argentina public disclosure authorized...(enohsa) were the liaison between the bank, the government...

Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No.: 18014

IMPLEMENTATION COMPLETION REPORT

ARGENTINA

WATER SUPPLY PROJECT(LOAN-2641-AR)

June 16, 1998

Finance, Private Sector and Infrastructure Sector Management UnitCountry Management Unit 7Latin America and the Caribbean Regional Office

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

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CURRENCY EQUIVALENTS

Name of the Currency: Peso $At September 1996: USS1 = $1

WEIGHTS AND MEASURES

Metric System

GOVERNMENT OF ARGENTINA FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AA AguasArgentinasGreater Buenos Aires water concessionaire

AC Aguas CordobesasWater Utility of the City of C6rdoba (private)

APSF Aguas Provinciales de Santa FeWater Utility of Santa Fe Province (private)

COFAPYS Consejo Federal de Agua Potable y SaneamientoFederal Council for Potable Water and Sanitation

DAS Direcci6n de Aguay Saneamiento de la Provincia de C6rdobaWater and Sanitation Regulatory Office for the Province of C6rdoba

DIPOS Direcci6n Provincial de Obras Sanitarias de Santa FeOffice of Public Works and Services of Santa Fd

ENOHSA Ente Nacional de Obras Hidricas de SaneamientoNational Entity of Sanitation Works

EPOS Empresa Provincial de Obras Sanitarias de C6rdobaPublic Works and Services Enterprise of C6rdoba

ENRESS Ente Regulador de Servicios SanitariosSanitation Services Regulatory Agency for the Province of Santa Fe

ETOSS Ente Tripartito de Obrasy Servicios SanitariosGreater Buenos Aires Water and Sanitation Regulator

lNCYTH Instituto Nacional de Cienciasy Tecnologia HidraulicaNational Institute of Hydraulic Sciences and Technology

MEOSP Ministerio de Economia y de Obrasy Servicios PublicosMinistry of Economy and Works and Public Services

MOSP Ministerio de Obrasy Servicios PuiblicosMinistry of Works and Public Services

OSN Obras Sanitarias de la Naci6nNational Sanitation Works

PAHO Organizaci6n Panamericana de la SaludPan-American Health Organization

SRH Secretarfa de Recursos HidricosWater Resources Secretariat

SNAP Sistema Nacional de Agua PotableNational Water Supply System

Vice President Shahid Javed BurkiCountry Management Director Myma AlexanderSector Management Unit Director Danny M. LeipzigerTask Manager Abel Mejia

FOR OFFICIAL USE ONLY


ARGENTINA

ARGENTINA WATER SUPPLY PROJECT(LOAN 2641)

TABLE OF CONTENTS

Page No.PREFACE ........................................................... iEVALUATION SUMMARY .......................................................... ii

PART I -PROJECT IMPLEMENTATION ASSESSMENT ........................................................... 1A. Background ........................................................... 1B. Project Objectives and Description .......................................................... 2C. Project Design and Preparation .......................................................... 6D. Project Implementation ........................................................... 7E. Project Results ........................................................... 9F. Project Sustainability .......................................................... 12G. Bank Performance .......................................................... 12H. Borrower Performance .......................................................... 13I. Assessment of outcome .......................................................... 13J. Future operation .......................................................... 14K. Lessons Learned .......................................................... 14

PART II - STATISTICAL ANNEXES

Table 1: Summary of Assessments ....................................................... 18Table 2: Related Bank Loans/Credits ....................................................... 19Table 3: Project Timetable ....................................................... 20Table 4: Project Scope and Implementation ....................................................... 21Table 5: Project Cost and Project Financing ..................... ................................... 22Table 6: Disbursements by Category ....................................................... 23Table 7: Loan Disbursements, Cumulative, Estimated and Actual ............................................ 24Table 8: Key Indicators for Project Operation ....................................................... 25Table 9: Studies Included in the Project ....................................................... 26Table 10: Status of Legal Covenants ....................................................... 28Table 11: Resources: Missions ....................................................... 31Table 12: Bank Resources: Staff Inputs ....................................................... 32

APPENDIX A - Borrower's Contribution to the ICR .......................................................... 33

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without WorldBank authorization.


ARGENTINA

ARGENTINA WATER SUPPLY PROJECT(LOAN 2641-AR)

PREFACE

This is the Implementation Completion Report (ICR) for the First Water SupplyProject, for which Loan 2641-AR in the amount of US$60.0 million was approved by theBoard on December 10, 1985 and became effective on April 24, 1987. The Bank canceledUS$20.0 million of the loan, at the request of the Government of Argentina: US$15.3million in 1993 and US$4.7 million in 1995.

After three extensions of the closing date by a total of three years , the loan wasclosed on June 30, 1997. Final disbursement took place on August 6, 1997, at that time abalance of US$1.6 million was canceled.

The ICR was prepared by Carlos Moreno-Pineda (LAIIU) and German Uzcategui(Consultant) and reviewed by Abel Mejia (Task Manager) and Asif Faiz, Sector Leader(LCC7C).

Preparation of this ICR is based on documents (Staff Appraisal, President's Report,Legal Agreements, audit reports, Bank supervision reports, correspondence, and internalBank documents) in the project files. The borrower and the participating executing agencies(COFAPYS, ENOHSA, OSN, DIPOS, EPOS and ETOSS), provided information tocomplete the evaluation of project preparation and implementation. The Borrower'scomments are included as an appendix to the ICR.

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ARGENTINA


EVALUATION SUMMARY

Project Objectives

Loan 2641-AR was the first loan to support expansion and rehabilitation of watersupply facilities and institutional strengthening of the water and sanitation sector inArgentina. The project had three main objectives: (i) rehabilitate deteriorating infrastructure,replace run-down facilities and extend water services in three main centers; (ii) prepare anational water and sanitation plan to provide the necessary institutional framework to permitthe newly decentralized system to function in a more efficient manner; and (iii) initiate anational operational improvements program to promote water conservation through physicalrehabilitation of water systems, production and consumption metering, and institutionalstrengthening of water utilities. In 1993, the description of the project was amended tosupport the concessioning process of the water utility in Metropolitan Buenos Aires.

The project had four parts: (i) Part A, preparation of the national water supply andsanitation plan; (ii) Part B, operational improvements in Metropolitan Buenos Aires and theinstitutional strengthening of Obras Sanitarias de la Naci6n (0SN); (iii) Part C,rehabilitation and extension of water supply systems in the city of Cordoba and theinstitutional strengthening of the Empresa Provincial de Obras Sanitarias de C6rdoba(EPOS); and (iv) Part D, operational improvements to the water supply system in the city ofRosario and the institutional strengthening of the Direcci6n Provincial de Obras Sanitariasde Santa Fe (DIPOS).

