Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 28559-BD

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 27.6 MILLION (US$40.0 MILLION EQUIVALENT)

TO THE

PEOPLE’S REPUBLIC OF BANGLADESH

FOR A

WATER SUPPLY PROGRAM PROJECT

May 18,2004

Environment and Social Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 2 1,2004)

CurrencyUnit = Taka Taka58 = US$1

US$1.4513 = l S D R

F I S C A L YEAR July 1 - June 30

ABBREVIATIONS AND A C R O N Y M S

ADB Asian Development Bank ADP Annual Development Program BAMWSP Bangladesh Arsenic Mitigation Water Supply Project BAEC Bangladesh Atomic Energy Commission CAS Country Assistance Strategy CAP Community Action Plan CAO Chief Accounts Officer CBO Community-Based Organization DANIDA Danish Intemational Development Agency DALYs Disability Adjusted L i f e Years DDO Drawing and Disbursement Officer DFID United Kingdom Department for International Development DPHE Department of Public Health Engineering ERR Economic Rate of Retum FMR Financial Management Report FR Feasibility Report FY Fiscal Year FRR Financial Rate of Retum GOB Government of the People's Republic of Bangladesh HH Household ICB Intemational Competitive Bidding IDA International Development Association M E A International Atomic Energy Agency IFC International Finance Committee LGD Local Government Division LGED Local Government Engineering Department LPCD Liters Per Capita Per Day MDGs Millennium Development Goals

MOU Memorandum of Understanding NIA not applicable NCB National Competitive Bidding NGO Non-govemmental Organization OBA Output Based Approach PAD Project Appraisal Document PCN Project Concept Note PIP Project Implementation Plan PMU Project Management Unit PO Private Operator RDA Rural Development Academy RWSG Regional Water Supply and Sanitation Group SDC Swiss Agency for Development Cooperation SDR Special Drawing fights SIPP Social Investment Program Project SO Support Organization SWAP Sector Wide Approach TA Technical Assistance TOR Terms of Reference UNDP United Nations Development Program pg/l Micrograms per liter PPB Parts Per Billion UP Union Parishads WAC Ward Arsenic Committee WASA Water Supply and Sewerage Authority WHO World Health Organization WSS Water Supply and Sanitation WTP Willingness To Pay

V ice President: Praful C. Pate1

Sector Manager: Jeffrey S. Racki Country Director: Christine I. Wal l i ch

Task Team Leader: Karin E. Kemper

FOR OFFICIAL USE ONLY

BANGLADESH

Water Supply Program Project

Project Appraisal Document

South Asia Region SASES

Date: May 18,2004 Country Director: Christine I. Wallich Sector MangedDirector: Jeffrey S. Rack

Team Leader: Karin E. Kemper Sectors: Water supply (90%); Sub-national government administration (1 0%) Themes: Water resource management (P); Pollution management and environmental health (P); Rural services and infrastructure (P) Environmental screening category: Partial Assessment Safeguard screening category: Limited

Project I D : PO86661

Lending Instrument: Specific Investment Loan impact

[ ] Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 40.00 Prnnosed terms:

Financing Plan (US$m) Source Local Foreign Total

BORROWERRECIPIENT 5.83 -- 5.83 INTERNATIONAL DEVELOPMENT 24.08 15.92 40.00 ASSOCIATION BENEFICIARIES/ SPONSORS 4.13 5.15 9.28 Total: 34.04 21.07 55.1 1

Borrower/Recipient : People’s Republic o f Bangladesh

Responsible Agency: Department o f Public Health Engineering Dhaka Bangladesh

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization.

Does the project depart from the CAS in content or other significant respects? Ref: PAD A.3 [ No .I

Does the project require any exceptions from Bank policies? Re$ PAD D. 7

I s approval for any pol icy exception sought from the Board? Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3

[ ]Yes [XINO

[ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o

Have these been approved by Bank management? E ]Yes [ IN0

The development objective o f the proposed project i s to contribute to Bangladesh’s efforts to achieve the Mil lennium Development Goals (MDGs) in water supply and sanitation by 2015. Specifically, the project will pi lot innovative measures to scale up the provision o f safe water supply free from arsenic and pathogens in rural areas and small towns.

Project description: Re$ PAD B.3.a, Technical Annex 4

Component 1 : promotion o f private-sector participation for rural piped water supply

Component 2: promotion o f private-sector participation in water supply in municipalities (pourashavas)

Component 3 : implemention o f arsenic mitigation measures in small arsenic-affected villages

Component 4: supporting development o f adequate regulations, monitoring, capacity building and training

Component 5: supporting the development o f a local credit market and risk mitigation mechanisms for village piped water supply

Component 6: implementation o f a monitoring and evaluation system for the project.

Component 7: project management

Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10 OP 4.1 Environmental Assessment: Owing to the small-scale individual interventions, the project will not have significant irreversible or long-term environmental impacts. The potential adverse environmental impacts, primarily related to the quality o f water supplied, or related to small and

local environmental degradation are manageable. These issues will be addressed by the effective implementation o f the environmental management framework prepared by the project.

Significant, non-standard conditions, if any, for: none Re$ PAD C. 7 Board presentation: June 17,2004

Grant effectiveness: October 3 1,2004

Covenants applicable to project implementation: Effectiveness conditions: (i) Operational Manual o f the project, and (ii) Project Proforma approved by GOB

BANGLADESH Water Supply Program Project

CONTENTS

Page STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 A .

1 . 2 . 3 .

Country and sector issues .................................................................................................... 1 Rationale for Bank involvement ......................................................................................... 2 Higher level objectives to which the project contributes .................................................... 3

B . PROJECT DESCRIPTION ................................................................................................. 3 1 . Lending instrument ............................................................................................................. 3 2 . Program objective and phases ............................................................................................. 3

3 . Project development objective and key indicators 3

4 . 5 . 6 . Altematives considered and reasons for rejection 9

.............................................................. Project components ............................................................................................................. 4 Lessons leamed and reflected in the project design ............................................................ 8

..............................................................

C . IMPLEMENTATION ........................................................................................................ 10 1 . Partnership arrangements 10 ..................................................................................................

................................................................ 2 . Institutional and implementation arrangements 10 3 . Monitoring and evaluation o f outcomes/results 10 4 . Sustainablhty ..................................................................................................................... 10

Critical risks and possible controversial aspects ............................................................... 11

Grant conditions and covenants ........................................................................................ 13

................................................................ . . .

5 . 6 .

D . APPRAISAL SUMMARY ................................................................................................. 13 ....................................................................................... 1 . Economic and financial analysis 13

2 . Technical ........................................................................................................................... 15 3 . Fiduciary ........................................................................................................................... 16

5 . Environment 17 6 . Safeguard policies - CATEGORY B 18 7 . Policy Exceptions and Readiness 19

4. Social ................................................................................................................................. 16 ......................................................................................................................

............................................................................... ......................................................................................

Annex 1: Country and Sector Background .............................................................................. 20 Annex 2: Ma jo r Related Projects Financed by the Bank and/or other Agencies ................. 24

Annex 4: Detailed Project Description ...................................................................................... 29 Annex 5: Project Costs ............................................................................................................... 39

Annex 3: Results Framework and Monitoring ........................................................................ 25

Annex 6: Implementation Arrangements ................................................................................. 40 Annex 7: Financial Management and Disbursement Arrangements ..................................... 45

Annex 9: Economic and Financial Analysis ............................................................................. 59

Annex 11: Project Preparation and Supervision ..................................................................... 82

Annex 13: Statement o f Loans and Credits .............................................................................. 85

Annex 8: Procurement ................................................................................................................ 53

Annex 10: Safeguard Policy Issues ............................................................................................ 74

Annex 12: Documents in the Project F i l e ................................................................................. 84

Annex 14: Country at a Glance ................................................................................................. 87 MAP (# 33262) ............................................................................................................................. 88

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

In the past decades, Bangladesh has made huge achievements in providing i t s rural population with access to household water supply, based in part o n government and donor investments, but principally through households’ own investments. Due to Bangladesh’s generous endowment with shallow groundwater resources in most o f the country, households have been able to access water by investing in hand pumps for individual supply. In contrast to many other countries, gross coverage levels for water supply are greater than 90 percent in rural areas, and an estimated 50 percent for piped water supply in urban areas (where the public sector is the main provider). 100 out o f 250 pourashavas do not have piped water supply at a l l and citizens use hand pumps.

Though the country has seen significant improvements in access to safe water supply, availability o f water supply and sanitation has not necessarily translated into improved health. Health statistics show that mortality rates for infants and children under five years o f age are 77 and 134 deaths per 1,000 l ive births respectively. Despite improved facilities, water-related diseases continue to be a common occurrence and account for a large number o f deaths every year.

Additionally, in the early 199Os, detection o f the f i rs t cases o f arsenicosis in some areas o f the country led researchers to quickly verify that many o f Bangladesh’s aquifers are contaminated with arsenic at levels not only above the World Health Organization (WHO) guideline level o f lOppb, but also above Bangladesh’s national standard o f 50ppb. Since i t s detection, many efforts have been made to increase knowledge regarding arsenic occurrence and its health and socio- economic impacts as well as to develop and implement mitigation activities. These efforts have provided much-needed, if not sufficient, knowledge about the problem and options to address it. According to the most recent estimates, about 30 mi l l ion people are exposed to arsenic f rom we l l water with contamination levels exceeding 50ppb and 49 mi l l ion people are exposed to water with contamination levels o f more than 10 ppb. Although arsenic i s one major water quality problem in Bangladesh, microbial contamination i s also a serious issue.

I t has therefore become clear that interventions in the water supply sector need to be scaled up because (i) a considerable portion o f the population st i l l lacks access to a safe water supply (regardless o f the arsenic issue), and (ii) small-scale implementation o f arsenic mitigation or prevention options, such as commonly-shared wells, actually represent a step backwards in terms o f service delivery in Bangladesh because the rural population has become accustomed to the high service level associated with the privately-owned hand pumps in their yards.

Willingness-to-pay studies indicate that communities value and are willing to pay for the convenience o f piped water supply even more than they value protection against arsenic. A national water supply program that allowed al l communities to participate would tackle different water supply related health problems with a common program.

The current institutional arrangements for water supply and sanitation services are not well enough coordinated to face the challenges in the sector. Planning and service delivery are supply

1

driven, government agencies have overlapping functions and pay insufficient attention to operation and maintenance issues, and user involvement and hygiene promotion are inadequate. As a result, service delivery mechanisms are weak and lack o f ownership by end users reduces sustainability o f the water and sanitation services.

2. Rationale for Bank involvement

Given the country and sector issues outlined in Section 1, the Government o f Bangladesh (GOB) has identified the need to scale up the provision o f water supply - in terms o f the number o f people served, and quality o f service provided in rural and urban areas. I t i s expected that this emphasis will be reflected in the upcoming CAS, the GoB’s PRSP, as well as the Country Water Resources Assistance Strategy, al l o f which are underway.

In rural areas, due to the high density o f villages and growth centers in Bangladesh, piped water supply i s emerging as a cost-effective solution that provides good levels o f water service to populations o f more than 200 households. Piped water supply investments could help to quickly scale up safe water service provision in the country and has therefore been identified as an important option to support the people o f Bangladesh in moving towards fblfil lment o f the Millennium Development Goals (MDGs) while, at the same time, addressing the need to diminish the population’s exposure to arsenic contaminated water.

Currently about 100 piped water supply pilots are being implemented in Bangladesh, 91 by the Department o f Public Health Engineering (DPHE) and the remainder through various NGOs, the Rural Development Academy (RDA) and donors (Swiss Government and Danish International Development Agency - DANIDA). The Bank - through the Bangladesh Arsenic Mit igation Water Supply Project (BAMWSP) and through the Social Investment Program Project (SIPP) - i s also promoting such pilots (6 through SIPP and approximately 15 through BAMWSP), with a clear emphasis on private sector involvement and appropriate levels o f cost recovery through adequate tariffs to support scaling up investments in the sector and ensure sustainability o f the investments. This experience and the know-how derived from it constitute a good basis for the Bank to undertake this project.

By being able to provide financing and technical expertise to promote an innovative approach to rural water supply at a larger scale through this project, the Bank i s well poised to support the GOB in providing safe water to communities and also scale up quickly. At the same time, the project contains a component that addresses the needs o f smaller communities where piped water supply is not viable, but which are highly arsenic-affected. This component has been designed based on experience from the on-going B A M W S P project as wel l as other on-going projects in Bangladesh.

As outlined in Section 1, the urban sector i s also in need o f a more effective approach to investment in operation and maintenance o f water supply systems. Given the GoB’s emphasis on the development o f new approaches to address the current situation, the urban project component i s designed to test private sector participation in the provision o f services in 3 to 5 arsenic- affected pourashavas, (i.e. at a very small scale, given overall needs). The results o f the

2

component could constitute the basis for a broader sector dialog on water supply provision in medium-sized towns in the future.

3. Higher level objectives to which the project contributes

The project would contribute to increased health and productivity in Bangladesh, thereby supporting the country’s goal o f sustainable growth and poverty reduction. Importantly, the project would be consistent with the GOB’S current efforts aimed at devolving decision-making authority to the local level. This will create a win-win situation because the project would be strengthened by clearly defining responsibilities at the village, Union Parishad and pourashava levels, thereby ensuring strong ownership by beneficiaries and enhancing long-term sustainability. At the same time, the project would help strengthen the decentralization process itself.

B. PROJECT DESCRIPTION

1. Lending instrument

The project i s a Sector Investment Grant with a total project cost o f US$55.1 million. US$40 million will be provided through an IDA Grant, US$5.8 million Government financing, and the remaining US$9.3 mi l l ion contributions from other sources, as explained in Section 4. The IDA grant component i s justified because the project i s strongly focused on the rural and urban poor, given that they have the least affordable options in terms o f access to arsenic and pathogen free water in sufficient quantities and are the most affected by inadequate supply.

2. Program objective and phases

The project provides an opportunity to support the GOB in developing i ts programmatic approach to the water supply sector. In the medium term, both Bank and donor contributions to the water supply sector could take place within such a programmatic approach. The objective therefore i s to use the lessons leamed from the project as an input to the eventual development o f a Sector Wide Approach (SWAP) in a next phase. The GOB has expressed its interest in other development partners joining the approach piloted under the current project.

3. Project development objective and key indicators

Project development objective:

The development objective o f the proposed project i s to contribute to Bangladesh’s efforts to achieve the Millennium Development Goals in water supply and sanitation by 2015. Specifically, the project will pi lot innovative measures to scale up the provision o f safe water supply free from arsenic and pathogens in rural areas and small towns.

This will take place by (i) promoting rural piped water supply with private-sector participation, (ii) promoting private-sector participation in water supply in municipalities (pourashavas), (iii)

3

implementing arsenic mitigation measures in arsenic-affected villages, (iv) supporting development o f adequate regulations, monitoring, capacity building and training, (v) supporting the development o f a local credit market for village piped water supply, and (vi) implementing a monitoring and evaluation system for the project.

Key indicators:

This i s a demand-based pi lot project in which communities can choose if they want to participate in the project and which options for water supply they prefer. For this reason, the quantitative indicators below are estimates only, based on average costs o f water supply schemes and likelihood o f technical options chosen.

0 Approximately 300 villages provided with functioning piped water supply schemes operated by sponsors;

0 At least 3 pourashavas provided with improved and functioning water supply systems operated through private sector participation;

0 Approximately 200 villages (approximately 2,000 point sources) provided with sustainable alternative water supply options at sufficiently high service levels where arsenic mitigation through piped water supply is not feasible. Functioning Monitoring and Evaluation System, which i s used to adapt lessons leamed during implementation in order to adjust project component design and create the basis for f i ture scaling up.

0

4. Project components

Component 1: Piped water supply in villages and growth centers - US$23.1 million

This component will expand the experience o f pi lot water supply schemes undertaken by DPHE, various NGOs and other organizations, and the pilots supported by BAMWSP and the Social Development Foundation. In this component, sponsors (entrepreneurs, cooperatives, CBOs, and/or NGOs), in close collaboration with communities and local governments, will develop village piped water supply schemes. The project will, on a grant basis, provide technical assistance and financial support. The grant wil l cover only a portion o f the total cost. The sponsor and the community through contributions or loans will provide the remainder. An affordability assessment was undertaken during preparation to ensure that the private operator would provide safe water service to the poor members o f the community. Three different options have been developed to ensure that al l segments o f the village will be able to afford safe water (piped supply with multiple house connections for wealthier households; yard standpipe for middle-income households; and shared standpipes for poor households). The Government, through DPHE and other institutions, wil l regulate key aspects o f the operation such as water quality, technical standards and service levels.

4

Component 2: Water and sanitation services in medium-size towns - US$14.8 million

2.a) Pourashavas and private sector involvement in piped water supply (US$l4.53 million)

Water service levels in Bangladesh’s medium-size towns are very poor. Only 100 out o f 250 pourashavas have piped water supply and in those, levels o f coverage attain only 30-60%, 3-12 hours o f service, and a number are affected by the presence o f arsenic in the water systems. The experience o f a pi lot currently under preparation with BAMWSP support in the town o f Chapai Nawabganj would be replicated in other medium-size cities. In Nawabganj a private sector operator wi l l be invited to improve and expand the water supply system and provide arsenic-free water, and manage the water utility under a design-build-operate contract. The proposed component wil l support similar reforms in water service delivery in self-selected municipalities (or groups o f municipalities) willing to undertake reform o f their water supply services. Eleven municipalities have formally expressed their interest so far. A total o f 3 to 5 pourashavas would be selected to participate in this component.

Under th is component the pourashava will create a Pourashava Water Supply Entity (PWSE) under i t s control, to own al l assets related to the provision o f water supply and to operate and maintain this service. The PWSE wil l contract with a private operator (PO) the management o f its operations and wil l be in charge o f the supervision o f the performance o f the PO. The PO will be responsible for the preparation o f final designs for the rehabilitation and expansion, for the construction and rehabilitation o f the water system and for i t s operation for a period o f 10 years. Responsibility o f the operation o f the system includes fbll responsibility for day-to-day operations, billing and collection, maintenance and rehabilitation and provision o f new water connections to meet demand (within the supply capacity o f the system).

The GOB will make funds available to finance the rehabilitation and expansion o f the water system in the pourashava and to cover justifiable cash operating shortages during the first 2-3 years o f operation. The pourashava, through the PWSE wil l pay back to the government 50 % o f the grant, under terms and conditions acceptable to IDA.

Also the option o f a concession will be explored, but results at appraisal indicated that this may not be possible at this point, due to the relative weakness o f local investors compared to the amount o f private financing that would be required.

2.b) Urban sanitation (US$0.22 million)

The project will provide technical assistance to finance pre-feasibility studies for urban sanitation. These may include:

0

0

0

Assessment o f alternative sanitation options (condominia1 sewer systems, individual house units - latrines) and costs; Identification o f potential urban centers where these options could be implemented; Definition o f institutional options and financial arrangements to operate and maintain public sanitation systems.

5

Component 3: Non-piped arsenic mitigation activities for villages - US4.4 million

In small villages o f less than 200 households piped water supply i s not viable and non-piped arsenic mitigation options are necessary. Based o n the experience fi-om BAMWSP and other GOB and donor initiatives, several options present themselves, including deep tube wells, dug wells, and pond sand filters. This component is designed to address the situation in small villages located in arsenic-affected hot spot Upazilas and to provide complementary service in fringe areas o f those villages where piped water supply will be supplied, but where it wil l not be feasible, for technical reasons, to cover al l households.

Component 4: Capacity building, regulations and training - US$3.2 million

4. a) Capacity building and training

The success o f the national program wil l depend o n a limited number o f support components focused on developing and strengthening the capacity o f stakeholders to implement mitigation measures. These components include support to:

0

0

0

Sponsors - for management o f community systems, financial management, and treatment technologies; Local private sector for the design, building and operating urban water supply systems; Local and central government officials - for the promotion, support, design and contract supervision (regulation by contract) o f piped water supply systems, designed, built and operated by the private sector;

0 DPHE and pourashavas- for technical and financial supervisory capacity. This includes benchmarking and fol low up o f investments and operations, o f urban water supply systems; Support to employees willing to set up private companies to develop rural piped systems; Communities and contractors - in areas needed to fulfill their roles.

0

0

The capacity o f these different entities has been assessed during preparation to address their different needs and to target the development o f these training activities.

4. b) Regulatory frameworks

The project will provide Technical Assistance to the developmenthtrengthening o f regulatory frameworks in two key areas: (i) involvement o f the private sector (cooperatives, NGOs and private companies) in rural and urban piped water supply; (ii) development and implementation of a benchmarking system to promote competition and efficiency by comparison o f operational performance; and (iii) groundwater management and administration. A benchmarking and monitoring fi-amework wil l be developed during the project that will address quality o f service, tari f f setting, project performance and conflict resolution, based o n lessons obtained during the first years o f implementation. Such a system would necessarily be based on GOB’S desire to devolve responsibilities to the local level as wel l as o n the need to retain oversight at the national level and will provide the basis for further development o f a more formal regulatory framework.

