Document of

The World Bank

FOR OFFICIAL USE ONLY

ReportNo: 18708

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF KENYA

THIRD NAIROBI WATER SUPPLY PROJECT(Cr. 2060-KE)

December 17, 1998

Water and Urban UnitEastern and Southern AfricaAfrica Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Kenya Shillings (KSh)

US$1.00 = 21.78 KSh Jan. 1990US$1.00 = 24.35 KSh Jan. 1991US$1.00 = 28.12 KSh Jan. 1992US$1.00 = 36.13 KSh Jan. 1993US$1.00 = 67.33 KSh Jan. 1994US$1.00 = 44.48 KSh Jan. 1995US$1.00 = 56.32 KSh Jan. 1996US$1.00 = 54.78 KSh Jan. 1997US$1.00 = 61.39 KSh Jan. 1998US$1.00 = 60.75 KSh Jun. 1998

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR OF BORROWERJuly 1 - June 30

ABBREVIATIONS AND ACRONYMS

AfDB African Development BankAfDF African Development FundEIB European Investment BankFY Fiscal YearIBRD International Bank for Reconstruction and Development (The Bank)IDA International Development AssociationMWD Ministry of Water DevelopmentNCC Nairobi City CommissionNGO Non-Governmental OrganizationOECF Overseas Economic and Cooperation Fund of JapanPIU Project Implementation UnitROK Republic of KenyaRWS Rural Water SupplyUfW Unaccounted for WaterUWS Urban Water SupplyWD Water Department of the Ministry of Water DevelopmentWSD Water and Sewerage Department of the Nairobi City Commission

Vice President Callisto E. MadavoDirector Harold E. WackmanSector Manager Jeffrey S. RackiTask Manager Alain R. Locussol

FOR OFFICIAL USE ONLYKENYA

THIRD NAIROBI WATER SUPPLY PROJECT[Credit 2060-KE]

IMPLEMENTATION COMPLETION REPORT

TABLE OF CONTENTSPage No.

PREFACE ............................................................. i.

EVALUATION SUMMARY ............................................................. ii

PART I - PROJECT' REVIEW FROM BANK'S PERSPECTIVE ................................... IA. Project Identity ............................................................. IB. Background ............................................................. 1.C. Statement and Evaluation of Project Objectives ..............................................................2D. Achievement of Project Objectives .............................................................. 4E. Implementation Record and Major Factors Affecting the Project .................................6F. Project Sustainability .............................................................. 7G. IDA Performance .............................................................. 8H. Borrower Performance .............................................................. 81. Assessment of Outcome .............................................................. 8J. Future Operations ............................................ 9K. Key Lessons Learned .......................................... 9

PART II. STATISTICAL ANNEXES ......................................... 1.1Table 1 - Suimmary of Assessments ......................................... 1.1Table 2 - Related Bank Loans/Credits ......................................... 12Table 3 - Project Timetable ......................................... 12Table 4 - Credit Disbursements ......................................... L3Table 5 - Key Indicators for Project Implementation ......................................... 14Table 6 - Key Indicators for Project Operations ......................................... 16Table 7- Studies Included in Project ......................................... 17Table 8A - Project Costs ......................................... 18Table 8B - Review and Analysis of the 10 Largest Civil Works/Goods Contracts ............... J9Table 8C - Project Financing ......................................... 20Table 9 - Economic Rate of Return ......................................... 21Table 10 - Status of Legal Covenants ......................................... 23Table 11 - Compliance with Operational Manual Statements ......................................... 25Table 12 - Estimated Bank Resources: Staff Inputs ..................................... 26Table 13 - Bank Resources: Missions .27

ANNEXESA. Mission's aide-memoireB. Borrower's contribution to the ICR

Map - IBRD No. 21208

This document has a restricted distribution and may be used by recipients oaly in theperfornance of their official duties. Its contents may not otherwise be disclosed withouttWorld Bank authorization.-.

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KENYA

THIRD NAIROBI WATER SUPPLY PROJECT[Credit 2060-KE]

IMPLEMENTATION COMPLETION REPORT

PREFACE

This is the Implementation Completion Report (ICR) for the Third Nairobi Water Supply Project,Republic of Kenya for which a Credit 2060-KE, in the amount of SDR 49.1 million (US$ million 64.8equivalent) was approved on July 25, 1989, the Development Credit Agreement was signed on August 15,1989, and the Credit was made effective on March 15, 1990.

The Credit was closed on June 30, 1998 two years after the scheduled closing date of June 30, 1996. Atthe time this Implementation Completion Report was issued, it was not possible to formally close theCredit as there was still a balance in the Special Account that needed to be documented by the Borrower.Co-financing for the Project was provided by the African Development Bank (AfDB), the EuropeanInvestment Bank (EIB) and the Overseas Economic and Cooperation Fund (OECF) of Japan.

The ICR was prepared by Messrs. Alain R. Locussol, Principal Water and Sanitation Specialist AFTU 1,and Tejbir Singh Phool, Consultant; it was reviewed by Messrs. Jeffrey Racki, Manager AFTU I andHarold E. Wackman, Director AFCO5.

Preparation of this ICR was begun in conjunction with IDA's final supervision/completion mission ofJune 1998. The Bonrower contributed to the preparation of the ICR by providing pertinent informationand commenting on the draft ICR. The Borrower also prepared a separate evaluation of the Project'spreparation and execution, that is attached to the ICR.

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KENYA

THIRD NAIROBI WATER SUPPLY PROJECT[Credit 2060-KE]

IMPLEMENTATION COMPLETION REPORT

EVALUATION SUMMARY

Introduction

1. In the late 1980's, Nairobi, the capital of the Republic of Kenya (ROK) housed approximately 1.3million people and experienced a population growth rate of 7% per annum; about 30% of the city had noaccess to a satisfactory water service and about 40% to a sanitation service. In 1998, Nairobi's populationwas estimated at about 2.1 million. The water supply and sanitation system, owned and operated by theNairobi City Commission (NCC), has always received high Government priority because Nairobi is animportant center of activity and tourism. The Town Clerk, the NCC chief executive, supervises sevendepartments, including the Water and Sewerage Department (WSD); the latter is headed by a GeneralManager. The Bank has been involved in the urban water supply sector since the 1970's and has financedthree water projects aimed at improving the service in Nairobi. The key lesson learned from these projectswas the need for a strong autonomous organization, capable of making sound economic decisions. Also,in the late 1980's, ROK was again experiencing deteriorating fiscal and monetary conditions, thatresulted in pressure on the national budget.

Project Objectives and Components

2. Objectives. The Project's main objectives were to: augment Nairobi's water supply; improvebasic needs provision and health conditions of the urban poor; assist in maintaining the city's sanitationstandards, decrease pollution in the Nairobi river; and improve operational and financial efficiency of theWSD. In view of the impending shortcomings of the water supply and sanitation service, the mainobjectives were appropriate. In framing the institutional objectives, IDA and the Govemment initiallyagreed on the need to convert the WSD into an autonomous organization, but ultimately articulated amuch weaker objective of strengthening only portions of the existing entity. They obviously missed astrategic opportunity to make significant institutional progress.

3. Components. The Project components included the construction of an impoundment dam andtransmission mains, the extension of the water treatment capacity, the (limited) extension of thedistribution system, the enhancement of the waste water treatment capacity, and the provision of technicalassistance and training for selected departments of the WSD. The design of the physical components wasadequate, and the dimensioning of the works consistent with the demand forecast made at appraisal. Thewater production and distribution programs were however somewhat unbalanced. There was also adiscrepancy between the objective of improving the service to lower income groups and a design thatincluded no secondary or tertiary water distribution pipes, sewers, connections or standposts in its originaldescription. This was partly corrected after most components of the original Project description werecompleted, by the introduction of a limited pilot water distribution component in the slum area of Kibera,home to about half a million people. The institutional objective was supported only by a limited technicalassistance and training program.

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Implementation Experience and Results

4. Achievement of Objectives. The Project has achieved its objective of increasing the waterproduction capacity, but at closing about 50% of the population still had no direct access to piiped waterdespite a significant increase of the number of connections. The Project has only partially achieved itsobjective of increasing the waste water treatment capacity, since construction was not completed atclosing. At closing, the full impact of the extension of the waste water treatment plant could not berealized because a significant portion of the sewage generated in the city did not reach it; effluent qualitywas however according to standards. The Project has only marginally achieved its objective of improvingthe water supply and sanitation service to low income communities, construction under the Kibera pilotscheme being completed only six months after closing. The Project has failed completely to improve theWSD operational and financial efficiency.

5. Project Cost. The final construction cost was US$213 million equivalent against the appraisedUS$217 million equivalent. The difference is accounted for partly by savings related to currencydevaluation and partly because components costing approximately US$1.5 million were not yetcompleted.

6. Project Implementation. The closing date of the Project was extended twice to June 30, 1998from June 30, 1996. Disbursement was suspended three times, because of constant disagreement on thebalance between the "General Account" of the NCC and the "Water Account" maintained by the WSD;these accounts were in fact managed as only one account, in violation of Credit covenants. At closing,disbursement had been suspended for six months; the audited balance between the two accounts was madeavailable five months after closing. Some savings were used to finance additional components toovercome shortcoming of the original design.

7. Factors Affecting the Project - Outside of Government Control. The performance of financingagencies, contractors and consultants with regards to implementation of construction activities of theoriginal Project description was generally satisfactory.

8. Factors Affecting the Project - Subject to Government Control. The Project suffered constantlyfrom the decision made not to address the major institutional shortcomings identified at appraisal. Atclosing, most WSD problems still had their roots, as already mentioned in the Staff Appraisal Report, inthe difficulty to: access cash generated from operations; attract and/or retain competent staff by proposinga competitive compensation package; simplify a complex decision making process involving theMinistries of Local Authorities and of Water Resources and the NCC; and procure goods and servicesaccording to industry standards. The nominal water tariff was increased, but in 1998 the real tariff wasbelow the 1989 level, and the "rate of return" covenant was not complied with. Counterpart funding wasnot a major issue, although it was currently unclear how WSD would fund the remaining constructionactivities.

9. Factors Affecting the Project - Subject to the Control of the ImplementingAgency. The ProjectImplementation Unit (PIU) of the WSD implemented the major physical components of the P'rojectsatisfactorily. The significant increase of the value of most major contracts, which ended up costing morethan 170% their value at award, required a detailed review by IDA. This increase is difficult to explaintaking into account that the Project was thoroughly prepared under an earlier Engineering Credit, and thatabout 16% of the construction costs were devoted to construction supervision, up from the 6% budgeted atappraisal. Also, while the Project was unable to overhaul the computerized billing system, the WSDshares the responsibility in the deterioration of its commercial operations. While Unaccounted for Water

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(UfW) improved from about 45% to 28% under the preceding project, it may have deteriorated again toabout 50% in 1998.

10. The Project is unlikely to be sustainable. The Government is still reluctant to address thefundamental issue of the managerial and financial autonomy of the WSD, although it has recently showninterest in "commercializing" municipal water companies. This will continue to constrain the internalresource generation capacity, and as a result, the WSD's capacity to fund maintenance activities; the WSDtrack record with funding maintenance is not encouraging. Major deficiencies in the commercialmanagement, as evidenced by accounts receivable equivalent to 770 days of billing, still remain to beaddressed, and further tariff increases are unlikely to be accepted by consumers unless there is aperception that the service is significantly improved.

