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Document o f The World Bank
FOR OFFICIAL USE ONLY
Report No: 39864-UY
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN IN THE AMOUNT OF US$SO MILLION
TO THE
ADMINISTRACION DE LAS OBRAS SANITARIAS DEL ESTADO (OSE) WITH THE GUARANTEE OF THE REPUBLICA ORIENTAL DEL URUGUAY
FOR THE
OSE MODERNIZATION & SYSTEMS REHABILITATION PROJECT (APL-2)
IN SUPPORT OF THE SECOND PHASE OF THE OSE MODERNIZATION & SYSTEMS REHABILITATION PROGRAM
May 3 1 , 2007
Sustainable Development Department Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and Caribbean Regional Office
T h i s document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective May 29,2007) Currency Unit - - Uruguay Pesos (UY$)
US$0.0418 uY$23.93
- - -
uY$ 1 US$ l -
APL ANEP BHU CAS CBA
CESAN COASAS
DINAMA
DINAMIGE DINASA
DINAVI DINOT
EA EMP ERR
FARAH FM FRR GIS GoU ICB IDB IMM INIA IM INE IRR
IUFR LATU
MEF
FISCAL YEAR January 1 - December 3 1
ABBREVIATIONS AND ACRONYMS
Adaptable Program Loan National Administration o f Public Education
Banco Hipotecario del Uruguay - Hipotecario Bank o f Uruguay Country Assistance Strategy
Cost-Benefit Analysis Espirito Santo State Water Company
Comisidn Asesora de Agua y Saneamiento -- Advising Commission on Water and Sanitation
Direccibn Nacional del Medio Ambiente - National Environment Directorate
National Directorate o f Mining and Geology Direccidn Nacional de Aguas y Saneamiento - National Water and
Sanitation Directorate Direccidn Nacional de Yivienda - National Directorate o f Households
National Directorate o f Territorial Planning Environmental Assessment
Environmental Management Plan Economic Rate o f Return
Financial Accounting, Reporting and Auditing Handbook Financial Management
Financial Rate o f Return Geographical Information Systems
Government o f Uruguay International Competitive Bidding Inter-American Development Bank
Intendencia Municipal de Montevideo - Montevideo Municipality National Institute of Agriculture
Intendencias Municipales -Municipality Governments Instituto Nacional de Estadistica -National Statistics Institute
Internal Rate o f Return Interim Unaudited Financial Reports
Laboratorio Tecnoldgico del Uruguay - Technology Laboratory o f
Ministerio de Economia y Finanzas - Ministry o f Economy and Finance Uruguay
FOR OFFICIAL USE ONLY
MEVIR MGAP MIDES MIEM M O U Memorandum o f Understanding
M V O T M A
Movement o f the Eradication o f Unhealthy Rural Households Ministry o f Livestock, Agriculture, and Fishing
Ministerio de Desarrollo Social - Ministry o f Social Development Ministry o f Industry, Energy and Mining
Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente - Ministry o f Housing, Land Management and Environment
NCB National Competitive Bidding NVP Ne t Present Value O M Operational Manual
O&M Operation and Maintenance OPP OJcina de Planeamiento y Presupuesto - Office o f Planning and Budget OSE Administracidn de las Obras Sanitarias del Estado - National Water
Supply and Sanitation Company PDO Project Development Objective PIA1 Programa de Integracidn de Asentamientos Irregulares - Program o f
Intergration o f Irregular Settlements P M U Project Management Unit PNS Plan Nacional de Saneamiento - National Sanitation Master Plan PSP Private Sector Participation
RANC Reduccion de Agua N o Contabilizada SBD Standard Bidding Document SOE Statement o f Expenditures STP Sewage Treatment Plant TAL
TOCAF UFW Unaccounted-for Water UGA
URSEA
Public Services Modernization Technical Assistance Loan Texto Ordenado de Contabilidad y Adimistracion Financiera
Unidad de Gestidn Ambiental - Environmental Management Unit Unidad Reguladora de Servicios de Energi'a y Agua - Regulator o f Energy
and Water Services wss Water Supply and Sanitation WTP Willingness to Pay
Vice President: Country Director: Sector Manager Sector Leader:
Task Team Leaders:
Pamela Cox A x e l van Trotsenburg
John Henry Stein Juan Gaviria
Carlos E. Velez & Catherine Tovev
This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.
URUGUAY OSE Modernization & Systems Rehabilitation APL-2
CONTENTS
Page
STRATEGIC CONTEXT AND RATIONALE ..................................................... 1 I . A . B . C .
I1 . A . B . C . D . E . F .
I11 . A . B . C . D . E . F .
IV . A . B . C . D . E . F . G .
Country and sector issues ........................................................................................ 1
Rationale for Bank involvement ............................................................................. 9 Higher level objectives to which the project contributes ...................................... 10
PROJECT DESCRIPTION ............................................................................... 11 Lending instrument ............................................................................................... 11
Program objective and phases ............................................................................... 11
Project development objective and key indicators ................................................ 15 Project components ............................................................................................... 15
Lessons learned and reflected in the project design .............................................. 18
Alternatives considered and reasons for rejection ................................................ 21
IMPLEMENTATION ........................................................................................ 22 Partnership arrangements ..................................................................................... 22
Institutional and implementation arrangements .................................................... 22
Monitoring and evaluation o f outcomeshesults., .................................................. 23
Sustainability ......................................................................................................... 24
Critical r isks and possible controversial aspects., ................................................. 24 Loadcredit conditions and covenants ................................................................... 26
APPRAISAL SUMMARY ................................................................................. 26 Economic and financial analyses .......................................................................... 26
Technical ............................................................................................................... 28
. . .
Fiduciary ............................................................................................................... 29
Social ..................................................................................................................... 29
Environment .......................................................................................................... 31
Safeguard policies ................................................................................................. 31
Policy exceptions and readiness ............................................................................ 31
Annex 1: Country and Sector or Program Background ............................................. 32
Annex 2: M a j o r Related Projects Financed by the Bank and other Agencies .......... 36
Annex 3: Results Framework and Monitoring ............................................................ 37
Annex 4: Detailed Project Description .......................................................................... 44
Annex 5: Project Costs ................................................................................................... 56
Annex 6: Implementation Arrangements ..................................................................... 57
Annex 7: Financial Management and Disbursement Arrangements ......................... 59
Annex 8: Procurement Arrangements .......................................................................... 66
Annex 9: Economic and Financial Analysis ................................................................. 75
Annex 10: Safeguard Policy Issues .............................................................................. 100
Annex 11: Output Based Disbursements ................................................................... 105
Annex 12: Project Preparation and Supervision ....................................................... 117
Annex 13: Documents in the Project File ................................................................... 118
Annex 14: Statement of Loans and Credits ................................................................ 119
Annex 15: Country at a Glance ................................................................................... 120
Annex 16: M a p (IBRD 30862) ..................................................................................... 122
URUGUAY
OSE MODERNIZATION & SYSTEMS REHABILITATION APL-2
PROJECT APPRAISAL DOCUMENT
LATIN AMERICA AND CARIBBEAN
LCSUW
Date: May 3 1,2007 Country Director: A x e l van Trotsenburg Sector ManagedDirector: John Henry Stein
Team Leader: Carlos E. Velez Sectors: Water supply (60%); Sanitation (40%) Themes: Access to urban services and housing (P); Other urban development (S) Environmental screening category: Partial Assessment
Project ID: P101432
Lending Instrument: Adaptable Program Loan
[XI Loan [ 3 Credit [ 3 Grant [ ] Guarantee [ ] Other:
For Loans/Credits/Others: Total Bank financing (US$m): 50.00 Proposed terms: Fixed-spread loan with level repayment dates from October 15,2012 to October 15,2022
Financing Plan (US$m) Source I Local Foreign Total
Borrower 6.00 12.10 18.10 International Bank for Reconstruction 16.50 33.50 50.00 and Development Total: 22.50 45.60 68.10
Borrower: Adrninistracion de las Obras Sanitarias del Estado (OSE)
Responsible Agency: Administracibn de las Obras Sanitarias del Estado (OSE) Carlos Roxlo 1275 Montevideo, Uruguay Tel: + 598 2 1952 4050 www.ose.com.uy
Project implementation period: From June 28,2007 to September 30,2012 Expected effectiveness date: October 3 1,2007 Expected closing date: March 3 1,201 3
[ ]Yes [XINO
[ ]Yes [XINO
[ ]Yes [XINO
[ ]Yes [XINO
[XIYes [ ] N o
Does the project depart from the CAS in content or other significant respects? Ref: PAD A.3 Does the project require any exceptions from Bank policies? Ref: PAD D. 7
I s approval for any policy exception sought from the Board? Does the project include any critical risks rated “substantial” or “high”? Ref: PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Ref: PAD D. 7
Have these been approved by Bank management? [ ]Yes [ IN0
Project development objective Ref: PAD B.2, Technical Annex 3 The Project Development Objective i s to ensure Uruguayans receive more accountable, customer orientated and better value for money, water and sanitation services.
Project description [one-sentence summary of each component] Ref: PAD B.3.a, Technical Annex 4 Component 1 will support OSE’s institutional renewal through institutional modernization; technological updates and optimization o f organizational processes; and investments in regional infrastructure .
Component 2 will improve the reliability o f OSE’s water supply system by finalizing the rehabilitation o f the Aguas Conientes water treatment plant and rolling out an extensive unaccounted for water reduction program.
Component 3 will continue the demand driven expansion o f the sewerage system, whilst developing strategies to enhance household connections to the existing network.
Component 4 will support project management; supervision and engineering support; staff exchanges and seminars; and audits
Which safeguard policies are triggered, if any? Ref: PAD D. 6, Technical Annex 10 Environmental Assessment (OP/BP 4.01) Physical Cultural Resources (OP/BP 4.1 1)
Significant, non-standard conditions, if any, for: Re$ PAD C. 7
Board presentation: June 28”, 2007
Loadcredi t effectiveness: October 3 1 , 2007
Covenants applicable to project implementation: i)
ii)
“Standard” wording for project audits. The annual audited financial statements wi l l b e furnished to the Bank not later than six months after the end o f each year. “Standard” wording for Inter im Unaudited Financial Reports IUFRs. Semiannual IUFRs wil l b e submitted to the Bank not later than 50 days after the end of each calendar semester, as part o f the project progress reports. The Borrower shall, each year, starting in the year 2008, spend an amount equivalent to at least 2% (two percent) o f i ts annual investment budget or not less than $1,000,000 whichever amount i s higher, to replace water distribution pipes and valves and connection piping in i t s water supply system.
iii)
I. STRATEGIC CONTEXT AND RATIONALE
A. Country and sector issues
1. Uruguay i s an upper-middle income country characterized by a high coverage and quality o f public services and infrastructure relative to other Latin American or middle income countries. The provision o f potable water i s practically universal in the entire country, as i s the provision o f adequate sanitation services. However, the coverage level falls to 56.5 percent when sanitation coverage i s measured as the percentage o f the population with household connections, and to 27.4% when measurement i s restricted to the population in the urban interior served by the Administracidn de las Obrus Sanitarias del Estado (OSE), the national water and sewage utility.
2. OSE provides water and sanitation services for the entire country, except for Montevideo, where sanitation services are provided by the municipality to 83.1% o f the population living in the capital, through household connections to the network. OSE was established by the 1952 Sector Law and reports to the Ministry o f Housing, Land Management and Environment (MVOTMA), through which it presents budgets to the OPP, which clears the proposals before the President approves them on behalf o f the national government.
A new sector context
3. Until very recently, Uruguay’s public utilities were virtually the only actors in the infrastructure sectors, acting as operators and de facto policy makers and regulators. In 1997 the scenario began to change when Parliament created a regulator and approved a legal and regulatory framework for the power sector. Later, in February 2001 , Parliament created a regulator for the communications sector, Unidud Reguladora de Sewicios de Comunicuciones (URSEC), and in December 2002, it completed the unbundling o f policy making, regulation and operation functions o f public services by abolishing the power regulator and creating the Unidad Reguladora de Sewicios de Energia y Agua (URSEA) and charging i t with rule-making for both the energy (power, natural gas and petroleum products) and water (water supply and sanitation) sectors.
4. URSEA i s a technically autonomous and decentralized executing unit, which reports to the Presidency o f the Republic. I t s functions include the protection o f consumer r ights and the resolution o f complaints; the definition o f quality and safety regulations; the study o f tariff proposals and the presentation o f these to the President, who grants approval on behalf o f the national government; the oversight o f operators’ compliance with existing norms and regulations; the promotion o f competition and transparency through the publication o f information; and the holding o f public audiences. URSEA’s Board i s appointed by the President, and has principle regulatory oversight in both sectors. Although URSEA became operational in 2003, it has to date focused
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predominantly on the ener y sector based on i ts historical legacy. Capacity in the water sector i s developing slowly . 7 5. The new Government elected in October 2004 whom, for the f i rst time in Uruguay’s history has not been drawn from the traditional Colorado and National parties, has continued supporting the unbundling o f decision-making policy, regulation and operations in an effort to increase the efficiency o f the public utilities, improve the country’s competitiveness and boost economic growth2.
6. Since the original design o f the APL Program in 2000, the reforms and the institutional changes that have taken place in the Water Supply and Sanitation (WSS) sector have been particularly significant due to a public national referendum held simultaneously with the general elections o f October 2004. The referendum approved a Constitutional amendment that made the provision o f WSS services the exclusivity o f state entities, profoundly changing Uruguay’s WSS legal framework. The two private concessionaires and 14 small private sector operators that existed at that time were reversed and all WSS services are now provided by OSE, the IMM or a subsidiary o f OSE (like the former private Maldonado concessions which were reabsorbed into the OSE Group) ’. 7. Later, in 2005, the Direccidn Nacional de Aguas y Saneamiento (DINASA) was established with the mandate to create national policies in water (water resources and water supply) and sanitation. DINASA’s Director i s designated by the Executive and reports to the Ministry o f Housing, Land Management and Environment (MVOTMA). Responsibilities for setting the overall water resources policies and strategies have yet to be fully defined.
8. The Advising Commission on Water and Sanitation (COASAS) was created simultaneously with DINASA to assist incorporating sector policies. It i s overseen by the Executive. In parallel to these activities, inter-institutional coordination has been initiated in order to best align the new institutional design with the principles found in the Constitutional reform. An Executive decree was promulgated in November 2006, defining the COASAS’ tasks and composition, and opening up a consultation process for the development o f a comprehensive water sector law (covering water supply, sanitation and water resources management).
9. The new institutional framework for the water and sanitation sector i s summarized in Figure 1.
’ A separate on-going World Bank project, the Uruguay Public Services Modernization Technical Assistance Loan PAL), i s seeking in parallel to strengthen the regulatory framework for public utilities.
A 2002 World Bank project, the Uruguay Public Services and Social Sectors Structural Adjustment Loan (Loan No.7 164O-UR)) which focused on reforms to boost economic growth, improve the competitiveness o f the Uruguayan economy, and improve the general welfare o f the population through better provision o f public and social services and infrastructures, provided additional support to the unbundling policy by helping consolidate and strengthen the regulatory agencies.
water (eg private borewells). Except for some individual households and residential blocks which have their own independent source o f
2
Figure 1. Institutional Framework for Water and Sanitation Sector
Policy definition
10. As it i s the case in all public services and infrastructure sectors in Uruguay, policy formulation i s today the weakest stage in the provision o f WSS services. Policymaking bodies at ministerial level have weak institutional structures and lack resources: analyses supporting key government decisions are seldom publicly available; commercial goals are often mixed with social policies; and subsidy policies are not explicit or well documented.
11. In the WSS sector, the recently created DINASA i s currently working on a draft Water Law aimed at establishing a legal and regulatory framework for the entire water sector (water supply, sanitation and water resources management), consistent with the 2004 Constitutional Amendment. The Water Law, based on DINASA’s new sector vision, i s expected to be sent to Parliament late in 2008. Simultaneously with the preparation o f the Law, DINASA i s also revisiting, redesigning and strengthening policy formulation, reviewing the existing distribution o f roles, responsibilities and relative capacity among government units in charge o f these functions, and studying how to improve the way those units interact among themselves.
12. DINASA i s currently in the process o f defining i ts vision for the sector, in collaboration with a range o f other Uruguayan environmental, social and economic institutions (including MVOTMA, OPP, OSE and IMM). OSE should collaborate more
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closely with DINASA, to help strengthen the new institution’s capacity, and to ensure DINASA’s proposed vision reflects ground realities. OSE wi l l be providing i t s own contributions to the policy debate at the technical level by (i) funding i t s own analytical work (tariff review, impact evaluation pilot for sanitation), (ii) commentinglpeer reviewing DINASA’s own background studies and draft laws, (iii) participating and supporting DINASA’s social data sharing working group. OSE’s senior management w i l l also need to support DINASA at a more strategic and political level. At the same time, OSE wi l l need to ensure i t s future operations are closely in l ine with DINASA’s emerging vision, including regular consultations with DINASA prior to setting i ts Annual and Five-yearly Strategic Plans. DINASA’s preliminary Vision document emphasizes the importance o f achieving universal water and sanitation coverage based on appropriate standards; and underpinning the Vision with carefully designed prioritization criteria for investments, which balance cost-efficiency, quality and safety standards. DINASA i s seeking to base i ts policy formulation on a careful diagnostic o f the situation4 (including analyses o f the cost-benefit and appropriateness o f in-house public sewerage systems in relation to alternative sanitation services; reviews o f tariff structures and subsidies, design o f a national water and sanitation investment plan, and an evaluation o f quality norms and user rights).
13. Sanitation standards. Uruguay has one o f the highest coverage levels for safe drinking water (99.3%) and household connections (92.2%) in the developing world and 97% have access to adequate sanitation. However, only 48 percent o f the households are connected to either OSE or IMM sewerage networks and, as a result, the previous administration defined the achievement o f universal access to sanitation, through in- house connections, as a medium term goal. Based on this strategy, the APL-1 sought to expand household sewerage coverage through a demand-driven approach based on capital cost-sharing agreements with local governments and beneficiary communities. Four years after the beginning o f the Program, demand for in-house connections has remained relatively low. Only 47% o f potential customers have actually assumed the additional costs to connect their houses to the newly built collectors, although connection rates have been increasing gradually over time (with connection rates for networks 2 years or older now reaching 56%).
14. Consequently, the new Uruguayan administration i s questioning the appropriateness o f the policy and has decided to take the lead on this issue in Latin America and wil l review the ‘appropriate standards’ for sanitation - assessing the costs and benefits o f in house connections to public sewerage systems in relation to properly maintained private septic tanks.
The World Bank’s Public Services Modernization Technical Assistance Loan (TAL) project wi l l be supporting some o f DINASA’s diagnostic studies (including analysis of water and sanitation services from the supply, demand and social perspectives; hydrology and urban drainage), analyses of the legal framework; and institutional strengthening.
4
Regulation
15. The country’s efforts at improving the allocation o f responsibilities in public services by separating the functions o f policy definition, regulation and operation are moving in the right direction. However, progress in regulating these industries has been slow because o f the considerable political power that most public uti l i t ies have traditionally enjoyed, due to their position as national monopolies, the extensive coverage and the relatively good quality o f the services they deliver. Furthermore, the two existing regulators, URSEA and URSEC, have a large degree o f autonomy but restricted functions - the regulatory agencies, for example, recommend tariff changes but the Executive decides.
16. The directors o f the regulatory agencies are selected by the Council o f Ministers and confirmed by the President o f the Republic, who also selects the regulator who wil l act as president o f the agency. Parliament approves the selection o f both the regulators and the agency president. The terms o f all regulators coincide and the agencies have the right to remove a director based simply on a motivated resolution.
17. Staffing levels in both URSEA and DINASA are low and capacity i s weak. Roles and responsibilities need to be more clearly defined and put into practice, to ensure a genuine separation o f functions can take place. As with other public services, OSE and IMM enjoy a disproportionate amount, relative to other sector actors, o f financial, political and human capital, which they are able to leverage effectively to meet their own ends.
18. URSEA’s consolidation and strengthening also needs political support. Whi ls t waiting for a Sector Law to be enacted, URSEA may wish to arrange the submission o f regular information on operational, financial, commercial, service quality and performance - for example through the signing o f a Memorandum o f Understanding (MoU). This type o f information sharing commitment would help assure a faster and smoother implementation o f regulatory accounting; avoid double delivery o f certain information (eg water quality); and, most importantly, would provide an opportunity to develop and strengthen a climate o f confidence through introducing, updating and monitoring agreements.
19. In addition, as part o f the existing Bank-financed Public Services Modernization Technical Assistance Loan (TAL), OPP carried out a regulatory accounting study that sets out uniform regulatory accounting standards for the WSS sector. The findings o f this regulatory accounting study have been approved by URSEA. An implementation action plan wil l now need to be defined and agreed on to roll-out the recommendations. The application o f this tool should foster efficiency gains by increasing transparency and efficiency.
20. Public support and social recognition. URSEA has been making good progress but the next few years w i l l be crucial for i t s development and consolidation. Social
5
recognition and public support play a key role towards that objective by reinforcing the authority o f the agencies’ resolutions. Activities that could build public support for regulation and the agencies include public audiences and other forms o f civic participation in the decision-making process, regular and abundant information, accessibility o f complaints channels, and above all, extensive and generous support from the President and sector Ministers for the work o f the agencies.
21. T h i s i s not a short-term task and cannot be treated as such; success requires patience and persistence. A major structural and behavioral change, including full acceptance o f regulation, w i l l take 10 or more years to achieve. The mandate for a public utility i s determined by i t s statutes. International. experience shows that although the mandate for change comes from the central government, the decision mandate ultimately comes from the local community. This i s the reason why it i s so difficult to force a mandate for change on local, politically well-organized utilities, and why so many processes that have ignored the customers have failed.
OSE: The Operator
22. OSE’s Governance Structure. Sustainable improvement in OSE’s performance will continue requiring efforts towards institutional change, particularly in i t s current governance and decision-making structure. OSE needs clear and explicit incentives for economic efficiency, to help optimize i t s operations and investments - and clear decision making structures based on sound information and analysis (rather than political, social or corporate imperatives). OSE’s Board i s politically appointed. It therefore remains important to insulate OSE from political and bureaucratic pressures, and preserve OSE resources from being channeled to that end. Reducing political interference can partially be achieved by vesting the real authority o f the Board, so that Government does not go beyond setting objectives and performance targets, appointing directors, monitoring OSE and Board performance, and stepping in only in extreme circumstances.
23. Over the past few years, OSE has made some important initial steps in this direction. In 2005, the new OSE Board developed and officially adopted a strategic vision for OSE. This vision, along with the recent appointment o f the OSE Board, should ensure that OSE’s priorities wil l stay the course over the next few years, and ensure the complete execution o f i ts current programs and projects. The current OSE board i s also seeking to improve performance monitoring. This has traditionally been a weak spot since the OSE Board has lacked the incentives to oversee a well-functioning, informed and active monitoring. Plans are currently being developed to systematically feed OSE’s performance benchmarking indicators to the Board to ensure more informed and strategic decision-making. However, improving OSE’s governance and overall performance cannot be undertaken by the Board in isolation. It wi l l require profound changes throughout the organization. OSE’s 2007 employee survey5 found that less than over 50% o f OSE employees do not consider OSE has a clear vision. The challenge for OSE
TEA Deloitte and Touche (2007), Analysis of climate and culture of change in OSE.
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wi l l now be to effectively communicate and implement these changes in OSE decision making, now based around an agreed medium term vision, goals and strategy; and lock i tse l f into accomplishing those goals through appropriate, publicly shared targets. Developing an OSE Code o f Conduct may be one way o f ensuring OSE employees and associated stakeholders become more aware o f OSE’s changing governance structures, and become empowered to actively help shape it. The process o f defining and operationalizing a joint code o f conduct could be a powerful tool for effectively and clearly disseminating OSE’s mission, vision, and values within the utility, and for sharing OSE’s commitment to appropriate behavior to all OSE staff, customers, contractors, supplies, government agencies and communities. In sum, developing a code o f conduct could help enhance OSE’s social responsibility and accountability by making i t s decision-making and actions more transparent.
24. Operational and financial efficiency. Despite Uruguay’s high coverage and quality o f WSS services, important operational and financial inefficiencies remain in the provision o f these services. After recovering from the impact o f the massive devaluation that came with the recent economic crisis, OSE i s now generating enough resources to recover the operation and maintenance costs o f delivering potable water and sanitation services o f excellent quality at accessible prices, as well as to leverage the investments needed to keep universal access to water supply and, within the short to medium-term, collect and treat all wastewater. However, a significant improvement o f both efficiency and incentives i s needed.
25. OSE made some steady efficiency gains under APL-1. Between 1999 and 2006, OSE successfully reduced labor productivity from 5.6 employees/l 000 connections to 4.3, decreased operating costs from US$ 0.98/m3 to US$ 0.81; and increased operating margins from 35% to 43%. However, as the comparison o f OSE’s performance indicators with those o f selected regional uti l i t ies makes clear, OSE’s performance continues to present significant room for improvement.
26. Financial Results. The stabilization o f the country’s economy after 2004 brought along improvement in OSE’s financial results: debt structure improved as well as operating costs to revenue ratios. OSE showed slight operational improvement in some indicators; while others such as unaccounted for water worsened. Commercial indicators remained stable not showing much progress. It i s important to recognize that OSE has navigated through these difficult years with reasonable success. T h i s figure may illustrate an advantage o f avoiding radical measures and instead opting for more constructive policies, as did Uruguay and Brazil, regarding tariff readjustments during the crisis.
27. Labor productivity. Thanks to the significant improvement achieved since 2000, OSE’s current level o f 4.3 employees per 1000 water connections remains below the average level observed in the Latin American region6. Legal constraints on public sector lay-offs in the country, the company’s monopoly position and political safeguards had
ADERASA (Asociacion de Entes Reguladores de Agua Potable y Saneamiento de las Americas) (2007), “Base de datos e indicadores de gestion para agua potable y alcatarillado, Ejercicio Annual de Benchmarking - 2006, Datos AGO 2005 ”.
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year after year added rigidity to OSE’s labor force, conspiring against improving i ts quality and reducing i ts size to the 1 to 3.5 range exhibited by the most efficient sector utilities in the region . 28. Unuccounted-for Wuter. The level o f unaccounted-for water (UFW) in OSE i s also very high and one o f the two key variables in explaining OSE’s low operational efficiency which i s reflected in the financial results. Currently at 56 percent, the level o f UFW in OSE i s far above the 20 to 35 percent band that can be observed in the best companies o f the region (ADERASA Benchmarking), and the 10 to 15 percent exhibited by a small group o f exceptional companies worldwide. Instead o f improving, the level o f UFW in OSE has been creeping up over time, particularly in the Metropolitan Area, which accounts for around 64% o f OSE’s overall water consumption. Performance has been better in the interior, where unaccounted for water now averages around 48%, with 3 out o f 5 target cities achieving within 2 percentage points o f their UFW target reductions under APL- 1.
29. Centralization, Accountability and Innovation. Under its new management, OSE i s seeking to break the State Owned Enterprise mold typified by a high degree o f centralization, a lack o f accountability and limited innovation by seeking to progressively re-shape traditional decision-making processes and institutional culture. In doing so, it w i l l need to address two major challenges:
30. First, as with many State Owned Enterprises, OSE decision-making processes have tended to be slow, bureaucratic and heavily centralized, with al l budget, human resources and decision-making processes concentrated in Montevideo. As a consequence, i ts commercial practices, including attention to the customers, as well as i t s operations and maintenance processes, whilst more decentralized, are as a result also slow, bureaucratic and unresponsive.
31. Second, the new OSE Board i s explicitly seeking to change OSE’s company culture, which has traditionally been highly technocratic, inward looking and shunning innovation. This wil l be a tall challenge. Cultural change i s likely to be gradual, with incentives for status quo strong. There i s a strong perception amongst employees that the company i s self-sufficient and does not need to seek external knowledge. Typically, there i s no incentive to end that isolation: in particular, salaries in these companies do not properly reflect equal pay for equal work or responsibility. The existence o f rigid institutional structures, in which supervisors may lack specific knowledge and leadership, also acts as a disincentive. In such case, salaries are not set in a way that fosters innovative ideas, the assumption o f additional responsibilities, better results, or full application to the job.
32. Improving Public Information through Quality of Service and Performance Information. Open access to standard corporate information about OSE as well as a reasonable level o f confidence in the accuracy and reliability o f that information, i s central to OSE’s accountability, and therefore i ts productive, financial and social effectiveness. Under APL- 1, OSE considerably improved i t s dissemination o f public information relating to i t s quality o f services and performance, and has been an example
8
o f best practice. OSE should aim to b e at least as transparent as l isted companies. In addition to disclosure required by the Banco Central del Uruguay (BCU) on listed f i rms, State Owned Enterprises such as OSE have the additional focus o n social (non-profit orientated) objectives (such as not presently cutting off unpaid water connections in informal settlements), and should therefore disclose the cost o f pursing those objectives and any subsidiedtaxes channeled between GoU and OSE. Such arrangements wou ld help identi fy unprofitable areas (after taking away the costs imposed by social objectives), and target those for reform to recover their viabil ity. But even more usefully, clear accountability and well-functioning control mechanisms within the State Owned Enterprises wil l permit performance measurement, and the easy identif ication o f value- drivers as we l l as pockets o f loss-creating activities. Such disclosures should b e extended to OSE’s operating, financial and social performance targets. Such a high level o f transparency will ensure OSE becomes even more accountable, and help the government achieve better monitoring o f OSE efficiency.
33. G iven the changes in the Constitution now prohibiting private sector participation and the s t i l l weak sector regulatory capacity, publ ic information has n o w become one o f the most important tools available to stimulate internal competitiveness, and increase consumers’ abi l i ty to make OSE more accountable. A s a result, OSE’s best practice benchmarking systems wil l need to b e further expanded. Most importantly, publ ic dissemination will need to be deepened to (i) reach more consumers and (ii) deliver a more sophisticated message, increasing consumers’ awareness o f their r ights and entitlements to a given level o f service provision. A company continuously exposed to public scrutiny and some sort o f competition wil l always have regard for i ts publ ic image and seek ways to deliver better services.
34. Tari f f Structures and Subsidies. OSE’s tariffs are high enough to cover operating and maintenance costs, ensure medium term profitabil ity, and generate enough revenues to support commercial borrowing for ambitious investment programs. However, as i s frequently the case in other countries, sewerage services are relatively lower, confirming the existence o f significant cross-subsidization between services.
35. A clear and transparent social po l i cy i s particularly important because i t i s the poor who suffer most from the lack o f efficient publ ic water supply services and from the unhealthy environment that exists in the absence o f adequate sewerage and wastewater treatment. Access to these most basic services i s crit ical for the alleviation o f poverty and the enhancement o f quality o f l i fe. OSE has recently made some important progress in this regard, working in close collaboration with the Min is t ry for Social Development (MIDES). OSE’s social policies (including tar i f fs and subsidies) now mirror the Government’s social policies.
B. Rationale for Bank involvement
36. The proposed project i s the product o f an on-going and deepening partnership between the World Bank and OSE, init iated in 1988 (with Loan 2921-UR) and cemented with the design o f a 10 year APL Program in 2000. This project constitutes the second
9
phase o f the APL Program, and remains consistent with i t s original design. Although OSE’s service coverage for water services i s excellent, and sewerage coverage i s relatively good, services provided to consumers s t i l l have room for improvement to enhance consumers’ welfare and Uruguay’s competitiveness. The project wil l continue to support the modernization o f OSE by consolidating existing gains and addressing outstanding issues, notably institutional reform and unaccounted for water. Both OSE and the government are committed to improving the efficiency o f the utility and both understand this wi l l not be possible without deeper reforms o f OSE administrative structure. To compliment this reform process, the government has just created DINASA, completing the unbundling o f sector functions (policy making, regulation, operations). This new political environment provides a unique window o f opportunity for APL-2 to support these reforms.
37. The Government o f Uruguay’s step-wise approach to sector reform has accompanied a long-term partnership with the Bank. The APL’s flexibility combined with long-term commitments has been a powerful instrument to secure client ownership throughout successive administrations. T h i s has never been truer than under the current administration, where there has been a sharp convergence between the new administration’s agenda and the APL Program’s objective. Remarkably, the new GoU and OSE administrations’ priorities for the sector, including the urgent need for OSE modernization, institutional renewal and improved efficiency, coincide fully with the World Bank’s diagnostic at the onset o f the APL Program (which i s s t i l l held today).