6

4. c) Water monitoring

This component will seek to strengthen water quality monitoring and capacity at national (DPHE), union parishad and pourashava levels. Parallel financing by the International Atomic Energy Agency ( M A ) as well as DFID (United Kingdom Department for International Development) is expected. In addition, the sub-component wil l focus on monitoring and assist DPHE in the characterization and monitoring o f safe groundwater resources, as groundwater wil l continue to be one o f the country’s main sources o f supply.

Component 5: Development of local credit market and risk management mechanisms for village piped water supply - US$4.9 million

At present there i s no local credit market for rural piped water supply in Bangladesh. This component seeks to help develop such a market as an essential long-term requirement for successful scaling-up o f rural piped water provision. With local banks in Bangladesh generally being unable to provide loans with long-term maturity - a crucial element in keeping water tar i f fs charged by private sponsors affordable - and lacking experience in financing rural piped water supply schemes, this component wil l make funding available to eligible sponsors. The chief objective o f the component i s to illustrate to private banks that private piped water supply schemes constitute a viable market and that it i s worthwhile for them to offer appropriate lending instruments. The primary mechanisms to be developed would be a Take-Out facility, a Partial Credit Guarantee, and/or related financial mechanisms for private banks interested in lending for village piped water supply. If these mechanisms were not sufficient to motivate the local banks and financial institutions, funds could then be made available directly to sponsors through loans appraised and administered by the Infkastructure Development Company Limited (IDCOL), the current implementation agency for other Bank-financed projects. In either case, these would be short-term financing mechanisms until the credit market for piped water supply i s developed more broadly and banks would offer direct lending to private sponsors.

The above financial mechanisms are currently being developed under the Private Sector Infrastructure Development Project (PSIDP). I t i s anticipated that the project component would be activated under the BWSPP only if sufficient resources were not available through PSIDP.

This component would also support a risk management mechanism to support private sponsors against force majeur situations outside their control. The private sponsors have indicated the need for support that would insure them against natural events l ike floods or tornadoes that could damage the infrastructure facilities, or against the appearance o f arsenic or other contaminants despite detailed engineering analyses conducted during each project preparation that would require the installation o f additional unplanned treatment facilities. There is no insurance industry in Bangladesh that would provide services o f this type to private sponsors. This component would provide protection to private sponsors against well-defined conditions identified in the subproject grant agreement.

Component 6: Monitoring and evaluation - US$1.4 million

Project design is purposefhlly flexible to encourage a variety o f approaches and actors. Given the large number o f villages in Bangladesh and the huge task o f scaling up safe water supply in the

7

country, project design wil l need to allow for rapid learning and replication. By encouraging participation o f different private-sector entities, and given the entrepreneurial spirit in the country, i t i s hoped that the successful experiences wil l draw in increasingly more investors and that new schemes wil l increase. At the same time, it is important to learn as systematically as possible f rom these interventions. The M&E component i s being designed accordingly. An M&E framework i s currently under development and wil l be included in the Operational Manual o f the project. In a f i rs t phase, i t i s expected that the framework wil l require intensive monitoring by the M&E group, but as the pi lot phase progresses towards a scaled-up program, the M&E framework should focus on key information and avoid excessive and costly data collection.

Component 7: Project management - US$3.3 million

The project will be managed by a Project Management Unit (PMU) within DPHE.

5. Lessons learned and reflected in the project design

In defining the project, experience from the on-going World Bank-financed Bangladesh Arsenic Mitigation Water Supply Project (BAMWSP), the Social Investment Program Project, the Water Supply Program (WSP), the Municipal Services Project as wel l as various donor initiatives have been taken into account.

Experience with B A M W S P has shown that a narrow arsenic-mitigation focus on rural water supply in Bangladesh i s not sufficient to address the identified sector issues, which include both arsenic and bacteriological contamination o f water supplies. For this reason a wider approach has been sought which would help support the water supply sector in Bangladesh move to a higher level o f service provision and thereby attain positive health and productivity impacts.

Specifically regarding the piped water supply component, willingness-to-pay studies and pi lot projects (under the on-going BAMWSP, SIPP, Government, and donor initiatives) have shown that rural households value the convenience o f water supply as much as or even more than the safety o f their supplies. The studies have also shown that there i s sufficient willingness-to-pay to make such systems viable for the long term. A significant number o f private entities (entrepreneurs and NGOs) have shown interest in implementing such schemes and investing their own finds. All o f these elements have been reflected in project design.

In addition, experience from B A M W S P has shown that the piecemeal approach to providing arsenic mitigation options is long-drawn and costly to the government. I t does not provide the opportunity to scale up safe water supply. Thus, while the B A M W S P approach, in an improved form, is needed for small villages, for larger villages the piped water-supply approach has been chosen.

Given the uncertainty regarding arsenic in Bangladesh (level and scope o f contamination, viable options to mitigate arsenic impacts, etc.) at the time when B A M W S P was conceived, a considerable amount o f work was done during its lifetime on getting the base information correct. Comparatively few investments have been made to actively provide alternative water supply options. At the same time, B A M W S P experience and that o f other donors, has shown that

8

for small villages where piped water supply is not an option, the service level needs to be increased in order to have a lasting impact. This improvement in service level, as well as an improved manner to involve communities and NGOs, has been taken into account in the design of Component 3 o f the current project.

In terms o f piped water supply pilots, experience from on-going piped water supply experiences in Bangladesh has been taken into account. In addition, piped pi lot schemes are currently under preparation through Bank-financed projects (BAMWSP and SIPP). These pilots wil l have already incorporated the lessons learned from the on-going schemes (an assessment o f 12 such schemes has been undertaken), and this wil l yield additional valuable insights.

Implementing Agency. Experience with BAMWSP has illustrated that having DPHE as that project’s implementing agency led to weakness in project implementation, but that such weakness was related, inter alia, to the PMU being set up outside o f established structures. In this project, implementation arrangements are built into existing structures.

Experience with the ADB Second Water Supply and Sanitation Project indicates that problems related to land acquisition can severely delay project execution. Therefore, the project will contain adequate provisions to ensure that pourashavas take prompt action to provide the required land for the installation o f water supply facilities (water treatment plants, storage tanks wells and pumping stations).

6. Alternatives considered and reasons for rejection

In the discussion o f alternative designs, a continuation o f the BAMWSP approach, which focuses on shared community wells as an arsenic mitigation measure, was considered. This alternative was discarded due to the fact that (i) investment needs for provision o f safe water are far greater than the government alone could provide in a reasonable period o f time so that additional sources of funding would have needed to be mobilized, (ii) most rural households are used to individual hand pumps and therefore willing to pay for piped water supply to maintain the level o f convenience to which they are accustomed, (iii) piped water supply will have significant additional health effects, not only related to avoidance o f arsenic intake, especially when coupled with the sanitation component. Thus, as compared to the shared point source model, the development impact o f the proposed design is expected to be greater. Nevertheless, shared community point sources wil l still be provided as an option for villages with fewer than 200 households as well as such households in villages with piped water supply where for technical reasons the piped system does not reach.

I t was also discussed to include sanitation interventions in the rural piped water supply. However, given the parallel development o f a Local Government Project, which wil l specifically include a Total Sanitation Approach in villages, i t was decided to not include such a component in this project, so as to avoid duplication and to reduce unnecessary complexity o f the project.

Regarding the urban component, i t was decided to take into account possible increased sanitation needs (due to higher water throughput with expanded access to piped water) by financing assessments and prefeasibility studies in the piloted pourashavas. Considering the timefiame o f

9

the project and the expected implementation time for the improved water supply and the absence o f reliable information on feasible technical options and costs o f sanitation options, these investments would have to be undertaken as a follow-up.

Another alternative considered was to exclude the urban pi lot component. However, given the current window o f opportunity to introduce an innovative approach to the urban water sector in Bangladesh, and given major needs in the face o f arsenic contamination o f private tube wells in urban areas, it was decided to include this pi lot as an input to the GOB’S strategy o f developing a programmatic approach to water supply in the country.

C. IMPLEMENTATION

1. Partnership arrangements

The project design seeks to build partnerships with the private sector, including NGOs, and community user groups for financing, operating and maintaining facilities.

The project wil l also partner with development partners. Specifically for the groundwater- monitoring component, the project will partner with the IAEA and with i t s local counterpart, the Bangladesh Atomic Energy Commission (BAEC), and with DFID for the water safety pilot activity. The Swiss Development Corporation has indicated its interest in contributing to the project through parallel financing by means o f a designated trust fund for this project. In addition, discussions are on going with DANIDA to align basic project operating rules in such a way that a sector wide approach would start to develop.

2. Institutional and implementation arrangements

The Ministry o f Local Government, Rural Development & Cooperatives i s the implementing agency for the project. The PMU, within the Department o f Public Health Engineering and reporting to i t s Chief Engineer, will carry out day-to-day management. The Union Parishads, villages/communities and Pourashavas will be involved in local project implementation. The details o f these arrangements are outlined in Annex 6.

3. Monitoring and evaluation of outcomes/results

Given the need to systematically monitor and learn from project interventions, a specific M&E Component has been designed for the project so that lessons learned can be continuously fed back into the project (see Component 6).

4. Sustainability

This project is designed to specifically address the issue o f sustainability o f investments in the water supply sector in Bangladesh by promoting innovative institutional arrangements. Regarding Components 1 and 2, by encouraging participation o f different private-sector entities and NGOs, and given the entrepreneurial spirit in the country, i t i s hoped that the successful

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experiences wil l attract more investors and users associations so that new schemes wil l multiply. Efforts to achieve higher levels o f cost recovery sufficient t o at least cover operation, maintenance, rehabilitation and small h t u r e expansion wil l also help to improve the sustainability o f the water supply systems.

Risk Mitigation Measures

In the context o f Component 3, the streamlined design seeks to ensure more efficient project implementation as we l l as involvement o f local government in rura l water supply so as to provide longer-term sustainability and strengthening o f operation and maintenance responsi- bilities.

Risk Rating with Mitigation

5. Critical risks and possible controversial aspects

Capacity. Weak capacity o f the different entities involved in delivering water supply. This goes for the capacity o f private sponsors to successfully mobilize communities and generate demand for their services, and to adequately operate the systems (including continuous compliance o f water quality standards, and source protection), the total number o f private sponsors willing to engage in water supply, the national credit market to provide sufficient credit to the private sponsors, the union parishads to take on

I Risks

Strengthen capacity o f different stakeholder groups through training, and developing appropriate institutional arrangements (formal regulatory as well as project-related ones)

T o Droi This project i s a large-scale pilot aiming to increase safe water supply in Bangladesh in an innovative manner through involvement o f the private sector. The main risk i s that conditions for the local private sector to engage in this activity are not favorable enough (primarily due to governance instability and weak credit markets) to achieve the desired scaling-up effect and that the project remains at pilot level.

I

ct development objectives Ensure transparency in selecting sponsors and private operators

Ensure conflict resolution mechanisms at local and central levels

Involve local, mid- and central level stakeholders to create transparent institutional arrangements and develop accountability

Close cooperation with the upcoming Local Government Project

S

S

11

:he responsibility for local water supply, md DPHE to regulate the evolving landscape o f private water supply systems in the country.

Private sector participation in the sector in Bangladesh i s in i t s infancy and, therefore, there are r isks that both the public and the private sectors will not live up to their contractual z ommitment s .

Many small-scale donor and government interventions are implemented without cost recovery; therefore there i s a risk that communities will not want to pay for piped water supply systems, rendering them financially unviable.

Reluctance o f pourashavas and the Ministry o f Local Government to authorize timely tariff increases to achieve the required levels.

Disagreement on the source o f water to implement the project. The ongoing BAMWSP has been hampered by a pending decision on the use o f the old (generally deeper) groundwater aquifer for safer water supply. Given that this aquifer will be one o f the sources to be used in all project components, there i s a risk that this project could also be hampered if the current uncertainty regarding this source were not resolved.

Training o f public and private partners to develop a productive framework to help improve service performance and access to services to the whole population within the mutual obligations under the contract.

lntroducing conflict resolution mechanisms at local levels, and introducing transparency in the sponsor selection process.

Training the sponsors and the Union Parishads to ensure that villages make informed decisions.

Ensuring stepwise increases o f tariffs, starting prior to implementation to ensure commitment. Procedures for review o f tariffs will be incorporated in the contract between the GOB, the Water Supply Entity (owned by the pourashava) and the private operator.

Monitoring and dialogue between the Bank and the authorities.

Ensuring that the status o f the deep groundwater use i s clarified by the beginning o f the implementation o f the project.

Ensuring that the well-drilling protocol i s followed, by training drillers and government personnel.

Implementing a strong monitoring system to detect any change in water quality once provided

S

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Water quality issues in the medium to Continuous water quality long term. The contamination risks (both monitoring during the construction

complex. Many sources, earlier specialized studies will assess and considered safe, became contaminated analyze the long-term over time (due to a number o f contamination risks. unforeseen factors). Overall &sk Rating

arsenic and bacteriological) are and operation periods. Also,

6. Grant conditions and covenants

S

S

Effectiveness condition:

0 Operational Manual agreed 0 Project Proforma (PP) approved

D. APPRAISAL SUMMARY

1. Economic and financial analysis

An economic and financial analysis has been carried out for three components o f this project, namely, the rural piped water supply, the pourashava piped water supply and the non-piped mitigation options in rural water supply. Table 1 summarizes the results o f the economic and financial analysis. For each component results are presented for various scenarios reflecting different assumptions in valuing project benefits.

Benefits o f the rural piped water supply component are estimated by valuing the incremental and non-incremental volume o f water supplied by the project as we l l as by estimating health and institutional benefits attributable to the project during its expected lifetime. Benefits o f the pourashava piped water supply component are estimated using the same approach as that o f the rural piped water schemes. Benefits o f the rural non-piped water supply component are estimated by valuing potential timesavings and health benefits attributable to the project component. The main costs are related to scaling up measures to provide arsenic and bacteriologically safe water in rural areas and small towns and include construction and engineering costs and costs o f scheme management, implementation, operation and maintenance.

The ERR o f the rural piped water supply schemes ranges from 20% to 45% based o n the assumptions used to quantify the benefits. For the most conservative assumptions (Scenario 1) the NPV is 214 mi l l ion Tk (see Annex 9 for a detailed summary). For the Pourashava piped water supply component, ERRs range from 16% to 34%. Scenario 1 for the Pourashava component results in a NPV o f 291 mi l l ion Tk. The ERRs for the rural non-piped mitigation options component range from 20% to 57%, with an N P V ’ o f 5,2.30 million Tk. under scenario 1, in which the only benefits that are valued are potential timesavings. The financial benefits for the rural piped water schemes were calculated assuming a domestic tariff o f 11 Tk./m3, a domestic supply o f 40 lpcd, a commercial tariff o f 19 TWm3 and a commercial supply o f 15 m3 per day

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^ 1 _ 1 -_._._ r Jiuril Piped Water Supply

-LI _---- --_ kuru1 Non-piped Mithation' Options ~.

. "

34.34% 2.3 8 3.921

2. Technical

There are no major technical issues to address for the design o f piped water supply during preparation. Indeed, experience from BAMWSP, SIPP, various NGOs, and DPHE has shown that the technical aspect is not the most difficult one to address. The risks involved in the project are more evident in the institutional parts o f the project in so far as this will involve the private sector. Therefore to increase the likelihood o f successhl implementation, the project includes a strong capacity building component, both technical and institutional, for private sponsors, union parishads, pourashavas and DPHE.

The project’s primary technical approach to piped water supply systems in rural areas i s to provide incentives for private sponsors to select adequate design and construction standards that provide service levels which households are willing to pay for and at the same time keep operational costs low while preventing deterioration o f the infrastructure. The fact that private sponsors wil l be investing equity shares in the system and taking out loans for capital costs will provide incentives for the above-mentioned approach. N o up-front restriction on technologies wil l be proposed and innovation will be encouraged. The project will promote the provision o f varying levels o f service (individual household connections, yard taps, and shared stand posts) to expand service provision to as many poor households as possible beyond the minimum coverage requirement.

The guidelines for private sponsors wil l include specific technical standards o n key areas such as safety, adequate drainage, shared stand posts, environmental protection, and overall quality. These standards wil l be designed to promote innovation while protecting the poor and the environment. One o f the most important aspects o f these standards will be water quality assurance at the water source evaluation phase and water quality at the tap during operation. The construction o f wells for systems tapping groundwater as source will also be subject to specific construction standards to prevent possible cross-contamination with aquifer layers containing high levels o f arsenic.

The Monitoring and Evaluation component wil l include specific activities to capture and disseminate lessons on technical issues faced by private sponsors and to identify areas where they might need specific training on international good practice on technical issues.

For al l components, the choice o f the source o f water might create some delay and, based on previous experience of the piped water supply such as the schemes being built under on-going pilots, this issue wil l require a flexible approach. The water source may be surface or deep groundwater. In some places deep groundwater does not exist while in other areas the surface water i s far too polluted and the cost o f water treatment would be far too expensive. Some altemative options such as surface water infiltration wells wil l be proposed under the project. It is preferable to leave some flexibility at this stage o f the project and provide more criteridrecommendations after the completion o f some piped water supply schemes. In al l cases the water provided should be monitored to ensure that i t follows Bangladesh’s national standard for drinking water.

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3. Fiduciary

Procurement. A procurement assessment was carried out during preparation. Procurement arrangements are included in Annex 8. Both with regard to procurement and to financial management, specific staff will have to be hired by the PMU in order to enable the project to carry out o f these functions in a satisfactory manner.

Financial Management. A Financial Management assessment was carried out covering a review o f the existing financial management arrangements and capacity o f DPHE, the implementing agency o f the project and identification o f the financial management arrangements that would be required to be in place at the PMU o f DPHE and at other levels o f implementation involving communities and pourashavas Fund Flow and Disbursement arrangement: IDA funds wil l be channeled to the dedicated special account upon Withdrawal Requests by the PMU, first as initial advance to the extent o f the authorized allocation limit and then for claiming replenishments o f payments for eligible project expenses. IDA and GOB funds will be allocated in the Annual Development Program (ADP) having regard to the budget estimates prepared by PMU based on the annual work plan o f the project. The PD, PMU will be the authorized signatory to withdraw IDA Grant proceeds and Drawing and Disbursement Officer to draw the Government funds. GOB fund allocated in the ADP, wil l be released quarterly and the P M U wil l present the bills to the Chief Accounts Officer (CAO) o f the ministry for actual disbursement. Appropriate fund f low arrangements with adequate control have been set for f low o f funds to the providers o f the water supply systems in urban and rural areas including CBOs as detailed in annex 7.

Payment o f funds would be monitored closely so that the processing time taken at the PMU does not adversely affect the execution o f the sub-projects at any level. Service standards (benchmarks) would be developed to specifically monitor the turn-around time for fund transfers from PMU to CBOs.

4. Social

A social assessment was carried out to understand the incentives, needs and priorities o f the different stakeholders, especially vulnerable groups (identified as hardcore poor, physically challenged, tribal households, and female headed households). A Social Framework and Guidelines for Sponsors were developed to ensure (i) targeting benefits to the vulnerable groups; (ii) inclusion, participation and voice - especially o f women and vulnerable groups; (iii) transparent mechanisms for functional, financial and administrative autonomy o f local communities; (iv) appropriate linkage with local government; (v) criteria for demand driven initiative and cost sharing; (vi) accountability and transparency in transactions; (vii) technical, institutional and financial sustainability; (viii) technical, financial and institutional support to the communities and local government to build their capacity; and (ix) participatory monitoring o f processes and outcomes.

Social development outcomes include (i) establishment o f inclusive and accountable local institutions (e.g. village/ward development committee, union parishad and pourashavas) which are responsive to the needs o f the poor; (ii) empowerment o f rural women by giving them greater

16

access, choice and voice in decision making; (iii) improvement in health status by bringing changes in personal, domestic and environmental hygiene behavior/practices; and (iv) capacity building o f local government and other institutions.

5. Environment

Given the small scale o f project interventions, no large-scale, significant andor irreversible environmental impacts are anticipated in this project. The potential environmental impacts primarily relate to (a) water source quality protection (including protection against arsenic, bacteriological and other toxic contamination), (b) ensuring adequate drainage and avoiding local construction-related impacts, and (c) disposal o f arsenic sludge if and when arsenic removal plants were to be implemented.

