs the process o f transferring the services fiom SANAA to the municipalities, stipulates that all staff that will be retrenched or changes employer during the transfer o f services will receive severance payments. Severance, retrenchment, early retirement, or termination of employment is determined by the collective bargaining agreements between SANAA and the trade union. The amount o f severance financing is relatively low inabsolute terms (US$3 million). Itis also a relatively small proportion o f the credit amount; it represents only 10 percent o f the proposed Bank financing for the operation. The severance financing can be seen as a pilot for the larger retrenchment needs in the further restructuring o f SANAA. In order to learn lessons from this retrenchment and to design future staffing, the subcomponent also contains a study on future staffing o f the remaining o f SANAA, which will design a broader retrenchment program that combines disciplinary staff reductions, addresses payroll fraud arising from ghost workers and improper hirings, and will determine future retrenchment needs. The study will include data gathering on alternative employment found by retrenchees in the on-going retrenchments, and on changes in staff employment totals inSANAAandother service providers. Rationalefor financing severancepayments under thepresent project This sub-component will fund severance payments for SANAA staff laid off in the course o f decentralization o f WSS services to the participating municipalities. It i s estimated that 200 staff will be retrenched during the course o f the project due to transfer o f services to participating municipalities-representing all the staff in the related SANAA regional offices. The severance payments will be grounded in an analysis o f relevant laws, regulations, and collective bargaining agreements that determine the payment o f statutory termination benefits and ex gratia severance 21Regional average fi-om 2005 review of the Association of Water and Sanitation Regulatory Entities of the Americas (ADERASA). 51 payments that are being carried out with Policy and Human Resources Development Fund (PHRD) financing. The payment o f severance to all SANAA staff working on operations in participating municipalities, together with the support received through component 1, represents a unique opportunity for the new service provider to start a clean sheet: The regional offices o f SANAA are loaded with significant financial liabilities that will need to be settled before the transfer can be done. In particular, the existence o f a generous pensiodseverance payment22plan creates an important liability for the future service provider. By paying off severance, the project will allow the newly formed service provider to start operating on a much more solid financial basis and free o f past liabilities. The payment o f severance to the entire affected staff also means that the newly formed service providers will be free to select their staffing level and staff profile based on a factual analysis o f the needs o f the new utility, instead o f inheriting it from SANAA. There i s no risk o f adverse selection because the Ley Marco prescribes that all staff (regardless o fperformance) i s laid off. As part of their work, the Consultorias de Apoyo a la Transferencia de 10s Servicios (Services Transfer Support Consultants [CATS]); see Component 1A) will support the municipalities in the preparation o f a business plan for the new service provider. This planwill outline the staffing needs and profiles, and will be backedby an economic and financial cash-flow analysis in order to ensure that efficiency gains from the transfer process are actually obtained. Risks and mitigating measures The political economy o f retrenchment in Honduras i s typified by overstaffing in public institutions combined with powerful public sector trade unions. These considerations affect the risk-mitigation measures. The following risks and mitigating measures have been identified with regard to the payment o f severanceto SANAA staff inparticipating municipalities: Risk MitigatingMeasure Qualification Noncompliancewith Bank One ofthe difficulties inassessingthe M rules on payment of compliance of severance payments with Bank severance. rules is the fact that the SANAA regional offices that will participate inthe project will only be identified duringproject implementation (see Component 1description). Similarly to the approach taken inan environmental assessment, the evaluation o f the payment of severance to retrenched SANAA staffwill confirm, priorto any 22 The term severance is not entirely correct inthis case since every staff is entitledto this payment at the time they leaveor retire fYom the institution;this explains why all staff affectedby a transfer would be receivingit regardless o fwhether they are re-hiredor not. It is a de facto pensionsystem. 52 Risk MitigatingMeasure I Qualification disbursement, that such payment would be in accordance with the principlesdetailed inOP 6.00 (Bank Financing) o fproductivity, sustainability and oversight requirements. Overpayment o f severance. As part o fthe ongoingPHRD, a respected and S independent auditing company i s being hired to validate existing severance estimates and to outline the options at hand for their payment. The study will inparticular analyze the legal basis for payments (national law and collective contracts). The Bank will only finance payments that have beenverified and certified by a credible, neutral entity. A limitednational counterpart fundinghas been includedunder severance payments to ensure negotiations between the Government andthe syndicates are conducted under the right incentives. The MinistryofFinance will berequiredto maintain sufficient informationon the number o f employees retrenched and average severance payments to enable independent audit. Adverse selection o f staff. Because all affected staff will be paid M severance regardless o f whether the new service provider chooses to hire them, there i s no perverse incentive for staff when choosing to leave or not. It i s expected that very few staff will remainwithin SANAA. Moral Hazard. The largest moral hazard is that the newly M formed municipal service providers will be free to select their entire staff based on actual needs. Itis expectedthat only the most-effective staff o f the existing SANAA will be hired by the new service provider. The project will be financed through the CATS, the preparation o f business plans that will help the service provider inchoosing suitable staffing levels and profiles; the business plans will be backed by cash-flow analysis. Inaddition, data on alternative employment found by retrenchees, and on changes in staff employment totals will be publicly available. Risk o f discontent and The project will comply with the decision social impact on retrenched agreed upon by SANAA'S labor union staff. organization and the central government and 53 Risk MitigatingMeasure Qualification provided that they comply with the requirementsset forth inthe "Noncompliance with Bank rules" riskabove. Negative financial impact Inthe shortterm, overstaffing inSANAA will S on SANAA central. increase as ittransfers systems: a largecentral departmentwill depend on incomefrom fewer connections. Staffing issues are critical to further improvementsinthe sector, at boththe national andthe local level. The component will therefore finance a study on rationalization staffing of SANAA during andafter decentralization. Sub-Component 3C: Preparatory activitiesfor Tegucigalpa transfer (total US$1.3 million, IDA US$l.lmillion) Tegucigalpa represents by far the largest city (in terms o f population) where water supply services are managed by SANAA, and the only city in which SANAA manages sanitation services. The transfer o f services will not be complete until a solution is found to the current difficulties linked with this specific transfer. While the project does not finance the transfer itself, this sub-component will support preparatory activities for the transfer o f service delivery from SANAA to the Municipality o f Tegucigalpa (AMDC). This support will include activities such as updating inventories, installing consumer and asset management systems, and planning the transfer process. These activities are in continuation o f the Bank's engagement through a Public- Private Infrastructure Advisory Facility (PPIAF) grant, and will be closely coordinated with the IDB,which has also been involved inupstream activities. ComDonent4: ProiectManagement-Cost US$1.6 million(IDA US$1.5 million) This component will finance the cost of salary, travel, and general operating costs of the project management unit. In addition, this component would also finance monitoring and evaluation (M&E) activities, including the collection of information and development of reports for continued evaluation throughout the project cycle by both project management and the Bank's supervision team. It will also cover audits and other project management activities that involve the governance and transparency aspects o f the overall project, including monitoring the good governance mechanisms implemented in each implementation agency to guarantee transparency in each of the processes implemented according to the Ley de Transparenciay Acceso a la Informacibn Pziblica and the Bank's anti-corruption guidelines. Finally, this component will finance the strengthening o f the implementing agencies, through participation in trainings and study tours, purchase o f vehicles and equipment, and upgrading o fthe working environment. 54 Estimatesof ProjectCosts, by Componentand Sub-component(US$ million) Component IDA Borrower Municip. TOTAL efficiency, rehabilitation, and expansion o f service Sub-ComponentIB: Support to tool service provider and improve eflciency Sub-Component IC: Investmentfor rehab and . . " . Sub-Component3B: SeverancePayments . " ent 3C: Preparation Transfer Component 4: Project Management Total SOM $1.6M $3.4M $35M ProjectFinancing(US$m) Institution Amount IDA 30.0 GOH 1.6 Municipalities o f Honduras 3.4 TOTAL 35.0 55 Annex 5: Project Costs HONDURAS:Water and Sanitation Sector ModernizationProject Local Foreign Total Project Cost by Component and/or Activity US$ US$ US$ Million Million Million Component 1: Supportto medium-size municipalities to create autonomous service providers andinvest inefficiency, rehabilitation, 15.4 5.8 21.2 and expansionof service delivery Component2: TegucigalpaNon-Revenue Water Reduction Program 3.2 1.3 4.5 Component 3: National and Regional Institutional Strengthening 6.2 1.5 7.7 Component4: Project Management 1.4 0.2 1.6 Total Baseline Cost 26.3 8.7 35.0 Physical Contingenciesa Price Contingencies Total Project Costs 26.3 8.7 35.0 Interest during construction Front-end Fee Total Financing Required 26.3 8.7 35.0 a. Due to the fact that sub-projects in Component 1 will only be determined during project implementation and investments are capped at a ceilingper municipality, the inclusion of physical contingencies is not relevant at this stage. 56 Annex 6: ImplementationArrangements HONDURAS:Water and SanitationSector ModernizationProject The Government o f Honduras will be the borrower o f the proposed credit. The Secretariat o f Finance (SEFIN) will be responsible for the execution o f the proposed project and as such will be the Program's Executing Entity. The overarching approach to project implementation would be to use existing capacity in the Honduran institutions involved rather than creating a new Project Implementation Unit (PIU). In addition, the implementation arrangements warrant a sound project governance structure with checks and balances included invarious areas. SEFIN has requested that implementation responsibility fall on the Unidad Administradora de Proyectos (Project Administration Unit, UAP)23given its previous experience with multilateral financing in the water and sanitation sector. The UAP was created as a consolidated PIU within SEFIN to manage financial resources from the International Development Association (IDA), the Inter-American Development Bank (IDB), and the Nordic Development Fund (NDF), among others, to assure timely implementation o f projects using the fiduciary capacity of SEFIN, which would involve several institutions or agencies ininnovative areas. At the time o f its creation, the UAP was in charge o f managing 18 investment projects (two o f which were directly involved in the water and sanitation sector) under the direct supervision o f both the Vice Ministers o f SEFIN for Public Credit and for Finances and Budget, who preside over the Technical Board that oversees the specific operations. The two IDA operations that worked under this scheme were the Economic and Financial Management Credit (IDA 3414-HO) and the Poverty Reduction Strategy Technical Assistance Credit (IDA 3939-HO). Under this arrangement, the other implementing agencies (Municipalities, Consejo Nacional de Agua Potable y Saneamiento [National Council for Water and Sanitation, CONASA], and Servicio Autdnomo Nacional de Acueductos y Alcantarillados [National Autonomous Water and Sewer Service, SANAA] fulfill mostly technical roles, while coordinating with the UAP on the flow o f funds, procurement of works, goods and services, financial reporting, and other requiredactivities (Figure A6.1). 