public disclosure authorized inu- 13

INU- 13THE WORLD BANK

POLICY PLANNING AND RESEARCH STAFF

Infrastructure and Urban Development Department

Report INU 13

Addressing the Urban ChallengeA Review of the World Bank FY87 Water Supply and Urban

Development Operations

by Per Ljungand Catherine Farvacque

March 1988

General Operational Review

This is a document published informally by the World Bank. The views and interpretations herein are those of the author and shouldnot be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf.

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Copyright 1988The World Bank1818 H Street, N.W.

All Rights ReservedFirst Printing March 1988

This is a document published informally by the World Bank. In order that the informationcontained in it can be presented with the least possible delay, the typescript has not been prepared inaccordance with the procedures appropriate to fcrmal printed texts, and the World Bank accepts noresponsibility for errcrs.

The World Bank does not accept responsibility for the views expressed herein, which arethose of the author and should not be attributed to the World Bank or to its affiliated organizations. Thefindings, interpretations, and conclusions are the results of research supported by the Bank; they do notnecessarily represent official policy of the Bank. The designations employed, the presentation of material,and any maps used in this document are solely for the convenience of the reader and do not imply theexpression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legalstatus of any country, territory, city, area, or of its authorities, or concerning the delimitations of itsboundaries or national affiliation.

The principal authors are Per Ljung and Catherine Farvacque from the Infrastructure andUrban Development Department of the World Bank. Special acknowledgement must go to G.C. Guarda,S. Mayo, B. Renaud and INURD Staff for their contribution.

The World Bank

Addressing the Urban Challenge

A Review of the World Bank FY87 Water Supply and Urban

Development Operations

General Operational Review

ABSTRACT

More than 40% of the world population are urban dwellers. Thedramatic increase over the past two decades has been concentrated in thecities of the developing world, which will have to absorb another 700million people or about 2/3 of the total population increase by the turnof the century.

These urbanization pressures combined with the growingrecognition of urban centers as economic entities and catalysts fordevelopment and the overall macro-economic constrainsts of most LDC'sgovernments have prompted the emergence of crucial policy issues. Ithas become clear that, on the one hand, inefficient urban centerslacking adequate infrastructure do create bottlenecks for economicexpansion and that, on the other, most governments cannot cope with thegrowing demand for basic urban services. Consequently, the improvementof the delivery system, the improvement of revenue mobilization and theprioritization of investments and targetting of resource allocation havebecome the overall policy framework of sectoral operations.

During the last five years, World Bank lending for water supplyand urban development has expanded rapidly and the nature of sector workand lending oprations have undergone a dramatic change to adjust theirresponse to the growing challenges. The approved urban lending (13projects totalling US$1,324 million) has almost tripled since FY83 andthe WSS lending amoung (17 projects totalling US$1,114 million) hasdoubled during FY87. The expansion of the Bank's activities has beenaccompanied by a shift in focus, the emergence of new lendinginstruments, and an increasing reliance on financial intermediaries. Ithas meant a move away from sporadic traditional interventions toencompass broader policy issues of greater impact on the process ofeconomic development.

Among the new development options, special attention is placedon 1. urban administration and municipal finance through the devolutionto local authorities of resource mobilization and investments planning,2. better land management as an alternative to inadequately servicedinformal settlement, 3. housing not only as a basic human need but alsoas a potential contributor to domestic resource mobilization andfinancial development, 4. subsectoral interventions in transport, watersupply and sanitation as necessary conditions for good functioning ofcities.

A REVIEW OF THE WORLD BANK FY87WATER SUPPLY AND URBAN DEVELOPMENT OPERATIONS

Table of Contents

Page No.

I. INTRODUCTION ........................................................ 1

II. SECTORAL ISSUES AND PROBLEMS ............ ................ 2

A. The Setting ......... ................................ 2Urbanization Pressures in Developing Countries .... 2Macro-Economic Constraints ................. ....... 3

B. Key Policy Issues ......... ........ ......... ....................... 4Alleviating the Shortcomings of the Delivery

System .................... *................................... 4Decentralization Policies ..... .................... 5Public versus Private Service Provision ........... 6The Informal Sector ............................... 6Improving Public Sector Resource Mobilization ..... 7Prioritizing Investments and Targetting ResourceAllocation ..................................................... 8

III. THE EFFECTIVENESS OF BANK OPERATIONS .................... 10

A. The Response to Sectoral Issues .................... , 10Shift in Focus ..... ............................................ 10Intensified Policy and Research Work ..........o.... 11Expanded Lending Program .......................... 11New Lending Instruments ........................... 12Regional Responsiveness . .......................... 14

B. Response to Sub-sectoral Issues .................... . 16Land Management ..... ............ ..... ................ . 16Housing and Shelter Financing ..................... 17Urban Transport .......... .... .... . ................ ..... . 19Decentralization and Local Government Management 9.. 1Water Supply and Sanitation ....................... 21

IV. LESSONS FROM THE PAST, CHALLENGES FOR THE FUTURE ........ 23

A. Emerging Trends from the Current Lending Program .... 23

B. Lessons from Completed Projects ..................... 24

C. Challenges for the Future et ......et................ 24

ANNEXES Page No.

FY87 Urban and Water Supply Lending ... .................. 26Trends in Lending FY85-FY87 (US$) ...................... 27Trends in Lending FY85-FY87 (Percentages) ............... 28Urban and Water Lending by Region (FY72-FY87) ........... 29Number of Urban and Water Operations (FY72-FY87) ........ 30FY87 Sector Work ............ . ....................... ........ 31

A REVIEW OF THE WORLD BANK FY87WATER SUPPLY AND URBAN DEVELOPMENT OPERATIONS

I. INTRODUCTION

1.01 During the last five years, World Bank lending for water andurban development has expanded rapidly and the nature of sector work andthe composition of lending operations have undergone a dramaticchange. This transformation of the Bank's urban activities represents,on the whole, an appropriate response to the long term challenges ofunabated urbanization--aggravated by the economic difficulties of the1980s--and to the lessons learned from earlier basic needs orientedwater and urban projects.

1.02 In line with the changed economic conditions and the Bank'ssupport of structural adjustment programs, the Regional work programsseek to forge a closer link between "traditional" urban concerns and themacro-economic investment and policy framework. Thus, great emphasis isbeing placed on country strategy formulation and on integrated planningand programming of all activities in each country. Specifically, bothproject and sector work emphasize:

-i) rationalization of public expenditure programs as well asincreased resource mobilization and cost recovery at thelocal level;

(ii) reform of municipal, regional, and central governmentinstitutions to better manage urban growth includingrestructuring of public sector enterprises;

(iii) policies to stimulate private initiatives and investmentsespecially in housing, land development, and urbantransport; and

(iv) urban policies and programs that enable secondary citiesand towns to better support agriculture and ruraldevelopment.

1.03 The subsequent chapters of this report provide: a briefreview of sectoral issues and problems (Chapter II) and an assessment ofthe effectiveness of the Bank's response to sectoral and subsectoralissues and special problems (Chapter III). Lastly, the reportsummarizes the lessons from the past and highlights the challenges forthe future (Chapter IV).

II. SECTORAL ISSUES AND PROBLEMS

A. The Setting

Urbanization Pressures in Developing Countries

2.01 Economic growth is accompanied by a declining share ofagriculture in total output, and employment. This movement out ofagriculture is invariably associated with increasing urbanization andthe ascendant role of cities in the development process. Over the pastthree or four decades, urbanization in the Third World has beendramatic: The urban population increased from less than 300 million in1950 to about 1,250 million today. The population concentration in suchcenters as Mexico City, Sao Paolo and Shanghai have reachedextraordinary levels. This process shows no signs of abating: thisyear, the urban population in developing countries will increase byanother 45 million (as compared to some 8 million in developedcountries); Mexico City alone will add at least another 500,000 people.

2.02 Up to the turn of the century, the cities and towns in thedeveloping world will have to absorb another 700 million people or abouttwo-thirds of the total population increase.1 Consequently, a large--and growing--share of public and private investments will be directed tourban areas to generate employment and to meet a broad range of humanneeds.