Managing and ensuring the quality o f water supplied wil l be the major challenge in the project. Although groundwater in Bangladesh is characterized by l o w total dissolved solids except in the coastal regions and a few pockets o f inland salinebrackish groundwater, there are issues over and above arsenic contamination. These include (i) occurrence o f high levels o f chloride in the deep wells in the coastal zone and some salinebrackish water pockets inland, (ii) localized occurrence o f an excessive amount o f dissolved iron, manganese, ammonium, and sodium in many deep wells, (iii) heavy metals such as barium and boron, and (limited) uranium both in shallow and deep groundwater, and (iv) secondary microbial contamination on some occasions. Surface water in Bangladesh has poor microbial water quality. The issues include (i) high levels o f fecal and total coliform and (ii) presence o f cynobacteria. Water treatment o f urban systems wil l ensure the provision o f safe water that meets GOB water drinking standards and water quality both at the source and at points o f delivery which wil l be monitored.

For sub-projects using deep/old groundwater, the project will make certain to tap those deep aquifers free from arsenic and bacteriological contamination. The project wil l also incorporate the lessons learned in the BAMWSP implementation process. At the sub-project level, quality o f water will be ensured through testing during feasibility studies and implementation (testing will include al l parameters stipulated by GOB for drinking water). Although the aim would be to avoid problematic sources by exploring and tapping safe sources (by location), adequate arsenic removal plants/technologies and conventional water treatment will be used wherever required. Adequate assessment wil l be undertaken to understand the aquifer thickness, hydraulic gradient and its recharge capacity prior to the installation o f deep tube wells. Safe drilling techniques wil l be employed following a protocol specifically being developed for the project in order to mitigate potential long-term impacts on the deep aquifer. Besides, the project will establish a partnership with BAEC for comprehensive monitoring o f arsenic-free groundwater. See Component 4 for details.

The Borrower has carried out an Environment Assessment; relevant environmental issues and the processes to manage or mitigate the environmental have been identified. An environment management framework has been prepared to address the issues during selection, design, implementation and operation o f the sub-projects. Regular supervision and periodic environmental audits wil l identify residual issues, level o f compliance with the environmental

17

management framework, and will recommend contingency mitigation measures, wherever required.

6. Safeguard policies - CATEGORY B

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I ~~

Pest Management (OP 4.09) [I Cultural Property (OPN 11-03, being revised as OP 4.1 1) [I Involuntary Resettlement (OPBP 4.12) [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I Forests (OP/BP 4.36) E l Safety o f Dams (OP/BP 4.37) [I Projects in Disputed Areas (OP/BP/GP 7.60)* [I Projects on International Waterways (OP/BP/GP 7.50) E l

Environmental Assessment - OP4.1: Owing to the small-scale individual interventions, the project will not have significant irreversible or long-term environmental impacts. The potential adverse environmental impacts, primarily related to the quality o f water supplied, or related to small and local environmental degradation are manageable. These issues will be addressed by the effective implementation o f the environmental management framework prepared by the project.

Mechanism for land possession: The piped water systems wil l be built on public or donated land, so land acquisition wil l not be required in the large majority o f cases. Therefore the Operational Policy on Involuntary Resettlement (OP 4.12) will not be triggered. Bangladesh law permits voluntary land donation by registering at the District Commissioner's office. All voluntary land transactions wil l meet the following criteria: (a) the land in question will be free of squatters, encroachers or other claims o f encumbrances; (b) verification o f the voluntary nature o f land donations in each case; (c) land transfers wil l be completed through registration; land ti t le wil l be vested in the Union Parishad (rural) and municipality (urban); and (d) a provision wil l be made for redressal o f grievances.

For those rare cases where the Sponsors wil l need to purchase land, such purchase will be undertaken with the portion o f funds provided by the Sponsor and the land title will be vested in the Union Parishad (rural) and municipality (urban). The PMU in DPHE will examine al l cases o f land purchases, with an independent agency as required, at the t ime o f proposal submission and before approving fund transfer for actual physical work. The project wil l develop the TOR and identify a suitable agency for ascertaining voluntarism o f al l land transfers and purchases before the signing o f implementation o f contracts. All grievances wil l be reviewed by a committee under the chairmanship o f the District Commissioner, and including the UP Chairman, and a PMU representative as its members. This committee will address any issue as brought out by an aggrieved person and/or as brought out by the external agency's examination reports.

* By supporting theproposedproject, the Bank does not intend to prejudice thefinal determination of the parties' claims on the disputed areas

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Piped water systems for Tribal Population: The majority o f the tribal population resides in the Chittagong Hill Tracts (CHT) and the h l ly northern areas in a scattered manner and groundwater in these areas is not contaminated by arsenic. Therefore, i t is not anticipated that the project would finance activities in such areas. Nevertheless, communities in these areas might opt for piped water supply schemes under Component 1. In the event o f a request for piped water systems from tribal areas, the sponsor will be required to develop a targeted mechanism for (a) creating enabling environment by using tribal language awareness kits and tribal workers for informed decision making by tribal groups, and (b) mobilizing the willing communities to determine the best approach and the community members’ role in the planning, implementation, operation and maintenance o f the piped water schemes. When the community and sponsor agree on the community taking an active role in the O&M, as opposed to having a relationship o f customer- water utility, the sponsor will be required to strengthen the community’s capacity to operate and maintain the project activitiedfacilities.

7. Policy Exceptions and Readiness

No policy exceptions have been sought.

Readiness:

A procurement plan for the project has been prepared and i s ready for implementation.

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Annex 1 : Country and Sector Background BANGLADESH: Water Supply Program Project

Bangladesh has made good progress in improving access to safe water. The water supply coverage has increased both in the urban and the rural areas. Nearly 96% o f the rural population i s served by over 11 mi l l ion hand tube wells. Arsenic contamination o f groundwater beyond the permissible limit o f 0.05 mg/liter in Bangladesh, has affected an estimated 25% o f the shallow tube wells bringing down the safe water coverage to around 75%. The arsenic in groundwater affects an estimated 35 million people’ both in urban and rural water areas. So far between 10,000 and 12,000 cases o f arsenicosis have been identified.

On average more than hal f the urban population has access to water supply. The four large cities; Dhaka, Chittagong, Khulna and Rajshahi have piped water systems that serve 76%, 55%, 51% and 40% o f the population respectively. However, only 100 out o f the over 250 municipal towns have piped water systems. These primarily serve the population in the urban core. The urban population in slums and fringes o f medium and small towns relies on hand tube wells.

Gains in rural sanitation coverage have not matched the achievement in water supply. Sanitation has consistently lagged behind. A recent survey puts sanitation coverage at 33%2 in the rural and l i t t le over 50% in the urban areas. The popular technology in rural areas i s the pit latrine with or without water seal.

The sanitation coverage in large towns and cities i s between 65 and 76%. Pit latrines and septic tanks are the technology o f choice in urban areas. Poor drainage decreases permeability o f soil making dense urban areas unfit for onsite sanitation options. Pits fill up too fast and effluent from septic tanks flows into open drains aggravating environmental pollution. Only Dhaka has a water-borne sewerage system that serves around 27% o f the population. The slow progress in sanitation coverage and poor hygiene habits among people have thwarted expected health gains from improved access to clean water. Morbidity and mortality rates due to excreta related and water borne diseases remain high resulting in malnutrition, increased medical cost and lost income.

The high water supply coverage fails to reflect the underlying problems o f water quality (arsenic and other chemical and biological contamination), the l o w coverage in terms o f adequate sanitation and poor hygiene practices. The high incidence o f diarrhea and other water-related diseases lead to high chi ld mortality and the loss o f 5.75 mi l l ion Disability Adjusted L i fe Years (DALYs), or 61% o f total lost D a y s 3 . Treatment o f hygiene-related disease costs 5 billion taka each year4. As studies from India suggest, linking clean water to sanitation and hygiene promotion can substantially reduce medical expenditure, D A L Y s lost and loss o f earnings and production for poor people, whose physical fitness i s their main productive asset.

’ Arsenic Mitigation in Bangladesh, An outcome o f the International Workshop on Arsenic Mitigation in Bangladesh, Dhaka, 14-16 January 2002, Editors: M. Feroze Ahmed, Chowdhury Mufad Ahmed, Local Government Division, Ministry o f LGRD & Co-operatives, Govemment o f the People’s Republic o f Bangladesh, September 2002

Baseline survey conducted prior to the Sanitation Campaign in 2003 D A L Y - Disability Adjusted Life Year, a measure o f effective loss o f l i f e through both death and incapacity S. A. Ahmed, Water & Sanitation Program, personal communication Apri l 2002, based upon “Health Care Expenditures in Bangladesh” in

“Health Situation and Health Care Expenditures in Bangladesh, Evidences from Nationally Representative Surveys”, BBS, April 1999

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National Policies. The adoption o f the National Policy for Safe Water Supply and Sanitation in 1998 is perhaps the most important development in the sector. The pol icy recognizes the many problems in the sector and makes provisions to address them. Though the pol icy does not have the force o f law, in principle al l planning and implementation in the water and sanitation sector should conform to it.

The National Water Policy 1999 o f the Government provides direction to al l agencies and institutions working directly or indirectly with the water sector for achievement o f specified objectives. The contents o f the National Water Policy do not conflict with the National Policy for Safe Water Supply and Sanitation 1998. However, implementation o f both policies requires institutional reforms, legal interventions and capacity building at different levels, something that this project i s designed to do.

Sector Planning. Planning and implementation in the sector has been largely a supply-driven, top-down and target-oriented process. Sector planning lacks a holistic approach and mechanisms to facilitate participatory planning at the local level. In consequence, planning i s project based and suffers from duplication, unclear priorities, and uncoordinated development. Agencies prefer and are geared to meet physical targets rather than to establish and monitor processes for reaching goals relating to facility operation, management, utilization or maintenance. Coordination o f sector development should be a government function. Unfortunately there is little coordination o f activities within the sector and virtually no coordination with other sectors such as the Ministry o f Health and Family Welfare, NWMP, DOE or WARP0 or MWR that have implications on development in the water and sanitation sector. Past lessons suggest that goals o f sustainability, equity, and efficiency may be met by focusing on demand-driven planning and implementation, which emphasize identifying and meeting consumer demands. The success o f future efforts in the WSS sector wil l rest in making a shift from a supply-driven to the demand-driven approach o f the proposed project.

Institutional framework. There is growing dissatisfaction among stakeholders with the public service delivery mechanism. The public sector i s overly centralized, supply driven and seldom responds to user needs and demand. The emphasis has been more o n construction than on improving the management o f services. Stakeholders recognize that development o f service and improvement in management have to go hand in hand. They call for institutional changes to give a greater role to local government institutions and user communities in planning, implementation and O&M o f services. The GOB is now determined to bring about concrete action regarding institutional change.

The statutory responsibility for the water supply and sanitation (WSS) sector lies with the Ministry o f Local Government, Rural Development and Co-operatives (MLGRD&C). The ministry delegates the functional responsibility to the DPHE, the Local Government Engineering Department (LGED), the city corporations (CCs), the municipalities and, in Dhaka and Chittagong, to the Water Supply and Sewerage Authorities (WASAs). DPHE i s responsible for planning, designing and implementing water supply and sanitation services in rural and urban areas except the cities o f Dhaka and Chittagong. LGED i s responsible for urban and rural infrastructure

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development but i t s activities in drainage, solid waste management and rehabilitation o f water supply overlap with the responsibilities vested in DPHE.

Provision, operation and maintenance o f water supply are statutory responsibilities o f municipalities (pourashavas), but they have limited technical competence and rely on DPHE (or LGED) for design and construction. Provision o f rural water services i s channeled through the Union Water Supply and Sanitation Committee. Allocation o f new tubewells i s on the basis o f a set o f selection criteria. DPHE contractors install the tubewells. Communities participate in site selection and make cash contributions depending on the type o f water point installed. Operation and maintenance o f water points are the responsibility o f the users and caretakers undertake minor repairs. Major repairs are done by DPHE or private sector mechanics. The government service delivery mechanism has been successful in achieving physical targets but the highly subsidized service provision and the continued public involvement in local level service planning and implementation jeopardize sustainability.

At the municipal level, DPHE plans and implements water and sanitation schemes. Despite the presence o f local DPHE offices, the centralized administrative structure o f DPHE coupled with the weak managerial, financial, technical and communication sk i l l s o f the pourashava has often resulted in inadequate consultation between DPHE, and municipalities and the local community. Under these circumstances, municipalities do not identify strongly with the schemes and subsequently provide poor maintenance and consumer service.

As per municipal ordinance, municipalities are responsible for water supply and sanitation, but lack sufficient autonomy to take decisions. LGD approves all-important municipal decisions on planning, implementation, staffing and tariff. Municipalities have l imited capacities in management, technical competence and finance to operate water systems efficiently or to undertake community development and social mobilization. Water supply services are organized as administrative departments o f the pourashavas and not as legally separated entities. Water revenues and expenses are part o f the overall budget o f the pourashava.

Unsustainable Cost Recovey. The current rural water supply program i s highly subsidized. On an average the user community currently contributes 10% o f the capital cost and bears the total cost o f operation and maintenance. DPHE village sanitation centers sell sanitary latrine components at cost price.

Municipal revenues from urban water services are also highly subsidized and insufficient to cover operation and maintenance costs, and even less to finance investments in system rehabilitation and expansion. Collection o f revenues i s also l o w and hence arrears, particularly to electricity providers, are high. The l imited investments carried out in system expansion are then dependent on central government subsidies through DPHE. Municipalities may, but rarely do, initiate water and sanitation projects from their annual government development grants. These financial policies lead to a rapid dilapidation o f existing infrastructure and to l o w levels o f service coverage.

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Financial dependence o f local authorities o n government or external funding further deepens the cycle o f dependence and inefficiency. By empowering local governments and encouraging private sector development, the project aims to break this cycle.

Inequitable service distribution. Average figures conceal the disparity in service access and distribution. The rural and the urban poor suffer the most. Despite the urban bias in sector investments, water supply coverage in the urban areas i s lower than in the rural with glaring inequity in service access by towns, socio-economic status and hydro-geological regions.

Despite high rural water supply coverage distribution o f services has been inequitable. The ratio o f persons to deep tube wells varies widely among different hydro-geological areas between 50 persons per tube wel l and 350. Even in well-served areas there are under-served and un-served pockets. Arsenic contamination has brought in a new dimension almost wiping out the achievement in safe water supply coverage in some areas. The water and sanitation service coverage in the hill districts i s much lower than the average national figures. Sanitation coverage has lagged behind water supply. The average coverage in the rural areas i s around 35%. Rural projects in the past have mainly concentrated on increasing service coverage. Despite user selection criteria for water point allocation, services continue to elude the poor. The policy emphasizes attention to un-served and underserved areas but subsidy targeting has not been easy.

Conclusion. The Water Supply and Sanitation Sector faces many inter-related issues pertaining to technology options, equitable distribution o f water and sanitation services, institutions, decentralization, finance and mobilization o f resources, capacity in management, planning and policy analysis and arsenic contamination mitigation measures. This project presents an opportunity to bring to bear the ski l l and financial resources o f the Wor ld Bank to help address the challenges with an approach that addresses the need for widening the group o f stakeholders in the water supply sector, strengthens local and national government capacity, and helps to scale up water supply services in Bangladesh.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies BANGLADESH: Water Supply Program Project

Sector Issue

Bank Financed (Piped) water supply/ decentralization

Financial mechanism

Other Development Agencies ADB

ADB

DANIDA

JICA

Drinking Water to arsenic affected areas in western Bangladesh

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Annex 3: Results Framework and Monitoring BANGLADESH: Water Supply Program Project

Results Framework

PDO

The development objective o f the proposed project i s to contribute to Bangladesh’s efforts to achieve the Millennium Development Goals (MDGs) in water supply and sanitation by 2015.

Specifically, the project will pilot innovative measures to scale up the provision o f safe water supply free from arsenic and pathogens in rural areas and small towns.

Intermediate Results One per Component

Component One: Enhance quality and quantity o f water supply for at least 300 villages

Component Two: Enhance quality and quantity o f water supply for at least 3 pourashavas

Component Three: Enhance quality and quantity o f water supply for approximately 200

Outcome Indicators

Pilot Innovative approaches to water supply provision functioning and attracting private sponsors

Scaling up o f rural and small town water supply on-going in a viable manner

Safe water provided to at least 1.25 million people

Local government capacity in providing safe water strengthened Results Indicators for Each

Component Component One: Number o f villages receiving and using effectively safe piped water supply in private-sponsor arrangements in a technically and financially sustainable manner

Proportion o f poor households receiving and effectively using piped water supply in service areas o f participating villages Component Two: a) Pourashavas (piped water supply)

Number o f pourashavas with expanded and improved water supply with a functioning private operator arrangement

Proportion o f poor households receiving and using effectively piped water supply in service areas o f participating pourashavas

b) Pourashava sanitation

Number o f prefeasibility studies for pourashava sanitation Component Three: Approximately 2,000 arsenic safe point water sources provided

Use of Outcome Information

Assess the health and productivity impacts o f project intervention

Assess viability and future prospects for further scaling up o f innovative institutional options for piped water supply

Use of Results Monitoring

Component One: Assess the viability and effectiveness o f private sponsor arrangements for village water supply

Assess options for fiu-ther scaling up o f village piped water supply

Component Two: a) Assess the viability and effectiveness o f private operator arrangements for pourashava water supply

Assess options for further scaling up o f urban piped water supply with private-sector participation

b) Provide decision basis for possible future investment in pourashava sanitation

Component Three: Assess increase and effective use in population using safe water

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villages in arsenic hot spot areas by providing safe point water sources

Component Five Develop a local credit market for rural piped water supply.

Component Six Implement a functioning M&E system for continuous learning from project implementation

Average number o f households effectively using safe point water source.

Share o f point sources with annual record o f water quality monitoring

Component Five (tlus component w i l l only be activated under the conditions outlined in Annex 4) Component Six Number and quality o f M&E studies during the l i f e o f the project

One analytical report to measure the effective use o f improved access to safe water options and i t s impact, at the end o f project.

Component Four Enhance capacity o f stakeholders to implement sustainable mitigation measures

Component Four: Share o f point sources with a water quality assessment upon completion o f water point (in piped and non- piped systems)

Component Four: Assess the safety and sustainability o f project interventions and correct interventions if necessary.

Component Five Assess the capacity o f the private sector for the scaling up o f the pi lot approach used in the project. Component Six Develop a functioning tool that will help scale up the pi lot approach used in the project and to adjust implementation as necessary.

26

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Annex 4: Detailed Project Description BANGLADESH: Water Supply Program Project

Component 1: Rural piped water supply - US$23.1 million

This component wil l support private sponsors’ efforts (including NGOs, private companies, cooperatives and CBOs) to implement and operate sustainable piped water supply systems in rural villages and growth centers. The component will provide technical assistance and a partial capital cost grant (50%) aimed at expanding provision o f the piped system to serve the poor members o f the community. In this component, the private sponsor and the community (in some cases with the support o f local elected officials - Union Parishad chairmen) wil l prepare the feasibility studies and the full project proposal and engineering designs for review and appraisal by DPHE and i t s PMU. Project preparation will be based on a participatory approach under specific guidelines to ensure involvement o f the poor and disadvantaged members o f the community.

Financing o f the piped systems wil l include equity contributions from the private sponsors, loans from local financial institutions, community contributions in the form o f connection fees, and a partial capital cost grant provided by the project. The payment o f this grant will take the form o f an Output-Based Aid (OBA) approach, with disbursements made upon certified achievements o f project milestones, such as functioning connections. The main objective o f the OBA grant i s to ensure provision o f water supply to the poor members o f the community. Provision o f water to commercial and industrial customers (including in some cases multi-purpose irrigation schemes) will be promoted to improve the financial viability o f the system but the OBA grant wil l not support the capital cost o f these activities. The private sponsor and the communities will negotiate tar i f fs and the tari f f review mechanism will be made explicit in the Service Agreement between the parties. The Project Unit wil l provide independent support to the communities as requested in these negotiations. In addition, a benchmarking system that will provide up-to-date information to communities joining the program wil l be established for al l o f these projects.

The private sponsor will be responsible for operating the piped system for a period o f 15 years under a Service Agreement with a Water Users Association or equivalent group, and the local government authority (Union Parishad), using formats prepared under the project. The Service Agreement wil l define roles and responsibilities o f each party and lay out clear dispute resolution procedures. The M&E system will closely fol low operation o f these systems and compile lessons during the f i rst two years o f operation to make a determination about the best approach to ensure prompt resolutions o f disputes. DPHE wil l be responsible for regulation and monitoring o f water quality and quality o f service.

29

Component 2: Water and sanitation services in medium-size towns - US$ 14.8 million

2.a Pourashavas and private sector involvement in piped water supply - US$ 14.53 million

This component wil l focus on improving water supply service in 3 to 5 mid-sized pourashavas by promoting participation o f the local private sector as a viable option to design, build, and operate the water supply systems. I t i s expected that this pi lot activity wil l improve current water service through (i) rehabilitation and expansion o f the pourashava water supply system, (ii) enabling 24-hour supply o f water (as compared to current 2 to10 hours), (iii) provision o f arsenic free and bacteriologically safe water by substituting for public contaminated wells and by offering an alternative to the many households that currently rely on contaminated water from hand pumps.