Seven executing agencies were ultimately responsible for project execution: (i) TheSubsecretariat for Hydraulic Resources (SRH), the Consejo Federal de Agua Potable ySaneacniento (COFAPYS) and the Ente Nacional de Obras Hidricas de Saneamiento(ENOHSA) were the liaison between the Bank, the Government and the projectbeneficiaries, and also were responsible for executing Part A of the project; (ii) OSN wasresponsible for executing Part B; (iii) EPOS was responsible for executing Part C; and (iv)DIPOS was responsible for executing Part D.

Project Implementation

The project, appraised in November 1985, was approved by the Board in December1985, and the loan became effective in April 1987. Significant delays occurred during thefirst three years of implementation. The reasons for the delays in project implementationwere: (i) length of time which elapsed from loan signing to loan effectiveness; (ii) lack offamiliarity of executing agencies with the Bank's procurement procedures; (iii) reluctance of

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bidders to quote prices during the hyper-inflationary period (1987-1989); (iv) change of theproject coordinating agency in 1988; and (v) change of the sector's strategy established byLaw No. 23.696 of August 1989, which allowed the privatization of OSN and otherfederally owned public utilities.

In June 1993, as a result of the privatization of OSN and the lack of the counterpartfunds required to conclude the works included in the Cordoba rehabilitation and expansioncomponent, it was agreed to: (i) cancel US$15.2 million from the EPOS component (PartC); and (ii) reallocate US$5.3 million from OSN (Part B) to Part A, in order to develop theinstitutional capacity to regulate the water concession of Metropolitan Buenos Aires.

Project Results

The Santa Fe Province water utility (DIPOS) fully implemented the physicalcomponents of the Rosario subproject and also improved its operational efficiency. OSN andEPOS, the Buenos Aires and C6rdoba water utilities respectively, only partially implementedtheir subprojects. During project implementation all the executing agencies decided toprivatize their water utility services, and the Bank strongly supported these decisions. Theservices in Buenos Aires, the province of Santa Fe, and C6rdoba are now operated byprivate concessionaires.

Part of the funds allocated to OSN were used to prepare the financial analysis andbidding documents required to privatize the water and sanitation services of MetropolitanBuenos Aires region. EPOS (Part C) partially completed a water treatment plant whichproduces one third of its design flow. In 1993, an amendment to the Loan Agreementreallocated to ETOSS funds originally allocated to OSN. This reallocation made possible todesign the institutional structure of ETOSS.

At appraisal the project was estimated to cost US$128.4 million. However, afterproject adjustments agreed with the Government due to a lack of local counterpart fundingby EPOS and the Province of Cordoba, the project's cost was reduced to US$65.0 million.As a result of the changes which occurred during project implementation, the Bank'sfinancing share increased from 47 to 57 percent.

Recent financial performance of the concessioned-utilites in Buenos Aires, Santa Feand Cordoba show a significant improvement when compared with the projections of theSAR. Water tariffs were initially reduced as a consequence of privatization, while theconcessionaires have increased the billing and collection rates. All three concessionaires havegiven the highest priority to the execution of an operational improvement program, withperformance indicators which are more demanding than the ones established in the SAR.

The economic revaluation showed a wide range of results. At appraisal, the IRR forthe rehabilitation and expansion of C6rdoba's water facilities was estimated at 10 percentand 44 percent for the operational improvement component, yielding a weighted IRR of 15percent. The economic revaluation of the C6rdoba subproject yielded an IRR of only 5percent. However, the Rosario subproject was fully executed and exceeded the appraised

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IRR of 44 percent. The OSN subproject was not executed, thus the ex-post IRR has notbeen calculated.

Project Sustainability

It is expected that water utilities in Buenos Aires, Santa Fe and Cordoba, underprivate sector management, will maintain good financial and operating performance, whileimproving the quality and coverage of the water and sanitation services. The main challengeto sustain the efficiency gains obtained in the three project cities, through the long-termconcession of their water utilities, is to improve the quality of the regulatory process.Effective regulation of the three water utilities requires: (i) to minimize political interferencein the appointment of regulators and improve the governance structure and efficiency ofregulatory institutions; (ii) to price water based on metered consumption; and (iii) toincorporate consumers into the decision making process.

Summary of Findings, Future Operations and Key Lessons Learned

This project had a very long gestation period, about 6 years, from identification in1979 to appraisal in 1985. The implementation of the project was even longer, about 12years, from 1985 to 1997. During these 18 years, the water and sanitation sector inArgentina went through fundamental changes. In the early eighties, the break-up of thenational monopoly of OSN into decentralized provincial utilities, followed, ten years later,by the bold decision of the government to privatize water and sanitation services in BuenosAires, the largest water utility of the country. Lessons from this project and developments inthe sector, not directly related to the project, are very rich and relevant to many othercountries, particularly in the LAC region.

Sector Strategy Lessons

Decentralization of a national water company without an adequate policyframework is not sustainable. Creation of provincial utilities was not enough toimprove sector performance. When the Government decided in 1979 to decentralizewater services, breaking-up the national monopoly of OSN was a step in the rightdirection; unfortunately, it was done in the absence of a sound public policyframework. Therefore, the decentralized utilities carbon-copied the regulatoryenvironment of OSN with excessive political interference in the appointment ofmanagers, and the approval of budgets and investment plans. The wrong tariffregulations remained intact, with the only difference that the power to approve newtariffs was transferred to sub-national jurisdictions at the provincial or regional level.The performance of most provincial utilities deteriorated even further. This situationwas exacerbated by the macroeconomic crisis in the country during most of theeighties.

Privatization of water utilities requires a different approach. The water sector is asector with frequently complex and conflicting objectives of efficiency and equity,and thus needs a different approach to reform other utility sectors such astelecommunications, power, and gas that do not face the same issues. The issues of

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the poor and the environment are more relevant in the water sector than any otherutility sector. The analytical framework to deal with these issues has still to bedeveloped in Argentina. The proposed Water Sector Reform Project has beendesigned to address these pending issues of the reform agenda.

Privatization of utilities requires development of a sound regulatory capacity in thepublic sector. The establishment of effective regulatory agencies is as important asprivate sector participation. However, in the case of ETOSS this task is takinglonger than anticipated mainly because the culture of regulating public utilities is analien concept in Argentina and in LAC. Hence, the new role of the public sector as aregulator of water utility services is not well defined, nor well understood by thesociety and the political establishment. The main lesson of the project in relation toETOSS is that the creation of regulatory agencies to promote competition, toimprove efficiency, and to represent the interest of consumers is a task that demandsa major concentration of high-quality Bank assistance.

Project Lessons

Project design must beflexible to respond to changes in country policies. When theadministration decided in late 1989 to allow privatization of OSN and established aPrivatization Committee, the Bank's support and commitment were critical in makinga success of the effort. However, such an important change in the project conceptshould have been done on the basis of a comprehensive review of the project'sscope and objectives in light of the changed policy stance in the federal governmentin 1989-90.