11. Overall IDA pierformance was unsatisfactory, although it was satisfactory during identification,when several desirable steps to support the establishment of an autonomous WSD were taken.Performance during preparation and appraisal was unsatisfactory. Neither were objectives fully consistentwith issues identified, nor were components fully consistent with the objectives articulated. While keyissues were of institutional nature, corresponding components were of managerial nature only; further,even the design of the managerial components proved inadequate. Performance during supervision wasalso unsatisfactory, with strong emphasis placed on construction activities, and not enough on commercialand financial performance of the WSD. While suspension of disbursement resulted in partial compliancewith covenants, it adversely affected Project implementation and did not provide proper answers to majorinstitutional problems sidelined at appraisal.

12. Overall, the Borrower performance was unsatisfactory, although the performance of the PIUduring implementation was satisfactory to the extent that all physical components of the original Projectdescription were implemented according to standards, within budget and with few delays. TheGovernment was never committed to addressing the major shortcoming of the institutional set-up, and theNCC defaulted on several covenants. At closing, Nairobi, after three Bank-supported projects, was stillserved by a WSD unable to produce reliable data on its operations, in an alanning financial situation, andunable to fund maintenance.

13. The Project outcome is unsatisfactory, although all physical components of the originaldescription were implemented generally in a satisfactory manner. A strategic opportunity to makesignificant institutional gains was obviously lost. Further, consumers could not reap the full benefits ofthe Project because water production and waste water treatment capacities built were not balanced bycorresponding water distribution and waste water collection capacities. Also, at closing, the Project hadnot been able to make a significant difference in the provision of the water supply service to lower incomecommunities. The Project has failed to improve the WSD commercial and financial performance. A newcomputerized billing system is unlikely to be the answer to the problem if issues of autonomy of the WSDand the incentive framework it would operate in are not addressed.

Summary of Findings, Future Operations and Lessons Learned

14. The Project demonstrated the importance of proper sequencing of institutional development andmajor investments. This requires the political will at the highest level of decision making to addressfundamental issues. At: closing, several important challenges remain. These include: changing theinstitutional framework the WSD operates in; developing alternative service standards and managementarrangements to provide a reliable and affordable service to lower income communities; improvingcollection of waste water; and ensuring that revenues generated from water supply and waste water

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operations are exclusively used to finance the maintenance and development of facilities in addition totheir operating costs. Main lessons are:

* IDA should not finance projects unless the Borrower is committed to implementing policy andinstitutional reforms that would guarantee their sustainability;

* IDA should insist on the creation of autonomous water utility companies prior to financing majordevelopment projects;

* IDA should encourage Borrowers to seek private sector participation options, such as management,lease or concession contracts to improve overall technical, commercial and financial performance ofthe water supply and sanitation service;

* IDA must carefully design financial covenants, watch performance indicators agreed upon duringnegotiations, and act decisively soon after evidence of violation appears; and

* water supply and sanitation projects must be designed to achieve a balance between production anddistribution capacities, and waste water treatment and collection capacities so that project benefitsreach the intended beneficiaries.

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KENYA

THIRD NAIROBI WATER SUPPLY PROJECT[Credit 2060-KE]

IMPLEMENTATION COMPLETION REPORT

PART I - PROJECT REVIEW FROM BANK'S PERSPECTIVE

A. Project Identity

Name : Third Nairobi Water Supply ProjectCredit Number 2060-KERVP Unit : AFRICA RegionCountry : KenyaSector : Water Supply

B. Background

1. The Republic of Kenya (ROK) stretches inland from the Indian Ocean to Lake Victoria andcovers 583,000 km2 straddling the equator. In the late 1980's, the ROK had a population of 21 milliongrowing at 3.8% annually, one of the fastest rate in the world. Nairobi, the capital city, housedapproximately 1.3 million and experienced a higher annual growth rate of 7%; in 1998 Nairobi'spopulation was estimated at 2.1 million. After receiving significant international aid that included anIMF-led readjustment package in the early 1980's, the ROK was again experiencing deteriorating fiscaland monetary condit:ions that resulted in pressure on the national budget and on government bodies.

2. In the late 1980's, about 70% of the city was served by house connections; about 60% had accessto the public sewerage system and another 20% relied on septic tanks. But, a large proportion of thepopulation received an unsatisfactory water and sanitation service, and each year, the rapid urbanpopulation growth rate added significantly to the large numbers of un-served individuals. Nairobi reliesmostly on surface water from nearby perennial rivers, where adequate water quantities are available;ground water resources are very limited and contain high levels of fluoride.

3. The Water Suapply and Sewerage systems are owned and operated by the Nairobi CityCommission (NCC), and receives high Government priority because the capital city is a major center ofactivity and tourism. The Town Clerk, the NCC chief executive, supervises seven departments includingthe Water and Sewerage Department (WSD). The WSD is headed by a General Manager.

4. The Bank Group has been involved in the urban water sector since 1970's, financing five waterprojects of which three were aimed at improving the service in Nairobi. The Nairobi Water SupplyProject (Loan 714-KE implemented during 1972-76) represented the first phase of a long-range programto develop the local river system to meet Nairobi's water supply requirements. The Second Nairobi WaterSupply Project (Loan 1520-KE implemented during 1978-84) provided extensions to meet water needssupply up to 1987-88. The Third Nairobi Water Supply Engineering Project (Credit 1566-KEimplemented during 1988-1991) assisted in the preparation of the next extension phase (Credit 2060-KE).The key lesson learned from these projects was the need for a strong autonomous organization capable ofmaking sound economic decisions within an established policy framework acceptable to the Govemment.

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C. Statement and Evaluation of Project Objectives

5. Project Objectives. The Project's main objectives (SAR No 7500-KE) were to:

* augment and secure the water supply to Nairobi through the expansion of source works to meetdemand up to year 2003/2005;

* improve basic needs provision and health conditions of the urban poor by expanding the coverageof the piped water supply to low income groups;

* assist in maintaining sanitation standards in the city;* decrease pollution in the recipient river; and* improve operational and financial efficiency of the WSD.

6. Project Components. The following components would achieve these objectives:

* extension of the water supply system* source works including the construction of: (a) a 63 m high dam on the Thika river with an

impounding capacity of 70 million m3; (b) access roads; (c) raw water intakes; and (d)transmission tunnels;

* extension of the water supply system: (a) extension of the capacity of the Ngethu watertreatment plant from 180,000 m3/d to 460,000 m3/d; (b) 36 km of transmission main with adiameter of 1.3 and 1.4 m; (c) three treated water reservoirs with a total capacity of 46,000m3; (d) two pumping stations; (e) 47 km of distribution pipes diameter of 0.2 to 1.0 m.; (f)instrumentation; and (g) offices and housing;

* rehabilitation and extension of the sewage treatment plant to a total capacity of 90,000 m3/d dryweather flow and construction of staff housing, offices and amenities;

* water supply and waste water disposal in low income residential areas;* engineering and construction supervision for the above works and for the preparation of a

Sewerage and Sanitation Master Plan; andtechnical assistance and training for the WSD, including provision of management and staffsupport, implementation of training program, implementation of a self accounting system, andimplementation of an environmental action plan.

7. Additional Components. During Project implementation and after most of the originalcomponents were completed, IDA agreed to allow cost savings of US$9.0 million to be used for additionalcomponents as follows: (a) water distribution in the low income communities of Kibera and Kasarani; (b)desludging of the Dandora waste stabilization ponds; (c) upgrading of the Kabete pumping station (d)additional upgrading of the Gigiri pumping station; (e) supply of sewer cleaning equipment; (f)computerization of the billing system; and (g) additional construction supervision.

8. Project Cost, Financing Plan, and Implementation Timetable. At appraisal, total Project costwas estimated at US$217.0 million equivalent, of which US$124.0 million represented foreign exchangerequirements: (a) the African Development Bank/Fund (AfDB) approved US$35.0 million for the Thikadam; (b) the European Investment Bank (EIB), US$19.0 million for raw water intakes and tunnels; (c) theOECF of Japan, US$40.0 million for treated water transmission lines; (d) IDA, US$65.0 million fortreatment plant, distribution, sewage treatment plant, engineering and construction supervision, andtechnical assistance to the WSD; (e) the NCC agreed to provide US$55.0 million for counterpart financingon all components; and (f) the Govermment of Kenya (GOK) agreed to provide US$3.0 million for landacquisition. The Project was to be implemented between 1990 and 1994, and its initial closing date wasJune 30, 1996.

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9. Project Extension. IDA agreed to extend the closing date twice to June 30, 1998 and to financethe Additional Components discussed above. A third extension could not be not requested, becausedisbursement had been under suspension since late 1997.

10. Evaluation of Objectives. In view of the impending shortages of water and sanitation service inNairobi, the physicad objectives were timely and appropriate. The Project's main objectives of increasingthe water production and sewage treatment capacities were simple, well understood by, and important forthe NCC and the WSD.

11. In framing the institutional objectives, IDA and the Borrower discussed the need to convert theWSD into an autonomous organization, took encouraging early steps, but ultimately articulated a muchless ambitious objective of strengthening portions only of the existing entity. A strategic opportunity tomake significant institutional progress was obviously missed. A letter from IDA to the NCC (5/6/86)indicated "... the Bank's prime concern in continuing to support Nairobi 's water supply and seweragedevelopment has been to strengthen the WSD to operate efficiently and with financial independence. Pastand current experience has revealed the serious shortcomings in both these areas ... ... Until theseweaknesses are corrected, it is the Bank's view (which we have repeatedly emphasized both to the KenyaGovernment and the Commission) that further investments of the magnitude envisaged would onlyaggravate an already difficult situation." The Borrower, eager to signal its concerns, replaced the entiresenior NCC management in early 1987 and agreed with IDA on the principle to create an autonomousregional water authority to manage the Nairobi water supply (memorandum of 3/6/87). Recognizing thatit would take several years to create this regional authority, IDA suggested in a letter dated 5/18/87 that:"... consideration be given to the preparation of an interim project " ... whose purpose would be to: (a)provide modest expansion of Nairobi water supply at minimal cost in advance of construction of the nextmajor investment project; (b) continue and strengthen the ongoing program of operational improvements;and (c) assist in the conversion of the Water and Sewerage Department into an autonomousorganization. "

12. The SAR (para. 4.07) however concluded that: "...the transformation of the WSD into a separateentity, which would require tremendous additional effort in manyfields -- political, legal, managerial,

financial, etc. - would be premature and counterproductive during implementation of the proposedProject." IDA was obviously faced with the conflicting objectives of initiating a large constructionprogram with a long implementation period, so that Nairobi has sufficient water in the medium term, andthe need for supporting an in depth institutional reform, so that the WSD becomes financially sustainableas soon as possible. IDA finally concluded that sufficient improvement in the institutional set-up could beachieved if the autonomy of the Water Fund (para. 21) was maintained and computerized billing wasinstituted; an alternative strategy of waiting for more radical institutional changes was rejected by IDAgiven the importance of securing Nairobi's water supply.

13. Evaluation of Components. The design of the physical components of the Project was adequate,and dimensioning of the works consistent with demand forecast made at appraisal. The production anddistribution extension programs were however somewhat unbalanced. There was also a discrepancybetween the objective of improving water supply and sanitation to lower income groups and a Project thatput little emphasis on service to customers and further included no secondary or tertiary water distributionpipes, sewers, or connections in its original description. This was partly corrected, after most componentsof the original Project description were completed, by the introduction of a limited pilot water distributioncomponent in particular in the slum area of Kibera, home to about half a million people. The Project'sinstitutional objective was supported only by a limited technical assistance and training program.