As in the village piped water supply system, different levels o f service will be provided in order to ensure affordability to al l sections o f the community. Costs will be recovered through tariffs and hence, no upfront connection fee will be charged to promote a higher rate o f connections to the water system. This approach was chosen because (i) connection fees may represent a major disincentive to connect to the public system, particularly in the case o f potential customers who have access to their private (often arsenic- contaminated) hand pumps, (ii) people, especially in peripheral areas, may not own their homes and therefore be unwilling to invest in a house connection; and (iii) non-domestic users with a private water source may also be unwilling to pay a connection fee.

While rehabilitation and construction o f the water system will be 100% financed by IDA, the pourashavas, through their water supply entity, will be responsible for repaying 50% o f the investment cost. This wil l be done through an on lending agreement between the government and the pourashavas. The terms and conditions o f these loans would be similar to those used in the Municipal Services Project (20 year repayment period, including 5 years grace period and 7% interest). The technical assistance under the project would be transferred to the pourashavas or their water supply entities as grants.

Pourashavas wil l create and own a Pourashava Water Supply Entity (PWSE) which will own the assets o f the water supply system and be the depository o f al l revenues that accrue from the provision o f water services. This PWSE and the GOB will enter into a contract with a private operator for the design, rehabilitatiodconstruction and operation o f the water supply for a period o f 10 years and will also be responsible for the supervision o f the contract with the private operator.

Selection o f the private operator wil l be made under competitive bidding. The PO will prepare final design documents to be approved by the PMU and will procure a l l the goods and services needed to rehabilitate and expand the water system. Rehabilitation and construction o f the system wil l also be supervised by DPHE and the PMU. The pourashavas wil l be invited by the PMU to actively participate in al l decisions related to

30

the preparation o f feasibility studies, and procurement, and bid evaluation o f offers by interested POs.

Contractual obligations o f the private operator during the operation phase include: (1) managing o f the personnel assigned by the government to the company; (2) full discretion for procuring (following agreed-upon procedures) goods and services needed to operate and maintain the water supply system; (3) billing and collection; (4) rehabilitation works needed to maintain the water system in optimal condition; and (5) installation o f new water connections and needed extensions and improvements to the distribution system (consistent with the capacity o f the water system). The private operator wil l also be responsible for the forward and timely planning o f the services and to advise the pourashava on actions needed to expand the system to meet future demand. Revenues from operations will be deposited in a special bank account owned by the asset holding company but managed by the private operator. No money from this account can be used for purposes other than those related to the operation and maintenance o f the services. The remuneration and productivity bonuses to the operator will be drawn from th is account with the authorization o f the asset holding company. Performance o f the private operator will be reviewed annually under a technicaVfinancia1 performance audit to be performed by a specialized private firm. The cost o f this audit wil l be paid from the special bank account.

I t i s likely, during the f i rst 1-3 years o f operation, that the operational cash flow o f the PWSE could be negative as tari f f increases (from the l o w present levels) are l ikely to be inadequate to cover al l costs. A project service charge would be established and financed by the project on a declining basis in order to stabilize the cash flow, provided that the negative cash f low i s not the result o f non-compliance by the Government (tariff increases and prompt payment o f water services provided to government agencies) or the private operator not fulfilling his obligations under the contract.

Under this component, the preparation o f feasibility studies (which includes preparation of bidding documents) and the technicaVfinancia1 performance audits will also be financed.

The option to include a concession arrangement with the Operator (through capital investment by the Operator himself) wil l be explored. At appraisal, this option seemed not viable due to the amount o f local debt financing needed under this arrangement.

Capacity Building component includes technical assistance for project preparation, bidding and construction supervision. Capacity building will also include actions to raise awareness and understanding o f private sector participation and to train central and local staff in the supervision and monitoring o f the contract with the private operator.

The criteria for pourashava eligibility are:

0 Willingness to supply assets,

introduce reforms to: a) create a municipal company to own the water accountable to the Chairman, and responsible for the provision o f

31

services with separate accounts from the municipal govemment; b) transfer to the water company o f the assets related to the water supply infrastructure; c) delegate to the water company the authority to contract with a private operator the provision o f services for ten years; d) delegate to the water company the supervision o f the performance o f and dialogue with the private operator and e) pay back to the government part o f the project cost (share to be defined) under an on-lending agreement (see above).

0 Additional criteria include the presence o f arsenic in the area’s water supply.

2. b Urban Sanitation - US$0.22 million

The project wil l finance pre-feasibility studies for urban sanitation. These may include:

0 Preparation o f alternative sanitation options (condominia1 sewer systems, individual house units - latrines).

0 Identification o f urban centers where these options could be implemented. 0 Definition o f institutional options and financial arrangements to operate and maintain

public sanitation systems.

Component 3: Non-piped arsenic mitigation activities - US$4.4 million

In small villages o f up to 200 households piped water supply is not viable and non-piped arsenic mitigation options need to be sought. Based o n experience from BAMWSP and other GOB and donor initiatives, many mitigation measures have been developed. Some o f the lessons learned include:

0 Dug wells: People’s acceptance level seems to be low, and the bacteriological quality as wel l as possible arsenic contamination i s a concern.

0 Pond Sand Filter: People’s acceptance level i s l ow and bacteriological quality i s poor.

0 Rainwater Harvesting: Acceptance seems to be good but there i s a concern about the bacteriological quality and availability as this method does not provide water year-round. Household water treatment: There are many techniques such as the Bucket Treatment Unit (BTU), tube well attached arsenic removal unit, and three-kolshi. Depending o n the technique, user acceptance varies; nevertheless these techniques may have other contamination problems. Community water treatment: So far i t seems that this technique is accepted and, in terms o f bacteriological water quality, i t i s easier to monitor water quality. Deep hand tube wells: there i s high acceptance by beneficiaries and the risk o f poor bacteriological quality is low.

0

0

0

The arsenic mitigation package to be offered will be based on these lessons learned. Since this component i s also demand driven, i t i s not possible at this stage to provide a final estimate o f which option the communities will choose to implement. B A M W S P experience has shown, however, that most communities prefer deep tube wells.

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(a) Small villages located in arsenic-affected Hot Spot Upazilas

This part o f Component 3 wil l make funding available to serve villages under 200 households located in 3 Ho t Spot Upazilas where more than 60 percent o f household tubewells are contaminated by arsenic. I t i s expected that around 200 villages can be covered with arsenic and pathogen safe water sources, according to the following base design:

Support Organizations (SOs) wil l be contracted to facilitate establishment o f Union and Ward Arsenic Committees, develop capacity o f these committees to raise awareness on the importance o f arsenic safe water, and support development o f ward level community action plans (CAP), which will detail the number o f point source options per ward, cost sharing mechanisms and O & M procedures; Union Parishads (UPS) and Ward Arsenic Committees (WACs) in the selected Upazilas wil l be made aware o f the project and the possible arsenic mitigation investments being offered by the project; To ensure that the new source i s attractive enough for beneficiaries to use, minimum service level for deep tube wells and dug wells i s 1 for every 10 to 15 households; Dug wells will only be offered in areas where no other option i s feasible and/or where soil conditions permit the digging o f such wells. In addition, provisions will be made for well disinfection. UPS and WACs work with villages to develop a request for funding investments according to a framework to be outlined in the Operational Manual; Each community contributes 10% to investment costs; Ward Committee contracts for the investments and installations and will, jointly with community caretakers, continue to be responsible for O&M in the future; Participation (at least 30%) o f women and vulnerable groups in ward arsenic committees, as outlined in Annex 10. SO will monitor the process o f contracting and completion o f CAP. SO will also provide follow up o f O&M activities one year after CAP completion.

(b) Complementary service in fringe areas o f those villages where piped water supply will be supplied, but where it wil l not be feasible, for technical reasons, to cover al l households. In such cases, beneficiaries wil l contribute 10% o f the investment.

Component 4: Capacity building, regulations and training - US$3.2 million

4. a Capacity building and training

For Component 1, the key capacity building requirement will be a package o f assistance to prospective local private partner/operators. This package should be provided by organizations familiar with management o f community level piped water systems, and should be delivered on an appropriate upazilddistrict level basis. A series o f workshops

33

will be carried out with participants who meet minimum requirements as potential operatorhponsors (e.g. experience with the management o f community-level enterprises andor mobilization, knowledge o f water system design and operation, etc.). A roster o f potential operators should be compiled with specific facilitation assistance provided at the community level as required.

For Component 2a, Workshops wil l be held with interested local private operators to discuss ways to increase competition and to take into account their concerns regarding the bidding documents. Workshops wil l also be held to discuss with government authorities at a l l levels the pol icy implications o f participation o f the private sector and the importance o f developing a responsive benchmarking and contract supervision system to promote synergy with private operators for the benefit o f a l l users o f the public water supply.

For component 2b, experienced consultants will be hired to assess the viability o f the technical, economic and social viability o f public and non-public approaches to urban sanitation.

For Component 3, the PMU will facilitate and monitor planning, implementation and operations o f investments. In addition, TA will be provided to Union Parishads and Ward Arsenic Committees to procure, implement, monitor and maintain the chosen arsenic mitigation package. This will take place through qualified NGOs (SOs). In addition, the design and implementation o f client satisfaction surveys in communities will be supported through this component. These surveys wil l be integrated into the project’s M&E and MLGRDC monitoring systems.

4. b Regulatory Frameworks

The project wil l provide Technical Assistance to the developmenthtrengthening o f a basic regulatory framework in two key areas: (i) involvement o f the private sector (cooperatives, NGOs and private companies) in rural and urban piped water supply, increased delegation o f responsibilities to local government and benchmarking o f operations to introduce competition and accountability; and (ii) groundwater management (development, monitoring and regulation).

4. c Water Monitoring

This component wil l seek to strengthen water quality monitoring routines and capacity at national (DPHE), union parishad and pourashava levels. Parallel financing by the IAEA as wel l as DFID i s expected.

(i) Water Quality Monitoring 0 A water quality monitoring protocol has been developed by BAMWSP and the

same protocol would be used to ensure that the water sources used for the BWSPP are safe and that information collected would be fed into the National Arsenic

34

Mitigation Information Center ("IC), which was developed under B A M W S P and has been functioning well. The protocol may also serve as a contribution to the development o f a national water quality monitoring protocol for DPHE. Institutional arrangements to support water quality monitoring through DPHE and local governments respectively and appropriate capacity building measures wil l be developed.

(ii) Groundwater mapping and aquifer characterization

This subcomponent will also focus on monitoring and assist DPHE in the characterization and monitoring o f safe groundwater resources, as groundwater will continue to be one o f the country's main sources o f water supply.

Deep (and older) groundwater in the Pleistocene aquifer i s generally free o f arsenic and a potential source for (piped) water supply schemes. The mapping and characterization will confirm i t s quality and show whether i t i s mixed with younger water from the upper (arsenic contaminated) aquifers. Deep groundwater investigations at various locations wil l contribute to building the knowledge base and provide guidelines for the safe abstraction o f groundwater (well construction guidelines to prevent cross flow in the well, monitoring requirements to control the possible mixing with younger water from the upper aquifer and regulatory requirements for monitoring and control o f the abstraction rates). Discussions are on-going with the IAEA to support deep aquifer characterization and mapping by use o f isotope analysis. Such analysis can confirm that the deep groundwater at different locations i s o f the same age and whether it i s mixed with the younger water from the upper (arsenic-contaminated) aquifers. Systematic isotope data collection from the deep groundwater wil l build a valuable database o f information on the confirmation that this water is from the same age (and origin) and different from the water o f the arsenic polluted aquifers. River bank infiltration systems are presently being tested under B A M W S P (in Chapai Nawabganj). These systems may provide a safe source o f drinking water if designed such that the major portion o f the pumped water originates from the r iver and i s bacteriologically safe. The results o f the current pi lot project under BAMWSP will be used to assess the feasibility o f similar systems at other locations. Isotope analysis wil l also be a useful tool in the design o f riverbank infiltration systems and to monitor i t s safe exploitation.

This sub component supports ongoing activities o f the GOB (including studies carried out by Japan Intemational Cooperation Agency (JICA) and the United States Geological Survey (USGS) in collaboration with Geological Survey o f Bangladesh (GSB) and Water Resources Development Board (WRDB) and wil l promote the use o f a valuable tool in developing the knowledge o f the deep aquifer and its safe exploitation and the feasibility o f development o f river bank infiltration schemes.

35

(iii) Water safety plans

The objective o f this sub-component i s to develop and test the application o f risk-based approaches to water safety management in Components 1, 2 and 3. It will finance the development o f pi lot projects to implement water safety plans in a selection o f communities with the objective o f informing the establishment o f national guidelines for implementing water safety plans in Bangladesh that are consistent with an overall water safety framework. Additional hnding wil l be provided from DFID via the Policy Support Unit (WSU) located in the Local Government Division.

Through this sub-component, water supply managers (local Government, private sector and/or communities) wil l be provided with the skills and tools to manage the safety o f their water supply and promote safe water storage and handling. This will include ensuring that the catchments o f water supplies are reasonably protected, that monitoring i s targeted on parameters detecting identified risks that infrastructure i s properly maintained and that good water handling hygiene is promoted. Experience from other countries has shown that these approaches promote better asset management and therefore implementing water safety plans i s expected to provide an overall benefit in protecting and maximizing investments. Some tools have been developed in other developing countries and small-scale pi lot activities fimded by the Policy Support Unit are being developed in Bangladesh to revise and refine these tools. The sub-component wil l finance consultant support and training o f water supply managers in developing appropriate water safety plans and tools for monitoring and corrective action. I t is envisaged that a number o f models o f implementing water safety plans W i l l be tested, including contracting o f water safety and supply management by Local Government Institutions to the small-scale private sector.

5. Development of local credit market and risk management mechanisms for village piped water supply - US$4.9 million

This component seeks to develop a local credit market for village piped water supply. With local banks in Bangladesh generally unable to provide local-currency loans with long-term maturity - a crucial element in keeping water tariffs charged by private sponsors affordable - and lacking experience in financing rural piped water supply schemes, this component wil l make available funding to eligible sponsors. The chief objective o f the component i s to illustrate to private banks that private piped water supply schemes constitute a viable market and that i t is worthwhile for them to offer appropriate lending instruments.

This component would support a facility with a variety o f mechanisms to support private banks interested in lending for village piped water supply. These instruments may include a credit line, partial credit guarantee, takeout and interest rate support, and as a last recourse direct lending to sponsors. The liquidity support or takeout mechanism would provide a re-financing mechanism to address liquidity problems stemming from the mismatch between tenors o f required lending and average maturity o f available deposits. The interest rate support mechanism would provide comfort against longer-term interest

36

rate volatility, thereby facilitating the local provision o f fixed rate loans. The direct lending to sponsors would be a last recourse in case local banks are not interested in the init ial group o f sponsors’ proposals. The interest o f local banks confirmed at appraisal is positive, although there i s interest in the takeout and interest support facilities. The facilities will be priced appropriately so that commercial lenders with liquidity would not require a l ine o f credit but would be given incentives to extend local currency loans with the required structure. These facilities would constitute a short-term mechanism until the market i s developed more broadly. The funding mechanism would be administered by the Infrastructure Development Company Limited (IDCOL), the implementing agency for the IDA-financed Private Sector Infrastructure Development Project (PSIDP) and the GEF grant for the Rural Electrification and Renewable Energy Development Project. I t is anticipated that this component would be activated if other altemative support mechanisms and funding sources, through the above existing projects or other IDA- supported activities - were not sufficient.

This component would also support a risk management mechanism to support private sponsors against force majeur situations outside their control. The private sponsors have indicated the need for support that would insure them against natural events l ike floods or tomadoes that could damage the infrastructure facilities, or against the appearance o f arsenic or other contaminants despite detailed engineering analyses conducted during each project preparation that would require the installation o f additional unplanned treatment facilities. There is no insurance industry in Bangladesh that would provide services o f this type to private sponsors. This component would provide protection to private sponsors against well-defined conditions identified in the subproject grant agreement. Based on lessons o f implementation o f this activity, the project wil l support the establishment o f a more permanent insurance mechanism in coordination with other Government programs.

6 Project monitoring and evaluation - US$1.4 million

An M&E framework for the project i s under development. M&E h c t i o n s would be carried out by a consulting company under the supervision o f a specialized subunit within the PMU. The data collected by the consulting company and i ts linkage to the databases managed by N A M I C i s being explored.

The objectives o f the M&E will include:

Component 1: 0 Assist BWSPP in the collection and analysis o f information related to the

preparation and implementation o f piped water schemes; 0 Prepare information to disseminate init ial lessons to al l stakeholders; 0 Prepare briefing documents that wil l raise issues and challenges faced by the

pilots to assist BWSPP and the World Bank with the necessary modifications to the guiding documents and overall project framework;

37

0 Assist BWSPP in the monitoring o f compliance by the sponsors and communities with the obligations stated in the Guidelines, Project Proposals, and legal agreements;

0 Develop and refine an M&E system that can be scaled-up to monitor a large-scale program o f rural piped water supply schemes that can be used by the Government to have up-to-date information on the sector in order to refine the overall regulatory and support framework; Develop a benchmarking system for piped systems supported by the project that can also be used by other programs supporting piped water supply.

0

Component 2:

0

0

0 Monitor project component performance; 0

Prepare indicators and benchmarking system to monitor performance o f water utilities (service, financial, administrative); Support update o f the DPHE urban benchmarking database;

Prepare guidelinesAessons learned from project intervention.

Component 3:

0 Prepare indicators for component performance and monitor process, output and impact o f non-piped arsenic project interventions;

0 Continue evaluation - initiated during BAMWSP - o f non-piped arsenic mitigation measures in terms o f water safety and social acceptance.

Project level:

0 Develop an overall project M&E monitoring framework, assisting BWSPP in project process, output and impact and financial monitoring based o n indicators developed as per above.

Component 7: Project management - US$3.3 million

The project wil l be managed by a PMU within DPHE. Minimum staffing requirements are shown in Annex 6.

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Annex 5: Project Costs BANGLADESH: Water Supply Program Project

Local Foreign Total Project Cost By Component and/or Activity U S $million U S $million U S $million

A. Piped Water Supply in Villages 10.66 8.66 19.32

B. Water and Sanitation Services in medium-size cities Pourashavas 6.62 5.78 12.39

Urban sanitation 0.16 0.04 0.20

Subtotal Water and Sanitation Services in 6.78 5.82 12.60 medium-size cities C. Non-piped Arsenic Mitigation Activities 2.63 1.13 3.76 for Villages D. Regulations, Capacity Building and 2.1 1 0.76 2.88 Training E. Local Credit Markets 4.31 - 4.31

F. Monitoring and Evaluation 1.01 0.26 1.27

G. Project Management Unit 1.89 1.05 2.94

Total Baseline Cost 29.39 17.69 47.08

Physical Contingencies 2.47 1.68 4.16

Price Contingencies 2.17 1.70 3.87

Total Project Costs’ 34.04 21.07 55.11

Interest during construction

Front-end Fee

Total Financing Required 34.04 21.07 55.11

Identifiable taxes and duties are US$ 5.8 million, and the total project cost, net o f taxes, i s US$ 49.3 mill ion. Therefore, the share o f project cost net o f taxes i s 89.4%. 1

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Annex 6: Implementation Arrangements BANGLADESH: Water Supply Program Project

6.1 Specific Challenges

Three o f the project’s four components provide grant financing for water supply infrastructure: community/union level piped systems in the case o f component 1 ; small town water treatment and supply systems in the case o f component 2; and point sources in the case o f component 3. In all three cases, public fbnds-in the forms o f grants from GOB-will finance infi-astructure that allows citizens to gain access to safe drinking water.

The arsenic contamination crisis in Bangladesh has engendered a wide variety o f responses to the challenge o f safe drinking water supply including top down and bottom up approaches and a wide variety o f standards and design solutions. Many donors are supporting solutions through separate instruments in selected areas o f the country. Significant GOB resources are being deployed through central agencies, notably DPHE. Thousands o f water systems with widely varying institutional and implementation arrangements are being delivered around the country. This multiplicity o f funding channels, standards and institutional and implementation arrangements has been necessary and useful in establishing effective delivery models.

This project supports effective delivery through consolidated implementation arrangements within a sustainable, appropriate institutional framework. A key challenge i s to align with GOB’S fiscal, jurisdictional, and monitoring systems while st i l l supporting the most appropriate institutional arrangements for various delivery systems at the local level. An important aspect o f this consolidation i s harmonization o f matching grant terms and conditions across components to achieve a higher level o f fiscal compatibility and minimize transaction costs.

6.2 Institutional Framework

DPHE, under the Ministry o f Local Government, Rural Development and Cooperatives (MLGRD&C), i s the implementing agency, with overall project management provided by the PMU. The PMU will take the lead in communicating the eligibility requirements under the three investment components o f the project, receiving and efficiently appraising investment proposals, and managing and reporting upon disbursements. Local institutional arrangements by investment component wil l be described in full detail in the Operational Manual, and wil l include:

Component 1:

Communities - at ward level - and sponsors will jo int ly prepare viable piped water supply system proposals which will be eligible for matching grants o f up to 50% o f capital costs.