Macro-context and Sector policies should be carefully evaluated. Thedecentralization policy of the government, while well oriented, lacked a frameworkof incentives to promote efficiency in the provincial utilities. With the lack of clarityin government policies at the time of appraisal (February, 1985) and taking intoconsideration the delay to make the loan effective (26 months), it would have beenadvisable, at least, to re-evaluate the project concept and the risks associated in itsimplementation. Such a decision would have been fully justified by the rapidlychanging institutional environment of the sector during 1985-1987, and thedeterioration of the overall economic conditions.

Sector constraints and issues should be reflected in project design. As part of thereview of the government strategy, issues related to tariff design, budgeting,investment decisions, personnel policies, financial management practices, level ofmanagement autonomy, etc. should be carefully identified as part of projectpreparation or through economic sector work. The project failed to identify most ofthese issues; therefore options to address them were not included in project design.Moreover, at the time of appraisal, OSN performance was rapidly deteriorating:revenues in 1984 did not cover operational costs, mainly because of almost 100percent increase--in real terms--of personnel costs in 1983. The Bank has onlyconducted a sector review in 1992.

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Anticipate requirements of technical assistance. The technical assistancecomponent of the project, about US$ 2.0 million, or 3.3 percent of the loan wasdisproportionally small when considering the challenge of the major sector reformsunderway at the time of project preparation. Through loan amendments, technicalassistance was increased to US$18.5 million, corresponding to 49 percent of the loanamount, after partial cancellation of the loan.

Develop adequate implementation procedures during project preparation. Theinexperience of executing agencies in the implementation of Bank-financed projects,and the risks associated with frequent changes of key project officials should beaddressed during project preparation. A detailed Project Operation Manual shouldhave been a condition of appraisal (as now is the practice). These procedures wouldhelp to maintain the institutional memory regarding the project implementationprocedures, and would also help to establish continuity in project administration forfuture management.

Address inexperience of counterpart agencies through continuous training. Startingfrom the early stages of project implementation, the Bank must provide training tothe staff of the executing agencies, as now is the practice. Training programs shouldbe repeated from time to time to address the turnover of government officials.Training should focus on the content of the Project Operation Manual, and onprocurement procedures. A considerable part of the implementation problems wereassociated with procurement issues, as demonstrated by the numerous procurementcorrespondences found in the project files between the agencies and the Bank, onrelatively standard procurement matters.

Complex projects require an strategic view. The strategic focus of Bank missions,and expert assistance should be sought when complex sectoral issues arise.Problems encountered in the implementation of civil works by EPOS could havebeen minimized with adequate technical and administrative support.


ARGENTINA


PART I - PROJECT IMPLEMENTATION ASSESSMENT

A. Background

Sector Objectives

1. By the end of 1978, when this project was being prepared, Argentina had anestimated population of 26.5 million, and a network coverage of 53 percent for watersupply and 30 percent for sewerage services. Most urban population not connected to thewater network relied on groundwater. In Metropolitan Buenos Aires, 45 percent of thepopulation consumed untreated water from shallow wells, often contaminated from septictanks. The sector objectives of the Government at the time of project preparation wereto: (i) increase water coverage to 90 percent of the urban population and to 26 percent ofthe rural population (75 percent of the concentrated rural population); and (ii) serve 65percent of the urban population with sewerage collection. In 1996, the population of thecountry was estimated at 33.7 million, being the network coverage in water distributionand sewage collection estimated at 81 and 51 percent, respectively.

Sector Organization

2. Until December 31, 1979, operation and construction of most urban systems wereentrusted by the provinces to Obras Sanitarias de la Naci6n (OSN) and to the ServicioNacional de Agua Potable Rural (SNAP). Both institutions were under the jurisdiction ofthe Ministry of Economy through the undersecretariat of Hydraulic Resources. StartingJanuary 1, 1980, water supply and sewerage services were transferred to the 23 provinceson a grant basis while OSN retained responsibilities for the Metropolitan Buenos Airesarea'. The transfers were implemented through individual agreements between OSN andthe provinces, and covered fixed assets, ongoing contracts, personnel, and accountsreceivable. Before the transfer, the Ministry of Economy approved all requests for tariffincreases, and subsequently transferred that responsibility to provincial governments.

3. During 1989, after loan effectiveness, the Federal Congress passed Law No.23.696, establishing the legal framework to privatize the water and sanitation services inthe Metropolitan Buenos Aires area. This decision was the turning point to initiate the

1 The City of Buenos Aires was at the time and up to 1996 under federal junsdiction.

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privatization of water and sewerage services in Argentina. However, each province wasfree to pursue its own policy in the sector and most were slow to adopt institutionalreforms like those of the federal government. Privatization of water services, and otherutilities, is only partially complete in these provinces.

Bank Sector Lending

4. This was the Bank's first intervention in the sector and was designed to supportthe decentralization strategy of the Government. Because federal financing was no longeravailable to the provinces, the proposed Bank loan was seen as an important contributionto the investment program of three provincial water utilities. The utilities selected forfinancing, received the highest priority by the Central Government and included thecountry's largest population centers. Furthermore, the project was designed to provideassistance to develop capabilities within the new sector organization for: investmentplanning; formulation of financial policies; project evaluation; training; and institutionalreorganization.

B. Project Objectives and Description

Project Origin

5. In 1985, the situation of the water supply and sewerage sector was critical.Services had deteriorated steadily since the break-up of OSN in 1981. The Governmentattempted a major effort in the early 1980s to rebuild the systems, but with limited successdue to financial constraints. At the time, the Government expressed its interest in the Bankplaying an important role in the reorganization of the sector including the provision offinancial assistance. The Bank assigned priority to assist in: (i) the implementation offinancial policies; (ii) the improvement of the efficiency in the use of existing resources;and (iii) the institutional reorganization of the sector. Being the first Bank financed waterand sanitation project in Argentina, it was designed to target 60 percent of the urbanpopulation of the country in the cities of Buenos Aires, Rosario and Cordoba.

Project Objectives

6. The objectives of the project were to: (i) rehabilitate deteriorating infrastructure,replace run-down facilities and extend water services to new urban areas; (ii) prepare anational plan to institutionalize the sector; and, (iii) promote water conservation throughphysical rehabilitation of water systems, production and consumption metering, andinstitutional strengthening of water utilities. These objectives were consistent with theBank's strategy to assist the Government in the improvement of public sectormanagement, promote greater efficiency in the use of resources, and rehabilitate socialinfrastructure.

7. In 1993, to support the privatization strategy of the Government, the descriptionof Part A of the project was expanded to include: "Strengthening of the organizationalcapabilities of ETOSS, through the provision of technical assistance and the acquisition

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and utilization of equipment required for said purposes". ETOSS, Ente Tripartito deObrasy Servicios Sanitarios, is the autonomous entity in charge of regulating water andsanitation services in the Metropolitan Buenos Aires area. ETOSS reported to theSecretariat of Public Works of the Ministry of Economy and Works and Public Services(MEOSP) until February 1998, and to the Secretary of Natural Resources and SustainableDevelopment thereafter.