23The UAP was created by Ministerial Agreement 0271 of 2004. 57 G Figure A.6.1. Secretariat of Finance ExecutiveCoordinators: Sub-secretariat ofCredit andPublicInvestment Sub-secretariat of FinancesandBudget Unidad 4--.. FinancialManagement .... Administradora de PrOJ4?CtOS (Project +... . MonitoringandSupervision .... ManagementUnit, UAP) 4- .. InstitutionalStrengthening .... proPramsandproiects ....................................................................................................... j Hence, SEFIN, operating through the UAP, will be acting as the project coordination unit and will serve as permanentlink betweenthe Bank andthe Government. With respectto this Project, the UAP will be assisted by professional staff with qualifications and experience acceptable to the Bank according to the Project's Operational Manual. In particular, the UAP will be strengthenedon the sector, technical staff side. The Bank will co-finance the salaries and other operational recurrent costs requiredfor the operation ofthe UAP from loan proceeds. The project would count on the high-level support of the Grupo Interinstitucional de Coordinacidn (GIC), comprising SEFIN, SANAA, CONASA, the Asociacidn de 10s Municipios de Honduras (Honduras Municipalities Association, AMHON), and the water sector regulator (Ente Regulador de 10s Servicios de Agua Potable y Saneamiento, Water and Sanitation Sector Regulador, ERSAPS). The GIC would monitor project progress (Figure A6.2). 58 E SEFIN I.Fiduciary Safeguards,Monitoring 1Technical unit 1; 3A - TechnicalAssistance a. Technical Supervisionincludes preparingTORSandbiddingdocuments, reviewingthe inputsof consultants, and so forth. b. Support means the following institutions will be asked to prepare or review draft TORS and inputs fkom consultantsbut will not be makingthe final decision. c. Dependingonthe capacity of the Municipality. To avoid unnecessary turnover in the personnel affected by implementing the project, both in UAP and inthe agencies incharge o f the various components, the financial agreement will make it necessary for any change of key staff to be made only if satisfactory to the Bank. This clause will apply not only to UAP staff, but also to key implementing staff in other agencies, in particular the PEMAPS unit. The project team will review the implementation arrangements two years after the project's effectiveness to determine whether the conditions for WSS sector institutions to take on more implementation responsibilitiesare provided. Arrangementsfor Component1(UAP and Municipalities) SEFIN, through the UAP, would be directly in charge o f the implementation of Component 1. UAP has been managing the Inter-American Development Bank's Water Supply and Sanitation (WSS) project since its inceptionand will be strengthened with regardto technical supervision o f the component. Inaddition, sector institutions would be providing technical support on aspects relevant to them (ERSAPS on utility governance questions, CONASA on policy and communication). UAP would also procure the services in Sub-Components lA, while the municipalities (through their technical unit) would be procuring works and goods under Sub-Components 1B and 1C under the supervision o f UAP for those Municipalities that are determined to have sufficient capacity (as established through a methodology to be detailed in the Operating Manual). For those municipalities that do not demonstrate sufficient procurement capacity, UAP will be executing the procurement process in close technical coordination with the Municipalities. In both cases, UAP will be managing the funds. A specific agreement would be signed with each participating municipality prior to any investments beingexecuted to establish the rules o f the intervention. 60 Arrangementsfor Component2 inSANAA SANAA would supervise technically this component through the existing Unidad Ejecutora del Proyecto de Optimizacidn Operativa de Tegucigalpa within the Divisidn de Planeacidn, which currently implements a large loan by the Spanish Fund for Assistance and Development to SANAA that includes network plans, leak reductions, metering, and so forth. The supervision will be transferred to the Tegucigalpa municipal service provider when services are transferred. UAPwill remain incharge ofthe procurement, contracting, andfinancial management aspects of this component. Arrangementsfor Component3 in ERSAPS,CONASA, and SANAA CONASA would create a PEMAPS Unit that would be in charge of technically supervising project activities and carrying out CONASA responsibilities under the PEMAPS. This Unit would be staffed by a group o f current SANAA managers and by external consultants who would be associated with this Unitthroughout the project implementation period. SANAA would be providing technical supervision to Sub-component 3C. UAP will remain in charge of the procurement, contracting, and financial management aspects o f this component and will also assume technical supervision o f Sub-component 3B (severance payments) to avoid conflicts o f interest. GovernanceFrameworkand CommunicationStrategy InDecember 2006, the Government o fHondurasapproved the Law of Transparency andAccess to Public Information that governs national public policy activity. This law requires public institutions to establish effective mechanisms to promote transparency in order to combat corruption and illegal activity in public policy matters. The law, in alignment with the Anti- corruption Guidelines from the World Bank Group applied to this project, (the GoH has already been informed o f the Anti-Corruption guidelines in a letter sent on March 26, 2007, by the Bank's Country Office-see Attachment 1to this annex), offers an opportunity to strengthen the WSS Sector. Although this law represents an important framework for promoting transparency within the Government and effective participation from stakeholders in project activities, significant work i s still necessary in this area. Since this law was recently approved, understandably this project may face challenges inmeeting the newrequirements. More transparency and citizen participation inthe water sector will lead to better public policies andbetter service delivery, so the supply o finformation and demand o ftransparency inthe water sector in Honduras need to be strengthened. O n one side the project aims to educate the consumers and civil society organizations to generate coherent, persistent, and technically capable demand o f transparency, information, and active participation (capacity building on the demand side). On the other side, the UAP will build capacity ineach implementation agency to comply with the fiduciary and procurement arrangements, the Law o f Transparency and Access to Information, and to promote the culture that public servants working under the scope o f the project are accountable for their own activities and that their activities are transparent (capacity buildingonthe supply side, both government and service providers). In order to meet the good governance standards mentioned above, the team o f the UAP will include professionals responsible for designing and implementing activities aimed to: (a) build capacity ineach implementing agency and establish transparency and accountability mechanisms 61 to comply with the Law o f Transparency and Access to Information under the scope o f the project; (b) promote an active civil society that will be invited to become partners, not only for project identification and implementation, but also for the long-term sustainability o f the sector; (c) educate and engage the media ina transparent and credible process; (d) improve coordination and harmonization within the public institutions, nongovernmental organizations, and development partners involved in the sector and PEMAPS implementation; and (e) strengthen and train civil society and other actors at the municipal level, to promote local government transparency and accountability, and encourage social and environmental responsibility by the main implementingagencies. As part of this strategy, a sound and thoughtful communicationstrategy (Component 3A) will act as the catalyst needed for good governance and transparency in the project. The communication strategy goes beyond the mere transmission of information. It implies the engagement o f the stakeholders involved in the process and the establishment o f mechanisms and messages that motivate a sustainable change. Some o f the main activities included in the communication strategy for the project include: (a) identification of stakeholder information needs and perceptions (opinions/attitudes) regarding the sector and the main implementation agencies (also aimed at defining the governance and communication indicators for the project); (b) developing consistent messages to be conveyed to all stakeholders (including contractors, suppliers, and so forth) regarding the project itself and the good governance approach it takes (including raising awareness on the anticorruption guidelines); (c) informing and educating civil society, the government, and the public-especially customers-about the challenges faced by the sector, the project contribution to the sector, and the transparent and good governance approach it will implement (some communication activities have been designed but the implementation has been very weak due the lack o f funds); (d) strengthening the credibility o f the project by informing and educating internal stakeholders (SANAA workers, CONASA, and so forth) regarding the overall process; and (e) developing on-time and credible information mechanisms regardingthe project activities, especially those relatedto procurement and financial management. Although a strategic communication will be designed at the UAP level with the participation o f each implementing agency, the implementation o f the governance and communication plans will be done by each agency so they will be accountable for the results o f the overallprocess. 62 Attachment 1 Letter Sent to GOHRegardingNew Sanctions' Regime - Mision Residente del Banco Mundial en Honduras BANCOINTERNACIONALOE RECONSlRUCCl6NY FOMENTO CENTRO FINANCIEROUNO, TEGUCIGALPA, HONDURAS ASOClACl6N INTERNACIONAL DE FOMENTO TEL:504-239-4551 FAX: 504-239-4555 26 de marzo del 2007 Lic. Rebeca Santos Ministra de Finanzas Secretaria de Finanzas Tegucigalpa, Honduras Rej: Nuevo Rkgimen de Sancionesdel Banco Mundial Estimada Sra. Ministra: Desde 1996, las Normas sobre Adquisiciones y las Normas para la Selecci6n y Contratacidn de Consultores del Banco Mundial, le han permitido a1Banco sancionar firmas e individuos por verse envueltos en fraude o corrupcibn en relaci6n a la adquisicibn de bienes o servicios, la seleccibn de consultores, o la ejecuci6n de cualquier contrato resultante. Como parte de esfuerzos actuales para avanzar el desarrollo de procedimientos y prkcticas de anticorrupci6n, el Banco Mundial en 2006 reforzb el marco de trabajo con la inclusidn de Normas de Anticorrupci6n especificas, las cuales detallan definiciones de faltas sancionables especificas de: fraude, corrupci6n, colusi6n, coaccibn y obstruccibn. Estas nuevas Normas de Anticorrupcibn han sido adoptadas como parte del marc0 legal de trabajo para las operaciones de inversi6n del Banco. A1 igual que las Normas sobre Adquisiciones y las Normas para la Selecci6n de Consultores, las Normas de Anticorrupcibn serin incorporadas como referencia en 10s acuerdos legales para cada proyecto de inversibn. Los remedios contractuales relacionados a1 fraude y la corrupci6n en las Condiciones Generales del Banco Internacional de Reconstruccibn y Foment0 (BIRF) y la Asociaci6n Internacionalde Foment0 (AIF) tambien han sido reforzadas. AdemBs, como parte de estos esfuerzos, el Regimen de Sanciones del Banco Mundial ha sido reforzado a traves de la adopcibn de unnuevo regimen aprobado por 10s Directores Ejecutivos el 1de agosto del 2006 (ver Anexo 2: Nota de Informaci6n). Las reformas a1regimen de sanciones incluyen: 1. La ampliaci6n del regimen de sanciones mBs all6 de la esfera de las adquisiciones a fin de abarcar en forma m9s general 10s casos de fraude y corrupcibn que pudieran surgir en relaci6n con el us0 de 10s fondos de 10s prestamos del Banco durante la preparaci6n y/o ejecuci6n de proyectos de inversibn financiados por el Banco Mundial; y 2. Adopci6n de "pricticas obstructivas" como una falta sancionable por si misma. El nuevo regimen de sanciones y cambios relacionados al marco legal de las operaciones del Banco se aplicari a todos 10s proyectos de inversi6n a financiar por el Banco en el Bmbito de la Estrategiade Asistencia a1 Pais, presentado a la Junta Directiva del Banco enNoviembre del 2006. 