C. Higher level objectives to which the project contributes
38. The proposed project w i l l contribute to two cornerstones o f the new Vazquez administration reform program. First, i t directly supports the government’s emerging sector vision o f universal and secure access to appropriate water and sanitation services provided exclusively by state entities7 which i s itself fully endorsed by OSE’s vision, and Five Year Strategic Plan. Second, efforts to improve OSE’s efficiency and transparency are directly aligned with the Government’s drive to enhance Uruguay’s performance and competitiveness by reforming State Owned Enterprises. The current government’s vision emphasizes that Uruguay public services and infrastructure require “continued improvements in competitiveness, regulation, corporate governance, social policies and increased efficiency o f operators”*.
39. In the same vein, the modernization o f a public utility directly supports the CAS objective o f sustaining growth. I t was recognized in the aftermath o f the crisis that structural weaknesses in public enterprises would need to be remedied in order for economic recovery to remain securely in place and serve as an effective foundation in the future. The APL-2 builds upon efforts o f the first phase o f the Program to consolidate institutional renewal o f OSE, particularly reforms aimed at improving the utility’s financial sustainability and governance structure, whilst improving services through reduced unaccounted for water, and increased sanitation coverage.
DINASA “Vision del Sector Agua y Saneamiento” (draft, 2007) * Carta del Ministro de Economia y Finanzas a1 Banco Mundial (November, 2006)
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11. PROJECT DESCRIPTION
A. Lending instrument
40. with the second phase o f the APL Program (see para. 35 & 36).
The lending instrument agreed upon by the Borrower and the Bank i s to continue
41. The financial terms indicated in the cover sheet have been selected by the Borrower because this type o f loan offers the Borrower substantial flexibility and it adjusts to the Borrower’s external debt repayment profile and debt management strategy.
B. Program objective and phases
42. This proposed project i s the second phase o f an existing APL Program, initiated in 2000. The overall APL Program objective i s to increase the efficiency, coverage and sustainability o f water supply and sanitation services in Uruguay by:
(i) improving the competitiveness o f OSE; (ii) maintaining the reliability and enhancing the coverage o f water supply
infrastructure; and (iii) increasing sewerage coverage and sewage treatment.
43. The APL Program i s broadly on track (see Table 1 and Annex 1). The f i rs t phase o f the APL (APL-1) has been successful, with all ISRs since 2004 consistently providing satisfactory PDO and implementation ratings. Notwithstanding, the APL- 1 ’s original strategy was based on using private sector participation as a tool to increase OSE’s competitiveness and address i ts quasi service delivery monopoly. T h i s tool i s no longer available following the 2004 Constitutional Amendment which precluded Private Sector Participation (PSP) and thus reversing the Concession in Maldonado, the small concession in Laguna del Sauce and 14 smaller private operators and cooperatives. The rationale for using PSP as tool for increasing OSE competitiveness and lack o f efficiency was three fold: (i) to unbundle policy, regulation and operational functions; (ii) to provide incentives for increased efficiency and competitiveness; and (iii) to increase transparency and accountability to reduce costs. However, PSP was not the only tool used under APL- 1. Indeed, the unbundling o f sector functions through the creation o f a regulatory entity and strengthening decision-making authority by creating a specialized policy-making water agency, as well as internal and external benchmarking; and the raising o f consumer awareness also proved highly successful, going well beyond initial expectations. Both the current Government and the OSE Board o f Directors have shown a willingness to modernize and professionalize OSE unseen in the past decades. T h i s includes further efforts to consolidate the unbundling o f sector functions, deepening o f performance based benchmarking, the operationalization o f regulatory accounting; compliance with the Regulator’s quality o f service norms and standards; the rolling out o f performance based staff bonuses; and the formulation o f an OSE Code o f Conduct. As a result the present
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tool-box, which mixes both new and improved existing tools, i s equally suitable for achieving the original objectives o f the overall APL Program.
44. A further challenge posed by the absence o f PSP relates to the reduction o f fiscal space for sector investments. The lack o f PSP may reduce opportunities to access capital markets in the future.
45. o f the APL program.
As a result, the proposed second phase remains as originally designed at the start
transfer o f the Maldonado concession to the private operator.
Trigger (ii): Satisfactory progress in building a performance benchmarking system for which data are collected and reported.
Trigger (iii): Satisfactory dialogue on sector financing requirements and responsibilities for sewage collection and treatment on the basis on PNS study.
Trigger (iv) Disbursement o f 75% o f load proceeds
(but later, as the concession was ‘rescinded’, this trigger i s not met). The Maldonado Concession was awarded to and its operation transferred to a private operator, URAGUA S.A. in September 30, 20009. On October 8,2005, as the result o f a Constitutional amendment, approved by referendum in October 2004 that restricted the provision o f water supply and sanitation services to public utilities and made WSS an exclusive function o f the State, the Maldonado Concession was returned to OSE.
APL-1 successfully implemented an internal benchmarking system, comparing the utility’s performance across 2 1 cities based on 8 service quality indicators. The indicators are widely disseminated. They are published in national newspapers (twice a year), permanently recorded on the web, and transmitted to the regulator and relevant ministries.
The development o f a National Sanitation Policy i s now the function o f DINASA (created in 2006) rather than OSE. OSE remains nevertheless responsible for developing i t s own implementation strategy. To this effect, a new strategy for the prioritization o f sewerage network expansion in 75 cities was completed in 2006.
As o f March 31,2007, 100 % o f loan proceeds have been disbursed, in a
[No longer relevant]
[Fully complied with]
[Fully complied with]
[Fully complied with]
On February 23,2000, OSE awarded the concession to a consortium led by Aguas de Bilbao Biskaia and on August 4,2000 the concession was signed.
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under APL-1 in a manner satisfactory to the Bank.
Trigger (v) Creation o f an independent regulatory entity satisfactory to the Bank.
Trigger (vi) Creation and operation o f an environmental unit within OSE, satisfactory to the Bank.
satisfactory manner.
In 2004, the government created URSEA, as an independent regulatory entity for the WSS and Energy sectors, satisfactory to the Bank.
An environmental unit was satisfactorily established in 200 1.
[Fully complied with]
[Fully complied with]
46. The APL Program i s comprised o f a four phase US$ 100 mill ion Adaptable Lending Program loan to OSE to be implemented over 10 years, including an initial APL-1 project loan o f $27 million. The proposed APL-2 project loan i s US$ 50 million. The current APL-2 loan i s higher than the amount originally allocated to APL-2 (although remains within the overall APL Program envelope). The decision to ‘front- load’ part o f the original APL-3 tranche i s based on the following rationale. First, the political will for implementing the program’s proposed reforms i s unprecedented, both within the Vasquez administration and OSE Senior Management. There i s therefore at present a unique window o f opportunity to push hard for the achievement o f most o f the APL’s objectives. Second, OSE’s capacity to borrow i s strong, supported by a buoyant economic and fiscal climate. The government continues to move ahead with the floating APL-4 tranche and has agreed with the Bank that, as soon as the required international waterways agreement i s reached, the proposal wil l be submitted to the Bank.
New sector issues to be taken into account in APL Program
47. will need to take into account the following new sector issues:
Although the objectives of the APL Program remain unchanged, the second APL
48. The 2004 Constitutional Amendment. The original APL Program design hoped private concessions would provide incentives to enhance OSE’s competitiveness. Indeed, by 2004, 16 successful concessions or permissions to private operators had been made. However, the 2004 Constitutional amendment now prohibits any form o f privately provided services in the water and sanitation sector. Although the Constitutional Amendment does not change the overall objectives o f the APL Program as stated above, the absence o f private sector participation could potentially increase the risk of achieving some program objectives by: (i) reducing incentives for OSE to become more competitive, and (ii) leading to political economy unbalances stemming from OSE’s monopolistic sector position. In order to mitigate such risks, the APL-2 project wil l specifically seek to encourage new means of encouraging competition and support the unbundling o f sector functions, as described below.
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49. Regulation and competitiveness. New means o f encouraging competition have emerged since the design o f the original APL Program. The presence o f a Regulator, URSEA, will increasingly provide additional performance incentives for OSE as i ts regulatory capacity i s progressively strengthened - notably through the World Bank’s Uruguay Public Services Modernization TAL, URSEA has already set up an independent drinking water quality monitoring program. Moreover, the internal and external benchmarking o f OSE’s performance initiated under APL-1, which compares the utility’s performance across 21 cities based on 8 service quality indicators, and disseminates the results publicly, i s helping stimulate OSE’s internal competitiveness. Finally, the APL-2 will seek to further stimulate OSE’s competitiveness by strengthening regional decentralization, increasing OSE transparency and accountability, and strengthening the regulator and other sector agencies.
50. Unbundling sector functions. At the inception o f the APL Program in 2000, OSE was s t i l l combining policy-making, service provision and regulatory functions. These functions have now been unbundled in order to increase the transparency and efficiency o f the sector. The DINASA (created in 2006) has taken over responsibility for establishing sector financing requirements and policies, to be underpinned by a new Water and Sanitation Sector Law (expected to be submitted to parliament in 2008). The World Bank i s fully committed to supporting the Government o f Uruguay undertake these reforms. The World Bank will be providing DINASA support in the background preparation o f the law through i ts Uruguay Public Services Modernization TAL. The APL will also seek to directly support the formulation and implementation o f new sector policies, including the forthcoming law, by encouraging OSE to pro-actively undertake and share i ts own sector analyses regarding tar i f fs and appropriate sanitation standards (including impact evaluation pilots and focus group studies). However, as highlighted in the World Bank 2007 Water Week by sector reform examples in Chile, Brazil and Mexico, genuine results wil l require patience, persistence and commitment, as well as practical opportunism. Successful reform requires a readiness to capture, and rapidly respond, to any future windows o f opportunity.
5 1. Re-defining sector objectives. The new administration i s now reviewing the costs and benefits o f the former sanitation strategy focused on universal access to in- house sewerage systems, particularly for small urban population given i ts high per capita cost (see para. 13). The financing o f new public sewerage networks in small towns should be slowed down until the sanitation sector strategy has been fully defined. The APL-2 w i l l therefore focus instead on increasing in-house sewerage connections where sewerage networks exist or have already been commissioned, in order to maximize returns on existing investments.
52. Service Quality. As measured by the index jointly developed by OSE and the Bank in the f i rst phase o f the APL, service quality i s currently modest due to a historical
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bias against the demand side o f service delivery. Nevertheless, paradoxically, more than 80% o f Uruguayan consumers are satisfied with OSE’s water services”.
C. Project development objective and key indicators
53. The project development objective (PDO) of the overall APL program is to increase the efficiency, coverage and sustainability o f water supply and sanitation services through: (i) improved efficiency and effectiveness o f OSE; (ii) treated water pumping capacity increases in Montevideo and UFW reductions; and (iii) increased sewerage treatment and a new strategy for sewerage expansion.
54. The PDO for phase 2 of the APL program remains consistent with the initial design of the APL program, while placing a greater emphasis on beneficiary outcomes. The APL-2 PDO is to ensure that “Uruguayans receive more accountable, customer orientated and better value for money, water and sanitation services”. The PDO remains consistent with the overall APL Program outcomes, but has been re-written with more attention to beneficiary outcomes. The main project outcome indicators are:
i. OSE complies with URSEA’s “WSS quality o f service norms” to safeguard customer interests
ii. Regulatory Accounting Framework for the WSS sector operationalized
D. Project components
55. The second phase o f the OSE Modernization and Systems Rehabilitation project i s expected to comprise o f the fol lowing components, consistent with the original APL program design (amounts in parentheses show OSE’s suggested use o f loan proceeds):
Component 1: OSE’s institutional renewal - US$22 million (16 million)
56. This component wil l finance OSE’s Senior Management’s flagship initiative for institutional change and administrative reform o f the utility (Program VECTOR). The Program VECTOR’S objectives are to improve OSE’s transparency, accountability, client responsiveness and efficiency. This component wil l help inst i l l a culture o f consumer orientation, quality and efficiency, and will help optimize organizational processes to cut costs, time and improve productivity and coordination, within a new organizational structure - and culture. In order to facilitate reform, Program VECTOR will in effect be responsible for the coordination and integration o f a series o f discrete project based initiatives on behalf o f Senior Management. The overall necessary financing for this component i s very large, since it includes a complete overhaul o f existing Management Information Systems (MIS), fol lowing decades o f under-investment, and involves the
lo OSE Encuesta del Cliente (Client Survey), 2006.
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development o f proprietary software (see Annex 8). Software updates constitutes the largest sub-component (US$ 10 million), followed by investments in regional infrastructure (US$ 5 million), and hardware and equipment update (US$ 4 million); other subcomponents such as: institutional strengthening, environmental capacity building, and management account for about US$ 1 mill ion each”. Program VECTOR, with the help o f a Change Management consultancy, w i l l support individual project managers lead the reform process in each area, from the participatory development o f a strategic vision, the optimization o f technical processes, the formulation o f appropriate new administrative norms, budgets and staffing requirements, process validation, staff training and finally implementation (see Annex 4).
57. Activities supporting institutional change include change management activities to support staff during the reforms; a deepening o f the internal and external performance benchmarking initiated under APL- 1 (including a tightening o f protocols, expansion o f service quality indicators, and more sophisticated dissemination); mainstreaming strategic planning tools based on reliable indicators for all managers; the development o f OSE’s own code o f conduct; and the promotion o f innovation through Regional staff exchanges and seminars. The optimization o f organizational processes to enhance OSE’s operational and administrative efficiency include the integration o f commercial and operational systems; the modernization o f human resources management and liquidation o f assets; the application o f up to date financial management and procurement systems; and the roll-out o f Geographical Information Systems. The project will be supporting OSE’s decentralization efforts by enhancing i ts regional environmental laboratory capacity (through the construction and staffing o f 10 regional laboratories). The project w i l l also continue efforts initiated under APL-1 to strengthen OSE’s environmental unit.
Component 2: Water supply - US$33 (US$24 million)
58. Reducing Unaccounted for Water (UFW) and increasing revenue collection i s at the heart of the APL-2 project. OSE’s strategy i s described in i ts Plan o f Action for Unaccounted for Water Reduction Program. This Plan i s an integral component o f the Program VECTOR’S program to improve OSE’s management and efficiency. Both the Plan’s operational activities and Program VECTOR’S commercial initiatives wil l need to be implemented jointly, in close coordination. As part o f the program VECTOR, a series o f innovative initiatives wil l be tested in selected pilot sectors, including Montevideo, to help align commercial and engineering incentives to tackle UFW. The performance o f these various initiatives w i l l be carefully monitored based on a sophisticated UFW indicator system which w i l l enable the distinction between physical and commercial water losses. Once the costs benefits have been positively assessed, successful initiatives will then be rolled out throughout OSE. Efforts to improve UFW will also focus on
l1 This institutional component i s large due to the strong focus on the re-engineering o f processes. The capacity and willingness o f OSE to undertake the necessary investments on a large scale i s illustrated by the fact that, at the time o f project appraisal, over US$ lmi l l ion under component 1 i s already under execution and a further US$ 6.6 mil l ion i s in the process o f being awarded.
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shifting company culture, and raising consumer awareness to promote a national culture o f paying for water (including communications campaigns focused on large consumers or newly regularized settlements). T h i s integrated UFW package w i l l also continue to finance essential physical investments (replacement o f distribution pipes, valves and household connections; replacement and refurbishment o f water meters; and systematic leak detection and repair).
59. T h i s UFW strategy w i l l be accompanied by initiatives to improve drinking water quality and water security through the further modernization o f the Aguas Corrientes water treatment plant. The rehabilitation o f Aguas Corrientes Treatment Plant i s now almost finalized. Under APL-2, eighth more rapid gravity filters will be built, along with the adaptation o f the tank accelerators (including conventional flocculation units and high-rate sedimentation basins).
Component 3: Expansion of sewerage systems - US$6 million (US$4.6 million)
60. This component will pursue the demand-driven expansion of sewerage networks initiated in APL-1. Much o f the sewerage expansion work originally planned for APL-2 has already been undertaken under APL-I, which went from targeting 4 to 17 localities in the Interior. O f the 27 works contracts awarded, 19 have been completed, and 8 are s t i l l under execution with OSE’s own financing. Under APL-2, this component wil l complete the requested sewerage expansion works in five o f these cities. Following the completion o f these works, the government now wants to review, in collaboration with OSE, the appropriateness o f the existing sanitation coverage standards.
61. Th is component w i l l also seek to stimulate demand for more households to connect to the existing network, to ensure both household coverage and the return on existing investments i s maximized. This wil l be undertaken as an impact evaluation pilot, which w i l l carefully assess the effectiveness o f different strategies in increasing household connection rates. The pilot w i l l focus on all cities which received a new public sewer extension under the APL-1. Alternative strategies wil l be applied to each locality, to test whether financial incentives, social mobilization or both, w i l l provide the most effective increases in household connections.
62. Output Based Disbursements. T h i s component wil l also pilot an innovative solution, using Output Based Disbursements (OBD), to help overcome traditionally low household connection rates to sewerage networks, though both the impact evaluation pilot and the demand-driven sewerage connection program. Many households require in- house reconfiguration works in order to connect to the network. OBD wil l allow OSE to readily provide an attractive financial package to individual households requiring in- house plumbing works (thereby providing incentives for more households to connect) with limited transaction costs for OSE. The World Bank will finance a US$ 1 mi l l ion OBD fund, which wil l contribute to 60% o f the standard costs for in-house works for an
17
estimated 3,600 households. Further details on OBD implementation are provided in Annex 11.
63. Feasibility studies for the treatment o f wastewater (including Colonia and Mercedes) wil l also be carried out to prepare for the construction o f Sewage Treatment Plans under the APL-3.
Component 4: Project administration and coordination US$1.4 million (about US$ 1.2 million)
64. Under APL-2 this component w i l l continue to provide funding for the following: project management; supervision and engineering sup ort; staff exchanges and seminars; and audits. The APL-1 Project Implementation Unit , the Gerencia de Programas con Financiamiento Externo (PFE) will remain in charge o f coordinating all external financing, including the implementation o f APL-2.
IP
E. Lessons learned and reflected in the project design
65. Reform Agenda. Policy and institutional changes must be realistic for the country context and part o f a clearly defined reform agenda. Successful reforms are not necessarily about seeking to achieve the most optimal outcomes, but rather about achieving a broad based consensus. Sector reform requires patience, persistence and commitment, as well as practical opportunism, and a strong backing from government, and real ownership from utilities Board and Senior Management. Many o f the institutional reforms proposed under the APL- 1 did not receive sufficient political support and lacked genuine ownership from the subsequent OSE administration which took over the project after project approval by the Board. Consequently, only moderate progress was made regarding some o f the activities in the institutional renewal component. In the case o f the proposed project, the Vhsquez administration has already demonstrated an unprecedented commitment to reform for improving SOE governance in general, and the water sector in particular, by promoting transparency and unbundling overlapping sector functions. The reform process i s also fully owned by OSE, rather than being externally driven. Based in initial groundwork laid under APL-1, the APL-2 wil l directly finance OSE’s Senior Management’s own new flagship initiative for institutional change and administrative reform (the Program VECTOR).
66. Reducing Unaccounted for Water. Reducing unaccounted for water requires a long term, sustained effort. APL- 1 helped lay some important foundations, including new institutions and essential infrastructure investments, paving the way for a more structured and comprehensive program. Unaccounted for water cannot simply be addressed by
’’ Previously named the Departmento de Administracidn de Recursos Aplicados en Programas de Financiamiento Externo (ARAPFE).
18
focusing only on operational solutions. Although infrastructure investments are essential, addressing unaccounted for water requires a more systematic and sustainable approach, by deepening institutional integration between commercial and engineering silos, and rolling-out innovative approaches. T h i s will require a new institutional culture drawing together OSE’s operational and commercial units. The focus o f everybody in OSE, from the highest and lowest levels, w i l l need to be centered on OSE’s water balance, and wil l need to include the w i l l to intensify measurement efforts, evaluate results, plan, encourage those who achieve targets and penalize those who do not. As a result, under APL-2, all institutional reforms proposed under Program VECTOR have been designed with reducing UFW in mind - from the integration o f commercial and operational systems, to the creation o f a social unit focusing on instilling a paying culture amongst OSE’s different clients (informal settlements, large consumers, etc). Efforts to support the operational and commercial cross-over w i l l also be supported under the APL-2 at the personnel level. The former head o f RANC i s now OSE’s commercial manager and heading-up Program VECTOR’S integration o f commercial and operation systems. Moreover, in order to maximize the complementarities between the Program VECTOR and RANC initiatives, key OSE personnel are being involved in both teams.
67. Appropriate Sanitation. The demand-driven sewerage strategy pursued under APL-1 achieved lower household connection rates than expected. To date, under APL-1, only 47% o f households on average have actually assumed the additional costs to connect their house to the new sewer. A similar phenomenon has been observed in many countries, although the reasons for low household connection rates are not entirely clear. Some preliminary lessons can be drawn from this experience. First, even though APL-1 only targeted localities that had expressed high initial demand, the indicator o f household commitment to connect turned out to be unreliable because the required deposit generally only reflected a very small fraction o f actual service charges and in-house reconfiguration costs. Second, low household demand may be due to the high individual costs o f the service relative to the perceived (or real) convenience, health and/or environmental benefits. However, preliminary results from focus groups carried out with APL-1 beneficiary target groups to evaluate the APL-1 experience suggest lack o f awareness o f environmental and health benefits may be less o f an issue than initially assumed. Barriers to connection appeared mostly associated with affordability, combined with poorly designed and overly complicated financial incentives (including initial deposit and CREDIMAT) and the absence o f clear information and community support. Lessons learned from a similar World Bank project supporting the Espirito Santo State Water Company, CESAN (Loan 4556-UR), in Brazil, showed that: (i) community sensitization through local consumer associations, municipalities and the local media translated into increased sewerage connection rates; (ii) differences in connection rates between municipalities were linked to perceptions o f broader benefits (eg tourism potential) and the presence (or absence) o f legislation; and (iii) political pressures have discouraged connections.
68. These experiences suggest there may be multiple factors influencing households’ decisions (not) to connect. The APL-1 ’s experience regarding demand-driven sewerage
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has prompted the new administration to review appropriate standards for sanitation. The APL-2 i s incorporating these lessons into i ts design in the following ways. First, the APL-1’s demand-driven sewerage strategy i s on hold until a clearer policy and operational strategy has been more clearly identified. As much as possible, immediate lessons (including better information) w i l l be applied to the works already under way. Second, to help inform policy making and OSE’s own operational strategy, an impact evaluation pilot wil l be carried out under the APL-2 to identify whether financial incentives and/or social mobilization can increase household connection rates to the existing network. In this context, this project wil l be using Output Based Disbursement as an innovative solution to provide attractive financing terms for in-house plumbing reconfiguration works, thereby potentially overcoming one o f the major barriers to household connections. In addition, OSE i s increasingly realizing the importance o f learning from outside experiences, and wi l l be seeking to develop a regional program o f partnerships and exchanges under APL-2 with CESAN and others so that they can learn from the other’s lessons.
69. Improving Utility Performance. Sustainable improvements in utility performance require a sector structure which provides incentives for economic efficiency. Due to the current, non-competitive environment, OSE leadership i s able to manage the utility based mainly on technical principles, and social and political objectives, which weaken the financial performance o f the company. The APL-1 had hoped to use the challenge o f external competition from private concessions, and internal benchmarking, as incentives to improve operational and financial inefficiencies and balance sheet imbalances. Since the threat o f better results in private sector utilities no longer exists, APL-2 wil l now need to identify and test alternative instruments available in a public sphere.
70. The following external incentives are being considered. First, the recent unbundling o f the sector now provides an opportunity for URSEA and DINASA to hold OSE to account. Although s t i l l relatively weak, the full implementation o f regulatory accounting, compliance with quality o f service norms and the approval o f the forthcoming Water Law will provide an opportunity to help strengthen both agencies’ capacity and clout. Second, the development o f performance based agreements between the operator, the regulator and/or the government would provide an important tool, notably by encouraging all parties to focus on results and helping strengthen the relationship between parties by giving them periodic opportunities to discuss progress and problems. Third, the preparation and implementation o f an OSE Code o f Conduct w i l l also help better define and strengthen key stakeholder relationships, and increase OSE’s transparency and accountability. Finally, arguably the most critical source o f external pressure needs to be provided by consumers, with support from civil society and the media, since consumers are ultimately the ones with the most to gain from improved OSE services. Future internal and external benchmarking wil l need to become far more consumer orientated, including new dissemination channels and initiatives (e.g. school awareness programs, media training). The aim, also supported by the code o f conduct, will be to generate specific consumer awareness o f the current shortcomings between OSE’s actual level o f service - and those they are entitled to.
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71. The following internal incentives are being considered. OSE i s continuing to progressively decentralize regional departments, both in terms o f cost centers and profits. Internal competition between regional units i s also being enhanced in other ways. Internal performance based arrangements have been receiving a lot o f attention. OSE i s currently reviewing options for performance bonuses for staff based on regional / departmental performance. The internal benchmarking o f discrete systems, including the bi-annual benchmarking o f 21 cities has already produced important changes (notably the awareness within OSE to start using i ts internal benchmarking to inform strategic decision making). The decision to maintain the Maldonado system institutionally and physically separate; and the careful benchmarking o f RANC pilots reflects how much OSE has come to value the benefits o f internal benchmarking. The project wil l now help OSE explore ways to maximize the incentives derived from i ts successful internal benchmarking, to further encourage intra-departmental and regional competition. For instance, an Annual Quality Awards wil l be established, designating winning departments in a number o f categories such as ‘unaccounted for water reduction’; ‘quality o f service improvements’ and ‘information sharing’ 13, Finally, the project i s encouraging OSE open i tse l f up to the world, by encouraging staff to participate in seminar, visits and exchanges with neighbors. Such exchanges wil l not be limited to Senior Management and professional staff, but w i l l also include trade-unions and workers (for instance regarding the use o f remote meter-readers).
72. Monitoring and Evaluation. It i s critical to define with great clarity, details and consistency the protocols for each indicator to be measured. Under APL-1, the performance o f several service quality indicators varied markedly from one measurement. The lack o f reliable data and trends in these instances were due to changes in measurement intervals and protocols. Most o f these protocols have been reviewed and defined more precisely. Where changes in protocols have been made, past data should be recalculated retroactively to enable the effective monitoring o f trends. Under APL-2, a clearer distinction w i l l also be made between the specific indicators that measure the performance o f the impact o f the project and higher level indicators that measure the performance o f the utility as a whole.
F. Alternatives considered and reasons for rejection
73. The Government chose not to finance OSE’s modernization through commercial banks because they wanted to benefit from the World Bank’s technical know-how, world-wide experience, and just-in time support to continuously address and push forward issues.
74. Although the World Bank has already committed to Government to a 10 year investment program under the APL Program, the GoU was given the opportunity to choose i t s preferred choice o f instrument: (i) continuing with the APL program, or (ii) starting a new stand-along investment program. The Government chose to continue with
l3 Nominations w i l l be put forward by OSE to a committee o f sector professionals (e.g. universities, chambers o f commerce; association o f engineers; URSEA).
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the APL Program, based on this proven track record, long term vision and credibility, and the Government’s wish to keep the original project objectives, whist increasing their overall investments.
111. IMPLEMENTATION
A. Partnership arrangements
75. Not applicable
B. Institutional and implementation arrangements
76. Borrower and Executing Agencies. Under APL-2, a US$50 mill ion loan will be extended to the Obras Sanitarias del Estado (OSE) to execute this project. The Republica Oriental del Uruguay wil l guarantee the loans.
77. Project Oversight, Coordination and Execution. OSE’s Board o f Directors and Management will be responsible for project oversight. OPP’s Division o f Public Enterprises wil l ensure consistency between sectoral development objectives and specific project measures carried out by OSE. DINASA wi l l provide guidance through policy definition and URSEA will regulate and control sector providers (OSE and the Intendencia Municipal de Montevideo, IMM).
78. The project w i l l be implemented entirely by OSE. The Gerencia de Programas con Financiamiento Externo (PFE) i s OSE’s unit in charge o f managing projects financed by Multilateral Development Banks (MDBs), and this unit wil l be the Project Management Unit (PMU) for the proposed operation, keeping the institutional arrangements already in place for the first phase o f the APL14. OSE wil l also continue to coordinate support provided by the Intendencias in the execution o f sewer network works.
79. Implementation Period. The second APL project wil l span 5 years (2007-2012). This program follows a gradualist sector reform approach, consistent with Uruguay’s political and social realities.
80. Procurement (see details in Annex 8). The Borrower has developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on February 13,2007 and i s available at the project files and the imagebank. It w i l l also be available in the Project’s database and in the Bank’s external website. The
l4 In April 2007, OSE’s Board o f Directors issued Resolution IUD 428/07 in which PFE replaced the Departamento de Administracion de Recursos Aplicados en Programas de Financiamiento Externo (ARAPFE), which was the PMU for APL- 1.
22
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. The Procurement Capacity Assessment carried out in August 2006 concluded that OSE i s fully prepared to implement Bank-financed procurement. The experience in previous Bank-financed operations, including the ongoing APL-1 , as well as the qualifications o f PFE personnel and OSE’s assurances that they wil l remain for APL-2, are the underlying inputs for this assessment. OSE demonstrated that focus on enhancing procurement planning i s a tool to mitigate r isks o f the complex procurement cycle.
81. Accounting, Financial Management and Auditing (see details in Annex 7). The Designated Account (the former Special Account) wil l have a ceiling o f US$ 5.0 mill ion .Project financial statements wil l be subject to an annual financial audit under Terms o f Reference and by an auditor acceptable to the Bank within six months o f each fiscal year. Annual audit would cover all funding and expenditures reported in the project financial statements. For audit purposes the fiscal year wil l be the calendar year. It has been proposed that Uruguay’s Supreme Audit Institution TCR (Tribunal de Cuentas de la Repdblica) be the external auditor for the APL-2. TCR f u l f i l l s the Bank requirements and has satisfactorily performed as external auditor on the ongoing project. The Bank has carried out a capacity assessment o f the financial management and project monitoring system used by OSE’s project implementation unit. I t has determined that OSE has skilled and capable fiduciary staff that performs project fiduciary’s functions in the ongoing project. N o major weaknesses identified.
82. Reports. Agreed reporting includes semi-annual reports on results and targets for the next six months, annual procurement reports, financial statements, quarterly progress reports (January, April, July and October o f each year), and annual operating plans. The complete l i s t of required reports i s described in the Operational Manual.
C. Monitoring and evaluation of outcomes/results
83. OSE has been a pioneer in the monitoring o f utility performance and benchmarking. I t was one o f the f i rst utilities to participate in the International Benchmarking Network for Water and Sanitation Ut i l i t ies (IBNET). OSE’s monitoring capacity will be further strengthened under APL-2 (component l), by expanding the set o f indicators, refining their protocols, and engaging other actors such as URSEA, in the monitoring o f sector outcomes.
84. The results framework and monitoring strategy i s included in Annex 3. T h i s framework has been developed in close coordination with OSE. OSE will submit monitoring indicators twice a year. The primary sources o f data wil l come directly from OSE. Data collection protocols for all project indicators have been (re)designed with great precision and care, and included in the final version o f the Operational Manual.
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OSE’s benchmark indicator program now has automated data collection systems in place for i t s variables. OSE’s Financial Planning unit w i l l manage the data collection process, in collaboration with the managers responsible for each sub-component. In addition, some outcomes w i l l be measured using OSE’s regular client surveys.
Risks Risk Minimization Measure@)
OSE 1eadershiD fails to For the fust time ever, institutional reform i s also the number one priority
D. Sustainability
Post- Mitigation
Rating N
85. The APL Program, based on a long-term, incremental, and therefore more sustainable approach to reforms, has further strengthened this partnership. Moreover, the GoU’s commitment to the sector reform agenda i s unprecedented and the project i s fully consistent with, and supportive of, the new sector policies. Nevertheless, the sustainability o f the program’s main sector level objectives and benefits wil l remain critically dependent on the government’s sustained commitment to the reform agenda.
sustain its current commitment to institutional change
86. A t the utility level, efficiency and effectiveness gains within OSE can only be sustained if the company increases i ts accountability and transparency. A more aggressive dissemination o f i t s internal benchmarking indicators wil l enhance OSE’s exposure to public scrutiny. The implementation o f a code o f conduct would further strengthen OSE’s accountability to a range o f stakeholders (including GoU, DINASA, URSEA, municipalities and the public).
o f the administration - which i s expected to remain in power for the duration o f the second APL. Sudden shifts in sector policy are also now less likely given the constraints posed by the 2004 Constitutional Amendment.
