Document of The World Bank FOROFFICIAL USEONLY ReportNo: 31475-NG PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OFSDR 132.7 MILLION (US$200.0 MILLIONEQUIVALENT) TO THE REPUBLIC OF NIGERIA FOR A SECONDNATIONALURBAN WATER SECTORREFORMPROJECT May 19,2005 Water and Urban2 Country Department 12 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective March 31,2005) Currency Unit = Naira Naira135 = U S $ l US1.508 = SDR1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS BMPIU Budget Monitoring and Price Intelligence Unit CAS Country Assistance Strategy CFAA Country FinancialAccountability Assessment CPAR Country Procurement Assessment Review CPS Country Partnership Strategy FD/FPIU Finance Department o f FPIU FGN FederalGovernment ofNigeria FMenv Federal Ministryo f the Environment FMF Federal Ministry o f Finance FMS Financial Management System FMWR Federal Ministry ofWater Resources FPA Federal Project Account FPIU Federal Project Implementing Unit FPM Financial Procedures Manual FSA Federal Special Account ICR Implementation Completion Report MTR Mid-TermReview NEEDS National Empowerment and Economic Development Strategy NWP National Water Policy OSAG Office of State Accountant General PFMU Project FinancialManagement Unit P I M Project ImplementationManual PIU Project ImplementationUnit PPF Project Preparation Facility PPP Public-Private Partnership PSR Project Status Report SEEDS State Empowerment and Economic Development Strategy SIL Sector Investment Loan SNUWSRP SecondNationalUrban Water Sector ReformProject SOE Statement o f Expenditure SPA State Project Account SPIU State Project Implementing Unit SSA State Special Account SWA State Water Authority SWRA State Water Regulatory Agency UFW Unaccountedfor Water Vice President: Gobind T. Nankani Country ManagerDirector: Hafez Ghanem Sector Manager: Eustache Ouayoro Task Team Leader: Alex McPhail FOROF'FICLALUSEONLY NIGERIA SECOND NATIONALURBANWATER SECTOR REFORMPROJECT CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for Bank involvement ......................................................................................... 2 3. Higher levelobjectives to which the project contributes .................................................... 3 B. PROJECT DESCRIPTION ................................................................................................. 4 1. Ler.dir,g instrument ............................................................................................................. 4 2. Project development objective andkey indicators.............................................................. 4 3. Project components............................................................................................................. 4 4. Lessons leamed andreflected inthe project design............................................................ 6 5. Altematives considered and reasons for rejection .............................................................. 7 C . IMPLEMENTATION .......................................................................................................... 8 1. Institutional and implementation arrangements .................................................................. 8 2. Monitoringand evaluation of outcomes/results .................................................................. 9 3. Sustainability....................................................................................................................... . . . 9 4. Critical risks and possible controversial aspects............................................................... 10 5. Loadcredit conditions and covenants............................................................................... 11 D APPRAISAL SUMMARY . ................................................................................................. 11 1. Economic and financial analyses ...................................................................................... 11 2. Technical........................................................................................................................... 11 3. Fiduciary........................................................................................................................... 12 4. Social................................................................................................................................. 13 5. Environment...................................................................................................................... 13 6. Safeguard policies............................................................................................................. 14 7. Policy Exceptions and Readiness...................................................................................... 15 Annex 1:CountryandSector or ProgramBackground ......................................................... 16 Annex 2: Major RelatedProjects Financedby the Bank and/or other Agencies .................19 This document hasa restricteddistributionand may be used by recipientsonly in the performance of their official duties Its contents may not be otherwise disclosed . without World Bank authorization. Annex 3: ResultsFrameworkandMonitoring ........................................................................ 20 Annex 4: DetailedProjectDescription ...................................................................................... 23 Annex 5: ProjectCosts............................................................................................................... 30 Annex 6: ImplementationArrangements ................................................................................. 32 Annex 7: FinancialManagementandDisbursementArrangements ..................................... 34 Annex 8: ProcurementArrangements ...................................................................................... 43 Annex 9: EconomicandFinancialAnalysis ............................................................................. 52 Annex 10: SafeguardPolicyIssues ............................................................................................ 56 Annex 11:ProjectPreparationand Supervision ..................................................................... 58 Annex 12: Documentsinthe ProjectFile (IRIS) ...................................................................... 60 Annex 13: Statementof LoansandCredits .............................................................................. 61 Annex 14: Country at a Glance ................................................................................................. 63 Annex 15: StakeholderParticipation ........................................................................................ 65 Map No 33824R MapNo 33967 MapNo 33968 MapNo 33969 .... NIGERIA SECOND NATIONALURBANWATER SECTOR REFORMPROJECT PROJECT APPRAISAL DOCUMENT AFRICA Date: May 19,2005 Team Leader: Alexander A. McPhail Country Director: Hafez M.Ghanem Sectors: Water supply(90%); Sub-national Sector Managermirector: EustacheOuayoro / government administration (10%) Michel Wormser Themes: Other financial andprivate sector development (P); Pollutionmanagementand environmental health (P); Access to urban services and housing (S); Regulation and competition policy (S) Project ID: PO71391 Environmental screening category: B LendingInstrument: Sector Investment Loan Safeguard screeningcategory: (S2) [ ] Loan [XICredit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (uS$m.): 200.00 Total: 10.50 200.00 210.50 Borrower: Lagos State Water Corporation Water House, Ijora P.O. Box 555 Lagos Lagos State Nigeria Tel: +234 1774-3013 olawale-c@yahoo.com www.lagoswater.com Cross River State Water Board Administrative Headquarters NdidemUsangIs0 Road Calabar . Cross River State Nigeria Tel: +234 87 234-243 Fax: +234 87 234-240 elemi4@,yahoo.com FederalMinistry o f Finance Finance Headquarters, Central Area Abuja Nigeria ResponsibleAgency: Project implementationperiod: Start: November 1,2005 End:December 31,2010 Expectedeffectiveness date: November 1,2005 Expectedclosing date: June 30,201 1 Does the project depart from the CAS incontent or other significant respects? Re$ PAD A.3 [ No Does the project require any exceptions from Bank policies? Re$ PAD D.7 Have these been approved by Bank management? I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Re$ PAD C.5 [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [XIYes [ ] N o Project development objective Re$ PAD B.2, TechnicalAnnex 3 The Project's principal development outcomes are: (i) increased reliability and financial viability of selected urban water utilities; and (ii) increased access to piped water networks in selected urban areas. Progress toward these principal development outcomes will be measured through: (i) the increase inwater deliveredthrough existing andextended networks; (ii) improvements incash flow; and (iii)increase inthe number o fhouseholds having access to the pipedwater network Project descriptionRe$ PAD B.3.a, TechnicalAnnex 4 The Project has four components: a) Rehabilitation and Network Expansion (US$I55.6m): This component will include engineering and civil works to be executed within inLagos and Cross River State, as well as dammaintenanceandheavy rolling stock for the utilities. b) Public-Private Partnership (PSP) Development (US$ 7.5m): This component supports: (i) the design and tendering o f the management contract for the Lagos Treatment Works; (ii) studies ands assistance related to ensuring smooth operation o f that contract and inCross River State; and (iii) fees for the treatment works operator. c) Service Sustainability and Project Management (US$I4.6m): This component will assist the utilities to hnction at increasing efficiency and self-sustainability and provides subsidies for energy and chemicals, supports stakeholder outreach programs, provides for office equipment and supports the Project ImplementationUnits. d) Institutional Development and Policy Reform(US$ IO.9m): Support under this component is for expert technical assistance for the utilities and the FMWR, staff training, river basin planningandMDGtracking. Which safeguard policies are triggered, ifany? Re$ PAD 0.6, Technical Annex 10 Environmental Assessment, OP 4.01 Involuntary Resettlement, OP 4.12 Safety o f Dams, OP 4.37 Projects on InternationalWaterways, OP 7.5 Significant, non-standard conditions: None. BoardpresentationCondition: The revisedDamSafety Report is disclosed. Credit effectiveness Conditions: None Disbursement Conditions: None Covenants applicable to project implementation: None A. STRATEGICCONTEXT AND RATIONALE 1. Country and sector issues Nigerian Urban Water Sector Strategy and Instruments 1. In the urban water sub-sector, the Nigerian government would like to separate the functions o f infrastructure investment and ownership from service operation thereby introducing competition and efficiency increases. Eventually, the government envisages that significant private sector funding could be available for urban water investments. On the service side, the strategy i s to improve service delivery through optimal private public partnerships (PPP or PSP) for the management and delivery o f water services. The key focuses o f development assistance sought by the government are, therefore, in the areas o f (i)reform to permit and encourage private sector financing and; (ii) technical and investment assistance to launch PPP for improved management o fthe sector. Issues Constraining Achievement of Better Sector Results 2. InvestmentDeficits. Currently, service coverage inurban areas is approximately 50%, and rural coverage is estimated to be 35% o f actual demand for water supply. To increase coverage to 80% by 2020 would require over US$10 billion investment each for water supply and basic sanitation and wastewater disposal facilities. Total investment costs would thus be approximately 4% o fNigeria's GDP, with operating costs being additional to this amount. 3. Poor Utility Performance. Water production facilities are rarely operated to capacity due to broken down equipment, or lack o f power or fuel for pumping. Mechanical equipment and pipes are poorly maintained, leading to frequent breakdowns and to high loss o f water through leakage. Lack o f metering, outdated information systems and inconsistent billing practices cause severe revenue losses. Cost o f production, including costs for distribution, chemicals, equipment, and electricity are frequently not factored into tariffs. State Water Authorities (SWA) are weak inthe commercial areas o f the business and rarely are proficient at customer billings, collections and cash flow management. As a result, most SWAs do not recover their operating expenses from their own revenues, and remain dependent on state governments for subsidies. 4. Restrictionson SWA Autonomy. Water supply is a state responsibility, andto this end state governments have created SWAs to manage and operate systems for water service delivery inall urban (officially defined in 1991 census as areas with a population inexcess of 300,000) and in some semi-urban areas. State ministries o f water are responsible for service delivery in small towns and rural areas within the state. While service provision is entirely in SWA jurisdiction, tariff setting is not. In a majority o f states, SWA may recommend tariff increases, but the state legislative assembly and/or the governor must approve such recommendation in order for tariffs to be raised. This gap between accountability andrevenue generating ability has resulted in compromised efficiency o f SWA in most states and adversely affected service provision. 1 5. Absence of Appropriate Regulation. As alluded to above, under the Nigerian constitution, states and local governments are responsible for provision o f water services, while the federal government has jurisdiction over shared water resources and some large dams. Currently there is no independent price or service regulation o f State Water Authorities at the state or local government level. Furthermore, private vendors dominate the large and growing informal market with no regulation o f quality or prices. In theory, State Environmental Protection Ministries havejurisdiction over water quality, but there is little practical exercise o f its mandate. 6. Lack of Enabling Policy Environment. Most states today perceive PSP as a potential means o f improving service delivery and investment in the water sector. However, states lack the policy, legal, and regulatory environment and expertise to attract and sustain private investment. State laws are not clear on the role, rights and obligations o f private parties in the provision o f public services and, as stated above, there is no regulatory entity at the state level which can set tariffs in a transparent manner. State agencies further lack expertise in designing and bidding PSP transactions. Thus, while there appears to be significant commitment for private partners to provide technical assistance and investment, the basic buildingblocks o f clear policies, enabling laws and transparent regulation do not exist inthe sector. Government Response to Resolution of Sector Issues 7. There is consensus among federal, state governments and development partners that the issues described above require a coordinated and sustained response. The government i s thus seeking to set the enabling environment context in a few key states-such as the ones participating in this project-so as to provide replicable models for other reform minded states. This approach is also consistent with IDA'Soverall strategy under the Country Partnership Strategy being presented to the Board with this Project (see Section A.3. below). While it i s anticipated that PPP will turn out to be a viable sector remedy, the Federal Government o f Nigeria (FGN) is also pragmatic regarding its PSP expectations-both interms of market risks andthe sector's ability to hedge such risks. Thus, and inthe case that large amounts o f private sector investment do not materialize, the government intends to seek support for measures that strengthen the public sector to achieve increased sustainability and access in the urban water sector. 2. Rationale for Bank involvement 8. Well functioning basic service delivery sectors are a necessary ingredient to sustainable development. Along with adequate electricity, roads, telecommunications and sanitation, a reliable and affordable source o f clean water i s an essential component o f the basic infrastructure package needed for robust economic activity and also necessary to ensure a healthy and vibrant population. Recognizing the central role that urban water supply plays in any country's growth and poverty reduction strategy, and in light o f the sector challenges highlightedin the previous section, the World Bank has for many years emphasized its involvement with this sector in Nigeria. 2 9. Despite the crucial role for international institutions inthe urban water sector, they have found this area of development in Nigeria to be difficult. The country's large size, its early stages o f decentralization, lack o fregulation, and low levels o f cost recovery have all contributed to the World Bank being the only large international development institution now active in the urban water sector. Other development partners, such as the European Commission, the European Investment Bank and the African Development Bank (AfDB) are now currently looking to the World Bank to lead the assistance effort and to help the government re-establish the development framework. 10. The World Bank has several advantages over other avenues o f assistance for the urban water sector. First, the World Bank has the ability to make big enough investments inthis large country to achieve significant results in terms o f rehabilitation and increasing access. For example, this Project is scheduled for US$200 million in IDA financing, and another IDA Project (National Urban Water Sector Reform Project Cr. 3924-UNI) i s now implementing US$120 million in support. The Bank also has a large staff with significant experience and expertise in water engineering, regulation, stakeholder involvement and the commercial operation o f utilities. It also has sufficient resources that permit engagement inthe sector over a prolonged period, helping to ensure consistent policies and investments. Finally, urban water utilities will need substantial financing from private sources, and the Bank is perhaps uniquely positioned in terms o f expertise and knowledge to assist the government in establishing the necessary conditions and environment to make this possible. 3. Higher level objectives to which the project contributes 11, This Project is presented to the IDA Board o f Executive Directors for approval with the new Country Partnership Strategy (CPS) for Nigeria. As a precursor to the CPS,, a National poverty reduction strategy (National Economic Empowerment and Development Strategy - NEEDS) was prepared in 2004. The NEEDS focuses on three key strategic pillars: (i) empowering people and building a social contract; (ii) promoting private enterprise; and, (iii) changing the way government works. The government also recognizes that sector strategies are needed at a national level and that each state must play its part inbringingforward an agenda for positive change. For this reason, states including Lagos and Cross River, are following the federal government and preparing their own state programs (SEEDS) inunison with the NEEDS. Together NEEDS and SEEDS form a national framework that i s Nigeria's poverty reduction strategy. 12. The objective o f IDA'SCountry Partnership Strategy i s to assist inthe implementation of NEEDS' long-term goals o f wealth creation, employment generation, poverty reduction and value reorientation. The CPS focuses on delivery o f results towards these goals through three main results packages: (i) improved service delivery for human development; (ii) improved environment and services for non-oil growth; and, (iii) improved transparency and accountability for better governance. 