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D. Achievement of Project Objectives

14. Overall Assessment. The Project has achieved its objective of increasing the water productionand only partially achieved the objective of increasing the waste water treatment capacity. The Project hasonly marginally achieved its objective of improving the water supply and sanitation service to low incomecommunities. It is still difficult to judge if the Project has achieved its objective of improving ambientwater quality in the Nairobi river. The Project has failed completely in its objective to improve the WSDoperational and financial efficiency. Facilities built by the Project are well designed and quality ofconstruction is good.

15. Water Supply Service. Construction of a new dam on the Thika River has added fresh waterimpoundment of 70 million m3. Available production capacity more than doubled from 214,000 m3 /dayin 1988/89 to 455,000 m3 /day in 1995/96 (Table 6); this capacity is estimated to be adequate to meetdemand through the year 2005. During the same period, actual production increased by 650%) from214,000 m3 /day to 347,000 m3/day. Total water connections increased from 101,000 to 158,000 andresidential connections increased from 93,000 to 145,000; this corresponds to average annual growth ratesof about 6.5%, comparable to that of the population. Population connected increased by about 50% from630,000 to 980,000, but at the end of the Project, still an estimated 1,100,000 people, or more than 50% ofthe total population had no direct access to piped water. During the Project implementation period,Unaccounted for Water (UfW) may have increased from 28% to 51 %, while it had gone down from about45% to 28% under the preceding project. These data indicate that the benefits of the water supplycomponent have been limited by a restricted extension of the distribution system and increase in UfW.The increase in UfW could reflect a combination of several factors: (a) suspected un-metered off-takes ontransmission lines; (b) steady deterioration of the WSD commercial operations; and (c) an increase inphysical leaks due to higher pressure in the networks. The Kibera water distribution component wasaimed at correcting shortcomings of the original Project description by supporting provision of service inlower income communities; it included a pilot community management system, with the WSD rolelimited to that of bulk supplier. Construction activities could be completed only six months after closing.

16. Waste Water Service. Waste water treatment capacity of the Dandora stabilization ponds hasincreased from 30,000 m3/day to 90,000 m3 /day. However, at closing, construction was still notcompleted and is likely to be jeopardized by shortage of funds. During the Project implementation period,the increase in the number of sewer connections has been mostly attributable to private real estatedevelopers; it is not known accurately. At closing, the available treatment capacity, after completion ofthe anaerobic ponds and desludging of the existing facultative ponds, was significantly above: the volumeof waste water delivered by the main trunk sewer of about 50,000 m3/day, partly because untreatedsewage was illegally diverted by small farmers for informal irrigation. Also, most of the center of the citystill relies on an old combined sewer and storm water drainage system whose flow was not diverted to theponds. While effluent quality was according to standards, there are no reliable data to assess the impactof the increase of waste water treatment capacity on the ambient water quality.

17. Low Income Communities. The Project has only marginally achieved its objective of improvingthe water supply and sanitation service to low income communities and a large percentage of thepopulation is still not served, despite increased capacities. The population with no direct access to pipedwater may have increased from 700,000 to 1,100,000 between 1988/89 and 1995/96 (Table 6). Thepoorest segments of the population, notably those living in slums are the most under-served, and theKibera pilot project was still in an early stage of implementation at closing.

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18. Institutional Development. The Project inappropriately aimed to address the institutionaldeficiencies by simply providing limited training and technical assistance (TA) to the commercial andfinancial management functions of the WSD. Training provided in Kenya and abroad failed to betranslated into improved performance; several staff trained left the WSD for better paid positions in theprivate sector. The TA to commercial management failed partly because major delays hamperedimplementation of a new computerized billing system. At closing , the WSD still took more than a year toprepare financial statements of questionable accuracy, partly because most recording was manual. Atclosing, procedures were also still too bureaucratic; for examnple, payment by the WSD still required thesignature of the NCC Treasurer and Town Clerk in addition to that of its General Manager for all expensesin excess of KShIO,000 (US$167). In 1996/97, the WSD was able to issue only five billings instead of the12 planned. On the bright side, limited decentralization of collection to the neighborhoods was a move inthe right direction.

19. The Project failed to improve the WSD operational efficiency. The WSD performance sufferedconstantly from the shortcomings of the institutional set-up identified at appraisal; this started with a sixmonth delay of the Credit effectiveness. With collection of local taxes being a major problem, the NCCperceived the WSD as a main source of revenues. Therefore, the NCC had little incentive to grantfinancial autonomy to the WSD and for the large part persistently starved the latter of much needed cash.The NCC defaulted on most financial covenants and as a result, disbursement was suspended three timesby IDA during the eight-year implementation period. At closing, the WSD was still unable to providereliable data on its commercial and financial operations or to fund routine maintenance activities. Atclosing, disbursement had been suspended for more than six-months, and conditions for liftingsuspension, had not been met (para. 21). In late 1990s, the WSD perfornance was still characterized byproblems idenitified in the SAR prepared in the late 1980's (para 4.05) namely: ''institutional problems,e.g. inadequate salaty scales, cashflow problems, bureaucratic decision-making processes, poorfinancial control, low staff morale, inflexible puirchasing procedures and hence poor management." Abright note, however on the staffing ratio that decreased from 15 to 11.8 per thousand connections duringthe Project implementation period.

20. FinancialPerformance. At closing, the financial performance and position of the WSD weresignificantly worse than projected, and also worse than at appraisal. In 1995/96, operating revenues andcash generated from operations were significantly below forecast. In 1996/97, the average tariff, inconstant terms, was blelow that of 1988/89. Also, the level of liquidity measured by the current ratiodecreased (Table 6); the level of indebtedness measured by the long term debt to equity ratio increased;and the ability to service the long term debt from operating income measured by the debt service ratiodeclined. As of end 1996/97, accounts receivable represented about 770 days of billing. The underprovisioning of non-collectible accounts overstated eamings, current and total assets and equity.

21. The WSD was constantly short of cash. Throughout Project implementation, the WSDmaintained a "Water Account" separate from the NCC "General Account" where revenues from watersales were deposited. However, due to weak accounting and internal control systems, the two accountswere still managed as only one. Because the WSD experienced difficulties accessing cash generated fromoperations, it was unable to carry out regular maintenance activities. Constant disagreement on thebalance between the two accounts and late reimbursement of amounts borrowed by the General Accountfrom the Water Account, prompted IDA to suspend disbursement for a third time in December 1997.Independent auditors were hired to certify the balance; preparation of the report was hampered by pooraccounting practices, co-mingled budgeting, and the multitude of inter account transfers. Their finalreport, showing a (tentative) balance of Ksh93 million (US$1.5 million) in favor of the General Account,was made available five months after closing. The auditors' report confirmed, as identified in the late

6

1980s, that financial autonomy of the WSD and the complete separation of the two accounts is aprerequisite for improved financial management. No action plan was submitted by WSD to offset thebalance between the two accounts.

22. The NCC defaulted repeatedly on financial covenants, that were not all adapted to the situation ofa utility company with poor collection and cash management records: (a) accounts and audits were alwayssubmitted with substantial delays; (b) calculation of the rate of return was affected by questionablevaluation of the operating income and fixed assets in operation; (c) the debt coverage ratio remainedbelow 1.5; (d) at the end of 1995/96, accounts receivable reached 770 days, i.e. more than eight times the90 days targeted at appraisal, because customers often refused to pay bills they considered inaccurate; (e)medium term financial forecasts were never prepared; and (f) misuse of the Water Account was the maincause of suspension of disbursement.

23. Environmental Action Plan. Under Credit 1566-KE, the Govemment undertook in 1]988 anextensive study of the environmental impacts of the proposed Project. In particular, a full environmentalimpact of the Thika dam was assessed. The dam inundated 280 hectares of land displacing 3:35 families.An acceptable resettlement program was undertaken by the Government in 1990; by 1992 whenimpoundment began, all 335 farnilies had been compensated and resettled. In 1993, an environmentalmid-term review was carried out by consultants financed by the Project. The review showed that, both interms of physical environment and socio-economic environmental impacts, the mitigation measuresimplemented had a satisfactory impact. At closing, the same consultants were hired again by the WSD fora final review; their report is in under preparation.

24. Economic Rate of Return (ERR). The ERR of the Project was recalculated at 0.2% as comparedwith 12.6% at appraisal (Table 9). As in the SAR, the consumer surplus and extemalities, such asimproved public health, have not been not captured, thus leading to undercounting of benefits. The muchlower ERR achieved by the Project than that estimated at appraisal is explained by the devaluation of thelocal currency that changed its capital cost structure and the rapid inflation that increased operating costs,while tariffs were slow to rise. It also reflects the WSD's poor commercial performance, which leads tosignificant loss of revenues.

E. Implementation Record and Major Factors Affecting the Project

25. Factors Outside of Government ControL The performance of financing agencies, contractors andconsultants with regards to implementation of construction activities of the original Project descriptionwas generally satisfactory. The country experienced a decline in economic conditions and theGovernment was forced to devalue the Kenyan Shilling several times. Between 1989 and 1998 theKenyan Shilling fell from approximately 22 to 61 against the US Dollar.

26. Factors Subject to Government ControL Throughout implementation, the Project suffered fromthe decision made at appraisal not to address the major institutional shortcomings singled out duringidentification, with regards to its lack of autonomy of the WSD and the unclear incentive frameworkwithin which it operates. At closing, most problems the WSD was faced with still had their r'oots in thedifficulty to: (a) access cash generatedfrom operations; (b) attract and/or retain competent staff byproposing a competitive compensation package; (c) simplify a complex decision making process involvingthe Ministries of Local Authorities and of Water Resources and the NCC; and (d) procure goods andservices according to industry standards. Counterpart funding was initially not a major issue, but atclosing, several contractors and consultants still claimed late payments and related interests on the portion

7

of the contracts financed by the WSD. It was also unclear how WSD would fund remaining constructionvalued at US$1.5 mjillion equivalent.

27. Factors Subject to the Control of the ImplementingAgency. The WSD Project ImplementationUnit (PIU) implemented the physical components agreed at appraisal satisfactorily. The PIU confirmedthat the participation of an expert panel to review the design and construction of the Thika dam wasbeneficial. The PIU was initially able to avoid extemal interventions on procurement decisions.Procurement records reveal that later, the NCC became more involved in procurement and adverselyaffected its process. Even if the main reason of the steady deterioration of the WSD commercialoperations is its antiquated computerized billing system, the WSD has its share of responsibility in poormeter reading, meter maintenance, bill collection and implementation of coercive measures for nonpayment. As a result of limited maintenance means and regulation enforcement capacity, the WSD hasallowed a situation where illegal water supply connections can be built, farmers can divert untreatedsewage to irrigation, and structures can be erected on water mains and trunk sewers.