Project Description

8. The project was designed to assist the Government to rehabilitate old, poorlymaintained water and sewerage facilities, extend water services to new areas in the threeurban centers; and strengthen sector planning, management and finances. It was divided infour parts, the first comprised of project activities to be carried out with the FederalGovernment, and the other three corresponded to each one of the cities included in theproject. Part C contains the project activities in the city of Cordoba and had the largestshare of project cost, 64 percent. The Buenos Aires component (Part B) represented 26percent of the project. The Rosario component (Part D) and the Federal component (PartA) had 9 and 1 percent of the project, respectively. Table 4 contains a detailed descriptionof the project scope and implementation.

Part A: National Water Supply and Sanitation Plan.

9. This component included: (i) the formulation of the Borrower's objectives in thesector, service targets and investment alternatives for the decade; (ii) the development ofproject evaluation criteria to foster adequate technical standards for project design withspecial emphasis on least cost analysis; (iii) the preparation of financial policies, includingdefinition of financial criteria for setting investment priorities; (iv) the definition of tariffstructures and levels to achieve reasonable rates of return on sector assets and enable thesector to contribute significantly to new investment; (v) the evaluation of the existingorganizational framework and responsibilities at federal and provincial levels; (vi)recommendations for the establishment of the organizational and institutional structures toeffectively implement the sanitation plan; (vii) recommendations on strategies directed atimproving the efficiency of the present organization; (viii) definition of responsibilities insector financing and alternative flow of funds; (ix) the identification of manpowerresources and staff training needs; (x) evaluation of existing research facilities and theirfunding, and recommendations for further development; (xi) carrying out trainingprograms for the MOSP staff for the preparation and execution of the national sanitationplan; and (xii) the carrying out of training programs for the preparation and execution ofthe national plan; and (xiii) acquisition and utilization of office equipment.

Part B: Operational Improvements in Metropolitan Buenos Aires and OSNInstitutional Strengthening.

(i) Acquisition and installation of about 200,000 water meters.

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(ii) Acquisition, installation and/or improvement of equipment in four measurementstations.

(iii) Rehabilitation or construction of about 700 kilometers of pipelines.

(iv) Strengthening the operating capability of OSN by: (i) updating of the mapping ofwater distribution and sewerage systems; (ii) updating of consumer files and tariffstudies, and upgrading of billing and collection systems; (iii) acquisition andutilization of data processing equipment; (iv) developing a system for routinesurveys, including the acquisition and utilization of pitometers; (v) developing asystems for preventive and corrective maintenance for water and seweragenetworks, including the acquisition and utilization of vehicles and specializedequipment; (vi) training programs for OSN's staff; (vii) developing financialmanagement systems including planning, budgeting, accounting and purchasing;and (viii) office equipment.

Part C: Rehabilitation and extension of the city of Cordoba water system, andEPOS Operational Improvement and Institutional Straightening.

(i) Construction of Los Molinos water intake and water treatment plant, with acapacity of about 2 cubic meters per second. Completion of Los Molinos rawwater channel with adequate capacity to operate the Los Molinos water treatmentplant at design capacity.

(ii) Upgrading of Suquia water treatment plant, including an expansion of itsproduction capacity by about three hundred liters per second.

(iii) Construction of four booster pumping stations in Arguello, Suquia, Alto Alberdiand Nueva.

(iv) Connection of the existing water distribution network to the new installations.

(v) Acquisition and installation of about 60,000 water meters.

(vi) Acquisition and installation of about 15 macro meters for water treatment plants,water storage facilities, and water mains.

(vii) Rehabilitation or construction of about 275 kilometers of pipelines.

(viii) Strengthening the operating capacity of EPOS by: (i) updating of the mapping ofwater distribution and sewerage systems; (ii) updating of consumer files and tariffstudies, and upgrading of billing and collection systems; (iii) acquisition andutilization of data processing equipment; (iv) developing a system for routinesurveys, including the acquisition and utilization of pitometers; (v) developingsystems for preventive and corrective maintenance for water and seweragenetworks, including the acquisition and utilization of vehicles and specializedequipment; (vi) training programs for EPOS' staff; (vii) developing financial

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management system including planning, budgeting, accounting and purchasing; and(viii) office equipment.

Part D. Operational Improvements in the City of Rosario and DIPOS InstitutionalStrengthening.

(i) Acquisition and installation of about 4,000 water meters for commercial andindustrial customers.

(ii) Acquisition and installation of about 10 macro-meters for water treatment plants,water storage facilities, and water mains.

(iii) Rehabilitation or construction of about 300 kilometers of pipelines.

(iv) Strengthening the operating capacity of DIPOS by: (i) updating of the mapping ofwater distribution and sewerage systems; (ii) updating of consumer files and tariffstudies, and upgrading of billing and collection systems; (iii) acquisition andutilization of data processing equipment; (iv) developing a system for routinesurveys, including the acquisition and utilization of pitometers; (v) developingsystems for preventive and corrective maintenance for water and seweragenetworks, including the acquisition and utilization of vehicles and specializedequipment; (vi) training programs for DIPOS' staff; (vii) developing a financialmanagement system incorporating planning, budgeting, accounting and purchasing;and (viii) office equipment.

The Executing Agencies

10. The borrower was the Argentine Republic. The Ministry of Works and PublicServices (MOSP), later merged with the Ministry of Economy (MEOSP), was theexecuting agency for the project, being responsible for overall project supervision andcoordination. To this end, MOSP through the Secretariat of Water Resources (SRIH-),would be the liaison between the Bank, the Government and project beneficiaries. MOSP,assisted by consultants, was to prepare the national water and sanitation plan. OSN,EPOS, and DIPOS were responsible for the execution of works and institutional programsin Metropolitan Buenos Aires, C6rdoba and Rosario, respectively. The project was to beexecuted during the period from January 1986 to December 1993. The followingexecuting agencies were assigned to each of the sub-projects.

(a) The Secretariat of Water Resources (SRH), under the jurisdiction of MOSP, wasresponsible for the implementation of Part A of the project. SRH had the overallresponsibility for coordinating water resources management at the federal level andoverseeing the activities of OSN, the National Water Supply System (SNAP), and theNational Institute of Hydrological Sciences and Technology (INCYTH). SRH was alsoresponsible for making operational the decentralized arrangements required to implementthe project. To that end, it created the executing unit (UE) of the National SanitationPlan. UE was also responsible for the development of water and sanitation sector policies,

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and for assisting the provincial utilities to implement the project. SRH also created theCoordinating Unit for Sector Investment (UC) with the responsibility for coordinatinginvestment projects which require Government funds and external financing.