2.03 Cities make vital contributions to economic growth. Some 60percent of the gross national product of the developing countries isproduced in urban areas although these areas contain only about one-third of the total population. The growth and specialization of nonagricultural activities are linked to the growth of large urban marketsand subsequently, reinforce the role of cities as incubators of newenterprises, producers, gatherers and distributors of goods andservices. Even if efforts to promote agricultural growth and to removewhatever "urban bias" might exist in macro-economic policies provesuccessful, some eight-tenths of CDP growth will come from urbanareas. As most economic activities increasingly are concentrating inurban centers, it is clear that inefficient and unproductive urbancenters with poor infrastructure create bottlenecks for economicexpansion. For example, it is estimated that as much as 20 percent ofthe initial capital investments by manufacturing plants in Nigeria aremade solely to compensate for inadequate supply of power and water incities. Longer travel time from home to workplace, costly transport ofgoods, uncertain delivery of inputs, lower productivity, higherproduction costs, lack of basic welfare, education, childcare, healthservices, and environmental decay in addition to water and power

1/ Source : United Nations, Urban and Rural PopulationProjections.

1950-2025: The 1984 Assessment (New York, 1986)

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.shortages are among the limiting factors on economic efficiency andhuman resource development.

Macro-Economic Constraints

2.04 Following the second oil shock, the economic environment fordeveloping countries has been characterized by sluggish growth, highinflation, high and volatile nominal and real interest rates, persistentinternal and external budget deficits. Adjustment efforts have focusedon the tradeable goods sector and public expenditures control. Oneresult has been declining investments in housing and urbaninfrastructure in a majority of developing countries. Also, the limitedsupply response of domestic industries to the changed incentivestructure combined with various demand management policies havetypically resulted in declining real wages in urban areas and increasedunemployment. In Sub-Saharan Africa, where the "urban bias" had beenconspicuous during the 1960s and 1970s, recent stabilization andadjustment efforts have largely corrected the policy imbalances. Theimpact on urban incomes has often been dramatic: In Tanzania, farmincomes rose by 5 percent between 1980 and 1984 while urban wage earnersfaced a decline of 50 percent; in Ghana, farm incomes stagnated buturban incomes fell by 40 percent during the same period; in Coted'Ivoire, the ratio of urban to rural incomes fell from 3.5 in 1980 toabout 2 in 1985. It should be noted, however, that the removal of"urban-biases" in macro-economic polici7s appears to have little impacton rural-urban migration. (In Turkey,_ for example, the rate of urbangrowth between 1980 and 1985 was twice the rate recorded for the 1975-80period although urban wages fell more than 30 percent between 1977 and1984.)

2.05 Measured in terms of per capita incomes, quite a number ofdeveloping countries today find themselves back where they were in the1970s and, in some cases, in the 1960s. Unfortunately, economic growthis likely to remain sluggish--probably in the 3 percent range--well intothe 1990s. With the prospects for export led growth limited, the needfor more far reaching restructuring of national economies is compelling.

2.06 In most developing countries housing and urban infrastructureinvestments account for about one-quarter of annual capital formationand close to half the capital stock. It is therefore clear that themanner in which resources are mobilized, how well they are invested andhow efficiently they are utilized will have a major impact on theprospects for adjustment and resumed growth. The adequacy of theseservices will have a major impact on the well being of the urban poorand on the productivity and growth of urban enterprises.

2/ Turkey is one of the rare developing countries wherepopulation censuses are taken every five years and, thus, itis possible to get an early picture of the impact of economicdisruption in the 1980s.

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2.07 The policy response by LDC governments has been mixed. Theyhave generally moved--slowly--in the right direction when it comes tocost recovery and rationalization of subsidies for various urbanservices. However, they have done little to improve the deliverysystems. In the housing area, a number of countries (like Turkey andArgentina) have moved in the wrong direction with the expansion of tax-supported, highly subsidized housing finance systems. These schemesdelay fundamental restructuring of the financial sector, push upinterest rates to other borrowers, directly or indirectly contribute tothe budget deficit and put upward pressure on inflation. For example, arecent study indicated that as much as one-fifth of Colombia'7 inflationrate might be due to inappropriate housing finance policies.- Thisimplies that the Bank's urban sector work and lending operations shouldfocus on policies and programs that support the adjustment effort andthat enable the resumption of growth. Although it will remain importantto ensure that government programs are responsive to the needs of thepoor, the direct provision of shelter and infrastructure services to theurban poor may no longer be the predominant rationale for Bankoperations in the sector.

B. Key Policy Issues

Alleviating the Shortcomings of the Delivery System

2.08 In spite of the progress made with sites-and-services, slumupgrading, low cost transport, water and sanitation projects, the ubanenvironment continues to deteriorate in most developing countries.-The most conspicuous sign that the urban development model of the1970's--which relied heavily on central government finance and publicsector agencies for implementation of isolated projects--hay failed isto be found in the rapid expansion of informal settlements) with poorinfrastructure facilities and dilapidated houses. Other signs are

3/ Source: Correa, Maria: "Consideraciones sobre el regimen deinversiones forzosas del sistema bancasio el impuestoinflacionario (1970-1985)", Ensayos Sobre PoliticaEconomica, June 1986.

4/ Although most middle-income countries managed to provide anincreasing percentage of their urban dwellers with piped waterduring the 1970s, the percentage connected to public systemsfell in virtually all low-income countries. There are directand indirect evidence that the trend was reversed in manymiddle-income countries after 1980.

5/ For example, the number of dwellings located in informalsettlements in Turkey increased from 50,000 in 1950 to aboutone million in 1980; in Morocco, the informal settlements aregrowing two to three times as fast as the overall urbanpopulation. Cities like Ankara, Bogota, Dar es Salaam,Lusaka, Manila, Mexico City and Tunis have between 40 and 70percent of their populations living in informal settlements.

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increasing congestion, air and water pollution and deterioratinginfrastructure. The shortage of investment capital has implied a cutback on new construction and capital intensive provision ofinfrastructure and services. In the same way, deferral of maintenanceexpenditures has caused rapid obsolescence of existing infrastructure,facilities and housing. In short, the rapid urbanization hasoutstripped many--if not most--governments' ability to cope with thedemand for basic urban services. Thus, the structure and role ofgovernments in the urbanization process have to be reassessed and, interalia, more responsibilities have to be delegated to municipalities and anew partnership with the private sector should be sought.

Decentralization Policies

2.09 Local governments--elected or centrally appointed--aregenerally more familiar with and responsive to local needs than centralgovernment agencies. Consequently, they have often been given theresponsibility for the delivery of a broad range of services.Typically, however, their revenue authority is quite limited. Virtuallynever are they permitted to collect income taxes from households orenterprises. Even when they are allowed to collect property taxes, thecentral governments often determine the rates. The revenue sources theycan tap are rarely buoyant. Consequently, local governments cannotconfront demands of urbanization with their own revenues and come todepend heavily on central government transfers. This cycle ofdependency has political as well as fiscal implications, lessening theirauthority over expenditure decisions and reducing self-reliance andcredibility of local administrators.

2.10 Local governments deficits are considerable, especially whenmunicipal and provincial governments deficits are combined, oftenexceeding the deficit of public enterprises. In many LDC's., suchdeficits amount to 5 percent of CDP. The absorption of subnationalgovernment deficits is a heavy burden on national accounts. Evenmarginal reductions would have a significant impact on the centralgovernments' budget deficits. Since local taxes and charges can be moredirectly linked to the services supplied, there is a significant scopefor a stronger resource mobilization effort at the municipal level.

2.11 Local authorities are usually weak. Their poorly paiduntrained personnel labors against impossible odds of a growingmanagement task. Strengthening local governments in LDC'S requires morethan external technical assistance; it also requires greater fiscalautonomy and greater authority of decision over expenditurepriorities. There is a trend in a number of developing countriestowards administrative decentralization (Turkey is probably the countrythat has undertaken the most drastic reform in recent years). However,little devolution of fiscal responsibility is taking place, in spite ofconsiderable talk about its desirability.

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2.12 Experience indicates that successful decentralization andstrengthening of local governments require action on four differentfronts: make automatic transfers based on objective criteria ratherthan ad-hoc political/administrative decisions; make additionalinvestment resources available to municipalities through a municipaldevelopment bank (or similar institution); increase the autonomy oflocal governments in raising tax revenues; introduce systematic trainingprograms for municipal staff in parallel with the expansion of theirfunctions and give local governments greater autonomy in salary andpersonnel matters.