13. The SNUWSRP supports results packages (i) and (ii) f the CPS. Under Improved o Service Delivery for Human Development, the related NEEDS target i s to increase access to safe water to 70% by 2007. Given the enormous difficulties o f estimating urban and rural water coverage in 36 separate states and a Federal Capital Territory, the CPS contains more easily quantifiable targets based on: (i)at least one-half million households gaining access to potable water by the end o f the period; and (ii)another 5 million receiving at least 20% increased hours of water availability. The Project assists to attain these goals for urban residents inboth Lagos andCross RiverStates. 14. As for the Improved Environment and Servicesfor Non-oil Growth results package, the CPS focuses on improving the coverage and quality o f basic infrastructure as a basis to improve economic growth. Past experience has also demonstrated that pro-growth interventions often failed to generate synergy due to wide geographical dispersion. Therefore, the CPS will focus detailed interventions in core states to assure removal o f critical roadblocks to growth in rural and urban environments. Lagos State (a de facto core state ahead o f the CPS implementation period) and Cross River State (likely to be a core state under the CPS) will undertake detailed analytical work under the CPS and this Project to identify key pro-growth interventions, o f which the reliable delivery o f potable water will be a prominent intervention identified for implementation. The Project also will help support core state urban water initiatives under the CPS with about US$1.1 million intechnical assistance. B. PROJECTDESCRIPTION 1. Lendinginstrument 15. The lendinginstrument i s a Sector Investment Loan(SIL). 2. Projectdevelopmentobjectiveand key indicators 16. The Project's principal development outcomes are to: (i) improve reliability o f water supply produced by the water treatment works in Lagos; (ii) increase access to piped water networks in four cities in Cross River State; and (iii) improve commercial viability o f the urban water utilities inCross River and Lagos States. 17. Progress toward these principal development outcomes will be measured through: (i) the increase in operating capacity and hours o f operation for the Lagos treatment works; (ii) the increase in the number o f connections to the piped water system in Cross River State; and (iii) the degree to which operating costs are recovered from water sales revenues in Cross River and Lagos States. 3. Projectcomponents 18. The Project will be implemented intwo states inNigeria: Lagos and Cross River. Given the development objectives described above, the Project emphasizes financing for water system rehabilitation, increasingtreatment capacity and adding household and standpipe connections. It will finance management interventions and strengthening. The Project also encompasses public private partnership (PPP) contracts for utility operations in both states and may help finance these contracts. 4 The Project has four components as shown inthe following table: r i - Component . us$ooo 1. RehabilitationandSystem Expansion 155,550 2. Public-Private Partnership Development 7,450 3. Service Sustainability & Project Mgmt. 14,550 Institutional Development & Policy 4. Reform 10,950 5. Contingencies & Unallocated 20,000 6. Re-PayPPF 2,000 Total 210,500 19. The Project's components were selected on the basis of: (i) professional engineering assessments o f the water systems' conditions in the states; (ii) public opinion polls carried out duringpreparation that signaled public participation would ensure the transparency o f the water sector reform while fostering accountability of water delivery to consumers; and (iii)the observation from Cross River State that private sector intervention i s a proven methodology for restoring financial sustainability. 20. For the Rehabilitation and Network Expansion component (72% o f total Project), the principal target groups are the water authorities' customers. For this target group, the expected outcome is substantially better water service, both in terms o f access and quantity delivered. Under the Public-Private Partnership Development component (4% o f total Project), Cross River State customers already experience enhanced service under the on-going PPP contract which will be continued under the Project, and water availability should sharply increase under the PPP contract for the Lagos treatment works when it i s effective. 21. Given the history o f water projects in Nigeria outlined in Section A above, the Service Sustainability component (9% o f total Project) will assist the utilities to function at increasing efficiency and self-sustainability, Included here is also support to other core states for basic technical assistance. The planned outcomes here are increased water production and greatly improved cash flows. Complementing the technical and operating improvements will be a comprehensive stakeholder outreach program to re-build relations between the communities and utilities, thereby hrthering the sustainability o f the Project's planned achievements. 22. The SWAs and the FMWR will benefit from the Institutional Development and Policy Reform component (5% o f total project). The outcome o f this component should be a strengthening o f key sector skills including: technical operations, commercial operations, regulation, measuring coverage and access, track progress on the water and sanitation MDGs, river basinplanningand water resources management. 23. Outputs from the Project are expected to include: (i) treatment works operating at Lagos 85% capacity for 80% o f the time; (ii) new household water connections in Cross River 50,000 State; (iii) by Project end, 100% of Lagos treatment costs recovered from sales to Distribution 5 Operators; and (iv) by Project end, 100% o f O&M costs collected from revenues in Cross River State. 24. It is anticipatedthat the Project will address all o fthe sector issues mentioned inSection A.l. As was described there, the sector is constrained by investment deficits and poor utility performance, which are addressed under the first, second and third Project components. Improved service and better physical networks will set the stage for more accountability, which should also be aidedby PPP contracts (supported by the second and fourth components). 4. Lessonslearnedandreflectedinthe projectdesign 25. The World Bank has supported urban water projects for over 50 years and this sector continues to be very active today. Injust the last four years alone, the World Bank Operations Evaluation Department (OED) issued over 40 evaluation reports for water projects, with the majority dealing with urban water. In addition, there are six previous World BanWIDA urban water projects in Nigeria, plus one on-going project (National Urban Water Sector Reform Project, Cr. 3924-UNI), which provide specific lessons for this country. Moreover, the World BankInfrastructureNetwork actively researches andpromotes best practice for this sector. From this largereference base, the following three lessons are important for the Project. 26. UnderstandingWater in the Social Environment. Ina large metropolitan area (such as Lagos), or in communities which have been without piped water service for a long period (as is the case with Calabar and the other smaller communities in Cross River State), a good understanding o f how water fits into the local social fabric i s essential for successful project design. Up-front identification o f water rights, both formal and informal, should be performed, and the community organizational and institutional structure should be well understood early on. Inaddition, effective outreach and communication efforts are required for the sector to achieve sustainable progress, adaptation and innovation. The Project has dedicated significant resources and effort to: (i)comprehending stakeholder perceptions about water service; (ii) to trying understand how local organizations (governmental or otherwise) deal with water; and (iii) building mechanisms into the Project that will sustain lines o f communication between the utilities and their communities. A summary o f efforts already undertaken, and those planned for implementation, is contained inAnnex 15. 27. Infrastructure Design and Sequencing: Project evaluations reveal there was often over-estimation o f demand when planningfor expansion inwater supply. Also, some projects in the 1990s Water Decade were not synchronized well-while the piped network expansion was completed, production capacity was not enhanced and as a result there were new pipes with no water in them. In other cases, treatment and transmission capacity was expanded, but the distribution network remained insufficient to deliver water to the final consumer. Based on these lessons and in order to better understand demand in a mega-city setting, rehabilitation in Lagos will precede network expansion. After the system is working at capacity and the supply versus demand balance re-calculated, then plans for expanded capacity can be more accurately determined. Conversely, in Calabar capacity now greatly exceeds demand as a result o f the African Development Bank (AfDB) financed plant rehabilitation and capacity expansion without 6 a complementary increase in consumer connections. The proposed Project will, therefore, in Calabar, concentrate on extendingthe distributionnetwork to the consumer. 28. Institution Strengthening: Experience in the sector, including with the on-going National Urban Water Sector Reform Project, has confirmed that capable utility management is key to successful operations and long term sustainability. The Project will provide over US$7 million to increase utility capacity in both technical and commercial areas, hrther strengthen PTU capacity to implement, monitor and evaluate progress, assist the FGN to develop and improve sector policies, including tracking progress on the government's efforts to meet the Millennium Development Goals for access to water and sanitation. There is also support for furthering the country's work on national and international river basin planning and water resources management. 5. Alternativesconsideredand reasons for rejection 29. Public Sector Solutionvs. PPP: Working with the SWAs without the prospect of PPP contracts was considered and then rejected as a project design. The World Bank's project for Nigeria's urban water sector during the 1990s (National Water Rehabilitation Fund Project, L3322-0, closed on June 30, 2001) emphasized a public sector strengthening approach. However, based on the disappointing operating performance o f SWAs after the National Water Rehabilitation Fund Project closed, and also with additional experience under the on-going National Urban Water Sector Reform Project (Cr. 3924-0), the FGN and World Bank have concluded that a PPP approach holds better promise inNigeria for reforming utility operations. During the years 2000-2002, IDA worked with the IFC on a plan to concession Lagos water supply, but there was eventually little private sector appetite for a concession. Therefore, the Project, andthe on-going National UrbanWater Sector Reform Project, take a more step-by-step approach and will seek to establish a successhl PPP intervention through performance based contracts. Ifthe private sector can develop a positive track record, then higher forms o f PPP can be considered where necessary. 30. Delayingthe Civil Works until the PPP contracts are in place: Under a SIL, it had been discussed whether or not to delay civil works until the PPP contracts were in place. This approach was ultimately rejected because stakeholder surveys indicated that raising tariffs would havebeenvery difficult without an improvement inservice. Inaddition, the commitment fees on the loan's un-disbursed balance would have been well in excess o f US$1 million for the first two years alone unless civil works commenced immediately. In addition, Cross River State is already operating its Calabar system under a PPP arrangement and the PPP design for Lagos i s well advanced and agreed with the Lagos State Government. Thus, the risk o f significant PPP not materializingunder the Project appears to be modest. 31. A "Lagos Only" Project: Following preparation activities originally undertaken with the IFC, this Project was originally conceived to implement only in Lagos State. However, the FGNhas subsequently emphasized increasing nationwide access to water and supply as a major objective under its 2004 National Economic Empowerment and Development Strategy (NEEDS, see Section A.3., above) and, therefore, requested late inpreparation that at least one additional state be added to the Project. IDA supports government's objectives in the NEEDS and, 7 therefore, has added Cross River State to the Project and reserved about US$1.1 million to permit other core states identified under the CPS to access technical assistance to better prepare them to deliver sustainable water services. C. IMPLEMENTATION 1. Institutionalandimplementationarrangements 32. Implementation Arranyements: The project is focused at the utility level, and therefore, implementation will be managed by the States. There will be a separate State Project Implementation Unit (SPIU) for eachparticipating utility at the state level, and a FederalProject Implementing Unit (FPIU) for FMWR at the federal level. The SPIUs will be staffed with relevant professional staff including a Procurement Officer or two Engineers familiar and experienced with World Bank Procurement Guidelines. Each SPIU will have overall responsibility to manage its own State procurement activities. The financial management functions will be performed by FPIU at the federal level. These functions will be performed by the Project Financial Management Unit (PFMU), which is located in the State Accountant General's office and LSWC in Cross River and Lagos States respectively. The FPIU, CRPFMU andLSWC will designate appropriate staff to handle the financial management functions for this project and ensure compliance with all IDA requirements. The role o f the FMWR, inaddition to implementing its own component, is expected to be overall Project monitoring and evaluation and serving as a resource and information help desk. Implementation activities and time frame are set out in the Project Implementation Manuals (PIM), which will be updated from time to time in agreement with IDA to include detailed implementation arrangements o f financial and accounting procedures, procurement arrangements, environmental and social monitoring and mitigation arrangements, andother administrative andorganizational arrangements. 33. Rationale for Institutional Arrangements: One o f the key lessons learned from the recently completed National Water Rehabilitation Project, as well as the on-going National UrbanWater Sector ReformProject, is that institution buildingand capacity development at the state water utility level is not easily achieved if the project is implemented at the federal level. Thus this project is designed to decentralize all technical, operational, and regulatory functions andbuildutilityand sector capacity at the state level. 34. Capacity Constraints to be Addressed: At the level o f the FMWR, financial management and procurement assessments carried out in January and February 2004 indicate that there is sufficient capacity for Project financial management and procurement. At the level o f the States, PFMUshave been established specifically for World Bank projects and the assessment inCross River State and a review o f LSWC have shown that it has the financial capacity to manage World Bank projects, but that there is also the opportunity for further training and experience. However, the procurement assessment indicates that there is existing and adequate procurement capacity at Lagos SPIU while there is none at Cross River SPIU which is yet to be established, At least for the first year, Cross-Rivers SPIU will require the services o f an experienced Procurement Specialist who will be recruited under a transparent and competitive process to assist with the implementation of procurement functions under the project. There is therefore the need for significant capacity building and strengthening at the SPIUs. In order to strengthen 8 financial management and procurement, a variety o f measures are envisaged under the Project, includingappropriate staffing inthe SPIU and PFMU, the preparation and follow-up o f detailed procurement plans andmanuals, and specialized training for the relevant staff. Annex 8 contains further details. 35. Flow o f Funds and Financial Reporting: Through the Federal Ministry o f Finance (FMF), the FGNwould pass on IDA funds to the FMWR and the implementing States. IDA will disburse the credit through: (a) one FSA for the federal component managed by F M W Federal Project Implementing Unit (FPIU); (b) one SSA managed by LSWC: and (c) one SSA managedby Cross Riverthrough its PFMU. 36. The IDA Credit Agreement will require the submission o f Consolidated Audited Project Financial Statements for the Project to IDA within six months after year-end. Samples o f audit reports are included in Annex XXI o f the Financial Accounting Reporting and Auditing Handbook (FARAH) of the World Bank. The FPIU and PFMUs will each appoint qualified external auditors on Terms o fReference acceptable to IDA. 2. Monitoring and evaluation of outcomes/results 37. Performance monitoring o f the proposed Project will include: (a) the performance indicators as included inAnnex 3; (b) the results o f stakeholder workshops and surveys; and (c) progress in preparation o f investment programs and in the execution of civil works contracts. The FPIUwill carry out necessary analyses of the various indicator data, as specified inthe PIM. The FPIU and IDA will monitor the implementation progress and evaluate the outcomes on a quarterly and annual basis, using information obtained from reports prepared by the SPIU. The Project's Capacity Building and Project Management component contains adequate funds to support monitoring and evaluation activities inthe FPIUand SPIUs. 38. The Project will also be subject to a Mid-Term Review (MTR) and Implementation Completion Report (ICR), which will both bejointly prepared by IDA and the FPIU. Results o f these reviews will be discussed with the SPIU Directors and the relevant officials inthe FMWR and FMF. 3. Sustainability 39. The FGNhas demonstrated its commitment to the Project and relevant policies through: (i)requesting and using for preparation a US$2.0 million Project Preparation Facility (PPF); (ii) procuring during preparation multiple engineering consultancies to design civil works to be financed under the Project; (iii) undertaking extensive public and stakeholder consultations in Lagos duringpreparation; and (iv) passinga comprehensive new water law inLagos State. 40. In addition to the measures mentioned above, it will also be necessary for the States to ensure adequate tariff levels over the long run and to support the SWAs through subsidies over the short to medium term. The states have demonstrated that they are committed to this support. Operational efficiency improvements are being implemented in each state through significant PPP contracts and arrangements, but it is clear that an important determinant o f sustainability in this sector will be an active and on-going involvement of the private sector. Thus, the Project 9 actively supports the private sector and seeks to strengthen the SWAs' ability to procure and supervise these contracts. 