The World Bank Third National Urban Water Sector Reform Project (P123513) REPORT NO.: RES34341 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THIRD NATIONAL URBAN WATER SECTOR REFORM PROJECT APPROVED ON APRIL 18, 2014 TO FEDERAL REPUBLIC OF NIGERIA WATER AFRICA Regional Vice President: Hafez M. H. Ghanem Country Director: Rachid Benmessaoud Senior Global Practice Director: Jennifer J. Sara Practice Manager/Manager: Maria Angelica Sotomayor Araujo Task Team Leader: Khairy Al-Jamal The World Bank Third National Urban Water Sector Reform Project (P123513) I. BASIC DATA Product Information Project ID Financing Instrument P123513 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 18-Apr-2014 30-Jun-2020 Organizations Borrower Responsible Agency Federal Republic of Nigeria Federal Ministry of Water Resources Project Development Objective (PDO) Original PDO The Project Development Objectives (PDO) are: a) to increase access to improved water supply service in selected States of Nigeria and improve the financial viability of existing water utilities in those States, and b) to increase the investment planning capacityof participating States. Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-54160 18-Apr-2014 07-Nov-2014 12-Feb-2015 30-Jun-2020 250.00 79.96 145.99 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES The World Bank Third National Urban Water Sector Reform Project (P123513) Introduction: 1. This is level 2 restructuring of the Third National Urban Water Sector Project, P123513, (NUWSRP-3) “the Project”. The restructuring objective is to reallocate the unallocated budget of the disbursement category 3 (XDR 12.9 million) to disbursement category 2, and to introduce minor modification to the Project Results Framework (replacing one indicator) based on the project progress and the indicators realism feasibility. The restructuring has been formally requested by the Federal Ministry of Finance (MoF) on August 16, 2018. 2. The Project Development Objectives (PDO) are: (a) to increase access to improved water supply service in selected states of Nigeria and improve the financial viability of existing water utilities in those states; and (b) to increase the investment planning capacity of participating states. The project was approved by the Board on April 18, 2014, signed on November 7, 2014 and became effective in February 12, 2015. The project has a total budget of SDR 161.6 million (US$250 million equivalent at the date of approval) spread through the following three components: (i) Sector reforms and water supply investments (US$215 million); (ii) Water sector governance, institutional strengthening and human capital development (US$23 million); and (iii) Sector wide improvement and project management at the federal level (US$12 million). The participating states are divided into two categories: Tier-1 states include Bauchi, Ekiti and Rivers benefiting from the bulk investments of Component 1; and Tier-2 states include Kano, Gombe, Benue, Jigawa, Ondo, Abia, Bayelsa, Anambra, and Plateau benefiting from Component 2. It is worth mentioning that the implementation status report (ISR) rating of the financial management (FM) of NUWSRP-3 has been consistently Satisfactory and the Project PDO and the Implementation Progress (IP) ratings are both moderately Satisfactory. The Project’s financing is performed under three disbursement categories including: (i) Category 1: Goods, works, non-consulting services, consultants’ services, Operating Costs and Training under Part 1 of the Project (SDR126.1 million); (ii) Category 2: Goods, non-consulting services, consultants’ services, Operating Costs and Training under Parts 2 and 3 of the Project (SDR22.6 million); and (iii) Category 3, Unallocated (SDR12.9 million). 3. The Borrower discussed the restructuring needs with the Bank mission during the midterm review in June 2017 and during the implementation support mission in May 2018. The Government requested that the scope of the restructuring may cover the aspects as summarized in the restructuring request, including: (i) provision of budget to support some operating costs including fuel, chemicals and testing reagents to Tier-1 states); (ii) revising/dropping of the PDO indicator “Percentage of operation and maintenance cost recovered in selected states” from the result framework given the real circumstances; (iii) reallocation of the unallocated budget to support the launch of priority technical assistance needs to support the national Water Supply, Sanitation and Hygiene (WASH) Action Plan; and (iv) provision to allow payments of allowances to the Project staff (Federal Project Management Unit (FPMU) similar to other project FPMUs under Bank’s financed projects. However, the Bank clarified that current IDA rules do not allow for payment of allowances to the FMPU apart from the payment of Daily Subsistence Allowance (DSA) that covers hotel expenditure and per diem when project staff are on official travel outside their duty station. Status: 4. The Project has made steady progress towards the achievement of its development objectives (PDO). Access to improved water supply services has increased in Bauchi and Ekiti through the emergency rehabilitation works in the water treatment plans however, significant increase is expected in the three states following the launch and completion of the major works contracts. Moreover, the investment planning capacity of participating states has benefitted from the feasibility and design consultants in all participating states which has been completed. Further improvements are expected