Document of The World Bank Report No: 67743-PA RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF PANAMA METRO WATER AND SANITATION IMPROVEMENT PROJECT LOAN NO. 7877-0 PAN BOARD APPROVAL DATE: MAY 18, 2010 TO THE REPUBLIC OF PANAMA April 4, 2012 ABBREVIATIONS AND ACRONYMS ISR Implementation Status and Results Report IDAAN Instituto de Acueductos y Alcantarillados Nacionales Government of Panama \ Regional Vice President: Hasan Tuluy Country Director: Carlos Felipe Jaramillo 2 Sector Manager / Director: Wambui Gichuri / Ede Jorge Ijjasz- Vasquez Task Team Leader: David Michaud / Lilian Pena P. Weiss 3 PANAMA METRO WATER AND SANITATION IMPROVEMENT PROJECT P119694 CONTENTS Page A. SUMMARY ........................................................................................................................... 4 B. PROJECT STATUS .............................................................................................................. 4 C. PROPOSED CHANGES ...................................................................................................... 4 4 METRO WATER AND SANITATION IMPROVEMENT PROJECT RESTRUCTURING PAPER A. SUMMARY 1. The proposed restructuring includes: modifying the Loan Agreement to allow for the hiring of an external fiduciary agent for the administration of the Loan proceeds so as to accelerate the implementation of the Project. B. PROJECT STATUS 2. The Panama Metro Water and Sanitation Improvement Project (Metro.Agua) for a loan of US$40 million was approved in May 2010 and became effective in September 2011. The Project’s development objective is to assist the Republic of Panama in increasing the quality, coverage and efficiency of its water supply and sanitation services in the lower-income neighborhoods of selected areas of the Panama Metropolitan Region. 3. The Project effectiveness took longer than expected mainly due to delays in national loan approval processes. Management changes in IDAAN have meant slower than anticipated implementation. However, the recent effectiveness of the Project, in parallel with the set-up of the project coordinating unit within IDAAN, have made it possible to accelerate Project implementation. The Master Plan and designs underpinning the first phase of investments financed under Component 1 are expected to be finalized in the coming months, allowing for the bidding of first works to start this semester. The preparation of the performance-based contract to improve the efficiency and quality of service in Colon under Component 2, should also be completed this semester, allowing for the bidding to be launched by June 2012, and the identification of measures to improve IDAAN’s institutional strengthening (Component 3) is on-going. 4. The Project’s performance has been rated as satisfactory in the last ISR filed in November 2011 and after the supervision mission in October 2011. Since then, the World Bank team has also conducted two supervision visits in January and March to help kick- off project implementation, and a formal supervision mission in April 2012. Additionally, it should be pointed out that no disbursement has taken place yet, in part because the Ministry of Economy and Finance first provided budget in the fiscal year 2012. A first disbursement of the loan should take place in the coming weeks. C. PROPOSED CHANGES 5. Changes in implementation arrangements. At the request of the Borrower and with the objective of accelerating the implementation of the project, the fiduciary arrangements of the project will add the use of a Fiduciary Agent that will be hired by IDAAN to assist in processing payments to vendors. The remaining fiduciary arrangements, namely IDAAN's responsibility for the financial management aspects of the project, through its institutional financial unit, including (i) budget formulation and 5 monitoring, (ii) cash flow management (including submitting payment requests to the Financial Agent and submitting loan withdrawal applications to the Bank), (iii) maintenance of accounting records (including the administration and maintenance of an inventory of project assets), (iv) preparation and submission of in-year and year-end financial reports, (v) administration of underlying information systems, and (vi) arranging for the execution of financial audits, will remain in place. 6. It should be noted that several other Bank projects in the Bank’s portfolio are implemented using this modality, and the change represents a change of approach by the Government of Panama which initially expected to use national procedures but later decided implementation had to be accelerated. 7. IDAAN has indicated that it intends to use national funds and procedures to contract the external fiduciary agent. Prior to the selection of the fiduciary agent becoming effective, the Bank would review the fiduciary capacity of the company selected, as well as the Terms of Reference under which it would be contracted. 8. Risks. The proposed changes will not raise the overall financial management risk of the project as IDAAN remains responsible for the financial management aspects of the project, but will benefit from the assistance of the Fiduciary Agent. 6