41. The Project design also seeks to improve sustainability o f the SWAs through: (i)a comprehensive training effort designed to deliver enhanced technical and commercial capacities and competencies; (ii) substantial technical assistance on both technical and commercial aspects of utility operations, including a "help desk" facility for the private distribution operators in Lagos; and (iii) establishment of stakeholder feedback mechanisms and capacity buildingfor the NGOs active inthe water sector. Risks RiskMitigationMeasures RiskRatingwith Mitigation To Project development objective State governments do not allow the Sector policies that emphasize Moderate S W Ato act ina sufficiently ~ and encourage autonomous and autonomous manner to sustain self-sufficientutilities. reliability o f investmentsand StrengtheningSWAs'commercial maintainadequate cash flow. capacity throughtargeted PPP contracts. Constraints inelectricity availability Engineeringapproachthat Substantial. make full utilization of restored or achowledges this constraint in new investments impossible. Nigeria and provides for sufficient stand-by electricity sources. To component results Not all PPP contracts are Introductory PPP, i.e. Moderate implementedbecausethe private performance-based PPP. Careful sector perceives Nigeria as too risky. and simple contract design designed to minimize contractual enforcement risk. Civil works are severely delayed or PIUtraining, use o f State Project Moderate not completed because of problems Financial Management Units, with procurement or financial and a project design that has few management. contracts. Project financial management risk Use of PFMUs in each state, Moderate adequate supervision by Bank FMS, andexternal audits Overall RiskRating IModerate 42. The Project will support significant PPP for the SWAs. The use o f the private sector to manage urban water supplies is normally controversial because o f perceptions about pricing, transparency and equity. Stakeholder polling inNigeria shows that most people are not opposed to PPP contracts for water service, but are concerned about what these contracts will mean for future price increases andwhether or not service will be provided on an equal basis to all income levels. There are, however, several NGOs in Nigeria that oppose World Bank support to the 10 sector, as is common in many developing countries. The Project seeks to allay these concerns through emphasizing transparency and providing for continuing stakeholder consultation and information. 43. The FPIU and SPIUs will be responsible for the financial management affairs o f the project. The FPIU has implemented the National Water Rehabilitation Project, a World-Bank assisted project and the on-going National Urban Water Sector Reform Project, and thus has experience in implementing IDA-assisted projects. The risk arising from the external environment is assessed as high, based on the 2004 updated CFAA. Given such an environment, robust control arrangements are necessary in the FPIU to ensure that hnds are used only for the purpose intended. There is a need to ensure a seamless flow o f information and rapid tum around between the other units o f the FPIU and SPIUwhich will handle project implementation activities and the FD/FPIU and PFMUs which will perform all FM. An adequate Financial Procedures Manualwill be developed specifically for the project. 5. Loadcredit conditions and covenants Board Conditions The updated Dam Safety Report is publicly disclosed. D. APPRAISAL SUMMARY 1. Economic and financial analyses Estimated (rounded) results o f the financial and economic modeling are shown inthe following table: NPV gU000) FIRR(%) Lagos ~~~ 136,000 10 13 Cross River 406,000 13 15 Complete details concerning the analysis, including methodology, assumptions and sensitivity, are contained inAnnex 9. 2. Technical 44. The Project involves water supply treatment and distribution civil works and goods that employ standard techniques and installations that are well established in the industry. The FMWRandSWAs are accustomed to these standards and designs and they are considered bythe World Bankand international engineering experts to represent an appropriate level o ftechnology for Nigeria. 11 3. Fiduciary 45. The Budget Monitoring and Price Intelligence Unit (BMPIU), established at the Presidency, has submitted approval and payment o f contracts at the federal level to a strict due process review, which is in accordance with Bank financed procurement procedures. This has strengthened procurement discipline. Moreover, the procurement environment o f the Federal Government o f Nigeria (FGN) improved when FGNwas accorded an IDF Grant to help launch the procurement reform at the federal level. The BMPIU has prepared and submitted to Parliament a procurement law, andthe Government has issued circulars to establish procurement units ingovernment agencies and create a procurement cadre. The level o f transparent processes are not yet applicable to State Governments. The State Water Boards o f the participating states will be responsible for management o f procurement functions at the State level. However, these responsibilities shall be discharged by SPIUs that i s fictional in Lagos but to be established in Cross River State. The just concluded assessment o f the implementing agencies revealed that, L W C has considerable experience in implementing World Bank financed projects with a good procurement track record (based on October 2004 Independent Procurement Audit (IPR) report. However, CRSWB do not have such experience. 46. To ensure that appropriate procurement capacity i s inplace, there is a need for significant capacity strengthening at the Federal PIU and the State Water Boards. To strengthen this required procurement capacity, a variety o f measures are envisaged and planned under the project as listed in Annex 8. Since it will take some time to buildthis capacity, each PIU may engage consultants to assist in supervision o f the large civil works contracts. The consultants' contracts shall make adequate provision for capacity building and transfer o f knowledge to relevant project staff. There are existing procurement manuals LSW C revised to accommodate the differences between the Generic Procurement Manual for Bank financed projects inNigeria. CRSWC will adopt/adapt the Generic Procurement Manual. For easy access and retrieval o f information, each will computerize their store records. 47. The Finance Department o f FPIU (FD/FPIU) Finance and Accounts Department o f LSWC (FAD/LSWC) and Cross River State PFMU (CRPFMU) will be responsible for managing the financial affairs o f the Project at the federal and state levels. FD/FPIU FAD/LSWC and CRPFMU are staffed by relevant qualified accountants. Modem intemal audit functions would be performed by the Intemal Audit Unit that will be set up at the FPIU (IAU/FPIU) LWSC's Regulatory Department and CRPFMU's internal audit section. FD/FPIU, FAD/LSWC and CRPFMU. FD/FPIU and PFMUs will be responsible for ensuring compliance with the financial management requirements of the Bank and the government, including forwarding the quarterly Financial MonitoringReports and audited annual financial statements to IDA. The FPIU, LSWC and CRPFMU are familiar with IDA financial management requirements given their participation in the implementation o f ongoing IDA-assisted projects. The FD/FPIU FAD/LSWC and CRPFMU will maintain adequate FM arrangements to support the deployment o f Project resources in an economic, efficient and effective manner to achieve the stated development objectives. The arrangements will also provide relevant information to FPIU and SPIU to facilitate the performance o f their oversight functions. Experienced and well qualified extemal auditors will be appointed (on a TOR acceptable to IDA) to audit Project accounts, financial statements and transactions irrespectiveo f the source o f financing. 12 4. Social 48. All decisions related to the Project's components and implementation arrangements have been taken in consultation with community representatives, SGs, LGs and Federal agencies, Consumer and stakeholder consultations included a comprehensive communication audit which assessed perceptions, attitudes, and beliefs o f stakeholders vis-&vis PSP in Lagos water provision. The communication audit also served as a baseline for the design and implementation o f a comprehensive strategic communication program to support the LSWC's PSP policy and consumers' concerns regarding the PSP. 49. A stakeholder specialist and a strategic communication team were part o fthe preparation team to ensure the involvement o f key local stakeholders in all Project phases, through a comprehensive Communication and Stakeholder Outreach Program, as described in section B and Technical Annex 4. 50. Shortly after Board approval, a Social Assessment to be conducted in the States will examine the range o f stakeholders' interests, and address potential social risks to the Project, the Project's social impacts on local consumers, the water boards, and informal providers (see Annex 15). The inclusive process initiated during Project preparation will build on recent and ongoing efforts of dialogue between communities, SGs and LGs on water issues and broader urban services and policies. The Project's social impact will be monitored through annual stakeholder surveys and at Project completion. The implementing agencies will set their own verifiable indicators to assess the degree o f participation o f the key stakeholders during implementation, as well as engage consumer representatives to participate in all monitoring and evaluation field visits and discussions with the water companies and government officials, and during IDA missions. All Project public documents will be made available at the federal, state and local levels at suitable locations. Key factors to the Project's success include the continued political commitment to the sector reform, stakeholder participation in the process, and ownership from consumers, workers, and informal suppliers. 5. Environment The Project i s rated Environmental Category B. 51. In Lagos State, civil works will be entirely rehabilitation of existing infrastructure involving only temporary inconvenience to adjacent properties and commercial activities, plus network extensions into an area east o f Ikoyi beside existing and planned roads, the latter on unused landreclaimed from the lagoon. A minor existing environmental issue is the disposal o f treatment plant sludge at Iju and Adiyan. Currently, the clarifiers do not work, and the slightly acidic sludge i s discharged into small nearby rivers. River ecology and hydrology appears to be affected and, at Adiyan, the sediments are contributing to periodic flooding o f a community road. 52. In Cross River State, the environmental and resettlement consequences o f SNUWSRP civil works are likely to be very minor or none, given normallyresponsible construction planning and management. Nonetheless, uncertainties about the nature and scope o f civil works in 13 Obudu, Ogoja and Ikom lead to the determination that there should be an Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF) prepared for NUWSRP2. These were finalized,before project appraisal inlate March 2005. 53. As inthe NUWSRP1 project, the Bank will consider including inNUWSRP2 provisions for technical assistance to the Lagos and Cross River water authorities so they can adequately manage the safeguards aspects o fproject implementation. 54. With water supply projects, there is the concern that improving accessibility will lead to increased sewage and wastewater, and consequent surface/groundwater quality and health impacts. Inthis context, the Project will provide technical assistance to characterizing the nature and extent o f groundwater quality problems insupport o f future groundwater management programs. 55. Ikom draws its water from the Cross River which rises in Cameroon, thus triggering the Bank's International Waterways policy (OP 7.50). Nigeria does have a general agreement with Cameroon on the use o f the river, but notification under OP 7.50 is still required under World Bank guidelines. The required notification was sent by Nigeria to Cameroon on March 1, 2005, with a reply requested no later than April 18, 2005. As o f the date o f this Project Appraisal Document, no response had been received from Cameroon. However, because the extractions from the international river are minimal, the task team believes that the project will not cause any adverse effects to Cameroon. 56. The only other safeguards policy which i s triggered is the safety o f dams (OP 4.37) since water supply to both the Lagos treatment plants (Iju and Adiyan) is controlled by an upstream dam on the Ogun River. The Dam Safety Assessment just completed for the World Bank- financed National UrbanWater Sector Reform Project (Cr. 3924-UNI) included this OgunRiver dam (the Assessment will be re-disclosed for this project). InCross River, the OwelobuduDam regulating water supply for Obudu does need remedial work on the spillway. [The FMWR and the Bank have agreed to extend the NUWSRP1 DSR to include Cross River State and that the updated Dam Safety Report, which i s now in draft, will be disclosed to the public no later than the June 1,2005.1 6. Safeguard policies Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OPBP/GP 4.0 1) I/ Natural Habitats (OPBP 4.04) I/ Pest Management (OP 4.09) I/ Cultural Property (OPN 11.03, being revised as OP 4.11) I/ Involuntary Resettlement (OPBP 4.12) I/ Indigenous Peoples (OD 4.20, being revised as OP 4.10) I/ Forests (OP/BP 4.36) I/ 14 Safety o f Dams (OPBP 4.37) I/ Projects inDisputedAreas (OPBP/GP 7.60)* I/ Projects on InternationalWaterways (OPBP/GP 7.50) I/ 7. Policy Exceptions and Readiness 57. The Project complies with all World Bank policies and no exceptions are necessary. The project's first 18-month procurement plan for both states was reviewed during Appraisal. The Project's first 18-month civil works were confirmed at Appraisal and the procurement plan was confirmed at Negotiations. Engineeringconsultants are already under contract in Lagos, and in the process o f being procured in Cross River. Civil works are expected to begin at about the time o f Effectiveness inboth states. * By supporting theproposedproject, the Bank does not intend toprejudice thejna2 determination of theparties` claims on the disputedareas 15 Annex 1:CountryandSector or ProgramBackground Geography andPopulation 58. Nigeria has a land area o f 924,000 sq. km. The average rainfall ranges from about 500 "/year in the north to over 2,000 "/year in the south. The northern terrain is flat and sparsely vegetated with river flows that are generally seasonal. The main rivers, Niger and Benue, converge inthe central region, thereafier flowing south as the Niger to discharge into the Atlantic Ocean through an extensive delta area. Their major tributaries are perennial, as are other rivers inthe south, and are frequently exploited for water supply. 59. Nigeria is the most populous country in Africa with an estimated population o f 132 million, growing annually at a rate o f 2 per cent. Economic and Political Conditions 60. Nigeria is the largest country inWest Africa with a GDP o f US$43.5 billion (2002). Per capita income is about US$290. Nigeria's total debt is at US$30.9 billion. Poverty inNigeria is widespread in the northem parts of the country, but more severe in the remote southem areas. Urban poverty is on the rise - it i s estimated that about 48% o f urban dwellers are living in poverty. About 30 million people were defined as extremely poor in 1996. The peaceful transition o f power to the re-elected (May 1999, and M a y 2002) democratic civilian government awakened the interest o f the international community in Nigeria, and re-kindled hope among Nigerians. Water Resources 61, Based on available data, Nigeria has adequate surface and ground water resources to meet current demands for potable water. However, the temporal and spatial distribution o f water has ledto scarcity insome locations, especially inthe north. This disparity has ledto rapid depletion o f groundwater, especially in the northern towns, which have resorted to other sources. Past Government efforts have been fragmented focusing on water resources development on a sub- sector basis, but neglecting to manage it strategically as a national resource. The River Basin Development Authorities (RBDA), now 12 in total, were created in 1976 for planning and developing water resources, irrigation work and the collection o f hydrological, hydro-geological and meteorological data. The Government recognizes the need to manage water supply in an integrated and sustainable manner, and has embarked on the preparation o f a National Water Resources Management Strategy (WRMS) to ensure proper management and development o f its water resources. Water Supply and Sanitation Coverage 62. Rapid population growth has not been accompanied by an increase in the delivery o f essential urban services such as water supply, sewerage and sanitation, and collection and disposal o f solid wastes. It i s estimated that currently only about 50% o f the urban and 20% o f the semi-urban population have access to reliable water supply o f acceptable quality (i.e. 16 something better than a traditional source). Overall effective urban water supply coverage may be as low as 30% o f the total population due to poor maintenance and unreliability o f supplies. Rural coverage i s estimated at 35%. 63. Except for Abuja and limited areas o f Lagos, no urban community has a sewerage system, resulting in sewage and sullage either lying stagnant, or are disposed through the storm water drainage system. The proportion o f the population with access to safe facilities for disposal o f excreta andwaste water i s lower than for water supply. InstitutionalAspects 64. The three levels o f government in Nigeria share responsibility for the delivery o f water supply and sanitation services. The Federal Ministry o f Water Resources (FMWR), initially created in 1976, i s responsible for formulating and coordinating national water policies, management o f shared water resources including allocation between states, and approving development projects. Responsibility for potable water supply was traditionally entrusted to departments o f the state governments (now 36 innumber). As the importance o f drinking water supply grew during the 1970s, most water departments were gradually transformed into State Water Agencies (SWA) to provide urban, semi-urban and, in some cases, rural water supply. Each SWA has, in general, been established under an edict to develop and manage water supply facilities within its respective state and to meet sound financial objectives. The Local Government Authorities (LGAs), o f which there are 774, are responsible for the provision o f ruralwater supplies and sanitation facilities intheir areas, although only a few have the resources and skills to address the problem. Only few LGAs have rural water supply divisions able to construct small water systems such as open wells and small impoundments o f surface water. Problems Confronting the Urban Water Sector inNigeria 65. The operational efficiency o f the majority o f state water utilities is low. Non-revenue or unaccounted for water (UfW) is very high, up to 65% in2004. It is conceivable that UfW could be higher given the absence o f metering o f production and distribution. On the physical side, aging pipes, frequent breaks, unreliable and unstable supply o f electrical energy or fiel, and treatment chemicals are common to most systems. Preventive maintenance is not a common practice and limited hnds have led to under-investment in new and expanded capacity while preventing the periodic replacement o f the aging components o f existing facilities. A rough estimate o f investment deficits in urban water supply indicates approximately US$6.8 billion is needed for rehabilitation and new facilities, and an additional US$lOO million a year for operations and maintenance. 