Public versus Private Service Provision

2.13 The regulatory framework tends to be protectionistic in favorof public agencies enforcing politically established monopolies andcreating a pattern of lengthy bureaucratic intermediation whichdiscourages private enterprises from building appropriate housing andproviding various public services. Urban transport and garbagecollection are good illustrations of such limitations of the privatesector role. There are some movement towards liberalization of laws andregulations that have protected the monopolies of public enterprises andagencies in the urban sector. Such reforms are usually done forpragmatic reasons, i.e., to reduce the burden on the government budgetand alleviate capital subsidies to the enterprises. This was, forexample, the reason why private buses were allowed to operate in NewDelhi in 1985. The response by the private sector in this case (as inmost others) was quick and today some 2,000 private buses are inoperation. Although there are numerous examples of successfulliberalization, the scope for reform is immense. It should be noted,however, that given the special nature of housing and urban services, asimplistic approach to "privatization" can lead to undesirable socialand economic consequences, i.e., monopoly profits and excessive costs toconsumers or reduced service levels.

The Informal Sector

2.14 Laws, codes and regulations defining the property rights forland and shelter, the rights to engage in production, commerce orservices, the rights to form trade associations, etc., are, with fewexceptions, cumbersome, overlapping and discriminatory. Thus, much ofthe regulatory framework goes against the economic interests of a 6/majority of urban dwellers. In the words of Hardoy and Satterthwaite-."Many Third World governments still try to plan and build cities forsocieties which only exist in the minds of technocrats and politicians."

6/ J. Hardoy and D. Satterthwaite: "The Legal and the IllegalCity" in Shelter, Settlement & Development by Lloyd Rodwin,editor, 1987.

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2.15 It is conventional to divide housing into three categories: agovernment sector; a formal private sector developing "modern" standardhousing; and a sector of small producers often called "self-help" or"informal". The public agencies usually have the odds stacked in theirfavor. They have relatively easy access to cheap and titled land andthey tend to get preferential treatment by public utilities agencies.They can often bypass official zoning regulations and building codes.Even when they are supposed to at least break-even, their accountingmethods tend to hide large implicit subsidies. The results of thesebiases and the high implicit cost associated with excessive regulationshave forced the private sector to operate "underground". For example,in the Indian State of Tamil Nadu it is illegal for the private sectorto try to duplicate the highly successful sites-and-services schemessupported by the Bank.

2.16 The informal sector has traditionally been described in rathersimple terms: low-income households occupying a small piece of land towhich they have no legal claim and building, mostly through their ownefforts, simple houses in an incremental fashion. However, recentstudies in Bangkok, Bogota, Cairo, Manila and othe7 cities indicate thatthe informal housing market is extremely complex.7 De facto propertyrights exist along a continuum ranging from illegal occupation to titledsettlement. Legal title--conveying full ownership rights--is not aprecondition for real estate dealings; a claim to land, however clouded,can be sold on its merits, and those who invade one day may sell theirstaked plot to a late comer the next day. Not only is land sold, butalso dwellings are sold or rented with great frequency. The buildersrange from firms using the latest construction technology to erectmulti-story apartment buildings, to self-employed artisans directing agang of laborers and using no equipment, to households putting togethershacks with temporary materials.

2.17 The unplanned nature of these settlements makes the provisionof basic infrastructure more expensive and the cost recovery for urbanservices more difficult. The extra legal status of the propertiesusually precludes the use of formal sector finance and clouded titlesand lack of amenities reduce the incentives to save and invest inhousing. The adoption of more realistic legal and regulatory frameworkswould have a salutary impact not only on the broad masses of urbandwellers but also on public finances and long term economic growth.

Improving Public Sector Resource Mobilization

2.18 Because the responsibilities for investments are dividedbetween a number of central ministries, public sector agencies,parastatal enterprises and provincial and municipal governments, little

7/ See, for example, Lisa Peattie, "Shelter, development and thepoor in Shelter, Settlement & Development by Lloyd Rodwin,editor, 1987.

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reliable data exist on the magnitude of aggregate urban infrastructureinvestments. However, based on piecemeal evidence it appears that inmiddle-income countries, urban infrastructure might account for aboutone-fifth of public investments. Given the present imperative to reducethe budget deficit, many governments are reducing urban infrastructureinvestments. More constructive, however, are some of the responsesdiscussed above like expanding the role of the private sector,decentralization of the responsibilities for service delivery to localgovernments, reductions in design standards and a greater emphasis onlow-cost solutions. Emphasis on rehabilitation rather than newconstruction as well as operation and maintenance of existing servicesare new policy choices that contribute to the improvement of resourcemobilization.

2.19 The most important changes, however, have to be made on therevenue side. The level of cost recovery for urban services tend to below due to inefficiencies in collection, excessive exemptions, delayedor delinquent payments, inflation or general lack of civic compliance.These administrative shortcomings are frequently aggravated byinadequate pricing policies and adoption of interest rates far below theactual cost of funds. Most water supply companies, for example, recoverlittle more than their operating costs. Those benefiting from sewerageinvestments and drainage improvements rarely pay directly for thefacilities. Public transport companies are usually money loosers. (Forexample, the Cairo Transport Authority was loosing US$1.5 million a weekin 1986). The largest subsidies, however, are usually associated withpublic housing agencies and housing finance institutions. It isestimated, for example, that the direct and indirect housing subsidiesin Poland amounts to 5 percent of GNP.

Prioritizing Investments and Targetting Resource Allocation

2.20 In an environment of resources constraints, the followingsubsectors call for sustained and improved intervention:

Land. With continuing urban migration and increasing rate ofurbanization, the stock of public land and the ability of thepublic sector to develop it have become limited, giving way tosprawl of informal squatter settlements. Land developmentconstraints and land tenure have been ignored for too long andrequire creative solutions at an early stage of thedevelopment process.

Housing. As previously stated, the housing subsector has beendirectly affected by the economic crisis. The recognition ofits interconnection with the rest of the financial markets isbound to increase its contribution to resource mobilizationand financial development.

Transport, solid waste management, water supply and sanitationremain the necessary conditions for good functioning of

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cities. Distribution of responsibilities between the publicand the private sector and the adoption of sound pricingpolicies are essential.

2.21 In period of policy reform or economic difficulty, protectingthe welfare of the poorest people remains an important policy issue.Implicit in the adjustment process is an increase in savings andinvestment rates and the reduction or elimination of counter-productivesubsidies. Although this process, hopefully, will improve incomedistribution in the longer run, it clearly has a negative effect on thereal income of consumers and those who had been recipients of explicitor implicit subsidies prior to the reforms. This means that policiesaimed at increasing employment are essential for the politicalacceptance of adjustment programs. In the urban sector, the poorest ofthe poor are often female-headed households whose economic contributioncould be considerably enhanced by the adoption of targetted humanresource development programs and employment policies.

2.22 The third chapter of this report will examine the way in whichthe World Bank has been addressing the sectoral and subsectoral issuesin its operations.

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III. THE EFFECTIVENESS OF BANK OPERATIONS

A. The Response to Sectoral Issues

Shift in Focus

3.01 In line with changing economic conditions and growing need foradjustment programs, the World Bank's urban agenda is increasinglyseeking closer links between traditional urban concerns and themacroeconomic investment and policy framework. The shift has beenaccompanied by a move away from sporadic interventions to encompassbroader issues of greater impact for the national economies and theproductivity of cities. Lending operations, sector work and theassociated policy discussions emphasize:

(i) rationalization of public expenditure programs andstrengthening of the mechanisms for transfers tomunicipalities as well as resource mobilization and costrecovery at the local level;

(ii) reform of municipal, regional, and central governmentinstitutions including restructuring of public sectorenterprises;

(iii) policies to stimulate private initiatives and investments,especially in housing, land development, and urbantransport; and

(iv) urban policies and investment programs that enable secondarycities to better support agriculture and rural development(i.e., without resorting to costly and ineffectiveindustrial location policies or regional developmentprograms).