as a result of the completion of the water service masterplan and short and medium-term investment planning. Based on the recent good progress during the last year, the project implementation progress has The World Bank Third National Urban Water Sector Reform Project (P123513) been upgraded to Moderately Satisfactory. This has been improved through stronger engagement of the State and the Federal Governments and the finalization and launch of the bidding documents for all planned works. In Rivers, bids for works as well as construction supervision are under evaluation for award. In addition, Port Harcourt Water Corporation (PHWC) board has been established and became active. In Bauchi, some works contracts have already been awarded while the remaining programed bids are under evaluation and to be awarded soonest. In addition, the board of Bauchi State Water and Sewerage Corporation (BSWSC) has been established and became functional too. In Ekiti, some works contracts have been awarded while the remaining programed works bids are under evaluation and to be awarded soonest. Moreover, several strategic studies to support Tier-2 states to become finance-ready have commenced and all are expected to be awarded before the end of 2018. As of December 5, 2018, the total disbursements stood at US$80.0 million (35% of the Credit) and is expected to rise to 140 million (60% of the Credit) in FY19. Changes: 5. The changes will include: (i) Dropping the PDO indicator “Percentage of operation and maintenance cost recovered in selected states” from the result framework and introducing the new indicator “Billing Efficiency” defined as percentage of customer billed to registered customers from the customer enumeration database as indicated in the attached Restructuring Notice. (ii) Reallocation of the SDR 12.9 million unallocated under disbursement Category 3 to disbursement Category 2 to support the launch of priority needs, capacity building and programs of the National WASH Action Plan. The revised proceeds among the disbursement categories, for purpose of Section IV. A.2 of Schedule 2 of the Financing Agreement between the Federal Republic of Nigeria and the Association dated November 7, 2014 is as illustrated in the attached Restructuring Notice. Item (i) of the request (provision of budget to supplement some operating costs including fuel, chemicals and testing reagents to Tier-1 states (Bauchi, Ekiti and Rivers)) is already covered by the current Financing Agreement under the Disbursement Category 1. As discussed with the FMWR and the states, the participating Tier-1 states can use up to $2.0 million from their allocations and recommended not to exceed 50% of their operational needs for this purpose. All purchases shall follow the Bank procurement guidelines for goods and services and need to be cleared by the World Bank as part of the project revised procurement plans. Rationale for the PDO indicator review and budget reallocation: 6. Results Framework: Given the high subsidies from the corresponding state governments and the very low tariffs in Bauchi, Ekiti and Rivers, it has been concluded that the PDO indicator “Percentage of operation and maintenance cost recovered in selected states” targets are not realistic and cannot be achieved unless the tariffs are revised and increased by more than 3 folds which is not a viable option to be accomplished in less than two years given the current sociopolitical context. For instance, without subsidy, the operating cost recovery ratio in Bauchi and Ekiti are currently in the range of 9.3% and 4.3% respectively and can reach 20.0% and 16.3% respectively by the end of the project (much lower than the 80% target for Bauchi and 78% for Ekiti). For more practical considerations, it was agreed during the May 2018 mission to drop this indicator and to replace it with the newly proposed indicator “Billing Efficiency” which is under the control of the participating water corporation and can be used fairly as performance indicators to reflect the efficiency of the corporations. Moreover, the new indicator is still aligned with the PDO of improving financial viability of utilities. The indicator’s targets were agreed to be set as 95% for Bauchi, Ekiti and Rivers. It seems to be a practical indicator and is likely to be achieved and to reflect the improved operational efficiency of the participating water corporation. It measures the real effort of the participating corporation in producing and The World Bank Third National Urban Water Sector Reform Project (P123513) distributing the bills to their registered customers from the updated customer database. The revised updated results framework is included in the attached compiled restructuring paper (RP), (Annex 1). 7. Budget reallocation: As part of the Project design, the unallocated budget was reserved as performance incentive to Tier -1 states which can access it as supplemental finance on top of their original allocation from Disbursement Category 1 based on their performance. The eligibility criteria includes (i) Implementation progress demonstrated by achieved disbursement rate at MTR of at least 25 percent (35 points); (ii) Customer enumeration and classification completed by utility and a database created (20 points); (iii) Completion of tariff studies reflecting, among other things, sound pro-poor design, and adoption of relevant policy by the state (Yes or No) (20 [points); and (iv) Investment Plans and designs to scale up access to water supply prepared (25 points). Perf ormance-based allocations were supposed to be determined by the midterm