28. Project Cost. The final Project cost is summarized in Table 8A. It is estimated at US$213.0million equivalent to be compared with the estimated US$217.0 million at appraisal. The difference isaccounted for partly by savings related to currency devaluation and partly because components costingapproximately US$1.5 million were not yet completed. However, while lowest bids for most major civilworks contracts generally compared with appraisal estimates, their final cost ended up to be about 70%above the bid price, of which about 42% was for physical contingencies (Table 8B); the major costoverrun of the Thika Damn component forced the AfDB to increase its financing from US$35.2 million toabout US$62.8 million equivalent. The large difference between the final cost of most contracts and theircost at award is difficult to explain taking into account that the Project had been thoroughly preparedunder an Engineering Credit and that about 16% of the construction costs were spent on constructionsupervision, up from 6% estimated at appraisal. IDA had to conduct a detailed review of these largecontract increases because documentation submitted to justify them was not always of acceptable quality.

F. Project Sustainability

29. Several considerations indicate that the Project is unlikely to be sustainable, even if the waterproduction and waste water treatment capacities are likely to be sufficient to meet demand until 2005.First, realizing the full benefit of the Project still requires that sizable investment be made to reinforce andextend the water distribution and sewer systems. Second, although some interest in "commercializing"municipal water companies has been demonstrated by the Government, there is still a high reluctance toaddress the fundamental issue of the financial and managerial autonomy of the WSD; this will continue toconstrain its internal resource generation capacity. Third, the WSD's track record with regards tomaintenance is not encouraging; while some of the works built by the Project were still under defectliability at closing, they may rapidly suffer from poor maintenance soon after demobilization ofcontractors. Fourth, major deficiencies in commercial management still remain to be addressed, and it isdoubtful that a revamped computerized system could lead to major improvements in an institutionalenvironment that provides little or no incentive to perform. Finally, tariff increases needed to service alarge debt burden are uLnlikely to be accepted by consumers, unless they perceive a major change in theway business is conducted.

8

G. IDA Performance

30. Overall, IDA performance was unsatisfactory, although performance was satisfactory duringProject identification, when IDA took several desirable steps to support the establishment of anautonomous WSD. Performance during preparation and appraisal was unsatisfactory: neither were Projectobjectives fully consistent with issues identified, nor were Project components fully consistent withobjectives articulated. Specifically, while issues identified were mostly of institutional rather than ofmanagerial origin, Project components designed to address them were of managerial nature only.Further, even managerial development components turned out to be inadequately designed. At appraisaland during negotiations, IDA should have: (a) insisted on the establishment of a strong autonomousorganization as a condition for financing a large investment program and encouraged implementation ofthe in-depth reforms needed to address all institutional shortcomings; (b) recommended a better balancebetween water production with distribution and guided design of water supply components to serve lowincome communities; and (c) selected financial covenants better suited to a utility company whose mainproblems were, and still are, tariff collection and cash management.

31. IDA performance during supervision was also unsatisfactory, with too much emphasis placed onconstruction activities, and not enough on the WSD commercial and financial performance; rnonitoring offinancial indicators and preparation of short term financial projections were somewhat deficient. A fornalmid-term review could have helped refocus the Project objectives and supervision activities. Despite thepoor achievement described above, Development Objective was often rated "satisfactory" in supervisionreports. Also, IDA may have contributed to delays in the procurement of the computerized billing systembecause agreement on the tender document could not be reached rapidly. Towards the end of the Project,supervision was also affected by changes of staff and poor record keeping; for exarnple, financialsupervision reports have been lost during reorganizations and moves. While suspension of disbursementresulted in partial compliance with covenants, it also adversely affected Project implementation and didnot provide answers to major institutional problems "sidelined" at appraisal.

H. Borrower Performance

32. Overall, the Borrower performance was unsatisfactory. During the preparation andimplementation stages, the NCC and the Ministry of Local Authorities demonstrated no willingness toaddress the many institutional issues to help the WSD improve its performance. However, theperformance of the PIU during implementation was satisfactory to the extent that all physical componentsof the original Project description were implemented according to standards, within budget and with fewdelays. Relatively speaking, the WSD is staffed with competent engineers and accountants who wereplaced in an environment that provided neither means nor incentives to efficiently perform maintenanceand commercial activities. Their frustration was exacerbated by the inability of the Project to overhaulcommercial operations. The NCC/WSD defaulted on most covenants. At closing, and after three IDAsupported projects during the last 25 years, the water supply and sewerage service in Nairobi was stillprovided by an agency unable to produce reliable data on its technical, commercial and financialoperations and in an alarming financial situation.

1. Assessment of Outcome

33. The Project outcome is unsatisfactory. Although all physical components of the originaldescription were implemented in a generally satisfactory manner, a strategic opportunity to achievesignificant institutional and commercial gains was wasted. Further, full benefits were not realized because

9

water production and waste water treatment capacities built by the Project were not balanced bycorresponding water distribution and waste water collection capacities, and consumers could not reap thefull benefits of these investments. Also, at closing, the Project had not been able to make a significantdifference in the provision of the water supply service to lower income communities and in the ambientwater quality in the Nairobi river. The Project has failed completely to improve the WSD commercial andfinancial performance, and issues of autonomy of the WSD and of the incentive framework it wouldoperate under have not been addressed.

J. Future Operations

34. Future operations are likely to suffer because the political will to change the institutionalframework and incentive structure influencing the NCC/WSD is weak. Several important challengesremain. Changing the institutional framework the WSD operates in would require the 'tremendous effort-- political, legal, managerial andfinancial "referred to in the SAR (para. 40).

35. With a growing population living in informal settlements and having no direct access to pipedwater, there is an obvious need to develop alternative service standards and management arrangements. Atclosing, the Kibera pilot water supply project was still in the early stages of implementation, andcommunity management options were still being investigated. The Kibera project must be continued andclosely monitored by the WSD so that it can be replicated in similar areas. But, with very littleincremental revenue to be expected from extending the service in such neighborhoods, the WSD may havelittle incentive to pursue this effort if it is unable to generate revenues in formal settlements and if noexternal financial and technical assistance is provided.

36. Impact of the increased waste water treatment capacity on the ambient water quality is yet to bedemonstrated. To achieve full benefit of the Project, it would be necessary to collect illegal waste waterdisposals in the Nairobi river, inject them in the trunk sewer and remove permanently the blockagescreated by farmers to irrigate.

37. Proper maintenance is a serious concern, because so far the WSD has been unable to finance it.This could lead to a rapid degradation of the facilities built and to the need for financing costlyrehabilitation programs in the medium term. At closing, most facilities of the original Project descriptionhad been in service for about two years; the defect liability period or technical assistance contract, such asthat for the Ngethu water treatment plant will end soon. While operation of the stabilization pondsrequire limited operating budget only, their benefits are directly linked to the WSD's capacity to increasethe flow of waste water treated and thus to maintain and "police" existing trunk sewers. It is likely thatweaknesses in the WSD's technical, commercial and financial operations can only be solved if a majordecision is made to change the institutional set-up and involve the private sector in the provision of thewater supply and sanitation service. As a first step in this direction, the WSD has recently requestedproposals from several private firms for taking over its commercial operations; financing for this servicecontract is supposed to come from WSD's own revenues.

K. Key Lessons Learned

38. Lessons learned from this Project are classified into three broad areas.

10

39. Institutional Development. The first main lesson is that IDA should not finance projects unlessthe Borrower is committed to implementing policy and institutional reforms that would guarantee theirsustainability. A second main lesson is that IDA must insist on the creation of autonomous water utilitycompanies prior to financing major development projects. A third main lesson is that IDA shouldencourage Borrowers to seek private sector participation options, such as management, lease orconcession contracts, to improve overall technical, commercial and financial performance of the watersupply and sanitation service. Components of these lessons are as follows:

* project objectives must address institutional issues identified during preparation; it has obviouslybeen counterproductive not to address them; it would have not been premature to address them inparallel to a large investment program;

* project components should be designed to achieve project objectives; if major institutional issuesare identified, managerial solutions are unlikely to address them;

* the financial autonomy of the utility company is a prerequisite for protecting revenues generatedfrom water supply and sanitation operations being diverted for other purposes;

* improvement of technical, commercial and financial operations of a utility depends on theincentive framework it operates in; involving the private sector in the delivery of service is oneway of implementing this incentive framework; and

- suspension of disbursement for non compliance with covenants affects implementation of theProject and does not provide the proper answer to issues "sidelined" at appraisal.

40. Financial Development. The main lesson learned is that IDA must carefully design financialcovenants, watch performance indicators agreed upon at negotiations and act decisively soon afterevidence of non compliance appears. Components of this lesson areas follows:

* IDA must carry out, at least once a year, a full supervision of the financial performance of theutility company, in order to check accuracy of data, and update financial forecasts and action planstogether with the Borrower; and

* financial covenants should be tailored to issues to be addressed; financial covenants linked to cashgeneration are preferable for utility companies with poor collection and cash management; inorder to be meaningful, a rate of return covenant must be based on maintenance expenses andvaluation of fixed assets be in line with industry standards.

41. Plhysical Design and Implementation. The main lesson learned is that water supply andsanitation projects must be designed to achieve a balance between production and distribution capacities,and waste water treatment and waste water collection capacities so that project benefits reach the intendedbeneficiaries. Additional lessons are as follows:

* good quality engineering preparation and participation of an expert panel to review the design andconstruction of dams, are elements that guarantee quality;

* well prepared and monitored environmental and resettlement plans that involve timelystakeholder participation are essential and do not delay Project design and implementation;

* management of large contracts requires special monitoring and attention from the Borrower andthe Bank to avoid tlle need to assess large claims and cost increases; and

* adding components to a Project that had already been suspended several times increases the riskof non completion, if the causes for suspension are not removed.

11

KENYA

THIRD NAIROBI WATER SUPPLY PROJECT[Credit 2060-KE]

IMPLEMENTATION COMPLETION REPORT

PART II. STATISTICAL ANNEXES

Table 1 - Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible Not applicable(/) (/) (/~~~) ' ()

Macro policies VSector policies _Financial objectivesInstitutional developmentPhysical objectives _Poverty reductionGender issuesOther social objectivesEnvironmental objectives =Public sector managementPrivate sector developmentOther (capacity building)

B. Project Sustainabil Likely Unlikely Uncertain(1) (V) (1)

C. Bank performance Highlysatisfactory Satisfactory Deficient

(V) (V) (I)Identification =Preparation assistanceAppraisalSupervision

D. Borrower performancesatisfactory Satisfactory Deficient

(V) (V/) (I)Preparation =ImplementationCovenant complianceOperation

E. Assessment of Outcome HighlyHighlysatisfactory Satisfactory Unsatisfactory unsatisfactory

(D) E ) ([)L- LL [E

12

Table 2 - Related Bank Loans/Credits

Preceding Operations

Loan 714-KE, Nairobi Develop the Chania-Kamania- 1970? Outcome: lWater Supply Project Thika river system for the Satisfactory

purpose of meeting Nairobi'swater needs

Loan 1520-KE, Second Provided extensions for 1978 Outcorne:Nairobi Water Supply Nairobi's water supply needs up SatisfactoryProject to 1987-88

Credit 1566-KE Third Assisted in the Preparation of 1985 Outcome:Nairobi Water Supply the Third Nairobi Water Supply SatisfactoryEngineering Project Project

Table 3 - Project Timetable

Identification (Initial Executive Project November 14, 1986Summary)

Identification (Executive Project Summary) October 4, 1987

Identification (Final Executive Project May 24, 1988Summary) . l

Preparation . 1986-1988

Appraisal June 1988 June 1988

Negotiations January 1989 March 1989

Board Presentation March 1989 July 25, 1989

Signing August 15, 1989

Effectiveness September 1989 March 15, 1990(after twoextensions)

Project Completion June 30, 1995 Dec 31, 1998estimated

Loan Closing June 30, 1996 June 30, 1998 (aftertwo extensions)

13

Table 4 - Credit Disbursements

(SDR million)

Appraisal estimate 3.08 10.5 13.51 11.56 7.29 2.89 0.27 0 0 0

Actual 3.82 6.3 5.41 2.71 6.32 3.91 7.31 5.01 2.47 0.4

Appraisal estimate 3.08 13.58 27.09 38.65 45.94 48.83 49.1 49.1 49.1 49.1cumulativeActual cumulative 3.82 10.12 15.53 18.24 24.56 28.47 35.78 40.79 43.26 43.66

Actual as % of estimate 124% 75% 57% 47% 53% 58% 73% 83% 88% 89%cumulative

_

14

Table 5: Key Indicators for Project Implementation

........ :-~ Item Estimae Acivmn

Part A: Water SupplyI Source Works

(i) New Dam on Thika River Impounding 70 million m3 of water Completed(ii) Access roads, raw water intakes, Thika-Kiama tunnel 1.1 Km. Long and, 2.5 Completed

transmission tunnels and main m. dia CompletedKisma-Chania tunnel 3.6 km. Long and 2.5 Completedm dia. CompletedKimakia weir and shaftMataara-Ngethu pipeline 10 km. 1 100 mm.Dia

2 Water Treatment, Delivery and Distribution System(i) Ngethu treatment plant Increase capacity from 180,000 to 460,000 Completed

m3 /day

(ii) Treated water transmission mains Ngethu to Kiambu & Gigiri 36 km. Long and Completed_____ ________________________________ 1300-1400 dia.