3.02 Special attention is consequently placed on institutional andregulatory bottlenecks at the national level. This implies expandedsupport for nation-wide programs and financing mechanisms. Such a trendis translated by the introduction and strengthening of financialintermediaries, such as housing finance institutions, and sub-sectoralAPEX organizations that can effectively reach a large number ofmunicipalities and local agencies. Similarly, the geographic sphere ofinfluence of more traditional projects tends to move beyond theneighborhood level focus that has characterized many past investmentprojects. A new city-wide approach is emerging, which implies a greaterconcern for urban management in the broadest sense as well as for theeffectiveness of central and local institutions and their contributionsto the urban economy.

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Intensified Policy and Research Work

3.03 In support of this shift in Bank operations, research andpolicy programs are focusing on the development of urban policies formacroeconomic adjustment and resumption of growth. Four key macro-urbanlinkages have been identified which are tied to the decision-makingstructure and the direct channeling of investment programs. Thesepriority areas include (i) the financing of housing and its ties to thefinancial markets; (ii) municipal finance and its links with governmentbudget; (iii) the functioning of land and housing markets and theirimpact on private savings, investments; and (iv) urban infrastructureprovision and location inducements and their impact on the productivityof manufacturing and service enterprises. Operation and maintenance ofurban infrastructure is another area of concern in which the Bank isintervening along with a major UNDP sponsored research effort undertakenby Habitat.

Expanded Lending Program

3.04 Each year the developing countries invest more than US$100billion (and perhaps as much as US$150 billion) in basic urbaninfrastructure and shelter. During the second half of the 1970s and thefirst half of the 1980s, the Bank's annual lending for water and urbandevelopment averaged US$0.8 billion and US$1.1 billion, respectively.Although the Bank's lending was quite miniscule compared with the urbaninvestment needs, the Bank had a major influence on the agenda for urbanand shelter investments in developing countries. Increasingly, thesecountries adopted low-cost design standards ("affordability") and costrecovery policies ("replicability") advocated by the Bank. However, theimpact of isolated projects--that often did not fit into existingadministrative structures--was rather limited: the number ofbeneficiaries was small compared to the large masses of urban poor andthe institution building efforts were too fragmented. With the broaderapproach described above (paras. 3.01-3.02) the stage was set for alarge expansion of urban and water lending (see Table 1).

Table 1: Recent Trends in Annual Water and Urban Lending

FY84 FY85 FY86 FY87Sub-Sector (---------------US$ million---------------)

Urban 500 385 1,565 /a 1,324

Water and Sanitation 641 781 580 1,114 /b

Total 1,141 1,166 2,145 /a 2,438 /b

/a Includes a US$400 million emergency reconstruction loan toMexico.

/b Includes a US$10 million emergency reconstruction loan toMadagascar.

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3.05 The combined lending amount has dramatically increased inFY87: The approved urban lending has almost tripled since FY83 and FY84and its share in the total Bank lending program, after reaching a peakof 9.4% in FY86, has stabilized around 8% in FY87. Similarly, the WaterSupply and Sanitation lending amount reached a new peak in FY87 with theapproval of several large projects such as the US$250 million AlgeriaSecond National Water Supply and Sanitation Project and the US$185million Third Bombay WSS Project and the share of the water supplysector in the total Bank lending has subsequently increased to 6% of thetotal lending amount and the total number of projects.

3.06 During FY87, thirteen urban projects, with a total cost ofUS$4,695 million, were approved for funding support by the World Bankgroup. The Bank's US$1,324.1 million share for these projectsrepresented 28% of the estimated total project costs. The funds areexpected to be disbursed over the next five to seven years through oneIDA credit (US$4.5 million Conakry Urban Development Supplemental Creditin Guinea) and eleven IBRD loans totalling US$1,169.6 million. Oneblend project (US$150 million Uttar Pradesh Urban Development Project)complements the FY87 urban profile. The average size of urban projectshas also increased over the years, reaching US$361 million in FY87 withan average loan/credit amount of US$101 million.

3.07 During FY87, seventeen water supply and sanitation projects,with a total cost of US$2,462 million, were approved for funding supportby the World Bank group. The Bank's US$1,114.4 million share for theseprojects represented 45% of the estimated total project costs. Thefunds are scheduled to be disbursed over the next four to six yearsthrough seven IDA credits totalling US$97.4 million, seven IBRD loanstotalling US$618.0 million and three blend projects totalling US$399.0million. The average size of water and sanitation projects was US$145million with an average loan/credit amount of US$65.6 million.

New Lending Instruments

3.08. A review of the 30 projects approved in FY87 shows the on-going shift towards operations with high policy content and broad impacton national institutions and programs: the FY87 program included foursector investment loans, two sub-sector loans that supported financialintermediaries including significant policy reforms, five projects thatsupported large national investment programs and reform of nationalagencies. Two projects were aimed at comprehensive policy andinstitutional reforms at the municipal level. There were 16 specificinvestment projects and one supplementary emergency credit (US$10million to Madagascar).

3.09 The Indonesia Urban Sector Development Project (US$270million) helped finance a two-year timeslice of the government's urbansector expenditure program. It supported a substantial acceleration ofsignificant sector reforms (that in turn grew out of extensive policy

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dialogue between the Bank and the government supported by sector workand a long series of urban projects). These reforms are aimed atdeveloping local governments' managerial and financial capabilities,rationalization of resource allocation to municipalities and reducingthe central government's share of urban infrastructure financing. TheNational Water Supply Rehabilitation Project in Morocco (US$60 million)supported policy reforms and sector adjustment measures, includingrestructuring of the national water agency and sixteen public watersupply enterprises. The Second National Water Supply and SewerageProject in Algeria (US$250 million) and the Uttar Pradesh UrbanDevelopment Project in India (US$150 million) supported a range ofpolicy and institutional strengthening efforts.

3.10 The Housing Finance Sector Loan in Korea (US$150 million)supported major reforms of the country's housing finance system toincrease its effectiveness in stimulating the supply of housingespecially for low-income groups. Besides physical components, theThird Urban Development Project in Cote de Ivoire (US$126 million)established a refinancing facility for housing loans provided bycommercial banks and, thus, encouraged a major shift towards the privatesector in the provision of housing finance.

3.11 Strengthening housing finance mechanisms and other agencieswith a nationwide mandate were also important objectives in threeshelter projects: the National Urban Development Project in Jordan(US$26 million), the Third Urban Development Project in Thailand (US$21million), the Fourth Urban Develoment Project in Tunisia (US$30million). The Fourth Urban Transport Project in Brazil (US$200 million)helped finance improvements in the country's nine largest cities andstrengthen financial aspects of national urban transport policies andinstitutional capabilities. The Second Water Supply Project in Rwanda(US$15 million) had as its primary objectives to improve cost recoveryand to increase the responsibilities and capabilities of localcommunities in the maintenance of rural water supply facilities.

3.12 The Pusan Urban Development Project in Korea (US$50 million)and Cukurova Urban Development Project in Turkey (US$120 million) aimedat major institutional and policy reforms at the municipal level.During the preparation phase, the Cukurova Project was also instrumentalin changing the basic national legislation guiding the financialmanagement and cost recovery policies of municipalities.

3.13 The 16 loans and credits for more traditional investmentprojects amounted to US$960 million or some 39 percent of total urbanand water lending. Given the lumpy nature of many water and sanitationinvestments, it is not surprising that 13 out of the 17 projects in thissubsector was for specific investment projects. As usual these projectsfocused on the technical, financial and economic viability of theinvestment and on the policies and capabilities of the implementingagency. The Shanghai Sewerage Project in China (US$145 million) had arelatively broad institutional focus, encompassing organizational,

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financial, technical and legislative matters for the management ofliquid wastes and for environmental protection. The Izmir Water Supplyand Sewerage Project in Turkey (US$184 million) supported the creationof an autonomous water agency and the introduction of appropriateindustrial waste-treatment policies and practices.

Regional Responsiveness

3.14 The differentiated responsiveness of the Bank's operations tourban and water supply problems in various part of the world can only befully assessed through a detailed analysis of the evolution ofindividual country programs. However, even a simpler analysis ofpatterns and time trends reveal that--possibly with a few exceptions--the Bank's lending is responsive to country needs.