87. Improvements in operational efficiency wil l have positive environmental impacts too. Reduced unaccounted for water and the increased efficiency o f the Aguas Corrientes treatment plant wil l help stabilize OSE’s water resources utilization and will provide a more secure service, less vulnerable to crises. Increased access to in-house sewerage connections may also further reduce environment and health externalities associated with inappropriate sanitation.
88. Finally, the sustainability o f project benefits wil l depend on institutional and commercial improvements within OSE that parallel physical UFW investments (component 2) and beneficiary willingness to connect to expanded sewerage systems (component 3).
E. Critical risks and possible controversial aspects
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DINASA fai l to provide an effective sector counterweight to OSE due to weak capacity
URSEA’s role as the regulator for the sector fails to be strengthened
OSE’s performance fails to improve due to lack o f external competition arising from i t s monopolistic position, the absence o f challenge from private operators and lack o f consolidation from a s t i l l emerging regulatory & sector framework
Institutional changes necessary to guarantee the sustainability o f the Unaccounted for Water Program fail to materialize.
Beneficiary populations fai l to connect to sewer networks, and to pay sewerage charges.
Support to D INASA i s being provided through the ongoing Uruguay Utilities Public Services Modernization TAL. The project will indirectly support a more effective unbundling o f the sector, and a clarificatiodacceptance o f roles and responsibilities, by encouraging OSE to develop a code o f conduct (which defines i t s relationship and commitments wi th sector agencies), reach performance agreements, and put in place a data sharing MoU. All these actions w i l l also help develop a climate o f confidence and trust.
This project i s supporting the operationalization o f 2 important regulatory tools through OSE’s compliance with URSEA’s quality o f service norms and the operationalization o f the WSS regulatory accounting framework. Efforts to clarify the roles o f the parties involved in the WSS sector will also be made through (i) a continuous dialogue will be held across government (including MEF and OPP) and (ii) the development o f an OSE code o f conduct, performance agreements and a data sharing MoU. All these actions w i l l help develop a climate o f confidence and trust.
The rationale for using PSP in the original APL Program strategy was an instrument for increasing OSE competitiveness and lack o f efficiency by: (i) unbundling policy, regulation and operational functions; (ii) providing incentives for increased efficiency and competitiveness and (iii) transparency and accountability. The unbundling o f sector functions through the creation o f URSEA and the strengthening o f decision-making authority by creating DINASA, as wel l as the strengthening and consolidation o f OSE’s internal and external benchmarking; and the raising o f consumer awareness already provide important mitigating measures. Furthermore the following new mitigating measures w i l l be undertaken under APL-2: the approval o f a sector law (which will clarify sector rules and strengthen the effectiveness o f D INASA and URSEA); the operationalization o f regulatory accounting; compliance with the Regulator’s quality o f service norms and standards; the rolling out o f performance based staff bonuses; and the formulation o f an OSE code of conduct Together, these mitigation measures contribute to the overall sustainability o f accountable, customer orientated and value for money services. OSE has already made some significant institutional changes (e.g. creation o f an UFW unit and an Environment Unit) and has recently launched its own flagship program for institutional reform - program VECTOR (which w i l l form the backbone o f component 1). This w i l l enable commercial and operational actions to become integrated. Staff performance bonuses focusing on labor productivity, including regional UFW improvements, w i l l further strengthen incentives for improvements. Moreover, OSE has the full support from the new government to pursue institutional reform. The World Bank i s also seeking to support the preparation o f a new sector law which w i l l put additional pressure on OSE to reform. The project will be specifically seeking to understand why households do not connect to the network. First, the project will include an impact evaluation pilot which w i l l examine the impact o f alternative strategies such as financial incentives andor social mobilization on connection rates. Second, OSE i s developing an exchange partnership with CESAN and others, so that both can learn from each other’s experiences.
N
M
M
M
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OSE and local governments are ineffective at community mobilization.
The Government o f Uruguay, MEF, MVOTMA and DINASA fai l to assert ownership o f sector reform agenda. Fiscal risk
Overall Rating Risk rating: H (High R i s
The new political reality in Uruguay has greatly improved relationships between OSE and local governments, thereby minimizing the earlier risk. This i s reflected in the way OSE plans to increasingly do business with local governments. Financing and technical assistance for capacity building within the regional OSE units w i l l also be provided.
The new government i s already moving ahead with the sector reform agenda, including the creation o f a D INASA and the strengthening o f URSEA. The World Bank i s supporting this momentum for sector reform through its TA loan to OPP. Moreover, th is project will include indicators to ensure OSE’s prompt operational responsiveness to sector reform.
The risk o f counterpart funding not being available i s small since it only accounts for 27% o f the estimated project costs. Continued support and monitoring w i l l also be provided by World Bank team o f OSE’s financial management. The lack o f private sector participation may reduce opportunities to access capital markets to secure investments in the sector in the future. If so, this risk could be mitigated in a number o f ways, including through World Bank credit and partial guarantees.
, S (Substantial Risk), M (Modest Risk), N (Negligible Risk)
N
N
M
M
F. Loadcredit conditions and covenants
89. Loan covenants:
iv) “Standard” wording for project audits. The annual audited financial statements w i l l be furnished to the Bank not later than six months after the end o f each year.
v) “Standard” wording for Interim Unaudited Financial Reports IUFRs. Semiannual IUFRs wi l l be submitted to the Bank not later than 50 days after the end o f each calendar semester, as part o f the project progress reports. The Borrower shall, each year, starting in the year 2008, spend an amount equivalent to at least 2% (two percent) o f i t s annual investment budget or not less than $1,000,000 whichever amount i s higher, to replace water distribution pipes and valves and connection piping in i t s water supply system.
vi)
IV. APPRAISAL SUMMARY
A. Economic and financial analyses
Economic Analysis
0 Cost Benefit o Cost Effectiveness o Other
NPV= US$98 million; ERR=37%
90. The APL-2 o f the OSE Modernization & Systems Rehabilitation Project i s financially and economically feasible as shown by detailed financial, economic, and distributive analyses carried out for all the activities to be financed in this phase. As
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shown in Annex 9, these analyses were complemented by sensitivity and risk assessments.
91. All investment activities are economically viable. Aguas Corrientes treatment plant component presents the largest expected net benefits (US$ 46 million) and an Economic Rate o f Return (ERR) o f 40 percent. The unaccounted for water program generates the highest ERR o f 82 percent and net benefits o f US$ 37 million. Sewerage expansion and Program VECTOR present ERRS o f 18 percent and 21 percent respectively. The successful implementation o f Program VECTOR i s however, a necessary condition for OSE’s financial and commercial sustainability and consequently to maintaining and improving current standards o f access and quality.
92. To eliminate market distortions, conversion factors were applied. To estimate direct and indirect benefits o f expanding sewerage, two approaches were used: willingness to pay (WTP) and revealed preference technique. The WTP was estimated during APL- 1 through direct information obtained from beneficiaries; this estimation was updated and employed to evaluate APL-2 project. The revealed preference technique was applied as a proxy to estimate beneficiaries’ demand for sewerage services, through the use o f market price o f septic tanks, wh ich are built and operated by most o f the potential beneficiaries. Both approaches were employed for comparison reasons and the results were similar: using WTP the net benefit i s about US$ 1 million and ERR o f 21%; whi le using septic tanks prices the returns are US$O.9 and ERR o f 18%. T o estimate the benefits for water components rationing costs were used to capture the benefits o f increasing the availabil ity and improving the rel iabi l i ty o f water supply; other benefits were related with savings o f operating costs obtained with the efficiency gains to b e attained with APL-2. The net fiscal impact i s negative and estimated loss i s about US$ 6 mil l ion, due to the reduction o f the VAT paid on reduced operating costs, which i s not compensated by taxes paid for new investments. Same happens with labor and other suppliers who loss due to reduction on operating cost that come along with OSE’s efficiency gains. The biggest winners are the customers who reap about U S $ 2 9 million.
93. percent probabil ity o f having positive returns.
Sensitivity and r isk analyses confirm the robustness o f the project, wh ich has a 99
Financial Analysis o f the Project NPV=US$ 98 million; FRR= 33%
94. All investment activities are financially viable. Water components, especially unaccounted for water and Program VECTOR, show large expected profi ts o f about US$ 85 million and FRR close to 40%. Sewerage activities though, show a modest profit o f US$ 13 thousand and financial rate o f 1 1.2%, close to the estimated opportunity cost o f capital in Uruguay (1 1 %).
95. The financial v iabi l i ty o f each investment was assessed from an investment point o f view, i.e. excluding the cost o f financing, to have a more accurate evaluation o f the financial returns o f the project.
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96. The risk assessment o f the financial analysis shows reassuring results for the whole project, which wil l have positive returns with 86% probability. Each o f the water components has likelihood higher than 67% to have positive returns. On the other hand, the success o f the sewerage component i s more uncertain.
Financial analysis of OSE
97. efficiency, long term viability, and capacity to assume the proposed loan.
A general financial evaluation was carried out to analyze OSE’s operational
98. The financial analysis o f OSE during the period 2000-2006, shows that financial results were affected by the severe fluctuations in the country’s economy. The deep recession o f 2001 -2003 weakened OSE’s financial situation and deteriorated all i t s financial indicators; the high depreciation o f the currency increased the burden o f the debt and i ts payment obligation, also the tariff decreased in real terms losing i ts margin to operating costs. The stabilization o f the economy after 2004 brought along improvement in OSE’s financial results: debt structure improved as well as operating cost to revenue ratios. The instability experienced by OSE during this period was accompanied by slight operational improvement in some indicators; while others, such as unaccounted for water worsened. Although commercial and labor productivity indicators s t i l l remain below the industry’s gold standard, financial indicators clearly demonstrated OSE’s resilience, and capacity to recover quickly from the crisis. Significant progress regarding OSE’s tariff system has also been made, including simplified volumetric tariffs, and the progressive removal o f various additional non-tariff related charges.
99. The financial analysis o f OSE for the next ten years shows that OSE i s financially viable and able to assume the proposed loan. The IRR o f Financial Cash Flow from operations i s 12% and the NPV i s US$ 153 million.
100. The evaluation shows the ample room OSE st i l l has for operational improvement. I t s levels o f unaccounted for water, labor productivity, and commercial indicators are below the gold standards o f the most efficient uti l i t ies in the industry. Sensitivity analysis demonstrates that improvements in those areas would generate important cash savings. The project aims to strengthen OSE’s efficiency through the Program VECTOR and the unaccounted for water components.
B. Technical
101. context and no significant technical obstacles are expected during project execution.
The project relies on conventional technologies appropriate to the Uruguayan
102. Rehabilitation o f drinking water systems. The rehabilitation o f the Aguas Corrientes treatment plant i s almost complete. Activities under APL8 will be limited to
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building 8 gravity filters along with the adaptation o f the tank accelerators, completing the initial design for the whole program - assuring Uruguay’s high water quality standards and norms w i l l continue over the next 3 decades.
103. UFW Reduction Program. Investments planned for UFW reduction (including the replacement o f pipelines, meters, and the correction o f commercial anomalies) are based on a detailed diagnostic o f both Montevideo and interior systems prepared by international consultants, adjusted based on the experience and lessons learned during the implementation o f APL-1.
104. Sewer extensions. The extension o f sewerage networks in 5 cities completes the work already initiated in 17 cities under APL-I. It follows the 75 Uruguayan cities sewerage Master Plan guidelines, drawn up by an international consulting agency. Regarding the system dimensions, OSE i s using known norms, such as Brazil’s SBNT.
105. Design of sewerage treatment plants. The design o f these plants wil l also follow the guidelines specified in the 75 Uruguayan cities sewerage Master Plan. As previously mentioned, system dimensions follow the values recommended by OSE’s and external consultants, and are in l ine with DINAMA’s standards o f quality for water discharged.
C. Fiduciary
106. From the Financial Management (FM) standpoint, the Project i s considered a low risk operation. The financial management arrangements in place are considered acceptable because they meet minimum Bank requirements. The proposed FM arrangements for the project are sound and OSE financial management and internal control systems for the ongoing APL-1 indicate a positive attitude by management toward control. A detailed risk assessment i s provided on Annex 7.
D. Social
107. A new social evaluation based on primary and secondary data, key informants and focus groups was carried out to complement the original social evaluation carried out at the inception o f the APL (see project file).
108. Overall evaluation. OSE’s attention to social issues, and capacity to address them, has significantly increased in the past couple o f years. A unit with five professional social scientists was created in 2006 to develop OSE’s social strategy, particularly in informal settlements, and ensure OSE’s policies are fully line with the Government’s social policies. OSE’s social tariffs now strictly mirror GoU’s own social protection program, targeting both low income households through MIDES’s PANES and all households living in informal settlements through PIAI. Overall, the project i s expected to contribute to the welfare o f Uruguayans by providing better value for money water and sanitation services. Improvements in OSE efficiency are expected to generate savings
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which w i l l be used to help improve Uruguay public goods and services (whether through more infrastructure investments, lower tariffs, or increased tax revenue).
109. Program VECTOR. This component will seek to increase OSE’s attention to consumers on the demand side, by improving service quality and responsiveness to complaints. Through i ts code o f conduct, and raising consumer awareness through benchmarking (highlighting the quality o f service received and the quality o f service entitled to), this component will empower consumers to better hold OSE to account. Some potential r isks factors may exist. Employees and trade unions may resist reform because they feel alienated by institutional change due to perceptions o f uncertainty; loss o f control; loss o f acquired rights, etc. An extensive change management program has been developed to support staff during this process (see Annex 4).
110. Water Supply. Improvements in the reliability and safety o f OSE’s water supply system, by improving the pumping capacity o f Aguas Corrientes, wil l have broad based social benefits. Tackling unaccounted for water i s somewhat more complex, since part of the strategy involves reducing the levels o f unpaid bills. To mitigate social risks, the strategy w i l l initially focus around raising consumers’ awareness, including: (i) communications campaigns underscoring individual’s social responsibility to pay for this scarce resource; (ii) notifications to individual consumers regarding existing illegal connection or un-paid bills; and (iii) options to regularize. A ‘large consumers’ unit providing a high level o f personalized customer care wil l also be created to help secure the business o f OSE’s powerful, highly profitable yet more flexible clients. At the other end o f the spectrum, OSE will also seek to increase cost recovery in informal settlements. T h i s issue wil l be handled on a priority basis by the OSE social unit. These informal settlements account for around 10% o f OSE’s unpaid water, and are largely un-metered, with very high levels o f estimated water consumption / wastage. OSE wil l work in close partnership with PIA1 and other state social programs, and through local NGOs, community groups, and other trusted intermediaries, to start promoting a culture o f paying for legal services and managing water as a scarce resource, prior to initiating a large scale metering and voluntary billing program.
1 1 1. Demand-driven sanitation. The proposed project w i l l improve service coverage and quality, particularly for low-income residents which are typically located at the urban periphery. In addition to expanding the sewerage network in five cities, the project will seek to increase household connections to the existing network, thereby maximizing household access in relation to existing investments made under APL-1. In order to enable more households to connect, OSE i s now making a concerted effort to gain a more nuanced understanding o f the barriers to connection faced by households, by using more participatory tools including focus groups analyses o f target beneficiaries under APL- 1, as well as testing the effectiveness o f potential household incentives through impact evaluation pilots. At the same time, the government i s reviewing appropriate sanitation standards for small urban centers, where alternative sanitation services may be more appropriate (e.g. use o f septic tanks with improved, regular maintenance from sludge
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emptying trucks). Such policies would greatly benefit rural/small town populations, by improving the overall quality o f sanitation without raising affordability issues.
E. Environment
112. A comprehensive Environmental Assessment (EA) was made in accordance with Bank Safeguards Policies applicable to Category "Bl' projects. The EA evaluates existing conditions, identifies potential direct and indirect environmental impacts, and proposes measures to mitigate negative impacts and to enhance positive impacts.
113. The Environmental Management Plan (EMP) addresses the following: (i) the mitigating actions o f the interventions foreseen during this phase o f the project; and (ii) strengthening OSE's environmental management in continuation o f the actions undertaken during APL- 1.
114. A public consultation was carried out on April 17, 2007 and documented following the disclosure procedures recommended by the Bank's environmental policy. The EA results and recommended measures are incorporated in the EMP and into project components. As part o f i t s objectives and design, the project wil l strengthen the environmental and institutional capacity o f OSE.
F. Safeguard policies
Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.0 1) [XI [ I Natural Habitats (OPBP 4.04) [ I [XI Pest Management (OP 4.09) 11 [XI Physical Cultural Resources (OPBP 4.11) [XI [ I Involuntary Resettlement (OPBP 4.12) [ I [XI Indigenous Peoples (OPBP 4.10) [ I [XI Forests (OPBP 4.36) [ I [XI Safety o f Dams (PP/BP 4.37) [ I [XI Projects in Disputed Areas (OPBP 7.60)* [ I [XI Projects on International Waterways (OPBP 7.50) [ I [XI
a By supporting theproposedproject, the Bank does not intend to prejudice thefinal determination of the parties' claimson the disputed areas
G. Policy Exceptions and Readiness
115. None.
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Annex 1: Country and Sector or Program Background
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
APL Program Background
1. Original APL Program objectives as designed in 2000. The $100 mill ion OSE APL Program was designed in 2000 to support incremental institutional reform and operational improvements within OSE. It was originally anticipated that the on-going concessioning o f services in the Department o f Maldonado would provide incentives for further sector reform and OSE operational improvements. Phase 1 focused on initiating OSE improvements through the design and implementation o f internal benchmarking and initial investments / technical assistance to improve OSE’s operational performance and environmental management capacity. Phase 2 was designed to strengthen OSE’s efficiency within an increasingly competitive environment, through continued operational improvements and the promotion o f investments in interior cities. Phase 3 would consolidate improvements in OSE’s performance with assistance to OSE, as well as additional investments in interior systems. A floating phase (APL-4) has been designed to finance the construction o f wastewater treatment plants in Salto and Paysandu, two cities located on the cross-boarder Rio Uruguay. The floating APL-4 had been designed to provide implementation flexibility, due to high uncertainty regarding the timing o f construction, due to the need to comply with World Bank international waterway agreements (OP 7.50).
2. appraised in 2000.
The following table summarizes the original triggers established when APL-1 was
Table 1 Original Triggers for APL Program (2000)
Triggers for APL-2 1. Operational transfer o f the Maldonado concession to the private operator.
2. Satisfactory progress in building a performance benchmarking system for which data are collected and reported.
3. Satisfactory dialogue on sector financing requirements and responsibilities for sewage collection and treatment on the basis on PNS study.
4. Disbursement o f 75% o f load proceeds under APL- 1 in a manner
Triggers for APL-3 1. APL-1 closed and 75% disbursements o f loan proceeds under APL-2 in a manner satisfactory to the Bank
2. Signature o f a second concession contract, satisfactory to the Bank.
3. Initiation o f bidding for a third concession contract, satisfactory to the Bank.
4. Consolidation o f a performance benchmarking system for which data i s collected and reported
Triggers for APL-4 1. GoU compliance with Bank OP 7.50 (International waterways), as evidenced by appropriate consent for treament plant construction from the Government o f Argentina (GOA).
2. Verification o f the financial, environmental, technical and social viability o f the proposed investments.
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satisfactory to the Bank.
5, Creation o f an independent regulatory entity satisfactory to the Bank.
6. Creation and operation o f an environmental unit within OSE, satisfactorv to the Bank.
5. Implementation o f a national investment program for sewage collection and treatment that i s consistent with OSE’s financial health
I
OSE achievements under APL-1
3. Institutional renewal. OSE made some steady efficiency gains under APL-1, even exceeding some o f the original APL-1 targets. Between 1999 and 2006, OSE successfully reduced labor productivity from 5.6 employees/l 000 connections to 4.3, decreased operating costs from U S $ 0.98/m3 to US$ 0.81; and increased operating margins from 35% to 43%. Some ini t ia l steps towards increasing OSE’s internal competitiveness were accomplished under APL- 1 which successfully implemented and disseminated an internal benchmarking system, comparing the uti l i ty’s performance across 2 1 cities based o n 8 service quali ty indicators, Nevertheless, institutional renewal remained l imi ted due to l imi ted support from the previous administration.
4. Water reliability. The APL-1 successfully helped the Aguas Corrientes plant reduce i t s vulnerabil ity to the failure o f one or more o f i ts treated water pumps. The treated water pumping capacity has now increased f rom 540,000 m3/day to 630,000 m3/day, as per the APL-1 target, Three new high pumps have been installed along with new section tubes, wh ich will become operational by June 2007. The plant will then dispose o f an overall max imum capacity o f 964,000 m3/day - enough to safely meet the projected 2035 demand. Addit ional works original ly planned for APL-2 & APL-3 have also been init iated ahead o f schedule, including the rehabilitation o f sedimentation basins and the rehabilitation o f the “accelerator” reactor-clarifiers.
5. Reducing unaccounted for water. Unaccounted for Water, wh ich i s around 56%, wil l continue to require a concerted effort. APL-1 helped l a y some important foundations, including new institutions, and essential infrastructure investments. Since 2002, OSE has changed over 125,000 meters and replaced over 80,000 existing meters. In 2006 alone, i t was able to change over 45,000 meters thanks to new financial incentives.
6. Nevertheless, in some cities, including the Montevideo area, levels o f UFW increased, making OSE’s aggregate level o f UFW higher. The results obtained during APL-1 were not as good as expected for a number o f specific reasons. The continued deterioration o f UFW levels, particularly at the start o f the project, i s part ial ly the result o f a lagged-response to decades o f chronic under-investments, particularly in maintenance, wh ich wil l take more than 5 years to redress. Moreover, the very fact o f
33
improving the measurement o f water flows in the system revealed that some 2000 UFW baseline indicators were actually underestimates. Finally, the 2002-2003 Uruguayan financial crisis, resulted in the sudden expansion o f “asentamientos” (informal settlements). Water supplied formally or informally to asentamientos was, until recently, completely un-metered and not charged for - and thereby classified as unaccounted for water. In sum, addressing UFW will require a long-term sustained approach.
Cities Baseline Actual
Salto 57 63 2000 (June 06)
7. Moreover, i t i s worth emphasizing that OSE’s UFW national average masks some variations in regional performance, with 3 out o f 5 target cities achieving within 2 percentage points o f their UFW target reductions under APL-1. Moving forward, unaccounted for water wil l need to be tackled in a more systematic and sustainable way, by deepening institutional integration between commercial and engineering silos, and rolling-out innovative approaches. OSE’s Unaccounted for Water Action Plan, which has been endorsed by Senior Management, including the heads o f the operational and commercial divisions marks a critical step in this direction.
End APL-1 target (March 07) 47
San Jose Florida Sist. Atlantida Sist. Sta. Lucia
44 46 34 43 35 33 64 55 54 60 44 50
8. Sewerage expansion. APL-1 helped improve sewerage coverage in secondary cities, through the demand-driven expansion o f sewerage networks in 12 interior cities (including 8 cities initially planned for later APL phases). These works now provide the capacity to connect an additional 16,800 households to public sewerage networks. A total o f 3,710 individual household connections have so far been finalized. Although initially lower than expected (47%), the number o f household connections to the new sewerage network has been steadily increasing. Connection rates for sewerage networks 2 years or older reaches 56%. Increased attention will now be focused on increasing household coverage to existing sewerage networks.
9. Sewerage treatment plants. The expansion o f the public sewerage network also went hand in hand with the construction o f new sewerage treatment plants. The APL-1 also helped finance three new sewerage treatment plants. The two sewerage treatment plants in Minas and Treinta Y Tres are now operational, with a capacity to serve more than 36,800 people thereby exceeding the APL-1 target o f increasing the capacity to connect an additional 28,000 people. In addition, the construction o f a third treatment plant in the city o f Durazno has almost been completed, which wil l enable the treatment o f sewage for a Mher 22,300 people.
34
10. Sewerage treatment plant feasibility studies. Feasibility studies for 2 treatment plants to be constructed under the floating APL-4 tranche are being finalized. The feasibility study for the Paysandfi treatment plant i s awaiting clearance from DINAMA.
Revised triggers for APL-3
11. Some o f the triggers for the APL-3 need to be revised in the light o f changes to the sector: including the Constitutional Amendment prohibiting private sector participation; and the Government’s desire to review i ts sanitation strategy.
Revised Triggers for APL-3
. APL-1 closed and 75% o f loan proceeds under APL-2 disbursed in a manner satisfactory to the Bank
Consolidation o f a performance benchmarking system for which data i s collected and reported . Implementation o f the national sanitation policy that i s consistent with OSE’s financial health . Water Law submitted to Parliament
35
Annex 2: Ma jor Related Projects Financed by the Bank and other Agencies URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
Public services efficiency; legal and regulatory sector
Development o f appropriate institutional framework to
Public Services frameworks; SOE competitiveness Modernization TAL SOE competitiveness Energy Efficiency Project
support international groundwater management. Project Pipeline Public sector modernization
Improving business climate; tax reform
Innovation, technology and staff transfer
GEF 6 L Guarani Aquifer
Institutions Building TAL Project First Programmatic Reform Implementation D P L Promoting Innovation to Enhance competitiveness
S S
MS M S S S
competitiveness Efficiency and competitiveness o f public services; quality and coverage Regulatory frameworks; increased competitiveness o f infrastructure sector (including water and sanitation); efficiency and accountability; strengthening regulatory
Santa Lucia Water Basin Regularization o f informal settlements, and service provision within them Modernization o f service delivery
and sector planning institutions. Efficiency and equity in service delivery;
Japan - JICA IDB - Programa de Integracibn de Asentamientos Irregulares IDB - Montevideo Sanitation Program (PSU
OSE Modernization and Systems Rehabilitation (APL) Public Services and Social Sectors S S A L Public Services and Social Sectors S A L
Modernization o f service delivery
Social Program Support Loan D P L
IV) IDB - Stormwater drainage Company for Ciudad de la Costa
T
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Annex 3: Results Framework and Monitoring
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
Results Framework
PDO
Uruguayans receive more accountable, customer orientated, better value for money, water and sanitation services.
Intermediate Outcomes
OSE’s transparency, client responsiveness, efficiency and financial viability have improved.
The reliability o f OSE’s potable water supply infrastructure i s increased.
Unaccounted for Water i s reduced
Project Outcome Indicators
OSE complies with URSEA’s “WSS quality o f service norms” to safeguard consumers interests.
Regulatory Accounting Framework for the WSS sector operationalized.
Intermediate Outcome Indicators
OSE ‘code o f conduct’ i s defined and operationalized
OSE fully complies with: > > > > >
80% o f i t s 4 Access targets 80% o f i t s 19 Quality o f Service targets 80% o f i t s 20 Operational and Commercial Efficiency targets 80% o f its 6 Financial Efficiency targets 80% o f i t s 6 Environmental Management targets
Backup capacity o f Aguas Corrientes Water Treatment Plant has increased from 620,000 &/day to 77 1,000 &/day
UFW reduced by at least: 5.8 percentage points in Montevideo; 16.8 percentage points in Salto; 23.9 percentage points in Artigas; 7.7 percentage points in Trinidad; 5.5 percentage points in Tacuarembo; and 10 percentage points in Melo.
Study to review and design budgetary incentive mechanisms to reduce unaccounted for water completed.
Implementation o f staff bonuses based on increased labor productivity, including regional UFW improvements.
Use o f Project Outcome Information
Enables Government Counterparts and Regulator to better monitor OSE’s performance.
Use of Intermediate Outcome Monitoring
Ensure process i s on track and adjust strategy accordingly
If annual targets are not met, review client and commercial strategy & systems.
Ensure works schedule i s on track and adjust strategy accordingly
Incremental annual improvements are expected. Flags possible operational andor commercial problems.
Ensure review process i s on track and adjust strategy accordingly
Ensure reform process i s on track and adjust strategy accordingly
37
Household connections to new and existing sewerage systems have increased.
Number o f new household connections to existing sewerage network built during APL- 1 and to new sewerage networks built during APL-2
In-house reconfiguration plumbing works for 3,600 households are financed through OBD
Lessons from Impact Evaluation Pilot
I I I I
Ensure review process i s on track and adjust strategy accordingly
Ensure process i s on track and adjust standard unit costs if necessary.
Intermediate lessons learned from impact evaluation pilot help adjust household connection strategy
Arranpements for results monitoring
1. The institutional arrangements for monitoring and evaluation have been in place since APL-1. These institutional arrangements have been very effective and highly satisfactory, and wi l l remain fully financed internally by OSE. At the start o f the project, monitoring was rather limited in scope, with few indicators handled by a handful o f skeptical participants. The initiative then progressively gained momentum and credibility within the organization. OSE has now become a pioneer in the monitoring o f utility performance and benchmarking and was one o f the f i rst ut i l i t ies to participate in the International Benchmarking Network for Water and Sanitation Uti l i t ies (IBNET). OSE i s now measuring an extensive set o f indicators representing all large to medium sized systems in every region, handled by an enthusiastic, highly dedicated, strong team o f employees representing all geographical regions, operational, commercial and managerial points o f views.
2. The monitoring and evaluation o f OSE’s performance comes to the core o f the project management, and more significantly, to the management o f OSE’s operations. This framework has been developed in close coordination with OSE’ who wil l submit monitoring indicators twice a year. OSE’s Planning Department oversees the monitoring o f all indicators, including output indicators relating to specific project impacts, financial viability and operational performance indicators for OSE as a whole; OSE’s client surveys (in collaboration with the social group o f the Program VECTOR); and service quality indicators led by the OSE Indicators Group. This Indicators Group i s in charge o f OSE’s performance benchmarking initiative, and i s responsible for designing the benchmarking program, collecting and disseminating the data internally and externally, to consumers and sector stakeholders. Under the APL-2, this Group i s being incorporated into the Program VECTOR to ensure OSE’s performance data i s taken into account by the OSE Board in i ts strategic decision-making. OSE’s monitoring capacity will be further strengthened under APL-2 (component l), by expanding the set o f indicators, refining their protocols, and engaging DINASA and URSEA in the monitoring o f sector outcomes.
3. The Supplemental Letter to the Loan Agreement provides a detailed specification o f all indicators which wil l be used to monitor the progress o f the project and the overall
38
performance o f OSE. Each indicator monitoring sheet wil l need to include the indicator’s definition, objective, calculation protocol, parameters which define the classification of the results; targets; and actual values. The targets and results wil l be presented in two manners: (a) a table reporting, for each indicator, the actual and targeted results based on their classification (excellent, good, acceptable, poor and very poor), at each point in time, and (b) a graph indicating the numerical values or percentages obtained and targeted for each indicator, at each point in time. For each one o f these indicators, the data source, department responsible for data collectiodcalculation, and the department responsible for data control will need to be specified, and if necessary clarifications w i l l be provided under the comments section. A comprehensive indicator data set will be regularly published on OSE’s website from December 2007, providing background data for each indicator based on OSE’s performance as a whole, by Region, by departmental capitals, and in any other area where disaggregated data i s available, including the separate Maldonado system.
4. Monitoring and Evaluation w i l l play an important part in enhancing OSE’s transparency, accountability and consumer awareness and participation in the accountability process. OSE’s benchmarking program includes an extensive public disseminatiodawareness raising component which seeks to build OSE consumers’ awareness o f the quality o f service they are currently receiving versus the quality o f service they are entitled to receive. In order to do this, dissemination strategies wil l need to be explicitly formulated in ways which ensure that the actual performance data i s clearly provided within a pertinent context (e.g. in relation to OSE/GoU standards, best regional performers, etc). Building such consumer awareness around actualltarget services wil l also require more sophisticated dissemination channels. T h i s more comprehensive dissemination campaign around performance indicators will be critical because enhancing consumer awareness and educating consumers on their entitlements wil l enhance consumers’ ability to hold OSE to account.
5. Data i s collected almost entirely based on primary data from OSE. OSE’s benchmark indicator program now has automated data collection systems in place, which will be providing the majority o f customer-orientated and operational data. Data collection and measurement protocols have been carefully developed for each indicator. Under the APL-2, protocols for some earlier indicators have been refined, and the scope o f indicators expanded. Specific additional questions wil l also be incorporated into future versions o f OSE’s client survey. OSE will also need to bear in mind that as efficiency in other selected uti l i t ies improves over time, the targets will need to keep moving. (OSE’s goal should not be simply to reach current target values in the future, but to catch up and keep pace with the group, through improved efficiency).