(b) OSN was responsible for implementing Part B of the project. OSN had theresponsibility to supply water to 1 million connections, and collect sewage from about 0.5million connections, in the Metropolitan Buenos Aires area. OSN, as described in theSAR, was in a dismal condition: its annual budget required congressional approval; tariffsrequired approval of the Secretaries of Public Works, Economy and Labor; the investmentplan required approval of the Planning Secretary of the Ministry of Economy; accountingreports were unreliable; instrumentation of main facilities were in condition of disrepair.Labor productivity was very low, about 10 employees per thousand connections. In May1993, Aguas Argentinas signed a 30-year concession contract to provide water andsanitation services in Buenos Aires, formerly under OSN.

(c) EPOS was responsible for implementing Part C of the project. EPOS suppliedwater to 260,000 connections, and collected sewage from 92,000 connections, in the cityof Cordoba. Operational, commercial, and financial management problems as reported inthe SAR, are similar to OSN. EPOS's budget required approval from the provincialcongress, and tariffs from the provincial government. The SAR indicated that engineeringand financial planning was adequate, and it improved noticeably during projectpreparation. In 1997, Aguas Cordobesas signed a long term concession contract for thewater supply service in the city of Cordoba. Sewage services in the city remain under theresponsibility of the municipality.

(d) DIPOS was responsible for implementing Part D of the project. The SAR indicatedthat accounting was satisfactory, but problems in the operational and commercial areaswere similar to those in OSN and EPOS. DIPOS supplied water to 299,000 connectionsand collected sewage from 148,000. In December 1995, Aguas Provinciales de Santa Fesigned a long term concession to provide water and sewage services in all major urbancenters of the province of Santa Fe, including the city of Rosario.

(e) ETOSS was responsible for partially implementing Part A of the project, related tothe institutional strengthening of ETOSS.

(1) In November 1988, the Federal Council for Potable Water and Sanitation(COFAPYS) replaced SRH in the administration of the loan. In November 1995,COFAPYS was abolished, and their functions were assumed by ENOHSA.

C. Project Design and Preparation

Conceptual Framework

11. The project was originally conceived to include the largest cities of thecountry: Buenos Aires, Cordoba, Rosario and Mendoza. Mendoza withdrew from theproject during preparation. The basis for project design was to provide financial

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assistance in: (i) the implementation of sound financial and human resources policies; (ii)the improvement of the efficiency in the use of the resources in the sector; and (iii) theinstitutional reorganization of the sector. The project is first mentioned in a back-to-officereport dated May 3, 1979, prepared by a combined Bank/Pan American HealthOrganization (PAHO) mission which visited Argentina to assess the nature and scope of apotential Bank operation in the water supply and sewerage sector. The reportsumrarized the Argentine water sector, as: (i) poor in performance; (ii) unable to coveroperating and maintenance costs; (iii) metering was practically nonexistent; (iv) nomedium and long tenn planning, with decision making heavily centralized in OSN; and (v)lack of sector training and upgrading plans. Since the early eighties the Government,aware of the constraints affecting the sector, adopted two basic strategies: (i)decentralization of services; and (ii) establishment of a financial self-sufficiency policy.The Government also fostered an official policy to introduce metering and setting tariffs torecover the costs of the service. The project was designed to address the sectoral policyframework adopted by the Government since 1980.

Project Preparation and Appraisal

12. Discussions to prepare the project were initiated in 1979, following theBank/PAHO mission. From 1979 to 1983, progress in the preparation of the project wasminimal due to frequent changes of sector authorities and the lack of clarity of sectorpolicies. In 1983, the new government requested the Bank to assess the progress made inthe sector reorganization and to assist in the preparation of a project. The Bank and theauthorities agreed on a plan for completing project preparation and establishing appraisalfor late September 1984. This included: (a) defining institutional arrangements andproject financing plan; (b) reviewing the scope for the institutional and the technicalassistance programs and reviewing the status of preparation of project engineering; and (c)preparing financial and economical analyses. The preparation of the project took longerthan anticipated, and the appraisal was finally carried out one year later, in November1985.

D. Project Implementation

Project Start-up

13. The project was approved by the Board on December 10, 1985. Loan signaturedid not take place until 11 months later, on November 11, 1986. To declare the loaneffective took another 5 months. The time elapsed between appraisal and the effectivenessof the loan was 26 months. During this period of time, Argentina was encounteringserious macro-economic difficulties and had initiated a series of largely unsuccessfulheterodox stabilization/adjustment programs with the support of the Bank and the IMF.

Project Implementation Schedule and Procurement

14. The SAR estimated that the execution of most of the components of the projectwould start in the first quarter of 1986, and the project would be completed by December

8

1993, with a closing date of June 30, 1994. However, the loan was declared effective onApril 24, 1987 and the first disbursement was not made until October 15, 1987. By July1989, when President Menem assumed office, little had been achieved. The slow progressin project implementation is explained by: (i) delays in the signature of the LoanAgreement caused by cumbersome bureaucratic procedures to approve sub-loanagreements; (ii) lack of knowledge and skills of executing agencies on Bank procurementprocedures; and (iii) the reluctance of contractors and suppliers to submit bids under thehyper-inflationary environment prevailing in the period immediately after the effectivenessof the loan.

Project Costs

15. The cost of the project at appraisal was estimated at US$128.4 million, includinginstitutional building, operational improvements and water rehabilitation and expansionworks. The final project costs reached US$65.0 million. The differences between the costat appraisal and actual cost can be attributed to: (i) Part B of the project was not executed,although half of its proceeds were used to support the privatization process of the waterand sewerage services of Metropolitan Buenos Aires; and (ii) only 40 percent of Part C ofthe project, corresponding to the city of Cordoba, was executed. However, Los MolinosChannel and the Alimentador Sur, both works included in the project, were subsequentlyfinanced by the Municipality of C6rdoba. If these works are considered, the project costis US$111.0 million (Table 5).

Project Financing

16. At appraisal, project financing was defined as: US$68.4 million from local sourcesand US$60.0 million from the Bank. The Bank's percentage of financing was as follows:(i) 100 percent of the costs of foreign expenditures for direct imports; (ii) 44 percent oflocal expenditures for imported equipment and materials procured locally and ex-factorycosts of locally manufactured goods; and (iii) 100 percent of total expenditures forconsulting services and training.

17. In June 1993, the project description was adjusted as a consequence of the changein the water sector policy established by Law No. 23.696 to allow privatization of OSN.MEOSP and the Bank agreed to amend the loan by reallocating US$5.3 million from OSN(PART B) to ETOSS (Part A) and canceling US$15.2 million from the EPOS sub-project(Part C). The reallocation was used for the strengthening of the organizational andoperational capacity of ETOSS. Later, due to the lack of local counterpart funds toconclude the C6rdoba rehabilitation and expansion component, two additionalamendments were accepted by the Bank, to reduce the loan to US$38.3 million. Afterthree extensions, the closing date was June 30, 1997. After loan closing, an additionalUS$1.6 million of undisbursed funds were canceled (Table 6).