Table 2: Long Term Trends in Water and Urban Lending

East West East South Latin TotalAfrica Africa Asia Asia EMENA America Bank

(As Percent of Total Regional Lending)

Water Lending

FY76 - 80 5.5 7.0 4.7 6.0 6.2 7.2 6.1FY81 - 85 3.9 5.5 2.9 1.2 8.8 6.1 4.6FY86 - 87 3.2 0.6 5.2 4.8 12.6 2.2 5.0

Urban Lending

FY76 - 80 3.0 3.1 4.2 2.2 0.5 4.6 2.9FY81 - 85 3.0 2.8 3.7 2.5 2.7 4.8 3.4FY86 - 87 0.5 11.5 14.0 3.5 4.0 7.3* 7.3

* Excludes the emergency loan to Mexico (US$400 million in FY86) forreconstruction of the earthquake.

3.15 In terms of time trends, it is apparent that lending for watersupply and sanitation has continued its downward trends in East and WestAfrica and in Latin America (See Table 2). Both urban and ruralpopulations in Latin America are relatively well served with water andsanitation facilities and the level of service has, in aggregate terms,improved over the last decade. Water supply institutions in the Regionare also relatively strong. The situation in Sub-Saharan Africa es justthe opposite: service levels are low and appears to be declining8 andinstitutions providing water are weak. Since both the urban and rural

8/ Sources: The International Drinking Water Supply andSanitation Decade: Review of Mid-Decade Progress, WHO, 1987,and Global Report on Human Settlements, 1986, UNCHS (Habitat),1987.

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populations in the Region are growing rapidly, the small and decliningamount of water supply lending is a matter of concern.

3.16 In Asia, it appears that the downward trend in water andsanitation lending has been reversed. In the EMENA region, water andsanitation lending has continued to expand both in total amount and asshare of regional lending. During the last two years, EMENA hasaccounted for 40 percent of total Bank lending for the sector. EMENA'swater resources are relatively scarce and it is quite reasonable thatthe Region's lending for water exceeds the levels recorded for othermiddle-income regions.

Table 3: Urban Growth and Regional Lend(Average FY86-87)

East West East South latin TotalAfrica Africa Asia Asia EDEA America Bank

Annual Urban PopulationGrowth 1987 (million) 3.5 3.2 12.0 12.4 4.1 8.9 44.1

Growth Rate of UrbanPopulation (%) 6.7 5.7 3.4 4.4 3.6 3.4 3.9

Average Annual Lendirg(US$ million)

Water & Sanitation 32 8 179 181 340 107k 847*Urban 4 142 483 148 108 360 1,245

Total 36 150 662 329 448 467 2,092*

Water and Urbanlending per New Urban * *Dweller (US$) 10 47 55 27 109 52 47

* Excludes the emergency loan to Mexico (US$400 million in FY86) forreconstruction after the earthquake.

3.17 Urban lending has continued its upward trend in all regionsexcept East Africa. Most noteworthy are the rapid expansion in lendingin West Africa and East Asia that has occurred in the last two years.In East Africa, only one urban project has been approved over the lasttwo years and that project (US$7.6 million) provided technicalassistance for economic diversification in a small mining town (Selebi-Phikwe with 30,000 people) in Botswana. East Africa's urban populationis growing by 3.5 million people a year (See Table 3), a figure which ishigher than the growth experienced in West Africa (3.2 million) and

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close to the increment observed in EMENA (4.1 million). In part, thelow and declining lending in East Africa was a result of the limitedsuccess of earlier urban interventions; but more so, it reflected anearlier Bank strategy of using rural development as engine of growth.However, extensive sector work carried out primarily during FY85 andFY86 has demonstrated that cities and towns should play an importantsupport role in an agriculture-led development strategy. Thus, projectpreparation efforts have been stepped up and it is likely that urbanlending--focusing on construction of basic urban infrastructure andstrengthening of local governments rather than sites and services--willexpand significantly in Eastern and Southern Africa over the mediumterm.

B. Response to Sub-sectoral Issues

Land Management

3.18 Throughout the developing world, land is being developed muchmore slowly than the required rate, leaving increasing numbers ofbusinesses and households with no alternative but informal (or illegal)settlement on inadequately serviced land. Although this is in part aresult of inadequate resource allocations for infrastructure and poorinteragency coordination, much of the problem stem from poor managementof the most essential urban resource, namely land. Land managementconsists of a number of separate but related measures for assuring thatan adequate supply of developed land is available to both the privateand public sectors and that this land is put to its most productive usefrom both an economic and social point of view. These measures includea legal framework that ensures that land can be easily bought and sold,a system of procedures and regulations to ensure the development of landat affordable cost, and land taxation measures to promote efficiency andequity in land use.

3.19 A land registration system must also be in a place whichensures that land ownership can easily be identified and transferred andthat property taxes can be assessed and collected. In many countries,land management problems are aggravated by divergences between modern(based on legal concepts) and popular perceptions of land rights whichare rooted in religion and tradition. In urban areas, the problemsmanifest themselves not only in expanding informal settlements but alsoin land speculation, inefficient spatial patterns, and excessive costsof urbanization. In rural areas, the problems are related to excessiveland fragmentation and low agricultural productivity. It should benoted that an estimated 40 percent of all Bank supported projects sufferfrom delays in land acquisition and land tenure problems.

3.20 Land management elements have formed part of sites and servicesand upgrading projects since 1973, especially granting secure tenure toproject beneficiaries and institutional strengthening of land relatedagencies. Over the last five years, the Bank has gradually broadenedits approach to land issues although few concrete results have come outso far. Components in a few on-going projects address tenureregularization and land registration (Brazil, Thailand), and property

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taxation system improvements on a city or nation-wide basis (Indonesia,YAR). A few projects also address the need for detailed basemaps forland use planning (especially in Indonesia). Two operations are underpreparation in Cameroon and Tunisia which are aimed at significantrestructuring of the system for legal and fiscal cadastres. However,because of the politically sensitive nature of land tenure, thepreparation and appraisal have suffered major delays. A number ofoperations including components dealing primarily with fiscal cadastres(and resource mobilization at the municipal level) are in the pipeline.

3.21 Although sector work in FY87 has not focused on land issues perse, land management issues are increasingly given prominence inhousing/housing finance studies and in municipal finance studies. Landmanagement has been identified as a major bottleneck in India andBotswana where non financial constraints such as land managementpolicies and land tenure traditions limit the supply of developableurban land. During FY87, the EMENA Region has sponsored a symposium onland management issues for senior government officials, private sectordevelopers and researchers.

3.22 Changes in land management policies involve a great array ofreligions, cultural, political, legal and institutional tasks. Thecomplex interaction between these factors is little understood. Thus,to enhance our knowledge about these problems and to provide guidance toBank staff, a major research program dealing with urban land issues wasinitiated in FY87 with UNDP financing. It is jointly undertaken by theBank and UNCHS (Habitat).

Housing and Shelter Financing

3.23 The shift from self-contained low income sites andservices/slum upgrading projects to sector level operations continues.This shift reflects an increasing understanding within the Bank of thepotential contribution that housing can make to domestic resourcemobilization and financial d v/elopment while at the same time meetingessential social objectives

3.24 This new outlook (which started in FY83 with the first housingloan to Credit Immobilier in Morocco and was followed by eight projects)has led to several types of subsectoral interventions in FY87: TheUS$150 million Housing Finance Sector Loan to Korea is intended toprovide a policy statement and program of actions to be adopted by thegovernment on the future directions of the housing finance system. Thepolicy statement expresses the intention of the government to expand thesystem on the basis of market principles, to target the social housingprograms, and to stimulate an increase in the construction of low-incomehousing. The major challenge remains therefore to increase the source

9/ See, for example, Robert Buckley and Steve Mayo: HousingPolicy in Developing Countries, Evaluating the Macro-EconomicImpact, INU Discussion Paper (forthcoming).

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and volume of long-term funds available for mortgage lending byimproving household savings mobilization, rationalizing the existingdeposit and savings schemes, improving the regulatory system,encouraging the creation of suitable financial instruments and theinvolvement of new institutions.

3.25 Parts of this action program are relevant to two other FY87projects: the Third Shelter Project in Thailand whose objectives are toincrease the National Housing Authority's reliance on domesticallymobilized resources and the Third Urban Development Project in the IvoryCoast which includes the creation of a new housing finance facility aswell as a pilot project to stimulate access of the informal sector tocommercial credit with assistance from non-governmental organizations.