6. OSE i s also seeking to collaborate and build the capacity o f other Government Agencies involved in the sector. Following i ts participation in the World Bank Buenos Aires Impact Evaluation Workshop, OSE wi l l be undertaking a pilot to evaluate the impact o f i t s demand-driven sanitation strategy, To this effect, OSE has helped set up a data sharing working group focusing on the broader social, public health and environmental impacts o f water and sanitation services in Uruguay. Partners include
39
DINASA, the Program o f Integration o f Irregular Settlements (PIAI), Plan de Atenci6n Nacional .a la Emergencia Social (PANES), Ministerio de Salud Publica (MSP), Instituto Nacional de Estadistica (INE) and the Ministry o f Social Develpoment (MIDES). This wil l help provide key data regarding the broader public health, social and economic impacts o f water and sanitation services.
40
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Annex 4: Detailed Project Description URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
1. would be supported by a US$50 loan. It w i l l comprise o f the following components (amounts show total component costs with loan proceeds in parentheses):
The second phase o f the OSE APL Program i s valued at US$ 68.1 mill ion and
Component 1: OSE institutional renewal - U S $ 2 2 million (US$16 million)
2. Program VECTOR i s OSE’s Senior Management’s flagship initiative for institutional change and administrative reform o f the utility. The program VECTOR’S objectives are to improve OSE’s transparency, client responsiveness, customer satisfaction, efficiency, financial viability and institutional strengthening. This component will help inst i l l a culture o f consumer orientation, quality and efficiency, and help optimize organizational processes to cut costs, time and improve productivity and coordination, within a new organizational structure - and culture. OSE’s current institutional structure i s inappropriate for tackling OSE’s most central and pervasive problem - increasingly high levels o f unaccounted for water. The Program VECTOR i s in effect responsible for coordinating and integrating a series o f discrete project-based initiatives, outlined below. The overall required financing for this component i s very large, since after decades o f uner-investment, i t includes a complete overhaul o f existing Management Information Systems (MIS) and the development o f proprietary software (see Annex 8). Software updates constitutes the largest sub-component (US$ 10 million), followed by investments in regional infrastructure (US$ 5 million), and hardware and equipment update (US$4 million); other subcomponents such as institutional strengthening, environmental capacity building, and management account for about US$ 1 mill ion each (see Table 1). The capacity and willingness o f OSE to undertake the necessary investments on a large scale i s illustrated by the fact that, at the time o f project appraisal, over US$ lmi l l ion under component 1 i s already under execution and a further US$6.6 mill ion i s in the process o f being awarded.
3. The urgent need to improve the management o f OSE has been widely acknowledged by the Board, employees and the general public alike for over a decade. Unfortunately, OSE’s successive attempts to date to reform i t s management have met with limited success, partly due to the lack o f political w i l l to follow through over time, to undertake necessary deep institutional changes in processes and culture, and to learn from external experience. The present attempt i s more likely to be successful for the following reasons. First, over the past 2 years, the new OSE Board has demonstrated unwavering support for institutional reform, and i s supported by the GoU’s own overall public sector reforms. Second, the design o f the overall institutional reform strategy, Program VECTOR, was developed internally within OSE as a plan o f action based on a detailed evaluation o f previous successes and failures, best practices in the sector, and a review o f today’s information technology market. Third, at the same time, OSE has not
44
shied away from seeking external guidance and experience, and has recruited one o f the best Uruguayan change management consultant f i rms to lead the process. Finally, OSE i s acutely aware that success will require widespread buy-in from employees throughout the utility, as well as the support o f trade unions - and has developed appropriate consultative and communications strategies to build-up this critical support.
Table 1: Indicative breakdown of financing requirements for Program VECTOR PROGRAM VECTOR SUB-COMPO?
1. Constructwn and equipment Regional laboratories Warehouse, trucks, electromechanical repair shop 2. Institutional strengthening Consulting Firm Training 3. Software Commercial software adquisition and maintenance Basic software adquisicion (DB,SO, financial and supply) Security GPS system 4. Hardware and equipment update 5. Management (Human Resources and Logistic) 6. Environmental Capacity Building
:NTS Million US$
5.14 1.74 3.40 1.04 0.47 0.57 9.76 5.39 3.50 0.26 0.62 4.17 1.16 1.00
22.26
23%
5%
44%
19% 5% 4%
100%
I, past 2 years, financed mostly by OSE’s own internal funds, with additional support from the APL-1. Program VECTOR i s overseen directly by OSE President, led by the President’s own team o f Technical Advisors. The past two years have been mostly dedicated to defining the Program’s vision, objectives and components in a participatory manner, involving staff consultations at all levels throughout the organization (in Montevideo and the Interior). The implementation o f the Program VECTOR reform process i s structured around the following key steps:
Institutional R e f o r m Process. Program VECTOR has already been active for the
Following a strategic visioning workshop, the Program has been divided into a series o f sub-projects to break down institutional reform into more manageable components. Each sub-project led by an OSE manager, who have each been carefully selected to ensure they have the appropriate institutional responsibilities to roll-out institutional change in their selected field and genuine leadership qualities. For each sub-project, institutional reform was initiated with the development o f a strategic vision, formulated in a participatory manner, involving all relevant staff both at headquarters and in the regional departments. Key technical processes are now being optimized and formalized prior to implementation. Appropriate administrative norms, budgets, and staffing requirements (including staff roles and responsibilities) wil l then be determined by the sub-project manager, to ensure overall coherence and strengthen the newly optimized technical processes.
45
0 The manager’s proposals w i l l then be reviewed the OSE Board and Human Resources Management, prior to approval. Each major decision.wil1 then be h l ly validated with management and staff, through a process o f diffusion and participation. In order to support the transition and ensure staff buy-in, an extensive change management support program will be provided to all OSE staff Specific technical training will be provided prior to implementation o f new hardware and software applications. Change management i s the most critical part o f institutional reform. This process was initiated two years ago, and i s being facilitated by a Change Management consultanc y.
0
5, (i) institutional modernization, (ii) technical modernization and optimization o f organizational processes; and (iii) strengthening regional decentralization.
Program VECTOR activities are grouped under three main areas o f intervention:
Institutional Modernization
6. Change management. Change management i s the most critical part o f institutional reform. This process was initiated two years ago, and i s being facilitated by a Change Management consultancy. Resistance to change can occur at all levels, due to perceptions o f uncertainty, loss o f control, disruption o f routines, loss o f given rights, and lack o f confidence in the change management process. Appropriate strategies need to be developed to respond to each case, tackling both operational and cultural change management issues, and need to take place before, during and after reforms. As a f irst step, a survey o f the perceptions o f change was carried out within OSE. The results from the survey wil l now be used to shape OSE’s formal communications strategy (which identifies target audiences, message, medium and frequency), in order to maintain all OSE employees informed, involved, and with an open communication line. Some institutional strengthening activities have also already taken place, including the strategic reorganization o f key personnel, to ensure managers with genuine leadership qualities are in charge o f leading and championing change. Following the administrations concerted effort to explain, l isten and engage to date, OSE’s Trade Unions and other sector stakeholders remain highly motivated and supportive o f the Program VECTOR and broader APL-2. Moving forward, the re-deployment and (re)training o f personnel to support more effectively the new operational processes i s likely to be the most sensitive and challenging area - and wil l require consistent care and attention. Institutional reform i s dynamic and unpredictable. Change management strategies wil l need to remain flexible and consistently ahead o f the game.
7. Performance benchmarking. This activity wil l seek to deepen OSE’s internal benchmarking system established under the APL-1 to stimulate internal regulation and competition. Since 2002, OSE has been comparing the utility’s performance across 21 cities based on 8 service quality indicators. Results are published bi-annually, and disseminated both internally and externally (through newspapers and internet). Benchmarking has gained the full support o f OSE staff and Government. Under the APL-
46
2, the geographical coverage, number and relevance o f service quality indicators wil l be expanded. Definitions and measurement protocols have been and will be further refined. Additional indicators have been established to distinguish between indicators measuring project performance and overall utility performance. Service quality indicators w i l l be further expanded to better reflect real client preferences. Additional operational indicators focusing on continuity o f service and pressure have been included. The internal benchmarking unit wil l need to be fully institutionalized within OSE. An internal process o f evaluation and adaptation to the semi-annual benchmarking process wil l be established to enhance OSE’s internal accountability. Most importantly, OSE’s dissemination strategy wil l need to become much more sophisticated, in order to really build consumer awareness (e.g. communication campaigns in schools) and increase public scrutiny of OSE’s performance.
8. exchanges with selected comparable International Regional utilities to mutually learn from each other. Such exchanges wil l not be limited to Senior Management and professional staff, but wil l also include trade unions and workers. Participation in local and international seminars and other visits wil l also be encouraged, to ensure a better sharing o f experiences. Financial support wil l be provided via OSE’s own funds and project management funds (see component 4).
OSE’s innovation and openness w i l l also be encouraged through a series o f
9. Code of Conduct. OSE will be establishing i ts own Code o f Conduct, to ensure that i t becomes more socially responsible and accountable to Uruguayans. The Code wil l guide external and internal relationships set out in clear, fair and transparent framework, to ensure greater respect and accountability. The Code o f Conduct w i l l set out OSE’s mission, vision and values, and wil l outline OSE commitment to appropriate behavior to all OSE staff, customers, contractors, suppliers, government agencies and communities.
10. will need to be developed in a highly participatory manner. I t wil l also be a useful tool for raising awareness amongst OSE staff o f OSE’s new vision and mission statement.
In order to ensure broad-based awareness and ownership, the Code o f Conduct
1 1. Strategic planning tools. The project seeks to introduce a business management system that ensures the Board and OSE managers at all levels are able to take decisions based on sound data, including easy access to indicators, goals, planning and associated analysis and decision-making tools. Mainstreaming strategic planning within OSE wil l represent a synthesis o f the entire company modernization process. This, along with a clear vision o f priority goals centered around cost reduction and UFW, should help ensure a more rational, strategic and coherent decision-making across the utility.
12. Social group. A new social group has been created within OSE to oversee the application o f social policies set by MIDES, following the lines o f the Environmental Management Unit and RANC. The social group i s currently working in close
47
collaboration with these two un i t s and MVOTMA’s PIAI program” in newly regularized informal settlements to help set appropriate tariffs and develop a communications strategy which w i l l encourage these new consumers to: (i) pay their water bills; and (ii) consume appropriate levels o f water without wastage. The social group wil l also support RANC develop alternative communications strategies targeting other key consumer groups (including large customers).
Technical modernization and optimization of organizational processes
13. Modernization and integration of commercial systems and operations. This i s one o f Program VECTOR’S most critical sub-projects. The lack o f integration between OSE’s commercial and operational systems, which are managed under different heads o f command, i s OSE’s single largest source o f inefficiency. Achieving OSE’s targets for reducing unaccounted for water will simply be impossible without the commercial and operational systems, management and staff working intimately together. In addition to being incompatible, both systems are obsolete. This project therefore seeks to develop a commercial system for improving customer service and efficiency gains, using up to date information technology. This will ensure that each intervention, from the moment the initial request i s inputted into the system to i t s implementation by operations, becomes quicker, cheaper and more accurate. Improved commercial management i s today one o f the main sources o f potential efficiency gains within OSE. The introduction o f new technological tools in the commercial project is, however, not enough to achieve success. OSE wi l l require a new organizational structure. New management systems and goals will need to be defined, and set within very clear geographical administrative boundaries (matching the physical distribution o f the piped network) with clear leadership guiding both commercial and operational activities.
14. Modernization o f human resources management and liquidation of assets. The project i s based around the acquisition and implementation o f human resources management software, and wil l be complemented by the re-qualification and training o f the personnel. As a consequence o f the foreseen change o f the administrative procedures and o f the new organizational structure, a more rational redistribution o f the current human resources i s expected.
15. Application o f financial management and procurement models. The project seeks to introduce an up to date financial management and procurement model, involving new processes, technology, norms and organizational structures. The project i s inserted in the overall context o f the administrative processes optimization. It i s expected that the improved efficiency in the financial management and procurement wil l result in a re- deployment and re-qualification o f OSE personnel to strengthening the operational / commercial area o f the company.
’’ The PIAI (Programa de Integracidn de Asentamientos Irregulares) i s the GoU oficial program to regularize informal settlements in Uruguay. The P I N i s executed under MVOTMA.
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16. Geographic Information Systems (GIs). The project wil l roll-out a technological tool that allows, for different departments within OSE, to spatially visualize and analyze all available information. T h i s component i s a priority for the operating/commercial area, since it a powerful tool to help tackle unaccounted for water. Cartographic information o f OSE’s operational and commercial areas w i l l therefore be updated as a priority, within the overall roll-out o f Program VECTOR.
Strengthening Regional Decentralization
17. Strengthening OSE’s Regional environmental laboratory capacity. These two projects are in the context o f the decentralization o f the company and some o f their main actions are mentioned below:
0 Training o f management and projection activities o f regional managers 0 Training o f management and control o f human resources 0 Training o f decentralized supply and works management 0 Construction o f 10 regional laboratories 0 Construction o f 4 regional electro-mechanic maintenance workshops 0 Construction o f 4 regional supply warehouses
18. OSE’s management i s in general very centralized with little autonomy at the regional level. The regionalization project wil l have to absorb all the changes encompassed in the optimization o f processes and the new organizational structure defined in other projects. An effort w i l l also need to be made to ensure the operational decentralization o f the metropolitan region o f Montevideo (responsible for most o f the invoicing turnover o f the company).
19. Strengthening environmental management capacity. OSE will also continue efforts to strengthen i t s environmental unit (Unidad Ambiental de Gestibn - UGA) created under APL-1, including the appointment o f key technical staff; the implementation o f an environmental monitoring plan at least for all the networks in departmental capitals; implementation o f environmental management systems in the three planned sewerage treatment plants; and the implementation o f a system to manage residuals for the sewerage treatment plants o f Minas and Treinta y Tres.
20. Institutional strengthening of the UFW program. Developing new institutional management structures to reduce UFW i s at the core o f OSE’s institutional renewal initiative. Without successfully tackling unaccounted for water, OSE will be simply unable to significantly increase i ts overall efficiency. OSE’s Unaccounted for Water Unit (RANC) was created in 2005 to develop operational strategies for reducing UFW, testing pilot initiatives, and mainstreaming successful initiatives within OSE. When the Program VECTOR was launched later that year, one o f i t s key commitments was to provide the appropriate holistic institutional framework which would support RANC’s operational initiatives. Although virtually all o f Program VECTOR’S sub-projects wil l have important implications for RANC, the following VECTOR interventions wil l be crucial to reducing OSE’s UFW: improvement and integration o f operational and commercial
49
processes, implementation o f new commercial systems, detection and regularization of commercial anomalies, management o f large consumers, and management and control o f water in informal settlements.
21. Particular attention has been paid to maximize the close integration o f the operational and commercial UFW initiatives, to overcome past problems associated with traditional sector silos. Close collaboration and coordination between operational and commercial activities wil l be assured thanks to extensive staff cross-support between RANC, Program VECTOR, the commercial department and the VECTOR social group. A strategic re-deployment o f key managers also been carried out. The former manager o f the RANC unit has now been appointed Head o f OSE’s Commercial Division, and will also personally oversee the integration o f commercial and operational systems. Unaccounted for water related indicators are being prioritized as part o f OSE’s new strategic planning tools for all OSE Managers and the Board. Regional improvements in UFW indicators wil l also be linked to OSE staff performance based pay bonuses.
Component 2: Water supply - US$33 million (US$24 million)
22. Rehabilitation of the Aguas Corrientes water treatment plant The Aguas Corrientes water treatment plant currently supplies potable water to Montevideo and to eight smaller communities (Ciudad de la Costa, Las Piedras, Pando, L a Paz, Cap. Juan A. Artigas, Progreso, Toledo, and J. Suarez), which together compose the Montevideo Metropolitan Region.
23. The APL Program was designed to increase the capacity and water treatment efficiency o f Montevideo’s Aguas Corrientes water treatment plant to improve the reliability and safety o f OSE’s overall water supply system. To achieve this objective, the program has been removing bottlenecks, by financing the installation o f new plant components and the rehabilitation o f existing ones, to ensure water quality w i l l continue meeting the U S Environmental Protection Agency (EPA)’s National Primary Drinking Water Standards, and satisfy the projected metropolitan water demand for the year 2035.
24. The APL-1 successfully helped the Aguas Corrientes plant reduce i t s vulnerability to the failure o f one or more o f i t s treated water pumps. The treated water pumping capacity has now increased from 540,000 m3/day to 630,000 m3/day, as per the APL-1 target. Three new high pumps have been installed along with new suction tubes, which w i l l become operational by June 2007. The plant wil l then dispose o f an overall maximum capacity o f 964.000 m3/day - enough to safely meet the projected 2035 demand. Additional works originally planned for APL-2 & APL-3 have also been initiated ahead o f schedule, including the construction o f a new canal stretch for decanted water, the rehabilitation o f two horizontal sedimentation basins and the rehabilitation of the “accelerator” reactor-clarifiers. These works are currently underway, and are expected to be completed by December 2007 with OSE’s own financing. The rehabilitation o f Aguas Corrientes Treatment Plant i s now almost finalized. To fully complete the plant’s rehabilitation, APL-2 w i l l finance the construction o f 8 more rapid gravity filters, along
50
with the adaptation o f the tank accelerators (including conventional flocculation units and high-rate sedimentation basins).
25. Unaccounted for Water Reduction Program (R4NC). Reducing UFW and increasing revenue collection i s at the heart o f the APL-2 project. Although APL-1 helped lay some important foundations, including new institutions, and essential infrastructure investments, reducing UFW remains around 54% wi l l continue to require a concerted effort. Lessons learned from APL-1 have shown that, in order to address the high levels o f UFW, technical and institutional interventions will need to go hand in hand.
26. OSE’s strategy i s described in detail in i t s Plan o f Action for UFW reduction program. T h i s Plan i s an integral component o f the Program VECTOR’S program to improve OSE’s management and efficiency. Both the Plan’s operational activities and Program VECTOR’S commercial initiatives wil l need to be implemented jointly, in close coordination. A series o f innovative approaches are being tested in several pilot areas including Montevideo to help align commercial and engineering incentives to tackle UFW (see Attachment 1). In each pilot area, specialized equipment wil l help track key UFW performance indicators and, most importantly, i t w i l l enable the distinction between two very different types o f UFW losses (physical losses versus financial losses due to illegal connections or faulty billing). Such UFW management indicators wil l therefore enable the identification and optimization o f the most effective strategies, so that these can then be rolled out through OSE. In the case o f the Montevideo RANC pilot projects in the metropolitan region, pilots will be developed within a sectorization planning spatially linked to the operational/commercial regionalization.
27. UFW indicators wil l also help perform an important communications function within OSE, by raising awareness o f UFW problems, actual results and overall goals - and generating a broad-based sense o f ownership within the company. The success o f the RANC project wil l depend on how emerging best practices are effectively disseminated, so that these initiatives are no longer pilots but become embedded within company practices. T h i s wil l require a new company culture, including the will to measure, to objectively evaluate results, to plan based on results, to reward those who reach their goals, and to penalize those who do not comply. I t wil l also require openness to learn from outside experiences. Program VECTOR will provide a powerful tool in this respect, since it i s explicitly seeking to shift company culture, through i t s strategic based planning initiative; performance based bonus pay for employees linked to UFW related indicators; and promotion o f regional staff exchanges.
28. RANC’s plan o f action includes 17 sub-components, a combination o f studies and concrete UFW activities. I t presents possible strategies from a theoretical stand-point, which w i l l need to be developed and tested in practice. Each sub-project has built-in flexibility, to ensure theoretical successes are translated into operational and commercial successes. A series o f pilot projects wil l be carried out in each city or important service area units. These pilots wil l provide opportunities to put the Plan o f Action into practice in order to learn, and identify successful UFW practices (as determined based on
51
measured improvements in UFW indicators in relation to associated costs). Successful interventions will then be rolled-out to the entire service area, incorporating appropriate lessons learned. Consistently relating actions to outcomes (i.e. a measurable impact on OSE's overall Water Balance and/or billing revenues) w i l l be key.
29. Specific interventions included in the R4NC Plan o f Action are listed below:
e
e
e
e
e
Formulation of UFW management indicators system. This wil l entail the establishment o f a coordination structure, the elaboration o f UFW indicators, the water balance and i ts corresponding protocols and the implementation o f an information system to analyze these indicators. Execution of pilots projects as the form of spread results and disseminate RANC practices. T h i s will include the definition o f zones (including Montevideo), the identification o f a leader for sub-projects in each zone, or the person responsible for undertaking the analysis and defining priority actions, including the cost- benefit o f each o f these actions. Improvement of OSE 's macro- and micro-metering system (through national water meter replacement program, and operational control centers). This will require the implementation o f an agreed methodology to control and evaluate the metering o f the overall levels o f water produced, distributed and consumed, expand macro-metering (currently at 93.8% o f the elevated volume), redefine the micro-metering policies (including planning o f permanent investments) , define the procedures for the appropriate size and maintenance o f the overall metering
Replacement of long lasting distribution pipes, valves and households connections. T h i s wil l include the definition o f materials and techniques, and the establishment o f a permanent policy for the substitution o f networks in poor condition. Detection and repair of visible and not visible leak . This entails improving the response time, and quality o f leakage repairs, defining strategies to detect invisible leakages, including the identification o f services with a major volume o f invisible losses. Raise consumer awareness to promote a national culture of paying for water. This wil l require a sophisticated and extensive communication strategy targeting a variety o f distinct consumer groups - including large customers and informal settlements. Develop an Agreement with UTE that allows both companies to combat frauds. An M o U with UTE has already been signed which aims to promote cooperation in areas o f mutual interest, particularly the coordination o f procedures to tackle commercial anomalies. Regularization of commercial anomalies. Specialized units wil l be created to address the detection and regularization o f commercial anomalies. The cost- benefits o f such units will be evaluated in the pilots. Large Customers Management. This wil l require the establishment o f a comprehensive database o f all large customers, to help improve the management
pool.
52
o f this group, including the implementation o f procedures to detect and address frauds. Control of water use in informalhegularized settlements. T h i s wil l entail the definition and implementation o f procedures to better understand real consumption levels, evaluate the quality o f the network, put in place macro- metering and establish policies to improve consumer awareness o f the costs and scarcity o f water. T h i s will be undertaken in close collaboration with the Program VECTOR’S social group.
City
Treinta y Tres Rio Branco Colonia Melo
Component 3: Expansion of sewerage systems - US$6.0 (US$4.6 million)
Percentage o f Households with access to individual sewerage connections
48 Yo 32 % 37 % 50 %
30. Sewerage Extension Program. The demand-driven extension o f sewerage systems in small secondary towns was a major component o f the APL-1. Indeed, APL-1 successfully succeeded in expanding sewerage networks in 17 localities, rather than the 4 originally planned, thereby achieving some o f the original APL-2 targets in advance. The new administration i s now reviewing the costs and benefits o f i t s former sanitation strategy focused o n universal access to in-house sewerage systems for small urban population. In order to remain in l ine with Government policies, large-scale financing o f new public sewerage networks in small towns should therefore be slowed down until the sanitation sector strategy has been fully defined.
Mercedes
31. The sewerage component under APL-2 wil l therefore focus o n completing the execution o f works in five cities where households had already expressed their demands under APL-1 (Treinta y Tres, Colonia, Mercedes, R io Branco and Melo) (see Table 2). Additional cities where demand has also been expressed may be included at a later date, subject to their compliance with the program’s environmental standards (carefully defined in the Operational Manual).
47 %
Table 2: Current Sewerage Coverage (YO)
Total 45 %
32. Instead, efforts wil l be focus on increasing in-house sewerage connections where sewerage networks exist or have already been commissioned, in order to maximize returns on existing investments. This wil l be undertaken as part o f an impact evaluation pilot, since many uncertainties remain regarding the main barriers to household connections, and empirical evidence i s critical to inform DINASA’s emerging water and sanitation strategy. The pi lot will focus on al l cities which received a new public sewer extension under the APL-1. Alternative strategies wil l be applied to each locality, to test
53
whether financial incentives, social mobilization or both, will provide the most effective increases in household connections.
33. Output Based Disbursements. This component will also pilot an innovative solution, using Output Based Disbursements (OBD), to help overcome traditionally low household connection rates to sewerage networks, though both the impact evaluation pilot and the demand-driven sewerage connection program. OBD provides an appropriate and innovative solution for the World Bank to help OSE finance these in-house works. OBD helps reduce the overall transactions costs for OSE o f financing individual connections, whilst simultaneously enhancing the focus on results. Households wishing to connect to the network and requiring in-house plumbing reconfiguration works, wil l be eligible to finance these works through a low interest rate loan repayable over 36 months, and wil l be exempt from paying the variable cost component o f their sewerage bill for up to 36 months. The World Bank will allocate US$ 1 mill ion as an OBD fund, and wil l pay 60% o f the standard unit costs o f in-house works, thereby targeting up to 3,600 new households. In order to improve households’ connection rate to both existing and new sewerage networks, the project w i l l support OSE’s efforts in financing the in-house plumbing works needed for connecting households to the public sewerage network. The implementation o f this OBD mechanism i s detailed in annex 1 1.
34. Sewage Treatment Plants. Feasibility studies for future Sewage Treatment Plants and outfalls w i l l also be undertaken, in order to meet future demand. Priority w i l l be given to the cities o f Colonia and Mercedes, which are included in the sewerage expansion component, but which do not currently have their own treatment plant.
Component 4: Project management, supervision and audits - US$ 1.4 million (US$ 1.2 million)
35.
0
a
0
0
Under APL-2, this component provides hnding for the following activities:
Project Management. Items to be financed under the heading include office equipment, project-related travel and general Consulting Services. Supervision and Engineering Support. OSE wi l l contract individual consultants and consulting f i rms as needed to supervise construction o f UFW works, the rehabilitation o f Aguas Corrientes, and the demand-driven sewerage expansions. Staffexchanges and Seminars. Funds wil l also be made available to encourage staff visits and exchanges with other Regional utilities, and participation in relevant conferences and seminars. Audits. External auditors acceptable to the Bank will audit the Designated and Project accounts, PMR’s (project management reports) and OSE financial statements. In addition, funding will be provided for outside technical audits o f actual performance results and project investments as needed.
54
Attachment 1 Unaccounted for Water Targets in Selected Cities
2000 2001 2002 2003 2004 2005 2006 2001 2008 2009 2010 2011 2012 REAL c_ PROJECTED
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PROJECTED REAL c--t
METROPOLITAN AREA (MONTEVIDEO) -
5 0 i , , , , , , 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 - PROJECTED REAL
ARTIGAS _.
8 0 1 - - - - - - -
TACUAREMBO .- I 57.0
I
I / \
40.5 "*- - - 40.2 - ..
38.5
3 0 4 , . I , , , , , , , , 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
PROJECTED REAL c_,
. _ " , I I I I , , , , . . 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
REAL - PROJECTED
55
Annex 5: Project Costs URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
Local Foreign Total
million million million Institutional Renewal 6.3 16.0 22.3 Water Supply 8.8 24.1 32.9 Expansion o f Sewerage Systems 4.9 0.9 5.8 Project Management, Supervision and Audits 1.2 0.2 1.4
Project Cost B y Component US$ US$ US$
Total Baseline Cost 21.2 41.2 62.4 Physical Contingencies 1 .o 2.1 3.1 Price Contingencies 0.9 1.7 2.6
Total Project Costs' 23.1 45.0 68.1 Interest during construction
Front-end Fee 0.0 0.0 0.0 Total Financing Required 23.1 45.0 68.1
'Identifiable taxes and duties are U S $ 13 million, and the total project cost, net o f taxes, i s US$ 55 million. Therefore, the share o f project cost net o f taxes i s 81%.
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Annex 6: Implementation Arrangements
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
1. Borrower and Executing Agencies. Under APL-2, a US$ 50 mill ion loan will be extended to the Obras Sanitarias del Estado (OSE) to execute this project. The Republica Oriental del Uruguay wil l guarantee the loan.
2. Project Oversight, Coordination and Execution. OSE’s Board o f Directors and Management wil l be responsible for project oversight. OPP’s Division o f Public Enterprises, DINASA and URSEA will ensure consistency between sectoral development objectives and specific project measures carried out by OSE. In order to support sector cooperation and ensure OSE remains responsive to changes in sector policies and institutional arrangements, this project includes such indicators for i t s PDO.
3. The Gerencia de Programas con Financiamiento Externo (PFE)16 i s OSE’s unit in charge o f managing projects financed by MDBs, and this unit wil l be the P M U for the proposed operation, keeping the institutional arrangements already in place for the first phase o f the APL. It i s important to emphasize this unit i s fully integrated within OSE, and i s not tied to the existence o f any World Bank projects. OSE wil l also continue to coordinate support provided by Intendencias in the execution o f sewer network works.
4. PFE, which previously was the Departmento de Administracion de Recursos Aplicados en Programas de Financiamiento Externo (ARAPFE), i s already highly experienced with Bank accounting, financial management and auditing procedures. The capacity o f PFE to implement procurement actions for the project has been certified by the Regional Procurement Advisor. PFE includes sufficient staff members with extensive experience in Bank procurement procedures. Both the Unit’s manager and his deputy have many years o f procurement experience o f Bank financed projects. Since, unlike APL-1, this project wil l follow the May 2004 World Bank Procurement Guidelines, a specific one-day course was held within OSE to ensure both PFE staff and OSE’s procurement department fully understand the new requirements.
5. A number o f new departments/groups have also been created in OSE since the beginning o f the APL Program. OSE now includes an environmental unit (Unidad Ambiental de Gestion) which has been instrumental in strengthening OSE’s environmental capacity based on ISO-14000, and OSE’s laboratory water quality monitoring program based on ISO-25000 certification. A social group has also been created as part o f Program VECTOR, to help improve OSE’s responsiveness to i t s different groups o f consumers, including in slums, and reduce non-payment o f bills. Finally, a unit was created to pilot initiatives to reduce UFW, which specifically bridges OSE’s engineering and commercial silos. T h i s project wil l continue to strengthen the effectiveness o f all three entities.
l6 The PFE was created in April 2007 through Board o f Directors Resolution lUD 428/07.
57
6. Implementation Period. The second APL project w i l l span 5 years (2007-2012). T h i s program follows a gradualist sector reform approach, consistent with Uruguay’s political and social realities.
58
Annex 7: Financial Management and Disbursement Arrangements
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
Summary
1. The assessment conclusion i s that OSE has adequate financial management arrangements in place for the proposed operation, which meet minimum Bank requirements. The overall project financial management risk i s rated Low. A detailed r isk assessment i s presented in the Project Risk section below.
2. Financial Management arrangements for APL-1 were reviewed in l ine with the guidelines issued by the Financial Management (FM) Board on November 2005, to determine whether or not the financial management arrangements originally in place for Loan 4556-UR (P063383) were adequately functioning and s t i l l acceptable to the Bank. A financial management assessment report, in accordance with the Guidelines mentioned above, i s presented below.
3. Project administration i s carried out by l ine departments o f OSE with the collaboration and coordination o f PFE, which wil l be responsible for project accounting, financial reporting - including preparation o f interim unaudited financial reports (IUFRs) and internal control and preparation o f withdrawal applications from the Loan account. Treasury operations w i l l be managed by OSE’s Financial Department.
4. includes previous Bank financed projects:
T h i s assessment considered OSE’s experience in project implementation, which
Loan 4556-UR - APL-1 (P063383). Amount $27 million; effective on July 31, 2001; and closed on March 31 , 2007. Loan 2991-UR (P008138). Amount $22.3 million; effective on July 11, 1988; and closed on Jan 30, 1999.
0
0
5. the Bank the following information, which the Bank reviewed and found acceptable:
Prior to negotiations and as part o f the FM preparation process, OSE submitted to
an updated version o f the project’s operational manual, including administrative procedures for project execution to complement OSE’s existing internal procedures;
0 the Project’s Chart o f Accounts; and 0 the format and contents o f the annual financial statements and Interim Unaudited
Financial Reports (IUFRs) format for monitoring and evaluation purposes.
0
Implementing Entity
6. OSEI7 i s a State Owned Enterprise (SOE) established in 1952 by Law 11.907 to “provide potable water and sewerage services in the territory o f Uruguay” and “to
~~ ~~
l7 Web site with institutional information: www.ose.com.uy
59
manage the study, construction and maintenance o f any work related with the mentioned services” (Article 2”).
Country Issues
7. A Country Financial Accountability Assessment (CFAA) for Uruguay was conducted in 2003 and the first draft was presented to the Uruguayan government in 2003. A second draft was presented to the newly elected government in 2005 and published at that time. I t i s worth noting that the final version o f the document does not present substantial changes from the original draft18.