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These proposals wil l be vetted by the respective Union Parishad Chairman and wil l b e submitted - jo int ly with the Chairman’s endorsement letter - to the PMU.

The PMU will evaluate the proposal. If it i s accepted, a contract will be signed between the (i) community representative, (ii) sponsor, (iii) Union Parishad Chairman and (iv) the PMU.

DPHE, through i ts Sub-Assistant Engineer (Upazila level) will provide Technical Assistance to the elaboration o f the proposal and to the supervision o f the carrying out o f the contract, once it i s signed.

The Union Parishad will carry out the following: conflict resolution, arbitration, as wel l as basic regulatory functions, including supervision o f tariffs and quality and quantity o f service. Adequate capacity strengthening o f the Union Parishads wil l be provided through the Project.

The contract between the 4 signatories wil l include stipulations in this regard. The sponsor will be responsible for testing water quality and providing the required information for monitoring.

The detailed requirements for the proposals to be submitted by sponsors, as wel l as the contractual documentation will be included in the Operational Manual o f the project.

Component 2: eligible pourashavas that have expressed their interest in participating in this component will be selected for the implementation o f viable water system rehabilitatiodexpansion programs implemented under a design-build-operate arrangement with a private sector partner. Feasibility studies to be undertaken by consultants hired through the project to prepare:

Legal and institutional arrangements for the creation o f a Pourashava Water Supply Entity (PWSE) in charge o f the water supply and owner o f the assets, and contractual relations with the private operator Feasibility studies for the rehabilitation and expansion o f the water supply system and breakdown and projections o f capital and O & M costs Preparation o f bidding documents to select a private operator Appropriate phasing o f proposed investments, particularly with regard to proper sequencing of: a) rehabilitation o f existing assets, b) institutional reforms required for sustainable operation o f those existing assets, and c) expansion o f the networks and house connections; Design and construction standards and supervision arrangements; Operational performance targets and bonuses to the private operator for exceeding operational targets Explicit measures to be taken to ensure continuing financial viability; Provisions for water supply to the poor at affordable rates; Terms and conditions o f employment for key technical and management staff adequate to attract and retain required expertise;

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0 Evidence o f additional financing to be provided from pourashava own resources or private partners, if applicable.

Component 3: unions/upazilas and wards will act as proponents for villages/communities in which piped water supply i s not a viable option (villages with scattered settlements and below 200 habitations/households). In these cases the local governments at the ward level wi l l liaise with the appropriate community based organization, water and sanitation committee, and/or ward arsenic committee to prepare proposals that clearly indicate:

Consent by consumers to the location o f the proposed point source, including a br ief analysis o f the suitability o f the proposed location to provide access for al l consumers; Consent by the consumers for contribution to at least 10% o f the capital costs o f the point source, and to periodic assessments over time payable to the union for required maintenance; Arrangements by the Wards and Unions to maintain transparent, ring-fenced water accounts for each source to a) meet construction costs and b) meet maintenance costs over time; Proposed design and construction management arrangements, to be supervised by DPHE technical staff deployed at the uniodupazila level and Support Organization at the Ward/scheme level; Provisions for access by poor households that cannot afford contribution to the capital cost o f the point source; Provisions for access by/supply to households that reside beyond a defined distance from the source.

6.3 Implementation Arrangements

In the case o f Component 1, implementation arrangements wil l be proposed and evaluated for each investment. Grant fbnding will be disbursed on a progress payment basis, with the combined prepayments o f the consumers and the fee for the operator for providing init ial capital for construction and O&M service.

Under Component 2, the government wil l make resources available to 3 to 5 pourashavas to improve and expand water supply services. The extent o f service improvement and expansion, and the investment costs will be defined in the feasibility study already mentioned in this annex. The consultants assisting the PMU in preparing the feasibility study will also assist the pourashavas in the preparation o f the bidding documents for the transaction with the private operator, which will be selected through a bidding process according to Bank procurement guidelines. To be eligible for financing under the project, the pourashavas, as the entity responsible for the provision o f services wil l commit themselves to:

e

0

Establish an autonomous pourashava water supply entity (PWSE) to provide the water services Make the PWSE accountable to the Chairman and the Board o f the Pourashava

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Transfer to the PWSE the assets related to the water supply infrastructure Delegate to the PWSE the authority to provide water services Require the PWSE to contract with a private operator the provision o f the services for a period o f ten years Delegate to the PWSE the supervision o f the performance o f and dialogue with the private operator Set tariffs adequate to cover operation, maintenance, depreciation charges or debt service payments, and payments to the private operator Keep in a separate bank account o f the PWSE the revenues collected by the private operator Delegate to the private operator authority the management o f the PWSE bank account under provisions and safeguards established in the contract.

The private operator wil l be responsible for:

0 Preparing final designs 0

0

0

0

Planning system expansion in consultation with the water company Rehabilitating existing infrastructure and carrying out investment in system expansion and improvement Operating and maintaining the water supply system Providing customer services, including billing and collection

Under Component 3, i t is anticipated that the PMU will contract Support Organizations (SOs) for the mobilization o f community, preparation o f Ward Action Plans and assistance in implementing the plans. Once the scheme i s finalized and endorsed by the Union Parishad and verified by the DPHE S A E , the matching grants will be disbursed to the Ward level committee for the implementation o f the ward action plan.

Under Component 4, MOUs will be signed with relevant agencies.

43

.

Annex 7: Financial Management and Disbursement Arrangements BANGLADESH: Water Supply Program Project

The Financial Management assessment o f the Bangladesh Water Supply Program Project entailed: (1) a review o f the existing financial management arrangements and the capacity o f DPHE, the implementing agency o f the project, and (2) identifying the financial management arrangements required at the PMU and at other levels o f implementation involving communities and pourashavas.

Project Management: DPHE, under the Ministry o f Local Government, Rural Development and Cooperatives (MLGRD&C), would be the implementing agency, with overall project management provided by the PMU, headed by a Project Director. The PMU will evaluate and decide on the eligibility o f the investment proposals for water supply systems received under the three investment components o f the project. The PMU will manage the disbursement in such a way as to ensure fiduciary safeguards while facilitating smooth implementation o f the project.

Component 1 - Rural Piped Water Supply

This component wil l support private sponsors’ (including NGOs, private companies, cooperatives and CBOs) proposals to build and operate piped water supply systems in approximately 300 rural villages each having more than 200 households. The project’s financing would be in the form o f matching grants o f up to 50 % o f capital costs, the sponsor financing 50% from its own equity, local bank loans and community participation. These proposals wil l be jo int ly submitted to the PMU by the community representative and the sponsor with the endorsement letter o f the UP chairman.

The PMU will evaluate each proposal. If one i s acceptable, a contract will be signed between (i) the community representative, (ii) the sponsor, (iii) the Union Parishad Chairman and (iv) the PMU. The contract will include the total cost o f the system, the amount payable as a grant (50%), the lump sum amount payable pertaining to approval o f the design, the mode o f payments o f the remaining grant amount based on progress achievements that would be certified by the UP Chairman and DPHE’s Sub-Assistant Engineer. The detailed requirements for the proposals are to be submitted by sponsors. These requirements, as wel l as the contractual documentation, wil l be included in the Operational Manual o f the project.

Component 2 - Urban Water Supply and Sanitation

(a) This component wil l focus on improving water service in 3 to 5 eligible pourashavas through the implementation o f viable water system rehabilitatiodexpansion programs under a design-build-operate arrangement with a private sector partner that wil l be selected by the PMU through competitive procurement procedures, with the active participation o f the respective pourashava. Consultants hired through the project will prepare legal and

45

institutional arrangements for the creation o f a Pourashava Water Supply Entity (PWSE) that wil l be responsible for arranging to provide water services, own the assets o f the water supply system and enter into contractual relations with the government and the private operator. The PWSE wil l supervise the implementation o f the contract with the private operator and be the depository o f al l revenues that would be earned from the provision o f water services and will provide the fimd for the O&M o f the system. While the rehabilitation and construction o f the water system will be 100% financed by the project as grants, the pourashavas through their PWSE will be in obligated to repay 50% o f the investment cost through an on-lending agreement with the government (the exact amount wil l st i l l be finalized as the component i s implemented). Grant funding will be disbursed on a progress payment basis to be certified by the PWSE and DPHE’s designated Engineer.

(b) Urban Sanitation. The project wil l finance pre-feasibility studies for urban sanitation. These may include preparation o f alternative sanitation options (condominium sewer systems, individual house un i t s - latrines), identification o f urban centers where these options could be implemented and definition o f institutional options and financial arrangements to operate and maintain public sanitation systems.

Component 3 - Non-piped arsenic mitigation activities

(a) This component wil l serve about 200 villages, each fewer than 200 households in 3 Hot Spot Upazilas where more than 60 percent o f household tube wells are contaminated by arsenic. The PMU will contract Support Organizations (SOs) for the mobilization o f the community, preparation o f ward level Community Action Plans (CAPS, which will detail the number o f point source options per ward, cost sharing mechanisms and O&M procedures. Once the scheme i s finalized and endorsed by the Union Parishad and verified by the DPHE S A E and the deposit o f the community contribution (10%) i s confirmed through receipt o f the community bank account statement, the matching grants will be disbursed to the community bank account in two phases (40% and 50%).

(b) Complementary service in fXnge areas o f those villages where piped water supply wi l l be supplied, but where it wil l not be feasible, for technical reasons, to cover al l households. In such cases, beneficiaries will contribute 10% o f the investment

Financial Management Capacity of DPHE: DPHE does not have any central department or unit to look after its overall financial management. Executive Engineers posted in each district are the Drawing and Disbursement Officers (DDOs) and single signatories to checks drawn on a Bangladesh Bank. A Divisional Accountant attached to each Executive Engineer is assigned by the Controller General o f Accounts to look after actual disbursements and financial reporting. The Divisional Accountant assisted by three other staff makes the disbursements after pre-auditing o f the bills. The accountant keeps the records and prepares the monthly statement o f Receipts and Payments and sends it to the Chief Accounts Officer (CAO) o f the Local Government Division (LGD) who

46

prepares the consolidated statement o f accounts for the DPHE by compiling the statements received from al l o f the Divisional Accountants. Mult iple Project Implementation Units (PIUs) headed by Project Directors have FM units to look after the financial management aspects o f the various development projects included in the Annual Development Plan (ADP). The Chief Engineer, DPHE prepares i t s non-development (recurrent) budget on the basis o f inputs from the various DPHE circles. The Superintending Engineer (SE), Planning Circle, prepares budgets for new development projects while the Project Directors for the ongoing projects prepare their own budget on the basis o f allocations in the ADP. The SE, Planning Circle prepares a consolidated monthly report on physical and financial progress o f DPHE by compiling the monthly progress reports received from each division and development project.

Project Financial Management - Staffing, Accounting System and Functions: Given the inadequate FM capacity o f the DPHE, a Financial Management section headed by a Financial Management Specialist (FMS) wil l be set up in the PMU to look after the FM needs o f the project. The F M S will be a qualified Charteremanagement Accountant with adequate knowledge o f project financial management needs o f IDA and GOB and proven experience using and customizing computerized accounting systems. The FMS wil l prepare a project chart o f accounts that will capture project costs in various dimensions such as government code o f accounts, Project Proforma (PP) heads, IDA disbursement categories and IDA project components so that various GOB reports and FMRs for IDA can be directly produced from the system. A computerized FM system wil l be developed to gather, store, and analyze financial information for timely reporting and decision making. The F M S wil l be responsible for having a computerized project accounting system in place by customizing an off-the-shelf accounting software with limited support from the software vendor or a short-term system specialist. The recruitment o f the F M S and procurement o f the accounting package software wil l be done as soon as possible but prior to the grant effectiveness and the costs wil l be available for retroactive financing under the grant. The F M S will be assisted by an Accounts officer and two accountants in adequately discharging the FM functions o f the project. These three accounting positions wil l be f i l led before the f i rs t project disbursement with personnel having qualifications and adequate experience in accounting, through recruitment from the market or by deputation o f government officials. The TORS for filling al l FM positions would need to be cleared by IDA.

The duties of FM staff will include: special account operations and submission o f withdrawal requests; processing the bi l ls for procurement o f works, goods and services; disbursements under various components; preparation o f an annual budget, revised budget and quarterly disbursement forecasts; obtaining quarterly fund release for GOB allocated fund and claiming the expenses against the released fund; maintenance o f books and records at PMU; monitoring book keeping by CBOs; maintenance o f contract ledger showing the up-to-date payments and payable status on al l contracts including those with CBOs, preparation o f Bank Reconciliation Statements; f ixed assets management in al l project locations tracking assets procurement; custody, use, disposal and physical verification; preparation o f annual financial statements and other periodic reports to the DPHE, the line ministry and other GOB agencies; submission o f quarterly Financial

47

Monitoring Reports (FMRs) to IDA; interfacing with auditors and developing new fund f low and disbursement arrangements as and when needed.

Reporting and Monitoring: The FM section wil l be responsible for preparing al l monthly, quarterly and annual financial reports for DPHE, CAO, the l ine ministry, MOF, IMED and any other GOB agencies, consistent with the government’s Project Accounting Manual. In addition, Financial Monitoring Reports (FMRs) namely Sources and Uses o f Fund, Project Expenditures by components, Procurement Status Report, and the Project’s Physical Performance wil l be prepared for submission to IDA within 45 days from the end o f each quarter. A quarterly progress monitoring report will be accepted as the Physical Progress Report o f FMRs. Year-end FMRs will also provide a reconciliation o f expenditure claimed from the Bank with expenditures incurred annually. The formats o f the reports will be agreed with the borrower during negotiations.

Internal Audit: Internal auditing wil l be carried out in accordance with a specific auditing plan and reports submitted to the Chief Engineer, DPHE with a copy to the BWSPP Project Director. Going beyond the financial aspects, the intemal audit would look into the effective and efficient use o f project resources and an independent appraisal o f the working o f the PMU and other partners in the implementation arrangement. Such activities wil l be independent from the control o f those who are responsible for carrying out the financial and accounting operations as wel l as those engaged in the execution o f services rendered. The key internal audit function wil l be: (i) ascertaining whether the system o f internal checks and controls operating within the organization for preventing errors and fraud is effective in design as wel l as in operation; (ii) ascertaining reliability o f accounting and other records as well as seeing that accounting methods provide the information necessary for preparation o f correct financial statements; (iii) ascertaining the extent to which the project entity’s assets are safeguarded from any unauthorized use or losses; (iv) ascertaining whether administrative and financial regulations o f the government and instructions issued by the Treasury as wel l as donors’ legal requirements are followed; and (v) ascertaining the effectiveness o f the system o f internal control adopted in preventing, as wel l as detecting waste, idle capacity and extravagance. The PMU will contract out each year’s internal audit function to firms o f Chartered Accountants with adequate relevant experience under a TOR to be prepared by the F M S and cleared with IDA. Such TOR should follow the good practices in line with the standards and guidelines o f the Institute o f Internal Auditors. The findings o f the internal audit wi l l be acted upon within a month o f the report after consultation with the relevant units.

External Audit: The Foreign Aided Project Audit Directorate (FAPAD) o f C&AG wil l audit the project annually. Audited financial statements wil l be submitted to IDA within six months f i om the end o f the financial year. The Project Director, PMU will be responsible for audit follow up and taking remedial actions with the assistance from F M S and the PMU program section@) relevant to the objections. A register, known as Audit Query Register, wil l be maintained which will be updated at the end o f every month with particular attention to unattended and serious audit objections. The P M U and DPHE with the help o f MLGRD&C will arrange tripartite meetings to resolve outstanding audit

48

objections within three months from the receipt o f audit report and improve the internal control arrangement to prevent recurrence o f issues that would trigger audit objections. Fund Flow and Disbursement arrangements: Disbursements o f IDA fund shall be made under traditional disbursement method through a Convertible Taka Special Account (CONTASA), to be opened in a branch o f a commercial Bank having adequate experience, manpower and computerized environment, in order to be acceptable to IDA.

FUND FLOW

From IDA and Government to the PMU: IDA funds will be channeled to the dedicated special account upon Withdrawal Requests by the PMU, first as an init ial advance to the extent o f the authorized allocation limit and then for claiming replenishments o f payments for eligible project expenses.

IDA and GOB funds will be allocated in the Annual Development Program (ADP) with regards to the budget estimates prepared by the PMU based on the annual work plan o f the project. The PD, PMU will be the authorized signatory to withdraw IDA Grant proceeds and the Drawing and Disbursement Officer to draw the Government funds. GOB funds allocated in the ADP will be released quarterly and the PMU will present the bi l ls to the Chief Accounts Officer (CAO) o f the Ministry for actual disbursement.

From PMU to Private Sponsors (Comp. 1): The sub-project proposals meeting criteria stated in the Operational Manual and found acceptable upon the PMU’s evaluation wil l be executed through four-party contracts between (i) the Community Representative, (ii) the Sponsor, (iii) the Union Parishad Chairman and (iv) the PMU. The contract will include the total cost o f the system, the amount payable as grant (50%), the lump sum amount payable pertaining to approval o f the design, and the mode o f payments o f the remaining grant amount based o n progress achievements. The private sponsor will claim each payment through an invoice submitted to the PMU supported by the progress achievements certified by the UP Chairman and DPHE’s Sub-Assistant Engineer. N o payment o f matching grants will be made by the P M U unless 20% o f the subproject costs i s incurred f i rst by the sponsor from his own equity or community contribution. All payments wil l be made by cross checks in favor o f the sponsor.

From PMU to Private Operator (PO) for Urban Water Supply System (Comp. 2): Three to five pourashavas will be eligible for project support under this component. The proposal that would be selected through a competitive process from amongst the pre- qualified POs with the active involvement o f the respective pourashava, will be implemented through a contract between the PO and the PWSE for design-build and operation o f the system for at least ten years. The capital cost o f the water system will be 100% financed by the project as grants; however, the pourashavas through their PWSE will be obligated to repay 50% o f the investment cost through an onlending agreement with the government. Grant funding will be disbursed o n a progress payment basis to be certified by the PWSE and DPHE’s designated Engineer. Progress payment percentage and the milestones as agreed between IDA and the PMU will be stated in the OM and also in the contract. The PO will submit its invoices for progress payments which wil l be

49

duly certified by PWSE and DPHE’s designated Engineer. The invoices approved by the PD will be paid by cross checks in favor o f the P.O.

From PMU to Community Based Organizations (CBOs) (Comp. 1): The PMU will contract Support Organizations (SOs) for: the mobilization o f the community; preparation o f ward level Community Action Plans (CAP), which will detail the number o f point source options per ward; cost sharing mechanisms and; O & M procedures. Once the scheme i s finalized and endorsed by the Union Parishad and verified by the DPHE S A E , the CBOs will be asked to s ign a Memorandum o f Understanding with the Chairman, Union Parishad specifying the total cost o f the scheme, work completion and payment milestones, and the obligation to maintain simplified books o f accounts and stock register. CBOs wil l then confirm the deposit o f community contribution (10%) by submission o f the evidencing community bank account statement certified by the UP Chairman. The concerned program unit o f the PMU will forward a payment request to the FM unit for payment o f the lSt 40% o f the matching grant to the CBO. The remaining 50 % will be processed for payment o n receipt o f certification from UP Chairman and SAE, DPHE that the physical progress o f the scheme represents 50% o f the costs. All payments to the CBOs will be made through Bank Drafts in favor o f the community bank account.

Payment o f funds would be monitored closely so that the processing time taken at the PMU does not adversely affect the execution o f the sub-projects at any level. Service standards (benchmarks) would be developed to specifically monitor the turn-around time for fund transfers from the PMU to CBOs.

Financial control at CBOs: The CBOs that would be implementing the small water supply schemes under component 3 would maintain simple accounting records showing funds received from al l sources and amounts spent for any purpose. Funds received from the project, contributions from the members and receipt from any other sources would be deposited to the community’s bank account. Withdrawals from the bank account would require checks signed by co-signatories. The CBOs will maintain the simplified books and records as stated below following the formats being used by CBOs under ongoing Bank funded Bangladesh Arsenic Mitigation and Water Supply Project:

* Simple cashhank book providing details o f amounts received into the project account

* Register o f contributions received from members in cash (or in labor and materials). * Stock Register, showing materials purchased and contributed, use o f materials in the

* A monthly statement o f Receipts and Payments.

and details o f payments and the balance available.

works, sale o f any surplus material and the balance.

CBOs wil l not be required to maintain any ledgers book. Books and records wil l be placed in the Up office and wil l be available for inspection by designated project staff, community members and auditors.