review. However, the three participating states encountered significant implementation delays, none was able to pass the minimum of 70 points to be eligible for the incentive payments. In fact, the overall disbursement ratio was 12% (Bauchi 6.64%, Ekiti 8.17% and Rivers 15.33% of its allocation). The actual expenditures accounts for Bauchi 3.08%, Ekiti 5.24% and rivers 0.00%. Customer enumeration, was completed in Ekiti and Bauchi only; tariff studies were not carried out by any stated and neither the investment plans nor the designs were ready. Hence it was clear that the three states are way below the 70 points’ threshold of eligibility (Bauchi 24 to 29 points, Ekiti 27 to 28 points and Rivers zero to 21 points, depending on the consideration of the disbursement reference whether to be considered as actual or received in their respective designated accounts). 8. As good planning practice, the three states reflect their allocation into their procurement plans and closely monitor their commitments to avoid any cost overrun. The task team and the project adopted the practice of highlighting the risks of overrun through ensuring close monitoring of the undisbursed balance and the actual and planned commitments. The budget allocations as well as disbursement progress and projections for the three states is summarized in Table 1 of the attached Word version of the Restructuring Paper. 9. Despite the progress in disbursement to Designated Accounts that reached 35% (around XDR 56.1 or US$80 million equivalent) at the end of June 2018, the actual and committed expenditures are still low, US$37.48 million. This is expected to increase shortly as additional US$30.59 million will be committed by the end of December 2018 and further US$119.38 million will be committed by June 2019 bringing the projected total commitment to US$187.45 million by the end of June 2019 out of which IDA share will be US$168.71 million and the remainder US$18.75 million will be financed from the Counterpart Fund. 10. 10. The Federal Ministry of Water Resources and in collaboration with the World Bank was able to launch the WASH sector Action Plan to revitalize the sector. This would require resources to prepare for new activities in Tier- 2 states and to build the capacity of some additional selected states including Adamawa (North-East region), Sokoto (North) and Imo States (South West) to be finance-ready to launch short to medium term investment operations, as well as addressing the sector policy reform to support the WASH sector turnaround and the participation of the private sector. These three additional states were selected based on their geographic spread, Government strategy to bridge the gap between North and South of Nigeria and all have not benefitting from water supply development finances. The proposed reallocation of the unallocated budget will allow for the kick-start of the implementation of the WASH action plan through the preparation of studies required to address short and medium terms investments and reforms in the sector. In particular, the unallocated budget will enable the FMWR to (i) scale up of component 2 through increasing the number of Tier-2 participation states. Similar to the original tier-2 states, for all the additional participating states the project shall finance the development of Customer Enumeration (cadaster), improving revenue and billing and collection, tariff reform, regulatory reform, improving State Water Agencies financial management and The World Bank Third National Urban Water Sector Reform Project (P123513) accounting systems, reduction of non-revenue water through provision of leakage detection equipment, installation of macro and micro metering, and implementation of strategic programs for capacity building and strengthening the institutional arrangement and performance, the development of urban water master plans and Investment plan; (ii) scale up the scope of component 2 through the preparation of feasibility studies, engineering designs and bidding documents as well as the preparation of safeguard documents (ESIA and RAP) for short to medium term investment programs in selected states (Tier-2 and the additional selected states) with priority to the original Tier-2 nine states; and (iii) build the FMWR capacity as well as SWAs and corporations in the preparation and management of Public- Private-Partnership (PPP). This will be complimented by building the capacity in the development of comprehensive communication strategy to ensure the buy-in from all stakeholders. This activity will result in the development of the communication strategy and the preparation of two pilot appropriate PPP transactions documents like management Contract or service contract for two to three State Water Agencies (SWAs) from the project participating states. The revised reallocation among the project disbursement categories is illustrated in Table 2 in Section III of the RP. III. DETAILED CHANGES REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Current Current Actuals + Proposed Disbursement % Ln/Cr/TF Expenditure Allocation Committed Allocation (Type Total) Category Current Proposed IDA-54160- Gds,Wks,NonCS, 001 CS,OC,Trg Pt 1 42,000,000.00 1,694,815.03 42,000,000.00 90.00 90.00 Currency: Bauchi XDR Gds,Wks,NonCS, 32,400,000.00 2,292,282.06 32,400,000.00 90.00 90.00 CS,OC,Trg Ekiti Gds,Wks,NonCS, 51,700,000.00 0.00 51,700,000.00 90.00 90.00 CS,OC,Trg Rivers Gds,NonCS,CS,O 22,600,000.00 757,149.99 35,500,000.00 90.00 90.00 C,Trg Pt 2&3 UNALLOCATED 12,900,000.00 0.00 0.00 Total 161,600,000.00 4,744,247.08 161,600,000.00