8. The report concludes that the country fiduciary risk in Uruguay i s low. The CFAA i s taken into account to determine the project fiduciary risk in the Project Risk section below.
Project Risk Assessment and Mitigation
Risk Rating
9. The overall FM risk was rated low and, as a result, no additional mitigation measures have been proposed and the FM arrangements o f APL-1 w i l l continue throughout the proposed APL-2 project. A detailed risk assessment i s shown in Table 1.
Strengths and Weaknesses
10. fiduciary’s functions under the ongoing project.
Strengths: OSE has skilled and capable fiduciary staff that perfonns the project
1 1. Weaknesses: No major weaknesses identified.
Internal Control
12. The Internal Audit unit o f OSE has well qualified staff and i t s technical capacity has been evaluated during this assessment. This Unit carries out internal auditing functions under an annual program and reports to OSE Board o f Directors.
External Audit Arrangements
13. Project financial statements wil l be subject to an annual financial audit under Terms o f Reference and by an auditor acceptable to the Bank within six months o f each fiscal year. The annual audit would cover all funding and expenditures reported in the project financial statements. For audit purposes the fiscal year wil l be the calendar year. Following government guidelines, OSE proposed to maintain the Tribunal de Cuentas de la Repbblica (Uruguay’s Supreme Audit Institution) as external auditor for the APL-2. This i s entirely satisfactory. As an external auditor for APL-1, the Tribunal de Cuentas de
’* WE3 Report 32851-UR
60
la Repziblica duly complied with the Bank requirements in terms o f independence, technical competence and timeliness.
Table 1: Risk Assessment and Mitigation Measures
Inherent Risk . Country Level . Project / Entity Level Fixed Assets accounting deficiencies
Project Control Risk . Budgeting . Accounting No observation on accounting in current project operation . Internal Control Subject to OSE’s Internal Control scrutinv
activities that will help enhance OSE financial management. . FM supervision will fol low up OSE’s financial management enhancement
. Funds Flow . Financial Reporting Satisfactory audit opinion in ongoing project . Auditing Timely audited financial statements received by the Bank Overall Risk Rating
L o w
I I
L o w L o w
I I
Low
14. The audit scope shall include in addition to standard financial audit requirements a sample audit o f the outputs delivered and the unit cost methodology used in the project. The following audit reports must be submitted in the dates indicated in Table 2.
Table 2: Audit Reports’ Schedule
APL-1 External Audit Results
15. External auditors’ observations are summarized in Table 3.
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Table 3: Auditors Opinion on Bank’s Operations with OSE (Loan 4556-UR)
2003
2002
I (clean opinion) I (clean opinion) I (clean opinion) I issues disclosed I opinion due to 5 2004 I Unqualified I Unqualified I Unqualified I No material I Disclaimer o f
(clean opinion) (clean opinion) (clean opinion) issues disclosed opinion due to 1’2’3’4
Unqualified Unqualified Unqualified N o material Qualified (clean opinion) (clean opinion) (clean opinion) issues disclosed Opinion due to
2,334 Unqualified Unqualified Unqualified N o material Qualified
(clean opinion) (clean opinion) (clean opinion) issues disclosed Opinion due to 2 ’3 ’4
16. From the auditors qualifications i t ’s apparent that in the past OSE did not provide adequate accounting record control over inventory. Bank FM specialists followed up the issues raised by the auditors and as a result, in 2004 OSE prepared an action plan to address the weaknesses. Most o f the auditors’ qualifications and internal control issues were addressed and solved during 2004/2005 and, thanks to satisfactory corrective actions taken by OSE, significantly less internal control issues were raised in 2005 audit report.
Accounting and Reporting
17. mandatory for OSE’s Financial Statements.
Uruguay has adopted International Accounting Standards and they wi l l be therefore
18. OSE wi l l be responsible for: (i) maintaining accounting records for Project activities at the Project level following International Accounting Standards for accrual accounting and the currently in use FM Information System (FMIS) for recording transactions; and (ii) preparing annual financial statements and semiannual Interim Unaudited Financial Reports (IUFR). The proposed format for the IUFR was submitted and agreed to with the Bank during the pre-appraisal mission. IUFR that are required to be presented to the Bank are as follows:
Sources and uses of funds: source and uses o f funds, for each semester and cumulative (uses by category), and uses o f funds by component; Physical progress: Allocated budget and financial execution compared to physical progress and achieved results.
62
19. and agreed with OSE. The agreed format has been included in the Operational Manual.
A draft format for presenting the Annual Financial Statements has been discussed
20. All the project uses wil l b e processed in OSE’s accounting system with the chart o f accounts reflecting the project categories, components and sources o f funding. This information wi l l b e supported and documented by evidence from related procurement on works, goods and services in accordance with Bank guidelines.
Disbursement Arrangements
21. The Bank and OSE agreed to base disbursements on the following methods: 0 Reimbursement 0 Advance 0 Direct Payment
22. Loan proceeds by OSE using the advance method wou ld use a segregated Designated Account in U S dollars. The Designated Account wil l b e he ld by the MEF at the Central Bank, fo l lowing Uruguay’s standard procedure for multi lateral lending. The ceil ing for advances to b e made into the Designated Account wil l b e $5 million, an amount estimated enough for peak disbursement during project execution.
23. advance and reimbursement methods, as follows:
Statements o f Expenditures (SOEs) wi l l document project expenditures under the
. . .
. payments for c i v i l works against contract valued at US$ 3,000,000 or less; payments for goods against contracts valued at US$ 250,000 or less; and payments for Consultant Services against contracts valued at US$ 100,000 or less; and payments for non-consultant services, operating costs and training.
24. Supporting documentation for direct payment will consist o f records (such as copies o f receipts and supplier / contractors invoices). The minimum value for applications for direct payments and reimbursements wil l b e US$ 1,000,000.
25. purposes for up to one year after the f inal withdrawal from the loan account.
OSE will maintain a l l consolidated SOEs documentation for post-review and audit
26. OSE will continue accessing the Bank’s Client Connection webpage to access the withdrawal form and to perform the reconciliation process periodically between their bank account and the resources received from the different sources.
27. The f low o f funds i s detailed in Figure 1.
63
Uses of Funds and Performance Based Disbursements
28. Uses o f funds comprise: (i) payments for works, goods, consultants and non- consultants services; operating costs and training for all components except for the costs incurred under Part 3 (b) o f the Project; and (ii) reimbursement o f a share o f the costs incurred in the carrying out o f in-house sewerage connections, under Part 3 (b) o f the Project .
29. OSE differentiated the works subjected to OBD, the in-house plumbing works, in three types: (a) small works (obra corta), (b) medium works (obra media); and (c) big works (obra Zarga). In estimating the unit cost o f each type o f in-house works, three different sources were taken into account: (i) market prices; (ii) contractors’ appraisals; and (iii) experts’ opinion. These costs are considered to be reliable proxies, on average, for actual costs o f delivering the works.”
30. Disbursements under Part 3 (b) o f the Project wil l be made using the reimbursement method. Reimbursement o f a share o f the unit costs incurred in the carrying out o f in-house plumbing works wil l be based on the number and type o f in- house works and evidence o f subsequent connection to the sewerage network. Supporting documentation for the reimbursement will be: (i) presentation o f an output report (customized SOE); (ii) certification o f the connections verified and approved by OSE; (iii) evidence o f 3 months o f consecutive sewerage bills. To ensure the functionality o f the new sewerage connections and the sustainability o f this approach, reimbursements from the Loan account w i l l only be made with the above certification. This method would ensure that only verified outputs are paid to service providers. Verification shall have to be physically inspected in the field by OSE’s qualified technicians or engineers.
31. Table 4.
Loan proceeds wil l be disbursed against the expenditure categories presented in
l9 Details on unit cost calculations and expected outputs are presented in Annex 11
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Table 4: Disbursements per Expenditure Category
1. Goods, with the exception o f goods for Part 3 (b) o f the Project 2. Works, with the exception o f goods for Part 3 (b) o f the Project 3. Consultants’ and non-consulting services, with the exception o f goods for Part 3 (b) o f the Project 4. Costs (including goods, works and services) incurred in the carrying out o f in- house sewerage connections, under Part 3 (b) o f the Project
5. Operating Costs 6. Training 7. Unallocated 8. Front End Fee 9. Premia for Interest Rate Caps and Collars
Total
Expenditure Category Percentage of Expenditures to be financed (inclusive of
Taxes) 14.30 100%
26.00 85%
3.60 80%
Amount financed in US$ million
1 .oo 60% o f Uni t Costs A, 60% o f Unit Costs B, and 60% o f Unit
Costs C as adjustable pursuant to Section L A 3 o f Schedule 2 o f the
Loan Agreement. 0.20 100% 0.70 100% 4.20
0 d a 0 d a
50.00
Type Timing Mechanism Visit Once during first Integrating supervision
year. Thereafter, missions. every two years if audit opinion i s clean.
Audit Once a Year Over the Audit Report Review submitted to the Bank
Retroactive financing
Objective + Review FM performance + Follow up on issues and recommendations
raised by external auditors + Update assigned risk + Review SOEs + IFRs information consistency + Raise issues disclosed in IFRs + Review Audit Report + Raise issues disclosed in Audit Report
32. Under APL-2 OSE will request retroactive reimbursement o f eligible expenditures incurred up to 12 months prior to the date o f the Loan Agreement. These expenditures should not exceed 20 percent o f the loan amount.
Staffing
33. The proposed organizational arrangement for this project comprising OSE’s structure i s considered satisfactory. K e y FM staff assigned to the project, who are OSE employees, are considered adequately skilled.
65
Annex 8: Procurement Arrangements URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
A. General
1. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits ” dated May 2004, revised October 2006; and “Guidelines: Selection and Employment of Consultants by Wor ld Bank Borrowers” dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure category i s described below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time-frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan w i l l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
2. Procurement of Works. Works planned to be procured under this project include: (i) under the water supply component o f the project, a major civil works contract for services in filters o f the “Aguas Corrientes” water plant as well as maintenance and restoration o f water networks in Montevideo and the Interior; (ii) under the sewage component, expansion o f the sewage networks in Minas, San JosC, Rivera and Colonia; (iii) under the institutional modernization component, 10 small contracts for the construction o f laboratories. The procurement wil l be done using the Bank’s Standard Bidding Documents (SBD) for all ICB and National SBD agreed with (or satisfactory to) the Bank.
3. During project preparation, i t was reported to the Bank that some specific country procurement practices might interfere during project implementation. Since TOCAF allows the use o f Bank’s procurement procedures in Bank-financed operations, the Loan Agreement explicitly outlines the specific practices to be applied to all contracts financed under APL-2. The special provisions for the procurement o f civil works, as stated in the Loan Agreement, Schedule 2, Section I11 E, are as follows:
“a) The time allowed for the preparation and submission of bids shall be at least 30 days.
b) The Borrower shall open a l l bids at the stipulated time andplace. The name of the bidder and total amount of each bid, and of any alternative bids if they have been requested or permitted, shall be read aloud and recorded when opened and a copy of this record shall be promptly sent to the Bank.
c) The disclosure of information related to the contents of each bid, other than as set out in paragraph b) above, shall not be permitted.
d) The lowest evaluated bid which has been determined by the Borrower to be substantially responsive to the bidding documents shall be selected for contract award.
66
There wi l l be no prescribed minimum number of bids to be submitted in order for a contract to be subsequently awarded.
Afer the public opening of bids, information relating to the examination, clarijkation and evaluation of bids and recommendations concerning awards shall not be disclosed to bidders or other persons not ofJicially concerned with this process until the successful bidder is noti9ed of the award.
Foreign bidders shall not be required to authenticate (legalizar) their bidding documents or any documentation related to such bidding documents with the Guarantor’s authorities as a prerequisite of bidding.
The Borrower shall award the contract, within the period of validity of bids, to the bidder who meets the appropriate standards of capability and resources and whose bid has been determined: (a) to be substantially responsive to the bidding documents; and (b) to offer the lowest evaluated cost. A bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. ”
Output Based Disbursements. The project wil l support OSE’s program for household sewage connections by financing the in-house works needed for connecting to public sewerage networks. The OBD approach wil l focus disbursements on the number o f households effectively connected to the sewerage system. In sum, this activity wil l finance very small works for connection o f households (hh) to the sewage network. The unit cost, calculated for three type o f works, varies from U S $ 235 to US$ 877 per household. It i s expected that around 3,500 households wil l need in-house works, which corresponds to a total cost o f about US$ 1.7 million. The Bank will allocate U S $ 1 mill ion dollars for this activity, or 60% o f total cost. The Bank will reimburse OSE for each connection up to 60% o f a maximum amount o f US$ 235 per hh when it corresponds to small work (obra corta), US$ 608 per hh when i t i s a medium works (obra media), or US$ 877 per hh when i t i s a big work (obra Zarga). Reimbursement wil l be made based on number o f connections and evidence o f three months o f consecutive billing. Households wil l be responsible for procuring the necessary works services and might organize in communities for gains o f scale.
5. Procurement o f Goods. Goods procured under this project would include: (i) under the institutional modernization component, the procurement o f computer desktops and software (both large value contracts), as well as the procurement o f computer network equipment, computer security equipment, office equipment, laboratory equipment and trucks; and (ii) under the water supply component, the procurement o f water flow meters (a large value contract) as well as the procurement o f large flow meters. The procurement wil l be done using Bank’s SBD for all ICB and National SBD agreed with (or satisfactory to) the Bank.
6. During project preparation, it was reported to the Bank that some specific country procurement practices might interfere during project implementation. Since TOCAF allows the use of Bank’s procurement procedures in Bank-financed operations, the Loan
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Agreement explicitly outlines the specific practices to be applied to all contracts financed under APL-2. The special provisions for the procurement o f goods, as stated in the Loan Agreement, Schedule 2, Section I11 E, are as follows:
The time allowed for the preparation and submission of bids shall be at least 30 days.
The Borrower shall open al l bids at the stipulated time andplace. The name of the bidder and total amount of each bid, and of any alternative bids if they have been requested or permitted, shall be read aloud and recorded when opened and a copy of this record shall be promptly sent to the Bank.
The disclosure of information related to the contents of each bid, other than as set out in paragraph b) above, shall not be permitted.
The lowest evaluated bid which has been determined by the Borrower to be substantially responsive to the bidding documents shall be selected for contract award.
There wi l l be no prescribed minimum number of bids to be submitted in order for a contract to be subsequently awarded.
Afer the public opening of bids, information relating to the examination, clariJication and evaluation of bids and recommendations concerning awards shall not be disclosed to bidders or other persons not oficially concerned with this process until the successful bidder is notij?ed of the award.
Foreign bidders shall not be required to authenticate (legalizar) their bidding documents or any documentation related to such bidding documents with the Guarantor’s authorities as a prerequisite of bidding.
The Borrower shall award the contract, within the period of validity of bids, to the bidder who meets the appropriate standards of capability and resources and whose bid has been determined: (a) to be substantially responsive to the bidding documents; and (b) to offer the lowest evaluated cost. A bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modifi the bid as originally submitted. ’’
Procurement of non-consulting services. The procurement plan prepared during project design and appraisal does not include the procurement o f services, other than for consulting services. There are, however, contracts for capacity building and seminars under the project administration component that cover the selection and employment o f speakers for such events. The planned contracts do not account for logistics o f these events.
8. Selection of Consultants. The procurement plan includes several large-value contracts for procurement o f business management software under the consultant’s category. However, these contracts are expected to follow an open-bidding approach and
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the SBDs for supply and installation systems taking into account that albeit consultant’s services are required to customize and deploy the system, a significant amount o f the contract price accounts for payment o f a customizable software package.
9. For the first component o f the proposed project, OSE managerial enhancement, the project i s expected to finance development and implementation o f major computer systems to support OSE’s “Program VECTOR”, which i s accountable for redesigning internal commercial processes, as well as supply chain, procurement, financial management and human resources operations, For APL-2, the proposed loan wil l focus on the reengineering o f the commercial processes and the development and deployment o f computer systems that will support it. Hardware equipment and software for implementation o f the system are expected to be financed by the operation as well.
10. Bidding documents for the procurement o f the commercial system were prepared by OSE during project preparation. The documents were reviewed by the Bank who found them to be in very good shape from technical viewpoint but emphasized to OSE that splitting the procurement o f software development from the procurement o f computer equipment w i l l entail some risks. Since OSE nevertheless decided to continue with this approach, the Bank suggested to OSE to take into account the following lessons drawn from international experience to ensure successful system implementation:
The proposed splitting wil l require close coordination to ensure the timely supply o f the required hardware and software equipment for systems deployment.
0
Mitigate the risk posed by the proposed procurement strategy o f facing a sole- source case for the hardware and software equipment, as a condition set by the developer o f the system to guarantee i ts productivity or maintenance, by laying down in the bidding documents carefully prepared software development specifications. Furthermore, the proposed split approach does not take into account when evaluating the overall information system “solution”, as called by the IT industry, the cost for procurement o f hardware infrastructure to operate the system as well as the recurrent costs o f proprietary software licensing. Should a procurement o f an information system “solution” have been preferred, the evaluation o f bids would have taken into account all these factors which wil l not be captured in the second bidding for procurement o f equipment.
11. For the sewage component, OSE has foressen the employment o f consultants to prepare engineering designs as well as the employment o f six engineers as individual consultants to supervise civil works contracts. Short l is ts o f consultants for services estimated to cost less than U S $ 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.
12. (Schedule 2, Section I11 E):
The following special provisions have been included in the Loan Agreement
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i. “Foreign consultants shall not be required to authenticate (legalizar) their proposals or any documentation related to such proposals with Uruguayan authorities as a prerequisite for participating in the selection procedure.
ii. The prices of contracts over one year duration may be adjusted. ’’
13. Operational Costs. The procurement plan includes US$ 250,000 to cover project’s operational costs. These costs would include reasonable expenditures including office supplies and communication expenses and shall be procured using OSE’s internal procedures which were found to be acceptable to the Bank.
14. Special arrangements. Two potential small sole-sources were identified during project preparation. OSE recommended working with the Universidad de la Rephblica to carry out diagnosis studies on water quality in addition to an assessment o f OSE’s program for promoting household connection to the sewage network. Furthermore, OSE also expressed interest in working with the Instituto Uruguay0 de Normas Tdcnicas (UNIT) and the Laboratorio Tecnoldgico del Uruguay (LATU) to build capacity of OSE’s personnel on environmental management and implementation o f an information system for environmental management. Each assignment i s expected to cost around US$ 100,000.
B. Assessment of OSE’s capacity to implement procurement
15. Procurement activities w i l l be carried out by PFE, keeping the institutional arrangements already in place for the first phase o f the APL. All procurement actions for the proposed operation wil l be implemented by OSE. The operational procurement unit i s staffed by two procurement officers.
16. A detailed assessment o f OSE’s capacity to implement procurement actions for the project was carried out in August 2006. The assessment reviewed the organizational structure for implementing the project, and the interaction between the project’s staff responsible for procurement and OSE’s relevant central unit for administration and finance.
17. The capacity assessment did not identify any major issue concerning the procurement process. OSE i s fully prepared to implement Bank-financed procurement. The experience in previous Bank-financed operations, including the ongoing APL-1, as well as the qualifications o f PFE personnel and the likelihood that they wil l remain for APL-2 are the underlying inputs for this assessment. OSE demonstrated that focus on enhancing procurement planning as a means to mitigate r isks o f the country’s complex procurement cycle.
18. In spite o f the above, an action plan was agreed to further strengthen communications o f procurement decisions and reach out the business community. The actions are listed below.
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Action Presentation o f the procurement plan to the “Tribunal de Cuentas” and to OSE’s Board. Seminar on the differences o f the 2004 Guidelines Publication o f amendments and clarification to bidding documents in OSE’s webpage Advertisement o f a General Procurement Notice
19. The overall project risk for procurement was rated as low.
Timeframe By October 3 1,2007
By October 3 1,2007 By October 3 1,2007
By October 3 1,2007
C. Procurement Plan
20. The Borrower developed, during project preparation, a Procurement Plan for project implementation which provides the basis for the procurement methods and i s acceptable to the Bank. T h i s plan i s available at the project files and the ImageBank as well as in the Project’s database and in the Bank’s external website. The Procurement Plan w i l l 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
21. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment recommends two post-review missions for the f i rs t year o f project implementation and annually from there on.
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Attachment 1 Details of the Procurement Arrangements
Goods, works, non consulting services and consulting services.
(i) All contract packages which w i l l be procured for the project are listed in the Table below.
(ii) The following procurement arrangements w i l l be subject to prior review: all ICB Contracts regardless o f the mount; all NCB contracts estimated to cost above US$ 250,000 for goods per contract and U S $ 3 mill ion for civil works per contract; and all direct contracting.
(iii) Consultancy services estimated to cost above US$ 100,000 per contract and all Single Source selection o f consultants (firms) w i l l also be subject to prior review by the Bank.
(iv) Short l is ts 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.
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CUADROS: PROGRAMA DE INVERSIONES Prdstemo BlRF Ne -UR
I ESTADO A MONTOS (USS) COMPONENTE I Subcomponente April-07 TOTALES I BlRF I OSE
1.4.3 Consultoria tratamiento de lodos de PTAR . Universtdad y otros En preparaci6n 100,000 80,000 20,000 I 1.4.3 Capaclaci6n UNIT, IATU y otros I En preparaci6n 60,0001 48,0001 12,000
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Annex 9: Economic and Financial Analysis
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
1. The APL-2 o f the OSE Modernization & Systems Rehabil itation Project i s f inancially and economically feasible as shown by detailed financial, economic, and distributive analyses carried out for a l l the activities to be financed by the project. These analyses are presented in this annex and complemented by sensitivity and risk analyses.
Methodology
2. The cost benefit analysis for APL-2 was carried out with the same methodology used for APL-1. T h i s analysis was done f rom three perspectives: financial, economic, and distributive analysis. From a financial perspective each activity was appraised measuring i ts costs and benefits at market prices. From an economic perspective each activity was evaluated converting financial cash flows into economic cash f lows through the use of: (i) conversion factors to eliminate market distortions; (ii) savings from cost o f water rationing when improvements in the rel iabi l i ty o f water supply are achieved; and (iii) savings o n the cost o f wastewater discharge when sewerage service i s available. The fiscal impact was estimated measuring the taxes and subsidies that occur in the transactions.
3. The distributive analysis was conducted based on the results o f the economic and financial evaluation. I t was carried out to assess the impact o f each activity on specific group o f stakeholders, such as, Government, customers, employees, and suppliers. Finally, the results o f the economic and financial analyses were tested against real world uncertainties by conducting a sensitivity and r isk analysis.
4. The net benefit of each activity equals the difference between the incremental benefits and the incremental costs o f two scenarios: “with” and “without” project. The “with” project scenario considers the proposed investment program and i ts associated targets. The “without” project scenario considers that services would continue unchanged, namely, current operational, financial, and commercial performance wou ld remain the same during the project’s expected l i fe. The activities were appraised measuring their flow o f costs and benefits for the l i fet ime o f the project, estimated as 30 years. Costs and benefits were expressed in constant prices o f June 2006’. The discount rate corresponded to the opportunity cost o f capital for Uruguay estimated in 20032 as 1 1 .2%3.
5. Benefits expected from the project include the reduction or elimination o f intermittent water provision, quality water improvements, service expansion to keep pace with population growth, and savings in operating costs. Benefits from sanitation consist o f
The exchange rate used was Ur$24.15: lUS$ 2 Barreix, Albert0 (2003). Rates of Return, Taxation, and the Economic Cost of Capital in Uruguay. Harvard University. Cambridge, MA. 3 The results o f the study show that the Economic Opportunity Cost o f Capital in Uruguay fluctuates between 10.71% and 11.57%, and it concludes that 11.2% i s a plausible result.
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increase on sewerage service coverage. The improved water and sewerage systems provision translate into better quality o f l i fe.
6. Financial benefits were estimated based on volume o f water consumed and current water and sewerage tariffs. Economic benefits were estimated based on savings on the cost o f rationing resulting from improved water supply reliability and savings on the cost o f wastewater discharge in septic tanks resulting from access to sewerage services. The flow of costs consisted o f investment and operating costs. Financial investment costs included: (i) costs o f APL-2, including physical contingencies, supervision and taxes; (ii) cost of new connections generated by population growth; (iii) in the “with” project scenario, the cost of new connections generated by increase coverage i s also included; (iv) complementary investment costs required to make operational the project; and (v) replacement costs o f equipment such as meters and electromechanical parts. Economic investment costs also include the cost o f in-house connections required for the potential beneficiaries to connect to the expanded sewerage system. Operation and maintenance (O&M) costs include the cost o f labor, chemicals, power, and general costs. O&M costs for the “without” project scenario were based on current unit costs. O&M costs for the “with” project scenario were calculated examining the expected impact o f the project on OSE’s current operational performance.
Assumptions
7. Current population in project areas were based on the Phase I o f 2004 census and projections made by the National Statistics Institute (Instituto Nacional de Estadistica, INE). Annual growth rate was estimated as 0.3% per year.
8. The volume of water consumed was calculated based on per capita water consumption times population connected to the service. Per capita water consumption was given by average consumption o f metered customers (96%). Population connected to the service was estimated based on OSE’s information and targets with the project.
9. The volume of water produced was calculated based on the volume o f water and UFW. The water produced was broken down in: (i) the volume o f treated water measured at the exit o f the plant; and (ii) the volume o f raw water measured at the entry o f the treatment plant. The volume o f treated water was estimated based on the volume o f water consumed (volume o f water billed and commercial losses) plus physical losses. The percentages of physical and commercial losses are shown in table 1. The volume o f raw water i s equal to the volume o f treated water plus the water used during the treatment process (known as treatment losses and currently at 10% in the treatment plant o f Aguas Corrientes). A reduction o f treatment losses to 5% i s one o f the expected benefits o f the Aguas Corrientes component.
10. Population, consumption and UFW estimates are presented in table 1.
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Population connected 2005 (000)
Interior Total Annual Growth Rate of Population Per capita Consumption billed per day (lpc) Montevideo Interior Total Unaccounted for water (%)
2005 2010 2015 2020 2025 2030 Average water tariff (lJr$/m3) Average Sewerage tariff(Ur$/m3)
Metropolitan Area o f Montevideo
1 1, investment; (iii) replacement costs; and (iv) investments carried outside OSE.
Investment Cost. Investment cost consists of: (i) project costs; (ii) complementary
1,759 995
2,760 0.3%
171 141 161
Physical Commercial Total 27.9% 26.4% 54.3% 26.5% 22% 49% 24.0% 20% 44% 2 1.5% 18% 40% 19.0% 17% 36% 18.0% 17% 35%
27.49 14.47
12. Project costs correspond to US$ 68 million. Part o f the investment costs correspond to programs already under implementation and part to future programs (mainly sanitation programs). The evaluation was made for all investment programs which are under preparation. In the sewerage expansion component the evaluation was made for municipalities already selected and under study. Total investment costs used for this evaluation are US$ 57 million, including 10% contingencies and 21 % taxes4. Water supply activities corresponds to the improvement o f OSE’s efficiency through the VECTOR Program, 35%; water activities, 59%; and the remaining sanitation, 6% (see Table 2). Complementary investment includes new connections built due to an increase in coverage. Replacement costs include equipment with a lifetime lower than the project as meters and electromechanical equipments. Investments carried outside OSE include in-house connections to sewerage networks. T h i s cost i s considered economic cost given that i t i s not paid by OSE but by the customer.
Investment Activity I VECTOR. Program 2. Water System
Improvement of OSE’s eficiency
2.1 Aguas Corrientes 2.2Unaccounted For Water Reduction
Improvement of water provision Improvement of water provision
3. Sanitation 3.2 Increase of sewerage coverage Improvement of sewerage service
Total 20 33 16 17
2
Taxes corresponded to 23% IVA on domestic products; 1% COFIS applied to 70% o f works (not applicable to services); 7% for duties, consular charges, and other customs fees.
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13. Operation and Maintenance Costs (O&IM). Labor cost was calculated as the number o f employees per 1,000 connections (labor productivity) multiplied by the number o f connections and the average cost per employee. In the “without” project scenario, labor productivity was kept constant and the number o f connections was increased so as to maintain the coverage level constant. In the “with” project scenario, labor productivity and the number o f connections increased in accordance with project’s targets. Social contributions, including labor related taxes were assumed at 67.5 percent o f nominal salaries’. Eighty seven percent o f social contributions were assumed to return to workers, while the remaining thirteen percent to the government as taxes. The cost o f chemical and electricity costs were estimated based on their unit costs and on projected volumes o f water produced and o f sewage collected and treated in both situations “with” and “without” project.
14. For the evaluation o f the Aguas Corrientes component, the following assumptions were made for investment and operating costs. Currently, the quality o f treated water in the plant o f Aguas Corrientes does not fully comply with OSE standards - which follow the United States Environmental Protection Agency’s regulation, when production exceeds 500,000 m3/day6. To comply with i t s own standards o f quality, OSE has two alternatives: (a) implement the project; or (b) reduce the production o f water at the treatment plant. With or without the project, an investment related with improving the water-disinfection process needs to be done to guarantee the quality o f the treated water. In the without project situation, these investments consist o f (i) rehabilitation o f some o f the existing systems (chlorine and aluminum sulfate); and (ii) addition o f news ones, as it i s the case with the polyelectrolyte system, as well as, the activate carbon and advance oxidation systems. Total investment cost under the without project situation i s o f US$ 3.8 mill ion for the period 2007-2010. In the with project situation, investments consist o f (i) construction o f new filters, channel, tank o f contact, alkalinization, and accelerators transformation; and (ii) the addition o f new disinfection systems (polyelectrolyte, as well as, activate carbon and advance oxidation), also included in the without project situation. Total investment cost for the period 2007-2010 i s US$ 17.5 million. A rehabilitation o f the fi lters to be built under the project in 2015 w i l l cost US$ 1.3 million, and from 201 1 forwards US$ 2.5 mill ion per year will be needed to improve existing civil works and electromechanical equipment, both with and without project (Table 3).
15. Operating costs of Aguas Corrientes Water Treatment Plant. Operating costs were calculated assuming, both with and without project, the inclusion o f activate carbon once the investment in the new disinfection systems i s implemented. Additionally in the with project situation, labor cost increases since more tasks are added in the operation o f the plant. The operating costs were projected multiplying volume o f raw water to be treated by cost o f treatment per cubic meter. T h i s cost was broken down in chemical, electricity, personnel, and general costs (others). Table 4 shows the unit cost o f treatment under three
Social contributions include: 15% contribution to the Banco de Provision Social; 6% provision income tax; 1.5% heath insurance; and 10% for other benefits such as Christmas present, financial aid in case o f marriage and child birth, etc.
Today’s nominal capacity o f the plant i s 690,000 m3/day. Once the project i s implemented the plant’s full capacity could be used and al l treated water will comply with OSE’s standards o f quality.
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situations: (i) current situation, which were applied from 2007 to 2010 for both situations (with and without project); (ii) costs in the with project situation, which were used from 2011 and on for the with project situation; (iii) and costs in the without project situation which were used form 201 1 and on for the volume o f water to be treated without project.
From 2007 to 2010 Construction of new filters, channel, tank of contact, and alkalinization Accelerators transfornation Rehabilitation of mixing chamber Rehabilitation of accelerators structure Rehabilitation of existingfilters Rehabilitation of chlorination system Rehabilitation of aluminum sulfate system Construction of polyelectrolyte system Construction of an activate carbon and advanced oxidation system Adjustment of alkalinization system
Table 3. Investment of the Aguas Corrientes Component with and without Project Without Project
situation (000 US$)
368 694
1,297 363 308 106 610 100
I n 2015 Rehabilitation of existing filters
From 2011 to 2035 Civil w o r h and electromechanical equipment
With Project situation (000 US$)
9,000 7,000
1,297
2,500 per year 2,500 per year
363 308 106 610 100
Chemical Electricity
Others Total
personnel
Current costs With project Without project 0.018 0.030 0.030 0.028 0.028 0.028 0.01 1 0.012 0.012 0.080 0.080 0.080 0.137 0.150 0.149
16. Supervision Cost corresponds to 2.85% o f the total investment cost. For evaluation proposes, i t i s included in each o f the components as a proportion o f i t s investment cost. Taxes consist of a value-added tax o f 23 percent for domestic goods and 1.3 percent for imported goods with value-added tax exemption7. Subsidies were not identified. OSE’s tariffstructure and levels were assumed to remain unchanged in both scenarios (with and without project). The current tariff was approved on January 2007’.