3.26 FY87 sector work on housing finance has been abundant with thepreparation of five studies in India, Pakistan, Turkey, Bostwana, andArgentina. In spite of fairly rapid economic growth in recent years,India has been experiencing a fall in housing investments. One of themajor constraints is the limited housing finance system which providesfinancing for less than 20% of housing investments. Past strategieshave depended heavily on direct investment by public sector agencies,especially HUDCO. Some piecemeal movements toward more market-orientedcredit allocation have started. (This policy shift will be givengreater focus and strength under the recently negotiated FY88 loan tothe private sector Housing Finance Development Corporation.)Recommendations include steps to address existing resource mobilizationconstraints as well as non financial constraints such as rent controland land management policies. In Pakistan, the issues are similar:formal housing finance institutions provide limited financing for lessthan 20% of the new urban housing requirements, the largest providerbeing the House Building Finance Corporation, a government corporationwhose returns are far below market rates. HBFC's lending criteria andprocedures are such that many low and moderate income householdscontinue to depend on household savings, high cost informal borrowingand asset liquidation to finance their housing. Strategy in Pakistaninvolves the introduction of market-oriented lending instruments as wellas a review of HBFC's lending practices. In Botswana, 70% of the urbanpopulation is in government-initiated housing programs. Currently,institutional arrangements, legislative constraints and governmentattitudes exclude the private sector participation in either theexpansion of the urban areas of Botswana or in the supply of housing.The sector study addresses the issue.

3.27 In Turkey, beyond the ineffective performance of the Emlak Bank(the public sector housing bank) as a financial intermediary, the majorchallenge addressed in the sector study remains the macro climate ofhigh inflation and high real interest rates, to which the tax-financedMass Housing Fund is contributing. In Argentina, the impact of theeconomic crisis has been felt very strongly in the housing system aswell as other social sectors. The principal challenge of housing policyreforms is to transform FONAVI--the wage tax financed housing fund--froma quasi current expenditure item in the budget into a sustainableinvestment fund that can rely on mortgage repayments for a major share

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of its new lending. The work in both Turkey and Argentina illustrateshow inappropriately designed housing finance systems can work counter tomacro-economic adjustment and stabilization objectives.

Urban Transport

3.28 The huge population growth that has characterized developingcities in the world has been accompanied by a substantial expansion ofcity boundaries and much higher levels of industrial and commercialactivity. With the new and heavy demands that rapid urban expansionplaces on transport networks, and the recognition that an effectivetransport system does help to maximize the economic efficiency of anycity, greater efforts to deal with the problems of moving people andgoods have been undertaken.

3.29 FY87 has been characterized by a very substantial increase inlending for urban transport and a trend toward sector and subsectorloans with the approval of three urban transport projects. A commonfeature of these projects is the massive number of low incomebeneficiaries, running into several millions in each project. Withinthe conceptual framework of financial and economic viability and systemefficiency, the major issues addressed are: (i) the strengthening ofurban transport institutions; (ii) the adoption of low cost solutionsincluding demand management, traffic management, road improvements andmaintenance; (iii) the provision of access and priority for publictransport users; (iv) the improvement of public transport, and (v) thegreater participation of the private sector in the provision oftransport services and facilities.

3.30 Accordingly, the US$200 million Fourth Urban Transport Projectin Brazil focuses on the improvement of the operating efficiency of theurban transport systems in the nine metropolitan regions through savingsin transport costs and time as well as their financial viability. InIndonesia, the US$51 million Regional Cities Transport Project approvedin FY87 seeks to implement a high priority program of infrastructureimprovement measures aimed at relieving traffic congestion and promotingtransport efficiency. The project also includes strengthening of citygovernment's capabilities to plan, implement, and maintain transportservices as well as enhancing of central government's capability todefine national policies. In Mexico, the US$125 million First UrbanTransport Project supports a system management approach to urbantransport in the states of Mexico and Nuevo Leon which emphasizesimprovement of accessibility and quality of services, operationalefficiency of public transport and involvement of the private sector.Additional US$49 million have been allocated to urban transportcomponents in the context of urban development projects such as theIvory Coast Urban III (35% of total loan amount) or the Conakry UrbanSupplemental Credit in Guinea (20% of total loan amount).

Decentralization and Local Government Management

3.31 The need for urban infrastructure and services is growingrapidly but most governments face serious budgetary constraints. Thus,

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there is a need to improve cost-recovery and resource mobilization atthe local level, to rationalize central-local government relationshipsand find better ways to finance municipal investments. Such issues havebecome central themes of a growing number of urban projects. Amongthem, the best illustrations are the following: The US$50 million PusanUrban Management Project in Korea supports a city-wide program ofinstitutional and policy development. Measures are introduced toconsolidate the financial planning of all investments and to strengthenthe performance monitoring system. It is likely that this approach willserve as a model for future Bank interventions in large cities,replacing earlier multi-component urban management project thattypically have had limited impact and encountered serious implementationproblems. In Indonesia, the US$270 million Urban Sector Loan supports asubstantial acceleration of significant sector reforms already initiatedby the government of Indonesia and aiming at developing local governmentcapabilities to mobilize resources and at reducing central government'sshare of urban infrastructure financing. In Turkey, The Cukurova UrbanDevelopment Project supports the government's decentralization strategythrough selective interventions in five medium sized cities in theCukurova region of Southern Turkey. The project will assist the fivemunicipalities in directing urban growth and catching up on urbandeficiencies through infrastructure investments.

3.32 Sector work activities have also been abundant in providinggroundwork for future projects on the issue: In Tunisia and Morocco, anactive decentralization policy has started more than a decade ago withthe objective of reducing regional disparities and lessening theadministrative bottlenecks at the central level. In spite of manyefforts, the municipalities remain tightly controlled by higherauthorities and continue to receive a large part of their funds fromtransfers or grants from the central government (in Tunisia, 50% ofrevenues are supplied by transfers from the central government). Inboth countries, the central governments have recently decided to takeimportant steps such as to increase local government resources throughthe reform of the local taxation system. The sector study has thereforecontributed to develop recommendations as to achieve these objectives inthe most efficient way. The creation of municipal development banks arekey elements pursued in the Bank's Moroccan and Tunisian assistancestrategies.

3.33 In Colombia, where the decentralization policy has continued toprosper with the passing of Law 12 in 1986, recommendations include thepromotion of use by municipalities of credit-based investment financingto replace the grants no longer available. In Indonesia, where apervasive lack of accountability seems to characterize regionalfinancial management, recommendations include the improvement ofallocation and utilization of government grants, the improvement ofproperty valuation and tax administration, the improvement of regionalgovernment borrowings through a consolidated and reliable source of loanfinancing for local governments. Most of these recommendations providedthe basis for the Urban Development Sector Loan. Finally, China hasalso been the subject of a sector study which led to the analysis ofcentral-local relationships. Among the recommendations, the

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introduction of a multi-year budget planning and the creation of amunicipal lending authority are the most noteworthy.

Water Supply and Sanitation

3.34 Project work included the approval of seventeen WSS projectsduring FY87. The underlying common challenge of these seventeenprojects is to help countries develop and introduce sound financialpolicies, autonomous institutions and modern administrative procedureswithin a context of political and economic constraints. Existingservices are being rehabilitated and extended in major urban centers andmetropolitan areas such as Greater Casablanca, Dhaka, Madras, GreaterAden, Lilongwe, Bombay, Izmir. Rural areas, in some cases, benefit fromthese improvements: the Second Water Supply Project in Rwanda aims atimproving the quality and quantity of water provided to the ruralpopulation through the rehabilitation of rural acqueducts in the Lavaregion and the establishment of a national program--relying on localcommunity--for the operation and maintenance of rural water systemsthroughout the country.

3.35 Nationwide projects are worth stressing: the National WaterSupply Rehabilitation Project provides the least cost solution torehabilitate water supply systems in Morocco. In Algeria, the SecondNational WSS Project includes four regional subprojects and expansion ofthe water supply distribution networks of all thirteen regionalcompanies. Strengthening of financial management continues to be amajor objective. The Izmir WSS project in Turkey is illustrative ofproject emphasis of financial policies through the establishment ofappropriate cost recovery policies. Similarly, the Second Guayaquil andGuayas Province Water Supply project in Ecuador is aiming at improvingthe financial performance of the municipal water supply authority. TheThird Bombay WSS Project is strengthening the Bombay MunicipalCorporation's revenues collection methods, financial planning and auditcontrols. The same approach applies to the Madras WSS Board through theMadras WSS project.