66. On the institutional side, SWA remain under the control o f state govemments - fiscally and operationally. Political tariff setting is rampant, and tariffs bear no correlation to cost o f production and delivery. Tariff increases may be proposedby utilities, but must be approvedby the state government in most cases. State governments often bear the utility's costs - particularly for electricity, staff, chemicals, and other - thereby blurringthe organizational lines o f accountability. Thus the original mandate o f most SWA edicts - to operate in a financially self sufficient manner-has thus far not been achieved. 17 67. The problems o f large utilities are compounded by the inclusion o f peri-urban areas surrounding the cities which come under the jurisdiction o f the main utility. Often such peri- urban areas remain a low priority in terms o f investments due to a relatively higher number o f illegal and/or squatter settlements on public land. Most are served by public standpipes on the system of the main utility, or by wells or boreholes. Some utilities have established kiosks for sale o f water to consumers or water carriers in these peri-urban areas. Inmany cases, water carriers deliver water to the consumers who pay much more than the utility charges for their water, since they must pay both the utility charge for the water and the cost o f labor o f the canier. 68. Government Response: The FMWR, jointly with the World Bank, has formulated a Water Sector Strategy to improve services and meet the MDG through 2015. For the urban water sector, FMWR i s focusing on improving SWA performance through institutional and policy reforms at the state level. States themselves are interested in attracting private financing to the water sector. To this end, many states are inthe process o f corporatizing their SWAYand are seeking technical assistance from development partners to tum urban water utilities into independent profit centers with little or no state assistance. FMWR and states are exploring optimal legal, regulatory, and transactional structures and modalities to attract private operators either to manage, and/or to invest inthe sector. 69. The Bank has financed seven projects in the water sector thus far, with mixed results. The state level projects have been successful, and as a result those states - Kano, Kaduna, and Katsina - are the strongest performers among all urbanwater utilities in Nigeria. The National Water Rehabilitation Project (NWRP) has attempted to address many o f the institutional weaknesses o f the urban water utilities. The project completed a manpower audit and established a national training program, developed standardized edicts for SWAS, developed manuals for many SWA functions, and provided technical assistance to many SWAs to improve their commercial, financial and technical operations. It was also instrumental in establishing a network and dialog amongst the personnel o f the SWAs, integrating the support given at the federal level, andpromoting the ideas o f reform needed inthe sector. 70. However, the scope o f impact o f a national level project is necessarily limited in a large country like Nigeria. Also, while the NWRP had a major impact interms o f capacity building, many o f the structural problems described above remain, leading inevitably to the clear conclusion that major structural reform i s needed inthe way o f doing business inthe sector. At the close o f NWRP, it was clear to FMWR and the Bank team that the modest scope o f the NWRP in terms o f institutional strengthening and reform needed to be expanded. However, it was also apparent that a more lasting impact was more likely by focusing on a few states that were already undertaking reforms, and would benefit from appropriate public-private partnerships. 18 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies 19 Annex 3: Results Frameworkand Monitoring Results Framework PDO OutcomeIndicators Use ofOutcomeInformation 1.To improve reliability o fwater (a) Lagos Treatment Works operate To assess the Project's impact on supplyproducedbythe water at 85% capacity for 80% o fthe Yigeria achieving goals under the treatment works inLagos. time-by June 30,2008. YEEDS and applicable SEEDS for 2. To increase access to pipedwater (b)Number ofconnections inCross increasedaccess to potable water. networks infour cities inCross River State increases from 1,000 to River State. 50,000-by Project end. 3, To improve commercial viability (c) 100%o f Lagos treatment costs o f the urban water utilities inCross recoveredfrom sales to Distribution River and Lagos States. Operator. 100%o f O&M costs recovered form revenue in Calabar-by Project end. IntermediateResults ResultsIndicatorsfor Each Use ofResultsMonitoring Oneper Component Component ComponentOne: ComponentOne: Component One: Rehabilitation andNetwork (a) Network in5 Distribution Assess progress inmaking up the Expansion Districts inLagos are rehabilitated- water sector Investment Deficit in byProject end. Lagos and Cross River. (b) The existing distribution network inCalabar reaches90% ofthe citv's population-by Project end. ComDonentTwo : ComponentTwo: Public-Private Partnership (a) 1 PScontracts for operation o f Assess progress on achieving SWA Development the treatment works inLagos-by Autonomy. MTR. Assess progress indeveloping a (b)PSPmodelpiloted for 1smaller successful track record for the urbantown inCross River-by private sector inNigeria's urban MTR. water sector. ComponentThree: ComponentThree: ComponentThree: Service Sustainability & Project (a) Lagos treatment plants increase Assess progress inimproving Poor Management capacity from 60 millionm3lyear to Utility Performance. 180 millionm3lyear-by Project end. (b) Communications and consumer Gauge stakeholder capacity and outreach programs operational in interest inactively influencing water Cross River and Lagos-by Project issues. end. ComponentFour: ComponentFour: ComponentFour: Institutional Development & Policy (a) MDG tracking system for access To track Nigeria's progress in Reform to potable water & sanitation achieving the MDGs for access to established and operational inthe water and sanitation. FMWR-by MTR (b) Nationalutilitytraining plan Assess use o f new skills by utility conceived and implemented--by personnel indaily operations. Proiect end. 20 E E s E vr m 0 3 3 3 W c 3 P * z m s vr h r- o g 3 c zP r d 3 .gm g s E g O 0 z_. r *- o 2 3 0 sr 3 d 3 m o g 9I 9 I E I- 2 C z" g E vr \o 4 -g g 0 v, Annex 4: DetailedProjectDescription 71. Theproject comprises the following four components: Component1: Rehabilitation and Network Expansion. (US$155.6million) 72. Lagos State (US$115.6 million). In Lagos, the proposed Project will concentrate on restoring the city's large treatment works to operational capacity and maintaining water production on a continuous basis. It will also rehabilitate distribution networks in up to five distribution service areas inside the city. Under the Project, it is estimated that somewhere between one third and one half o f the City's population would have either a distribution network upgrade or a new network, and the entire city will benefit through greatly increased bulk water supply (estimated at an 83 millionm3/year incremental increaseby2010). Lagos' Adiyan and Iju water treatment facilities are very large installations with the following operating characteristics: I I Year 1 Aduvan I Iiu I commissioned I1991 11985 Installed Capacity (MLD) 318.2 204.6 Current Operating Capacity (est.) 128.0 82.0 73. As shown above, the treatment plants are now operating at about 30-40% of rated capacity, with significant variations throughout a typical year caused by breakdowns, electricity interruptions from the national power grid, and a lack o f essential chemicals and diesel fuel to power standby generators. 74. Component 1would also possibly rehabilitate a third, smaller, Ishasi plant. Expansion of treatment capacity at Ishasimay also beundertaken--iftechnical studies so warrant and hnds are available. The proposedProject would also undertake expansion o f the distributionnetwork ina limited number of Districts currently not served by the piped network. The Project may also rehabilitate a small numbero fminiandmicro treatment works. 75. The criteria for selecting the five, or possibly six, LSWC's Districts to participate inthe Project would be based on achieving an equitable balance between higher income areas (to increase LSWC's cash flow) and lower income areas (to help meet the Project's poverty alleviation objectives). 76. At the time of Appraisal, two Districtswere selected: District 1covering Lagos Island and Ikoyi; andDistrict 4 covering IkeyaIand I1and Oshodi. District 1 i)ThetransmissionmainspassingthebridgetotheLagosIslandandIkoyiaredirectly connected to the distribution system and are also conveying water to District 8, Victoria Island; 23 ii)One major andtwo smaller storage tanks inreasonably good conditions are non- functional; iii)ThereisoneminiwaterproductionfacilityatIkoyiwith3outof7boreholesinoperation and with pumping through pressure filters directly into the distribution system without any retention tank for chlorination. The groundwater has high iron content, which is reduced through aeration and with lime being added for phcorrection; and iv) At the location o f the major storage tank (Onikan) 2 boreholes have been drilledbut still have to be made operational. District 4 i)Thewaterissuppliedthrough5connectionstothemaintransmissionmains; ii)Twostoragetanksareoutofoperation; iii)Thedistributionsystemcanreadilybeisolatedfromadjacentserviceareas; iv) An micro water production facility, located inAlousa, Ikeya 11, is inoperationwith water being pumped to an elevated storage tank; and v) A new water production facility, Ikeya I,has recently been commissioned including treatment works, aeration and filters for iron removal. The water is pumped to an elevated storage tank. 77. Under the Project, the approach for a medium-term solution o f water allocation to the Districts would be: Design capacities for the water intakes and surface water treatment works should be restored; A hydraulic analysis should be carried out for the transmission mains to conclude on the adequacy for present and future requirements. This should also confirm the potential need for any strengthening/extensions; m Direct connections from the transmission mains to the distribution system in different service areas should, where feasible, be avoided with water instead to be conveyed to storage tanks with preceding water metering and regulating valves. This should enable a proper control o f water pressures and allocations, particularly in case o f water shortages. This should also necessitate an updating o f network analysis for individual service areas for determining the need for enhanced storage capacity and locations/elevations o f additional storage tanks and for rehabilitatiodstrengtheningo f the distribution systems; and A centralized operational system should be established for monitoring and controlling water flows, water pressures and water allocations. Thephasing for the execution o frequiredinvestmentswould take into account: The need for an early increase inwater production capacity from both surface and ground water resources; The need for early installation o f bulk water meters and regulating valves to control the flows to respective service areas; The need for improving the operation o f water transmission and water storage systems; and 24 The execution of works for rehabilitatiodstrengthening o f the distribution systems could take place during a longer time period with contracts possibly to be awarded on an annual basis and with inputsonprioritizations to be provided by the Operators. 78. The consulting services for the engineering works, to include feasibility studies and detailed engineering design with preparation o f tender documents for the first phase investments will likelybe divided into six consultant contracts covering: The intakes and surface water treatment works with an analysis of water transmission systems; District 1 (Lagos Island and Ikoyi) including potential ground water development; and District 4 (Ikeja Iand I1and Oshodi) District X to be determined District Y to be determined District Z to be determined 79. Cross River State (US$37.5 million). On the basis o f the water system infrastructure deficiencies and operational challenges o f the CRSWB, the proposed Project would improve the current physical state o f the water system infrastructure in Cross River State and enable the CRSWB operate a viable water utility that is able to meet the ever increasingwater supply needs o f the current and future population. 80. The project will finance the completion o f the network densification in Calabar South (Calabar Metropolitan Area) started under a soon to close African Development Bank (AfDB) financed project and cover the needs o f northern Calabar as well. Under the IDA projects, an estimated 500km o f pipeline will be financed. A total o f 300 public standposts or "kiosks" and at least 40,000 additional connections will be provided under the project. The kiosks will be provided in addition to the 150 kiosks planned by the CRSWB under the current PPP arrangements. 81. Inpursuit ofits demandmanagement objectives, the CRSWBplansto meter all consumer connections. Investments in Calabar water supply will concentrate on an extension o f service coverage to all city residents in order to optimize revenue generation. The city has water treatment capacity well in excess o f the demand from currently connected customers. There will therefore be no need for investments inproduction facilities inCalabar. 82. Ikom, Ogoja and Obudu are without a functional piped water system, placing these populations at a substantial health risk. In all three towns, present demand far outstrips supply capacity. An urgent first step will be to put the water systems back into operation and at a minimum,restore the level o fproduction to their respective installed capacities. The distribution network in these towns, which is presently limited in extent and comprises very old Asbestos Cement (AC) pipes, will be improved. Connections to the improved distribution network will begin with a minimum service level o f public standposts or kiosks and then household connections where feasible. The project will also provide for the supply and installation of bulk meters to ensure accurate volumetric measurement o f production and distribution o f treated water. 25 83. InIkom, the current floating intake cannot provide for all year round abstraction due to the silting up o f the river and the fall inthe water level during the dry season. The Project will, therefore, finance an improved raw water intake upstream o f the current location. Groundwater sources will also be developed where feasible and integrated into the network to augment the supply. 84. Ikom's Water Treatment Plant i s generally in a poor state and has not produced treated water for several months. The installed capacity o f 900m3/day is grossly inadequate for a population o f 110,000. There are structural defects and leaks inthe sedimentation tanks and the clear water reservoir i s much too small. There are also inadequacies in the selection o f pump capacities. On the basis o f further engineering study, the project will finance the most cost- effective improvements to the plant to resume production and restore, at a minimum, production to the installed capacity. 85. The project will finance improvements to Ikom's transmission, storage and distribution network. The proposed construction o f a new reservoir on Ekabokon Hill will be further assessed. To the extent possible, A C distribution mains will be replacedwith PVC mains andthe network will be densified to maximize access to piped supply. An estimated l O O K m o f new pipeline including bulk meters will be financed. A total o f 100 kiosks and estimated 2,500 connections will be provided. 86. InOgoja, the original intake constructed for the stationconsists of a rectangular concrete tunnel, which links the river bed with a sump. A vertical shaft from the pump house links the sump below. The tunnel is completely blocked with silt and has been out o f use for a long time. A floating intake was deployed inplace o f the original structure but has been out o f use since 2002 following damage it suffered from flood during that year's rainy season. The current floating intake cannot provide for all year round abstraction due to the silting up o f the river and the fall in the water level during the dry season. Further engineering studies will be carried out to determine the feasibility o f constructing a weir downstream o f the current intake location or the alternative o f utilizing groundwater sources for supply to be implemented under the project. The project will also finance the upgrading o f power lines to the intake and source protection works. 87. Ogoja's treatment plant comprises o f the old works completed inthe 1960's and the new works which were completed in the 1990's. Both works are in a poor state and have not produced treated water for several years. The old plant has a capacity o f 450m3/d and the new plant 3,450m3/d resulting in a combined treatment capacity o f 3,900m3/d. The installed plant capacity i s inadequate for a population o f 110,000. As an initial intervention, the Project will finance the rehabilitation o f the plant to resume water production and restore at a minimum, the productionto the installedcapacity. 88. The Project will also finance improvements to the transmission, storage and distribution network in Ogoja. The old Asbestos Concrete pumping main between the intake and the treatment plant will be replaced. Three booster stations will be rehabilitated to ensure adequate head exists to service the storage reservoirs. The present situation where the booster stations are directly on-line would be reassessed. In order that it may be possible to use the booster pumps 26 duringperiods of NEPA power outage, standby generating capacity will be provided at each o f the stations. 89. To the extent possible, A C distribution mains will be replaced with PVC mains and the network will be densified to maximize access to piped supply. An estimated l O O K m o f new pipeline including bulk meters will be financed. A total o f 100 kiosks and estimated 2,000 connections will be provided. 90. In Obudu, the water system has a reliable source which has perennial flows mainly emanating from an upstream dam. The Obuduintake is located at the river be where a 2-3 meter highweir hasbeenconstructed acrossthe river to raise the water level. The intakeis unprotected from human activity and there is a high likelihood o f source pollution occurring. The intake is heavily silted due to the retaining o f sediments by the weir and the intake structure i s a make- shift arrangement for raw water abstraction. The Project will finance improvements to the intake and source protection works. 91. The WTP in Obudu is generally in a poor state and produces only minimal quantities o f water for sale at an outlet at the plant. No water quality analysis i s being done and chemical dosing i s rather arbitrary. The installed capacity o f 450m3/day is grossly inadequate for the city's population o f 89,000. Obudu is considered to be the most water-stressed town amongst the four project areas. On the basis o f further engineering study, the Project will finance the most cost-effective improvements to the plant to increase the treatment capacity and resume production o f treated water inthe shortest possible time. 92. Obudu has a limited distribution network. The Project will finance extension o f the distribution network and improvements to the transmission and storage infrastructure. To the extent possible, existing A C distribution mains will be replacedwith PVC mains and the network will be densified to maximize access to piped supply. An estimated l O O K m o f new pipeline including bulk meters will be financed. A total o f 100 kiosks and estimated 2,000 connections will be provided. Groundwater sources will also be developedwhere feasible and integrated into the network to augment the supply capacity. 