FM Risk: Overall FM risk rating for the project at appraisal i s high due to: (1) the large number o f widely dispersed entities participating in the project with limited FM capacity;

50

(2) weak FM capacity o f the PMU, and; (3) handling o f project funds by community organizations. The risk is expected to come down to medium at project startup by monitoring the staff recruitment process and procurement o f the accounting system, ensuring strict adherence to the internal control and bookkeeping system at community level. By training up community organizations in book keeping, implementation o f monitoring and reporting and instituting the internal audit operation, the risk level would be maintained at medium level if not reduced further.

Special Account: For utilization o f IDA’s share o f project expenditures, a Convertible Taka Special Account (CONTASA), wil l be opened in a commercial Bank under terms and conditions satisfactory to IDA. The authorized allocation in respect o f the Special Deposit Account will be Tk.150,000,000 (approximately US$ 2.5m) calculated o n the basis o f 3 to 4 months average requirements o f funds; provided, however, that the init ial authorized allocation wil l be limited to Tk.90,000,000 (approximately US$1.5m) until the total withdrawal from the Grant account reaches the equivalent o f US$10.2m.

The applications to replenish the Special Account wil l be submitted on a monthly basis or whenever the withdrawals from the Special Account reaches 50% o f the init ial deposit, whichever occurs first. If there is n o expenditure from the Special Account in a given month, the PMU will be required to submit a copy o f the bank statement, without any withdrawal application. I t is expected that al l IDA-eligible expenditures shall normally be made from the Special Account. However, in order to avoid cash f low problems o f the Special Account, direct payment withdrawal applications may be submitted to IDA provided, however, that the value o f such individual withdrawal application is equivalent to about 25% o f the authorized allocation to the Special Account.

Disbursement Method: Traditional transaction-based disbursement will be applicable initially. After the Mid-Term Review, disbursements may be switched over on the basis o f Financial Monitoring Reports (FMRs) if the borrower so prefers and IDA finds that project financial management system i s working satisfactorily and i s generating timely and reliable (full set of) FMRs which are acceptable to IDA.

Use of Statements of Expenditure (SOE): Transaction-based disbursement procedures will be applicable for withdrawal o f Grant funds. IDA will require full documentation for al l prior review contracts which exceed the equivalent o f (a) US$200,000 for works; (b) US$200,000 for goods; (c) US$lOO,OOO for services and training by firms, and; (d) US$50,000 for services and training by individuals. Expenditures below the above threshold and al l expenditure under incremental operating costs will be claimed on Statements o f Expenditure (SOE) basis. IDA will make post review o f SOEs to assess to what extent the funds are utilized for their intended purposes and in accordance with the agreed terms o f the credit agreement. Any deviations noticed during supervision missions or independent reviews wil l be noted for remedy and improvement.

Retroactive financing not to exceed US$500,000 equivalent will be provided in respect o f eligible expenditures o n consultants services and incremental operating costs. In order to be eligible for retroactive financing, procedures for procurement, the use o f consultants, and processing and clearance are subject to IDA’s Procurement and

51

Consultants Guidelines as applicable to the project. In addition, documentation requirements for expenditures claimed under retroactive financing are the same as those for disbursements against payments made after the Development Grant Agreement is signed and effective. The retroactive financing provision can be used for eligible expenditures incurred after September 2003.

Expenditure Category

The disbursements o f IDA grants under the project are expected to be completed over the implementation period o f five years (FY05-09). The estimated annual phasing o f disbursement and the financing plan by source and currencies are presented o n page 1 o f this PAD. The categories o f expenditures to be supported under the project and the percentage o f expenditures to be financed by IDA for various expenditure categories are indicated in Table 1 below:

Amount of IDA Grant Allocated (US$ Million) be Financed

% of Expenditure to

Table 1: Allocation o f Grant Proceeds

1. C iv i l Works (Component 3) 2. Sub-Proiects: Rural

3.1 80.0 10.2 50.0

3. Sub-Projects: Urban 4. Consultant’s Services

10.6 90.0 2.4 80.0

5. Training&& tudies 6. Goods

3.0 80.0 1.3 85.0

7. Service Charge 8. Credit Markets (Sub-Loans)

0.4 100.0 4.6 100.0

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9. Operating Costs 10. Unallocated

1.2 85.0 3.2 -

Annex 8: Procurement BANGLADESH: Water Supply Program Project

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, and the Bangladesh Public Procurement Regulation 2003, as per the provisions stipulated in the Grant Agreement. The general description o f various items under different expenditure categories are described below.

For each contract to be financed by the grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and timeframe are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

The total value o f the project is U S $ 55 mi l l ion with US$ 40 M i l l i on an IDA grant and the remainder consisting o f contributions from GOB, local communities and private sponsors. The Bank’s Standard Bidding Documents (SBD) and Standard Request for Proposals (WP) will be used for the IDA-financed I C B goods, works and consultant services respectively. IDA-financed local procurement o f goods, works and services, for which the shortlist i s comprised o f national consultants, will follow the Government’s Public Procurement Regulation 2003 and be acceptable to the Bank.

The project supports the rural and urban water supply sub-projects as described below:

Component 1 : Rural piped water supply sub-projects

The private sponsors (entrepreneurs, co-operatives, CBOs andor NGOs) in close collaboration with communities and local governments wil l develop piped water supply subprojects in rural areas. The average cost o f each scheme wil l be around US$ 50,000. The following procedure has been agreed for the selection o f sponsors. For the selection o f private sponsors, DPHE will publish REOIs (Request for Expression o f Interest) and pre-qualify sponsors based on prescribed criteria to be agreed by IDA. Pre-qualified sponsors will be issued specific guidelines relating to project preparation and capital costs and evaluation criteria for selection o f the projects. Pre-qualified sponsors will submit feasibility reports (FR) and detailed project reports (DPR). DPHEPMU will review the Feasibility Reports (FRs)/DPR and recommend to IDA for clearance. Sponsors o f approved schemes wil l be free to procure as under their own procedures. Given the large number o f schemes, a large number o f Sponsors will be required.

A new Prequalification process will be carried out half-yearly.

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Component 2: Urban water supply sub-projects

Three to five urban piped water supply subprojects wi l l be implemented through private operators which wil l include repairs and renovation and expansion o f the system where necessary. Each scheme wil l cost approximately US$ 3 million. DPHE will engage consultants for project preparation (technical, financial and cost recovery aspects) to define project costs and the viable tariff level for sustained operation and bidding and supervision o f the project. The basis o f selection o f the operator (lowest management fees/ lease operator tariff, etc.) wil l be worked out and reviewed by the Bank. Based on bidding documents prepared by the consultant, DPHE will invite bids o n a design-build- operate (DBO) basis (operation init ial ly for a period o f ten years), from private operators. Private operators wil l be selected through ICB. Operators will be free to procure goods, works and services from eligible sources using their own procedures.

Component 3: Non-piped rural water supply sub-projects

This component targets villages too small or too dispersed for piped water supply. Support organizations wil l be selected to assist UpazilasKJnion Parishads with costs, options, and O&M. Union ParishaddWard committees wil l implement, with the assistance o f SOs, point source options in arsenic affected villages for non-piped water supply. Procurement o f schemes approved by DPHE will be done by the Ward committees. Each o f these procurements will cost approximately US$ 20,000 and wil l fol low NCB/Shopping. Details wil l be worked out in the procurement plan as implementation progresses.

Procurement of Works: Works procured under th is project would include sub-projects described above. The procurement wil l be done using the Bank’s Standard Bidding Documents (SBD) for a l l I C B and National SBD agreed with GOB and satisfactory to the Bank for NCB. The project wil l also involve procurement by communities under component 3.

Procurement of Goods: Goods procured under this project will include, fbmiture, computers, vehicles, lab & testing equipment, printing etc. The procurement will be done using Bank’s SBD for al l I C B and National SBD agreed with GOB and satisfactory to the Bank for NCB.

Selection o f Consultants: Consultants wil l be selected to help develop a legal/ institutional framework, framing specification, training, and monitoring and evaluation. Shortlists o f consultants for services estimated to cost less than US$ 200,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. Further services o f Individual consultants, Universities, Government Research institutions, Training Institutions, NGOs and any special organizations will be taken as required during implementation and reflected in Procurement Plan.

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Operational Costs: Salary’ rental costs for office/accommodation etc. o f GOB assigned to the project in the operational phase which wil l be financed by the project, which wil l be procured using the implementing agency’s administrative procedures under force account.

Others: The project will support the development o f rural credit market, tar i f f gap financing in the init ial phase o f operation which will be covered under force account.

B. Assessment of the agency’s capacity to implement procurement

Procurement activities wi l l be carried out by the PMU o f DPHE (under the Secretariat o f the Ministry o f Local Government, Rural Development and Cooperatives). The agency i s staffed by personnel making purchases based on GOB procedures and i s headed by a staff at the level o f Executive Engineer.

An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project was carried out (on various dates between January 2004 to April 2004 using standard questionnaire and discussion with the PMU). Most o f the issues/risks concerning the procurement component for implementation o f the project have been identified and include non-familiarity o f the staff with Bank’s procedures, no experience in procurement o f services, lack o f training on procurement and lack o f project purchase orientation. However, with Promulgation o f the 2003 Procurement Regulations, which need to be followed by DPHE in i t s own purchases, results are expected to show improvement. But this wil l take time. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for Procurement, i.e. the Procurement Officer, and the other relevant implementation and finance units. This project i s conceptually innovative and procurement issues involving selection o f sponsors, evaluation o f sub-projects etc. wil l be highly complex for DPHE.

The overall r i s k assessment o f the Project is high due to the fact that DPHE has inherent capacity limitations and implementation wil l be highly decentralized.

Strengthening Procurement Capacity In order to mitigate procurement-associated risks, strengthen capacity and take advance procurement actions as a part o f project preparation, the following arrangements need to be made:

1. DPHE must engage a procurement specialist prior to credit effectiveness; 2. The GOB must agree to transfer selected staff from B A M W S P to the new PMU; 3. A core DPHE team must be created and trained on procurement matters urgently.

The overall project risk for procurement is High.

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C. Procurement Plan

The PMU, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods to be used. This plan was agreed between the Borrower and the Project Team on April 22,2004 and i s available at WBOD and with the PMU. I t will also be available in ’ the Project’s database and on the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

In addition to the prior review supervision to be carried out from Bank offices, based on the capacity assessment o f the Implementing Agency, half-yearly supervision missions to visit the f ield to carry out post review o f procurement actions i s recommended.

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Attachment 1 DETAILS OF GOODS, WORKS AND SERVICES UNDER INTERNATIONAL COMPETITIVE BIDDING

1.

a) L is t o f contract Packages which w i l l be procured following ICB and Direct contracting

Goods and works and non-consulting services.

6 1 7 1 8

Contract (Description)

9

Selection o f private operators , for pourshavas

I

3

Estimated cost

Million US$

US$ 12.9

4

Procurement Method

ICB

- 5

P- Q

-

- No

Domestic Preference

(yeslno)

Yes

Review by

Bank (Prior I Post) Prior

Expected Bid-

Opening Date

b) ICB Contracts estimated to cost above US$200,000 per contract and all Direct contracting w i l l be subject to prior review by the Bank.

2. Consulting Services.

a) L is t o f Consulting Assignments with short-list o f international f i rms.

1

Ref. No.

2

Description of Assignment

TA consultanc y for urban component Monitoring and Evaluation

Comments

~ Estimated Selection

cost Method

Mil l ion I

5

Review by Bank (Prior I Post)

Yes

Proposals Submission

b) Consultancy services estimated to cost above US$lOO,OOO per contract and Single Source selection o f consultants (firms) for assignments estimated to cost above US$50,000 wi l l be subject to prior review by the Bank.

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c) Short lists composed entirely of national consultants: Shortlists o f consultants for services estimated to cost less than US$200,000 equivalent per contract, may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

Bangladesh Water Supply Program Project Procurement Methods

Procurement Arrangements (US $ Mil l ion)

International National Competitive Competitive Local Direct Force Consulting

Bidding Bidding Shopping Contracting Account Services N.B.F. Total

A. Civil Works

B. SUB-PROJECTS: RURAL

C. SUB-PROJECTS: URBAN

D. Consultants

E. Monitoring and Evaluation

F. Training and Studies

G. Goods & Equipment

H. Vehicles

I. Tariff Gap Financing

J. Credit Markets

K. Operating Costs

Total

12.90 (11.6)

12.90

2.14

22.32 (1.7)

(11.2)

1.19

0.30 (1.0)

(0.3)

25.95

2.14 (1.7)

0.18

0.00 (0.2)

(0.0)

2.32

0.26 (0.2)

- 0.47 (0.5)

(4.9)

(1.3)

- 4.88

- 1.50

0.26 6.84

- 4.27 (3.5)

(11.2) - 22.32

- 12.90 (11.6)

1.76 - 1.76 (1.4) ( 1.4)

(1.1) (1.1)

(2.9) (3.1)

(1.2)

(0.3)

(0.5)

(4.9)

(1.3)

1.42 - 1.42

3.65 - 3.91

- 1.37

- 0.30

- 0.47

- 4.88

- 1.50

6.83 - 55.11 (11.6) (14.2) (1.9) (0.2) (6.6) (5.5) - (40.0)

‘Figures in parentheses are the amounts to be financed by the Grant. All costs include contingencies.

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Annex 9: Economic and Financial Analysis BANGLADESH: Water Supply Program Project

9.1 Summary o f Benefits and Costs

The proposed project has six main components (1) Rural Piped Water Supply, (2) Pourashava Piped Water Supply, (3) Non-piped Mitigation Options for Rural Water Supply, (4) Capacity Building, Institutional Strengthening, Regulations, (5) Local Credit Markets, and (6) Monitoring and Evaluation. Component 7 will finance project management.

The primary project benefits that are envisaged include:

Increased availability o f safe water through piped water supply in rural areas and small towns and small community arsenic mitigation. Increased availability o f safe water is l ikely to result in significant health benefits and reduced medical expenditures for both the rural and urban population in villages and small towns served by this project. Potential health benefits, including reductions in morbidity and mortality, are expected to be significant for children under 5 years o f age, due to a decreased incidence o f diarrhea, as well as for the population currently reliant o n arsenic contaminated water. Arsenic contamination o f groundwater has been detected in 59 o f the 64 districts and 249 o f the country’s 463 sub-districts. Unconfirmed estimates indicated that 30-50 mi l l ion people out o f a population o f 129 mi l l ion are potentially at risk o f arsenic poisoning from sources o f drinking water.

Timesavings arising from reduced time spent collecting water. Time savings are l ikely to be significant for households that have shifted from arsenic contaminated sources (in close proximity to their homes) to arsenic-free sources located at a distance. Timesavings are l ikely to translate into increased time allocation to productive activities and hence increased household incomes.

Institutional strengthening and sustainability achieved by strengthening the capacity o f the private sector and NGOs to plan and deliver rural and urban water supply services and strengthening the regulatory capacity o f local and central government.

Availability o f water for irrigation in multipurpose schemes may also allow increases in crop production due to increased crop intensity and changes in crop patterns. Availability o f larger quantities o f water may also allow more water use in home gardens, small animal husbandry, livestock production and other water- requiring activities that increase food consumption or purchasing power.

The main costs related to scaling up measures to provide arsenic and bacteriologically safe water in rural areas and small towns are: (i) Construction and engineering costs. (ii) Costs o f scheme management, implementation, operation and maintenance.

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9.2 Economic and Financial Analysis

An economic and financial analysis has been carried out for the f i rs t three components o f this project, namely, the rural piped water supply, the Pourashava piped water supply and the non-piped mitigation options in rural water supply. The main assumptions and results are summarized below.

Population served by the project

I t i s envisioned that the project wil l serve approximately 602,000 rural residents through the delivery o f piped water supply to 300 rural communities (with more than 250 households), and 2.5 mi l l ion urban residents in small towns through 5 pourashava piped water supply schemes. Approximately 200 rural communities - a population o f 252,000 - wil l be served by small community arsenic mitigation schemes (approximately 2,000 point sources) during the economic l i fe o f the project.

Main Assumptions

1. Rural Piped Water Supply Component

(i) Benefits o f the rural piped water supply component are estimated by valuing the incremental and non-incremental volume o f water supplied by the project as wel l as by estimating health and institutional benefits attributable to the project during its expected l i fe time. Two approaches are used to value health benefits drawing o n methods suggested in recent studies examining the economic costs o f arsenic contamination in Bangladesh.’

a. The first method (which wil l be referred to as method A) uses a variant o f the cost o f i l lness approach and values current health expenditures on arsenic-related illnesses as well as the loss o f output due to arsenic-related morbidity or premature death among the population (Koundouri, 2004). Annual arsenic-related health expenditures are assumed to be equivalent to 0.40% o f GDP. These are converted into per-capita expenditures to arrive at a value o f arsenic-related health expenditures for each scheme. Output lost i s calculated as the fraction o f GDP that each person becoming ill would produce. I t i s assumed that 3.76 persons per 10,000 population are affected by arsenic-related illnesses each year. The loss o f output per capita i s assumed to be equivalent to the value-added per agricultural worker, which i s estimated at 25,000 Tk. in 2004 prices.

b. The second approach (which wil l be referred to as method B) i s based on estimates o f the annual per capita health costs o f arsenic as reported in

(ii)

Maddison, D., R. Catala and D. Pearce. 2004. The Economic Cost o f Arsenic Contamination o f Groundwater in Bangladesh. Mimeo. Khoundouri, P. 2004. A Report on the Economics of Arsenic Mitigation. Mimeo.

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Maddison et al., 2004. In this approach the population affected by various fatal and non-fatal cancers and other illnesses related to the ingestion o f arsenic is estimated by combining epidemiological dose response functions with survey estimates o f arsenic concentration in groundwater, the number o f households reliant o n groundwater for drinking purposes and the mitigation strategies employed by these households. Unit values o f health costs o f the various arsenic related illnesses are derived in a number o f different ways. Various non-cancer arsenic-related morbidity impacts are valued by predicting willingness-to-pay values from a model relating WTP measures with a quality o f well-being index and the duration o f the illness. Non-fatal and fatal cancers are valued using results o f existing studies adjusted to the Bangladeshi context. Based on results o f the study, annual per capita health costs for a concentration o f 28 pg per liter are estimated as 140 Tk./capita in 2004 current prices.

Institutional benefits are computed as the difference between the full minimum salary that a water supply scheme operator and lineman would earn after the project and the (social minimum) salary that they earn pre-project. It i s assumed that every water supply system creates two new jobs and that each employee has a two-year learning curve during which they receive training related to their new responsibilities. In year 3 these individuals would have a chance to earn a full minimum salary in the labor market. I t i s assumed that the operator and lineman would be paid 150 Tk./day post-project compared to pre-project wages o f 80 Tk./day. I t is assumed that they will be employed for 240 days resulting in an institutional benefit o f 33,600 Tk. in 2004 prices per scheme. Benefits and costs have been forecast over a 20-year horizon from the first year o f the project in 2004. Border prices have been estimated by applying the standard conversion factor o f 0.9 to al l domestic expenditures and benefits. The opportunity cost o f capital i s 12% and the weighted average cost o f capital (WACC) i s assumed to be 10%. The inflation rate i s assumed to be 5%. Population growth is assumed to be 0.98%.6 The present population served by a scheme is assumed to be 300 households. I t is assumed that 300 rural piped water schemes are constructed during the l i fe o f the project with 10 schemes completed in year 1, followed by 32 schemes in year 2,60 schemes in year 3,95 schemes in year 4 and 103 schemes in year 5. The average household size i s assumed to be 5.5 persons. The cost assumptions are based on rural piped water schemes using deep ground water sources. The capital cost o f a scheme is estimated as 2.5 million Tk. in 2004 prices. I t is assumed that scheme construction i s completed within the f i rs t year o f the project . Annual operation and maintenance costs (O&M) are estimated at 0.20 million Tk. per scheme (2004 prices). In order to quantify the consumer surplus arising fi-om increased availability o f safe water i t i s assumed that the cost o f water pre-project is 13 Tk./ m3. I t i s

World Bank, SIMA database, percent annual rural population growth in 2001.

61

(xiv)

assumed that rural households spend approximately 22.5 minutes/day/household to collect water (20 liters per capita per day (lpcd)), which i s valued at 2.1 Tk./ho~sehold.~ This translates into a cost o f 13 Tk./m3 for households not served by domestic piped water. The domestic tariff post-project i s estimated as 11 Tk./m3 assuming an average supply o f 40 lpcd for domestic consumers and that the project also supplies non- domestic consumers in the village including 10 shops and institutions, 2 horticulture nurseries, 2 dairy f m s , 2 poultry farms and 5 fish ponds. I t is assumed that non-domestic connections wil l pay a tari f f that i s 1.5 times higher than the average domestic tariff. The domestic tari f f o f 11 TWm3 translates into an average tari f f o f 188 Tkhouseholdmonth for households with single connections with multiple taps; 94 Tkhouseholdmonth for households with yard taps that are shared between 2 households and 38 Tkhouseholdmonth for households with shared connections where 5-7 households share a tap-stand. It is further assumed that 10% o f households in the village opt for single connections, 40% opt for yard connections and the remaining 50% opt for shared connections.