18. Disbursements did not follow the appraisal estimates as shown in Table 7. Thedisbursements were initiated two years later than expected in appraisal and the bulk ofdisbursement occurred between 1989 and 1993.

9

E. Project Results

Changes in Project Description

19. Funds allocated to OSN were used to support the financial evaluation of theprivatization of the water and sanitation systems of Metropolitan Buenos Aires, toprepare the bidding documents, the concession contract and the regulatory framework.The approved loan amendment allowed use of the proceeds originally allocated to OSN tostrengthen the organizational and operational capabilities of ETOSS, through theprovision of technical assistance and the acquisition and utilization of equipment.

Physical and Institutional Results

20. Once the Federal and Provincial Governments decided to support the privatizationprocess, project targets defined at appraisal were adjusted.

(a) By November 1988, SRH had completed the preparation of the National Waterand Sanitation Plan (Part A); however the plan was never implemented due to the changeof the sector strategy of the government based on private sector operation of the sectorand independent regulatory agencies.

(b) The organizational structure of ETOSS was defined, as well as its administrativeprocedures, personnel policies, and training needs. An evaluation of Aguas Argentinas'sewerage expansion plan, which modified the plan presented at the time of the bidding ofthe concession, was contracted to a panel of international experts. An important study toreview the economic regulation of the concession and define a new tariff structure was notexecuted because unjustified long delays of ETOSS in the selection of consultants. TheBank assigned the highest priority to this study and justified the third extension of theclosing date of the loan to finance it.

(c) To implement Part B of the project, in June 1988, OSN selected a Germanconsulting firm to evaluate the operational performance of the utility. The firm completedthe study but its recommendations were never implemented. Because of theGovernment's decision to privatize the services, OSN decided it would not be appropriateto implement recommendations such as the improvement of the commercial systembecause the future concessionaire most likely would use its own system. For the samereasons, OSN did not adopt the rehabilitation investment plan. However, the informationcollected and the analysis presented by the consultant were useful to prepare theprivatization of OSN.

(d) EPOS prepared the institutional improvement program (Part C), but it was onlymarginally implemented. The physical sub-project components were partially completed.Los Molinos water treatment plant is working at 30 percent of its design capacity, becauseof a contractual dispute with the contractor which impeded the completion of the plant,and concluded with the takeover of the works by EPOS. The channel of raw water to feedthe plant was built by the Province and the Municipality of Cordoba. Most of the works

10

that were not built with the support of the loan have since been included in the first five-year investment plan of the private concessionaire, Aguas Cordobesas.

(e) DIPOS fully implemented Part D of the project.

21. Table 8 contains the key indicators for project implementation. The performanceof OSN and EPOS was not satisfactory. DIPOS partially complied with the indicators.OSN and EPOS gave priority to privatization which made implementation of the projectlower priority as the new operators would assume responsibilities for operationalimprovements and physical investments. OSN was privatized in May 1993, DIPOS inDecember 1995, and EPOS in May 1997.

22. In the three localities (Buenos Aires, Cordoba and Rosario), the newconcessionaires have given the highest priority to the execution of an operational andcommercial improvement programs similar to the one proposed in the project. Theseinclude: (i) revamping the commercial system; (ii) aggressive metering; (iii) updatedcadaster of facilities and customers; and (iv) sectorization of the water distribution system.The performance targets established in the concession contracts in the three utilities aremore ambitious than the monitoring indicators of the project. For example, in BuenosAires, during the first year of operation, 40,000 water meters were to be installed for largenon residential consumers, and 2,600 valves were rehabilitated or renovated.

Financial Performance

23. Financial projections were not included in the SAR. The financial informationprovided in the SAR covered period 1982-1984, of which only OSN presented auditedstater ents for years 1982 and 1983. The SAR stated that the financial information ofOSN and EPOS was unreliable. Hence, the financial performance of the utilities includedin the project has not been assessed. However, the financial performance of theprivatized utilities in Buenos Aires, Rosario and Cordoba has improved dramatically whencompared with the performance of the utilities previous to privatization. This improvedperformance, however, is only partially related to the project, in spite of the strongsupport provided to the privatization efforts and the catalytic role of the Bank inpromoting the sectoral reform in the country. Information of these private utilities andtheir corresponding regulatory entities is summarized below:

(a) - Aguas Argentinas, a consortium headed by Lyonnaise des Eaux, won the biddingprocess to provide water supply and sanitation services to the Metropolitan Buenos Airesarea. Aguas Argentinas has been operating the service since May 1993. The impact of aprivate operator has been felt as Aguas Argentinas has decreased the water tariff by 17percent, while increasing OSN's billings from $300 million in 1992 to $375 million in1996, a 25 percent increase, and increasing the six month collection ratio from 86 percentin 1992 to 89 percent in 1997.

11

(b) ETOSS, the regulatory agency for Metropolitan Buenos Aires, has yearlyoperating expenses of about US$10.0 million, which are financed by 2.67 percentsurcharge on the billing amounts.

(c) Aguas Provinciales de Santa Fe, a consortium headed by Lyonnaise des Eaux,replaced DIPOS in all main cities of the province, including Rosario. Since December1995, Aguas Provinciales has been operating the water supply and sanitation service forcities with more than 30,000 inhabitants, under a similar scheme to the one followed inBuenos Aires. As a consequence of the privatization process, the average water tariff wasreduced from 0.34 to 0.29 US$/m3, which exceeds the expected tariff calculated duringappraisal. Towns in the province with less than 30,000 inhabitants are served bycooperatives, and municipal services, and by a "residual company" in those areasformerly with DIPOS, but not transferred to the private concessionaire.

(d) Ente Regulador de Servicios Sanitarios (ENRES) is the regulatory agency for theProvince of Santa Fe, and its expenses are covered by a 4.90 percent surcharge on thebilling amount of the concessionaire and 2.60 percent surcharge on the-billing of thecooperatives and municipalities. Its annual budget is of about US$3.5 million.

(e) Since May 1997, Aguas Cordobesas, a consortium lead by Lyonnaise des Eaux isoperating 75 percent of the water system of the city of Cordoba. The remaining 25percent of the city has been served for years by small water companies using groundwater.This scheme will continue but the small water companies are now entitled to buy bulkwater from the concessionaire. The city sewers have been operated by the municipalitysince 1990. The rest of the water and sewerage systems of the province are operated bycooperatives and municipalities. As a consequence of the privatization process, theaverage water tariff in the city of Cordoba, served by Aguas Cordobesas, were reduced by8.2 percent.