(iii) Extension to distribution system Add. reservoirs 46,000 m3 . CompletedI Grgiri pumping station

(iv) Instrumentation, control, automation __ Completed(v) Construction of staff housing and Completed

offices l

Part B: Sewage Treatment Plant Extension1 Rehab and extension of Dandora Increase capacity to 90,000 m3 ./day dry Completed

Sewage Treatmnent Plant weather2 Construction of staff housing and Completed

offices

Part C: Improvement of Water Supply and Waste Disposal Facilities in Low Income Residential Areas1| Vehicles, water meters and misc. _ Completed2 In-filling mains, public water points, Completed

kiosks, and improving sanitaryfacilities

Part D: Engineering and Construction Supervision1 Consulting services for design and Water treatment plant, pumping station, Completed

construction supervision J sewerage works and dam and tunnel safety| panel

2 Consulting services for Master Plan | Sewage and Sanitation Completed

Part E: Technical Assistance and Training for NCC/WSD1 Management support to NCCIWSD Salaries and benefits Completed2 Training programs Training consultancy services Completed

Equipment and MaterialsCourses in Kenya and abroadOffice technology equipment

3 Self Accounting System Asset valuation for WSD Completed4 Environmental Action Plan Enhance area around Thika dam Final Phase near

WSD/NCC Implement EAP completionWSD/NCC establish EAP team

15

Part F: Additional ComponentsI Kibera and Kasarani Distribution Improved water supply distribution to nearly Construction

Network 500.,000 residents of the Kibera informal completionsettlement. estimated for

December 19982 Desludging I)andora Ponds Improved wastewater treatment efficiency Construction

and reduced pollution loading on Nairobi completionRiver estimated for

November 19983 Upgrading Kabete Pumping Station Improved water supply distribution in Completed

Nairobi4 Computerization of Billing Svstem Improved financial performance Not Implemented

due to procurementproblems

5 Additional Project Supervision To improve quality of construction for Ongoingadditional components

16

Table 6: Key Indicators for Project Operations

....... ~~~~~~~~~~~~~ ~~~~~~~~~~~~~~ .... "/ ...... .99............ Fiscal 1988/89 Ficl1 91 9619Unit SAR iActual~ ~SAR Actua SA Actual

Physical Indicators _

Population 000 1,345 2,050 1,980 2,150 2,090

Population Connected 000 630 NA 930 NA 980

Connection Ratio % 47 NA 47 NA 47

Population Not Connected 000 715 NA 1,050 NA 1,110

Total Water Connections 000 101 NA 150 NA 158Residential Connections 000 93 NA 138 NA 145

Production Capacity mil. 214 455 455 455 455m 3 ./d

Production mil. 214 377 269 401 347m 3 ./d

Sales mil. 149 283 194 301 170m 3 ./d _-

Unaccounted for Water _ 28 25 28 25 51

Staff employed 1,520 _ 1,869

Staff /1.000 connections 15 11.8

Financial Indicators .Operating Revenues Shillings 30,326 27,751 89,911 63,595Net Operating Expenses Shillings 6,302 6,252 14,587 34,519 _

Operating Income Shillings 24,025 18,247 75,325 23,429

Cash from Operations Shillings 9,939 11,804 35,613 18,416

Operating Ratio % 34 63 _

Return on Gross Fix Assets 9.9 19 12.5 15 _

Working Capital Shillings 23,667 (63,873)Net Book Val of Fix Assets Shillings 76,273 . 111,114 _

Long Term Debt Shillings 43,314 . 481,941 _

Current Ratio Ratio 2.35 0.69Accounts Receivable Days of 240 417 90 769

Bill.

Long Term Debt to Equity Ratio 0.58 2.4 _

Debt Service Coverage Ratio 1.4 1.5 1.2

Nominal Average Water Shillings 7 23TariffReal Average Water Tariff Shillings 7 5 _

17

Table 7: Studies Included in Project

Study DefinedPurpose Status Impactof Stdy

Ci t u p s .S.... ..... .. .

1. Final Review Report Baseline EnvironmentalPhysical Environment Awaited Information

2 Social Environment Final Review Report Baseline EnvironmentalAwaited Infornation

3 Leak Detection TechnicalAssistance

4 Physical Environment Mid Term Review Completed Baseline EnvironmentalInformation

5 Social Environment Mid Term Review Completed Baseline EnvironmentalInformation

6 Drainage and Sewerage Update Completed Future Drainage PlansMaster Plan

7 Billing and Collection Computerization Pilot program 10,000 largest customersconducted computerized

18

Table 8A - Project Costs

(US$ million)

Cemp~~rnent% 7, Appraisal E't"mate ........... 1nd~~gA~itiona1'~~~ Local orein . ota..oc. .... n

1 Intakes, Tunnel, Access Roads 4.0 9.6 13.6 8.8 14.7 23. 52 Thika Darn 7.9 24.4 32.3 20.3 47.5 67.8

3 Ngethu Electrical and Mech. 2.0 7.3 9.3 1.0 2.2 3. 24 Ngethu Civil Works 6.8 3.1 10.0 2.9 4.5 7.5 Raw and Treated Water Main 14.8 24.7 39.5 14.1 21.0 35.1

6 Reservoirs 3.8 1.6 5.4 3.3 0.4 3.

7 Distribution Network 4.0 8.9 12.9 5.0 9.2 14. 28 Gigiri Electrical and Mech. 0.1 0.9 1.0 1.2 1.3 2.5

9 Gigiri Civil Works 0.2 0.0 0.2 0.6 0.0 0.6iO Instrument Control and 0.6 1.0 1.7 0.0 0.0 0.011 Housing and Offices 1.6 0.0 1.6 3.5 0.0 3.5

12 Dandora Civil Works 12.4 5.2 17.6 6.4 8.0 14.13 Dandora Electrical and Mech. 0.5 2.9 3.5 0.8 2.2 3.0

14 Dandora Building 0.9 0.0 0.9 1.6 0.0 1.615 Engineering Services 4.5 4.6 9.1 4.9 20.4 25.316 Training and Management 1.3 1.8 3.0 0.1 1.1 1.2

17 Land Acquisition 3.4 0.0 3.4 5.9 0.0 5.9

Total Base Cost 68.9 96.1 165.0Physical Contingencies 9.4 15.1 24.6Price Contingencies 14.4 12.8 27.2

Total Project Cost 92.7 124.0 216.7 80.4 132.5 212.9

Costs estimated at appraisal are base costs as of end 1989; physical and price contingency are added in anaggregate manner to arrive at the Total Project Cost. Actual contract costs were derived from (items I to14) from final payment certificates. For engineering services, training, and management support (items 15and 16). the actual cost figures were obtained from IDA disbursement information. The cost of landacquisition was provided by NCC.

19

Table 8:B: Review and Analysis of the 10 Largest Civil Works/Goods Contracts

(KSh million)

.......... ~ ~ ~ ~ ~ ~ wetcL

AwArded1. Intakes. Tunnels, and EIB 231 359 45 69 133 606

Access Roads

2. Thika Dam AfDB/ 549 829 339 150 420 1,738AtDF

3. Raw and Treated Water OECF 671 784 180 113 89 1,165Pipelines

4. Ngethu Treatmenit Plant IDA 169 144 39 30 105 318Civil Works

5. Ngethu Treatment Plawt IDA 158 134 11 26 7 177Electro-Mechanical

6. Reservoirs IDA 92 120 18 0 26 164

7. Trunk Distribution IDA lIt) 140 53 31 30 254Mains

8. Supply of Pipes and IDA 110 122 17 69 0 208Fittings

9. Dandora Stabilization IDA 299 260 26 20 46 352Ponds - Civil Works

10. Dandora Stabilization IDA 59 83 10 1 4 98Ponds - E&MI

Total 2,973 739 508 860 5,08

% 100.0 t i ;! 170.9

SAR Estimates 2,450 365 404 3,21

0/0 100.0 _41$ 131.

The above table compares the base value of ten major construction contracts at appraisal, award, andcompletion. The total value of these contracts was about KSh 2,973 million at award, to be compared with anestimate of KSh 2.450 at appraisal. Their final value was KSh 5,061 million. Variation orders and acceptableclaims by contractors represented 25% and 17% respectively, or a total of 42% of the cost of these contracts ataward; this figure is to be compared with estimated physical contingencies of 15% at appraisal. Priceadjustments represented about 29% of the cost of these contracts at award, to be compared with pricecontingencies of 16% at appraisal.

It is difficult to explain the large difference between the contract cost at award and completion, i.e. about 42%without price adjustment, taking into account that: (a) the Project was implemented after an Engineeringproject that financed the preparation of detailed designs and tender documents; and (b) a total of aboutUS$21.2 million (or about 16% of the Project construction costs) was spent on two major Consultantcontracts for supervising construction activities. The value of one of these Consultant contracts doubled fromUS$9.6 to 18.5 million during the Project implementation period.