Estimation of Economic Costs
17. Financial costs were transformed into economic costs using conversion factors, which eliminate market distortions created by taxes, tariffs, and subsidies. The conversion factors
’ Imported goods with tax exemption pay a tax o f 1.1% to the Banco de la Republica and a fee o f 0.2% to customs (tasa de servicios aduaneros). * For more detailed information on tariffs see the section o f Financial Analysis o f OSE.
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were taken for estimations made by OPP in 20049. Additionally, the investment and operating costs o f each o f the components were broken down into their main inputs, as Table 5 shows. The economic cost for each input was estimated as the financial cost multiplied by its conversion factor. All economic costs o f the project’s inputs were lower than the market costs due to the taxes and tariffs charged in Uruguay.
I Table 5. Conversion Factors and Cost Composition I
Estimation of Benejts
18.
(i)
(ii)
The following are the benefits identified for each component o f the project:
VECTOR Program aims to increase OSE’s efficiency by improving labor productivity and commercial management. It i s expected to reduce labor costs in about 15%, administrative costs in lo%, and decrease commercial losses in about 1%. The benefits were therefore calculated based on savings in operating costs, and increase in revenues.
The water component consists o f two sub-projects: improvement o f the treatment plant o f Aguas Corrientes and reduction o f UFW (R4NC sub-project). The benefits o f both sub-projects include: (a) the increase o f water supply that comes along with
Pereyra, AndrQ. Estimacion de Precios de Cuenta para la Evaluacion Economica de Proyectos del Programa de Desarrollo Municipal VI. Oficina de Planeamiento y Presupuesto. Programa de Desarrollo Municipal. Montevideo, Uruguay. Abril2004.
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(iii)
19.
the decrease o f physical losses, which in turn diminishes the likelihood o f rationing; and (b) service expansion to keep pace with population growth or increase coverage.
The improvement of the treatment plant of Aguas Corrientes i s expected to: (1) decrease losses during the treatment process (from the current 10% to 5%), allowing more potable water nto the distribution system (about 0.4m3/seg); and (2) improve the quality o f potable water that goes into the distribution system. Once the project i s implemented, the Plant could work at full capacity complying with quality standards established by OSE. Currently, if OSE were to comply with i t s own standards, the plant o f Aguas Corrientes should be producing only at 72% o f i t s capacity"; however due to demand requirements, the plant i s currently operating at full capacity, without complying with water quality standards. The economic benefits o f the improvement o f quality were not quantified, due to lack o f information. There are not financial benefits o f quality improvement given that revenues are the same for both situations with and without project. The RANC component (reduction of UFW) was assumed to reduce existing losses from current 52% to 49% by 201 1. Not all this reduction would imply an increase in water supply, given that unaccounted for water consists o f commercial and physical losses. Commercial losses consist o f water that i s not billed by OSE although consumed by population; therefore their reduction does not imply an increase in supply, but an increase in revenues. Physical losses on the contrary, correspond to water lost in the distribution system (pipelines, leaks, connections, etc), and hence their improvement would imply an increase in the water supply, as well as, an increase in revenue. This second subcomponent aims to reduce physical losses in 1.4% (from 27.9% to 26.5% by 201 1) increasing water supply in approximately 0.25 m3/seg. Both subcomponents Aguas Corrientes and RANC) are expected to increase water supply in 0.65 m /seg and raise water coverage from current 83% to 85%. Commercial losses would be reduced in 2.4% (from 24.4% to 22% by 201 1) by the RANC subcomponent and the VECTOR Program, each contributing in about
0
0
0
I
50%.
Sanitation corresponds to network expansion to increase coverage o f sewerage service. The project i s expected to increase coverage in five municipalities: Treinta y Tres, Melo, Colonia, Rio Branco, and Mercedes. Total coverage in these municipalities i s expected to increase from current level o f 49% to 53%. The benefits consist o f an increase o f service coverage and reduction o f environmental pollution, which both translate into better quality o f l i fe. Improved hygienic conditions lead to decreases in infant mortality and reduction in incidence o f water-borne diseases. Improved environmental conditions contribute to recovery o f the beaches, enhance tourism activities, and increase recreational activities.
The Financial benefits were estimated according to the type o f benefit obtained, as follows:
lo The maximum to be treated to comply with standards i s 500,000 m3/day. Plant's capacity i s 690,000 m3/day
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(0
(ii)
(iii)
20.
(0
(ii)
(iii)
VECTOR Program has benefits related to reduction o f costs and improvement in revenue due to reduction in commercial losses. The benefits were calculated as the savings o f operating costs estimated as the difference between operating costs under both situations with and without project. Improvement in revenue was estimated as the difference o f revenue collected under both situations with and without project. Water component has benefits related to increase in revenues based on coverage increase, reduction o f rationing, and reduction o f UFW. The revenue was estimated as volume o f billed water multiplied by current tariffs. The reduction o f commercial losses would increase revenues. Sanitation component has benefits related to increase in revenues due to higher sewerage coverage. Sewerage revenues were calculated for each locality as the sum o f service charges (fixed and volumetric) and connection charges. Service charges were calculated by multiplying the volume o f water billed to household with sewerage service by current average sewerage tariff. Connection charges were calculated by multiplying the connection tariff times the number o f household connected.
The economic benefits were estimated for each component as follows:
VECTOR Program only economic benefit would be savings in operating costs. There i s no economic benefit for the customers given that the improvement o f OSE's efficiency would decrease labor costs and commercial losses, but it wil l not bring along an increase in water supply or increase in coverage. The Water Component economic benefits were estimated as the savings resulting for a reduction o f rationing o f water. It was assumed that in order to avoid rationing, customers build a reservoir to storage water whenever i s available. The cost o f installing and operating reservoirs was estimated as US$ 148 for building it, 5 years lifetime, and operatin costs equal to 5% o f investment cost, i.e, US$ 0.26/m3 for a consumption o f 15 m per month. The rationing cost i s then the cost o f the reservoir plus the average tariff per cubic meter. The total rationing cost was estimated as the volume o f water rationed times the unit rationing cost. The Sanitation Component benefit i s mainly having access to a public sewerage network as well as to sewage treatment. The economic benefit was estimated through two methodologies: a. The first methodology measures as benefits the savings that the beneficiaries wil l
have once the service i s connected. Currently the lack o f service makes people look for solutions such as septic tanks or discharge wastewaters to streets or streams nearby. I t i s estimated that in the project area about 97.4%" o f the population without service has a septic tank as solution. The benefits o f this component were estimated as the savings obtained for not having to build and operate the septic tanks; estimated as US$ 13.4/household per month'*.
B
INE, Situacion de Vivienda en Uruguay I trimestre 2006. Informe de Divulgacion. Septiembre 2006 l2 The estimation was based on the following costs: (i) an investment cost o f a typical septic tank o f U S $ 355 with a lifetime o f 15 years; (ii) maintenance and repair cost o f US$ 120/year, incurred once every five years; and (iii) cleaning cost o f US$87 per year. The total cost per year i s US$ 13.4/household per month.
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b. The second methodology measures the benefits as the willingness to pay for the service. T h i s estimation was taken from the economic evaluation carried out during preparation o f APL-I. The results were as follows: U S $ 22 per household per month for services and infrastructure to be paid during 36 months for sewage collection; and US$ 16 per household per month for service to be paid after the third year.
c. The economic benefit i s partially offset with the economic cost that some beneficiaries wil l have adjusting their in-house c~nnect ion'~. The adjustment depends mainly on the location o f the septic tank; the likelihood o f having to make the investment i s when the septic tank i s not located in front o f the house. I t i s estimated that all beneficiaries with septic tanks would have to invest in adjusting the in house connection.
Net Present Value (000 US$) Investment activity I I
21. There are additional benefits which were not quantified in this evaluation. Benefits such as: (a) savings in medical costs, due to reduction o f illnesses produced with improper wastewater discharge and lack o f treatment; (b) savings on maintenance costs o f the roads after adequate sewage collection; and (c) benefits from improvement o f recreation facilities.
Internal Rate of
Results of the Cost Benefit Analysis
Aguas Corrientes Program VECTOR RANC Sewerage Total
Financial Results
Ben e fus Costs Net benejii Return @A) Improvement Water Supply 35,312 23,273 12,039 20%
Improvement Water Supply 15,746 (18,905) 34,651 43%
64,6 10 (33,119) 97,730 33%
Improvement OSE s efficiency 1 1,649 (39,376) 5 1,026 38%
Sanitation 1,902 1,889 13 1 1.3%
22. As shown in Table 6 all project components are financially viable and all internal rates o f return are above 11%. The project's net profit i s US$ 98 mill ion and i t s internal rate o f return (IRR) i s 33%.
Economic Results
23. As shown in Table 7 all project components are economically viable. The economic rate o f return (ERR) goes from 18% in the sewerage component to 82% in the UFW component. The project's total economic benefit i s US$ 98 mill ion and the ERR i s 37%.
l3 This average cost i s estimated as US$250 per hh and i t i s applied to 97% o f current households to be beneficiaries.
83
I Investment activity I I I Internal Rate of I Net Present Value (000 US$)
24. When economic results are estimated based on WTP for sewarage the returns are higher: the net present value o f benefits i s US$ 2.9 mill ion and o f costs US$ 1.9 million, for a net benefit o f US$ 1 .O mill ion and an IRR o f 21 ‘YO. These results are as expected since WTP for sewerage i s above the actual O&M costs o f septic tanks.
Aguas Corrientes
RANC Sewerage Total
Program VECTOR
Distributive Analysis
Benefits Costs Net benefa Return (%) Improvement Water Supply 64,741 18,302 46,438 40% Improvement OSE’s efficiency (1 3,493) 13,493 21% Improvement Water Supply 26,785 (10,385) 37,171 82%
94,277 (3,703) 97,980 37% Sanitation 2,75 1 1,874 878 18%
25. The difference between economic and financial flows represents rents or monetary flows that accrue to someone other than OSE. Taxes represent monetary flows accruing to the government. Winners and losers with the project were identified by decomposing economic and financial costs for each project input and comparing the differences. Big winners are the customers with a return o f US$ 29 mill ion resulting from savings made by reducing or eliminating water rationing and by access to sewerage service, which more than offset the payments they would need to make to OSE to connect to the network and the cost o f the in-house connection. Employees’ and suppliers’ losses are due to efficiency gains resulting from implementing the VECTOR and RANC Programs. As shown in Table 8, the net gain for the economy as a whole i s US$ 0.25 million.
Table 8. Winners and Losers
Government (Fiscal Impact) Taxes
On Investments On Operating costs
Total taxes Subsidies
Total Government Customers
Payment for the service Saving on rationing reduction Savings with sewerage service
In-house connections Total Customers
Labor Suppliers
Total Others
Others
Total gains and losses
with the Project Present Value of Flows (000 US$)
Aguas Program Corrientes VECTOR RANC Sewerage Total
2,414 3,058 2,167 312 7,95 1 1,938 (1 0,421) (5,702) 41 (1 4,144) 4,352 (7,363) (3,535) 353 (6,193)
4,352 (7,363) (3,535) 353 (6,193)
(35,312) (1 1,649) (1 5,746) ( 1,902) (64,6 10) 64,741 26,785 91,526
2,75 1 2,75 1 (439) (439)
29,428 (1 1,649) 1 1,039 410 29,228
592 (16,891) (4,546) 26 (20,818) 27 (1,629) (439) 75 (1,966)
619 (18,520) (4,985) 101 (22,784) 34,399 (3 7,533) 2,519 864 250
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Sensitivity and Risk Analyses
26. The results obtained so far assume that all variable are certain. The sensitivity and r isk analyses measure the impact on the results when some of the assumed values for critical variables change. The sensitivity analysis measures the outcome if one o f the variables changes while all others remain fixed. The risk analysis measures the outcome when all selected variables change at the same time, each one based on a probability distribution.
Sensitivity Analysis
27. The variables selected as those conveying major r isks are: (i) an investment cost overrun; (ii) a reduction in the cost o f rationing; (iii) a reduction in water consumption; (iv) a project delay; and (v) a lower connection rate to sewerage networks. As Table 9 shows, the investment cost overrun conveys very low risks to both economic and financial results and the cost of rationing could be 72% lower and the project could remain profitable. Water consumption however i s a very sensitive variable for the results o f Aguas Corrientes; a decrease o f 3% would make the project not financially profitable and a decrease o f 5% would result in economic losses. Sewerage projects are very sensitive to project delays and a lower connection rate; a one year delay could make the project non-financially viable and the rate o f connection to sewerage networks need to be higher than 90% to assure financial returns.
Table 9 Risk Variables and their impact on financial and economic results
Component
Program VECTOR Financial Results equal zero Economic Results equal zero
Financial Results equal zero Economic Results equal zero
Financial Results equal zero Economic Results equal zero
Financial Results equal zero Economic Results equal zero
Financial Results equal zero Economic Results equal zero
Aguas Corrientes
RANC
Sewerage
Total project
Risk Analysis
Investment costs
Overrun
312% 91%
78% 360%
299% 413%
1% 68%
217% 258%
Bt.
Reduction in rationing cost
n.a n.a
n.a 72%
n.a 139%
n.a 90%
keven Point for Reduction in
water consumption
75% 65%
3% 5%
56% 45%
52% 35%
roJits Connection
rate %
90% 51%
Project Delays (years)
> 4 > 4
2 4 > 4
> 4 > 4
1 4
28. To enhance the accuracy o f the financial and economic analysis, the uncertainties o f the real world are approximated using Monte Carlo simulation with the Crystal Bal l software. T h i s software measures the extent o f various risks and their impact on the results o f the project by modeling a likely probability distribution that best describes the behavior
85
o f each o f the selected variables. Based on a simulation o f 1,000 trials the model recalculates the results o f the financial and economic analyses by simultaneous changing each o f the selected risk variables according to their probability distributions.
Component
Program VECTOR Aguas Corrientes RANC Sewerage Total project
29. Some o f the probability distributions were chosen based on the historical behavior (variation on water consumption, labor productivity, and project delay); and others based on the historical behavior and the mitigation measures to be taken by the project (sewerage connection rate and UFW).
Financial Results Economic Results
Probability of Mean expected Probability of Mean positive NPV NP V positive NPV expected NPV
94% 41.311 100% 1 1,276 61% 3,250 97% 28,525 10% 22,155 98% 26,881 1% (931) 38% 169
86% 11,845 99% 66,386
30. In sum, as seen in table 10, the result o f the risk analysis confirms the robustness o f the APL-2 project. The probability o f having a positive financial return i s 86% and of having a positive economic profit i s 99%. The risk evaluation shows that the likelihood o f a negative financial outcome i s low for all components but sewerage. The Aguas Corrientes component, with 67% probability o f having positive results, i s the one with the lowest probability among the water components. On the other hand, due to the high connection rate needed to achieve a positive return (90%), the probability o f having a negative outcome in the sewerage project i s 99%. The risk analysis shows very reassuring results for economic outputs. Once market distortions are eliminated and the benefits are captured, including improvements in service reliability, the probability o f positive output i s higher than 90% in water activities and 38% in sewerage.
3 1. respective parameters.
Table 11 presents the assumed probability distributions o f each variable and their
Financial Analysis at the Entity Level
Objective
32. The objective o f the financial analysis i s to assess OSE’s financial structure, operational efficiency, long-term viability, and capacity to assume the proposed loan. This i s done based on the audited historical and pro forma financial statements, using financial ratio analyses and measurements against relevant industry comparators. This analysis also discusses the appropriateness o f tariffs in relation to long-run marginal cost and O&M costs and the effect o f pricing and cost recovery policies on OSE’s financial viability. Lastly, the analysis discusses the extent to which OSE i s likely to assume the proposed loan and what the financial impact would be if the targets are not achieved.
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Table 11. Assumed Probabilty Distributions
Value
0 I 2 3
Variable
Probability
0.10 0.40 0.40 0.10
Investment Cost Overrun
Decrease of Intermittency Cost
Reduction in Water Consumption
Connection Rate
Variation of Unaccounted for water
Decrease in Labor Productivity
Project Delays
Methodology
Distribution Range
Triangular Distribution with following parameters Minimum: -5% Likeliest: 0% Maximum: 30%
Gamma Distribution with parameters: Location: 0% Scale: 2% Shape: 3
Normal Distribution with parameters: Mean: 0% Stvd Deviation: 2%
Custom Distribui
Value 0%50%
50%65% 65%80% 80%90% 90%95%
95%100%
n with parameter
Probability 0.25 0.20 0.18 0.15 0.12 0.1
Gamma Distribution with parameters: Location: -2% Scale: 1% Shape: 2
Triangular Distribution with following parameters Minimum: -5% Likeliest: 0% Maximum: 15%
33. The financial spreadsheet model used was the one built preparing APL-1, which OSE adopted as i t s tool for financial analysis and management decisions and the company's planning department keeps updating. The financial analysis was based on OSE's performance during the period 2000-2006 and i t s projected financial situation for the next
87
ten years. Historical information corresponded to six years o f audited financial statements (2000 - 2005) and preliminary information for 2006. For the ten years projection, the main assumptions consisted o f water consumption, served population, investment programs and related targets.
34. OSE’s performance and viability was assessed based on the following indicators:
Cost recovery, through comparisons between revenues and costs, such as: (i) operating margin; (ii) operating indicator; (iii) working ratio; (iv) percentage o f investment financed by own resources; and (vi) appropriateness o f tariffs in relation to long-run marginal cost. All charges that OSE bills to i t s customers besides tar i f fs were also revised. Commercial eficiency, through indicators such as: (i) bad customer debts to revenue; (ii) revenue collection rate; and (iii) account receivable comparator. Operational eficiency, through: (i) personnel productivity (employees per 1000 water connections); (ii) personnel cost to operating cost ratio; (iii) unaccounted for water; and (iv) percentage o f connections with meters. Debt Structure. The following indicators were used to measure the weight o f debt,: (i) long- term debt to equity ratio; (ii) total debt to equity ratio; (iii) debt service ratio; (iv) debt stock to operating revenue ratio; and (iv) current ratio.
OSE ’s Financial Situation during 2000-2006
35. During this period, OSE’s financial results were affected by fluctuation in the country’s economy. The deep recession o f 2001 -2003 weakened OSE’s financial situation and deteriorated i ts financial indicators; the high depreciation o f the Uruguayan Peso increased the burden o f the debt and i ts payment obligation and the tariff decreased in real terms losing i ts margin to operating costs. The stabilization o f the economy after 2004 improved OSE’s financial results: debt structure improved as well as operating cost to revenue ratios. From 2000 to 2006 OSE experienced instability accompanied by s l ight operational improvement in some areas but a worsening in others, such as UFW. Commercial indicators remained stable not showing much progress. Labor productivity improved but s t i l l remains below the average level observed in the Latin American region14 (Attachment 1 summarizes the financial statements for the period 2000-2006).
36. Cost Recovery. While tariffs suffered real losses in the period, their levels have been high enough to cover OSE’s operating costs, resulting in operating margin15 higher than 35% in the whole period. Revenues increased 6% in real terms, given that real loss o f 4% in tariffs16 was offset by a 12% increase o f volume o f water billed. Additionally operating costs decreased 3% in real terms which helped to improve financial results. There has been a remnant to partially pay for investment, which by 2006 was 74% o f total investment (see Table 12 for additional information).
l4 “Ejercicio Annual de Benchmarking - 2006”, with 2005 data, Asociacih de Entres Reguladoras de Agua Potable y Saneamiento de las h e r i t a s , February 2007 l5 Operating margin equals to one minus working ratio l6 The calculation was made for the average tariff o f water and sewerage
88
2000 2001 2002 2003 2004 Operational Margin 36% 36% 37% 38% 38% Net Income margin 0% 0% -64% -5% 9% Operating ratio (Operating costs (with dep)/op revenue) 75% 76% 77% 75% 75% Working ratio (Operating costs (w/o dep)/op revenue) 64% 64% 63% 62% 62% %Investment financed with own sources 14% 62% 52% 46% 9%
2005 2006e 41% 43% 16% 12%
71% 69%
59% 57% 64% 74%
2001 2002 2003 2004 2005
27.60 27.84 27.30 27.32 27.50 14.80 15.45 14.98 14.92 15.20
1.11 0.85 0.80 0.92 1.09 0.59 0.47 0.44 0.50 0.60
38. Appropriateness of targs in relation to long-run marginal cost. Marginal cost was calculated based on the proposed investment plan for APL-2, and hence does not reflect OSE’s full cost o f providing services. In order to have an estimation o f OSE’s total cost for water, a calculation was made based on the entire investment plan for the next five years in the water sector and the demand to be served. For sewerage the estimation was made based on the investment proposed in APL-2 and for wastewater treatment the information was taken from APL-I. According to this estimation and as seen in Table 14, current average tariff covers 100% o f total cost o f water improvement and 96% o f total cost o f providing the service. In sewerage, tariff covers 100% o f the cost without including wastewater treatment. When wastewater treatment i s included tariff recovers 68% o f cost.
.
2006e
27.68 15.29
1.22 0.67
Table 14. Marginal Cost and Tarvfs Marginal cost Tarqfs Cost recovery
US$/^^) VS$/m-’) Water
Investments under APL-2 1.15 1.22 100% Total Cost OSE 1.27 1.22 96% Sewerage & wastewater treatment
Wastewater Treatment * 0.40 0% Total 0.93 0.63 68% *For sewerage i t was based on investment under AF’L-2. For wastewater treatment estimations were based on results from APLl
Sewerage * 0.53 0.67 100%
Tariffs in Constant Ur Prices of 2005 Average water tariff (UR$/m-’)
Average sewerage tanff (UR$/m-’)
Average water tar$f(US$/m-’) Average sewerage tanff(US$/m-’)
Tariff in US$
89
2000
28.30 16.53
1.22 0.71
39. Besides tar i f fs and loans, OSE has had other internal resources to pay for investment. These resources have come from: (i) additional charges billed to customers; (ii) investments carried out for customers and returned to OSE for O&M; and (iii) the canon from the Maldonado concession. Additional charges include connection charges (paid by the customer to have access to the service); the aporte frentista (charged in some areas to pay for the secondary network); and the tarfa adicional (pay for specific investments during a certain period o f time, as in the case o f the Quintu Linea). The investments carried out for customers correspond mainly to the secondary networks needed to connect to the main pipelines. Lastly, the canon from the Maldonado concession started in 2000 and ended in 2005 when the concession was given back to OSE.
40. Revenue from WSS tariffs has been increasing i t s participation from 83% in 2000 to 92% in 2006 (see Table 15). Meanwhile, except connection charges, other sources have been decreasing with a tendency to disappear - charges such as meters and network extension w i l l be charged in the service tariff, More significant, at the beginning o f 2007 OSE’s Board o f Directors decided not to recover the investment o f Sexta Linea through the tarfa adicional, but instead through tariffs. These decisions have contributed to made clearer the tariff system.
Table IS . OSE’s Revenues (%)
Water and Sewerage tarifs Other revenues different to tariffs: Connexion, meters, and penalties Maldonado Canon Non operating revenue Third Party Investments Tanya Additional Aporte Frentista Subtotal Other Revenue Total Financial Sources
2,000 83.2%
10.4% 0.2% 1.4% 1.2% 3.6% 0.0% 16.8% 100%
41. In January 2007, there were ad
2,001 I 2,002 1 2,003 81.8% 82.0% 81.9%
9.5% 1.2% 2.5% 1.2% 3.8% 0.0% 18.2% 100%
8.6% 2.7% 1.7% 1.2% 3.8% 0.0% 18.0% 100%
9.6% 3.2%
0.6% 4.0% 0.0% 18.1% 100%
0.7%
5.7% 3.7% 0.9% 0.1% 4.0% 0.0% 14.4% 100%
tional changes to improve the tariff structur,, such as: (i) the volumetric tariff for the residential sector was modified from a system in which the bill was calculated applying to whole consumption the tariff o f the last block o f consumption, to a system in which the bill i s calculated by blocks, applying to each block the corresponding tariff; (ii) i t was abolished the ceiling o f the variable charge for sewerage; and (iii) it was stated that the cost o f changing meters should be included as part o f the tariff o f the service.
42. Commercial EfJiciency. During the years 2000-2006, OSE has kept i t s commercial efficiency without major changes (see Table 16). Revenue collection rate has improved from 91% to 93%, after decreasing in 2002 and 2003 to levels as low as 87%. Account receivable comparator has been about 60 days during the whole period - a result due in part to the accounting practice o f registering as bad debts most o f the uncollected revenue.
43. Operational Efficiency shows improvement in labor productivity, since it increased from 5.7 employees per 1,000 connections in 2000 to 4.2 in 2006. The personnel cost to
90
operating ratio decreased from 57% to 47% due to the improvement in productivity and a real decrease o f 5% in salaries. UFW has increased from levels close to 50% in 2000 to about 55% in 2006. Micro-metering has increased in almost 3 points from 2000 to 2006.
Commercial Efficiency Accounts receivable comparator (days) Revenue Collection rate Bad debtdoperating revenue Operational Efficiency Unaccounted for water (UFV Micro-metering (%) Personnel Costs / Operating costs Employeesh 000 water & sewerage connections
2000 59 91% 9%
2000 49.5% 94.9% 57%
5.7
2001 66
92% 3 yo
2001 50.8% 96.2% 58%
5.5
44. Debt Structure. Debt indicators, as other financial indicators, deteriorated during 2002-2004, when started to improve (see Table 17). During the critical years, current ratio was lower than one, leverage increased to 52%, debt service ratio did not reach one in 2004, and debt stock to operating revenue was higher than 1.2 in 2002. In 2005 OSE started improving i t s debt position and indicators reached sound levels in 2006: leverage lower than 30%, debt service ratio o f 1.9 and debt stock lower than 50% o f revenues.
2002 2003 2004 2005 2006e 65 59 49 60 60
88% 87% 90% 91% 93% 15% 12% 12% 6% 6% 2002 2003 2004 2005 2006*
52.1% 52.4% 54.1% 54.7% 54.8% 97.0% 97.0% 96.4% 96.7% 97.5% 54% 50% 49% 46% 46%
5.4 5.2 4.9 4.3 4.2
Table 17. Debt Profile 2000 1.12 1.2
22% 32% 12% 5% 17% 67%
Debt service ratio Current ratio Long Term Leverage Total Leverage Debt Service/Operating revenue Financial expensedoperating revenue Commercial debt/operating expenses Debt StocWOperating Revenue
2001 2002 1.64 1.26 1.3 0.99
25% 36% 35% 52% 13% 22% 6% 6% 13% 14% 84% 121%
2003 1.16 0.87 30% 46% 25%
17% 92%
6%
2004 2005 2006 0.95 1.27 1.93 0.85 1.14 1.30 22% 17% 14% 37% 30% 26% 21% 15% 12%
18% 18% 14% 70% 56% 45%
4 % 2 Yo 3 %
45. The balance sheet structure shows that OSE i s not relying in short debt to finance i t s operation, as i t used to in the 1990s. In the same path, OSE reduced the time o f payment to suppliers from 61 days o f operating expenses in 2000 to 52 days in 2006.
2000 2001 2002 2003 2004 Short term debt 8% 7 % 7 Yo 7% 9% Long term debt 17% 17% 15% 14% 12% Capital 76% 76% 78% 79% 19%
Total 100% 100% 100% 100% 100%
2005 2006 9% 9 % 12% 11% 79% 80% 100% 100%
46. Concession of Maldonado. A t the end o f 2005, OSE received the concession o f Maldonado back from URAGUA, the private concessionaire, as a result o f a Constitutional referendum o f October 2004, which stated that WSS services have to be provided exclusively by the State. During the period o f the concession, i.e. from 2000 to 2005, OSE
91
received an average annual canon o f US$ 3 million. Projecting the operation in Maldonado for the next twenty years, the expected net present value o f i t s cash flow i s US$ 30 million. In the projection i s included U S $ 50 mill ion investment for the next five years million, and US$ 3 mill ion per year thereafter.
Financial Projections
47. Assumptions. A base case scenario was built to project financial projection for the next ten years. The projection included the proposed APL-2 targets as follows:
0 Unaccounted for water decreases from 55% in 2006 to 50% by 2010 0 Sewerage coverage increases from 27% to 29% by 2010 and then 33.3% by 2016
Labor productivity increases from 4.2 in 2006 to 3.9 by 201 1 0 Water coverage from 83% to 85% by 2010
48. The tax reform issued on January 200717 was incorporated in the projections. The main issues affecting OSE’s financial situation are:
0
0
0
0
0
49. 0
0
Reduction o f employer’s contribution to the Banco de Prevision Social (BPS) from current level o f 24.5% to 7.5% starting in June 2007. This contribution i s applied on personnel cost. Elimination o f the social retribution tax (Impuesto de retribucion social, IRP), currently 1 % and applied on personnel costsl. Water and sewerage revenues are to be charged with VAT o f 22% with exemption o f residential customers for their minimum charge, which currently equals to 15 cubic meters. Reduction on income tax (IRAE impuesto de renta de las actividades economicas) from current level o f 30% to 25%, starting on 2008. Elimination o f ICOSIFI (impuesto de control del sistema financiero) and IMABA (impuesto a 10s activos de las empresas bancarias) on domestic and foreign loans. Incorporation o f 23% VAT on interest o f foreign loans.
The impact o f the reform was included as follows: Reduction o f employer’s contribution to the BPS and elimination o f the IRP have direct impact on operating costs, reducing them. The Government established that the decrease in operating cost should be compensated with decrease on tariff in the same proportion, which means that OSE must reduce the average tariff in 3.4% in 2007. The net financial impact after both transactions i s zero. VAT on revenues can be deducted from the VAT charged on operating costs as well as on investment costs. I t i s estimated that VAT will be applied to about 58% o f revenues, which means that the same percentage can be deduct to the VAT on operating costs and the remnant to the VAT on investment cost, which w i l l imply a net decrease o f OSE’s payments o f VAT and hence an additional cash.
0 Reduction o f 5% on the IRAE has direct impact on net income and i t was applied on the projection from 2008 and on.
l7 Law N“ 18.083 published January 18,2007
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50. program in Table 20, below.
Other assumptions are presented in Table 19 and the corresponding investment
Table 19. Assumptions, Item
Operational Assumptions Population Water Coverage Rate Sewerage Coverage Rate
Metering Rate Per capita consumption
Average water tarif
Average sewerage tarif
Tarifa Adicional Aporte Frentista Revenue collection rate UFW Personnel Productivity
Other Operating costs Capital expenditures
Taxes
Accounts receivable Financial Assumptions Exchange Rate
CPI
Accounts receivable Bad DebtdRevenues Accounts Payable Long term debt
Results
r Financial Projections Assumptions
Assumed to grow by 0.3% per year I t i s supposed to increase from 83% in 2006 to 87% by 2012. I t i s supposed to increase from 27% to 29% as network expansion investment are implement as part o f the APL-2 Assumed to remain at current level o f 96% Current levels are 171 liters per inhabitant per day in Montevideo, 141 in the Interior and 161 in average for the whole area served by OSE. I t i s assumed to remain at these levels. In June 2007 i t decreases 3.4% to comply with regulation related with tax reform. From 2008 and on i t remains constant in real terms. In June 2007 it decreases 3.4% to comply with regulation related with tax reform. From 2008 and on i t remains constant in real terms. Assumed zero Assumed zero Remains at its current level o f 93% Assumed to improve from 54% to 50% by 201 1
Remain at the current levels Consist o f OSE’s five years investment plan o f US$338 million, which includes the following programs: APL-2, Sexta Linea, Ciudad de la Costa, Maldonado, and partially APL-3 and APL-4. Details are presented in table XX. From 201 1 and on i t i s assumed US$65 million per year. In 2007, effective tax rate set at 43% o f income before tax (include 30% income tax as well as a tax on total equity). From 2008 and on tax rate i s reduced 5% (tax reform decreased the income tax rate from 30% to 25%). I t improves from current level o f 60 days to 45 by 201 1.
Exchange rate for 2007 and 2008 corresponded to Ur$24.7:US$l and Ur$24.2:US$1 respectively, according to the results obtained from the Survey o f Economic Expectations March 2007, Central Bank o f Uruguay. From 2009 i t was assumed a depreciation rate o f 5.85% per year following the projected internal inflation. Inflation rate for 2007 and 2008 corresponded to 6.57% and 6.23% respectively, according to the results obtained from the Survey o f Economic Expectations March 2007, Central Bank o f Uruguay. From 2009 i t was assumed an inflation rate o f 5.85% per year. I t improves from current level o f 60 days to 45 by 201 1. Decreases from current level o f 6% to 3% by 201 1 I t i s assumed to improve from 52 days to 48 days o f operating expenses Besides current long-term debt on OSE’s balance sheet, i t includes US$ 154 million, which OSE i s about to contract for the period 2007-201 1 with : IBRD (for APL), IBD (for investment in Ciudad de la Costa), and supplier loan (to partially finance sexta linea). To the existing debt and new loans under negotiation, it i s added the minimum amount o f long term debt necessary each year to finance forecast investment. After 2012 it i s estimated an additional loan o f US$24 million i s necessary if all forecast investment i s to be carried out.