(f) Regulation in the province of Cordoba is under the responsibility of the Direccionde Aguay Saneamiento (DAS), which is also responsible for providing technicalassistance to small water companies, and for construction and management of smallirrigation systems, flood control and other hydraulic works.

(g) Although all three winning consortiums were lead by Lyonnaise des Eaux, thebidding process for competition for the market was responsive. In the city of BuenosAires and Santa Fe three consortiums participated in each of the bidding processes, whilein the city of C6rdoba there were two participants.

Economic Reevaluation

24. At appraisal, internal rates of return (IRR) were calculated only for twocomponents of the C6rdoba subproject (65 percent of the project cost). The estimatedIRR for the rehabilitation of facilities and expansion component was 10 percent, whereasthe IRR for the operational improvement component was 44 percent, yielding a weightedIRR of 15 percent.

12

(a) For C6rdoba, the operational improvement component was not executed, whilethe rehabilitation and expansion component was partially executed. The water treatmentplant is working at 30 percent of design capacity. The IRR of the Cordoba subproject isless than 5 percent, using the economic evaluation model of the appraisal.

(b) The OSN subproject anticipated for Buenos Aires was not executed.

(c) The Rosario subproject was fully executed. An estimated IRR of 44 percent hasbeen calculated.

Impact on the Poor

25. The project was not designed to benefit directly the poor since it was to addressrehabilitation of existing services (largely for non-poor consumers). However, thebenefits derived from the overall improvement of the operational system of Rosario andthe increase in water production in Cordoba are presumed to have a marginal impact onthe low income population in these two cities.

F. Project Sustainability

26. The project, as originally designed, would not have been sustainable even aftertaking into consideration the successful implementation of the Rosario component.However, it is expected that the private concessionaires have much better prospects tosustain good financial and operating performance and improve the quality and coverage ofthe water and sanitation services. Sustainability can still be undermined by the weaknessesof regulatory entities which must be improved by reinforcing their institutional and legalframework, and increase their independence from the Government.

G. Bank Performance

27. At identification and appraisal the Bank supported the strategy of the Governmentto improve performance of decentralized public utilities. However, the Bank failed toidentify some fundamental flaws of that strategy. First, the Bank underestimated theextent of deterioration and the lack of constitutional capacity in the sector/participatingprovinces. The complexity generated by multiple executing agencies, and the weakinstitutional capacity of provincial utilities was not well assessed. This is demonstrated bythe fact that two thirds of the project cost was allocated to the weakest provincial utility(EPOS). Second, tariff systems when not associated to metered consumption generatewidespread economic distortions, wasteful use of water, and constraints the financial self-sufficiency of utilities. The Bank also failed to properly recognize the risk of a lack ofcounterpart funds of OSN and provincial utilities due to the Argentine economic crisis atthe moment of appraisal. The project was designed to finance multiple activities whichrequired a well tuned coordination capacity, and experience in Bank financed projects.This capacity did not exist.

13

28. During the period of economic instability (1986-89), moreover, the Bank did notreassess the likelihood of realizing the project objectives, in light of the fiscal problemsfacing the Borrower and provinces. However, once the Government decided to privatizethe services under the responsibility of OSN in the Metropolitan Buenos Aires, the Bankwas flexible in changing direction and supporting the privatization process promptly anddecisively. During that period from 1990 to 1993, the Bank supervision was intense andeffective. Unfortunately, the Bank allocated limited resources to supervise theimplementation of the works executed by EPOS, which faced important technical andadministrative problems. At that stage of project execution, more frequent supervisions toC6rdoba's component may have given better results.

29. Additionally, the Bank did little to strengthen COFAPYS and the other executingagencies over the life of the loan. Faced with an extremely complex federal-provincialsetting and wide-spread institutional weakness, the Bank was indecisive and not able toprovide a clear picture of the extent to which institutional reform was needed. There wereclearly fundamental issues of autonomy and capacity which were left unaddressed. Hadthese issues been addressed, the entities may have been able to play a more decisive role inthe overall project implementation.

H. Borrower Performance

30. In the initial years of implementation, the project was slow due to delays inprocessing of procurement documents and a lack of experience in the executing agencieswith Bank procedures. The high rates of inflation in the period 1988-1990 contributed tofurther delays in project implementation.

31. When the Federal and Provincial Governments decided on privatization, theproject was affected in different forms: (i) OSN abandoned the objectives of the projectand focused only on the privatization; (ii) DIPOS continued investing in operational andinstitutional improvements of its system, fundamentally in critical areas of the business,such as timely bill issuing and improving collection and negotiating tariff adjustments; (iii)EPOS concentrated on the construction of the water treatment plant, and paid no attentionto improve its operational and commercial efficiency; (iv) SRH first and COFAPYS later,focused only in managing the loan disbursements, but did poorly in the actualimplementation of the overall Project components; and (v) ETOSS only partiallyimplemented the operational manuals financed under the project, and was incapable toovercome bureaucratic hurdles within the administration to contract a much neededconsultancy designed to review the economic regulation of the concession, and design anew tariff structure.

L Assessment of outcome

32. The project was not successful in meeting its original objectives, even though theobjectives of increasing the efficiency of services provided by water utilities in BuenosAires, Rosario and Cordoba, will be achieved. This improvement and a better quality of

14

service will not be achieved through improved public-managed utilities as envisaged atappraisal, but by private concessionaires. It is expected that the private provision of waterand sanitation services would lead to a faster and more sustainable improvement in thecoverage and quality of services as well as to a better allocation of investment resources.This outcome can not be fully attributable to the project, but to the decision of theGovernment to change the institutional model to provide water and sanitation servicesthrough private concessionaires and limit the role of the public sector to the regulatoryfunction. The Bank was flexible and provided a strong support to the Government'sdecision to privatize and played a key catalytic role through the reform process.

J. Future operation

33. The three utilities now under private operation will continue to operate that wayand are likely to demonstrate continued operational improvements. However, muchremains to be done especially to: (i) extend the privatizationl restructuring process toother provincial water utilities; (ii) reinforce the regulatory framework; (iii) developpolicies/strategies/processes to ensure extension of water and sewerage services to poorareas; and (iv) finally, to progress in the sewerage sub-sector from collection to treatmentand to improve drainage systems. It was expected that a series of operations would beneeded to complete this agenda. The first follow-up project was the Water Supply andSewerage Sector Project (Loan 3281-AR) approved in December 1990, which aimed atpromoting greater sector efficiency and financial viability, service coverage expansion,improvement in service quality, and encouragement of private sector participation. Theproject has suffered long implementation delays, essentially due to the executing agency'spoor performance and continued institutional instability. Proceeds of the loan have beenused for technical assistance for institutional reforms in several provinces, includingestablishment of regulatory agencies, tariff studies, and preparation of bidding documentsfor concessions. To continue supporting Argentina's water and sanitation sector, a newproject is under preparation. The proposed project will build upon the lessons learnedfrom the two previous projects and complement them by supporting a second generationof privatization of water utilities in medium size cities. In parallel, EDI/BM have beensupporting strengthening of the provincial regulatory agencies and the Bank has agreed toprovide reimbursable technical assistance to ETOSS, for expert advise in post-privatization issues.