20

Table 8C: Project Financing

(US$ million)

IDA 18.0 46.8 64. 8 9.3 53.0 62.3

OECF 8.3 31.7 40.0 9.4 21.1 30.5AfDB/AfDF 2.5 32.7 35.2 18.8 44.0 62.8EIB 5.8 12.8 18.6 6.2 14.4 20.6NCC/WSD 54.7 54.7 36.0 0 36.0

Government 3.4 3.4 0.7 0 0.7

Total 92.7 124.0 216.7 80.4 132.5 212.9

21

Table 9 - Economic Rate of Return

Incremental Cost and Benefit Analysis (Millions of Kenyan Pounds) Operating Cost & RevenuesCost Estimates Cash Flow Cumul. Cash Flow

Year Investmnent |Operation I Total IRevenuesiCurrent Prices Inflation 1989 Prices Costs Revenues

1 1990 15.8 0.00 15.8 0.0 -15.8 1.2 -13.7 7.7 31.52 1991 44.8 2.80 47.6 1.0 -46.6 1.4 -33.6 10.5 32.53 1992 63.7 4.78 68.5 -0.7 -69.2 1.8 -39.2 12.5 30.84 1993 78.6 5.37 84.0 5.0 -79.0 2.0 -38.7 13.1 36.55 1994 75.9 8.71 84.6 38.4 -46.2 3.0 -15.5 16.4 69.9

6 1995 26.4 15.69 42.1 31.6 -10.4 3.8 -2.7 23.4 63.17 1996 51.8 26.82 78.6 32.1 -46.5 3.9 -11.9 34.5 63.68 1997 108.1 33.30 141.4 32.5 -109.0 4.3 -25.6 41.0 63.99 1998 40.39 40.4 62.7 22.3 4.7 4.7 48.1 94.2

10 1999 48.81 48.8 71.6 22.8 5.1 4.4 56.5 103.0

11 2000 58.81 58.8 87.6 28.8 5.1 5.6 66.5 119.1

12 2001 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0

1 3 2002 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.014 2003 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.015 2004 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.016 2005 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.017 2006 70.68 70.7 101.5 30.9 5.1 6.0 78,4 133.018 2007 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.019 2008 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0

20 2009 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.021 2010 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0

22 2011 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.023 2012 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.024 2013 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.025 2014 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.026 2015 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.027 2016 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.028 2017 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.029 2018 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.030 2019 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.031 2020 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.032 2021 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.033 2022 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0

34 2023 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0

35 2024 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.036 2025 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.037 2026 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0

38 2027 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.039 2028 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0

40 2029 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0

Total 465 2295 2760 3306 546 8 2603 4566

Internal Rate of Return expressed in constant 1989 prices 0.2%

Internal Rate of Return estimated at Appraisal 12.6%

22

Sources:* investment costs were provided by NCC;* incremental costs and revenues are consistent with those used by the AfDB in their reports (AfDB

Aide-Memoire date 11/8/97);* selected operating income and costs were verified from audited financial statements (9/23/96)

Note: the methodology adopted in this calculation is slightly different from that adopted in the SAR:the SAR estimates revenues and costs basing them on production, UFW, collection efficiency, and tariffestimates;* since estimates for these data are not all available, the PICR estimate is based on costs and revenues

reported in financial statements;* in both approaches, the ERR is calculated from estimated cash streams associated with the project,

and consumer surplus and externalities, such as improved public health, have not been captured, thusleading to undercounting of actual benefits; and

* in the PICR, the cash streams reported in current terms have been adjusted to real 1989 terms tocalculate the ERR.

Results: the lower ERR than that calculated at appraisal can be explained by:* the devaluation of the local currency that changed the capital cost structure;* the rapid inflation that increased operating costs while tariffs were slow to rise; and* the poor overall commercial performance of the WSD which leads to significant loss of revenues.

23

Table 10 - Status of Legal Covenants

CR 4.01 C 6/30/9 Borrower to reimburse NCC for cost of land Complied withI acquisition and compensation payments

associated with Project

CR 4.03 NC Borrower to agree with IDA and NCC on plan Mutualof action for resolving the qualification indebted-nessregarding non-payment of foreign and local requiresloans on NCC's 1984 and subsequent audit clarificationreports

PR 2.06 C 1/1/90 NCC to implement environmental action plan Complied

PR 4.01(a) CP NCC to maintain records and accounts adequate FY1995/96,to reflect its operations and financial condition, 96/97 and 7/1-including separate records, accounts, and 12/97 notfinancial statements for its water and sewerage auditedactivities prepared in a commercial accountingformat as well as separate Project accounts

PR 4.01(b)i CP NCC to have accounts audited by independent FYY1995/96,auditors 96/97 and 7/1-

12/97 notaudited

4.01(b)i CP NCC to submit financial statements and interim FY1995/96,PR i audit reports within 9 months of fiscal year 96/97 and 7/1-

12/97 notaudited

PR 4.01(b)i CP NCC to submit certified copies of financial WSD complied,ii statements and final audit reports within 12 NCC did not

months of fiscal year

PR 4.02i 'NC WSD to ensure annual rate of return >7.5% after ROR <7.5%1991.92

PR 4.03 NC Debt service coverage to be >1.5 every year Not complied

PR 4.04 NC 6/30/9 NCC to employ consultants to revalue assets Valued once in0 annually. 1990

PR 4.05 NCC to ensure that WSD would consult IDA Compliedbefore undertaking any additional investexceeding US$2 million

PR 4.06 NC NCC to reduce accounts receivables arrears Arrears are at______________ ___ progressively to 90 days 769 days

24

CR 4.01 C 6130/9 Borrower to reimburse NCC for cost of land Complied with1 acquisition and compensation payments

associated with Project

PR 4.07(a) CP NCC to uses Water Fund only for water and Water fundsewage loaned large

amounts togeneral fund

PR 4. 07(a) NC NCC to progressively eliminate outstanding Water fundobligations to Water Fund loaned large

amounts togeneral fund

Status Codes: C-complied, CD-Compliance after delay, CP-Partial compliance

25

Table 11: Compliance with Operational Manual Statements

Sitateent Number and .- Comments.

OD 10.60 Weak intemal control within WSD led to the preparation of financialAccounting, Financial statements of dubious accuracy, always submitted with substantial delays.Reporting, andAuditing

OD 13.10 Complied with, albeit with substantial delays. Last audit report of WSDBorrower Compliance financial statements received for 1995/96. Last audit report on Specialwith Audit Covenants Account included significant qualifications.

OP 6.30 Complied with. The Borrower contributed about 19% of the actual projectLocal Cost Financing cost.and Cost Sharing

OD 13.30 Complied with. IDA also granted a grace period of four months after theExtension of Closing closing date to allow for disbursements for services completed before theDates Closing date.

OD 13.55 Complied with. WSD prepared its own evaluation of the Project'sICR preparation achievements and participated actively in IDA completion mission and the

review of IDA PICR.

OD 4.01 Complied with. The final review of environmental effects and mitigation planEnvironmental by independent consultants is still underway.Assessment

OD 4.30 Complied with. The final review of resettlement and mitigation plan byInvoluntary Resettlement independent consultants is still underway.

26

Table 12 - Estimated Bank Resources: Staff Inputs

g ... 0~~~~~~~~~~~~~~~~.. ......I......

Through Appraisal 34.9 86.5

Appraisal-Board 45.118.lBoard-Effectiveness 0 0Supervision 188.2 546.2Completion 16.5 34.0

5 ~~~Total 284.70 853.00

27

Table 13 - Bank Resources: Missions

|Tdentification =|Praration 6/8 W 1 2 FAPrWaration 1/87- 1 12 FA _

| Prepration 6/87_ NA NA FA .Prenaration 12/87_ 2 NA F.N FV|Pre-Ap=jqnis 3/88 12 F.NI ,.-nAggrmical 6/88 3 12 E.N, FC.t. F ASilpervision 9/89 1 7 FIN CC PP

| .lpervision 7/90) _ 3 12 F.N, FA, LT .Gc,(

|nptnervision l0/90 2 6 .EN FA 2 1 CC AFCnpDerYion 4/91_ 2 15 EN, FA 3 I CC AF

pSnperision J 6/912 _ 3 15 FEN FA,SWervision 11/91 L 5 FNJ FA 3 1 CC AF PP

|npervision 3/92 _ 2 FII EN FA 3 1 CC AF PP, FPCnupervision 4/92 2- 5N F F 3 1 CC AF PP PP P.

SWervnision 73924- 2 ~ 1. EN, FA S HSC PP PP PS

|Sipervision 11/92 1 29L nC cc AFP PP FP, PS

iserjinn 2L92i 2.. 25L EN.JFA IT I CC, AF PP PP PS

|S£ervisian 5/93 - 2 15 F.N FA I 1 . CC AFP PP, PS

-Silpervision 10/93 2 20 2 1 CC AF PP FP PS|Siervj-inn 3/94_ 2 15 F. N FA J S T-T t.CC PP FP PSSupervision 9/94 I RN FA, CM , R PP PS

| Silpervi-don 7/95_- 2 20 FN.N F A TT R t tC, AF, PP, FP PS,| SiVpervision 1/96 _ 3 I S EN, FA, OP .R IR CC, AF, FP| Supervision 10/26 3 - 13 FN.N F A S 11; cc1, PP, FP|SiRlervision 1/97 2 13 FN F A S 1R c(, PPI FP- Silpervigion 7/97 _ 1 S FA I T R PPS ,Rlnerviisinn .L9& _ 3 I 1I FN.N I T IT CC, PP, FPLa T.6stMission- 6/9X 3 1- FN.N A,F. IT EI CCPP PE

28

Staff Skills Performance Ratings Types of ProblemsAR - Architect 1 - Minor or No Problems AF: Availability of FundsCON - Consultant 2 - Moderate Problems CC: Compliance with LegalEC - Economist 3 - Major Problem CovenantsEN Engineer S Satisfactory FP: Financial PerformanceEV - Environmentalist HS Highly Satisfactory PDO: Project DevelopmentFA -Financial Analyst U Unsatisfactory ObjectivesOA - Operation Assistant PMP: Project ManagementLG - Legal Expert PerformanceOP Operations Officer PP: Procurement ProgressPO - Project Officer PS: Progress of StudiesTTL - Task Team Leader TA: Technical AssistanceDC -Division Chief ProgressCM - ComputerizationSpecialist

ANNEX APage 1 of 6

Third Nairobi Water Supply Project

Credit 2060 KE

Final Supervision and Completion Mission

Aide Memoire

Distribution

Messrs./Mmes.:

B. Chele, PS, Ministry of Local AuthoritiesE. Mwongera, PS, Ministry of Water ResourcesM. Chemengich, PS, Ministry of FinanceM. Wandera, Town Clerk, NCCJ. Ongele, Depuity Town Clerk, NCCL. M. Musyoka, General Manager, WSDJ. M. Macharia, Manager, PIU.

World Bank Kenya Director's Office, NairobiWorld Bank Kenya Country Team, WashingtonRegional Water and Sanitation Group, Nairobi

African Development BankEuropean Investment BankOverseas Economic and Cooperation Fund

NairobiJuly 3, 1998

ANNEX APage 2 of 6

KENYA

THIRD NAIROBI WATER SUPPLY PROJECT(Credit 2060-KE)

Final Supervision Report

1. An IDA mission comprising Messrs. A. Locussol (Principal Water and SanitationSpecialist), L. Morrell (Senior Financial Analyst), J. Gadek (Sanitary Engineer, consultant), J.Karuiru and J. Sasia (Operations Officers, World Bank Nairobi) visited Nairobi between June 22and July 3, 1998 to carry out a final supervision of the Third Nairobi Water Supply Project, forwhich IDA Credit 2060 KE was closed on June 30, 1998, and initiate the preparation of theProject Implementation Completion Report (PICR) that must be submitted to the Board beforeend 1998. The mission was also joined by Ms. M. Kariuki (RWSG/EA). The mission met withMessrs./Mmes. B. Chele, Permanent Secretary, Ministry of Local Authorities, M. Wande:ra, TownClerk, Nairobi City Council (NCC), J. Ongele, Deputy Town Clerk NCC, L.M. Musyoka, GeneralManager of the NCC Water and Sewerage Department (NCC/WSD), J.M. Macharia, PIUManager, the WSD senior staff and the Consultants who assisted the WSD implementing theProject. The mission wishes to thank the WSD for its active collaboration and the courtesiesextended.