63 Lic. Rebeca Santos -2- 26 de marzo del 2007 Los gerentes de equipos del Banco que se encuentren trabajando en proyectos actualmente en preparaci6n le brindarhn informacih mhs detallada acerca de las consecuencias que las reformas tendrhn sobre esos proyectos. L e ruego no dude en contactarme a mi, a Dante Mossi o a Pilar Gonzhlez, Abogado del Pais, paramayor informacih general sobre el nuevo rkgimen de sanciones. Le saluda muy atentamente, Adrian Fozzard RepresentanteResidente C.C. Hugo Castillo, Secretariade Finanzas Orlando Garner, Secretaria de Finanzas Yani Rosenthal, Secretaria de la Presidencia Ricardo Arias, Secretaria de laPresidencia 64 Annex 7: FinancialManagementandDisbursementArrangements HONDURAS:Water andSanitationSector ModernizationProject SummaryConclusionof FinancialManagementAssessment Insummary, the proposedprojecthasbeendesigned as follows: (i) The Secretariat of Finance (SEFIN) will beresponsible for the execution of the proposed project and as such will be the project's executing agency. Implementing agencies (Servicio Autdnomo Nacional de Acueductos y Alcantarillados, National Autonomous Water and Sewer Service, SANAA], Consejo Nacional de Agua Potable y Saneamiento [National Council for Water and Sanitation, CONASA], and Ente Regulador de 10s Servicios de Agua Potable y Saneamiento [Water and Sanitation Sector Regulador, ERSAPS]) will fulfill technical roles, while coordinating with SEFIN. SEFIN has requested that project coordination and administration fall under the Unidad Administradora de Proyectos (UAP), an existing, integrated unit within SEFIN experienced inmanaging administrative and financial aspects o f projects financed by the World Bank. Therefore, the UAP will be directly in charge o f financial management (FM) tasks for all the components of the proposed project and will manage the Designated Account. On the basis o f the assessments performed, the financial management team presents the following conclusions: (i) The FM capacity assessment (FMA) has identified project-specific actions in order to strengthen the FM capacity o f the UAP and enable it to effectively carry out the financial activities o f the proposed project (action planpresented inthis annex). (ii) Importantly, the project i s expected to use country systems (SIAFI and the Unidades Ejecutoras de Pre'stamos Externos [External Loans Execution Unit, UEPEX]) for accounting and reporting purposes, because these systems would provide adequate information for monitoring specific project expenditures. N o additional system is expected to be needed. In addition to the use o f country systems (SIAFI), the proposed project will also use the single treasury account to make project payments. The project envisions the participation o f certain municipalities; thus, transfers to municipalities have been considered as part o f financial arrangements for the project, once municipalities have been assessedandpossess sufficient capacity, as described below. (iii) The UAP will be making contract payments in close technical coordination with the municipality. OrganizationalArrangements andStaffing The Government of Honduras will bethe borrower ofthe proposed Bankloan. The Secretariat of Finance (SEFIN) will be responsible for the execution o f the proposed project and as such will be the Program's Executing Entity. The overarching approach to project implementation would 65 be to use existing capacity in the Honduran institutions involved, rather than creating new Project Implementation Units (PIUs). In addition, the implementation arrangements would warrant a sound project governance structure with checks and balances included invarious areas. SEFINhas requested that project coordination and administration fall underthe UAP. Therefore, the UAP will be directly in charge o f financial management (FM) tasks. These will include: (a) budget formulation and monitoring, (b) cash-flow management (including processing payments and submitting loan withdrawal applications to the Bank), (c) maintenance o f accounting records, (d) preparation o f in-year and year-end financial reports, (e) administration of underlying information systems, and (f) arrangingfor execution o f external audit. Inaddition, the U A P will be responsible for implementing the governance and transparency aspects of the overall project, including monitoring the good governance mechanisms implemented in each implementation agency, especially the participating municipalities, to guarantee transparency in each o f the processes implemented according to the Ley de Transparencia y Acceso a la Inforrnacidn Pziblica (part o f Component 4). The UAP was created in 2004 by a decree (Decree No. 271-2004) with the objective o f creating a single unit within SEFIN to administer projects with external financing executed by this Ministry. Since its creation, the UAP has administered 6 loans and 8 trust funds from the Inter- American Development Bank, and 2 credits (IDA 3414-HO and IDA 3939-HO) and 1 trust fund from the Bank. Therefore, the unit already has the capacity necessary to administer the financial aspects o f the proposed project, including a basic administrative structure and FM systems in place. Under this arrangement, the implementing agencies (CONASA, SANAA, and ERSAPS) will fulfill technical roles, while the UAP will be responsible for the flow of funds, procurement o f works, goods and services, making project payments, financial reporting, and other related fiduciary activities. The UAP will carry out its functions with its existing staff and be required to maintain professional staff in numbers and with qualifications and experience acceptable to the Bank according to the Project's Operational Manual. It is expected that no additional staff will be necessary for financial management, as the person currently responsible for IDA 3939-HOY which i s expected to close on June 15, 2008, will be able to carry out the financial activities o f the proposedproject. BudgetPlanning DuringApril and May o f each year, the UAP will prepare its tentative investment program for the next year (including the investment program for the proposed project) and submit it to the Ministry o f Finance (SEFIN) for review and approval. The program should be consistent with the budget policy provided by the Ministry o f Finance, and be incorporated into the national budget for its submittal to Congress inSeptember. O n the basis o f the approved budget, the UAP will adjust as needed its project annual work (POA) and procurement plan, which will be reviewed by the World Bank (WB). 66 AccountingandFinancialReporting Accounting Policies and Procedures. The main FM regulatory framework for the project will consist of: (a) Honduras' laws governing budget management, (b) SEFIN's operating manuals, and (c) the Unit's operating noms. These documents will be complemented by project-specific FM arrangements documented in a concise FM section of the project's operational manual. Among others, specific reference will be made to: (a) the internal controls appropriate for the project, (b) the formats o f project financial reports, (c) auditing arrangements, and (d) criteria for participation o fthe municipalities. Information Systems. The proposed project will use country systems for accounting and financial reporting. The financial activities o f the project (especially budget and budget execution) will be recorded in SIAFI. In addition, to meet the reporting requirements o f the proposed project, the project team i s contemplating the use o f UEPEX, which is a module o f SIAFI specifically designed for the accounting and reporting of externally financed projects. The team will continue to work with SEFIN to ensure the proper implementation and operation o f UEPEX for the proposed project. Treasury System. It is important to note that with the use o f country systems (SIAFI) comes the use o f the single treasury account. As expenditures/commitmentsarise, they will be recorded in SIAFI, and once approved, funds will be converted into local currency by the National Treasury inthe Ministry of Finance (SEFIN) and channeled through the single treasury account to make payments to suppliers, contractors, and consultants. Municipalities. Itwas decided that the UAP will be makingcontract payments inclose technical coordination with the municipality. Specific procedures for contract payments from the UAP and municipality contributions will be described inthe Operational Manual. Financial Reports. On a semi-annual basis, the UAP will prepare and submit to the WB an unaudited interim financial report (IFR) containing at least: (a) a statement o f sources and uses o f funds and cash balances (with expenditures classified by subcomponent), and (b) a statement of budget execution per subcomponent (with expenditures classified by the major budgetary accounts). The interim reports will be submitted not later than 45 days after the end o f each semester. Inthis case, the IFRs are not expected to be used for disbursement purposes (at least at the beginning). If at a later date, the IFRs are used for disbursement purposes, the following annexes would be required: (a) a Special Account activity statement (including a copy o f the bank statement); (b) a summary statement o f Special Account expenditures for contracts subject to prior review, and (c) a summary statement o f Special Account expenditures for contracts not subject to prior review. On an annual basis, the UAP will prepare project financial statements including cumulative figures, for the year and as o f the end o f that year, o f the financial statements cited in the previous paragraph. The financial statements will also include explanatory notes in accordance with the Cash Basis International Public Sector Accounting Standard (IPSAS), and UAP's assertion that loan funds were used in accordance with the intendedpurposes as specified inthe 67 Loan Agreement. These financial statements, once audited, will be submitted to the WB not later thansix months after the end ofthe Government's fiscal year (which equals the calendar year). The supporting documentation o f the semi-annual and annual financial statements will be maintained on the Unit's premises, and made easily accessible to WB supervision missions and to external auditors. Flow of Funds WB Disbursement Method. Loan proceeds will be withdrawn by the UAP using the advance method supported by documentation showing that the loan proceeds previously withdrawn were used to finance eligible expenditures. Supporting documentation will be in the form o f Statements o f Expenditures (SOEs), at least initially, with the exception o f payments related to contracts above the SOE threshold, which will be reimbursed against full supporting documentation. The SOE threshold for the project has been set at US$lOO,OOO for goods, works, non-consultants services, consultants, training, and operating costs for the various components o f the project. Once the system for producing IFRs has been tested and found satisfactory to the Bank, the supporting documentationmay be changedto interimunauditedfinancialreports. Other Procedures. By appraisal, no need has been identified for the use o f special commitment procedures. Should the need arise during implementation, the Bank will evaluate it and if granted, agree to their use via an amendment to the Disbursement Letter. The project may use reimbursement or direct payments. WB Designated Account. The UAP will open a segregated Designated Account in Banco Central de Honduras inU.S.dollars, to be used exclusively for deposits and withdrawals o f loan proceeds for eligible expenditures. After the conditions o f effectiveness have been met, and the designated account has been opened, the UAP will submit its first disbursement request to the WB, together with the expenditure and financing needs forecast for the next six months. For subsequent withdrawals, the UAP will submit the disbursement request, along with the supporting documentation (SOEs or IFRs). At any time, the undocumented advance to the designated account cannot exceed the authorized ceiling, which has been established at US$2.5 million. Disbursement Deadline Date. Four months after the closing date specified in the Loan Agreement. Audit Arrangements Internal Audit. In the course o f its regular internal audit activities vis-a-vis the institutional budget, internal auditors for SEFIN may include project activities intheir annual work plans. If such audits occur, the UAP will provide the Bank with copies o f internal audit reports covering project activities and financial transactions. External Audit. As stated earlier, the UCP in MINSA managed the recently closed part o f the Economic and Financial Management project (credit 3414) and i s currently managing part o f the Poverty Reduction Support Technical Assistance project (credit 3939), for which no audit 68 compliance issues have been identified. Overall, the audit reports for the fiscal years 2002 to 2005 for the above-mentioned projects have been received on time and presented unqualified opinions. The annual project financial statements prepared by the UAP will be audited following International Standards on Auditing (ISA), by an independent firm (or the Controller General o f Accounts, subject to prior agreement with the Bank) and in accordance with terms of reference (TORS),both acceptable to the Bank. The audit opinion covering project financial statements will contain a reference to the eligibility o f expenditures. The audit work described above can be financed with loan proceeds. The UAP will arrange for the first external audit within three months after Credit Effectiveness. Each audit engagement i s expected to cover at least two years. Disbursement Schedule Amount of the Amount of the Percentageof categoryz4 FinancingAllocated FinancingAllocated Expendituresto be (expressedinUSD) (expressedin SDR) Financed II II I I (1) Consultants' services under Parts 1.A, 2,3.A, 3.B.2, and 4 of the Project 8,200,000 5,400,000 100% (2) Consultants' services under Part 3.C of the Project 1,100,000 750,000 85% (3) Goods and works under Parts 2,3 .A and 4 of the Project 3,700,000 2,400,000 90% I (4) Goods, works, consultants' services, 100% except for non-consultant services and Training those costs covered underParts 1.Band 1.C ofthe Project bythe 13300,000 8,900,000 municipalities (5) SeverancePaymentsunderPart 3.B.1ofthe Project 2,700,000 1,800,000 90% (6) Operating Costs under Parts 3.A and 4 of the Project 500,000 350,000 90% (7) Training and non-consultant 300,000 200,000 100% services under Parts 3.A and 4 o fthe 24The numberingofthe componentsand subcomponents reflects the numbersusedinthe FinancingAgreement. In particular, 3(b)(i) refers to severance payments. 