Assumed to improve from 4.3 to 3.9 by 201 1 Real salaries are supposed to increase by 2.0% per year.
5 1. Based on these assumptions and subjected to achieving expected performance improvements, OSE appears financially viable and able to assume the proposed loan. Expected financial ratios and returns are higher that the cost o f capital in Uruguay, estimated at 1 1.2%. The present value o f the operational cash f low in the ten year projection
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period i s U S $ 153 million and the IRR i s 12% (see projected financial statements in Attachment 2).
APL-2 Sexta Linea Ciudad de la Costa Others (including Maldonado, APL-3 & 4) Total
Total
2011 2,007 2,008 2,009 2,010 2,011 68,500 6,234 14,901 19,796 16,482 11,087 50,000 5,000 20,000 18,000 7,000 52,000 1,000 17,000 17,000 17,000 156,205 37,286 24,944 24,993 33,278 35,704 326,705 48,520 60,845 79,789 73,760 63,791
2007-
52. A s shown in Table 21, the operational margin i s above 40% and the net income margin higher than 9% in a l l projected years. The percentage o f investment to be financed with OSE’s o w n resources would b e higher than 60 % by 201 1.
Operational Margin Net Income margin Operating ratio (Operating costs (with dep)/op revenue) Working ratio (Operating costs (w/o dep)/op revenue) %Investment Jinanced with own sources
2007 2008 2009 43% 43% 43% 12% 11% 9%
69% 70% 10%
53% 53% 53% 74% 55% 47%
2010 43% 9%
70%
53% 49%
53. According to the financial results, OSE needs to keep i ts real tariffs constant but does not appear in need o f increasing them. However wastewater treatment costs are not h l l y recovered and later on OSE could b e required to increase tariffs to achieve 100% wastewater treatment. Assuming efficiency gains and current tariffs, OSE i s profitable but could do even better by achieving higher efficiency. Current expected improvement in commercial and operational efficiency, resulting from the implementation o f the VECTOR Program i s summarixed in Table 22.
2011 2012 2013 44% 45% 45% 8% 9% 9%
70% 69% 69%
56% 56% 55% 65% 74% 63%
Accounts receivable comparator (days) Revenue Collection rate Bad debtdoperating revenue Unaccounted for water
Employees/l 000 WSS connections Personnel Costs /Operating costs
2009 60
6% 54.5% 45% 4.1
93%
2007 2008 60 60
93% 93% 6% 6%
56.6% 55.3% 47% 45% 4.3 4.2
2010 60
93% 6%
49.9% 46% 4.0
93% 93%
48.9% 48.0% 45% 44%
2013 60
93% 6%
47.1% 44% 3.7
54. Debt indicators (see Table 23) show satisfactory results and give assurance of the financial sustainability o f OSE through the l i f e o f the loan. Debt service coverage i s higher than 1.9 during the projection and total leverage i s about 28%, an acceptable level by industry standards. To service i t s debt OSE would require approximately 1 1% o f revenues.
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Debt service ratio Current ratio Long Term Leverage Total Leverage Debt Service/Operating revenue Financial expenses/operating revenue Commercial debtloperating expenses Debt StocWOperating Revenue
19% 19% 29% 28% 11% 10% 4% 14% 14% 68% 69%
2007 2008 2009 2.4 2.2 2.1 1.2 1.4 1.5
12% 13% 17% 23% 24% 27% 10% 10% 10% 3% 3% 4% 16% 16% 14% 40% 47% 61%
18% 19% 28% 28%
5% 14% 13% 68% 70%
11% 14%
2007 2008 2009 2010 2011 2012 Short term debt 9% 9% 10% 9% 9% 9 Yo Long term debt 10% 12% 15% 17% 18% 18% Capital 80% 78% 75% 74% 73% 73%
Total 100% 100% 100% 100% 100% 100%
55. A s shown in Table 24, it i s expected that in the projected years OSE’s short debt wi l l remain at i ts current level o f 9% and i ts long term wil l increase to 19%, s t i l l an adequate level. Equity i s higher than 73%, and OSE i s expected to pay i t s suppliers within 50 days.
2013 9% 19% 73% 100%
Sensitivity Analvsis
56. A sensitivity analysis was made to evaluate the financial impact o f changes in some key variables. The financial projections were built assuming that some performance improvements would b e attained with the implementation o f OSE’s investment plan. There i s ample room for additional gains given that even reaching the targets, some indicators wou ld st i l l be below industry standards, such as: unaccounted for water, labor productivity, and commercial efficiency. The sensitivity analysis shows the financial strength o f further improvements o f additional gains but also that the financial v iabi l i ty i s at risk if expected performance improvements are not attained.
57. Sensitivity analysis was conducted on the fol lowing crit ical assumptions: (i) UFW; (ii) collection revenue rate; (iii) personal productivity; (iv) decrease in consumption; and (v) fluctuation o f depreciation rate o f Uruguayan Peso against the U S dollar. The f i rs t three are under management control, addressed within APL-2 and hence will b e monitored during implementation o f the project. The last two even though are beyond OSE’s management control, affect financial results and OSE should design strategies to lessen the risk in case o f occurrence.
58. Unaccounted for water. UFW reduction could release some additional cash through: (i) savings in operating costs by reducing physical losses, and (ii) increase in revenues by reducing commercial losses. To the contrary, an increase in UFW could translate into additional financial needs. Any change in this variable i s very sensitive to financial results. As shown in Table 25. if OSE does not improve and keeps current levels i t would b e losing about US$ 100 million o f cash compared to the base case scenario. At the same t ime with
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additional improvements o f seven points, i t would have additional cash o f about US$ 110 mill ion to finance more investments.
UFWat 2011 Net Income in 201 1 (000 US$) NPV o f operation (2007-2016) (000 US$) IRR o f free cash flow (2007-2016) Minimum debt service ratio (2007-29 16) Operational Margin Net income Margin
Base Case No improvement Additwnal
50% 54.8% 40% 19,875 10,756 23,235
153,237 57,269 262,000 12% n.a 29% 1.85 1.51 1.92 43% 40% 43% 8 % 4% 9%
improvement
59. Collection Revenue Rate. It affects OSE’s ability to finance i t s operation. As shown in Table 26, OSE i s expected to maintain i s current level o f 93% collection revenue; however an increases to 95% would result in additional cash o f US$ 30 million. If it decreases to 90% OSE would be losing about US$50 million, compared to the base case scenario.
Base Case Decrease Collection Revenue Rate at 2011 93% 90% Net Income in 201 1 (000 US$) 19,875 15,186 NPV o f operation (2007-2016) (000 US$) 153,237 104,000 IRR o f free cash flow (2007-2016) 12% 4% Minimum debt service ratio (2007-2916) 1.85 1.67 Operational Margin 43% 43% Net income Margin 8% 7 %
Increase 95%
23,001 185,892
27% 1.95 43% 9%
60. Personnel Productivity directly affects operating costs and hence net income. As shown in Table 27, if there i s no improvement and productivity remains at its current level, the internal rate o f return o f free cash flows would be o f just 2% and i t s cash flow would be reduced in about U S $ 70 million. If additional improvements are reached, the cash flow would increase to U S $ 50 million.
Base Case No improvement
4.2 Personnel productivity at 2001 (employees per I, 000 connections) Net Income in 201 1 (000 US$) 19,875 16,05 1 NPV of operation (2007-2016) (000 US$) 153,237 86,666 IRR o f free cash flow (2007-2016) 12% 2% Minimum debt service ratio (2007-2916) 1.85 1.69 Operational Margin 43% 40%
3.7
Net income Margin 8 Yo 7%
Additwnal Improvement
3.2 23,259 206,620
32% 2.23 44% 10%
6 1. Decrease in Consumption affects revenue from metered customers and the operating cost due to the impact on production. In the last five year consumption has decreased about 1% per year and therefore OSE needs to address this risk. As shown in Table 28, with 1% decrease in years 2008-201 1, the cash flow would be reduced in about US$ 20 million. If increased (assuming there i s no restrictions with supply), cash flow would increase in about US$ 60 million.
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Base Case Increase Consumption per connection (Variation in years 2008-201 I) l % p . a Net Income in 201 1 (000 US$) 19,875 26,538 NPV of operation (2007-2016) (000 US$) 153,237 2 10,694 IRR of free cash flow (2007-201 6) 12% 34% Minimum debt service ratio (2007-2916) 1.85 2.03 Operational Margin 43% 44% Net income Margin 8 Yo 10%
62. Depreciation of the Uruguayan Peso to the US$ i s beyond OSE’s management control and affects debt indicators and net income results. Table 29 shows how an additional depreciation o f 20% would impact OSE’s financial indicators.
Decrease I % p . a 17,724
134,608 6% 1.79 43% 8 Yo
Base Additional Case Depreciation
Depreciation of Uruguayan Peso to the US$ 20% (2009-2011) Net Income in 201 1 (000 US$) 19,875 15,187 NPV of operation (2007-2016) (000 US$) 153,237 120,946
Minimum debt service ratio (2007-2916) 1.85 1.57 Operational Margin 43% 43%
IRR o f free cash flow (2007-2016) 12% 4%
Net income Margin 8% 4 yo
63. The financial indicators chosen for monitoring OSE: current ratio, operating margin, debt service coverage, operating ratio, revenue collection rate, and account receivable comparator, are based on the figures obtained in the financial analysis. They wil l show OSE’s efficiency improvement based on better operating cost coverage and increasing cash flow to cover debt obligations.
Additional Appreciation
24,603 188,820
12% 1.89 43% 10%
2% (2009-201 I)
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Attachment 1. Financial Statements
(OOOUr$) Income Statement
Revenues Operating Expenses Operating Margin Net Income
Cash Flow Internal Sources Loans Third party donation Tanfa adicional
Investment Inc (dec) working capital Debt Service Dividends
Cash increase
Current Assets Fixed assets
Current Liability Long term liability Equity
Liabilities and equity
Total own sources
Total uses
Balance
Total assets
2000
2,704,605 1,720,172 984,433
486
582,010 578,364 35,647 104,179
1,300,201 813,133 137,406 327,268
1,318 1,279,125 21,076
1,021,719 9,957,179 10,978,898
85 1,037 1,8 16,726 8,311,134 10,978,898
2001
2,601,858 1,676,563 925,295
645
854,342 299,502 33,164 107,23 8
1,294,245 565,5 16 168,044 334,124
0 1,067,684 226,562
1,17633 1 10,631,408 11,807,939
899,129 2,184,124 8,724,686
2002
2,917,772 1,845,546 1,072,226 -1,855,915
714,5 15 199,765 39,485 121,506
1,075,270 49 1,39 1 -195,355 656,322
0 952,358 122,912
1,501,174 13,252,982 14,754,156 1,513,154 3,53 1,085 9,709,918 14,754,156
2003
3,619,9 15 2,247,833 1,372,082 -189,251
9 15,395 114,056 23,827 157,687
1,2 10,965 422,336 -8,257
91 1,557 0
1,325,637 -1 14,672
1,605,506 14,776,744 16,382,250 1,843,772 3,332,824 1 1,205,654 16,382,250
2004
3,953,375 2,449,110 1,504,265 35 1,239
770,389 199,858 5,304
174,142 1,149,693 560,582 - 1 12,237 831,021
0 1,279,366 -1 29,673
1,647,049 15,876,111 17,523,160 1,943,077 2,759,239 12,820,844 17,523,160
2005
4,317,179 2,541,350 1,775,829 672,216
1,030,915 349,840
6,984 136,098
1,523,838 1,000,798 -44,221 629,643
0 1,586,219 -62,382
1,784,019 16,75 1,835 18,535,853 1,866,279 2,400,793 14,268,782 18,535,853
2006
5,014,464 2,866,7 16 2,147,748 608,484
1,349,809 260,168
7,533 94,884
1,712,393 892,330 72,901
605,801 0
1 3 7 1,032 141,362
1,938,870 18,075,240 20,014,110 1,818,920 2,260,206 15,934,985 20,O 14,110
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Attachment 2. Projected Financial Statements
5,996,082 3,412,004 2,584,078 566,254
1,729,145 1,278,019
9,599 0
3,016,764 2,069,493 149,194 619,503
0 2,838,190 178,574
1,117,3 12 2,846,584
24,412,632 2,118,287 3,636,166
21,504,763 27,259,216
(000 Ur$) Income Statement
Revenues Operating Expenses Operating Margin Net Income
Cash Flow Internal Sources Loans Third party donation Tarifa adicional
Investment Inc (dec) working capital Debt Service Dividends
Cash increase
Total own sources
Total uses
Balance
6,512,070 3,680,611 2,831,459 575,622
1,936,550 1,087,995
10,385 0
3,034,931 2,025,03 1 263,576 691,194
0 2,979,801
55,130
1,213,976 3,260,9 12
26,987,745 2,312,155 4,433,502
23,503,000 30,248,657
Current Assets Fixed assets
Current Liability Long term liability Equity
Liabilities and equity
Total assets
6,974,889 3,905,561 3,069,328 577,588
2007
5,386,071 3,054,947 2,331,125 641,168
1,500,500 2 2 0,6 8 0
8,188 0
1,729,368 1,185,101
78,251 554,130
0 1,817,481 -88,113
941,636 2,060,670 19,777,129 1,934,997 2,150,088 17,752,715 21,837,800
7,536,701 4,151,522 3,385,179 653,350
2008
5,538,817 3,158,806 2,380,012 609,579
1,539,082 8 13,205
8,882 0
2,361,169 1,5 18,085 160,43 1 543,797
0 2,222,3 13 138,857
1,03 1,887 2,446,240
21,826,271 2,032,796 2,615,431 19,624,284 24,272,5 12
2,018,603 680,3 17 1 1,095
0 2,7 10,O 15 1,853,811
89,709 73 1,470
0 2,674,990
35,025
2,284,609 629,898 1 1,894
0 2,926,402 2,290,644 -245,068 850,581
0 2,896,156
30,245
2013
8,125,505 4,441,810 3,683,695 728,136
2,707,199 937,857 12,692
0 3,657,748 2,38 1,105 107,936
1 ,I 14,207 0
3,603,248 54,500
1,5 16,690 3,618,730
35,522,566 2,776,O 15 5,724,995 30,640,285 39,141,295
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Annex 10: Safeguard Policy Issues URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
1. The Uruguay OSE Modernization & Systems Rehabilitation APL-2 Project i s classified as a Category B project in accordance with the World Bank's Environmental and Social Safeguards Policies. Specific safeguards triggered by the Project are: (i) OP 4.01 - Environmental Assessment; and (ii) OP 4.1 1 - Physical Cultural Resources. A description o f these triggered safeguards and remaining non-triggered safeguards follows below.
Safeguard Policies Triggered by the Project.
OP 4.01 - Environmental Assessment
2. Environmental Assessment Report. An Environmental Assessment Report (EAR) was prepared with the aim o f identifying the potential environmental impacts o f the Project in accordance with the environmental policies o f the Bank applicable to Category "B" projects. In accordance with the Bank's Information Disclosure Policy (BP 17.50) copies o f this report were available for public review at OSE's headquarters; a Spanish.copy o f the executive summary was published in OSE's website and sent to the main stakeholders; and a Public Consultation was carried out and documented. A copy o f the EAR was forwarded to the Bank InfoShop on 2 May 2007. The EAR includes a 12 page executive summary in English.
3. Environmental Analysis of the Project Components. The physical interventions foreseen in the project refer to the improvement o f the water treatment system in the city o f Montevideo and expanding the wastewater systems o f several cities. In addition, actions to reduce the amount o f unaccounted for water are also planned (see Annex 4 - Detailed Project Description).
4. Improving the Aguas Corrientes Treatment Plant. The objective o f this intervention i s to improve the production efficiency o f treated water. This intervention will engender positive environmental benefits. Specifically, the need to extend the water capture wil l be avoided since i t i s expected that the current abstraction wil l satisfy demand until 2035.
5. The sludge generated in the plant at present flows onto land adjacent to the Santa Lucia River, downstream from the capture point, from where i t finds i t s way to the watercourse. Estimated current production o f sludge i s 2800m3/d, and as a result o f the rehabilitation works, i t i s estimated that future production wil l be approximately 2300 m3/d, representing a reduction o f 18%.
6. A study produced by JICA under an agreement with DINAMA regarding water quality in the basin o f the Santa Lucia River indicates that downstream fkom the plant, the quantity o f suspended solids (greater than 1.400 mg/l) and conductivity (20.000 ps/cm) are high - mainly due to saline intrusion. The amount o f phosphorus (come in 0,025 and 0,100 mg/l) i s also high due to activities upstream from the plant. At present DINAMA has no
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assessments that would indicate environmental problems caused by sludge produced by the plant.
7. However, the preparation and implementation o f the Waste Management Plan (sludge) for the Aguas Corrientes Plant wil l be included in the Environmental Management Plan (EMP). Furthermore an environmental assessment study o f the hydrographic basin o f the Santa Lucia River wil l be produced, complementing the JICA study, and including a proposal to classify watercourses in accordance with existing Uruguayan norms.
8. Extending the wastewater networks. T h i s intervention w i l l consist o f continuing the works initiated during the APL-1 and wil l comprise minor extensions to the sewerage networks for the cities o f Minas, Colonia, Rio Blanco, Melo, Treinta e TrCs, Mercedes, and additional cities to be defined.
9. These are small scale interventions in systems that have already been built and currently under operation. As such it i s expected that they shall not have any negative environmental impacts. The impacts arising from the civil works can be avoided and/or minimized by adopting appropriate engineering methods and techniques. The OSE at present possesses the Works Environmental Manual (Manual Ambiental de Obras) developed during APL-1, and which i s and wil l continue to be taken into account in the official tendering announcements concerned with the works.
10. The EAR evaluated the impact o f these extensions on the treatment and final destination of wastewater by checking expected increases vis-ii-vis actual nominal capacity o f the treatment plants and/or dilution capacities o f the water bodies.
11. In the cities o f Minas and Treinta y TrCs the networks wil l be connected to the wastewater treatment plants constructed during the APL-I, all o f which are operating satisfactorily. In the cities o f Melo and Rio Blanco, treatment plants are operating with sufficient capacity to cope with the planned extensions,
12. Two cities - Colonia and Mercedes - have no treatment plants. The city o f Colonia has 23,300 inhabitants and around 3930 connections to the waste water network. The planned extension involves 340 new connections and strengthening the main collector system. Untreated sewage i s currently emptied into the L a Plata River estuary through the main outlet pipe. Water quality monitoring carried out by DINAMA shows that the adjacent beaches are suitable for swimming and uncontaminated by fecal colliforms. Monitoring undertaken by OSE at sampling points located 50 meters downstream and also upstream from the sewerage discharge point confirms this situation. The planned increase in the volume o f waste i s only around 9% - which should not alter the currently verified situation.
13. In the city o f Mercedes, with i t s population o f 40,000 and around 7300 wastewater connections, the project foresees boosting the network to allow an increase o f around 235 connections (a 3.2% increase). Untreated sewage i s discharged into the Rio Negro. Average estimated wastewater flow in this case i s o f the order o f 52 l/s. The Rio Negro, a tributary o f the Uruguay River, has a regularized minimum flow o f 250 m3/s. Th is data gives an
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indication o f the dilution capacity o f the receptor body. The monitoring figures also demonstrate that the water quality o f the Rio Negro downstream from the raw effluent discharge point remains within Class 3 watercourse standards (DOB less than 10mg/l and DO over 5mg/l).
14. Increasing the networks by 3.2% should not alter th i s situation. Furthermore, a study (project) o f treatment plants and final wastewater disposal destinations for the cities o f Colonia and Mercedes i s planned within APL-2 in order to facilitate h t u r e extensions to the networks. Implementation o f these projects i s planned for the future APL-3.
1 5. Environmental criteria for projects concerned with increasing wastewater networks in cities that have not yet been selected. For those cities that have not yet been selected, the EAR will establish the environmental criteria and procedures that need to be adopted for the approval o f the projects.
OP 4.11- Physical Cultural Resources
16. The city o f Colonia possesses an area that i s considered to be a cultural heritage site for the benefit o f humanity. I t i s expected that extending the wastewater networks and strengthening the main collector system will not affect the protected zone. A stretch o f around 200 meters o f impulsion piping exists in the public area adjacent to the Amortization Zone (Cautela). OSE has formally consulted the “Cultural Heritage Commission for the Nation” (CPCN) which declared itself to be in favor o f the works, requesting that prior archaeological research should be undertaken along the relevant stretch. In addition, in order to conform to the Physical Cultural Property, “chance find procedures” wil l be adopted as set out in the environmental construction manual (Manual Ambiental de Construccion) to be included as part o f the works contract. The participation o f an archaeologist during the execution o f the works w i l l be requested in bidding documents.
Safeguard Policies Not Triggered by the Project
OP 4.04 -Natural Habitats
17. The project interventions wil l not affect sensitive natural habitats or protected areas.
OP 4.12 - Involuntary Resettlement
18. Project interventions will not involve any involuntary resettlement, including relocations or loss o f access to natural resources. The EAR has photos and maps o f intervention areas.
Environmental Management Plan
19. An Environmental Management Plan (EMP) was prepared addressing: (i) mitigation efforts for the interventions foreseen for this phase o f the project; and (ii) the consolidation and strengthening o f OSEs environmental management. The EMP covers the following
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activities whose total estimated cost i s US$ 1 million. Bank financing wou ld cover approximately US$0.48 million o f the total. Identif ied activities include:
Environmental assessment of OSE 's water supply and sewerage facilities. This activity wi l l review the environmental management systems currently in place for the operation o f these facilities. The study wil l include (i) an assessment o f facilities' existing environmental management and monitoring plans; and (ii) an evaluation o f the environmental conditions o f these systems. T h i s assessment wil l help the Environmental Management Unit (UGA) formulate appropriate strategies, including preventive and corrective actions to improve the environmental management o f existing water supply and sewerage systems. Under the APL-2, the evaluation wil l focus on systems servicing departmental capitals. The evaluation could then b e further expanded under APL-3 to a l l cities with a population over 25,000 inhabitants. The UGA will b e responsible for the design and implementation o f this assessment.
Environmental assessment of the Santa Lucia River Basin. T h i s activity aims to develop an environmental study o f the basin in order for OSE to propose a Class 1 rat ing classification o f the stretch o f the r iver in accordance with Uruguayan norms. UGA will also b e responsible for carrying out this activity.
Strengthening of OSE 's Environmental Management Unit. An environmental training program both for this unit and for other OSE technical units interested in environmental matters will be implemented. UGA will be responsible for carrying out this activity.
Implementation of Environmental Management Systems (IS0 14.000). This activi ty foresees continuity o f the implementation o f the E M S in the wastewater treatment plants o f Florida and Minas and in the Water Treatment Plant o f Laguna del Sauce. Extending the E M S i s foreseen for a minimum o f three other plants. This act ivi ty wil l b e under the coordination o f UGA, which will b e carried out jointly with plant managers.
Environmental Guidelines on the Design of Water Supply and Wastewater Systems. T h i s activity wi l l cover drafting and discussing the Guidelines with key practitioners, in order to consolidate them as a tool to b e adopted by OSE. T h i s activity will b e under the responsibility o f UGA and OSE's Technical Department.
Program for the Management of Waste from the Water Treatment Plant of Aguas Corrientes. This activity includes undertaking studies o f alternatives for the handling o f sludge from the Aguas Corrientes water treatment plant. The Technical Department wil l be responsible for executing this activity, supported by UGA and Production Management personnel.
Program for the Management of Waste from the Wastewater Treatment Plants. This activity covers studying alternative approaches to the management o f sludge from the wastewater treatment plants and i t s in i t ia l implementation in APL-1 plants: Minas, Durazno and Treinta y Tres. A sludge treatment p i lo t experiment (vermin-composting) i s planned for the Treinta y Tres plant to b e undertaken jointly with the Faculty o f Sciences o f the University o f the Republic. Responsibility for executing this activi ty wi l l fa l l with the Technical Department. For the Dwazno and Minas plants, the alternatives have already been selected and wil l be implemented in APL-2 with 100% counterpart funding.
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Environmental Monitoring. The sewerage treatment plants built under APL- 1 , and their potential impact on their respective water bodies, will continue to be monitored closely. A monitoring program will be drawn up for treatment plants serving Departmental Capitals. The UGA will be responsible for the design o f these monitoring programs, and the analysis o f the environmental data. The Central Laboratory, along with the Technical Head o f the each Departmental Capital, wil l be responsible for the practical implementation o f the program.
Development of the environmental database with support of the GIs system. This activity wil l take place in 3 phases: (i) existing GIS full utilization with incorporation o f environmental information; (ii) the construction o f an environmental database compatible with OSE’s Future Mega-database; (iii) incorporation o f environmental database in OSENector’s GIS when operative. UGA will be responsible for implementation, jointly with the Coordinating Unit o f the GIS system (Vector).
The EAR presents, for each activity described above, its: (i) objectives; (ii) activities 20. (iii) schedule; (iv) estimated cost; and (v) institutional responsibilities.
Public Consultation
21. A public consultation was carried out following the disclosure principles o f the OP4.01. The key issues raised during the consultation are summarized in the EAR. The report’s executive summary has been available in OSE’s website since April gth 2007. Formal invitations were sent out on that date, inviting central and local government representatives, and civil society organizations (including environmental organizations), to read the assessment and provide feedback at a public consultation. A public consultation was successfully held on April 17th 2007, and was attended by around 45 people. No major issues were raised.
Targets
22. Targets. Reinforcing UGA technical team through the incorporation o f two additional university level professionals and two additional technical staff at the level o f scholarship holders (to complete, as. a minimum, a six-member team) i s a key step towards maintaining the implementation o f agreed activities and the achievement o f agreed targets as an APL-2 priority. I t i s particularly important that satisfactory staffing i s achieved, since OSE has decided to undertake part o f the environmental program with 100% counterpart funding.
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Annex 11: Output Based Disbursements
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
1. The high costs o f in-house plumbing reconfigurations appear to be one o f the most significant barriers preventing households from connecting themselves to public sewerage networks. In order to improve household connection rates to both existing and new sewerage networks, the project wi l l support OSE's efforts in financing the in-house plumbing works needed for connecting households to the public sewerage network. Output Based Disbursements (OBD) provides an appropriate and innovative solution for the World Bank to help OSE finance these in-house works. OBD helps reduce the overall transactions costs for OSE by financing individual connections, whilst simultaneously enhancing the focus on results.
2. The OBD financing w i l l be offered to households under two different initiatives in Component 3, which require in-house works to be carried out in order to connect to the network. I t wil l be offered to all households wishing to connect to the new public sewerage network being built under the APL-2 project. I t w i l l also be offered to households seeking to connect to the existing public sewerage network built under APL-I, under the terms o f the impact evaluation pilot (financial assistance provided through OBD wi l l constitute one o f the two variables to be tested under this pilot to encourage households to connect to the network)".
3. Share of financing of Unit Costs. Taking into account the number o f projected households in need o f in-house works and the average unit cost, the estimated total cost i s about U S $ 1.7 million. The Bank will allocate US$ 1 mill ion for this component which corresponds to 60% o f the total estimated costs. As a result, the Bank will finance 60% o f the unit costs for each o f the 3 common typologies for in-house works (see Attachment 1). T h i s will help finance individual connections for 3,600 households (see Table 2).
4. Loan terms. The loan terms offered to households who require in-house works and are interested in connecting to their existing or new sewerage network are as follows. Each household wil l be offered a 36 month low interest loan (below market rates). In addition, a 36 month waiver wil l be provided for the variable component o f sanitation tari f fs (the fixed costs wil l s t i l l be charged). Through this financing mechanism, OSE will, in effect, be providing an im licit connection subsidy o f US$ 109, which corresponds to 24% o f the connection costs . E
Justification of Unit Costs
5. According to previous experiences, OSE identified several types o f works needed inside the house, depending on factors such as: (i) location o f the septic tank; (ii) pipeline
~~
l8 Although OBD financing will initially only be available to selected localities participating in the pilot, i t will then be subsequently rolled-out to all localities selected under APL-I before the end o f the project. l9 The implicit connection subsidy i s based on the assumption o f interest rates remaining on average 2 points below market rates and a 36 month waiver for the variable sanitation tariff.
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length from sanitary facilities to sewerage network; (iii) slope junctions; and (iv) number of inspection chambers. After a rigorous analysis, OSE differentiated the works in three categories: (i) obra corta (small works); (ii) obra media (medium works); and (iii) obra larga (big works). Attachment 1 shows the figure for each type o f works.
6. The characteristics o f each type o f works are as follows:
(i) (ii)
(iii)
Obra corta. It requires a pipeline 5 meters long or less and one inspection chamber; Obra media. I t requires a primary pipe longer than 5 meters and less than 15 meters; a secondary pipe 5 meters long or less; and two or three inspection chambers; Obra larga. I t requires a primary pipe longer than 15 meters, a secondary pipe longer or equal to 6 meters, and from two to five inspection chambers.
7. In estimating the unit cost o f each type o f in-house works, three different sources were taken into account: (a) market prices; (b) contractors’ appraisals; and (c) experts’ opinion.
Market Prices. Market prices were estimated by CREDIMAT, which has been in charge o f building and financing these works. I t s estimation was based on materials required for each type o f work appraised at market prices, plus an administrative cost based on current CREDIMAT’s charges. Detailed results from this appraisal are presented in Attachment 2.
Contractors ’ appraisal. Appraisals were obtained from Contractors located in different municipalities o f similar characteristics to those where APL-2 wil l be implemented. The appraisal was done at present prices. Detailed results from this appraisal are presented in Attachment 3.
Experts ’ opinion. A panel o f technical personnel o f OSE and some experts from the Bank discussed the previous evaluations and noticed that the cost o f materials plus labor were very similar, although administrative cost differed significantly (Table 1). The panel found that the estimation from CREDIMAT underestimated the administrative cost and did not value the actual cost to be charged by a service provider. On the other hand, the contractors’ estimation for administrative cost was overestimated and did not respond to a competitive price. The panel decided to set the minimum value for materials and labor and on top o f this cost add a 25% o f administrative costs (1 5% corresponding to administrative costs and 10% to profit), which i s the typical cost added for contractors o f this type o f works in Uruguay.
The agreed figure to be taken as reference i s the one proposed by experts, which i s presented in table 1 along with results from the other two evaluations:
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Table 1. Average Unit cost from three different sources
~xperts’ opinion I 16,869 * Based on an estimated average exchange rate
I
4,217 21,086 I 877 o f 24 Uruguayan pesos (Ur%) to 1 US dollar (US$)
Total costs ktimated cost fa A dm in istrative
costs Ur$
Total costs
600 5,200 1,128
Obra corta: Market prices
Contractors Experts’ opinion
Obra media: Market prices
Contractors Experts’ opinion
Obra larga: Market prices
Contractors
700 6,300 2,922
Materials and Labor
Ur$ *
5,204 4,5 13 4,5 13
1 1,689 1 1,8 14 1 1,689
16,869 18,276
700 7,700
Ur$
5,804 9,713 5,641
12,389 18,114 14,611
17,569 25,976
US$
24 1 404 235
515 753 608
73 1 1,080
Households Expected to build in-house Average Of works within APL-2 implementation
Works( %) period US$ Type of work
Total
Obra corta 235 49% 973 778 1,750 Obra media 608 36% 715 57 1 1,286 Obra larga 877 15% 298 238 536
Total 100% 1,985 1,587 3,572
Existing New network network
Total cost 000 US$
41 1 78 1 470
1,662
9. average unit cost, the estimated total cost i s about US$ 1.7 mill ion as shown in table 2
Taking into account the projected households in need o f in-house works and the
Local 662 Funds for in-house works (000 US$)
Funding (%) 40%
Table 2. Estimated OBD costs (000 US$)
IBRD Total 1,000 1,662 60% 100%
10. o f total cost, as table 3 shows.
The Bank will allocate US$ 1 mill ion for this component which corresponds to 60%
Monitoring and evaluation requirements
11. Specific annual OBD financing targets are indicated in the results framework (Annex 3). OSE will need to periodically report the total number o f in-house works carried out during specified period per works type. All works will need to be certified by OSE. To ensure the functionality o f the new sewerage connections, disbursements wil l only be made
107
with evidence o f 3 months o f consecutive sewerage bill payments. Only in-house works carried out after the start date o f the APL-2 project will b e considered.