2. The present aide memoire reflects the findings and views of the mission. It was discussedwith the WSD senior staff and reviewed during a wrap-up meeting chaired by the PS, Ministry ofLocal Authorities on July 2, 1998. IDA evaluation of the Project will be reflected in a draft PICRthat will be submitted to the Government for review in October 1998. The Government's viewson the Project must also be reflected in its own completion report, to be prepared according toBank guidelines (a copy was provided), and sent to IDA by October 1998. An unedited version ofthe Government's report will be included in the final PICR submitted to the Board (if it containsless than 10 pages).

3. The aide memoire includes in addition to this Final Supervision Report:

* a first draft of main text of the PICR;* Annex 1: Final Project Cost, Implementation Issues; and* Annex 2: NCC/WSD Financial Performance.

Implementation Issues

4. The Credit was definitively closed on June 30, 1998, after two extensions from theoriginal closing date of June 30, 1996. At the Credit closing date, disbursement had beensuspended since December 1997. Conditions for lifting suspension -- submission of an auditedbalance of the Water and General Funds, together with an action plan to settle amounts borrowedby the General Fund -- had not been met at the closing date; the auditors report is now expectedfor July, 1998. The mission requested that a copy be forwarded to IDA for information, togetherwith the corresponding action plan, as soon as possible. A third extension of the closing date wasneither requested by the Ministry of Finance, nor considered by IDA.

ANNEX APage 3 of 6

5. At the Credit closing date, several construction contracts, that were added in February1997 to the original Project description, could not be not completed. Disbursement applicationsfor works and services completed before June 30, 1998 can be processed until July 31, 1998.However, the mission will investigate the possibility of extending this date until October 30,1998; it is likely that IDA would request that ineligible expenses paid from the Special Accountbe first reimbursed. Annex I shows that about US$1.45 million equivalent remained to be paidfor activities to be carried out after the closing date. Annex 2 shows that it is unlikely that theWSD can generate sufficient revenues in 1997/98 and 1998/99 to finance these contracts. TheMinistry of Local Authorities plans to seek agreement from the Ministry of Finance to financethese contract from funds available in other IDA supported projects. The mission suggested thatIDA could accept a proposal to finance completion of the Kibera water distribution contract fromCr. 2333 KE (Second Mombasa Water Supply Project) which was recently extended untilDecember 31, 1998. The mission asked that a copy of the agreement, if any, between the Ministryof Water Resources, NWCPC, and the WSD be forwarded for review as soon as possible.According to estimate carried out, the maximum amount to be financed should be:

US$ Equivalent

Completion of construction activities 180,000Construction supervision 10,000Technical assistance to communities N/A

Contingencies 10,000

Total 200,000

NCC/WSD Financial Situation

6. Annex 2 reflects the WSD financial performance and position as of end 1995/96, thefiscal year for which financial statements were last prepared. The financial situation issignificantly worse than what was forecast at appraisal and even worse than at appraisal. It can besummarized as shown in the table below. Since beginning of the Project, the WSD has constantlydefaulted on Credit financial covenants. As explained in the Outline of the ProjectImplementation Completion Report, it is unlikely that the situation can be improved in the nearfuture if the institutional set-up and incentive framework the WSD is placed in is not drasticallychanged.

ANNEX APage 4 of 6

NCC/WSD Summary Income Statements and Financial Positions(in Kenyan Pounds -- Kf1.0 = Ksh2O)

1988/89 1995/96

SAR Actual SAR Actual

Volume of Water Sold (million m3) 50.24 95.53Average Water tariff (KSh/m3) 9.00 13.96

Income StatementOperating Revenue 30,326 27,751 89,911 63,595Net Operating Expenses 6,302 6,252 14,587 34,519Operating Income 24,025 18,247 75,325 27,009Cash Generated from Operations 9,939 11,804 35,613 21,966Operating Ratio 34% 63%Rate of Return on Gross Fixed Assets 9.9% 19% 12.5% 15%

Financial PositionWorking Capital 23,667 (63,873)Net Book Value of Fixed Assets 76,273 1.11,114Long Term Debt 43,314 481,941Current Ratio 2.35 0.69Accounts Receivable (day of billing) 240 417 90 769Long Term Debt to Equity 0.58 3.2Debt Service Coverage 1.4 1.2

Summary of the Findings of the Completion Mission

7. The Project has achieved its objective of increasing the water production and sewagetreatment capacities. Facilities built by the Project are well designed and quality of construction isgood. The Project has only marginally achieved its objective of improving the water supply andsanitation service to low income communities, that now represent half of the population ofNairobi. The Project has failed to improve the WSD operational and financial efficiency. TheWSD performance suffered constantly from the shortcomings of the institutional set-up identifiedduring preparation. At appraisal, however, it was decided that it would be counterproductive andpremature to address during Project implementation.

8. The Project is likely to be unsustainable:* the Government still appears somewhat reluctant to address the fundamental issue of the

WSD financial and managerial autonomy, it has shown interest for "commercialization" ofmunicipal water utility companies;

* major deficiencies in the WSD commercial management remain to be addressed, and withlimited external financing available, the timetable for improvement is uncertain;

* NCC/WSD track record with proper budgeting of maintenance is not encouraging; worksbuilt by the Project could rapidly suffer from lack of maintenance;

ANNEX APage 5 of 6

* any tariff increase to generate additional revenues needed to service the WSD mounting longand short teim debt is unlikely to be accepted by consumers, unless they perceive that majorchanges in tde way business is conducted;

* realizing the full benefit of the Project would require sizable investment to reinforce andextend water distribution and waste water collection; in the current economic situation,external financing is questionable.

9. To achieve Project sustainability, major changes in the institutional framework the WSDoperates in would require the 'tremendous effort -- political, legal, managerial andfinancial "referred to in the Staff Appraisal Report. More precisely, this would require: (a) a strong politicalwillingness at the highest level of decision making; (b) the participation of independentconsultants with relevant experience in assisting governments reorganizing their water supply andsanitation sectors and selecting options for private sector participation adapted to local conditions;(c) study tours in countries, preferably in Africa, where successful reorganizations have beenimplemented; and (d) targeted public relation exercises to involve all stakeholders in the design ofthe solution.

10. With a growing population living in informal settlements and having no direct access topiped water, there is a need to develop alternative service standards and managementarrangements. The Kibera pilot water supply project was only in early stages of implementationat the Credit closing date and community management options were still being investigated. Thisproject must be continued and closely monitored by the WSD, so that it can be replicated insimilar areas. But, with very little incremental revenue to be expected from service extension inthese neighborhoods, the WSD may have little incentive to pursue this effort if it is not able togenerate revenues in formal settlements and if no external financial and technical assistance isprovided.

Key Lessons Learned

11. Institutional Development

* project objectives must address the major institutional issues identified during preparation;* it has been counterproductive not to address the major institutional issues identified during

preparation; it was not been premature to address them in parallel to a large investmentprogram;

* project components should be designed to achieve project objectives; if major institutionalissues are identified, they are unlikely to be addressed adequately by limited managerialsolutions;

* learning lessons from countries, preferably in Africa, that have successfully implementedmajor institutional reforms could have helped design solutions adapted to the local situation;

* improvement of commercial operations depends as much upon quality of the billing system ason the incentive framework a utility company is placed in to reduce unaccounted for water(UfW) and improve collection;

* suspension of disbursement for non compliance with covenants affects projectimplementation and does not provide the proper answer to issues "sidelined" at appraisal.

ANNEX APage 6 of 6

12. Financial Development

* IDA must carry out, at least once a year, a full supervision of the financial performance of theutility company it lends to, in order to review accuracy of data, prepare short-tern financialforecast and action plans with the company;

* financial covenants should be tailored to the financial issues to be addressed; financialcovenants linked to cash generation are preferable for utility companies with poor collectionand cash management;

* if audit reports are not in line with industry standards, IDA should request the Borrower toemploy the service of acceptable auditors.

13. Physical Implementation

* good quality preparation, continuity of the engineering consultant throughout the prcjectcycle, participation of an expert panel to review the design and construction of darns, areelements that guarantee quality;

* well prepared and monitored environmental and resettlement plans do not delay proj ectdesign and implementation;

* management of large contracts requires special attention to avoid assessing large claims andcost increases;

* adding components to a project that had already been suspended several times increases therisk of non completion, if causes for suspension are not removed.

ANNEX B

Third Nairobi Water Supply Project

Credit 2060 KE

Borrower's Contribution to the ICR

]]DA CREDIT 2060 KETHIRD NAIROBI WATER SUPPLY PROJECTIMPLEMENTATION COMPLETION REPORT

A (i). EVALUATION OF OBJECTIVES

The objective of the project was to;

* Expand Nairobi's Water Supply System to cater for increased demrand up tothe year 2003 - 5.

Improve the basic needs provision and health conditions of the poor

Assist in maintaining the sanitation standards in the city.

Preventing pollution in the recipient rivers.

* Improving the efficiency of NCC's Water and Sewerage Department (WSD)with the aim of supporting its transition, at a later date into an autonomousbody.

(ii) Project Components.

To achieve these objectives, the project included the following major components;

- Extension of the water supply system

Expansion of source works and raw water transmission capacity.

Extension of treatment capacity at Ngethu waterworks from 180,()00m3 /dayto 440,000m3/day.

Extension of the treated water transmission and storage capacity.

Construction of a new pumping station at Gigiri and Improvement of thereliability of the pumping facility at Kabete.Extension of the distribution system.

Construction of offices, staff housing and social amenities.

Rehabilitation and extension of the sewerage treatment plant to total capacityof 80,000m3 /day

Water supply and waste-water disposal in low income residential areas.

Engineering and construction supervision for the above works and thepreparation of a sewerage and sanitation master plan.

Page 1 of 9

* Technical Assistance and training for WSD.

B (i) ACHIIEVEMENT OF OBJECTIVES

(i) Physical

The major objective of the project, that is to expand Nairobi's water supply system;was substantially achieved. However the improvement of basic needs provision andhealth conditions could not be accomplished by implementation of the above projectcomponents on their own. It required parallel complementary programmes from othersectors e.g; health, housing and environment.

There is also need to continue the expansion of the distribution system if benefits ofthe expanded source works and treatment capacity are to be fully realised.

The trunk sewers are in very sorry state partly due to wilful blocking of the same byfarmners, theft of manhole covers, deterioration due to age, surface overburden etc.Construction of houses along the sewer wayleave has made it difficult for WSD tocarry out maintenance operations. These are matters which need to be attended to inthe near future otherwise discharge of raw sewage into water courses and pollutionof the rivers will continue for quite some time.

(ii) Macroeconomic Policies

This has no direct relevance.

(iii) Sector policies

The project is yet another step forward in realisation of the water andsanitation sector development policies.

(iv) Financial Objective:

The project has failed to improve the WSD operation and financial efficiency.In fact WSD is worse off financially than it was before the project. Thereasons for this is that the development of the Institutional capacity of WSDand NCC has failed to keep pace with development of WSD's PhysicalInfrastructure. The billing system and procedures are woefully inadequate fora city the size of Nairobi. The current WSD/NCC Institutional arrangementrequires restructuring if the water supply and sanitation services are to befinancially sustainable.