2. Pourashava Component

Benefits o f the Pourashava piped water supply component are estimated by valuing the incremental and non-incremental volume o f water supplied by the project and the expected health benefits. Benefits and costs have been forecast over a 30-year horizon from the first year o f the project in 2004. Border prices have been estimated by applying the standard conversion factor o f 0.9 to al l domestic expenditures and benefits. The opportunity cost o f capital i s 12 % and the WACC i s 6.6%. The inflation rate i s assumed to be 5%. Population growth i s assumed to be 4.2%.' The present population served by a scheme i s assumed to be 32,000 households. The average household size is assumed to be 5.5 persons. I t i s anticipated that 10% o f households in the small towns are connected in the year following construction. The percentage o f connections is assumed to increase to 40% in year 3. From year 4 onwards it i s assumed that 80% o f households are connected. The capital cost o f a scheme i s estimated as 310 mi l l ion Tk. in 2004 prices. Scheme construction costs are assumed to be distributed over 3 years with 26% o f costs incurred in year 1, 45% in year 2 and 29% in year 3. Total scheme expansion costs are 58 mi l l ion Tk. with system expansion taking place from the fourth year onwards for each scheme. Annual operation and maintenance costs (O&M) increase over the project l i fe as the number o f connections increase and are estimated as approximately 35-40 mi l l ion TWyear af'ter completion o f construction (2004 prices).

These assumptions are based on data collected in the recent study titled Willingness to Pay for Arsenic- Free Safe, Drinking Water in Bangladesh.

World Bank, SIMA database, percent annual urban population growth in 2001.

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In order to quantify the consumer surplus arising from increased availability o f safe water i t is assumed that the cost o f water pre-project is 11.5 Tk./m3. I t is assumed that currently approximately 8% o f the population in the Pourashava i s served by a piped water supply scheme with the remaining 92% relying on private or public wells. The population served by domestic piped water connections pays 40 Tk./month/household for their water. I t is assumed that the remaining population spends approximately 22.5 minutes/day/household to collect water (20 lpcd), which i s valued at 1.5 Tk./household.' This translates into a cost o f 13 Tk.1 m3 for households not served by domestic p i ed water. A weighted average o f costs results in a pre-project cost o f 11.5 Tk./ m . The tariff post-project i s estimated as 9 Tk./m3 which is 150 Tk./household/month assuming water supplied by the project is 100 lpcd. This assumption i s based on expected tar i f fs under a scenario o f a 50% grant and reflects the tariff levels in the sixth year after construction when tari f f levels are expected to stabilized. This tariff level translates into a monthly household tariff o f 300 Tk for households with a single connection with multiple taps, 210 Tk. for households with a yard connection and 50 Tk. for households with domestic water points shared between 7 households.

P

3. Rural Non-piped Mitigation Options Component

(i) Benefits o f the rural non-piped water supply component are estimated by valuing potential timesavings and health benefits attributable to the project component during its expected lifetime. The health benefits are measured using the same assumptions and approaches as in the rural piped water supply component. This component o f the project will make safe water available closer to homes, thereby potentially reducing the time needed to draw water from more distant safe sources for drinking and cooking purposes. It is assumed that households wil l continue to use water from their hand pumps for bathing as in the pre-project scenario or if they shifts to a new source, the distance to the new source will be equivalent to pre-project scenario. Prior to the project i t i s assumed that the rural population in villages served by this component spend approximately 58.5 minutes per day collecting water for drinking and cooking purposes (5 lpcd), which i s valued at 3.5 Tkhouseholdday. This estimate assumes that 70% o f the population in the village has shifted from arsenic contaminated sources (in close proximity to their homes) to arsenic-free sources located at a distance. This 70% o f households spend 27 minutes per day collecting drinking water as compared to 9 minutes per day spent by the remaining 30% o f households." Similarly the 70% o f households spend additional time collecting water for cooking. Post- project, the average time spent per day collecting water i s 22.5 minutes per day

(ii)

These assumptions are based on data collected in the recent study titled Willingness to Pay for Arsenic- Free Safe, Drinking Water in Bangladesh.

lo These assumptions are based on data collected in the recent study titled Willingness to Pay for Arsenic- Free Safe, Drinking Water in Bangladesh.

63

valued at 1.5 Tk./household/day. This translates into a savings o f 2 Tk./household/day. Benefits and costs have been forecast over a 15-year horizon from the f i rs t year o f the project in 2004. Border prices have been estimated by applying the standard conversion factor o f 0.9 to a l l domestic expenditures and benefits. The opportunity cost o f capital i s 12 %. The inflation rate is assumed to be 5%. Population growth is assumed to be 0.98%." The present population served by a scheme is assumed to be 200 households. The average household size is assumed to be 5.5 persons. The capital costs for non-piped mitigation options in a village are estimated as 1.16 mi l l ion Tk. in 2004 prices. I t i s assumed that scheme construction i s completed within the first year o f the project and that there are 10 households per point source and each point source costs 58,000 Tk. Annual operation and maintenance costs (O&M) are estimated at 0.035 million Tk. per village (2004 prices).

Summary of Economic and Financial Rates of Return

The results o f the economic analysis are summarized in the tables below. For each component results are presented for various scenarios reflecting different assumptions in valuing project benefits. In all components scenario 1 presents the most conservative estimates. The economic rates o f return o f the rural piped water supply schemes range from 20% to 45% depending on the assumptions used to quantify the benefits. For the most conservative assumptions (Scenario 1) the NPV is 214 mi l l ion Tk. These results are based on schemes that use deep groundwater sources. In reality there may be several different types o f schemes including those using deep groundwater, deep groundwater with treatment, surface water abstraction with treatment and surface water infiltration systems. As this i s a demand driven project it i s not possible a priori to predict the number o f schemes for each technology.

For the Pourashava piped water supply component, ERRs range from 16% to 34%. Scenario 1 for the Pourashava component results in an NPV o f 291 million Tk. The ERRs for the rural non-piped mitigation options component range from 20% to 57%, with an NPV o f 52.30 mi l l ion Tk. under scenario 1 in which the only benefits that are valued are potential timesaving. The financial benefits for component 1 were calculated assuming a domestic tari f f o f 11 Tk./m3' a domestic supply o f 40 lpcd, a commercial tariff o f 19 TWm3 and a commercial supply o f 15 m3 per day per scheme resulting in a FRR o f 13%. The assumed tari f f for component 2 is 9 Tk./ m3 yielding a FRR o f 9%.

l1 World Bank, S I M A database, percent annual urban population growth in 2001.

64

'I'ahle 1 : Economic Rates o f Return -I . - -

'Rural i.. - Piped Water Supply I KKK _ _ _ INPV - (BDT Millions) __

t

Table 7: Affordability of Urban Piped Water Tariffs

Month ly average Monthly Water Bill household income Water Bill as % o f

HighIncome 1/ 300 23,000 1.30 Middle Income 2/ 210 8.000 2.63

(TMHouseholdmonth) (Tk.) Income

Urban Water Supply Systems - Business Model

The case o f Chapai Nawabganj was used to assess the financial viability o f the proposed approach to the development o f the water supply systems in the Pourashavas to be included in the project. This case was selected taking into account the experience o f the pi lot currently under preparation with BAMWSP support, and the results o f the Willingness-to-Pay Study carried out in 2003. The main characteristics o f the market for services are presented in the table below.

Chapai Nawbganj Market for Services and Projected Tariffs

2/ Total to be paid by the seven households per multiple connection 31 Tklmonthlconn-2004 prices. I n the table above i t i s worth noting that 50% o f the households would be served through multiple connections (3,125 connections serving 21,875 families in 2019, followed by yard connections (35% o f the households), and single connections (1 5% of the households).

68

The proposed tar i f f levels are significantly higher than the current ones in Chapai Nawabganj (Tk 40 per connection per month) but similar to the tar i f fs in other urban areas.I2 In any event, the business model envisages gradual tariff increases so as to make them more acceptable to the customers.

verage op. income per hhlmonth

The predominance o f multiple connections makes it essential for the water supply entity to establish adequate procedures to avoid water waste and to enforce bill collection from these customers, as they are l ikely to represent a significant proportion (18%) o f the amount billed.

63 75 94 113 126 148 150 151 151 151

The base financial scenario under the above market for services and projected tar i f fs shows that the water companies would be able to cover their operation and maintenance expenditures, the remuneration o f the private operator, and either the depreciation charges or the debt service (see income statement and sources and applications o f h n d s below). The project investments would be 100% financed by the loan during the years 2007 thru 2010. The cash deficit envisaged for the first year o f the private operator (2006) would be financed from the loan proceeds.

Projected Income Statements (000 Tk. 2004 prices)

Net Income Before Income Taxes 31 -4,117 -8,712 -6,392 -3,083 2,476 1,219 3,026 4,946 ~ , 2 2 9 7,578

21 From 2006 thru 2010 are considered part of the investment costs 3/ The legal and tax situation of the water utility are not yet known. Taxable income is expected only several years from now. The feasibility

studies should consider this item.

l2 The monthly tariff per connection o f %,’ in selected urban areas range from Tk 60 in Chuadunga, Tk 80 in Jessore, Tk 100 in Chandpur and Shariaptur, and Tk 110 in Manikganj.

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Projected Cash Flows

Cash surplus for year (deficit) Operational grant I/ Cumul. cash surplus (deficit)

-1,717 -2,112 2,908 -1,484 4,582 -2,907 -1,597 -207 511 1,258 1,717 2,112 0 0 0 0 0 0 0 0

0 0 2,908 1,424 6,006 3,099 1,502 1,295 1,806 3,064

I / To cover operational deficits up to the initial three years of the private operator provided that meets contract targets

Rural Piped Water Systems-Business Model The-base case o f the rural piped water systems business model assumes a capital structure where the community contributes 10% o f the total costs, the sponsor has 10% equity, 30% o f the total cost i s financed through a loan and the remaining 50% is a grant. Service standards for a typical village o f 300 households include 30 households with single connections with multiple taps, 120 households with yard taps that are shared between 2 households and 150 households with domestic water points that are shared between 7 households. I t i s assumed that households with a single connection consume 1001pcd, households with yard connections consume 50 lpcd and l o w income households consume 20 lpcd. The base case business models also assumes that the project supplies non-domestic consumers in the village including 10 shops and institutions, 2 horticulture nurseries, 2 dairy farms, 2 poultry farms and 5 fish ponds. The tariff paid by users will cover the interest and principal payments o f the debt assumed by the sponsor as wel l as 100% o f the operation and maintenance costs o f the scheme. I t i s assumed that the tariff for commercial connections will be equal to 1.5 times the base tariff. Collection efficiency for the schemes i s assumed to range from 80% to 90%. I t i s also assumed that per capita consumption grows at 1% per year.

(vii) The terms o f the loan are as follows: the loan i s a 10-year loan for up to 40% o f total

(viii)Construction i s assumed to take 6 months. (ix) The total capital cost i s 2.5 mi l l ion Tk. and annual O&M cost i s 0.20 mi l l ion Tk. (x) The model assumes a minimum Debt Service Coverage Ratio (DSCR) o f 1.2 and a

dividend payout ratio o f 15% on the sponsor’s equity.

project costs. There is a 2-year grace period and the interest rate i s assumed as 11%.

70

Annex 10: Safeguard Policy Issues BANGLADESH: Water Supply Program Project

1. Environmental Assessment & Management

DPHE, GOB, i s implementing the Water Supply Program Project (BWSSP) to (i) assist Bangladesh move forward in achieving the MDGs in water supply and sanitation by 2015 and (ii) scale up measures to provide arsenic and bacteriological safe water in rural areas and small towns. The current project aims to launch piped water supply schemes in about 300 villages, 3-5 small towns, and alternative water supply options in 200 arsenic-affected villages where piped water supply is not feasible. As the project wil l promote demand-driven sustainable water supply with direct involvement o f private sponsors, sub-projects will be identified o n a rol l ing basis. These sub-project areas may include flood plains, coastal areas, small towns and any other hinterlands in Bangladesh. While the coastal region will have saline intrusion in groundwater as a key environmental concern, water supply sub-project location in flood plains would require a complex environmental management strategy. The project wil l avoid overlapping with such areas where other large-scale water supply and sanitation activities are ongoing, such as the hill tracts and the coastal belt. The project will also keep out o f the naturally protected areas l ike the World Heritage Site - largest single mangrove forests o f the Sundarbans Reserve Forest (SW) and the country’s biggest freshwater wetlands ‘Tangur Haor’ areas.

Environmental Issues in the Project: Given the small scale o f project interventions, no large- scale, significant and/or irreversible environmental impacts are anticipated in this project. The potential environmental impacts primarily relate to [a] water source quality protection (including protection against arsenic, bacteriological and other toxic contamination or cross-contamination), [b] ensuring adequate drainage and avoiding local construction-related impacts, and [c] disposal o f arsenic sludge if and when arsenic removal plants were to be implemented.

Managing and ensuring the quality o f water supplied wil l be the major challenge in the project. Over and above arsenic contamination, issues related to water supply include occurrence o f high levels o f chloride in the deep wells in the coastal and some saline/ brackish water pockets inland; localized occurrence o f an excessive amount o f dissolved iron, manganese, ammonium, and sodium in many deep wells; heavy metals such as barium and boron, and (limited) uranium both in shallow and deep groundwater; and secondary microbial contamination in some occasions. For surface water, the issues include high levels o f fecal coliform and total coliform; and presence o f cynobacteria.

As deep tubewells become more and more popular owing to the relative advantages regarding arsenic and bacteriological contamination, indiscriminate drilling without understanding the local aquifer dynamics wil l be a long-term indirect risk. The groundwater monitoring component o f the project seeks to address this long-term risk by continuing to support the GOB in increasing the knowledge base regarding the deep/old aquifer. The absence o f efficient sewage treatment plant in the towns covered in the project i s also a matter o f concern, where there would be possibilities o f additional pollution o f surface and ground water resources. No other long-term impact is anticipated.

74

Environmental Assessment in the Project: The Borrower has carried out an Environmental Assessment. Relevant environmental issues and the processes to manage or mitigate the environmental have been identified. An Environmental Management Framework (EMF) has been prepared to address the environmental issues; specifying the implementation and monitoring arrangements to ensure that the environmental issues are mainstreamed in the planning and implementation o f the project.

Community Consultations: The project design seeks to build partnerships with the private sector, NGOs, and community user groups in financing, operating and maintaining facilities. Specifically for the groundwater monitoring component, the project will partner with the IAEA and with i t s local counterpart, the B A E C and DFID. The project is based on a 2001/2 assessment o f people’s perceptions o f the extent o f the arsenic problem and possible solutions. It examined people’s willingness to pay for arsenic-free safe drinking water options in rural Bangladesh, and the preferences for various householdcommunity-based arsenic mitigation technologies. During preparation o f this project, the communities, CBO/water users body, local NGOs, local government bodies, local DPHE officials, and implementing agencies were consulted in detail to identify the key issues related to community mobilization, schemes design, procurement and construction, operation and maintenance. Civ i l society consultations were held in different levels to discuss issues such as quality o f water and the required intervention to ensure sustainability o f sub-projects. Consultations with al l stakeholders - communities, experts, NGOs and private sector sponsors wil l continue throughout the implementation period.

Mitigation Plans: An EMF has been prepared to address the environmental issues in the project. The EMF includes (i) institutional arrangements; (ii) screening procedures at the sub-proj ect preparation and approval stage, (iii) assigned responsibilities o f the different stakeholders during implementation and operation stages, and (iv) environmental monitoring and audit. Adequate implementation o f the EMF (especially environmental screening and periodic environmental audits) has been included as covenants in the project agreement.

Environmental screening will be integrated into the bidding and approval o f the sub-projects. Environmental screening will normally result in mitigation andor management plans to be implemented by the private sector sponsor. The DPHE will ensure that these environmental mitigation plans are adequately implemented by each o f the sub-project sponsors. At this stage, a source protection plan, and a water quality surveillance plan wil l be agreed with each o f the sub- project sponsors. Depending on site-specific requirements, plans for mitigating any expected air pollution, soil erosion, land acquisition and traffic diversion (in rural/peri-urban roads) during construction wil l be agreed. Based on quick site appraisals by the DPHE, plans for mitigating any other environmental concern will be agreed with the sponsors.

For sub-projects using gvoundwater, the project will ensure that only those deep aquifers free from arsenic and bacteriological contamination will be tapped. At the sub-project level, quality o f water will be ensured through testing during feasibility studies and implementation (testing wil l include al l parameters notified for GOB for drinking water). Although the aim would be to avoid problematic sources, by exploring and tapping safe sources (by location), adequate arsenic removal plants/technologies and conventional water treatment will be used, wherever required. Adequate assessment wil l be undertaken to understand the aquifer thickness, hydraulic gradient and its recharge capacity prior to the installation o f deep tube wells. Safe drilling techniques will

75

be employed following a protocol specifically being developed for the project. Besides, the project will establish a partnership with BAEC for comprehensive monitoring o f arsenic-free groundwater.

Under Project Component 2 and 3, the project will explore various locally accepted arsenic free water harvesting technologies, including dugwells, pond-sand filters and surface water infiltration systems. These sub-projects wi l l implement adequate environmental measures for source protection, managing bacteriological contamination and restricting pesticides and fertilizer residues entering into the ponds and dug-wells as run off. For sub-projects using surface water, the project wil l make provisions for regular bacteriological surveillance, adequate management o f sludge and chemical from water treatment facilities.

Mitigation of construction related impacts: The project wil l take adequate precautionary measures to avoid degradation in local environment. The construction work for both installation and distribution network of piped water supply system wil l be monitored for adequate materials management, including transportation, storage and disposal o f construction materials; damage to local ponds and water bodies, or local flora.

Mitigation of project operation-related issues: Each sub-project wil l be screened to ensure that issues such as environmental sanitation, lack o f proper drainage around public stand post or water distribution points, are minimized. Depending upon the withdrawal capacity and the demand, each public stand post wil l have a concrete platform at the distribution point. The project wil l collaborate with the proposed Local Government Project, which wil l specifically include a Total Sanitation Approach in villages to promote better hygiene and environmental sanitation practices in the project area. The project wil l have adequate provision to mobilize users for ensuring quality control measures during the installation and operation o f the sub- projects.

The project wil l implement specific protocol for arsenic sludge disposal and for treating other wastes l ikely to be generated while removing arsenic from groundwater. The protocol wil l be developed in compliance with GOB Notification: July 20,2002.

Budget: Most o f the mitigation measures, such as source protection, management o f construction activities are mainstreamed with the overall sub-proj ect (at preparation, implementation and operation phases). The budget for these mitigation measures i s integrated in the overall sub- project budget. Additional and specific budget for implementing the EMF are required for (a) staffing o f the PMU with environmental specialists, (b) compliance monitoring by PMU staff, (c) periodic water quality surveillance by the PMU (separate from the water quality surveillance by sponsors), and (d) environmental audits. The total budget for these activities wil l be about US$285,000.

Implementation Capacity: This project builds o n the experience o f IDA-funded B A M W S P and other similar projects financed by bilateral agencies implemented by the GOB since 1998. During implementation of those projects, considerable expertise has been gained by the implementing agencies, especially with regard to managing the water quality issues including arsenic and microbial contamination. The Borrower has demonstrated institutional capacity to manage the project, including planning and implementation o f actions to meet social and environmental needs and safeguards. This project also includes capacity building initiatives,

76

including knowledge management activities. Specifically Component 4 o f the project wil l help enhance the capacity for groundwater management and administration. This component will also seek to strengthen water quality monitoring and capacity at national (DPHE), union parishad and pourashava levels; and in characterization and monitoring o f safe groundwater resources.

Institutional Arrangements: DPHE i s the implementing agency for this project, with overall project management support provided by a PMU. The PMU as the nodal entity will decide on the allocation o f the core responsibility and ensure coordination between the private and the public utilities for adequate management and mitigation o f the adverse environmental impacts. The PMU will nominate one o f i t s senior members as Environment Coordinator (EC) exclusively responsible for ensuring the implementation o f the EMF in each o f the sub-projects. The EC wil l be supported by a designated full-time Environmental Officer (EO) and environmental consultants, procured as and when necessary. The EO will be stationed in the PMU, and wil l be responsible for assisting the E C o n a regular basis; environmental screening o f the sub-project proposals; and monitoring the implementation o f the sub-projects.

A specific monitoring and evaluation component (from both point o f views: bacteriological and chemical) has been designed for the project that will systematically monitor the environmental impacts and learn from project interventions. Besides, the project has established a partnership with the IAEA through their local counterpart in Bangladesh - B A E C for a comprehensive groundwater monitoring. Other specific strategies are to include environmental parameters in appraisal and review (including environmental screening) o f the project proposals, and in the periodic review o f program implementation. Additionally the sub-projects will be subject to periodic Independent Third-party Environmental Audits, which will examine the implementation o f the environmental management measures o n a sample o f sub-projects, for Project Components 1, 2, and 3; and covering al l geographical divisions o f Bangladesh.