69 Amount of the Amount ofthe Percentageof ~ategory2~ FinancingAllocated FinancingAllocated Expendituresto be (expressedinUSD) (expressedin SDR) Financed 1TOTALAMOUNT 30,000,000 I 19,800,000 1 CountryIssues As stated in Governance Strategy Note (2006), significant improvements have been made in strengthening public financial management systems in Honduras, with the launch o f a comprehensive reform program to support implementation o f the 2004 Finance Law, the implementation o f SIAFI at the central level o f government, and the National Payment System. However, corruption remains a serious concern, which impedes growth and development. Therefore, as an effort to support improvements in governance in Honduras, accelerate growth, and make sustained progress inpoverty reduction, the Bankhas produced a Governance Strategy Note that provides a framework for the Bank's involvement inHonduras. This note recommends specific actions to strengthentransparency accountability and the demand for good governance across the portfolio through among others, extensive disclosure o f project procurement information, strengthened partnerships with civil society and beneficiaries inproject design and monitoring, regular risk assessments and enhanced supervision where needed, and continuity o f project staffing. This assessment has taken into account the conclusions o f the Governance Strategy Note. RiskAssessment Summary The FM risk for this project has been assessed at Substantial and once there is evidence that the mitigating measures have been implemented and are working as intended, the level o f FM risk for this project will be re-assessed and revised accordingly. Table A7.1 presents the risk assessment and the risk-mitigating measures incorporated into the design o f the project and the financial management implementation arrangements. Risk Risk Risk-Mitigating Measures IncorporatedintoProject Conditionof Rating Design Negotiations/Boardor Effectiveness (Y/N)? 1Inherent Risk I Country Level S In part because of the poor rating of Honduras in Transparency International's Corruption indexes, and despite recent measurable improvements in the country's public financial management systems, inherent risk i s still consideredto be substantial. 1EntityLevel I S I I I Project Level S Because the project includes various implementing agencies, the FM aspects of the project will be Secretariat o f Finance) responsible for overseeing the fiduciary aspects of externally fimded projects, staffed with personnel possessingadequate qualifications. The Credit Agreement will include a covenant that SEFIN will be required to maintain adequate implementation arrangements at all times. The UAP will make all payments in connection to works o f sub-projects inMunicipalities. Control risk Budgeting, M Project budget and accounting will be registered in the Accounting, national system (SIAFI), and the UAP will use UEPEX Internal Control (module of SIAFIdeveloped especially for projects). The project will preparean operational manual. Effectiveness: Y FundsFlow M The Project will use the single treasury account to make payment to suppliers, contractors, and consultants. There will be no transfer of fimds to municipalities, becausethe UAP will make all payments. Financial M The project will use country systems (SIAFI and UEPEX) Reporting, for accounting and financial reporting. Auditing SEFIN will furnish audit reports to the Bank. FMRisk S FinancialManagementAction Plan 1. Finalize the draft format of unaudited financial SEFIN-UAP 1 By negotiations reports (IFRs). 2. Finalize draft audit TORSand short list. SEFIN-UAP By negotiations 3. Finalize the draft FMsection o fthe project SEFIN-UAP By negotiations operational manual. 4. Finalize andincorporate inthe operating manualthe SEFIN-UAP By effectiveness proposal inrelation to the chart o f account and incomoration o fthe project into SIAFI's structure and 5. Contract external auditors, basedon short list SEFIN-UAP I 3 months after World BankFinancialManagementSupervisionPlan. A World BankFinancialManagement Specialist may perform a supervision mission prior to effectiveness to verify the implementation of the unit and the FM system. After effectiveness, the FM Specialist must review the annual audit reports, should review the financial sections o f the semi-annual IFRs, and should perform at least one to two supervision missions per year. 71 Annex 8: ProcurementArrangements HONDURAS:Water and SanitationSector ModernizationProject A. General The Secretariat o f Finance (SEFIN), through its Unidad Administradora de Proyectos (UAP), will carry out procurement for the proposed project in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits," publishedby the Bank in May 2004 and revised in October 2006; the "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers," published by the Bank in May 2004 and revised in October 2006; and the provisions stipulated in the Credit Agreement. The general description o f various contracts under different expenditure categories i s below. The specific arrangements will be further detailedinthe Procurement Planandthe Project's operational manual. B. ProcurementArrangementsby ProjectComponent B.l. Component 1: Support to medium-sizemunicipalitiesto create autonomous service providersand investinefficiency,rehabilitation,andexpansion of service delivery Sub-Component 1A: Technical Assistance for transfer preparation and implementation. This sub-component will finance procurement of consultants (Consultorias de Apoyo a la Transferencia de 10s Servicios, CATS) by the UAP inconjunctionwith the municipalities. CATS will be used to (a) help municipalities identify appropriate models; (b) prepare the legal, financial, technical, and social instruments required to implement them; and (c) assist inplanning the transfer process. This component will also finance the procurement o f other consultants to prepare master plans and designs and supervise works. Sub-Component 1B: Support to tool municipal units and service providers and improve efficiency. This sub-component will finance procurement of: (a) advisory in specific areas, such as improvement o f commercial practices, design o f effective management systems, and financial and technical planning o f operations and maintenance; (b) basic management tools for the service provider, such as office inventory, commercial information systems, vehicles, and (c) other activities such as communication campaigns and training o f staff. This sub-component will also finance procurement o f small works, and goods and services for innovative, cost-effective approaches (performance-based contracts, outsourcing o f non-core activities) for rapid efficiency gains. Procurement will include: (a) technical, such as leak detection, network sectorization, meter installation; and (b) commercial, such as billing and collection, and reduction o f non- revenue water. Sub-Component 1C: Investment for system rehabilitation and expansion. This sub- component will finance procurement o f works and goods and services to enable service providers to expand and improve services. Procurement will include: (a) rehabilitation, connection to, and expansion o f water supply and sewer networks; (b) on-site sanitation facilities such as municipal tankers to empty septic tanks and sludge treatment facilities; and (c) wastewater tanks and treatment plants such as stabilization ponds, artificial wetlands, and communal septic tanks. 72 B. 2. Component2: TegucigalpaNon-RevenueWater Reduction This sub-component will finance procurement o f a private company under a performance-based service contract to reduce technical and commercial losses in a limited geographic area o f the municipality of the Metropolitan District (Alcaldia Municipal del Distrito Central, Municipality o f Tegucigalpa, AMDC). Procurement under this component will be implemented by UAP in coordination with the Servicio Autdnomo Nacional de Acueductos y Alcantarillados (National Autonomous Water and Sewer Service, SANAA) withthe understandingthat the contract will be transferred to the municipal service provider if and when services are transferred. This sub- component will also finance the contracting o f consultant services for the design and supervision o f the performance-based service contract. B.3. Component 3: Institutional Strengthening of National and Regional Sector Institutions Sub-component 3A: Technical Assistance to national institutions. This sub-component will finance procurement o f consulting services for the strengthening o fthe ConsejoNacional de Agua Potable y Saneamiento (National Council for Water and Sanitation, CONASA) as a sector planning entity. Procurement will include advisory services on: (a) policy and legal instruments to clarify CONASA's governance structure, mandate, and financing; (b) the development o f a sector financing policy aimed at guaranteeing the long-term sustainability of the sector; (c) a national communication program, including awareness and education campaigns about sector needs and options, promotion o f social accountability, and building trust between government and civil society, and information for sector stakeholders regarding the future o f the sector; (d) strengthening o f the Ente Regulador de 10s Servicios de Agua Potable y Saneamiento (Water and Sanitation Sector Regulador, ERSAPS) capacity for setting tariffs, vetting municipal service providers, municipal oversight o f service providers after decentralization, and benchmarking o f service providers. Sub-Component 3C: Preparatory activitiesfor Tegucigalpa transfer. This sub-component will finance procurement o f small works and goods and services for preparatory activities for the transfer o f service delivery from SANAA to the Municipality o f Tegucigalpa (AMDC). Procurement will include advisory services and goods for: (a) updating inventories, (b) installing consumer and asset management systems; and (c) planning the transfer process. C. Assessment of UAP's Capacityto ImplementProcurement A procurement capacity assessment o f UAP was carried out. SEFIN requested that implementation responsibility fall on the UAP given its previous experience with multilateral financing inthe water and sanitation sector. The UAP was created as a consolidated Project Implementation Unit within SEFIN to manage financial resources from the International Development Association (IDA), the Inter-American Development Bank (IDB), and the Nordic Development Fund (NDF), among others, to assure timely implementation o f projects using the fiduciary capacity o f SEFIN, which would involve several institutions or agencies in innovative areas. At the time o f its creation, the UAP was in charge o f managing 18 investment projects (two o f which were directly involved in the water and sanitation sector) under the direct supervision of both Vice Ministers o f SEFIN for Public 73 Credit and for Finances and Budget, who preside over the Technical Board that oversees the specific operations. Two IDA operations have been implemented satisfactorily under this scheme: the Economic and Financial Management Credit (IDA 3414-HO) and the Poverty Reduction Strategy Technical Assistance Credit (IDA 3939-HO). Under this arrangement, the UAP will coordinate on the flow o f funds, procurement o f works and goods and services, financial reporting, and other required activities. The assessment reviewed the capacity o f the UAP to carry out procurement, looking into (a) organization, (b) facilities and support capacity, (c) staffing, (d) professional experience, (e) record-keeping and filing system, (f) procurement planningand monitoring/control systems used, and (g) capacity to meet the Bank's procurement reporting requirements. The assessment also considered the capacity o f alternative proposed agencies such as the Fond0 HondureAo de Inversibn Social (Honduran Fund for Social Investment, FHIS) to implement procurement for Component 1,and SANAA and CONASA for Components 2 and 3. The findings led to rejection o f the use o f these agencies for project implementation and to embracingthe UAP instead. D. RiskAssessment The overall project risk for procurement is substantial. Once there is evidence that the mitigating measures have been implemented and are working as intended, the level of risk for this project will be reassessedand revised accordingly. Table A8.1 presents the risk assessment andthe risk- mitigating measures incorporatedinto the designo f the project andthe procurement management implementation arrangements. TableA.8.1: RiskAssessment and RiskMitigation Action Responsible Completiona I 1.Finalize the Procurement Plan. SEFIN-UAP 2. Finalize the draft procurement section of the SEFIN-UAP project operational manual. 