Page 2 of 9

(v) Institutional Developments

The Institutional problems afflicting WSD were identified during thepreparation of the staff appraisal report. However the SAR concluded that thetransformation of WSD into a separate entity " would be premature andcounter-productive during implementation of the project. Consequently, onlymarginal institutional developments have occurred in the recent past. Themajor problems identified by the SAR, namely inadequate salary scales, cashflow problems, bureaucratic decision making processes and hence poormanagement continue to plague W&SD

C. MAJOR FACTORS AFFECTING THE PROJECT

(i) Factors not generallv subject to Government Control

The project was affected by factors outside of Government Control. Theoutbreak of the Gulf War resulted in changes in oil and energy costs and ledto increases in freight costs for offshore source goods. The wind of politicalchange in Africa that brought with it high internal inflation rate.

(ii) Factors Generally Subject to Government Control

The Project suffered from the decision made at appraisal not to address themajor shortcomings of the institutional set up while the SAR identifiedautonomy of the WSD as a prerequisite for performance. Thus WSD is stillunable to access cash generated from its operations, unable to offercompetitive compensation package in order to attract and retain quallified staff,and faced with a complex decision making process involving the ministries oflocal authorities, water resources and Nairobi City Council etc.

The disbursements of IDA funds for the project was suspended on threedifferent occasions due to non compliance with credit conditionalities by theGovernment not only for the project credit but other credits as well.

(iii) Factors subject to the control of the Implementing Agency:

The Project Implementation Unit under the Project Manager implemented thephysical components of the project satisfactorily. However over the yearscertain components of the project eg sewer master plan, computerisation ofWSD, Training of WSD Staff etc. were silently removed from the directcontrol of the Project Manager. As a result, implementationi of thesecomponents did not benefit from the exposure and experience of the P.I.Ustaff.

Page 3 of 9

Institutional structure constraints continued to affect the implementation of theproject particularly the lengthy decision making process often compromisedby politics. Thus contracts could not be awarded in time; compensation toland owners could not be effected in time etc. The effect has been theobvious delay in completion of the project especially the added componentsfinanced through savings from initial project cost.

The overhaul of the commercial operations of WSD is a case in point whereinstitutional and managerial has resulted in a situation where metering, billingand collection of revenue has all but stalled. Indecisiveness in procurement ofwater meters for instance led to a situation where between 1995 and 1997,new connections were hampered by lack of meters and metering ofconsumption was abandoned in certain housing estates.

There were significant cost overruns in local currency terms. However in USdollar terms there were savings. This is due to the fact that projectcomponents were priced in Kenya Shilling which between 1990 and 1995devalued from 18 to 70 shilling to the dollar, resulting in more thanproportionate increase in cost of inputs on the local market.

There were minor delays in the implementation of the project. The SARanticipated the implementation to be complete by 1994/95. However at theCredit closing date implementation of some components was still under-way;though these were additional elements. The main cause of the delays were:-

(i) Length decision making process both within the NCC and other keyplayers and delays in selection of Contractors.

(ii) Delay in land acquisition

(iii) Delays in payment to the contractors by both the Bank and NCCleading to Contractors suspending work or going slow.

(iv) Suspension of disbursement by the bank due to non compliance byNCC and GOK with Development Credit Agreement conditions.

(v) The change in the project horizon necessitated redesign of somecomponents of the project eg. the Treatment Plant, resulting in delayin calling of tenders.

There were no natural disasters which directly affected the Project. Marginalinterruption were recorded as a result of the collapse of the Nairobi-Mombasa railwayline and lastly the onset of El Nino phenomenon affected the additional components.

Page 4 of 9

D. PROJECT SUSTAINABIL1TY

The achievement made by the project in relation to its objectives are unlikely to besustained due to the following:-

i) The Government has yet to decide on WSD autonomy.

ii) The physical infrastructure installed under the project are likely to fall into astate of disrepair due to allocation of inadequate maintenance funds and skilledstaff. The pumping stations and the expanded water and sewage treatmentplants are likely to suffer most.

iii) The commercial operations of the department have been virtually untouchedby the project and there has been a steady deterioration in the efficiency of thedepartment commercially. This decline is expected to continue with knock oneffect on the entire operation of the department. Failure to implement thebilling and software component of the project is likely to accelerate the declineof the billing system.

iv) WSD does not have power to review tariff for cost recovery. The procedureinvolve the Ministry of Local Authority and Water Resources etc.

v) The water distribution system and sewer collection systems need to beexpanded if the full benefit of the project are to be realised. Not muchactivity is expected on these twin direction due to financial constraints. Thusthe water may be available at the terminal of the transmission points butactually selling it and generating the much needed revenue will continue to bea problem. The matter of follow up projects needs to be addressed urgently.

E. BANK PERFORMANCE

i) Project Identification and preparation

The project was consistent with the Governments and Banks development strategy.However, components of the water supply to the urban poor and collection of wastewater should have been given more weight. The assistance of the bank in the projectpreparation was satisfactory. The major aspect of preparation namely technical,financial, economic, environmental and sociological were adequately covered. Therewere shortfalls in the commercial and institutional aspects arising mainly out ofinadequate involvement of the bank in the development and implementation of theseaspects. Perhaps the bank failed to appreciate the potential negative impact ofinstitutional shortfalls in the implementation of the project.

Page 5 of 9

ii) Bank's Performance in Project Appraisal

During the project appraisal, the above aspects were looked into in details.Experience was also drawn from the implementation of the Nairobi water supplyphase II under credit 1520KE. Thus at the time of appraisal, the necessary measuresnecessary to ensure proper implementation and sustainability of the project wereidentified.

Despite identification of these problems, the project suffered heavily from the risksidentified at appraisal namely; inadequate improvement in WSDs institutional capacityand heavy borrowing by NCC general fund from the water capital fund.

The financing package was adequate for the project.

The bank's relationship and coordination with other financing agencies was cordial.

iii) Bank's Performance in Project Supervision

The performance of the bank during the project implementation can be judged as ofmixed quality. Until the later stages of the project implementation, all issues werereviewed and resolved in Washington. Follow-up was always a major problem. Thebank placed emphasis on physical aspect of the project implementation thoughcuriously enough, the credit was suspended on three (3) occasions on non-engineeringmatters. Perhaps if the bank had placed more emphasis on management and fmancialissues in the project supervision, the suspensions could have been avoided. In anyevent, the suspension of disbursements caused more problems than the solutions theyprovided.

There was a high turnover of bank staff resulting in serious difficulties in follow-up.The delegation of certain responsibilities to the local office in the later stages of theproject did ease the problems somewhat.

F. BORROWER PERFORMANCE

i) Performance of WSD

The performance of WSD in the project identification, preparation andimplementation can also be judged of mixed quality. The P.I.U. which wasresponsible for the physical implementation performed satisfactorily in a less thanconducilve environment. The selection of contractors and consultants was conductedin a transparent and professional manner. The commercial section of the WSDperformed less satisfactorily perhaps due to inadequate emphasis placed oncommercial aspects by all parties.

Page 6 of 9

ii) Performance of NCC

By NCC is meant other arms of the City Council which WSD had to liaise with inthe project implementation including the Council. The support of NCC was less thansatisfactory. Approval of contract awards delayed due to trivialities. Payments tocontractors and landowners was always delayed. Perhaps the greatest impact on theproject was use of water capital fund by the general fund causing the project to besuspended twice.

iii) Performance of the GOK

The performance of GOK was also less than satisfactory. The budgetary allocationfor the project was not always adequate. The Government abdicated its responsibilityon land acquisition leaving NCC to shoulder the burden of compensating land owneraffected by the project. The decision making in the Government is bureaucratic andlengthy. Failure by GOK to comply with conditionalities on other IDA fundedprojects led to suspension of the credit once.

The accounting system and disbursement procedures were lengthy making paymentsto contractors and consultants delayed leading to payment of interest on latepayments, suspension by contractors and delay in project implementation.

G. ASSESSMENT OF OUTCOME

The project outcome is satisfactory. However, although all physical component of theoriginal description were implemented according to specifications. Implementationof additional components are still under-way and their future hangs in balance due tofinancing uncertainties. WSD is still unable to get water to a substantial proportionof Nairobi Residents due to constraints in the distribution system. Similarly,inadequacy in the waste water collection system means that the expanded sewagetreatment works operates below capacity as most of the raw sewage discharged intonatural water courses. The project has failed to improve the WSD commercial andfinancial performance. The new billing system has not been installed although itwould not have been expected to make much impact if issue of WSD autonomy andincentive framework are not addressed. The training component can also bedescribed to have been of mixed success, some of the beneficiaries of trainingprogramme have left the organisation in search of better working conditions whileothers who have remained continue to work in less than conducive environment. Ona more positive note, WSD now has a fully developed source works and water andwaste water capacity to sustain the demands of a fast growing city up to the year2010.

Page 7 of 9

H. FUT1JRE OPERATION

Unless the commercialisation of the urban water supply sector is implementedspeedily, the future prospects of the operation of the project do not look verypromising. WSD's maintenance has been run in a fire fighting basis with inadequatebudget and funds. There is real danger of rapid degradation leading to financingcostly rehabilitation programmes in the medium term. The commercial operations ofthe department cannot be sustained at the current state; there is an urgent need tochange the way business is conducted. Involvement of the private sector in newconnections, metering and billing may be the way into the future.

1. KEY LESSONS LEARNED

(i) Institutional Development

* Project objectives must address institutional issues identified duringpreparation; it has obviously been counterproductive not to address them; itwould have not been premature to address them in parallel to a largeinvestment program;

* Project components should be designed to achieve project objectives; if majorinstitutional issues are identified, managerial solutions are unlikely to addressthem;

Learning from countries, preferably in Africa, that have successfullyimplemented major institutional reforms could have helped design institutionaloptions adapted to the local situation;

Improvement of commercial operations depend as much on the quality of thebilling system as on the incentive framework the utility company is placed into reduce UfW and improve collection;

Suspension of disbursement for non compliance with covenants affectsimplementation of the project and does not provide the proper answer to issues"sidelined" 'at appraisal.

(ii) Financial Development

There should be as much emphasis on financial performance as technicalperformance.

Audit reports should be prepared by a different institution to the one thatprepares the accounts to enable cross-checking.

Financial records should be readily accessible and possibly computerised.

Page 8 of 9

* Proper records of WSD/NCC mutual indebtedness should be maintained inline with normal accounting standards. WSD should be free to source forservices rendered by NCC from the open market to enable it get the bestservices at better rates eg Computer and legal services.

(iii) Physical Implementation

Thorough definition and appraisal, continuity of engineering consultantthroughout the project cycle and participation of an expert panel to review thedesign and construction of dams are elements that guarantee quality thoughcontinuity of consultant may deny the borrower the opportunity to obtaincompetitive rates and may also lead to complacency on the part of theconsultant.

Well prepared and monitored environmental and resettlement plans do notdelay project design and implementation.

Management of large contracts requires special attention to avoid the need toassess large claims and cost increases.

Awarding contracts to the lowest bidder does not guarantee least cost ofimplementation and maybe a recipe for complications on qcality control.

Inspite of the institutional shortcomings, it is still possible Lo implement acomplicated water supply project though this may be too demanding on theproject management team.

Page 9 of 9

IBRD 21208

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NOVEMBER 19B8