2. Social Framework

Identifying and Prioritizing Vulnerable Groups

Vulnerability in the context o f arsenic i s defined as insecurity and defenselessness o f the people and continuous exposure to risk o f arsenicosis in the absence o f safe water options. There are two primary parameters. Firs, vulnerability relates to the insecurity, risk and stress caused by the natural element o f arsenic; and second, i s individual capacity as wel l as the available options to cope with the situation. The social assessment identified the poorest segment o f the population, women, children and the physically challenged as vulnerable.

Paying for Piped Water: Need for Informed Consent

People are aware that arsenic-contaminated water poses a serious health hazard and have a positive attitude toward piped water systems. They are not, however, convinced about paying for water. A vigorous awareness campaign should be launched focusing on the cost ofwater sewice so that the people can understand the rationale for why they would be required to pay for water. The sponsors and Union Parishad chairpersons wil l take the lead in this process during

77

preparation and operation o f rural piped projects, as established in the Guidelines to Sponsors. The Pourashava chairman and the private operator wil l have that role for the urban schemes.

Gender Issues

Role of Women as Household Water Manager: Strategic Issues

Collection o f water i s considered women’s work and i t is the women who invest their time and labor to bring water to the household. It i s the women who decide when, from where and also how much water to collect. Therefore, economizing, proper use, and misuse o f water fall within the purview o f women’s domain as homemakers in Bangladesh.

From the perspective o f women and other vulnerable sectors o f the community, the following factors should be considered in order to generate popular buy-in for the schemes and promote the long-term sustainability o f the piped water system:

0

0 Privacy and convenience; 0 Easy accessibility; 0

0

Distance o f the pipe stand from the house;

Location o f the stand pipe (where and in whose courtyard); More time and labor to collect water should not be required.

Women ’s Participation

Women would have a central role in different stages o f the project cycle o f the non-piped water supply component as follows:

Women as “community mobilizers,” operators, monthly bill collectors and caretakers o f water options. Training would be provided by SOs. At least 30% women members in the VDC/ward arsenic committee. The V D C meeting should be convened in a convenient location and time so that al l the women members o f the V D C can attend such meeting. Women would be encouraged and provided opportunity to play a more proactive role in implementing and managing piped water system. Women Union Parishad (UP) members would be members o f the VDC/ward committee and would be a jo int signatory for all infrastructure contracts. Existing women’s microcredithelf help/social mobilization groups would to be involved in the ward committees.

For the piped schemes in rural and urban areas, women - as the main customers and decision makers in terms o f water use - will be fully involved in the decision making process coordinated by the sponsors. The feasibility studies and the project proposals wil l include sufficient information to demonstrate the participation o f women in the preparation process, as wel l as a clear description o f their role during operation, as defined in the Guidelines to Sponsors.

78

Piped Water System for Tribal Population

The majority o f the tribal population resides in the Chittagong Hill Tracts and the hilly northern areas in a scattered manner and groundwater in these areas i s not contaminated by arsenic. Therefore i t i s not anticipated that the project would finance activities in such areas. Nevertheless, communities in these areas might opt for piped water supply schemes under Component 1. In the event that a request for piped water systems from tribal areas, the sponsor wil l be required to develop a targeted mechanism for (a) creating enabling environment by using tribal language awareness kits and tribal workers for informed decision making by tribal groups, and (b) mobilizing the willing communities to determine the best approach and the community members’ role in the planning, implementation, operation and maintenance o f the piped water schemes. When the community and sponsor agree on the community taking an active role in the O&M, as opposed to having a relationship o f customer-water utility, the sponsor will be required to strengthen the community’s capacity to operate and maintain the project activitiedfacilities.

Mechanism for Voluntary Land Donation

The piped water systems will be built on public land or donated land, so land acquisition wil l not be required in the large majority o f cases. Bangladesh law permits voluntary land donation by registering at the District Commissioner’s office. All voluntary land transactions wil l meet the following criteria: (a) the land in question will be free o f squatters, encroachers or other claims o f encumbrances; (c) verification o f the voluntary nature o f land donations in each case; (d) land transfers will be completed through registration, land title will be vested in the Union Parishad (rural) and municipality (urban); and (e) a provision will be made for redressal o f grievances.

For those rare cases where the Sponsors wil l need to purchase land, such purchase will be undertaken with the portion o f funds provided by the Sponsor. The PMU in DPHE will examine al l cases o f land purchases, with an independent agency as required, at the time o f proposal submission and before approving fund transfer for actual physical work. The project will develop the TOR and identify a suitable agency for ascertaining voluntarism o f al l land transfers and purchases before the signing o f implementation o f contracts. All grievances wil l be reviewed by a committee under the chairmanship o f the District Commissioner, and including the UP Chairman, and a PMU representative as its members. This committee wil l address any issue as brought out by an aggrieved person andor as brought out by the external agency’s examination reports.

Institutional Framework

In the village piped water system, the stakeholders include community-based grassroots organizations, a l l types o f beneficiaries, NGOs who might act as sponsors, UP, DPHE and also LGED. The functions and linkages among different stakeholders are described below:

79

Sponsors for Village Piped Water Systems

In villages having more than 200 households, sponsors (entrepreneurs, cooperatives, CBOs, and/or NGOs) will be contracted to develop village piped water supply schemes in close collaboration with communities and local governments. Guidelines and TORS have been developed for the sponsor and are available in Project Files and will constitute part of the Operational Manual.

Support Organizations (SO)

In small villages with less than 200 households, piped water systems will not be cost effective. In these villages, Support Organizations (SO) will be contracted to facilitate establishment of Union and Ward Arsenic Committees, develop capacity o f these committees to raise awareness on the importance o f arsenic safe water, and development o f ward level community action plans (CAP), which will detail the number o f options per ward, cost sharing mechanism and O&M procedures. SOs wil l monitor completion o f CAP and the smooth functioning o f O&M systems.

Union Parishad Arsenic Committee

0

0 Co-signatory for CAPS. Overall guidance o f arsenic mitigation in the union.

VillageNard Arsenic Mitigation Committee

For the non-piped water supply systems, the Village/Ward arsenic mitigation committee will take the lead in:

0 Deciding and reaching a consensus for a jo int water distribution system to provide arsenic-fiee safe water;

0 Approving CAP; 0 Deciding to use o f the common property resources such as, river, pond, baor, khas

land. 0 Resolving problems that may arise in the implementation o f the project; 0 Collecting initial community contribution and cost o f O&M;

For rural piped water supply schemes, the village/ward arsenic mitigation committee may take a lead role in a variety o f preparation and implementation activities, as agreed with the sponsor and the community overall. Their role and involvement, as agreed in the community participation process, will be described in the feasibility studies and project proposals.

Water Users Committee

Depending o n the agreements with the sponsors during the init ial consultation process, a Water Users Committee may have a variety o f roles during implementation, such as:

0

0 Preventing misuse o f water; 0

Releasing the tap and make sure that everyone gets water;

Collecting the monthly dues fiom the households regularly;

80

0

0

0

Depositing monthly collection to the treasurer; Preventing any conflict and feud among the water users; Reporting problem to the ward committee for onward transmission to the higher committee.

The specific roles and responsibilities o f the Water Users Committee will be clearly outlined in the feasibility studies and project proposals, and wil l be part o f the legal Service Agreement.

Participatory Monitoring

Participatory monitoring will be an integral part o f the system. The monitoring framework will include processes and outcomes. The M&E framework described in the main body o f the PAD includes specific provisions for the collection o f social indicators to evaluate these processes and outcomes. Social development outcomes include (i) establishment o f inclusive and accountable local institutions (e.g. village/ward development committee, union parishad) which are responsive to the needs o f the rural poor; (ii) empowerment o f rural women by giving them greater access, choice and voice in decision making; (iii) improvement in health status by bringing changes in personal, domestic and environmental hygiene behavior/practices; and (iv) capacity building o f local government and other institutions.

81

Annex 11: Project Preparation and Supervision BANGLADESH: Water Supply Program Project

Planned Actual PCN review November 1 1 , 2003 November 1 1,2003 Initial PID to PIC November 26,2003 December 03,2003 Initial ISDS to PIC November 26,2003 December 03,2003 Appraisal April 10,2004 April 10,2004 Negotiations May 10,2004 May 11,2004 BoardRVP approval June 17,2004 June 17,2004 Planned date o f effectiveness October 3 1,2004 Planned date o f mid-term review March 3 1,2007 Planned closing date April 30,2010

Key institutions responsible for preparation o f the project: Ministry o f Local Government and Cooperatives; Department o f Public Health Engineering.

Bank staff and consultants who worked on the project include:

Name Title Unit Karin Erika Kemper Sr Water Resources Mgmt. Spec. SASES Khawaja M. Minnatullah Sr Water & Sanitation Spec. EWDSA

Mona Sur Economist SASRD Nilufar Ahmad Sr Social Scientist SASES Burhanuddin Ahmed Sr Financial Management Spec. SARFM

Tapas Paul Environmental Spec. SASES h a 1 Talbi Young Professional SASES Abul Fayez Khan Program Assistant EWDSA Razia Sultana Program Assistant SASES Hawanty Page Program Assistant SASES Alain R. Locussol Lead Water and Sanitation Spec., SASE1

Junaid Ahmad Lead Economist, Regional Team EWDSA

David G. D e Groot Sr Urban Spec. AFTUl Husein Rashid Consultant n.a. Saki1 Ahmed Ferdousi Consultant n.a Tanveer A h s a n Consultants EWDSA Bernard0 Gomez Consultant n.a Guillermo Yepes Consultant n.a Syed Abuhena Mostafa Kamal Consultant n.a M. Khaliquzzaman Consultant SASES Feroze Ahmed Consultant n.a

Ede Jorge Ijj asz-Vasquez Sr Environmental Spec. ENV

Debabrata Chakraborti Procurement Spec. SARPS

Peer Reviewer

Leader, WSP-SA

82

Oliver Taft Consultant SASES Franz Drees Sector Leader; Peer Reviewer LCSFP Luiz Tavares Senior Water and Sanitation Spec.; EASUR

Alexander Bakalian QER Reviewer MNSER Parameswaran Iyer QER Reviewer EWDWS

Peer Reviewer

Bank finds expended to date on project preparation: 1. Bank resources: $3 15,000 2. Trust funds: $25,000 3. Total: $340,000

Estimated Approval and Supervision costs: 1. Remaining costs to approval: $5,000 2. Estimated annual supervision cost: $1 50,000

83

Annex 12: Documents in the Project File BANGLADESH: Water Supply Program Project

Guidelines for sponsors o f rural piped water supply schemes

Social Assessment Report

Environmental Impact Assessment Report including Environmental Management Plan

Agency Procurement Capacity Assessment Report

Mission Aide Memoires

Other

Willingness-to-Pay Studies by Water and Sanitation Program

84

Annex 13: Statement of Loans and Credits BANGLADESH: Water Supply Program Project

~______ ~ _ _ _ _ _ __________ ~

Difference between expected and actual

disbursements Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb Ong. Frm. Rev’d

PO74966 2004

PO53578 2003 PO62916 2003

PO71435 2003 PO81849 2003

PO44876 2002 PO75016 2002 PO74040 2002 PO74731 2002 PO71794 2002 PO50752 2001 PO57833 2001 PO59143 2001 PO69933 2001 PO44810 2001 PO44811 2000 PO50751 2000 PO49587 2000

PO09468 2000 PO41887 1999

PO37294 1999 PO09524 1999 PO50745 1999

PO49790 1999 PO44789 1998 PO37857 1998

Primary Education Development Program I1 Social Investment Program Project Central Bank Strengthening Project Rural Transport Improvement Project

BD: Telecommunications Technical Assist. Female Secondary School Assis. I1 Public Procurement Reform Project Renewable Energy Development

Financial Services for the Poorest Rural Elect. Renewable Energy Dev. Post-Literacy & Continuing Education Air Quality Management Project Microfinance I1 HIV/AIDS Prevention

Legal & Judicial Capacity Building Financial Institutions Development

National Nutrition Program Aquatic Biodiversity Conservation

Fourth Fisheries Municipal Services Third Road Rehabilitation & Maintenance Dhaka Urban Transport Arsenic Mitigation Water Supply Export Diversification

BD Private Sector Infrastructure Dev Health and Population Program

0.00 150.00 0.00 0.00 0.00 153.95 0.00 0.00

0.00 18.24 0.00 0.00 0.00 18.29 2.10 0.00 0.00 37.00 0.00 0.00 0.00 37.05 19.32 0.00 0.00 190.00 0.00 0.00 0.00 191.06 1.96 0.00 0.00 9.12 0.00 0.00 0.00 9.87 -0.06 0.00

0.00 120.90 0.00 0.00 0.00 99.04 19.39 0.00 0.00 4.50 0.00 0.00 0.00 2.77 1.03 0.00 0.00 0.00 0.00 8.20 0.00 7.72 1.05 0.00 0.00 5.00 0.00 0.00 0.00 4.44 1.65 0.00 0.00 190.98 0.00 0.00 0.00 188.89 82.13 0.00 0.00 53.30 0.00 0.00 0.00 43.04 13.22 -0.42 0.00 4.71 0.00 0.00 0.00 3.45 3.51 0.00 0.00 151.00 0.00 0.00 0.00 26.44 -0.20 0.00 0.00 40.00 0.00 0.00 21.98 14.61 26.49 -2.01 0.00 30.60 0.00 0.00 0.04 26.56 12.44 0.00 0.00 46.90 0.00 0.00 0.00 10.68 26.02 0.00 0.00 92.00 0.00 0.00 24.02 50.56 62.13 6.1 1 0.00 0.00 0.00 5.00 1.25 1.85 4.82 2.66 0.00 28.00 0.00 5.00 8.25 11.81 18.83 3.67 0.00 138.60 0.00 0.00 0.00 83.37 29.25 0.00 0.00 273.00 0.00 0.00 0.00 97.93 88.58 29.11 0.00 177.00 0.00 0.00 64.89 46.54 110.54 35.37 0.00 32.40 0.00 0.00 4.35 15.82 18.67 0.00 0.00 32.00 0.00 0.00 0.00 0.24 0.63 0.00 0.00 235.00 0.00 0.00 0.00 147.68 148.65 0.00 0.00 250.00 0.00 0.00 0.78 51.61 55.13 0.00

Total: 0.00 2,310.25 0.00 18.20 125.56 1,345.27 747.28 74.49

85

Bangladesh STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of U S Dollars

Committed Disbursed

IFC IFC FY Approval Company Loan Equity

2001 BDTEF 13.00 0.00 1997 DBH 2.33 0.65 1991 Dynamic Textile 1.86 0.00 1998 Grameen Phone 6.67 0.09 1985 IDLC 0.00 0.15 1998 IPDC 6.88 0.00 1998 Khulna 14.74 0.00

Quasi Partic. Loan Equity Quasi Partic.

0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 1.48

0.00 0.00 0.00

17.99

0.00 0.00 0.00 0.00 2.33 0.65 0.00 0.00 1.86 0.00 0.00 1.48 6.67 0.09 0.00 0.00 0.00 0.15 0.00 0.00 6.88 0.00 0.00 0.00

14.74 0.00 0.00 17.99 1998/00 Lafargelsum 0.00 0.00 0.00 15.00 0.00 0.00 0.00 0.00 2003 RAK Ceramics 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2000 Scancem 9.29 0.00 0.00 0.00 9.29 0.00 0.00 0.00 2000 United Leasing 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total portfolio: 71.77 0.89 0.00 34.47 53.77 0.89 0.00 19.47

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2001 BRAC Bank 0.00 3.00 0.00 0.00 2001 Dhaka Westin 8.75 0.00 0.00 0.00 2004 Grameen Phone I1 30.00 0.00 0.00 0.00 1998 Khulna 0.00 3.30 0.00 0.00 2000 USPCL 0.00 3 .OO 4.00 0.00

Total pending commitment: 38.75 9.30 4.00 0.00

86

Annex 14: Country at a Glance BANGLADESH: Water Supply Program Project

4.5 4.5 4.5 5.0

POVERTY and SOCIAL

2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 1996-02

Population I%) Labor force (%)

Most recent estimate (latest year available, 199

-GDI -C>-GDP

Bangladesh

1982-92 199242 2o01 2o02 (average annual growth) Agriculture 2.2 3.4 3.1 0.0

6.5 Industry 6.0 7.1 7.4 Manufacturing 5.6 6.6 6.7 5.5

Services 3.7 4.8 5.5 5.4

Private consumption 3.0 3.7 4.8 -0.1 General government consumption 2.7 4.5 4.5 19.2 Gross domestic investment 6.3 9.6 5.8 8.2 Imports of goods and services 2.3 9.4 11.2 -11.2

42) Poverty (% of population below national poverty line) Urban papulation (% of total population) Life expectancv at birth (years) Infant mortalitv (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source 1% of popu/ation) lliiteracv (% ofpopulation age 15+) Gross primary enrollment I% of schooi-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982

GDP (US$ billions) 18.1 Gross domestic investmentlGDP 17 8 Exports of goods and servicedGDP 5.2 Gross domestic savingdGDP 12 5 Gross national savingslGDP 17.9

Current account balance/GDP -49 Interest pamentdGDP 0 3 Total debffGDP 27 9 Total debt service/exports 17 7 Present value of debffGDP Present value of debt/exports

1982-92 199242 (average annual growth) GDP 3 8 5.0

Growth of exports and Imports (%) 2o

i o

-" -20 - Exports "-0-lIrpOrtS

135.7 380 51 1

1.7 2 a

34 26 62 52 48 97 59

100 100 101

1992 31.7 17.3 7.6

13.9 19 3

-04 0.5

16.2 42 a

2001

5 3 3 5

South Asia

1,401 460 E40

1.8 2.3

28 63 71

84 44 97

108 89

2001 47.0 23.1 15.4 18 0 224

-1.7 0.3

32.4 7.3

20.7 105.4

2002

4 4

Low- income

2,495 430

1,072

1 9 2 3

30 59 a i 76 37 95

103 a7

2002

47 6 23 1 14 3 18 2 23 4

0 5 0 3

35 8 7 7

2002-06

2.6

I Development dlamond'

Life expectancy

GNi Gross per primary capita nrollment

Access to improved water source

- Bangladesh Low-income WOUD . .. ..

Economic ratios'

Trade

Investment Domestic savings

nvestment

I I

Indebtedness

- Bangladesh Low-income arom .. ....

1% of GDP) Agriculture Industry

Services

Private consumption General government consumption imports of goods and services

Manufacturing

31.2 29.4 24.1 22.7 l5

21.1 22.5 25.9 26.4 10 13.7 13.9 15.6 15.9 47.7 48.1 50.0 50.9

87

Bangladesh PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices implicit GDP defiator

Government finance (% of GDP, includes current grantsf Current revenue Current budget balance Overall surpluddeficit

TRADE

(US$ millions) Total exports (fob)

Raw iute Leather and leather products Manufactures

Total imports (cifl Food Fuel and energy Capital goods

Export price index (1995=100J Import price index (1995=100J Terms of trade (7995=100J

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, local/US$J

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Porffolio equity

World Bank prwram Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1982

9.7

-9.6

1982

1982

840 2,759

-1,919

-97 1,121

-895

387 508

20.0

1982

5,054 55

1,270

220 3 9

759 739 21 7 0

571 188

0 188 12

175

1992

4.5 3.0

8.3 1.9

-4.5

1992

1,986 106 139

1,593 3,526

265 168

1,289

86 107 81

1992

2,468 3,932

-1,464

-89 1,435

-116

635 -517

1,600 37.7

1992

13,561 60

4,534

552 7

52

357 623 -19

4 6

353 323 24

300 35

264

2001

1.6 1.6

9.0 1.4

-5.0

2001

6,476 67

254 5,766 9,363

380

2,400

112 129 87

848

2001

7,235 10,103 -2,868

-264 2,316

-816

490 326

1,307 54.0

2001

15,216 17

6,439

671 7

143

287 419 230 174

0

296 312 99

213 50

163

2002

1.9 3.2

10.1 2.1

-4.6

2002

5,929 61

207 5,367 7,697

437 723

2,617

115 106 108

2002

6,794 9,061

-2,267

-319 2,826

240

35 -275

1,583 57.4

2002

17,010 13

7,063

722 7

156

410 220 85 65 -6

479 301 112 190 51

138

97 98 99 w 01 1 -GDPdeflator -0 -CPI

Export and Import levels (US0 mill.) 1

98 97 98 99 w 01

~xports .imports

Current account balance to GDP (%)

I 1 T

Composition of 2002 debt (US0 mill.)

G:494 A: ,3 F 565

A - IBRD B - IDA D - Other multilateral F - Private C-IMF G - Short-term

E - Bilateral

88

MAP (# 33262)

89