3.36 Operational efficiency of water supply systems is becomingincreasingly important in the Bank's operations. All projects includeoperation and maintenance features involving training of manpower,reduction of unaccounted for water and leak detection. The Third DhakaWSS Project, for example, includes the implementation of a large scaleleak detection program to reduce leakage and unaccounted for water aswell as the installation of a computer system for commercial managementand monitoring of operations.

3.37 Although a greater percentage of urban dwellers slowly arebeing connected to sewerage systems, the number of unconnectedhouseholds is increasing rapidly. Perhaps only one quarter of allsewage is treated before it is released into rivers, lakes and seas.Continued growth of untreated industrial waste releases are endangeringhealth and environment. Increasingly, the Bank's operations are dealingwith these problems. Seven of the projects in the sub-sector includedmajor sanitation components and two projects (in Casablanca and

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Shanghai) were only dealing with sanitation. The Shanghai SewerageProject had a broad institutional focus, encompassing organizational,financial, technical and legislative matters for the management ofliquid waste and environmental protection. The Izmir Water Supply andSewerage Project also dealt with industrial waste-treatment policies.

3.38 Sector work on water supply and sanitation has been mostextensive in the Latin American countries. In all countries, thecontext is the same: grants or soft loans provided by the centralgovernment, little if any cost recovery, fragmented institutional set-up, deficient operations and maintenance. In Guatemala, Chile, Ecuadorand Argentina, the Bank recommends the prompt reform of presentfinancial tariff and commercial policies and the full cost recovery ofinvestments and operating costs based on metered consumption and moderncommercial policies. Similar issues of resource management improvement,institutional capability improvement and optimization of existing watersources and uses have been dealt with in sector studies in Syria andTurkey. In Nigeria, a rural sector study has been conducted afterrecommendations made in a 1984 report. In recent years, several stateshave made large investments in piped water supply systems for urban andsemi-urban areas. Efforts need to be made in rural areas and financingis one but many issues that are constraining sector development. Alsoin Nigeria, a study of the Gongola state has provided the first statewide approach in the WSS sector which deals with rehabilitation ofexisting WSS systems, improvement of operation and maintenance,establishment of commercial accounting systems and improvement ofbilling and collection systems as well as design of suitable tariffstructure.

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IV. LESSONS FROM THE PAST, CHALLENGES FOR THE FUTURE

A. Emerging Trends from the Current Lending Program

4.01 The review of the 30 projects approved during FY87 suggests theemergence of new and interesting features which are worth stressing.They can be summarized as follows:

- The shift towards operations with broad impact on nationalinstitutions and programs continues with correspondingincreases in project size (to US$240 million) andloan/credit amount (to US$81 million) and number ofbeneficiaries.

- The Bank's sub-sectoral interventions in many largecountries are becoming more balanced; for example, the Bankmade its first entry into the urban transport sector in twocountries: Indonesia and Mexico.

- Greater involvement of the private sector has been a majorobjective in operations such as Korea Housing FinanceProject, Cote d'Ivoire Urban III Project and the two urbantransport projects in Mexico and Brazil.

- Improved operation and management of water supply productionand distribution systems have been identified as acontinuing trend of the water supply lending program, asillustrated in countries such as Algeria, Morocco, Rwandaand Ecuador.

- More than one third of the new projects have been found toaddress sector wide policy issues. Among the policies mostcommonly reinforced, the clarification of appropriate rolesof central and local government as well as specific sub-sectoral agencies ranks the highest. The improvement ofnational tariff policies has also been identified in onethird of the projects approved in FY87. Other crucialpolicy reforms related to municipal finance or land tenurehave been influenced to a much lesser extent by a morelimited number of projects.

- Two-thirds of the projects were reported to place a strongemphasis on resource mobilization measures, exploring costrecovery potentials as well as long term perspective forimprovement of local resources.

- Half of the projects have placed emphasis on low-costtechnologies as well as systematic preventive maintenance.

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B. Lessons from Completed Projects

4.02 Significant lessons can be learned from completed projects. InFY87, 38 were completed. The projects were identified, appraised,approved and implemented during the period FY73 through FY84. On thewhole, the water and urban development projects suffered from the sameproblems as projects in other sectors. However, there are a few lessonsthat deserve special attention.

- Project Complexity. The design of many of the urbandevelopment projects reflected an unrealistic optimism thatnewly created project units and other project institutionscould be promptly established and be functional in the shortterm. Projects were accordingly designed with too manycomponents, requiring coordinated action by too manyinstitutions attempting to accomplish a large number ofambitious objectives. The average urban development projectcompleted in FY87 has an ambitious 8.6 primary objectives--as opposed to 4.6 primary objectives for water andsanitation projects. It is quite clear that projects thatwere less complex with few agencies involved and limitedinstitutional objectives had the greatest rate of success.While urban projects have become more streamlined, there arestill a few operations that are comparatively complex (likethe Cukurova Project in Turkey). The general trend towardslending through APEX institutions and financialintermediaries provides the basis for focused institutionbuilding efforts and broad impact on sub-sector policies.

- Demand Projections. Typically, rather simplistic approacheshave been taken to assess demand for housing and urbanservices, especially water. In short, rules of thumbregarding the ability of project beneficiaries to pay, havereplaced assessments of their willingness to pay. This hasinfluenced the performance of some sites and servicesprojects. However, the problem appears to be most seriousin water supply projects. In a review of some 60 completedprojects, more than four-fifths failed to achieve theirobjectives regarding the number of consumers served and thesale of water. Although, on the average, these projectsachieved tariff levels exceeding appraisal estimates, theshortfall in demand created financial problems for the waterauthorities.

C. Challenges for the Future

- The Bank has been able to incorporate lessons aimed attackling the urbanization problems of small and medium-sizedcities. Limited success, however, has been experienced bypast interventions in the larger cities such as Calcutta,Cairo, or Istanbul.

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Dealing with concentrated growth in large urban centers willremain a major challenge. Interventions such as the PusanUrban Management Project may be a vehicle toward creativesolutions.

Identifying and resolving development constraints involveanother range of continuing challenges. The Bank is in theearly learning stage of tackling bottlenecks such as landmanagement and private sector participation. Much remainsto be done to enhance the removal of these constraints.

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ANNEXES

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FY87 URBAN AND WATER SUPPLY LENDING

Sector IBRD IDA Total

Urban DevelopmentBrazil (Fourth Urban Transport Project) 200.0 - 200.0Cote d'Ivoire (Third Urban Development) 126.0 -- 126.0Guinea (Conakry Urban Development Project) -- 4.5 4.5India (Uttar Pradesh Urban Development Project) 20.0 130.0 150.0

Indonesia (Regional Cities Urban Transport) 51.0 -- 51.0Indonesia (Urban Sector Loan) 270.0 - 270.0Jordan (National Urban Development) 26.4 -- 26.4

Korea, Republic of (Housing Sector Loan) 150.0 -- 150.0Korea, Republic of (Pusan Urban Management Project) 50.0 -- 50.0

Mexico (First Urban Transport Project) 125.0 -- 125.0Thailand (Third Shelter Project) 21.0 -- 21.0Tunisia (Fourth Urban Development Project) 30.2 30.2Turkey (Cukurova Urban Development Project) 120.0 -- 120.0

Total 1,189.6 134.5 1,324.1

Water Supply and SewerageAlgeria (Second National WSS Project) 250.0 -- 250.0

Bahamas (New Providence Island WSS Project) 10.0 -- 10.0Bangladesh (Third Dhaka WSS Project) -- 30.0 30.0

China (Shanghai Sewerage Project) 45.0 100.0 145.0Ecuador (Guayaquil and Guayas WS Project) 31.0 -- 31.0Gambia, The (Water and Electricity Project) -- 7.0 7.0

Guatemala (WS Rehabilitation Project) 23.0 - 23.0India (Third Bombay WSS Project) 40.0 145.0 185.0India (Madras WSS Project) 53.0 16.0 69.0Lesotho (Higlands Water Engineering Project) -- 9.8 9.8Madagascar (Supplemental Credit) -- 10.0 10.0

Malawi (Second Lilongwe WS Project) -- 20.0 20.0

Morocco (National Water Supply Project) 60.0 -- 60.0

Morocco (Greater Casablanca Sewerage Project) 60.0 -- 60.0Rwanda (Second Water Supply Project) -- 15.0 15.0Turkey (Izmir WSS Project) 184.0 -- 184.0

Yemen, Peoples DemocraticRepublic of (Greater Aden Second WSS Project) -- 5.6 5.6

Total 756.0 358.4 1,114.3

Bank Total 14,188.2 3,485.8 17,674.0

1/ Contrary to World Bank Annual Report, The ShanghaiSewerage Project is included under WSS projects.