3. Finalize draft CATS TORs and short list. SEFIN-UAP 4. Finalize and incorporate inthe operating manual SEFIN-UAP By effectiveness the evaluation framework that will be usedto determine the municipalities' capacity to implementthe works and managethe procurement aspects o f Component 1,includingthe systemof thresholds. 5. Finalize the draft TORs and short-list SEFIN-UAP consultants for the designof the performance- basedcontract and biddingdocuments for Component 2. 6. Contract external auditors, basedon short-list SEFIN-UAP satisfactow to the Bank. a. This column presents only the estimatedcompletion date, not an indication of legal conditions. 74 E.ProcurementProcessingofGoods andWorks E.l. Component1 All procurement packages will be prepared by the municipalities directly, andwill be carried out in accordance with the Procurement Plan as agreed with the Bank. The UAP will forward the procurement planto the Bank for prior review and no objection. The UAP will be solely responsible for theterms o freference andprocurement o fthe consultants needed as permanent staff to the UAP, for the CATS to support the municipalities, for the consultants preparing the master plans and designs and works supervision, and for contract supervisionand monitoring and verification o fworks. The procurement, contracting, and supervision of works and goods inthe municipalities will be executed by the proper municipality under strict supervision from UAP, provided that its capacity i s deemed sufficient. A rigorous evaluation framework, to be detailed in the operating manual, will be used to determine the capacity o f municipalities to implement the works, based on the analysis conducted prior to the Barrio Ciudad project and the Rural Infrastructure Project (PIR). When the capacity o fthe municipality is found to be insufficient, the UAP will implement the works and make contract payments inclose technical coordination with the municipality. Procurement o f works and goods for Component 1 will be conducted as follows: If the implementer i s a municipality o f category A, it will use their existing procurement practices below agreed thresholds. Ifthe implementeri s a municipality o f category Byit will follow UAP's operational guidelines for project procurement. A system o f thresholds will be outlined in the Procurement Planand inthe Operational Manual. For the assessment o f the implementer's procurement procedures, the following methods may be usedfor procurement o f goods and works for the execution o fthe sub-projects: (a) shopping; (b) direct contracting; and (c) national competitive bidding, which have been found acceptable to the Bankfollowing the selection criteria established inthe Operational Manual. As part of the overall review of each sub-component implementer's capacity to implement the proposed project, UAP will review and certify that all appropriate procurement procedures are consistent with Bank procurement guidelines. A no objection from the Bank will be required prior to the award o f each sub-component request. E.2.Component2 The management operators will be procured using International Competitive Bidding (ICB) procedures as described in the Procurement Guidelines. Prior to starting the ICB procedures, bidder prequalification will take place in accordance with paragraphs 2.9 and 2.10 o f the Guidelines. Prequalified bidders would be invited to submit technical and financial proposals usingbiddingdocumentsinaccordance with Bankprocurement guidelines. 75 Detailed procurement procedures, standard biddingdocuments for contracting o f operators, and planning approach toward their contracting will be described in the Operational Manual. The technical specifications for the performance-based contracts will be written by appropriate specialists that the UAP will employ and which will be housed inthe UAP. E.3.Components 3 and4 The Goods inComponents 3 and4 will be procuredusing shopping. F. ProcurementProcessingof Consultants'Services Consulting Services under this Project will be procured exclusively by the UAP. This will include services to be provided by firms and individual consultants such as: (a) auditing services, (b) CATS, (c) UAP staff and consultants to support Component 1, and (d) advisory services under Components 1, 2 and 3. The following selection procedures would be used for Consultants, Services: (a) Quality and Cost-Based Selection: QCBS will be the mainstream method for contracts estimated to cost $100,000 equivalent or more. (b) Consultant's Qualification Selection: CQS may be used for contracts estimated to cost less than US$lOO,OOO equivalent for auditing, monitoring, and verification o f works, and small and simple assignments for advisory and training services under the project. (c) Other consultant selection methods: Fixed-Budget Selection, Least-Cost Selection, Single- Source Selection and Quality-Based Selection may be used when duly justified in accordance withthe Bank's consultant services guidelines. (d) Individuals. Consultant contracts for specialized advisory services for the Project to be provided by individual consultants and with estimated cost below than $30,000 shall be selected through comparison o f qualifications o f three consultants. Consultant services contracted with individual consultants shall meet the requirements set forth inparagraphs 5.1 through 5.3 o f the Consultant Guidelines. To ensure that priority i s given to the identification o f suitable and qualified national consulting firms, short-lists for contracts may be comprised entirely o f national consultants, provided that at least three qualified firms or individual consultants are available. However, if foreign firms or individualconsultants have expressed interest, they would not be excludedfrom consideration. G. ProcurementPlan The UAP developed an 18-month procurement planfor project implementation, which provides the basis for contract grouping andidentification o fprocurement methods. The procurement and consultant selection methods, estimated costs, prior review requirements, and time frame have been agreed upon between UAP and the Bank on the procurement plan 76 during project preparation, and will be reviewed and cleared by the project procurement specialist at negotiations. During project implementation, UAP and the Bank agreed to meet periodically to review and assess progress achieved on the execution o f the procurement plan. The plan will be updated and submitted to the Bank for prior review and no objection every six months of each year o f project implementation. Upon delivery o f no objection, UAP shall advertise the agreed plan in Development Business, newspapers, and other publishingsources. H.FrequencyofProcurementSupervisionMissions The Bank will assist UAP in the upstart activities by providing training to key staff in procurement under Bank procedures, particularly in relation to relatively innovative features o f the project such as service performance-based contracts. Nevertheless, it i s recommended that the Bank carry out frequent procurement supervision, especially duringthe first year o f project implementation. Inaddition to prior review supervision tasks to be carried out by Bank staff, the capacity assessment o f the UAP has recommended one supervision mission every six months. The supervision mission will not be limited to UAP but will also extendto selected municipalitiesexecuting the procurementprocesses. 77 Annex 9: EconomicandFinancialAnalysis HONDURAS:Water andSanitationSector ModernizationProject The proposed project is based on a framework approach where specific sub-projects are not pre- defined. Rather, they will be identified based on the demand from the municipalities supported withtechnical assistanceand capacity buildingactivities to ensure its successful implementation. Given this demand-driven approach, it was not possible to have for appraisal a representative sample o f well-identified, eligible sub-projects to be fully analyzed economically. The team however, has identified appropriate methodologies for conducting the economic analysis o f the eligible investments duringproject implementation. Inorder to test the methodology and have an idea o f the possible economic returns that could be achieved through the implementation o f this proposed project, a small sample o fpossible interventionswas analyzed. This annex presents the results o f the economic and financial analyses that concentrated on Subcomponents 1B and 1C (US$17.5 million) and Component 2 (US$4.5 million), which account for 63 percent o f total project cost. Consultants will be hiredfor the development o f the municipal water and sanitation efficiency improvement plans (Subcomponent 1B) and for the development o f master plans (Subcomponent 1C). These consultants will be responsible for conducting financial and economic feasibility studies, and to ensure that all proposed interventions will be economically feasible. Cost-benefit analyses will be used to assess the economic feasibility o f the proposed plans. The Operational Manual will contain the methodology and detailed information on the development o f the economic analysis for the investments to be financed by the project. The economic analysis principles to be applied are discussed below. Subcomponent 1B (efficiency improvement): Any eligible investment in efficiency improvement will have to be part o f either the efficiency improvement plan or the master planof the utility requesting it, in which case it would already have been evaluated for its economic feasibility. Incase the proposed investment was not part o f the efficiency improvement plan, the municipality will need to present its economic feasibility study based on the methodology specified under the Project Operational Manual. Investments that are not economically feasible will not be eligible for funding. Subcomponent 1C (investments): Any investment under this component will have to bejustified as part o f a master plan approach to Water Supply and Sanitation (WSS) services development. Inthe process of appraising a national Output-Based Aid (OBA) fund for water and sanitation investments, a sample o f projects was assessed. The methodology used for assessing the economic feasibility o f those sub-projects will be used for assessingthose to be financed through this proposed project. The results and methodology are ready and are presented inthis Annex. Component 2 won-Revenue Water Reduction in Tegucigalpa): Component 2 will focus on Non-Revenue Water reduction for Tegucigalpa. The design o f such program will be based on a strategic diagnostic that identifies the actions that lead to the best results for the money available. Economic and financial analysis will be an inherent part o f this strategic diagnostic, hence ensuringthat only actions that make economic andfinancial sense are funded. 78 Methodology A cost-benefit analysis will be used to assess the economic feasibility of the sub-projects to be financed by the proposed project. To determine the net incremental financial costs and benefits, "with" and "without" project scenarios will be constructed. For Subcomponent I B and Component 2: The "with" project situation will assume that all targets expected for each proposed investment planwould be met. Conservatively, the "without" project situation will assume that the performance indicators o f the utility would remain unchanged (instead o f deteriorating) that is, current performance, coverage, Non-Revenue Water levels, and other operational indicators. In the case o f Component 2, it will only refer to the reduction o f Non-Revenue Water. On the basis o f these scenarios, the incremental financial benefits and costs o f the proposed investment programs will be assessed. The stream o f financial flows will be adjusted for the impact o f taxes, subsidies, and externalities to arrive at the economic flows o f costs and benefits, with the use o f the conversion factors calculated during project preparation. Because this component does not foresee any expansion in coverage, the main economic benefits are resource savings for the economy resulting from a better use o f those within the utility, and some increase in consumption for connected users that will benefit from improvement inservice reliability andcontinuity. Subcomponent IC: In the process o f appraising a national Output-Based Aid (OBA) fund for water and sanitation investments, a sample o f projects was assessed. The methodology used to assess the economic feasibility o f these sub-projects that aim at expanding water and sanitation services i s presented here as an example o f possible results that could be obtained from the financing o fthis type o f project. Assumptions Investment Costs. The "with" project scenario includes all associated investment costs including labor and the necessary equipment, including those not directly financed by the Project, but are necessary for the expected benefits to materialize. Operation and Maintenance (O&M) Costs. The O&M costs for both the "with" and "without" project scenarios include the cost o f labor, chemicals, electricity, and all administrative recurrent costs. It i s expected that the incremental O&M costs resulting from the project will be considerably lower, resulting inresources savings for the utility/municipality andthe economy o f Honduras. Economic Costs. For the economic cost-benefit analysis, shadow prices will be used. During project preparation the team estimated the conversion factors for the main inputs o f the typical sub-projects to be used for the actual analysis of eligible business and investment plans: unskilled labor, skilled labor, national and imported goods, and the standard conversion factor. Details o fthe calculations can be found inthe project files. 