93. Component 1 o f the Project will also finance dam safety assessments, and civil works where required, to ensure the safety o f dams supplying the water systems in Cross River State. This work will be undertaken by the FMWR. 94. The Project will also provide much needed laboratory equipment for water quality analysis and quality control to all the stations. Operational and specialized rolling stock especially required for maintenance and for other operational duties will be provided including communication and IT equipment for commercial operations such as billing. Component2: Public-Private Partnership Development. (US87.5 million) 95. Included inthis component are: (i) to design and bid the public private technical support assistance and then affermage partnerships to operate the Lagos treatment works; (ii) setting up andstaffing a "help desk" for the distribution service area operators; and(iii) majority o f the the fees to be paid to the private operator for the Lagos Treatment Works and a provisional sum to be paid to the private operator inCross River. 27 96. The private contractor and operator for the Lagos treatment works will be competitively bid according to World Bank procedures. The firm will be contracted to first provide performance based technical assistance duringthe time the plant i s rehabilitated, and then it may also bid in a second round of competitive bidding to maintain and operate the plant on an affermage basis for 4-5 years. 97. The LSWC plans to have private companies operate and manage its distribution system inits 10 Districts throughout the city. IDA will not be directly involved inthe procurement or contracting o f these firms, nor will it support the fees o f these firms. However, the Project will provide "help desk" functions for selected tasks that will be available free o f charge to the operators. Assistance could be available for such items as: customer enumeration; technical problems with the network; stakeholder and customer relations and financial planning. 98. This component also contains hnds for the independent technical and financial auditors that will certify private sector performance. Component 3: Service Sustainability & Project Management. (US14.6 million) 99. Included in this component is US$1.1 million to finance basic technical assistance and utility planning for water boards in core states under the Country Partnership Strategy. This component also includes subsidies for electricity, chemical and diesel fuel to be used in Lagos and Cross River until water production (Lagos) or the customer base (Cross River) reach the point that the treatment operations inboth cities canbe self-financing. 100. It also includes office equipment, cars and light trucks for the utilities, as well as the operating costs o fthe Project Management Units. 101. Component 3 contains support to the water boards and local consumer organizations to design and implement efficient consumer outreach. A Costumer Feed-Back System will be implemented under the Project in both Lagos and Cross River States by selected consumer organizations to: (i) promote citizens' participation in the Project, in particular defend the interests of customers through continuous costumer feed-back on service, performance and future improvements; (ii) long-term service-oriented relations between the customers and build the water boards; (iii) that LSWC and CRWB have appropriate knowledge on consumers' ensure needs and priorities, improve performance and transparence, and adapt to changing customer preferences; and (iv) buildknowledge and capacity o f consumers and their representatives inkey water provision issues. Component 4: Institutional Development & Policy Reform. (UBII,0 million) 102. This component will provide for experts to advise and assist the utilities and the FMWR on technical, commercial and management issues. It will also help to establish and support the sector regulator in Lagos State, and provides for regulatory framework studies and strategy development in Cross River Sate. This component also includes provision for utility staff training. 28 103. These efforts will be complimented by the establishment of a national utility training strategy and plan, including assistance for the National Water Supply and Sanitation Training Network. The component also includes support for the country's water resources management initiatives and national and international river basin planning efforts. Finally, the Project will support the establishment of a national MDGtracking capacity. 29 Annex 5: ProjectCosts 1 IRehabilitation and SystemExpansion I 1 Engineering Design 1 &Tendering I 1,630.01 6,520.01 8,150.01 3.90 1Sub-Total1 j 2,190.01 8,760.0 I 10,950.0 I 5.30 IIFront-end Fee/ 0.0 0.01 o.o! Total Financing Required / I I 55,332.51 155,167.51 210,500.01 100.00 30 Annex 5: ProjectCosts ByImplementingAgency Total Lagos , CrossRiver . FMWR Project Cost byComponent us%ooo US$OOO us$ooo US$OOO PIURunningCosts 2,750.0 1,000.0 750.0 1,000.0 Sub-Total I 14,550.0 8,500.0 3,550.0 2,500.0 5 Contingencies(Physical, Price& Unallocated) 20,000.0 14,500.0 5,000.0 500.0 6 Re-PayPPF 2,000.0 1,500.0 500.0 0.0 Total ProjectCosts 210,500.0 150,800.0 50,000.0 9,700.0 31 Annex 6: ImplementationArrangements ImplementationPeriod: FY2006-FY2011 104. Borrower and Executing Agency. The Borrower is the Government o f Nigeria, represented by the Federal Ministry o f Finance (FMF). The executing agency o f the federal component o f the project i s the Federal Ministry o f Water Resources (FMWR). The executing agencies o f the states components o f this project are the Lagos Water Corporation and the Cross River State Water Board. Overall Project monitoring and evaluation functions will be undertakenby the FPIUat the FMWR. 105. ProjectImplementationat State Level. All technical assistance, institutional building, and investment sub-projects will be managed and supervised by a SPIU in each participating state. Each SPIU will be headed by a senior coordinator who will manage an inter-disciplinary staff comprising engineers, PSP transaction expert, low income services advisor, Procurement Officers and core communications staff. The staff o f each SPIU are substantially in place in Lagos State while Cross-River will establish its SPIU soon. Logistical set-up, communications equipment and software are expected to be completed by project effectiveness. SPIU staff will also complete adequate procurement, financial management, and safeguards training to comply with IDA rules and guidelines by effectiveness. An experienced Procurement Specialist will be hired using a transparent and competitive process to beef up procurement capacity at Cross- Rivers SPIU. 106. Project Management and Coordination at Federal Level. At the federal level, the FPIU at FMWR will manage and supervise the implementation o f technical assistance sub- projects in the federal component o f the project, Additionally, the FPIU will perform selected coordination tasks and serve as a resource and information help desk. The FPIU is currently in place and consists of experienced staff who managed the recently completed Bank financed National Water Rehabilitation Project and who are currently implementing the FMWR's components under the on-going National UrbanWater Sector Reform Project. 107. Financing. The total project cost is US$210.5 million, o f which IDA is providing US$200 million. Counterpart financing o f US$10.5 million will be shared by the states and the federal government. The total Project cost o f 210.5 million will be split among the implementing entities as follows; Lagos: US$150.8 million, Cross River: US$50.0 million, and FMWR: US$9.7 million. Counterpart funds will be paid in advance by the states and FMWR into State Project Accounts (SPA) and a Federal Project Account (FPA) respectively. IDA credit proceeds will be on-lent by the FMF to the states under a sub-loan agreement between the parties, which will bind the participating states to full compliance with IDA implementation standards and guidelines. On-lending terms will replicate IDA lending terms, except for a tighter repayment schedule in the repayment o f the sub-loan by states to the federal government. Implementation arrangements pertaining to flow o f funds, financial management, and compliance with IDA fiduciary safeguards are detailed inAnnex 7. 108. Monitoring and Evaluation. M&E procedures and reports are described above in Section C.2, Implementation, Monitoring and evaluationo f outcomes/results. 32 109. ProjectImplementationManual(PIM). A detailed PIMwill be updated from time to time in agreement with IDA to guide implementation at each level: utility/operator, state PIU and FMWR. The PIM will set forth all operational and procedural steps regarding sub-project evaluation, reviews and approval, flow o f information, detailed description o f PIU functions, operational agreements among participating agencies, procurement and financial management arrangements and standards and tasks, standards for reports, change management and manual amendment procedures. 33 Annex 7: FinancialManagement and Disbursement Arrangements A. GENERAL 110. The objective of the Financial Management Systems (FMS) i s to support the implementing units in deploying Project resources to produce the required outputs and with attention to economy, efficiency and effectiveness. Specifically, the FMsystems will be capable o f producing timely, understandable, relevant and reliable financial information that will enable the implementing units to plan, coordinate, monitor and appraise the Project's overall progress towards the achievement of its objectives as well as ensuring that costs are under control and Project funds are used for the purposes intended. Financial Management 111. Federal level: The Federal Ministry o f Water Resources (FMWR) will serve as the oversight body. It will provide (a) international and local expertise to strengthen the national policy dialogue and assist with sector reform; (b) training and specialist support to the states including states other than the two states for capacity building; and (c) project support including monitoring and evaluation, dissemination and sector promotion. The FPIU (Federal Project Implementing Unit) will coordinate Project activities on behalf o f the FMWR and would be responsible for the financial management aspects o f the Project at the Federal level. A Finance Department has been set up for this purpose. They were also responsible for the financial management o fthe Bank-assisted National Water Rehabilitation Project which closedin2001. 112. The Finance Department o f FPIU (FD/FPKJ) will be responsible for managing the financial affairs o f the Project. FD/FPIU will be staffed by relevantly qualified accountants. Modem internal audit functions will beperformed by an Internal Audit Unit (IAU)which will be established at the FPIU and will be staffed with professionally qualified and experienced accountants from the Office o f the Auditor General o f the Federation. The IAUwill carry out a systematic review, appraisal and reporting o f the adequacy o f the systems o f managerial, financial, operational and budgetary control and their reliability in practice. FD/FPIU will be responsible for ensuring compliance with the financial management requirements o f the Bank and the government, including forwarding the quarterly Financial Monitoring Reports (FMR) andauditedannual financial statements to FMWRandIDA. 113. State level: A State project implementing unit (SPIU) will be responsible for general oversight o f the technical aspects o f projects in each State. The SPIU will enjoy operational autonomy and flexibility to carry out its roles and responsibilities. Financial Management in Cross River State will be carried out by the State Project Financial Management Unit (CRPFMU), which is located in the Office o f the State Accountant General (OSAG). The Finance and Accounts Department o f LSWC (FAD/LSWC) will be responsible for project financial management inLagos State. Internal Audit fbnctions will be performed by the internal audit section o f CRPFMU and the regulatory department o f LSWC. 114. Specifically, FD/FPIU, FADILSWC and CRPFMU will be responsible for managing the financial affairs o f Bank-assisted projects in the state, including NUWRSPII. The FD/FPIU, FAD/LSWC and CRPFMU will be responsible for preparing budgets, monthly reports, quarterly 34 FMRs, annual financial statements and progress reports respectively. FDRPIU, FAD/LSW C and CRPFMU will also be responsible for ensuring compliance with the FM requirements o f the Bank and the government, including forwarding quarterly FMRs and annual financial statements to IDA. B. RISKANALYSIS InherentRisks 115. The Country Financial Accountability Assessment (CFAA), which was conducted in C Y 2000, assessedthe risk o fwaste, diversion andmisuse o f funds was highlyrateduntilsuch a time as the CFAA recommendations have been implemented. A review o f the implementation o f CFAA recommendations in January 2005 revealed that some o f the identified weaknesses have been addressed under EMCAP and through other government initiatives aimed at improving financial management and accountability. It observed that substantial reforms have been implemented, especially over the last two years. The review showed that although much still needto be done, the impact o f the reforms has beenpositive. The review, however, notedthat the fiduciary assurance environment inFGNremains weak. The 2004 Lagos SFAA assessedthe risk arising from the outside environment as high. It stressed that given such an environment, strong controls are necessary to prevent wrongful use o f public funds. It noted, however, that inreality, controls are quite weak, leaving dangerous gaps inFMand accountability systems. The LSFAA assessed the overall risk to public funds in Lagos as high.With respect to Cross River State, the riskto public funds has not beenassessed-a SFAA is yet to be conducted for Cross River State 116. To minimize the aforementioned risks and ensure that the appropriate financial management capacity is in place prior to Project effectiveness, an assessment o f the financial management capacity o f the FPIUCRPFMUandLSWC has beenundertaken. ControlRisks 117. The overall Project risk from a financial management perspective is considered moderate, provided: (a) the weaknesses described in paragraph 10 are satisfactorily addressed; (b) the financial management action plan described in paragraph 37 is fully implemented; and (c) the conditions for Board are met. StrengthandWeaknesses 118. Strength: FPIU and LSWC have previous experience in implementing Bank-Assisted Projects. Similarly, the staff inCRPFMU have beenperforming financial management functions for Bank-Assisted Projects. Most o f the staff have already attended training in Financial Management and Disbursement in Bank-Assisted Projects. Based on this, the FPIU LSWC and CRPFMU are familiar with Bank Financial Management Procedures. In Cross River State the financial management functions o f the project will be handled by a PFMU situated inthe OSAG under the funds flow arrangement for Nigeria. LSWC will provide monthly retums to the Lagos State PFMU(LAPFMU) and the retums will be subject to audit by LAPFMUintemal Auditors. 35 119. The FPMU arrangements feature relevantly qualified staff, effective internal control- including adequate segregation o f duties, intemal check and monitoring, and effective modern internal audit as well as computerized FM systems. The Bank has been assisting in the computerization o fthe FMsystems o fthe unit and training o f staff inBank procedures. 120. Weaknesses: The internal audit function in FPIU and LSWC need to be strengthened. Also, given FAD/LSWC's overall responsibility for the finance and account functions o f LSWC and its subsidiaries, there is a need to strengthen the department by recruiting additional professional qualified staff and reorganizing the department inline with the recommendations o f a financial management consultant hiredby LSWC. C. FINANCIALMANAGEMENTSYSTEMS FundsFlow and BankingArrangements 121. The overall project funding will be from the IDA credit and government counterpart funds. IDA will disburse the credit through a Special Account, which will be managed by the FDFPIU, FAD/LSWC and CRPFMU. 122. IDA will disburse the credit through special accounts consisting o f (a) 1federal special account (FSA) managed by FPIU; and (b) 1state special account (SSA) for each state. FPIU and the participating States will each maintainthe following accounts: 1. A SA inU S Dollars to which the initial deposit and replenishments from IDA will be .. lodged. 11. A Current (Draw-down) Account inNaira with Bank X to which draw-downs from the Special Account will be credited once or twice per month in respect of incurred eligible expenditures (the FSA and SSA). Following the immediate payments in respect o f those ... eligible expenditures, the balance on this account should be zero. 111. A Current (Project) Account inNaira with Bank X to which Counterpart Funds will be deposited, iv. A Current (Interest) Account inNaira with Bank X to which interest on project account balances will be credited. V. A Current (Interest) Account in Dollars with Bank X to which interest on the special account balances will be credited. 123. Also, they will each maintain an IDA Ledger Loan Account (Washington) in US Dollars/Naira/SDR to keep track of draw-downs from IDA credit. The account will show (a) deposits made into Bank X by IDA, (b) direct payments by IDA, and (c) opening and closing balances. 124. All bank accounts will be reconciled with bank statements on a monthly basis by the FDFPIU, FAD/LSWC and CRPFMU. The bank reconciliation statements will be reviewed by designated officials, and identified differences will be expeditiously investigated. 125. The FDRPIU, FAD/LSWC and CRPFMU will be responsible for preparing and submitting to the World Bank consolidated applications for withdrawal, as appropriate. 36 Appropriate procedures and controls, which will be documented inthe FPM, will be instituted to ensure disbursements and flow o f finds are carried out inan efficient and effective manner. 126. The FDFPIU, FAD/LSWC and CRPFMU will maintain a cumulative record o f draw- downs from the Credit that will be reconciled monthly with the Disbursement Summary provided bythe Bank. 127. Detailed banking arrangements, including control procedures over all bank transactions (e.g. check signatories, transfers, etc.), will be documented inthe FPMs. FundsFlow Diagram Sources of Funds IDA I Government Budget I I I Special Accounts Special Account ($) ($) for FPIU for each State I I Draw-down (zero Draw-down (zero Project (Naira Counterpart balance) NairaAIC balance) Naira AIC 1. DisbursementArrangements Use of statementsof expenditures(SOEs) 128. All applications for the withdrawal o fproceeds from the credit will be filly documented, except for: (i) contracts with an estimated value of less than US$250,000 for goods; (ii) contracts with an estimated value o f less than US$1 million for works packages; (iii) contracts with an estimated value o f less than US$200,000 for consulting firms, and less than US$50,000 for individual consultants; (iv) training costing less thanUS$15,000, study tours and workshops; (v) incremental operating costs; and (vi) critical treatment plan inputs, which may be claimed on the basis of certified Statements o f Expenditures (SOEs). Documentation supporting all expenditures claimed against SOEs will be retained by FD/FPIU, FAD/LSWC and CRPFMU, and will be available for review when requested by IDA supervision missions and project auditors. All disbursements are subject to the conditions o f the Development Credit Agreement and the procedures defined inthe Disbursement Letter. 