12. The Task Team wil l periodically ver i fy during supervisions that outputs reported for disbursement purposes have been physically delivered and are o f requisite quality and standards
13. The fol lowing schedule o f Outputs and Unit Costs wil l b e used (see Table 4).
Table 4. APL-2 Schedule of Outputs and Unit Costs
In-house plumbing works by Type and Cost (US$)
Type I: Obra Corta US$235
Type 11: Obra Media US$608
Type 111: Obra Larga US$877
For a definition of typologies, see attachment I
108
Attachment 1. Type of works needed inside the households
CROQUIS TIPOLOGIA OBRA C O R T A \ / '
CROQUIS TIPOLOGIA OBRA MEDIA
L
109
CROQUIS TIPOLOGIA O B R A L A R G A
4 Li
110
Attachment 2. Results from cost estimation based on market prices
OBRA CORTA
Material Cant Precio Total tapa 20 x 20 tapa 40 x 40 tapa 60 x 60 contratapa con diente 60 x 60 bulones para tapa pileta de patio hormigon c.i. polietileno 60 x 60 x 40 c.i. polietileno 60 x 60 x 60 c.i. polietileno sifonada sifon desconector 110 h sifon desconector 110 p.v.c cafio pvc 40 mm x 3 mts cafio pvc 50 mm x 3 mts caiio pvc 63 mm x 3 mts caiio pvc 110 mm x 3 mts codopvc40 a 90" cod0 pvc 50 a 90" codopvc63 a 90" cod0 pvc 1 10 a 90" cod0 pvc 40 a 45" cod0 pvc 50 a 45" cod0 pvc 63 a 45" cod0 pvc 1 10 a 45" curva pvc 50 curva pvc 1 I O tee pvc 40 mm tee pvc 50 mm tee pvc 110 mm tee pvc 110 mm a 63 mm ramal "Y" 1 1 Omm a 63mm rejilla aspiracion pvc63mm
85 160 250
210 11 130
1050 1050 1650 500 500 85 1 I O 145 250 25 25 30 60 25 25 28 60 85 85 20 25 80 70 95 40
sombrerete pvc 1 10 mm 1 50 ~~
Total cost of Materials Mano de obra Tip0 Dias Jornal total Oficial 1 328 328 Medio Oficial 2 270.15 540.3 Peon 2 250.85 501.7 Aportes al BPS 1096 Total Mano de Obra 2466
0 0
250
0 0 0 0 0
1,650 0 0 0 0 0
500 0 0 0
120 0 0 0 0 0 0 0 0 0 0 0 0 50
Costos operativos 600
Costos totales 5,804
Material Cant Precio Total sombrerete pvc 63 mm sombrerete pvc 50 mm abrazaderas pvc 1 10 mm
abrazaderas pvc 50 mm abrazaderas pvc 63 mm grasera pvc caja sifonada pvc pegamento para pvc tacos fisher no 8 portland ladrillos arena pedregullo malla acero m2 baldosas de vereda baldosas lisas rojas baldosas lisas amarillas baldosas lisas verdes azulejos pileta de patio pvc sifbn de cocina caiio pvc 160 mm x 6 mts retroexcavadora (hora) c.i. polietileno 40x40 x 40 cafio pvc 200 mm x 6 mts registros retroexcavadora metro monturas sifon desc. polietileno relleno
0.2
0.5
0.2
30 50 30
25 30
280 200 120 11 190 3
240 300 65 I O 10 10 I O 15
350 145 950 1030 650 1350 9500 140 3 80 240 1100
0 0 0
0 0 0 0
24 0 95 0
48 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
9 7 9 7
111
OBRA MEDIA
Material Cant Precw Total tapa 20 x 20 tapa 40 x 40 tapa 60 x 60 contratapa con diente 60 x 60 bulones para tapa pileta de patio hormigon c.i. polietileno 60 x 60 x 40 c.i. polietileno 60 x 60 x 60 c.i. polietileno sifonada sifon desconector 1 10 h sifon desconector 110 p.v.c cario pvc 40 mm x 3 mts caiio pvc 50 mm x 3 mts caiio pvc 63 mm x 3 mts cario pvc 110 mm x 3 mts codopvc40 a 90" cod0 pvc 50 a 90" codopvc63 a 90" cod0 pvc 1 10 a 90" cod0 pvc 40 a 45" cod0 pvc 50 a 45" cod0 pvc 63 a 45" cod0 pvc 110 a 45" curva pvc 50 curva pvc 110 tee pvc 40 mm tee pvc 50 mm tee pvc 1 I O mm tee pvc 1 I O mm a 63 mm ramal "Y" 1 1 Omm a 63mm rejilla aspiracion pvc63mm
1
2
0
1 1
0 1 6
2 4
0
85 160 250
210 11
130 1050 1050 1650 500 500 85 110 145 250 25 25 30 60 25 25 28 60 85 85 20 25 80 70 95 40
85 0
500
0 0 0 0
1,050 1,650
0 0 0 0
145 1,500
0 0
60 240
0 0 0 0 0 0 0 0 0 0 0 0
sombrerete pvc 1 10 mm 2 50 100 Total cost of Materials Mano de obra Tip0 Dias Jornal total Oficial 3 328 985 Medio Oficial 4 270.15 1,081 Peon 4 250.85 1,003 Aportes at BPS 2,455 Total Mano de Obra 5,524
Costos operativos 700
Costos totales 12,389
Material Cant Precio Total sombrerete pvc 63 mm sombrerete pvc 50 mm abrazaderas pvc 1 I O mm
abrazaderas pvc 50 mm abrazaderas pvc 63 mm grasera pvc caja sifonada pvc pegamento para pvc tacos fisher no 8 portland ladrillos arena pedregullo malla acero m2 baldosas de vereda baldosas l isas rojas baldosas l isas amarillas baldosas lisas verdes azulejos pileta de patio pvc sifbn de cocina caiio pvc 160 mm x 6 mts retroexcavadora (hora) c.i. polietileno 40x40 x 40 caiio pvc 200 mm x 6 mts registros retroexcavadora metro monturas sifon desc. polietileno relleno
2
1
0.25
1.5 20 0.5
30 50 30
25 30
280 200 120 11
I90 3
240 300 65 10 10 10 10 15
350 145 950 1030 650 1350 9500 140 380 240 1100
0 0
60
0 0
280 0 30 0
285 60 120 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
6, I65
112
OBRA LARGA
Material Cant Precio Total tapa 20 x 20 tapa 40 x 40 tapa 60 x 60 contratapa con diente 60 x 60 bulones para tapa pileta de patio hormigon c.i. polietileno 60 x 60 x 40 c.i. polietileno 60 x 60 x 60 c.i. polietileno sifonada sifon desconector 1 10 h sifon desconector 110 p.v.c caiio pvc 40 mm x 3 mts caiio pvc 50 mm x 3 mts caiio pvc 63 mm x 3 mts caiio pvc 110 mm x 3 mts codopvc40 a 90" cod0 pvc 50 a 90" codopvc63 a 90" cod0 pvc 1 I O a 90" cod0 pvc 40 a 45" cod0 pvc 50 a 45' cod0 pvc 63 a 45" cod0 pvc 1 10 a 45" curva pvc 50 curva pvc 1 10 tee pvc 40 mm tee pvc 50 mm tee pvc 110 mm tee pvc 110 mm a 63 mm ramal "Y" 1 1 Omm a 63mm rejilla aspiracion pvc63mm
2
2
0
1 1
0 2 8
2 4
1
85 160 250
21 0 11
130 1050 1050 1650 500 500 85 110 145 250 25 25 30 60 25 25 28 60 85 85 20 25 80 70 95 40
170 0
500
0 0 0 0
1,050 1,650
0 0 0 0
290 2,000
0 0
60 240
0 0 0 0 0 0 0 0 80 0 0 0
sombrerete pvc 1 10 mm 2 50 100 Total cost of Materials Mano de obra Tip0 Dias Jornal total Oficial 5 328 1,642 Medio Oficial 7 270.15 1,891 Peon 7 250.85 1,756 Aportes al BPS 4,23 1 Total Mano de Obra 9,519
Costos operativos 700
~
Costos totales 17,569
Material Cant Precw Total sombrerete pvc 63 mm sombrerete pvc 50 mm abrazaderas pvc 1 10 mm
abrazaderas pvc 50 mm abrazaderas pvc 63 mm grasera pvc caja sifonada pvc pegamento para pvc tacos fisher no 8 portland ladrillos arena pedregullo malla acero m2 baldosas de vereda baldosas lisas rojas baldosas lisas amarillas baldosas lisas verdes azulejos pileta de patio pvc sifbn de cocina caiio pvc 160 mm x 6 mts retroexcavadora (hora) c.i. polietileno 40x40 x 40 caiio pvc 200 mm x 6 mts registros retroexcavadora metro monturas sifon desc. polietileno relleno
30 50
2 30
25 30
1 280 200
0.5 120 11
3 190 40 3 0.5 240
300 65 10 10 10 10 15
350 145 950 1030 650 1350 9500 140 380 240 1100
0 0
60
0 0
280 0
60 0
570 120 120 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
7,350
113
Attachment 3. Results from cost estimation based on contractors' appraisal
OBRA CORTA
Material Cant Precw Total tapa 20 x 20 tapa 40 x 40 tapa 60 x 60 contratapa diente60x 60 bulones para tapa pileta de patio hormigon c.i. polietileno 60 x 60 x 40 c.i. polietileno 60 x 60 x 60 c.i. polietileno sifonada sifon desconector 1 10 h sifon desconector 110 p.v.c caiio pvc 40 mm x 3 mts caiio pvc 50 mm x 3 mts caiio pvc 63 mm x 3 mts caAo pvc 110 mm x 3 mts cod0 pvc 40 a 90" cod0 pvc 50 a 90" codopvc63 a 90" cod0 pvc 1 10 a 90" cod0 pvc 40 a 45" cod0 pvc 50 a 45" cod0 pvc 63 a 45" cod0 pvc 1 10 a 45" curva pvc 50 curva pvc 110 tee pvc 40 mm tee pvc 50 mm tee pvc 110 mm tee pvc 1 10 mm a 63 mm ramal "Y" 1 lOmm a 63mm rejilla aspiracion pvc63mm
1 300 300
2 270 540
2 95 190
sombrerete pvc 1 10 mm 1 76 76 Total cost of Materials Mano de obra Tip0 Dins Jornal total Oficial 1 441.75 441.75 Medio Oficial 2 363.68 727.36 Peon 2 311.66 623.32
Total Mano de Obra 3,225.37 Aportes al BPS 1,433.94
Costos operativos 5,200
Costos totales 9,713
Material Cant Precw Total sombrerete pvc 63 mm sombrerete pvc 50 mm abrazaderas pvc 1 10 mm abrazaderas pvc 50 mm abrazaderas pvc 63 mm grasera pvc caja sifonada pvc pegamento para pvc tacos fisher no 8 Portland Ladrillos Arena Pedregullo malla acero m2 baldosas de vereda baldosas lisas rojas baldosas lisas amarillas baldosas lisas verdes Azulejos pileta de patio pvc s i f h de cocina caiio pvc 160 mm x 6 mts retroexcavadora (hora) c.i. polietileno 40x40 x 40 c f i o pvc 200 mm x 6 mts registros retroexcavadora metro Monturas sifon desc. polietileno Relleno
1 25 25
0.5 173 86.5
0.2 360 70
2,737
114
OBRA MEDIA
Material Cant Precio Total tapa 20 x 20 tapa 40 x 40 tapa 60 x 60 contratapa diente60x 60 bulones para tapa pileta de patio hormigon c.i. polietileno 60 x 60 x 40 c.i. polietileno 60 x 60 x 60 c.i. polietileno sifonada sifon desconector 110 h sifon desconector 110 p.v.c caiio pvc 40 mm x 3 mts caiio pvc 50 mm x 3 mts caiio pvc 63 mm x 3 mts ca i i opvc l lOmmx3mts codopvc40 a 90" cod0 pvc 50 a 90" codopvc63 a 90" cod0 pvc 110 a 90" cod0 pvc 40 a 45" cod0 pvc 50 a 45" cod0 pvc 63 a 45" cod0 pvc 1 10 a 45" curva pvc 50 curva pvc 1 I O tee pvc 40 mm tee pvc 50 mm tee pvc 110 mm tee pvc 1 10 mm a 63 mm ramal "Y" 1 1 Omm a 63mm rejilla aspiracion pvc63mm
1 135 135
2 300 600
1 230 230 6 270 1.620
2 50 100 4 150 600
1 150 150
sombrerete pvc 1 10 mm 2 76 152 Total cost of Materials Mano de obra Tip0 Dias Jornal total Oticial 3 441.75 1,325 Medio Oficial 4 363.68 1,454 Peon 4 311.66 1,246 Aportes al BPS 3,221.29 Total Mano de Obra 7,247.90
Costos operativos 6,300
Costos totales 18,114
Material Cant Precio Total sombrerete pvc 63 mm sombrerete pvc 50 mm abrazaderas pvc 1 10 mm abrazaderas pvc 50 mm abrazaderas pvc 63 mm grasera pvc caja sifonada pvc pegamento para pvc tacos fisher no 8 Portland Ladrillos Arena Pedregullo malla acero m2 baldosas de vereda baldosas lisas rojas baldosas lisas amarillas baldosas lisas verdes Azulejos pileta de patio pvc s i f h de cocina caiio pvc 160 mm x 6 mts retroexcavadora (hora) c.i. polietileno 40x40 x 40 caiio pvc 200 mm x 6 mts registros retroexcavadora metro Monturas sifon desc. polietileno Relleno
2 100 200
1 260 260
1 25 25
1.5 173 259 20 3 60 0.5 350 175
4.566.5
115
OBRA LARGA
Material Cant Precw Total tapa 20 x 20 tapa 40 x 40 tapa 60 x 60 contratapa diente60x 60 bulones para tapa pileta de patio hormigon c.i. polietileno 60 x 60 x 40 c.i. polietileno 60 x 60 x 60 c.i. polietileno sifonada sifon desconector 1 10 h sifon desconector 110 p.v.c caiio pvc 40 mm x 3 mts caiio pvc 50 mm x 3 mts caiio pvc 63 mm x 3 mts cario pvc 1 I O mm x 3 mts cod0 pvc 40 a 90" codopvc50 a 90" codopvc63 a 90" cod0 pvc 1 10 a 90" cod0 pvc 40 a 45" cod0 pvc 50 a 45" cod0 pvc 63 a 45" cod0 pvc 1 I O a 45" curva pvc 50 curva pvc 1 10 tee pvc 40 mm tee pvc 50 mm teepvc 110mm tee pvc 110 mm a 63 mm ramal "Y" 1 lOmm a 63mm rejilla aspiracion pvc63mm
2 135
2 300
2 230 a 270
2 50 4 150
1 150
270
600
460 2,160
100 600
150
sombrerete pvc 1 I O mm 2 76 152 Total cost of MateriaIs Mano de obra Tip0 Dias Jornal total Oficial 5 441.75 2,209 Medio Oficial 7 363.6a 2,546 Peon 7 311.66 2,183 Aportes ai BPS 5,549 Total Mano de Obra 12,485
Costos operativos 7,700
Costos totales 2 5 9 76
Material Cant Precw Total sombrerete pvc 63 mm sombrerete pvc 50 mm abrazaderas pvc 1 10 mm abrazaderas pvc 50 mm abrazaderas pvc 63 mm grasera pvc caja sifonada pvc pegamento para pvc tacos fisher no 8 Portland Ladrillos Arena Pedregullo malla acero m2 baldosas de vereda baldosas lisas rojas baldosas l isas amarillas baldosas lisas verdes Azulejos pileta de patio pvc s i f h de cocina caiio pvc 160 mm x 6 mts retroexcavadora (hora) c.i. polietileno 40x40 x 40 caiio pvc 200 mm x 6 mts registros retroexcavadora metro Monturas sifon desc. polietileno Relleno
2 100 200
1 260 260
1 25 25
3 173 519 40 3 120 0.5 350 175
116
Annex 12: Project Preparation and Supervision
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
Initial PID to PIC Initial ISDS to PIC Appraisal Negotiations BoarcURVP approval Planned date o f effectiveness Planned date o f mid-term review
28/06/2007 31/10/2007 3 1/03/2010
10/23/2006 1211 1/2006 05/07/2007 0511 8/2007
Key institutions responsible for preparation of the project: OSE i s the principal institution responsible for the preparation o f the project. Complimentary support has been provided by other GoU agencies, including the Ministry o f Finance, OPP, MVOTMA-DINASA, and URSEA.
Bank staff and consultants who worked on the project included:
Lead Economist Water and Sanitation Spec. Procurement Spec.
Financial Management Spec Counsel Sr. Disbursement Officer JPA Benchmarking Analyst Senior Program Assistant Senior Environmental Sp. Senior Financial Spec. Senior Engineer
LCSUW LCSUW LCSPT
Name Title Unit Carlos E. Velez Catherine Tovey Alexandre Borges de Oliveira Alejandro Solanot Alejandro Alcala Gerez Xiomara Morel Victoria Vanasco Georgeta Dragoiu Violeta Wagner Alexandre Fortes Luz Maria Gonzalez Wilson Rocha
LCSFM LEGLA L O A G l LCSPF LCSSD LCSUW Consultant Consultant Consultant
Bank funds expended to date on project preparation: 1. Bank resources: US$ 185,000 2. Trust funds: 0 3. Total: US$ 185,000
Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$ 0 2. Estimated annual supervision cost: US$ 100,000
117
Annex 13: Documents in the Project File
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
A. Bank Staff Assessments World Bank (2007) Financial Management Assessment for OSE. World Bank. (2006) Procurement Agency Capacity Assessment for OSE. World Bank (2006) Uruguay: Report on the Observance of Standards and Codes (ROSC) - Corporate governance country assessment. 38589-UY. World Bank (2005) Country Financial Accountability Assessment (CFAA), Report
World Bank (2005) Uruguay Policy Notes, Report 3 3 3 8 4 1 World Bank (2005) Monitoring Socio-Economic Conditions in Argentina, Chile, Paraguay and Uruguay (Vol4.), Report 32949-W.
32851-UR.
B. a
a
a
a
a
a
a
0
a a
a
a
a
a
a
a
Other ADERASA (Asociacih de Entes Reguladores de Agua Potable y Saneamiento de las Americas) (2007), Base de datos e indicadores de gestion para agua potable y alcatarillado, Ejercicio Anual de Benchmarking - 2006, Datos ano 2005. Barreix A. (2003), Rates of Return, Taxation and the Economic Cost of Capital in Uruguay. Harvard University, Cambridge MA. DINASA (2007), Visidn del Sector Aguas y Saneamiento (Draft). Dornel, S., Pereyra A. and Sarachaga D. (2007), Andisis de Aspectos Sociales Vinculados a APL-2. INE (2006), Encuesta Continua de Hogares. Incidencia de la Pobreza en 2005. N E (2006), Situacidn de Vivienda en Uruguay I trimestre 2006. Informe de Divulgacidn. Lyonnaise des Eaux (1998) Plan Preliminarpara Reduccidn del Agua no Contabilizada en el Interior del Pais. Lyonnaise des Eaux (1 998) Programa de Reduccidn y Control del Agua no Contabilizada en Montevideo, Estrategia General, Fase 3. MOM (2006), OSE Encuesta del Cliente. OSE (2007) Programa de Modernizacidn y de Rehabilitacidn de 10s Sistemas de OSE: Evaluacidn ambiental. OSE (2007) Proyecto de Modernizacidn y de Rehabilitacidn de 10s Sistemas de OSE: Etapa APL-2, Prdstamo BIRF, OSE (2007) Proyecto de Modernizacidn y de Rehabilitacidn de 10s Sistemas de OSE: Manual Operativo. Pereyra A. (2004), Estimacidn de Precios de Cuenta para la Evaluacidn Econdmica de Proyectos del Programa de Desarrollo Municipal IV. Oficina de Planeamiento y Presupuesto, Montevideo. Roche H. (1999), Estudios de Demanda y Disposicidn a Pagar, Ampliacidn de Redes de Alcantarillado y Plantas de Tratamiento, Informe Final. Tahal Consulting Engineers (2005) Estudio de Prefactibilidad para Obras de Saneamiento de 75 Ciudades del Uruguay. TEA Deloitte and Touche (2007), Analysis of Climate and Culture of Change in OSE
118
Annex 14: Statement of Loans and Credits
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
Original Amount in US$ Millions
Difference between expected and actual
disbursements
Proiect ID FY Pumose IBRD IDA SF GEF Cancel. Undisb. Oria. Frm. Rev’d
PO57481 PO70653 PO77676 PO68124 PO70937 PO74543 PO70058
PO63383
2005 2005 2005 2004 2002 2002 200 1
2000
W Tramp. Inf. Maint. and Rural Access W Integr. Nat. Res. & Biodiveristy Mgmt W GEF-Biod & Integmted Ecosystem W Energy Efficiency Project W- BASIC EDUCATION 3 W FOOT & MOUTH DISEASE - ERL W PUBLIC SERVICES MODERNIZATION TA pY APL OSE MOD&REHAB.
Total:
70.00 0.00 30.00 0.00 0.00 0.00 0.00 0.00
42.00 0.00 18.50 0.00 6.00 0.00
27.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00
0.00 0.00 59.13 9.80 0.00 0.00 0.00 28.72 3.88 0.00 7.00 0.00 6.94 2.67 0.00 6.88 0.00 6.30 3.33 0.00 0.00 0.00 22.21 18.37 0.00 0.00 0.00 6.50 -0.40 -0.40 0.00 0.00 3.60 3.60 0.77
0.00 0.00 0.11 0.1 1 -0.86
193.50 0.00 0.00 13.88 0.00 133.51 41.36 - 0.49
URUGUAY STATEMENT OF IFC’s
Held and Disbursed Portfolio In Millions o f U S Dollars
Committed Disbursed
IFC IFC
FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.
1985 Azucitrus 0.00 0.19 0.00 0.00 0.00 0.19 0.00 0.00
2002 Conaprole 15.01 0.00 10.00 0.00 15.01 0.00 10.00 0.00
2005 Surinvest 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00
2001 UMontevideo 2.61 0.00 0.00 0.00 2.61 0.00 0.00 0.00
Total portfolio: 17.62 0.20 10.00 0.00 17.62 0.19 10.00 0.00
Approvals Pending Commitment
FY Approval Company Loan Equity Quasi Partic.
Total pending commitment: 0.00 0.00 0.00 0.00
119
Annex 15: Country at a Glance
URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
(average annual growth) Agriculture 2.6 0.3 3.2 6.0 Industry 1.5 -1.6 8.5 8.7
Manufacturing 0.2 -2.1 9.5 10.8 Services 5.0 -0.1 6.5 6.3
Househdd final consumption expenditure 4.9 -0.6 2.5 7.3 General gov't final consumption expenditure 1.9 -0.9 2.5 1.8
10.1 16.4 Gross capital formation 9.0 -4.9 imports of goods and sewices 11.6 -1.8 8.8 14.7
Uruguay at a glance
Grown rates or exports ana imports (x) 40
2o
0
-20
-40
-Exports *Imports
POVERTY and SOCIAL
2005 Population, mid-year (mllllons) GNI per capita (Atlasmethod, US$) GNi (Atlas method, US$ billions)
Average annual growth, 199995
Population (%) Labor fwce (%)
Most recent estimate (latest ye Poverty (% of population below n Urban population (% of total populelion) Life expectancy at birth (years) Infant mortality (per 1,000 iive births) Child malnurilon (% of children under 5) Access to an improved water source (% ofpopulatm) Literacy (% ofpopulation age 75+) Gross primary enrollment (% of schod-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1985
GDP (US$ billbns) Grcss capita formationiGDP Exports of goods and sewiceslGDP Grcss domestic savings/GDP Grcss national savingdGDP
Current accwnt balanceiGDP Interest paymentsiGDP Total debVGDP ** Total debt service/exports ** Present value of debtlGDP Present value of debtlexports
4.7 11.4 26.8 17.0 9.8
-2.1 6.2
83.1 42 6
1985-95 1995-05 (average annual growth) GDP 3.7 1.4 GDP per capita 3.0 1.1 Exports of goods and sewices 6.9 0.3
Uruguay
3.3 4,570
15.1
0.7 1.6
29 92 76 14
100 97
109 110 108
1995
18.3 15.4 19.0 15.3 14.1
-1.2 1.6
29 0 21.8
2005
6.6 6.4
18.6
Latin Upper- Amerlca mlddie 8 Carib. income
551 599 4,008 5,625 2,210 3,366
77 72 72 69 27 23 7 7
91 94 90 94
119 107 121 108 117 106
2005 2006(e)
16.9 19.6 13.2 14.3 30.1 29.5 15.4 16.1 12.9 13.4
0.0 -0.8 5.0 5.3
87.5 53 7 53.1 87.9
2006(e) 200549
6 6 4.8 6.5 4.5
134 11.3
Development diamond'
Life expectancy
GNP Grosi per prima? capita molimen
I
Access to safe water
-Uruguay - Upper-middle-income group
Economic ratios'
Trade
T
Indebtedness
-Uruguay
STRUCTURE of the ECONOMY
(% of GDP) Agriculture industry
Services Manufacturing
Growth rates of capital and GDP (%)
40 T I 1985 1995 2005 2006(e)
13.6 8.4 9.3 8.7 35.9 26.1 31.1 31.7 29.4 19.1 22.2 23.1 50.5 63.6 59.6 59.6
Household final consumption expenditure 68.5 72.9 73.5 72.5 General gov't final consumption expenditure 14.4 11.8 11.2 10.7 Imports of goods and services 21.1 19.1 27.6 28.7
20
0
-20
-40 -GCF *GDP I
120
Uruguay
PRICES and GOVERNMENT FINANCE
Domestic prices (% change) Consumer prices Implicit GDP deflator
Government finance (“h of GDP, includes curent grants) Current revenue Current budget balance Overall surplusldeflcit
TRADE
(US$ millions) Total exports (fob)
Meat Vegetables Manufactures
Total imports (cif) Food Fuel and energy Capital goods
Export price index (2000=100) Import price index (2000=100) Terms of trade (2000=100)
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$)
EXTERNAL DEBT and RESOURCE FLOWS
(US$ 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 (net inflows) Portfolio equity (net inflows)
World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers
I 985
72.2 74.0
16.0 -1.4 -3.1
1985
854 202 141 391 708 51
107 130
68 66
104
1985
1,257 1,015
242
-351
-98
164 -66
0.1
1985
3,919 152
0
568 30 0
2 10 17 0 0
4 23 19 4
11 -7
1995
42.2 41 .O
17.5 0.3
-1.8
1995
2,106 562 304 980
2,875 262 340 987
116 98
118
1995
3,507 3,569
-62
-227 76
-213
43 1 -218
1,675 6.7
1995
5,318 51 3
0
862 117
0
15 4
183 157
0
29 32 78
40 -46
-86
2005 2006(e)
4.9 6.4 1.7 6.2
31.8 31.7 6.2 6.0
-0.7 -0.5
2005 200qe)
3,758 4,420 864 1,136 579 619
1,240 1,432 3,879 4,775
279 349 907 1,261 514 621
106 ... 97 ...
110 ...
2005 2006(e)
5,093 5,775 4,656 5,423
437 352
-585 -614 149 115
1 -147
453 1,098 -454 -951
3,438 3,074 24.5 24.0
2005 2006(e)
11,417 10,388 816 653
0 0
2,073 0 138 246
0 0
71 1
175 7 134 42 104 205
34 41 30 -163
-4 -204
inflation (%) 1217 20 15 10
5 0
00 01 02 03 04 05 OB
Export and import levels (US$ mill.) I
88 W 01 02 03 04 05 OB
3 Expolis Imports
Current account balance to GDP (%) I
:omposition of 2005 debt (US0 mill.)”
E: 142
4 - IBRD E -Bilateral 3 - IDA D -Other multilateral F -Private
- IMF G - Short-tern
121
Annex 16: M a p IBRD 30862 URUGUAY: OSE Modernization & Systems Rehabilitation APL-2
123
Unidad de GestiónDesconcentradade Maldonado
Bella Unión
Artigas
Constitución
Rivera
Salto
PaysandúGuichon
PiedraSola
TacuarembóVichadero
Aceguá
Melo
RioBranco
Treinta y Tres
Sarandídel Yí
Durazno
Paso delos
TorosYoung
FrayBentos
Mercedes
DoloresSoriana
NuevaPalmira
Carmelo
Colonia delSacramento
Cardona
RosarioE. Paullier
Juan ILacaze
San Joséde Mayo
Libertad
V. Rodriguez Canelones
Florida
Sarandi Grande
Trinidad
Atlantida
Minas
San CarlosMaldonado
Punta del Este
Rocha
La Paloma
Castillos
La Coronilla
Chuy
MONTEVIDEO
1
1
1
1
1
4
1
1
1
4 1
1
1
1
1
1
1
11
1
1
1
2
22
1 2
1 2
OSE LITTORALREGION
OSE NORTHERNREGION
OSE SOUTHERNREGION
OSE EASTERNREGION
MONTEVIDEOMETROPOLITAN
REGION
OSE NORTHERNREGION
A R T I G A S
S A L T O
P A Y S A N D U T A C U A R E M B O
D U R A Z N O
FLORES
SORIANO
R I O N E G R O
R O C H A
L A V A L L E J A
F L O R I D A
COLONIA
CANELONES
MONTEVIDEO
SAN JOSE
MALDONADO
C E R R O L A R G O
T R E I N T A Y T R E S
R I V E R A
B R A Z I L
ARGENTINA
Rio Neg
ro
Rio Tacuarembo
Rio Cuareim
Rio Arapey
Rio Dayman
Grande
Queguay
Rio Negro
Rio Uruguay
R í od e l a
P l a t a
Rio
Rio Negro Reservoir
MerínLagoon
A T L A N T I C O C E A N
58°
31°
32°
33°
32°
33°
34°
35°
56°57° 55° 54° 53
58° 56°57° 55° 54°
34°
35°
For detail,For detail,see insetsee inset
For detail,see inset
PAC
IFIC
OC
EAN
ATLANTICOCEAN
Montevideo
BRAZILBOLIVIA
PERU
CHILE
URUGUAY
ARGENTINA
PARAGUAY
Atlantida
Santa Lucia
Aguas Corrientes Water Treatment Plant
San Ramon
TalaCastellanos
San Bautista
Santa Rosa
San Jacinto
25 de Agosto
Margat
Canelones
Sauce
Pando
Villa ArgentinaLas ToscasParque del Plata
Tapia
Soca
La FlorestaCosta AzulBelo Horizonte
Sta. Lucia Del Este
La Tuna
V. Sudriers
J. SuarezToledo
Los Cerrillos
La Paz
Progreso
Las Piedras
Juánico
Sayago
Villa del Cerro
MONTEVIDEO
Montes
SalinasM
arindiaFortin De Sta. Rosa
MiguesSan Antonio
FLORIDA
MONTEVIDEO
C A N E L O N E S
LAVELLEJA
SANJOSE
34°30'
35°00'
34°30'34°30'
56°30' 56°00' 55°30'
0 16 Kilometers
0 16 Miles
APPROXIMATE LIMITSOF COSTA DEL ORO
UFW REDUCTION SITES
WATER TREATMENT PLANT
DEPARTMENT BOUNDARIES
SELECTED CITIES
NATIONAL CAPITAL
San Jose de Carrasco
Lagomar
El BosqueSolym
arShangrila
City Park
Ciudad de la Costa(UFW Reduction Site)
1
0 10 20 30 40 50
KILOMETERS
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
URUGUAY
OSE MODERNIZATION ANDSYSTEMS REHABILITATION
PROJECT
WATER SUPPLY:
AGUAS CORRIENTES WATER TREATMENT PLANT
UFW REDUCTION SITES
SANITATION:
SEWERAGE EXTENSIONS (APL-1)
SEWERAGE EXTENSIONS (APL-2)
SEWAGE TREATMENT PLANT CONSTRUCTION (APL-1)
SEWAGE TREATMENT PLANT CONSTRUCTION (APL-4)
OSE ADMINISTRATIVE REGIONS
SELECTED TOWNS
NATIONAL CAPITAL
DEPARTMENT BOUNDARIES
INTERNATIONAL BOUNDARIES
NOTE: Map shows project activities for APL-1 and APL-4 only.
1
1
2
4
IBRD 30862
JUNE 2007