79 Incremental Benefits. Incrementalbenefits identified includethe following: Increased consumption of water supplied by the utilities and increased revenues resulting from higher volume o f water billed; Increased revenues resulting from the reclassification o f the customer database and cadastre updates (financial); Resource savings to the economy due to reduced operating costs resulting from the reduction o f system operational losses and to efficiency improvements; 0 Cost savings to the economy due to the reduction o f expenses associated with waterborne diseases; 0 Cost savings to the economy associated to time savedassociated with fetching water. The sub-projects under these components will generate additional economic benefits, including intangible and more difficult-to-measure environmental benefits and increased customer satisfaction. Improved reliability and leakage management will reduce the level o f illegal tampering and so reduce the cost o f distribution maintenance. The Project will also have an impact on increasing the flexibility in the operational handling o f the systems and improved pressure management. This will reduce the level o f current pipe burst-out-and therefore leakages-while increasing the economic life o f pipelines and therefore reducing the cost o f distribution maintenance. These additional benefits have not been considered in the analysis, so the results will be a conservative estimate o fthe economic impacts o f the financed investments. CollectionE'ciency. Collection efficiency was assumed to remain constant. Unaccounted for water. This is defined as volume o f water not billed over volume o f water supplied.Its value has beenprojectedaccording to project targets. The implementation schedule o f each sub-project varies from 1 to 3 years depending on the type o f project. Discount rate. The cash flows will be discounted using a discount rate o f 12 percent for the financial analysis, which i s estimated to be a proxy o f Honduras's opportunity cost o f capital. The costs andbenefitswill beprojectedfor 20 years. Results Initial resultsfor Subcomponent1B Cost-benefit analyses were conducted on a small sample o f sub-projects from the first group o f potentially participating municipalities, L a Ceiba (138,000 inhabitants), Choluteca (82,000 inhabitants), and Siguatepeque (45,000 inhabitants). These were based on preliminary efficiency improvement plans and the results are presented as an example o f the type o f investments that could be financed and their associated economic feasibility. To determine the net incremental costs and benefits, "with" and "without" project scenarios were constructed based on the results and observations from the preliminary efficiency improvement plans developed for those three 80 communities, which were then adjusted for the impact o f taxes, subsidies, and externalities to arrive at the economic flow o f costs andbenefits. The main benefits o f the sub-projects include resource savings generated by the optimization o f the system and introduction o f efficiency gains supported by the technical assistance and investment program supported by the project; improved water supply and sanitation services, including a reduction or elimination o f supply rationing and intermittent services and ultimately improved heath conditions, estimated by resource savings related to expenditures inhealth costs associated to treating waterborne diseases. The main expected benefit from the interventions to be financed under this component i s the resource savings generated to the economy by the utility, as it i s assumed that operating costs will be reduced, commercial efficiency improved, andNon-Revenue Water reduced. Other important benefits to the economy that accrue from the reduction o f Non-Revenue Water results from the reduction o f rationing, allowing an increase in water consumption and generating resource savings associated with the substitution o f water sources for cheaper and better-quality utility water. Inthe case o f La Ceiba, it was assumed that 35 percent o f users are rationed; inthe case o f Choluteca, 40 percent; and inthe case o f Siguatepeque, 60 percent; inthe computed project scenario those are beinggradually served. Preliminary results show that the component i s expected to be highly feasible, as can be seen in Table A9.1. TableA9.1: Resultsfrom Sample EconomicAnalysis for Component 1C (000) 11I I Sub-project I Population ENFV LaCeiba 138,000 LPS2G22.1 61% ~ Choluteca 82,000 LPS10,939.8 17% Siguatepeque II1 45,000 1III LPS19,122.7 24% III Initial Resultsfor Component ID Eligible sub-projects to be financed under this component by the proposed project will be evaluated based on a cost-benefit analysis that will be conducted as part o f the master plans. Household surveys will be used to define the "without" project situation. A detailed methodology specifying how to estimate economic costs and benefits will be part o f the operations manual and o f the terms o f reference for the consultants responsible for the development of the master plans. 81 For the purposes o f a preliminary assessment, the following sub-projects were identified as potential candidates for funding through the OBA fund, which will have the same criteria as the proposed operation andthe same scope interms o f size o f municipalities (Table A9.2). Table A9.2. Projects Analyzed under by GP-OBA Fund Water Barrios en Desarrollo (Tegucigalpa) 6877 1,263,106 184 Water Kiosks La Masica-Water 438 905,322 2,067 La Esperanza-Water 469 414,566 884 La Esperanza-Wastewater 216 521,105 2,4 13 Total 25,843 15,334,611 593 These sub-projects were subject to detailed economic and financial analysis by the Global Partnership for Output-Based Aid (GPOBA) Fund. The economic analysis was based on estimates o f current consumption and on cost o f water purchased from vendors (currently, the charge for a 19-liter container is US$0.40, which roughly equates to US$21/m3). Data on tariffs and operation and maintenance costs were provided by the respective utilities/municipalities. For all projects, the analysis was based on a discount rate o f 12percent and a useful life of 20 years. Barrios en Desarrollo, Water (Programa Regional de Reconstruccidn Para Amkrica Central, CentralAmerica Regional ReconstructionProgram, PRRAC): The analysis was undertaken for a population o f 107,058 inhabitants growing at 3.2 percent per year and where the household size i s 6 people. The economic Net Present Value (NPV) o f the project i s US$6,351,238 and the Economic Internal Rate o f Return (EIRR) is 20 percent. At 62 percent, expenditure savings are the largest proportion o f economic benefits followed by time benefits (31 percent) and health benefits (7 percent). A sensitivity analysis showed that the results are robust: The EIRR with expenditure savings i s 12 percent. It increases to 18 percent with the addition o f time savings and to 20 percent with the addition o f healthbenefits. Barrios en Desarrollo, Water Kiosks (Tegucigalpa): The analysis was undertaken for a population o f 41,262 inhabitants growing at 3.5 percent per year. The household size i s 6. The project has an economic NPV o f US$1,793,261 and an EIRR of 31 percent. Expenditure, time, and health benefits are 49 percent, 35 percent, and 16 percent of total benefits, respectively. A sensitivity analysis showed that including expenditure savings alone yields an EIRR o f 16 percent; it increases to 27 percent with time savings added and to 31 percent with health benefits also included. La Masica, Water: The analysis was undertaken for a population o f 2,628 growing at 3.2 percent per year. The household size is 6 people. The economic N P V o f the project i s US$2,119,571 and the EIRRis 43 percent. Expenditure,time, and healthbenefits are 48 percent, 36 percent, and 16 82 percent, respectively. Results from a sensitivity analysis showed that the EIRRis 22 percent with expenditure savings. It increases to 36 percent when time savings are added and to 43 percent when health benefits are also added. La Esperanza, Water: The analysis was undertaken for a population o f 1,893 inhabitants growing at a rate o f 3.2 percent per year and a household size o f 6. The project has an economic NPV o f US$34,93 1 and an EIRR of 13 percent. Time savings constitute the largest proportion o f economic benefits at over 50 percent. Expenditure savings constitute 41 percent while health savings are less than 10 percent o f the benefits. For this project a sensitivity analysis showed that the EIRR with expenditure savings i s 2 percent, but when time savings are added it increases to 12percent, andto 13 percent when healthbenefits are also added. La Esperanza, Wastewater; The analysis has been done for a population of 950 growing at a rate o f 3.2 percent per year and a household size o f 4. The project has a very low EIRR (1 percent) and a negative economic NPV (US$256,553). This project will therefore not be considered eligible for funding under OBA or under the proposed project. Incremental net cash--ow methodology was usedfor rate-of-return calculations: The methodology confines quantified economic benefits to expenditure savings, time savings, and value-of-health savings. Since detailed household surveys were not available, the economic benefits o f time savings and health savings were quantified based on adjusted World Health Organization (WHO)25estimates. Specifically, valuation o f health benefits has been restricted to those due only to direct patient treatment costs saved and adult working days gained as a result o f reduced instances of diarrhea. Workdays lost per year per case o f adult illness are taken as the average o f the WHO range (14). Illness treatment costs are discounted to account for only 50 percent o f cases being formally treated. Time savings, that is, water collection time saved per household, i s taken at the lower end o f the WHO range o f 0.25 to 1.00 hour. The methodology also assumes one productive adult wage earner per household and minimum wage earnings as the opportunity cost o f time. The minimum wage is adjusted downward for high self- employment and unemployment. The financial internal rate o f return (FIRR) was calculated based on the incomehevenue and expenditure streams o f the project. This calculation was needed because the OBA subsidies will be directed only to those sub-projects with a positive economic NPV and a negative financial NPV. The value of the OBA subsidy will cover the financial deficit to the utilities of serving these poor neighborhoods (Table A9.3). 25 Guy Hutton and Laurence Haller, "Water, Sanitation and Health Protection of the Human Environment, Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the Global Level," World Health Organization, Geneva, 2004. 83 Table 89.3, Net PresentValue of Gash Flaws i. :sod eligible for f ~ i iunderiOBA~or underthe proposedproject. ~ ~ As part of the efficiency i~a~ro~~ement p~ans~~aster plans, finmciaX modeIs will be wed to prqiect the cash flows of the propo~edplans. The work done as part of the ORA Facility and the pr~parationof this proposed project show that mmy of the eligible sub-p~o-jcctsmay be ~ ~ n a n c i a~~n~f es ~ s ~H ~ e .e ~ eitr ,is ~ ~ p o ~toa clarify that according to OP 10.04?sub- b o ~ n t projects that are financialty unfeasible may be eligible for World B ~ i financing as~longAas ~ ~ they are e c # ~ # n ~ ~ cfeasible. "ftae ~ n a ~ i canalysis. however, is i ~ p o r t a ~the utififics to a l ~ y i ~ t for ~ take controt of their own financial p e r f o ~ a ~ ~tocprioritize i ~ a ~ e msd to see ~the~impact ~ c . ~ ~ ~ s of proposed i n t e ~ ~ e n t ~ono ~their s OWTI ~ ~ heattta, Project funding uill be used only~to a ~ c ~ ~ finance e c o n ~ ~ ~feasiblel li y~ t e ~ r e ~thati were~prioritized by the ~ ~ ~ ~ c i pthat wilI t ~ ~ s ~ ~ t ~ n a ~ i be c # - ~ ~ i these~i ~i i~~ ie~s ~ ~ e n t s . a ~ Inthe case ofthe OBA Fund, the financial a ~ s e s i~parteofthe e~l ~ ~ ~ bcriteriaand for the s ~ ~ ~ i I ~ t s estimate of the subsidy a~~~~~~to be ~ l l o c ~ toethe specific utifity, The OBA fund will finance ~ d only ~ub-pro,je~ts that yield a negative present value but. that are ~ c o n u ~ feasibte.