37 Specialaccount 129. To facilitate disbursements for eligible expenditures for goods and services under the Federal component, the FPrU will open a special account - the FSA, which will be managed and administered by the FPIU, in a commercial bank to cover part o f IDA'S share o f eligible expenditures. The authorized allocation o f the special account would be US$900,000 covering an estimated 4-6 months o f eligible expenditures financed by IDA. Similarly, Lagos and Cross River State would each open a special account with an authorized allocation o f US$7.5 million (Lagos) and US$3.0 million (Cross River) to cover part o f IDA'Sshare o f eligible expenditures. FDLFPIU, FAD/LSWC and CRPFMU will be responsible for submittingmonthly replenishment applications with appropriate supporting documents for expenditures. To the extent possible, all of IDA'Sshare o f expenditures should be paid through the FSA and respective SSA. Initial deposits into the Special Account will be US$0.5 million, US$4.0 million and US$1.5 million for the FSA, Lagos State and Cross River State, respectively. 130. The SAs will be replenished through the submission of Withdrawal Applications on a monthly basis and will include reconciled bank statements and other documents as may be required until such time as the borrower may choose to convert to report-based disbursement. All disbursements will be channeled through SAs, and in lieu o f such special accounts, the borrower may choose to pre-finance project expenditure and seek reimbursement from IDA. 131. By effectiveness, the Project will not be ready for report-based disbursements. Thus, at the initial stage, the transaction-based disbursement procedures (as described in the World Bank Disbursement Handbook) will be followed, i.e. direct payment, reimbursement, and special commitments. 132. When project implementationbegins, the quarterly Financial MonitoringReports (FMRs) produced by the project will be reviewed. Where the reports are adequate and produced on a timely basis, and the borrower requests conversion to report-based disbursements, a review will be undertaken by the Task Team Leader (TTL) to determine if the project is eligible. The adoption o f report-based disbursements by the project will enable it to move away from time- consuming voucher-by-voucher (transaction-based) disbursement methods to quarterly disbursements to the FSA and SSA, based on FMRs. 133. Detailed disbursement procedures will be documented inthe FPM. PlanningandBudgeting 134. Cash Budget preparation will follow the Federal Government and participating States' procedures. Additionally, financial projections or forecasts for the life o f the project (analyzed by year) will be prepared. On an annual basis, the Project Accountant inFD/FPIU, FAD/LSWC and CRPFMU (in consultation with key members o f the implementing unit) will prepare the cash budget for the coming period based on the work program. The cash budget should include the figures for the year, analyzed by quarter. The cash budget for each quarter will reflect the detailed specifications for project activities, schedules (including procurement plan), and expenditure on project activities scheduled respectively for the quarter. (Guidance on the preparation o f budgets i s available in the Bank publication entitled "Financial Monitoring 38 Reports: Guidelines to Borrowers".) The annual cash budget will be sent to the TTL at least two months before the beginning o fthe project fiscal year. Detailed procedures for planning andbudgeting will be documented inthe FPMs. Fixed Assets and Contracts Registers 135. At the FD/FPIU, FAD/LSWC and CRPFMU, a FixedAssets Register will be prepared, regularly updated and checked. A Contracts Register will also be maintained inrespect o f all contracts with consultants and suppliers. The FD/FPIU, FAD/LSWC and CRPFMU will prepare Contract Status Reports quarterly. Control procedures over fixed assets and contracts with consultants and suppliershendors for States and federal levels will be documented in the Financial Procedures Manual. Information Systems 136. The FPIU presently has a Lotus based accounting system. This is being used for the National Urban Water Sector Reform Project and the Small Towns Water Supply and Sanitation Project which closed in 2004. FPIU will upgrade the system taking into consideration the reporting requirements inthe Financial Monitoring Reports Guideline; and train staff on the use o f the software incompliance with the FPM. LSWC uses a Sun accounting package. The system is being used currently for the LSWC component o f Privatization Support Project. The package will be upgrade to include a procurement module and multi-currency features. Under the standard funds flow arrangements for Nigeria States implementing IDA-financed projects, a computerized financial management system has been developed and is being installed in the PFMUs and staff are being givenrelevant training. FinancialReporting and Monitoring 137. Monthly, quarterly and annual reports will be prepared (as outlined inparagraphs 28,29, 30 and 31) for the purpose o f monitoring project implementation. The reports will be submitted to the project coordinators, project implementingunits, government and IDA. In compliance with government reporting requirements, Monthly Returnswill be made to the Federal and State Accountants General, for incorporation inthe Government's accounts, as described inthe FPM. 138. Monthly: On a monthly basis, the FDFPIU, FAD/LSWC and CRPFMU will prepare and submit the following reportsto the project coordinators: 9 A Bank Reconciliation Statement for each bank account; 9 Monthly Statement of cash position for project funds from all sources, taking into consideration significant reconciling items; 9 A monthly Statement of expenditure classified by project components, disbursement categories, and comparison with budgets, or a variance analysis; and Statement of Sources and Uses of funds (by Credit Category/ Activity showing IDA and Counterpart Funds separately). 39 139. Quarterly: The following financial monitoring reports will be prepared by the FD/FPIU, FAD/LSWC and CRPFMU on a quarterly basis and submitted to FMWR, IDA and the project . coordinators: Financial Reports which include a Statement showing for the period and cumulatively (project life or year to date) inflows by sources and outflows by main expenditure classifications; beginning and ending cash balances o f the project; and supporting . schedules comparing actual and planned expenditures. The reports will also include cash forecast for the next two quarters. Physical Progress Reports which include narrative information and output indicators (agreed during project preparation) linking financial information with physical progress, andhighlightissuesthat require attention. w Procurement Reports, which provide information on the procurement o f goods, work, and related services, and the selection o f consultants, and on compliance with agreed procurement methods. The reports will compare procurement performance against the plan agreed at negotiations or subsequently updated, and highlight key procurement issues such as staffing andbuildingBorrower capacity. 140. SOE Withdrawal Schedule listing individual withdrawal applications relating to disbursements by the SOE Method, by reference number, date and amount. CRFMU will submit a copy o f the quarterly project financial monitoring reports to the SPILT. CRPFMU and FAD/LSWC will forward a copy o f the reports to the FPIU for consolidation. 141. Annually: The annual project financial Statements, which will be prepared by the FD/FPIU, FAD/LSWC andCRPFMUwill includethe following: .. A Statement o f Sources and Uses o f funds (by Credit Categorylby Activity showing IDA andCounterpart Fundsseparately); Statement o f Cash Position for Project Funds from all sources; Statements reconciling the balances on the various bank accounts (including IDA Special Account) to the bank balances shown on the Statement o f Sources and Uses o f funds; SOE Withdrawal Schedules listing individual withdrawal applications relating to disbursements bythe SOE Method, by reference number, date and amount; Notes to the Financial Statements. Each CRPFMU and FAD/LSWC will submit a copy o f the project financial statements to the FPIUfor consolidation. 142. Indicative formats for the reports are outlined in two Bank publications: (a) Financial Monitoring Reports: Guidelines to Borrowers-quarterly FMRs, and (b) Financial Accounting, .Reportingand Auditing Handbook (FARAH) - monthly and annual reports. AccountingPoliciesandProcedures 143. IDA and Counterpart Funds will be accounted for by the Project on a cash basis. This will be augmented with appropriate records and procedures to track commitments and to 40 safeguard assets. Also, accounting records will be maintained in dual currencies @.e.Naira and U S Dollars). 144. The Chart of Accounts will facilitate the preparation o f relevant monthly, quarterly and annual financial Statements, including information on the following: ....Total project expenditures Total financial contribution from each financier Total expenditure on each project component/activity, and Analysis o f that total expenditure into civil works, various categories o f goods, training, consultants and other procurement and disbursement categories. 145. Annual financial Statements will be prepared in accordance with International Accounting Standards (IASs). All accounting and control procedures will be documented inthe FPM, a livingdocument that will be regularly updatedbythe Project Accountants. D.ACTION PLAN 6 Upgrade Sun accounting package to include procurement module and multi- LSWC July 1, 2005 currency features. 7 Strengthen finance and accounts department to better support LSWC, its LSWC April 1, 2006 subsidiaries, and the Project. 8 Initial capacity building inBank procedures and computer applications FPIUiBank July 1,2005 comoleted. Supervision Plan 146. Supervision activities will include review o f quarterly FMRs; review o f annual audited financial statements and management letter as well as timely follow-up o f issues arising; annual SOE review; participation inproject supervision missions as appropriate; and updating the FM rating inthe Implementation Status Report (ISR). 41 2. Audit Arrangements InternalAudit 147. The Internal Audit Unit o f FPIU (IAURPIU) and PFMU, and the regulatory department of LSWC will perform intemal audit activities for the project. Regular intemal audit reports will be submitted to the FPIU/SPIU and the Accountant General. Project activities, records and accounts will be reviewed and subjected to intemal audit. At FPIU, LSWC and PFMU, the intemal audit function will be performed by relevantly qualified staff. Regular intemal audit reports will be submitted to Project coordinators/officers, the Federal and State Ministry of Water ResourcesRMF or the supervising agency and the Accountant General for the State as appropriate. ExternalAudit 148. Audited Project Financial Statements for the project will be submitted to IDA within six months after year-end. The FPIU, LSWC and CRPFMU will appoint relevantly qualified extemal auditors based on Terms o fReference acceptable to the Bank to perform these audits. 149. Besides expressing an opinion on the Project Financial Statements in accordance with Intemational Standards on Auditing (ISAs),the auditors will be required to comment on whether counterpart funds have been provided regularly and used in accordance with the financing agreement. 150. In addition to the audit report, the extemal auditors will be expected to prepare Management Letters giving observations and comments, and providing recommendations for improvements in accounting records, systems, controls and compliance with financial covenants inthe IDAagreement. 3. ProcurementArrangements 151. A Bank Procurement Specialist (PS) has carried out an assessment of the Procurement Capacity o f the implementing entities. 152. For IDA Funds, the project will observe procurement procedures outlined in the Guidelines: `Procurement under IBRD and IDA Credits and Guidelines for the Use of consultants by World Bank Borrowers and by the World Bank as Executing Agency. ' The Federal Government o f Nigeria and FMF procurement regulations will apply for Counterpart Funds. The Project Accountant, intemal auditor and support staff must be conversant with the Bank's procurement procedures, as intemal control issues and the incurring o f liabilities will be matters of concern to the financial management function. 42 Annex 8: ProcurementArrangements 153. Procurement Environment. As a result o f the CPAR o f 2000 and a subsequent IDF Grant to help execute the agreed Action Plan, the Federal Government has made substantial progress with procurement reform. A draft Procurement Law was submitted to Parliament in early 2005, and circulars were issued to Government services to establish procurement units and recruit procurement staff, that would constitute over time the Federal Government's Procurement Cadre. The Budget Monitoring and Price Intelligence Unit (BMPIU), established within the Presidency and responsible for the procurement reform agenda, instituted a due process mechanism for all contracts to ensure that public procurement is carried out in accordance with the required principles and procedures. BMPIU is also a member o f a high level Cash Management Committee chaired by the Minister o f Finance to certify that contracts for which budgetary payments are requested have met the due process requirements. It is envisaged that the State will adopt/adapt these procurement codifications and transparent process when finally operational at the Federal Government level. 154. Untilgovernment takes major steps to reform the procurement policies and practices in the country (presumably the reform process will reach an advanced stage by end of FY05), the procurement risk for doing business inNigeria i s assessed as high. However, the agencies that would be managing the proposed project at both Federal and Lagos State levels, have considerable experience in implementing World Bank financed projects with a good procurement track record. The procurement risk for the proposed project is therefore rated "medium". 155. Guidelines:Procurement for the proposed project will be carried out inaccordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, andthe provisions stipulated inthe Legal Agreement. The various items under different expenditure categories are described ingeneral below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, andtime frame will be agreed upon between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 156. The procurement process that will be used by the implementing agencies will be well defined inthe Procurement Implementation Manual (PIM) which will include a Procurement and Financial Management Manual. The Bank shall provide the Government with a copy o f the Generic Procurement and Financial Management Manuals. 157. Procurementof Goods and Works: Goods procured under this project would include: project vehicles, computers and accessories, software, communication and office equipment, journals and publications, etc. Works procured under this project would include rehabilitation or provision o f new potable water systems, including intake works, treatment facilities, transmission and distribution pipes, storage facilities and other related infrastructure. Procurement will be carried out using the Bank's SBD for all ICB and National Bidding Documents agreed with or satisfactory to the Bank. However, since there is no National Standard BiddingDocument, the Bank's Standard BiddingDocument for Goods and Works shall 43 be adopted by the Borrower. For evaluation of bids, the Bank's Standard Evaluation Forms will be used. Procurement for (i) available off-the-shelf goods that cannot be grouped or readily standard specification commodities for individual contracts o f less than US$50,000 equivalent, (ii) civilworkscontracts, estimatedtocostlessthan$100,000 equivalentwhicharelabor minor intensive, spread over time and which do not lend themselves to grouping and therefore are unlikely to attract foreign bidders may be procured under Shopping procedures as detailed in paragraph 3.5 and 3.6 o f the "Guidelines: Procurement under lBRD Loans and IDA Credits" and June 9,2000 Memorandum "Guidance on Shopping" issuedby the Bank. 158. In cases where the quantity of work cannot be defined in advance, are too small and scattered to attract private contractors, and under emergency situations when work must be carried out without disrupting ongoing operations, and are estimated to cost less than $50,000 equivalent, Force Account procedures can be used. Not withstanding the above provisions, direct contract may be required for a few goods items such as large pumps and valves, large generators, electrical panels, or electricity where only one supplier exists, or under emergency or where direct contracting i s the most economical mode o fpurchase. Insuch cases, direct contracting will be acceptable. All direct contracting will be subject to IDA'SPrior review. 159. Procurement For Emergency Purposes: The following items if listed on the procurement Plan for the project, are satisfactory to the Association and determined by the Borrower and the Association as emergency requirements for the purposes o f the Project; and procured by the SPIUs under contract awarded within a period not later than 12 months after Effectiveness Date may inthe case of: Works under Component 1 up to an aggregate o f $300,000 equivalent per package may be procured using shopping procedures inaccordance with provisions o f paragraphs 3.5 and . 3.6 o f the Guidelines; and Vehicles under Component 3 up to an aggregate o f $200,000 equivalent per package may be procured using shopping procedures in accordance with provisions o f paragraphs 3.5 and 3.6 o f the Guidelines, or from IAPSO inaccordance with the provisions o f paragraphs 3.9 o f the Guidelines. 160. Selection of Consultants: Consultancy services which include software development, studies, technical and financial audits, legal and utility operations, environmental/social assessment, capacity building, engineering design and tender documents and supervision o f constructionhehabilitation works etc., from firms and individuals would be selected using Requests for Expressions for Interest, short-lists and the Bank's SRFPs, where required by the Bank' Guidelines. Short-lists o f consultants for services estimated to cost less than $200,000 equivalent per contract may entirely comprise national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. The appropriate selection method for each consulting contract would be established inthe ProcurementPlan. 161. OperatingCosts: The types o foperating costs that shall be financed bythe project were discussed at appraisal and agreed upon during negotiations and are included in the Project's Development Credit Agreement. 44 162. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, will be presented in the Second National UrbanWater Sector ReformProject ImplementationManual (PIM) that will be developed. Training, WorkshopsandStudyTours($1.7million) 163. Training, workshops, and study tours will be carried out on the basis o f approved annual programs that would identify the general framework of training activities for the year, including the nature o f trainindstudy toudworkshops, the number o f trainees, and cost estimates, to be reviewed and cleared by IDA. Selection o ftraining institutions for workshops/training shouldbe based on a competitive process usingthe Consultant's Qualifications method o f selection. B. Assessment of the agency's capacityto implementprocurement: 164. A formal assessment o f the capacity o f the National and two participating States have been conducted in accordance with Procurement Services Policy Group (OCSPR) guidelines dated August 11, 1998. The assessment outlines the main issues and recommendations and i s in the project files. Based on these recommendations, for the FPIU and SPIU to perform procurement coordination responsibilities, the following action plan was agreed with the Borrower: The existing experienced FPIU staff at the Federal level and Lagos SPIU will continue to manage the procurement functions at that level. All the participating states will establish their own SPIU with relevant professionals among which shall be qualified and experienced procurement officers either seconded from ministries or direct recruitment under a transparent and competitive process, before July 31,2005. The FPIU and the participating States PIUs will adopt/adapt the Generic Procurement Manual for Bank financedprojects inNigeria on or before project effectiveness. Relevant staff o f the project FPIUand SPIUs would be encouraged to attend procurement course at training institutes such as NCEMA, Lagos Business School, ESAMI or GIMPA not later than September, 30,2005. Contract management workshop will be organized for FPIU and SPIU officials no later thanthree monthsafter effectiveness. FPIU and the SPIUs shall hold meetings with the Business Communities in their environment after preparation or adoption o f Procurement Manual no later than six months after effectiveness. 