Tren~ds In 1emldisg, FY85-7

Trends in LTnding, Im D Am If, Fiscal Yews 1!5-87(millions of US Dollars)

1985 1986 1987Sector IBED IDA Total IBRD IDA Total IBRD IDA Total

Agriculture and RuralDevelopment 2,389.6 1,359.7 3,749.3 3,761.7 1,015.7 4,777.4 1,946.3 964.0 2,930.3

Development Finance Companies 506.1 59.3 565.3 1,324.7 124.5 1,449.2 2,2Q4.9 93.0 2,297.9Education 514.9 412.9 927.8 577.7 251.5 829.2 173.5 266.3 439.8

En'erffOil, Gas, and Coal 1,193.7 137.7 1,331.4 213.0 18.1 231.1 605.4 82.0 687.4 1

Power 2,171.6 78.7 2,250.3 2,423.2 363.7 2,786.9 2,857.0 159.9 3,016.9 NIndustry 635.0 9.0 644.0 757.2 63.9 821.1 411.4 7.0 418.4 CD

Nonproject 435.0 194.2 629.2 900.0 421.0 1,321.0 1,790.0 647.1 2,437.1Popilation, Health, andNutrition 160.9 30.1 191.0 166.6 252.9 419.5 33.3 20.8 54.1

Small-scale Enterprises 553.1 7.5 560.6 264.5 10.0 274.5 405.5 16.0 421.5

Technical Assistance 42.5 67.2 109.7 60.1 77.8 137.9 15.0 88.9 103.9

Telecoamunicatins 59.6 62.0 121.6 24.5 25.9 50.4 654.5 27.8 682.3

Transportation 1,866.9 271.8 2,138.7 1,253.8 244.4 1,498.2 1,145.8 600.1 1,745.9Urban Dmml opit 204.6 180.0 384.6 944.5 173.0 1,117.5 1,189.6 134.5 1,324.1

ater SStWy anl Smemrae 622.8 158.0 780.8 507.3 97.5 604.8 756.0 358.4 1,114.3

Total 11,356.3 3,028.1 14,384.3 13,178.8 3,139.9 16,318.7 14,188.2 3,485.8 17,674.0

Trenis in lending, FY85-87

Trnds In !Lening, I AND MA,, Fiscal Years 1985-87(percentages)

1985 1986 1987

Sector IBRD IDA Total IBRD IDA Total IBRD IrA Total

Agriculture and RuralDevelopnent 21.0 44.9 26.1 28.5 32.3 29.3 13.7 28.2 16.6

Development Finance Companies 4.5 2.0 3.9 10.1 4.0 8.9 15.5 2.7 13.0

Education 4.5 13.6 6.5 4.4 8.0 5.1 1.2 7.6 2.5

EnergyOil, Cas, and Coal 10.5 4.5 9.3 1.6 0.6 1.4 4.3 2.4 3.9

Power 19.1 2.6 15.6 18.4 11.6 17.1 20.1 4.6 17.1

Industry 5.6 0.3 4.5 5.7 2.0 5.0 2.9 0.2 2.4

Nonproject 3.8 6.4 4.4 6.8 13.4 8.1 12.6 18.6 13.8

Population, Health, andNutrition 1.4 1.0 1.3 1.3 8.1 2.6 0.2 0.6 0.3

Smnall-scale Enterprises 4.9 0.2 3.9 2.0 0.3 1.7 2.9 0.5 2.4

Techiical assistance 0.4 2.2 0.8 0.5 2.5 0.8 0.1 2.6 0.6

Teleamxjnicatiorn:is 0.5 2.0 0.8 0.2 0.8 0.3 4.6 0.8 3.9

Transportation 16.4 9.0 14.9 9.5 7.8 9.2 8.1 17.2 9.9

UdhbIk Uxse1njat 1.8 5.9 2.7 7.2 5.5 6.8 8.7 6.7 8.0

Walr Supply and S*mma 5.5 5.2 5.4 3.8 3.1 3.7 5.0 7.4 6.0

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

- 30 -

URBAN AND WATER LENDING BY REGION (FY72-FY87)

FISCAL AERICA ASIA EMEN% LAC ITEALYEAR Urban Water Urban Water Urban Water Urban Water Urban Water

1972 8.0 10.8 0.0 0.0 2.3 37.0 0.0 6.9 10.3 54.71973 0.0 9.5 16.0 88.7 0.0 71.7 20.0 99.1 36.0 269.01974 3.0 10.4 35.0 74.8 60.0 229.3 15.0 59.2 113.0 373.71975 44.5 12.5 40.0 39.5 0.0 51.1 8.5 42.0 93.0 145.1

1976 0.0 56.5 58.5 88.1 0.0 164.6 21.6 52.0 80.1 361.21977 44.0 22.0 101.5 44.2 0.0 173.0 32.7 61.5 178.2 300.71978 78.2 85.0 93.8 0.0 32.0 140.7 162.8 149.5 366.8 375.21979 12.0 141.0 102.0 491.0 19.0 117.0 176.5 169.8 309.5 918.81980 38.8 45.9 222.0 233.0 10.0 36.2 88.0 316.0 358.8 631.1

1981 15.0 14.0 175.0 27.0 57.0 147.1 254.0 346.5 501.0 534.61982 61.0 151.0 33.0 90.0 74.0 159.6 206.8 40.6 374.8 441.21983 69.0 95.2 338.1 160.5 117.0 131.0 46.2 424.2 570.3 810.91984 84.0 32.9 149.8 151.5 75.0 427.8 191.2 28.6 500.0 640.81985 42.0 150.0 218.5 175.0 37.2 292.0 86.9 163.8 384.6 780.8

1986 160.6 19.5 500.0 290.3 110.0 120.0 794.5 150.0 1565.1 579.81987 130.5 61.8 692.0 429.0 176.6 559.6 325.0 64.0 1324.1 1114.4

TilAL 790.6 918.0 2775.2 2382.6 770.1 2857.7 2429.7 2173.7 6765.6 8332.0

Please note that the FY86 figures are in some sense distorted in that theyinclude a US$ 400 million emergency loan to Mexico. (Other emergency loans have beenmuch smaller and, therefore, they do not distort the timetrends to the same extent asthe Mexico project).

February 18, 1988

- 31 -

NTI CF N A) WA2 PRATID (F!72-F8)

FISCAL AFRICA ASIA aim LA TOMYEAR Urban Water Urban Water Urban Water Urban Water Urban Water

1972 1 1 0 0 1 1 0 1 2 31973 0 1 1 3 0 3 1 2 2 91974 1 1 1 3 2 2 1 2 5 81975 3 2 2 2 0 4 1 2 6 10

1976 0 2 3 3 0 5 1 2 4 121977 1 2 2 3 0 5 2 3 5 131978 4 3 2 0 2 6 5 5 13 141979 1 6 3 8 1 4 2 3 7 211980 3 3 4 5 1 4 3 3 11 15

1981 1 2 3 1 2 3 2 5 8 111982 2 6 2 1 2 3 5 1 11 111983 3 7 3 3 4 5 4 3 14 181984 5 2 4 2 3 7 4 2 16 131985 3 6 3 2 2 2 2 2 10 12

1986 4 2 4 6 3 2 7 4 18 141987 2 5 6 4 3 5 2 3 13 17

ITOAIS 34 51 43 46 26 61 42 43 145 201

February 18, 1988

public disclosure authorized inu- 13

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