~In the ~ ~ a ~ y case of this proposedproject, the ~ub-proje~t~be assessedonly by their economic retunis. will 84 Annex 10: SafeguardPolicyIssues HONDURAS:Water andSanitationSector ModernizationProject This project will trigger the Environmental Assessment, Natural Habitats, and Physical Cultural Resources and Indigenous Peoples Safeguards, and i s rated as Category Bygiventhe small scale o fphysical investments andthat no significant impacts are predicted for the environment. Infact, given the possibility that some sub-projects may be increased wastewater treatment, in those cases there will be net benefits to the environment. Since sub-projects and specific locations have not yet been identified, a Framework for Environmental and Social Management (which will also encompass measures to ensure that the Physical Cultural Resources and Natural Habitats Safeguards will be addressed) and Indigenous Peoples Framework has been prepared. This project will not finance dams or involuntary resettlement according to the Bank's definition. EnvironmentalImpacts Environmental implications issue only from Sub-Component 1C on Investment for System Rehabilitation and Expansion, and Component 2, Tegucigalpa Non-Revenue Water Reduction activities. Investments funded under Component 1 would include rehabilitation, connection to and expansion o f water supply and sewer networks, on-site sanitation facilities, and wastewater treatment systems. Water supply investments can include coverage extension, rehabilitation of existing networks, tanks and treatment plants, and the development o f new water production capacity. Piped sewerage investment can include rehabilitationand expansion o f standard, small- bore, and condominia1 systems. On-site sanitation investment will focus on creating supportive conditions for on-site solutions (acquisition o f municipal tankers to empty septic tanks, sludge- treatment facilities and so forth), and will only subsidize on-site solutions when it is deemed appropriate. Wastewater treatment investments will include simple independent treatment systems such as stabilization ponds, artificial wetlands, and communal septic tanks. Since some projects may be located on the north coast o f Honduras, a known ecotourism zone, the Natural Habitats Safeguard i s triggered. Measures to ensure compliance with this safeguard are located in the Framework for Environmental and Social Management. For Component 1, the main possible environmental impacts resulting from the execution o f and later operation of works to extract and convey water may include construction waste, dislocated soil, and contamination o f water sources, but all o f these impacts will be handled through the guidelines governing the work o f constructioncontractors. All works during constructionusually increase levels o f noise and particulate matter (dust); the sub-project implementors will use measures as detailed in the Framework for Environmental and Social Management to prevent, mitigate, and reduce these impacts. On the other hand, the rehabilitation and expansion o f distribution networks could also cause negative impacts for inhabitants that live near such networks and for users o f waterways. 85 Investments under Component 2 Leak Reduction will include works-related activities such as detecting leaks and repair or replacement o f pipes-all very benign rehabilitation activities without many environmental consequences. Such activities are classified as category B.26Leak detection has negligible and very temporary environmental implications such as temporary air quality reduction from the smoke used to detect leaks or illegal connections, for example, ifthat particular method i s used (there are others). The repair or replacement o f leaky pipes will generally mean removal o f dirt from digging and its eventual replacement. Resulting minor environmental impacts (proper disposal o f construction waste, erosion control, protection of spring catchments, and so forth) will be addressed by appropriate guidelines that will be incorporated into the technical specifications governing the work o f constructioncontractors. Although the project does not foresee working in culturally or archeologically sensitive areas, any physical cultural property that may be found duringthe course o f conducting works will be handled according to Honduras's already established laws for handling chance finds in compliance with the Bank's Physical Cultural Property Safeguard. Arrangements for finding, a schedule for implementation (as necessary), and monitoring arrangements will be located inthe Framework for Environmental and Social Management. SocialImpacts 1.PositiveSocialImpacts: The project's potentialfor delivering positive social impacts is high. The proposed decentralization o f water and sanitation services i s intended to improve service delivery, facilitate local accountability by tailoring infrastructure services to the needs o f local constituencies, and promote good governance by municipalities and communities taking the lead toward more transparent and efficient decisionmaking. These positive benefits will be heightened by increased stakeholder participation in decisionmaking, which will in turn strengthen ownership among municipal constituents andwater and sanitation service consumers. 2. Safeguards frameworks prepared: In terms o f Component 1 physical interventions, the pertinent social safeguard instruments have been prepared. Regarding involuntary resettlement, giventhe nature and scale o f these water and sanitation works to be implemented inurban areas, a proposed sub-project will be considered ineligible if it involves (a) the involuntary taking o f landresultingin(i) relocation or loss o f shelter; (ii) o f assets or access to assets, or (iii) loss loss o f income sources or means o f livelihood, whether or not the affected persons must move to another location; or (b) the involuntary restriction o f access to legally designated parks and protected areas resulting inadverse impacts on the livelihoods o fthe displaced persons. Although sub-projects will not be determined before project implementation, the project does foresee targeting a geographically diverse set o f municipalities, raising the probability o f working with the country's heterogeneous indigenous and ethnic communities. For that reason, the Government has preparedan Indigenous Peoples Framework (also referred to as an Ethnic Communities Policy Framework inreference to the inclusion o f both native indigenous groups as well as Afro-Honduran communities); including the input it received through individual 26Safeguards Management and Review Team (SMART), Simplifiing Safeguards: Addressing Environmental and Social Issues in Water Supply and SanitationProjects,2004. 86 consultations with key indigenous and Garifuna organization directors. This framework reflects the values embodied in the Bank's policy, by recognizing that the identities and cultures o f Honduran indigenous groups and Afro-Honduran communities are inextricably linked to the lands on which they live andthe natural resources on which they depend, whichexposes them to different types o f risks and levels o f impacts from development projects, including loss o f identity, culture, and customary livelihoods, and exposure to disease. For this reason, the framework has highlighted the appropriate social inclusion mechanisms, corroborated with national indigenous and Afro-Honduran leaders, to be implementedthroughout the project cycle. 3. Rapid social assessments to be carried out during implementation: Once the cities have been selected, a rapid social assessment will be carried out per city, serving a double purpose. First, in terms o f project preparation, these assessments will provide the implementing agency with valuable information about the population, ranging from basic demographic data to customer needs and satisfaction levels, which will guide the design of the project interventions. As a result, the project will be more responsive to social development concerns, including seeking to enhance benefits for poor and vulnerable people while minimizing or mitigating risk and adverse impacts. Second, the assessments will enable the optimal use o f the project's monitoring and evaluation indicators by providing a substantial baseline with valuable qualitative andquantitative data. The assessment process will include the following activities during Steps 1 and 2 o f Component 1: ~ Activity Which Responsible Description Stage ofthe Party Process 1. Inclusion Step 1 CATS The consultants will discussthe inclusion Strategy agreed strategy for vulnerable groups with the with municipality municipality (including non-indigenous, indigenous, and Afro-descendant groups). The municipality will sendan official note to eachhousehold inthe neighborhood, introducingthe project and its benefits, costs to be incurredby the community, and inviting community participation. 2. Desk Review Step 1 CATS The desk review will include the analysis of secondary data regarding: the demographic and socioeconomic conditions of the selected city, current supply of infrastructure and access to services, presenceof local institutions and civil society organizations, technical capacity of the municipal team, and status of municipal and neighborhood development plans. 3. 1Participatory Step 2 UAP - Participatory focus groups will be conducted 87 Activity Which Responsible Description Stage of the Party Process Focus Groups social withthe identifiedstakeholdersofthe consultant project. These workshops aim to (a) complete the construction of the baseline by validating and enhancing the quantitative results of the household surveys; and (b) further discuss community needs, priorities, and expectations regardingresults. Socioeconomic Step 2 Consulting Socioeconomic household survey will be and consumer firm usedto collect data in eachparticipating satisfaction As part of municipality, to include socioeconomic survey the Master Plans aspects such as (a) social, cultural, and economic characteristics (level of social and human capital, income); (b) accessto and perceptions o f water and sanitation services; (c) incidence of waterborne diseases and respiratory infections inthe community; (d) social problems including crime and violence, problems causedby migration or immigration from rural areas, and consumer satisfaction dimensions such as (a) water consumption patterns, (b) use of sanitation facilities, (c) existinghygiene habits, and (d) willingnesstoward infrastructure improvement and cost recovery. 88 Annex 11: Project Preparation and Supervision HONDURAS: Water and Sanitation Sector Modernization Project Planned Actual PCNreview 03/08/2007 Initial PID to PIC 02/16/2007 Initial ISDS to PIC 02/16/2007 Appraisal 04/09/2007 Negotiations 05/17/2007 Board/RVP approval 06/21/2007 Planneddate of effectiveness 12/31/2007 Planneddate of midtermreview 12/31/2010 Plannedclosing date 12/31/2013 Key institutions responsiblefor preparation of the project: SANAA, SEFIN, Municipalities. Bank staff and consultantswho worked onthe project include: Name Title Unit Gustavo Saltiel Senior Water Engineer - LCSUW John V. Kellenberg Sector Leader LCSSD DanteAriel Mossi Reyes Country Operations Officer LCCHN Pilar Elisa GonzalezRodriguez Senior Counsel LEGLA Maria Angelica Sotomayor Araujo Senior Economist LCSUW Meike van Ginneken Senior Water & Sanitation ETWWA Specialist DavidMichaud Water and Sanitation LCSUW Specialist RafaelVera Senior Water & Sanitation ETWAN Specialist LuisTineo ProcurementSpecialist LCSPT Fabienne Mroczka Financial Management LCSFM Analyst Nicole Maywah OperationsAnalyst LCSUW LuisAlbert0Andres Infrastructure Economist LCSSD Miguel Vargas-Ramirez Water & Sanitation Specialist LCSUW Karla Chaman Communications Officer EXTCD Ana Consuelo FunesRosales Team Assistant LCCHN RosaElena Bellido LanguageProgramAssistant LCSUW FernandaRuizNunez Consultant LCSUW KimberlyVilar Consultant LCSTR Arturo Jimenez Consultant LCSUW Jose Eduardo Mestre Consultant LCSUW 89 Bankfunds expended to date on projectpreparation: 1. Bankresources:US$156,771.69 2. Trust funds: US$14,481.00 3. Total:US$171,252.69 EstimatedApprovaland Supervisioncosts: Remaining costs to approval: US$30,000 Estimated annual supervision cost: US$l50,000 90 Annex 12: Documents in the Project File HONDURAS: Water and Sanitation Sector Modernization Project Bank Documents 0 Aide Memoire PreparationMission, February 12, 15,2007. 0 Aide Memoire Identification MainFindings of PreparationMission, March 19-22,2006. 0 Aide Memoire Pre-AppraisalMission, April. 0 Project ConceptNote. 0 Project InformationDocument (Appraisal Stage). 0 Integrated SafeguardsData Sheet (Appraisal Stage). 0 MinutesofDecisionPackageMeeting. 0 PAD Water and Sanitation Sector Modernization Sector Project. 0 "Implementation Completion Report on a Loan to the Republic of Honduras for Sustainable Tourism Development Project," Report No. 35651,World Bank, 2006. 0 Honduras Country Assistance Evaluation, Report No. 37861,World Bank, 2006. 0 Country Assistance Strategy for the Republic of Honduras, Report No. 3728O-HNy2006. Studies ReporteDe Actividades De Formulacibn de Planesde Negocios ParaLocalidades en el Norte de Honduras, (04 A1 10D e FebreroDe 2007). "The Need for Wastewater Treatment in Latin America: A Case Study of the Use of Wastewater Stabilization Ponds inHonduras," Stewart M.Oakley, Ph.D., 2005. Government Documents "Plan EstratCgicode Modernizacibn del Sector Agua Potabley Saneamiento (PEMAPS)", Government of Honduras, 2005. 