165. One of the major problems inproject implementation inNigeria i s the change o f staff mid- stream. Assurances were sought during negotiations that staff who will have received training under the project would not be changed except for reasons to be mutually agreed upon between the Government andIDA. 45 166. All technical assistance, institutional building, and investment sub-projects will be managed and supervised by a SPIU in each participating state. Each SPIU will be headed by a senior coordinator who will manage an inter-disciplinary staff comprising engineers, PSP transaction expert, low income services advisor, Procurement Officers and core communications staff, The staff o f each SPIU are substantially in place in Lagos State while Cross-River will establish its SPIU soon. Logistical set-up, communications equipment and software are expected to be completed by project effectiveness. SPIU staff will also complete adequate procurement, financial management, and safeguards training to comply with IDA rules and guidelines by effectiveness. An experienced Procurement Specialist will be hired using a transparent and competitive process to beef up procurement capacity at Cross-Rivers SPIU. The overall project risk for procurement based on the assessmenti s considered Medium. C. ProcurementPlanning 167. The Borrower developed at appraisal a procurement plan for project implementation which provides the basis for the procurement methods. This plan was agreed upon between the Borrower and the Bank at negotiations. The agreed plan will also be made available in the project's database and in the Bank's external website (see attachment). The plan includes relevant information (including selectiodprocurement methods) on goods and consulting services as well as the timing o f each milestone in the procurement process for each implementing agency. The agreed Procurement Planwill be updated by the project in agreement with the Bank annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 168. Publication of Results and Debriefing: Publication o f contract awards would be required for all ICB, NCB, Direct Contracting and the Selection o f Consultants for contracts exceeding a value o f USD 200,000. In addition, where pre-qualification has taken place, the list o f pre-qualified bidders will be published. With regard to ICB, and large-value consulting contracts, the Borrowers would be required to assure publication o f contract awards as soon as the Bank has issued its `no objection' notice to the recommended award. With regard to Direct Contracting and NCB, publication of contract awards could be in aggregate form on a quarterly basis and local. All consultants competing for an assignment involving the submission o f separate technical and financial proposals, irrespective o f its estimated contract value, should be informed o f the result o f the technical evaluation (number o f points that each firm received), before the opening o f the financial proposals. The implementing agencies would be requiredto offer debriefings to unsuccessful bidders and consultants. The Borrower agreed to the above conditions at negotiations. 169. Fraud, Coercion and Corruption:All procuring entities as well as bidders, suppliers and contractors shall observe the highest standard of ethics duringthe procurement and execution of contracts financed under the project in accordance with paragraphs 1.15 & 1.16 of the ProcurementGuidelines and paragraphs 1.25 & 1.26 of the ConsultantsGuidelines. D. Frequencyof ProcurementSupervision 170. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended 2 supervision missions to visit the field to carry out post review o fprocurement actions. 46 ProcurementPlanning E. Detailsof the ProcurementArrangementsInvolvingInternationalCompetition 171. The project's detailed activities for the first 18 months o f implementation will be presented in detailed in the procurement plan that was agreed between IDA and the Borrower duringnegotiations andwill beincorporated inthe PIM. Table A: Allocation o f Credit Proceeds I Total 132,700 IDA Prior Review 1. Goods, Works, andNonConsultingServices Prior Review Threshold:Procurement decisionssubject to Prior Review by the Bank as stated in Appendix 1 to the Guidelinesfor Procurement. A. Goods Procurement Method Prior Review Threshold Comments (US$ equivalent) 1. ICB (Goods) 2 500,000 All 2. NCB (Goods) <500,000 None 3. Shopping <50,000 None 4. Direct Contracting Any Amount All B. Works Procurement Method Prior Review Threshold Comments (US$ equivalent) 1. ICB 2 1,000,000 All 2. NCB < 1,000.000 None 3. Shopping <100,000 None 47 2. Selection of Consultants Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1to the Guidelines Selection and Employment of Consultants: Selection Method Prior Review Threshold Comments (US$ equivalent) 1 QCBS (Firms) >200,000 ALL 2 Single Source (SS)/Firms/ Individual All ALL 3 Individual Consultants(IC) ~100,000 ALL 4 Individual Consultants(IC) <100,000 None 5 ConsultantQualification (CQ) N/A None 6 Annual Training Plan ALL ALL Short list consisting entirely of national consultants: Short list o f consultants for services, estimated to cost less than $200,000 equivalent per contract, may consist entirely ofnational consultants inaccordance with the provisions o fparagraph 2.7 of the Consultant Guidelines. 48 Procurementmethods (TableA) TableA: ProjectCostsbyProcurementArrangements (US$ million equivalent) Expenditure Category ICB NCB Other 21 N.B.F. Total Cost 1. Works 112.8 20.7 2.0 0.0 135.5 (107.1) (19.7) (1.9) (0.0) (128.7) 2. Goods 0 2.0 2.0 0.0 4.0 (0) (1.9) (1.9) (0.0) (3.8) 3. Consultant Services 0.0 0.0 38.5 0.0 38.5 (0.0) (0.0) (36.6) (0.0) (36.6) 4. Training, Study Tours 0.0 0.0 2.7 0.0 2.7 and Workshops (0.0) (0.0) (2.5) (0.0) (2.5) 5. IncrementalOperating 0.0 0.0 2.8 0.0 2.8 costs (2.6) (0.0) (2.6) 6. Critical Treatment Plant ~~~ 2.5 2.5 0.0 5.0 Inputs (2.4) (2.4) (4.8) 7 PPFRefinancing 0.0 0.0 2.0 0.0 2.0 (0.0) (0.0) (2.0) (0.0) (2.0) Unallocated 10.0 10.0 0.0 0.0 20.0 (9.5) (9.5) (0.0) (0.0) (19.0) Total 122.8 35.2 52.5 0.0 210.5 (116.6) (33.5) (49.9) (0.0) (200.00) 1/Figures inparenthesisare the amounts to be financed bythe IDA Credit. All costs include contingencies. 2/ Includes civil works and goods to be procuredthrough local shopping, consulting services, line ministries action plans andNGO/community grants, training, technical assistance services, and operating costs related to project management. 49 Table B: Thresholds for Procurement Methodsand Prior Review Contract Value ContractsSubject to Threshold Procurement Prior Review (US$) Method (US$ millions) US$l,OOO,OOO andabove ICB All Small works (rehab) under line ministries action plans Less thanUS$l,OOO,OOO NCB 1'' contract packageof FederalandState Less than$100,000 Lump-sumfixed-pricedon PostReview. the basis o f three quotations PostReview Less than$50,000 ForceAccount PostReview 2. Goods $250,000 andabove ICB All $30,000-$250,000 NCB 1'' contract packagefor FederalandState PIUS. Less than $30,000 and Shopping PostReview UrgentProcurement Services $200,000 and above QCBS All (fil-ms) Less than $100,000 ( f i ) QCBS-CQS-LCS PostReview $50,000 and above(individual) IC All Less than$50,000 (individual) IC PostReview All contracts Single Source All Total value of contractssubject to prior review: $112Million OverallProcurementRisk Assessment: Medium Frequencyof procurementsupervisionmissionsproposed: One every three months (includes specific procurement supervision for post-review/audits) 50 Table C: Allocation of CreditProceeds ExpenditureCategory Amount 1FinancingPercentage1 (US$ million) i Civil Works 125.2 95% Goods 8.5 95% ~ ConsultantServices 40.1 95% Project Management 2.6 95% Training & Workshops 2.6 95% PPF 2.0 100% Unallocated 19.0 95% rota1Credit Proceeds 200.00 51 Annex 9: EconomicandFinancialAnalysis FinancialandEconomicInternalRatesofReturn Results o fthe Project's financial and economic modeling are shown inTable 9.1 Table 9.1 Results o fBase Case Financial andEconomic Analyses 172. The difference between the FIRR and EIRR are estimated taxes in selected portions of the IDA financed portions o f the Project. Taxes are estimated to represent 10% o f the cost o f new civil works, engineering and equipment investments. Model Methodology and Key Assumptions. 173. The models for both Lagos and Cross River are incremental cost benefit models, with a 15 year analysis period and a 10% discount rate. For Cross River, the results are for Calabar only as there was insufficient information to model the three smaller cities. All monetary amounts are in 2005 Naira. Summary worksheets o f the results for both states are shown at the end o fthis Annex. 174. Lagos: Only the wholesale (Le., treatment and bulk transmission) revenue flows are in the model. However, all the IDA investment is included, both for treatment works and the five distribution zones. As a result o f the Project, the Lagos Treatment works are assumed to be restored to about 90% o f installed capacity from today's approximately 33% operational efficiency. All o f the water produced after UFW losses is assumed to be sold to the Districts at the bulk tariff shown. Unaccounted for water inthe Treatment Works is also assumed to decrease about eight percent during the Project and stay at about that level for the remainder of the analysis period. 175. Calabar City: The Project is assumed to add 50,000 new householdconnections, about 300 new commercial and industrial customers, and about 300 new standposts. Inbothmodels, no tariff increases aremadeduringthe Project period, Le., 2005 to 2010. Electronic versions o f the complete financial models are inIRIS for the Project. Sensitivity and Switching Analysis. 176. Keyrisks outlined inSection C4 o fthe PAD are modeled for their effect onthe Base Case results infour scenarios as follows: Scenario 1. No tariff increases for period 2010-2019. 52 Scenario 2. Incrementalwater producedi s reduced by 20% causedby electricity and/or diesel shortages. Scenario 3. Bulk Tariff inLagos i s N45/m3 insteado fN50/m3. Scenario 4. Civil works implementation delays result ina 20% reduction innew household connections inCalabar. Results o fthe sensitivity analysis are shown inTable 9.2 below: 177. The same scenarios were then modeled to determine what adjustment would be necessary to cause the NPV to equal zero. The results for Lagos are shown inTable 9.3, and those for Calabar inTable 9.4. Table 9.3 Switching Values for Lagos I Scenario I Value When NPV=O I Table 9.4 Switching Values for Calabar Scenario 4I II Value When NPV=O 9a/ L 10 2 33% 4 27% Implications for Proiect Implementation 178. As shown above, the importance o f regular tariff increases after the year 2010 (by which time service will have been vastly improved and thereby making tariff increases more acceptable) is very important for the Project's long-run sustainability. This has regulatory implications for both states, highlighting the importance o f this area in Component 4 o f the Project. Scenario 2 shows the importance of one key input largely outside control o f the utilities, i.e., the reliability of electricity supplies (also presented to the Boardwith this Project is an IDA financed project for the electricity sector). For Lagos, the bulk tariff charged to the District Operators will be a key consideration as the Project implements. The critical range appears to be between N45 and N50 per cubic meter, which would seem to give the District Operators the flexibility to hold domestic tariffs constant at current levels, with any shortfall to be made up by raising commercial and industrial rates. 53 I Annex 10: SafeguardPolicy Issues 179. Introduction and Summaw of Safemard Issues. The Project will be implemented in established urban areas in two states in Nigeria: Lagos and Cross River. In Lagos, the project will focus on the three areas targeted for private operator contracts, namely Ikeja, Ikoyi, and Lagos Island as well as works at the Adiyan and Akute Ijuintakes and treatment works. InCross River, the four urban areas to be included are Calabar, Obudu, Ogoja, and Ikom. In all cases, water is sourced from nearbyrivers, some o fwhich are regulated by upstreamdams. 180. In Lagos State, civil works will be entirely rehabilitation of existing infrastructure involving only temporary inconvenience to adjacent properties and commercial activities, plus network extensions into an area east o f Ikoyi beside existing and planned roads, the latter on unused land reclaimed from the lagoon. A minor existing environmental issue is the disposal o f treatment plant sludge at Iju and Adiyan. Currently, the clarifiers do not work, and the slightly acidic sludge i s discharged into small nearby rivers. River ecology and hydrology appears to be affected and, at Adiyan, the sediments are contributing to periodic flooding o f a community road. 181, In Cross River State, the environmental and resettlement consequences o f anticipated civil works are likely to be very minor to none, given normally responsible construction planning and management. Nonetheless, uncertainties about the nature and scope o f civil works in Obudu, Ogoja andIkomleadto the determinationthat anEnvironmental andSocial Management Framework (ESMF) would beprepared for the project 182. Resettlement. Land acquisition is expected to be minimal to none since civil works will largely be rehabilitation o f existing infrastructure, and some extensions o f treatment facilities within current plant boundaries, and o fdistributionnetworks alongside existing roads. Nonetheless, uncertainties about the nature and scope o f civil works in Obudu, Ogoja and Ikom leadto the determination that a Resettlement Policy Framework (RPF) prepared for the project. 183. Dam Safety. The dam safety report (DSR) prepared for NUWSRP1 covered the dam regulating water supply to Lagos, but not dams in Cross River State. The Owelobudu Dam regulating water supply for Obudu does need remedial work on the spillway. Thus, during preparation it was determined that the NUWSRP1 DSR would be extended to include Cross River State. The revised DamSafety Report [was completed and disclosed to the public inMay 20051. 184. International Watenua-ys. Ikom draws its water from the Cross River which rises in Cameroon, thus triggering the Bank's International Waterways policy (OP 7.50). Nigeria does have a general agreement with Cameroon on the use o f the river, but notification under OP 7.50 i s still required under World Bank guidelines [andwas completed inM a y 20051, 185. Wastewater. With water supplyprojects, there is the concern that improving accessibility will lead to increased sewage and wastewater, and consequent surface/groundwater quality and healthimpacts. Inthis context, the Project will provide technical assistance to characterizingthe nature and extent o f any current surface or groundwater quality problems in urban areas with a view to supporting o f future sewage, waste water and groundwater management programs. This 56 process i s already started inLagos, where a comprehensive wastewater strategy and Action Plan study, financed by the Bank-Netherlands Water Partnership, started in March 2005. A similar effort i s planned for Cross River State. 186. Borrower Ca~acitv. The borrower prepared an ESMF, RPF and DSR for the first NUWSRP, incollaborationwith the relevant state water and environmental agencies, and has the capacity to do so for this project. The state environmental agencies have adequate capacity for specifying, reviewing and supervising any EA or EMP requirements as the project i s implemented, As in the first NUWSRP project, the Bank will include provisions for technical assistance to the Lagos and Cross River water authorities so they can adequately manage the safeguards aspects o fproject implementation. 57 Annex 11: ProjectPreparationandSupervision Planned Actual PCNreview December 11,2001 Up-datedPID to PIC July 7,2004 Initial ISDS to PIC July 7,2004 Appraisal April 13-25,2005 Negotiations April 26-27,2005 BoardRVP approval June 16,2005 Planned date o f effectiveness November 1,2005 Planned date of mid-termreview December,2008 Planned closing date June 30,201 1 Keyinstitutions responsible for preparation ofthe project: Federal Ministry of Water Resources FederalMinistryo fFinance Lagos State Water Corporation Cross River State Water Board Bank staff and consultants who worked on the project included: Name Title Unit Task Team Alexander McPhail TTL/Economist AFTU2 HassanKida Engineer AFTU2 Lars Rasmusson Engineer AFTU2 Arthur Swatson Engineer AFTU2 KarenHudes Country Lawyer LEGAF JanFranck FinancialAdvisor AFTU2 Wole Afolabi Financial Advisor AFTU2 John Boyle Environmental Specialist AFTS1 Tony Chen DisbursementsOfficer LOAG2 NikeMustafa Financial Management Specialist AFTFM Edward Olowo-Okere Financial Management Specialist AFTFM Bay0 Awosemusi Procurement Specialist AFTPC JanJanssens ProgramManager EWDWS Daniele Calabrese Communications Officer EXTCD Massimiliano Giamprini Communications Officer EXTCD EstherMonier-Illouz Stakeholder Specialist AFTU2 58 Name Title Unit Comfort Onyeje Olantunji Project Support AFTU2 Maya El-Azzazi Project Support AFTU2 ModupeDay0 Olorunfemi Project Support AFTU2 Peer Reviewers BrainSteven Smith Financial Analyst ESCIE Raja Iyer Management Specialist EASUR MukamiKariuki Water & Sanitation Specialist EWDWS Quality Reviewer Richard Verspyck Water & Sanitation Specialist AFTU2 Bank funds expendedto date onproject preparation: 1. Bankresources:US$588,070 2. Trust funds: US$15,003 3. Total: US$603,073 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: US$lO,OOO 2. Estimated annual supervision cost: US$l10,000 59 Annex 12: Documentsinthe ProjectFile (IRIS) 1. Financial Excelmodelfiles for Lagos Water Corporation and Calabar. 2. Economic Excel models for Lagos Water Corporation and Calabar. 3. OP7.50 letter and technical annex sent by the FederalMinistry of Water Resourcesto the MinistryofFinance andBudget inCameroon. 4. IDAMissionAide Memoires. 5. Lagos State Water Law, 2004. 6. Cross River State UrbanWater Sector Policy, May 2005 7. Project Implementation Manual(when completedinJune 2005) 60 Annex 13: Statementof LoansandCredits Differencebetween expectedandactual OriginalAmount inUS$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO71075 2004 UrbanWater Sector ReformProject 1 0.00 120.00 0.00 0.00 0.00 118.94 0.00 0.00 PO71817 2004 NG: Local Empowerment& Env.Mgt Proj. 0.00 0.00 0.00 8.00 0.00 8.00 0.92 0.00 PO69892 2004 NG Local Empowerment& Envir.Mgmt. 0.00 70.00 0.00 0.00 0.00 76.15 2.96 -0.36 PO83082 2004 NG-Micro, Smalland Medium Enterprise 0.00 32.00 0.00 0.00 0.00 32.61 1.71 0.00 PO63622 2004 NG:Fadama I1 0.00 100.00 0.00 0.00 0.00 100.02 3.03 0.00 PO71494 2003 UniversalBasic Ed. 0.00 101.00 0.00 0.00 0.00 111.57 51.60 0.00 PO74963 2003 NG Lagos UrbanTransport Project 0.00 100.00 0.00 0.00 0.00 103.87 18.08 4.68 PO80295 2003 Polio Eradication 0.00 28.70 0.00 0.00 0.00 1.33 7.09 0.00 PO72018 2002 Nigeria:Transmission DevelopmentProject 0.00 100.00 0.00 0.00 0.00 104.13 66.95 31.13 PO69901 2002 CommunityBased Urban Development 0.00 110.00 0.00 0.00 0.00 124.01 45.61 15.91 PO70290 2002 2nd HealthSystems Dev. 0.00 127.01 0.00 0.00 0.00 138.59 45.58 -0.76 PO70291 2002 HIVIAIDS Prog. Dev. 0.00 90.30 0.00 0.00 0.00 93.62 34.40 0.00 PO69086 2001 Community-based Poverty Reduction 0.00 60.00 0.00 0.00 0.00 49.10 15.49 9.99 PO70293 2001 PRIVATIZATION SUPPORTPROJECT 0.00 114.29 0.00 0.00 0.00 109.04 44.55 0.00 PO66571 2000 2nd PrimaryEduc. 