0 Marco de Politicas de Comunidades Indigenasy Afrohondurefias del PROMOSAS. Marco Conceptualpara el Manejo Ambiental y Social del Proyecto de Modernizacibn del Sector de Agua y Saneamiento (PROMOSAS). EncuestasPermanentesde Hogares, Instituto Nacional de Estadisticasde Honduras, 2003. Laws and Regulations LEYES de Municipalidades y Reglamento. Ley Marco de Agua y Saneamiento. ReglamentoLey Marco Sector Agua Potabley Saneamiento. 91 Annex 13: Statementof LoansandCredits HONDURAS:Water and SanitationSector ModernizationProject Difference Between Expectedand Actual Oriainal Amount in US$ Millions Disbursements" Project ID Project Name Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd PO86775 HN Rural Infrastructure Project 2006 47.00 44.75 PO88319 HN Barrio-Ciudad Project 2006 15.00 13.56 0.28 PO07397 HN Community-Based Education Project 2001 415 0 4.59 5.21 PO64913 HN Emergency Disaster Management 2000 10.82 0.10 (0.57) PO64914 HN Forests and Rural Productivity 2004 20.00 10.85 5.50 PO40177 HN Financial Sector Technical Assistance 2003 9.90 7.34 6.32 PO83311 HN First Prog Fin Sec Dev Pol Credit 2005 25.00 11.91 26.96 PO90113 HN GEF Rural Electrification 2006 2.35 2.35 0.25 PO81516 HN Judicial Branch Modernization 2006 15.00 14.19 1.51 PO55991 HN Land Administration Program 2004 25.00 6.96 3.43 PO83244 HN Nuestras Raices Program 2004 15.00 13.46 11.30 PO82242 HN Nutrition and Social Protection 2006 20.00 17.81 7.80 HN Poverty Reduction StrategyTechnical PO83851 Assistance Credit 2004 8.00 5.58 4.80 PO57538 HN Road Reconstruction and Improvement 2001 66.50 0.49 (5.47) PO81172 HN Regional Dev in the Copan Valley 2003 12.00 3.54 1.40 PO70038 HN Trade Facilitatio & Productivity Enha 2004 28.06 21.72 15.92 10.68 PO53575 HN- Health System Reform Project 2002 27.10 8.70 3.22 Overall Result 385.88 2.35 187.90 84.66 10.68 STATEMENT OF IFC's HeldandDisbursedPortfolio, inMillions ofUSDollars, As of 07/31/2006 Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic Granjas 1999 Marinas 2.45 0 0 0 2.45 0 0 0 International... 9 0 0 0 9 0 0 0 Total Portfolio: 11.45 0 0 0 11.45 0 0 0 ApprovalsPendingCommitment FY Company Loan Equity Quasi Partic. Approval Total pending commitment: 0.00 0.00 0.00 0.00 92 Annex 14: Country at a Glance HONDURAS:Water and Sanitation Sector ModernizationProject Honduras at a glance 5/9/07 Latin Lower Key Development Indlcators America middle Honduras 8 Carib. income Age dlstributlon, 2006 (2006) Female Population,mid-year(millions) 7.4 551 2,475 Surfacearea (thousandsq. km) 112 20,420 39,955 Populationgrowth (%) 2.1 1.3 1.0 Urbanpopulation(% of total population) 47 77 50 GNI(Atlas method,US$ billions) 8.8 2,226 4,760 GNIper capita (Atias method, US$) 1,200 4,045 1,923 GNi per capita (PPP, international$) 6,129 6,399 GDP growth(56) 6.1 4.5 7.0 15 10 5 0 5 10 15 GDP per capita growth (%) 3.9 3.1 6.0 percent (most recent estlmata, 2000-2006) Povertyheadcountratio at $1 a day (PPP, %) 15 9 Povertyheadcountratio at $2 a day (PPP, %) 36 22 Under4 mortallty rate (per 1,000) Life expectancy at birth (years) 69 72 71 Infant mortality(per 1,000 live birihs) 31 26 31 Chiid malnutrition(% of childrenunder5) 17 12 Adult literacy,male (% of ages 15and older) 80 91 93 Adult literacy,female (% of ages 15and older) 80 89 85 40 Gross primaryenrollment,male (% of age group) 113 120 117 Grossprimary enrollment.female (Ohof age group) 113 116 114 20 Access to an improvedwater source(Ohof population) 67 91 62 0 Accessto improvedsanitationfacilities (% of population) 69 77 57 lsso 189s 2 m ms OHonduras QLatin America &the Canbbean Net Aid Flows 1980 1990 2000 2d06 ' (US$ millions) Net ODA and omcial aid 102 446 449 681 IGrowth of GDP and GDP per caplta (Oh) TOP3 donors (in 2005): Japan 7 85 50 103 Spain 6 35 95 loT UnitedStates 19 215 110 68 Aid (% of GNI) 4.2 16.0 7.7 6.6 Aid per capita (US$) 29 92 70 94 Long-Term Economic Trends Consumer prices (annual% change) 23.3 11.0 5.2 GDP implicitdeflator(annual% change) 13.2 21.2 9.7 5.2 Exchange rate (annual average, local per US$) 2.0 4.1 15.0 19.0 Terms of trade index(2000 100) 129 100 1980-90 1990-2000 2000-06 (average annualgrowth %) Population,mid-year(millions) 3.6 4.9 6.4 7.4 3.1 2.6 2.3 GDP (US$ millions) 2,566 3,049 5,956 9,235 2.7 3.2 4.0 (% of GDP) Agriculture 23.7 22.4 16.2 13.5 2.7 2.2 3.5 Industry 24.3 26.4 31.6 30.5 3.3 3.6 4.0 Manufacturing 15.0 16.3 19.6 19.5 3.7 4.0 4.3 services 52.0 51.2 52.2 56.1 2.5 3.8 4.6 Householdfinal consumptionexpenditure 69.4 66.8 70.6 76.8 2.6 3.0 5.5 Generalgov't final consumptionexpenditure 12.7 12.9 12.5 18.0 3.3 2.0 5.7 Gross capitalformation 24.6 23.0 30.7 30.3 3.0 6.9 2.9 Exportsof goodsand services 37.2 37.2 41.3 41.0 1.1 1.6 6.4 Imports of goods and services 44.1 39.9 55.2 66.8 1.2 3.8 8.7 Gross savings 13.2 21.7 26.8 32.1 Note:Figuresin italics arefor years otherthan those specified. 2006 data are preliminary. Group data are for 2005. ..indicatesdata are not available a. Aid data are for 2005 DevelopmentEconomics,DevelopmentData Group (DECDG). 93 Honduras Balance of Payments and Trade 2000 2006 Governance Indlcators,2000 and 2006 (US$ millions) W2005 Total merchandiseexports(fob) 1,436 1,927 Total merchandiseimports (cif) 2.856 5,415 02000 Indaccountability Net trade in goods and services -840 -2,377 Politicalstability Workers' remittancesand compensationof employees (receipts) 416 1,796 Regulatoryquality Currentaccount balance -232 -55 Rule of law as a % of GDP -3.9 -0.6 Controlof corrupllon 1 Reserves,includinggold 1,319 2,776 I 0 25 50 75 1W Consolidated Non-Financial Public Sector Finance 2000 2005 Countyspercentilerank (0-100) hk7hh.r!mI~esnnp4y boner nbng (% of GDP) Revenue 29.2 28.1 Tax revenue 17.3 17.0 Expenditureand Net Lending 30.0 32.0 Technology and Infrastructure 2000 2006 Overallsurplusldeficit -0.8 -3.9 Paved roads (% of total) 20.4 Highestmarginaltax rate (%) Fixedline and mobile phone individual 25 25 subsclibers (per 1,000people) 71 246 Corporate 75 25 Hightechnologyexports (% of manufacturedexports) 0.3 2.2 External Debt and Resource Flows Environment (US$ millions) Total debt outstandingand disbursed 5,360 5,242 Agriculturalland (% of land area) 26 26 Total debt service 389 381 Forestarea (W of land area,2000 and 2005) 48.5 41.5 HiPC and MDRl debt relief(expected;flow) 1,053 Nationallyprotectedareas (% of land area) .. 21.0 Total debt (Uof GDP) 90.0 63.2 Freshwaterresourcesper capita (cu. meters) .. 13,311 Total debt service (% of exports) 12.3 7.3 Freshwaterwithdrawal(% of internal resources) 0.9 Foreigndirect investment(net inflows) 282 464 C02 emissions per capita (mt) 0.78 0.94 Portfolioequity (netinflows) 0 0 GDP per unit of energy use 5.3 4.8 Composition of totalexternaldebt, 2005 (2000 PPP 0 per kg of oil equivalent) Energyuse per capita (kgof oil equivalent) 469 548 IBRD 0 (US$ millionsj iBRD Total debt outstandingend disbursed 151 0 Disbursements 0 0 Pnnupai repayments 27 70 interest payments 15 3 IDA Total debt outstandingand disbursed 838 1,353 Disbursements 38 151 Private Sector Development 2000 2006 Total debt service 8 18 Time requiredto start a business(days) 44 iFC (fiscal year) Cost to start a business(% of GNi per capita) 60 6 Total disbursed and outstandingportfolio 42 3 Time requiredto registerproperty (days) 36 of which iFC own account 27 3 Disbursementsfor iFC own accounl 9 0 Rankedas a major constraintto business Portfoliosaies,prepaymentsand (56 of managerssurveyedwho agreed) repaymentsfor iFC own account 26 10 Corruption 62 7 Access tolcost of financing 62 4 MlGA Gross exposure 16 0 Stock market capitalization(%of GDP) 8.8 Bank branches(per 100,000people) Note: Figuresin italics are for years other than those specified. 2006 data are preliminary. 5/9/07 ..indicatesdata are notavailable. indicatesobservationis not applicable. - DevelopmentEconomics.DevelopmentData Group (DECDG) 94 Millennium Development Goals Honduras With selected targets to achieve between 7990 and 2015 (estimate Closestto date shown, +/- 2 years) Goal 1:halvethe ratesfor $1 a daypoverIyand malnutrltlon 1990 1996 2000 2006 Poverty headcountratio at $1 a day (PPP,% of population) 37 8 25 0 20 7 14 9 Povertyheadcountratio at nationalpoverty line (%of population) 47 0 48 0 Shareof income or consumptionto the poorest qunitile(36) 2 8 3 4 3 0 3 4 Prevalenceof malnutrition(% of childrenunder 5) 18 0 25 4 166 Goal 2: ensure that childrenare abldto completeprlmaryschoollng Pnmaryschool enrollment(net %) 89 88 91 Pnmarycompletionrate (% of relevantage group) 65 71 79 Secondary schoolenrollment(gross,%) 33 65 Youth literacyrate (Ohof peopleages 15-24) 80 89 Goal 3: ellmlnategenderdlsparltyIneducatlonand empowerwomen Ratio of girls to boysin pnmary and secondaryeducation (%) 106 97 109 Women employedinthe nonagnwlturel sector (% of nonagncuituraiemployment) 48 45 48 47 Proportionof seatsheld bywomen in nationalparliament (%) 10 0 9 23 Goal 4: reduce under4 mortalltybytwothlrds Under-5mortalityrate (per 1,000) 59 49 43 40 Infantmortalityrate (per 1,000 live births) 44 31 33 31 Measlesimmunization(proportionof one-year olds immunized. %) 90 89 98 92 Goal 5: reduce maternalmortalltybythree-fourths Maternalmortalityratio(modeledestimate,per 100,000 live births) 110 Births attendedby skilledhealthstaff (Ohof total) 45 55 56 Goal 6: halt and beginto reversethe spread of HIWAIDSand othermajordbeases Prevalenceof HIV (%of populationages 15-49) 1.5 Contraceptiveprevalence(36 of women ages 15-49) 47 50 62 Incidenceof tuberculosis(per 100,000 people) 115 101 89 78 Tuberculosiscasesdetectedunder DOTS (U) 101 82 Goal 7: halvethe proportlonof peoplewithoutsustalnableaccessto bask needs Access to an improvedwatersource(Ohof population) 84 87 Access to improvedsanitationfacilities (56 of population) 50 69 Forestarea (% of total landarea) 66.0 48.5 41.5 Nationallyproteded areas (Ohof total land area) 21.0 CO2 emissions (metrictons per capita) 0.5 0.7 0.8 0.9 GDP per unit of energy use (constant2000 PPP $ per kg of oil equivalent) 5.0 4.9 5.3 4.8 Goal 8: developa globalpartnershipfor development Fixedline and mobilephone subscribers(per 1,000people) 18 29 71 246 internetusers (Der1,000mode) 0 0 12 38 Personalcom&ers'(per '1,000people) 3 11 16 Youth unemployment(% of total labor force ages 15-24) 7.4 5.2 7.2 7.0 IEducatlonIndicators(%) Measles lmmunlzatlon(% of 1-yearolds) ICT lndlcaton (per 1,000 people) 3W1 -Primary net enrolimamratio WJ ws XYM 2m5 XYM m2 ZMS OHondumSULatlnAmrlca 8 the Caribbean OFixed+ mobileSubScrlbBn p1Internetusen Note: Figuresin italicsare for years other thanthose specifled. ,. indicatesdata are not available. 5/9/07 DevelopmentEconomics,DevelopmentData Group (DECDG). 95 89°W 88°W 87°W 86°W 85°W 17°N 17°N BELIZE Caribbean Sea HONDURAS Roatán L A B A H I A Gulf of Honduras 16°N I S L A S D E 16°N Trujillo Iriona Puerto Cortés Tela La Ceiba Corocito Corocito Barra Patuca Balfate Balfate GUATEMALA M C O R T E S o Sonaguera C O L Ó N speranza Sonaguera E s Choloma AT L Á N T I D A La q u Lago de i San Pedro San Pedro Aguan ra Paulaya to Izabal Olanchito Olanchito SulaSula El Progreso El Progreso QuimistanQuimistan LaLa La Vega La ega C LimaLima El Carbón El Carbón MorazánMorazán Siero G R A C I A S o a Puerto s Lempira Higuerito Higuerito Y O R O Sic NuevoNuevo Sirsirtara Sirsirtara ArcadiaArcadia S A N TAUlúa A D I O S t San Esteban San Esteban Yoro oro Dulce Nombre Dulce Nombre 15°N B Á R B A R A Sulaco de Culmí de Culmí 15°N C O P Á N SantaSanta O L A N C H O Coón del Patuuca ca BárbaraBárbara Lago de Catacamas Catacamas CopánCopán SalamáSalamá Santa Rosa Santa Rosa Yojoa San Luis San Luis de de Copán de Copán Humuya Guayape Pat Auasbila Auasbila To JaitiqueJaitique To Chiquimula GraciasGracias Puerto SiguatepequeSiguatepeque de Montañas JuticalpaJuticalpa Cabezas O C O T E - CedrosCedros Montañas CerroCerro ComayaguaComayagua COMAYAG Guaimaca Guaimaca Las Minas Las Minas Comayagua Montañas Nueva P E Q U E (2,870 m) (2,870 m) LaLa UA Ocotepeque EsperanzaEsperanza La Paz La Paz O HONDURAS L E M P I R A To WATER AND SANITATION San Salvador MarcalaMarcala CISCZANTEGUCIGALPATEGUCIGALP EL ARAÍSOJalán Guyaambre EL PARAÍSO Coco MapulacaMapulaca INTIBL A PA Z UCÁ N DanlíDanlí SECTOR MODERNIZATION 14°N CamascaCamasca RA 14°N O PROJECT Sabana Sabana Yuscarán scarán EL SALVADOR To FRAM Las Manos Las Manos San Miguel Grande Grande CITIES ELIGIBLE FOR COMPONENT 1 COMPONENT 2 CITY VALLE ALLE NICARAGUA To SELECTED CITIES AND TOWNS To NacaomeNacaome Estelí San Marcos San Marcos San Salvador San Lorenzo San Lorenzo de Colón de Colón DEPARTMENT CAPITALS CholutecaCholuteca 0 20 40 60 80 100 Kilometers NATIONAL CAPITAL RIVERS de Fonseca C H O L U T E C A 0 20 40 60 Miles 13°N Golfo ElEl TriunfTriunfo Triunfo 13°N MAIN ROADS This map was produced by the Map Design Unit of The World Bank. IBRD PACIFIC OCEAN To The boundaries, colors, denominations and any other information RAILROADS MA Managua shown on this map do not imply, on the part of The World Bank 35484 Y Group, any judgment on the legal status of any territory, or any DEPARTMENT BOUNDARIES 2007 endorsement or acceptance of such boundaries. 89°W 88°W 87°W 86°W 85°W INTERNATIONAL BOUNDARIES