0.00 55.00 0.00 0.00 0.00 20.10 17.42 16.16 PO65301 2000 ECON.MGMT.CAP.BLDG. 0.00 20.00 0.00 0.00 0.00 7.27 -1.09 0.00 PO64008 2000 SMALL TOWNS WATER 0.00 5.00 0.00 0.00 0.00 2.45 1.93 0.65 Total: 0.00 1,233.30 0.00 8.00 0.00 1,200.80 356.23 77.40 NIGERIA STATEMENT OF IFC's HeldandDisbursedPortfolio InMillionsofUS Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1998 AEF Ansbby 0.10 0.00 0.00 0.00 0.10 0.00 0.00 0.00 1999 AEF Global Fabri 0.32 0.00 0.00 0.00 0.32 0.00 0.00 0.00 1999 AEF Hercules 1.30 0.00 0.00 0.00 1.30 0.00 0.00 0.00 1999 AEF Hygeia 0.00 0.19 0.00 0.00 0.00 0.19 0.00 0.00 1996 AEF Mid-East 0.00 0.00 0.12 0.00 0.00 0.00 0.12 0.00 1997 AEF Moorhouse 0.68 0.00 0.00 0.00 0.68 0.00 0.00 0.00 2000 AEF OhaMotors 0.84 0.00 0.00 0.00 0.84 0.00 0.00 0.00 1997 AEF Radmed 0.25 0.00 0.00 0.00 0.25 0.00 0.00 0.00 2000 AEF SafetyCenter 0.50 0.06 0.00 0.00 0.50 0.06 0.00 0.00 1997 AEF Telipoint 0.08 0.00 0.00 0.00 0.08 0.00 0.00 0.00 1995 AEF Vinfesen 1.oo 0.00 0.00 0.00 1.oo 0.00 0.00 0.00 1994 Abuja Intl 1.75 0.71 0.00 0.00 1.75 0.71 0.00 0.00 2003 Adamac 25.00 0.00 0.00 15.00 11.56 0.00 0.00 6.94 61 2000 CAPE FUND 0.00 7.50 0.00 0.00 0.00 5.40 0.00 0.00 2000 Citibank (Nig) 7.36 0.00 0.00 0.00 7.36 0.00 0.00 0.00 2001 Delta Contractor 15.00 0.00 0.00 0.00 0.20 0.00 0.00 0.00 2000 DiamondBank 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2000 FSB 9.45 0.00 11.25 0.00 9.45 0.00 6.75 0.00 1992 FSDH 0.00 0.86 0.00 0.00 0.00 0.86 0.00 0.00 2000 GTB 16.00 0.00 0.00 0.00 16.00 0.00 0.00 0.00 2000 IBTC 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1981/88 Ikeja Hotel 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00 2002 NTEF 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 UBA 0.00 0.00 10.00 0.00 0.00 0.00 0.00 0.00 Totalportfolio: 131.63 9.57 21.37 15.00 83.39 7.47 6.87 6.94 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2004 UPDC Hotels Ltd 0.01 0.00 0.00 0.00 Total pendingcommitment: 0.01 0.00 0.00 0.00 62 Annex 14: Country at a Glance Sub- POVERTY and SOCIAL Saharan Low- Nigeria Africa income 2002 Population, mid-year(millions) t32.8 888 2,495 Lifeexpectancy GNIper capita (Atlas method, US$) 290 450 430 GNI(Atlas method, US$billions) 38.7 308 /072 Average annual growth, 1998.02 T Population(%) 2.5 2.4 19 Laborforce (%) 2.6 2.5 2.3 GNI Gross per primary M o s t recent estimate (latest year avallable, 1998-02) capita nroliment Poverty (%ofpopulationbeiownationalPOvertyline) Urbanpopulation (%of totalpopulation) 48 33 30 Lifeexpectancyat birth (pan) 45 46 59 Infant mortaiity(per 1OOOlivebirths) 139 a 5 81 Childmalnutrition (%ofchildrenunder5) 31 Access to improvedwater source Access to an improvedwater source (%of population) 62 58 76 llliteracy(%ofpopulationage 69 33 37 37 Gross primaryenrollment (%of school-age population) 82 88 95 -Nigeria Male 89 92 a 3 -Low-incomegroup Female 74 80 87 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratlos' GDP (US$ billions) 49.7 32.7 42.5 43.4 Gross domestic investmentlGDP .. 218 20.1 23.3 Exportsof goods and serviceslGDP Trade 6.3 42.2 44.4 37.7 Gross domestic savingslGDP 14.0 23.5 24.5 nA Gross national savingslGDP 114 6.9 22.9 14.a Current account balancelGDP -0.5 -4.0 2.8 -8.5 InterestpaymentslGDP 17 5.6 4.8 Total debtlGDP 24.1 88.7 73.2 89.4 Total debt servicelexports 6.1 30.9 8.0 m.1 1 Present value of debffGDP 72.6 Present valueof debtlexports 60.6 Indebtedness 1882.92 1992-02 2001 2002 2002.06 (averageannualgrowfh) GDP 4.2 2.3 2.9 -0.9 3.5 -Nigeria GDP percapita 12 -0.4 0.6 -3.1 0.5 Lowincome group ~ STRUCTURE o f the ECONOMY 1982 1992 2001 2002 1 Growth o f investment and GDP ( O h ) (%of GDP) Agriculture 30.8 23.8 34.6 37.4 Industry 33.3 58.3 35.5 28.8 Manufacturing 9.6 4.3 4.2 Services 35.8 8.9 29.9 33.8 Private consumption 69.9 58.1 45.5 55.4 Generalgovernment consumption 6.1 m.4 30.0 27.2 Imports of goods and services 22.3 40.5 39.9 43.8 I -GO1 -GDP 1 1982-92 1992-02 2001 2002 (averageannualgrorulh) Agriculture 4.8 3.8 3.8 5.3 Industry 2.4 0.8 15 -4.8 Manufacturing 2.8 13 3.8 Services 8a 2.4 3.2 -4.3 Private consumption -18 -2.0 - a 5 7.2 Generalgovernmentconsumption -1.0 a.5 22.9 -116 Gross domestic investment 2.2 6.6 t3.3 20.5 Imports of goods and services -8.9 6.5 1t3 8.8 -Exports -Inports 63 PRICES and GOVERNMENT FINANCE I 1982 1992 2001 2002 Domestic prices Inflation (%) (%change) 40 T Consumer prices 7.7 44.6 18.9 9.9 30 ImplicitGDP deflator 2.6 83.6 7.8 n 6 20 Government finance M (%of GDP, includescurrentgrants) 0 Currentrevenue 35.1 46.9 40.2 .io Currentbudget balance 7.8 16.7 7.1 2.9 Overallsurplusldeficit -3.3 -5.8 ---GDPdeflatOr -CPI TRADE 1982 1992 2001 2002 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 9,154 11,686 l7,949 14,99 Crudepetroleum 11,868 11542 8,574 t3.306 25,000 T Liquefiednaturalgas 706 666 20,000 Manufactures 36 88 69 15,000 Total imports (cif) l7.730 9,842 0,68 14.752 Food 2,690 607 1790 1,9l7 i0,ooo Fueland energy 2,7l7 3,470 5,000 I Capitalgoods 0 Exportpriceindex(S95=WO) 186 10 I46 6 2 96 97 98 99 00 Import priceindex(S95=W0) 63 69 85 64 Terms of trade (895-WO) 293 0 3 175 181 eEvorts mlrrports BALANCE o f PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balance to GDP (Oh) Exportsof goods and services 9,607 0,034 18,943 15,932 Imports of goods and services 7720 11539 17.041 18,455 I Resource balance -4,602 495 $902 -2,523 Net income -1661 -2,569 -2482 -2,956 Net currenttransfers 776 1,773 1,69 Currentaccount balance -6,693 -l,298 183 -3,667 Financingitems (net) 4,326 -717 -l70 675 Changes innet reserves 2,357 2,05 -1023 2,991 Memo: Reserves includinggold (US$ millions) 1639 2 3 5 0,423 7,233 Conversion rate (DEC, iocal/US$) 10 8.0 1115 910 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Composition of 2002 debt (US$ mill.) Total debt outstanding and disbursed 11972 29,OQ 31,129 30,116 IBRD 674 3,l74 1337 /275 A 1275 IDA 37 80 521 676 G 1,723 B 676 Total debt service 2,067 3,750 3,659 2,933 IBRD 65 555 285 251 IDA 1 1 t3 6 Compositionof net resource flows Official grants Official creditors 169 8 8 -1464 Private creditors 2 4 8 -1542 -84 Foreigndirect investment 744 1,796 1950 Portfolio equity 0 0 0 E World Bank program 22,446 Commitments 00 581 305 438 - Disbursements A IBRD E- Bilateral 144 296 27 20 , BC-IMF - IDA D Other mrltilateral - F. Private Principalrepayments 33 295 215 189 G-Sbrt-term 64 Annex 15: StakeholderParticipation 187. This Annex examines the Project participatory approach, the Public Communication Program, the Customer Feedback System as well as important social issues for the Project. A. Projectparticipatoryapproach 188. Civil society outreach for this Project started in 2001. A comprehensive communication audit first assessed perceptions vis-A-vis the private sector participation in the water sector in Lagos. The audit served as a baseline for the design o f a strategic communication program. Although some aspects o f the Project have changed, this program was effective in supporting consumers' concerns regarding PSP, through TV and radio programs, outdoors advertising, corporate advertising, media relations, events, community communication, and public opinion research. 189. At Project Appraisal, the team met with six local NGOs involved in the water reform consultation to explain the Project's objectives and to better understand the concerns o f civil society over urban water issues. At a follow-up consultation mission, further field visits and discussions were held with local NGOs in both states. The project team also initiated an open process for the procurement o f NGOs for the Project Component 3's Customer Feed-Back System assignment (see description below). The Terms o f Reference (TOR) for NGO contractors were disseminated widely to civic groups and networks in Nigeria and to international NGOs, and were posted on the World Bank Nigeria website and the dgMarket. Two meetings in Lagos and Calabar were then organizedto collect comments from NGOs on the TOR, and the TOR was subsequently revised to reflect concerns and suggestions for improvement. B. PublicCommunicationProgram(PCP) 190. The Project will build ownership and ensure effective stakeholder participation at all levels through a systematic and institutionalized two-way "Communication and Stakeholder Outreach Program". This effort will focus on building consensus and influencing actions o f relevant departments and institutions to uphold customers' rights and improve service delivery to consumers from all socio-economic groups. 191. The objectives o f the PCP include: (i) ensuring effective stakeholder participation; (ii) promoting ownership within and outside the government; (iii) building awareness about water issues; and (iv) buildingconsensus among various stakeholders. 192. The communication strategy will take stock o f previous communications efforts in Lagos and will be based on further research as required. In both states, opinion research will help establish a strategic PCP and action plan. The action plan will include a matrix o f activities, target stakeholder groups, messages, channels, timeline, and budget. A clear set o f indicators and activities for monitoring and evaluation o f the PCP will be established to measure output and the impact o f the communication intervention at mid-termreview and at the end o f the Project. A needs-assessment will also be conducted to design and implement capacity building for the relevant water.boards departments. 65 C. CustomerFeedbackSystem 193. Giving users voice in water issues is expected to help break the cycle o f inadequate, unresponsive service provision. Both Lagos State Water Corporation (LSWC) and Cross River State Water Board (CRWB) have decided to build an efficient consumer outreach effort that will contribute to more sustainable service provision. The Customer Feed-Back System will build long-term interaction mechanisms between consumers and the water boards, enabling consumers to express their opinion on water provision, utility performance, and engage indecision-making. This activity will be designed and implemented by community-based organizations and NGOs active in the water and sanitation sector to ensure that water service provision reflects demands o f all user groups. In addition the consultancy will provide the selected organizations with training and capacity building to enable them to engage as the utilities' and communities' primary contacts duringthe Project's implementationperiod andbeyond. 194. The objectives o f the Customer Feed-Back System are to: (i)promote citizens` participation in the Project through continuous feed-back on service, performance, and future improvements; (ii) service-oriented relations between the customers and utilities; (iii) build ensure that LSWC and CRWB have appropriate knowledge on customers' needs and priorities; and (iv) buildknowledge and capacity o f customers and customers representatives in key water provision issues. 195. The specific tasks o f the Customer Feed-Back System will include: (i) conducting bi- annual customer surveys; (ii) meeting with the water boards twice a year to present and discuss the survey results; (iii) conducting community training on key water provision issues; (iv) participating in NGO Training to be provided under the Project; (v) organizing annual community workshops with customers from each Project area; and (vi) participating in annual NGO workshops to review progress and share experience, ideas and instruments. 196. The Customer Feed-Back System will also include neighborhoodsite visits for utility personnel, and meeting with community leaders on a regular basis. D. InformalProvidersinLagos andthe Project 197. Supply in Lagos i s dominated by vendors and from boreholes. A survey for the Lagos Metropolitan Development Project in 2002 reported that 64% o f the households buy water from vendors, 25% get water from boreholes, and 5% from standpipes. Among the households that use vendors, 59% get water from private neighborhood taps, 35% from mobile vendors and the rest from vendors for LSWC standpipes or others. Only 15 households inthe survey sample had private house connection. Therefore, any fiture scheme to involve the private sector will need to pay special attention to the informal water providers who are currently supplying water to a large portion o f the population in Lagos and are accepted by the community. Any action to decrease their role will be strongly opposed. Some o f the effects o f the sector reform on informal providers are briefly presented below. The introduction o f competition with formal operators may represent both a threat and an opportunity for the informal providers active in the Lagos Project areas (e.g. mobile vendors, tankers, boreholes and wells owners). Borehole consumers 66 and tankers will benefit from the price competition. But bulk water cost will likely increase for the borehole owners thus reducing their profit margin. Moreover, the market size o f tankers supplying water inhighincome areas such as Ikoyi will decrease, as residents using underground tanks shift to house connections. The compliance to new quality standards will also be an issue for the informal providers. Finally, improved metering will end the practice of households illegally selling water taken from LSWC's network as is often practiced in Lagos Island. This may inturn affect income for this category of informalvendors. E. PublicPerceptionandDegreeofVoice inGovernance. 198. Dialogue between communities, SGs and LGs and responsible departments on water issues and broader urban services and policy (e.g. Lagos Strategy process) have taken place in Lagos over the past few years. In particular, the Heinrich Boll Foundation Nigeria supported several meetings on Lagos water sector PSP and policy. Representatives o f the LSWC, the media, and civil society organizations met on May 10, 2004 to discuss the Lagos water policy. On May 20, 2004, LSWC organized a tour o f LSWC facilities, in which several NGO representatives participated. As a follow-up, the Pan-African Vision for Environment, Lagos (PAVE) organized a Consultative Forum for Lagos-based CSOs active in the Water and Sanitation sector on October 20, 2004. The Consultative Forum addressed principles for the engagement o f CSOs in the Lagos water PSP. Lagos-based groups have also organized themselves to analyze the new Water Sector Law for Lagos and at a NGO brainstorming roundtable on November 11, 2004, proposed a position that was communicated to relevant institutions. Additional comments have been made by civic organizations at a group discussion on February 25, 2005, and at a Public Policy Forum on the Lagos Water Sector Reform on May 26,2005. With the support of Public Citizen, U.S.A, nationwide community basedorganizations and NGOS formed the Civil Society Coalition Against Water Privatization in Nigeria (CISCAWP NIGERIA) which has held numerous events (e.g. March 2, 18). On broader water and environment sector issues, the National Civil Society Network on Water and Sanitation (NEWSAN) was formally establishedon March22,2005, with the support of WaterAid. Finally, civic groups have launched an online `Watenvatch Group' to highlight problems associatedwith water pollution; advocate policies for quality water supply; promote practices for effective water conservation, public sanitation and environment; and generally disseminate news and informationon water issues inNigeria. F. Monitoringof theMainSocialImpactsof the Project 199. The Project's social impact will be monitored through the following: (i)surveyo f 1,000 a stakeholders at MTR to measure stakeholders' appreciation o f the social outcome of the PSP; (ii) stakeholder survey at the Project's completion; and (iii) reviews by the SWAs, using a annual methodology to be developed during the first year o f implementation, of the Project's social impact. Monitoring o f specific service delivery targets will be part of the Customer Feed-Back System to include bi-annual surveys on customer concerns about water service delivery. The implementing agencies will set their own verifiable indicators to assess the social impact o f all Project interventions, and the degree of participation o f the key stakeholdersduring all phases of Project implementation. 67 MAP SECTION IBRD 33824R 14° 4° 6° 8° 10° 12° 1963 Level 14° 14° 1973 Level N I G E R C H A D N I G E R I A Rima Lake Chad 2001 Level SECOND NATIONAL URBAN Sokoto Katsina WATER SECTOR REFORM PROJECT Sokoto Gahsua Yobe R. INTERNATIONAL RIVER BASINS Tomas Jakara Gana Birnin Kebbi Gusau Hadedjia Komadugu KOMADUGU YOBE Ngadda IKOM PROJECT CITIES IN CROSS RIVER STATE Kano RIVER BASIN 12° Dutse CROSS RIVER BASIN Damaturu Maiduguri Gulbinka OTHER RIVER BASINS & RIVER BASIN LIMITS Yedseram OTHER SELECTED TOWNS Danzaki Galma Kano Jama'are STATE CAPITALS NATIONAL CAPITAL Madaki NIGER RIVER BASIN RIVERS Kaduna B E N I N Kainji Bauchi Gombe INTERNATIONAL BOUNDARIES Reservoir Kaduna 10° Gongola 10° Jos Kilange Minna Pai Belwa Benue Mayolne Niger ABUJA Yola Awun R. NIGER RIVER BASIN Jalingo 0 50 100 150 200 250 Ilorin Lafia Taraba KILOMETERS Ove Gurara Mada Benue 8° R. 8° This map was produced by the Map Design Unit of The World Bank. Oshogbo The boundaries, colors, denominations and any other information shown Lokoja Makurdi on this map do not imply, on the part of The World Bank Group, any Ogun Ado-Ekiti For Detail, judgment on the legal status of any territory, or any endorsement or Ibadan See IBRD 33968 Donga acceptance of such boundaries. Akure Abeokuta Oshun Anambra a Katsina-Ala 0° 10° Ay M A L I NATIONAL RIVER BASIN N I G E R LAGOS OGOJA OBUDU C H A D Osse Enugu Benin City Abakaliki BURKINA For Detail, See IBRD 33969 Asaba Awka Aboine FASO 6° IKOM R. Cross 6° CROSS RIVER Cross 10° BENIN Niger N I G E R I A 10° Niger BASIN C A M E R O O N C . A . R . Abuja Benue Owerri Umuahia G H A N A TOGO G u l f o f NIGERIA Uyo CENTRAL Yenagoa Port AFRICAN Harcourt C A M E R O O N G u i n e a CALABAR REPUBLIC EQUATORIAL Gulf of Guinea GUINEA SÃO TOMÉ 4° 6° 8° 10° 12° 14° 0° & PRÍNCIPE 10° GABON CONGO MAY 2005 14° 4° 6° 8° 10° 12° 14° 16° 14° N I G E R C H A D This map was produced by the Map Design Unit of The World Bank. S O K O T O The boundaries, colors, denominations Sokoto Lake Katsina and any other information shown on R. YobeR. Chad this map do not imply, on the part of Sokoto The World Bank Group, any judgment Rima KATSINA on the legal status of any territory, or Birnin any endorsement or acceptance of Kebbi R. J I G AWA such boundaries. Gusau Kano Y O B E B O R N O 12° K E B B I Z A M F A R A Dutse Damaturu Maiduguri K A N O N I G E R I A SECOND NATIONAL B A U C H I Kaduna G O M B E B E N I N Kainji Bauchi Reservoir URBAN WATER SECTOR K A D U N A Gombe 10° N I G E R 10° Jos Minna A D A M AWA REFORM PROJECT Niger PROJECT STATES R. ABUJA P L A T E A U Yola Jalingo FEDERAL K W A R A CAPITAL TERRITORY N A S A R A W A PROJECT STATES Ilorin O Y O Lafia STATE CAPITALS Benue T A R A B A 8° R. NATIONAL CAPITAL 8° Osogbo EKITI Lokoja RIVERS Ado-Ekiti Makurdi Ibadan OSUN K O G I STATE BOUNDARIES B E N U E Abeokuta Akure INTERNATIONAL BOUNDARIES O N D O OGUN Ikeja ENUGU 14° 16° L A G O S E D O Enugu EBONYI For Detail, Benin Awka City Asaba Abakaliki 0° 10° M A L I 6° See IBRD 33969 CROSS 6° N I G E R R. ANAMBRA ABIA RIVER C H A D Niger I M O Umuahia DELTA BURKINA Owerri C A M E R O O N FASO Uyo Yenagoa R I V E R S AKWA- 10° BENIN NigerN I G E R I A 10° B AY E L S A Calabar Port IBOM Abuja Harcourt Benue For Detail, G H A N A TOGO 0 50 100 150 200 250 4° See IBRD 33968 4° CENTRAL KILOMETERS AFRICAN C A M E R O O N G u l f o f G u i n e a REPUBLIC IBRD APRIL EQUATORIAL Gulf of Guinea GUINEA 33967 2005 SÃO TOMÉ 4° 6° 8° 10° 12° 0° & PRÍNCIPE 10° GABON CONGO