K. Lessons Learned

34. This project had a very long gestation period, about 6 years, from identification in1979 to appraisal in 1985. The implementation of the project was even longer, about 12years, from 1985 to 1997. During these 18 years, the water and sanitation sector inArgentina was subject to fundamental changes. In the early eighties, the break-up of thenational monopoly of OSN into decentralized provincial utilities, followed ten years laterby the bold decision of the Government to privatize water and sanitation services inBuenos Aires, the largest of the water utilities in the country. Lessons from this projectare relevant to many other countries, particularly in the LAC region.

15

Policy Lessons

(a) Decentralization of a national water company without an adequate policyframework is not sustainable. Creation of provincial utilities was not enough toimprove sector performance. Breaking-up the national monopoly of OSN was astep in the right direction, unfortunately, in the absence of a sound public policyframework. The Government, in the middle of a deep fiscal crisis, incapable tocontinue subsidizing the operations and investment of the sector made the decisionto transfer the responsibility of service provision to regional governments. Thisdecision was made without creating at the same time the environment to promoteeconomic efficiency, and competition. Therefore, decentralized utilities carbon-copied the regulatory environment of OSN with excessive political interference inthe appointment of managers, and the approval of budgets and investment plans.The wrong tariff regulations remained intact, with the only difference that thepower to approve new tariffs was transferred to the sub-national jurisdictions, atthe provincial or regional level. The performance of most provincial utilitiesdeteriorated even further. This situation was exacerbated by the macroeconomiccrisis in the country during most of the eighties.

(b) Privatization of water utilities requires a different approach. Creation ofprovincial utilities was not enough to improve sector performance. When theGovernment decided in 1979 to decentralize water services, breaking-up thenational monopoly of OSN was a step in the right direction; unfortunately, it wasdone in the absence of a sound public policy framework. Therefore, thedecentralized utilities carbon-copied the regulatory environment of OSN withexcessive political interference in the appointment of managers, and the approval ofbudgets and investment plans. The wrong tariff regulations remained intact, withthe only difference that the power to approve new tariffs was transferred to sub-national jurisdictions at the provincial or regional level. The performance of mostprovincial utilities deteriorated even further. This situation was exacerbated by themacroeconomic crisis in the country during most of the eighties.

(c) Privatization of utilities requires development of a sound regulatory capacity inthe public sector. The establishment of effective regulatory agencies is asimportant as private sector participation. However, in the case of ETOSS thistask is taking longer than anticipated mainly because the culture of regulatingpublic utilities is an alien concept in Argentina and in LAC. Hence, the new role ofthe public sector as a regulator of water utility services is not well defined, nor wellunderstood by the society and the political establishment. The main lesson of theproject in relation to ETOSS is that the creation of regulatory agencies to promotecompetition, to improve efficiency, and to represent the interest of consumers is atask that demands a major concentration of high-quality Bank assistance.

16

Project Lessons

(e) Project design must beflexible to respond to changes in country policies. Whenthe administration decided in late 1989 to allow privatization of OSN andestablished a Privatization Committee, the Bank's support and commitment werecritical in making a success of the effort. However, such an important change inthe project concept should have been done on the basis of a comprehensive reviewof the project's scope and objectives. In light of the changed policy stance in thefederal government in 1989-90.

(f) Macro-context and Sector policies should be carefully evaluated. Thedecentralization policy of the government, while well oriented, lacked aframework of incentives to promote efficiency in the provincial utilities. With thelack of clarity in government policies at the time of appraisal (February, 1985) andtaking into consideration the delay to make the loan effective (26 months), itwould have been advisable, at least, to re-evaluate the project concept and the risksassociated in its implementation. Such a decision would have been fully justifiedby the rapidly changing institutional environment of the sector during 1985-1987,and the deterioration of the overall economic conditions.

(g) Sectorconstraintsand issuesshould be reflected inproject design. As part ofthereview of the government strategy, issues related to tariff design, budgeting,investment decisions, personnel policies, financial management practices, level ofmanagement autonomy, etc. should be carefully identified as part of projectpreparation or through economic sector work. The project failed to identify mostof these issues, therefore options to address them were not included in projectdesign. Moreover, at the time of appraisal, OSN performance was rapidlydeteriorating: revenues in 1984 did not cover operational costs, mainly because ofalmost 100 percent increase--in real terms--of personnel costs in 1983. The Bankhas only conducted a sector review in 1992.

(h) Anticipate requirements of technical assistance. The technical assistancecomponent of the project, about US$ 2.0 million, or 3.3 percent of the loan wasdisproportionally small when considering the challenge of the major sector reformsunderway at the time of project preparation. Through loan amendments, technicalassistance was increased to US$18.5 million, corresponding to 49 percent of theloan amount, after partial cancellation of the loan.

(i) Develop adequate implementation procedures during project preparation. Theinexperience of executing agencies in the implementation of Bank-financedprojects, and the risks associated with frequent changes of key project officialsshould be addressed during project preparation. A detailed Project OperationManual should have been a condition of appraisal (as now is the practice). Theseprocedures would help to maintain the institutional memory regarding the projectimplementation procedures, and would also help to establish continuity in projectadministration for future management.

17

(a) Address inexperience of counterpart agencies through continuous training.Starting from the early stages of project implementation, the Bank must providetraining to the staff of the executing agencies. Training programs should berepeated from time to time to address the tumover of government officials.Training should be focused on the content of the Project Operation Manual and onprocurement procedures. A considerable part of the implementation problems areassociated with procurement issues as demonstrated by the numerous procurementcorrespondences found in the project files between the agencies and the Bank, onstandard procurement matters.

(k) Complex projects require more supervision than normal. The frequency of Bankmissions would be increased, and expert consultant support should be sought whencomplex technical/procurement problems arise. Problems encountered in theimplementation of civil works by EPOS could have been minimized with adequatetechnical and administrative support.

18

PART 11: STATISTICAL ANNEXES

Table 1. Sanuary of Asseannts

A. Achievement of obiecdives Substantia Partial Neeluidble Not anlUcable

Macroeconomic policies E ElSector tariffpolicies [ E El E

Financial Objectives E l El ElIstitukional Development EJ EPhysical Objectives E EJ E E

Poverty Reduction E E E El

Gender Issues [ E E El

Other social objectives E E E El

Environmental objectives n El E OPublic sector management El El E E

Private setor development E E E El

B. Prolect sustainability Likelv Unlikel Uncertain

[RI 1: 1:HLuhlv

C. Bank nerformance satisfactory Satisfactory Deficient

Identification IEl El 1

Preparation assistance E El Elz~~E El El

Supervision E E El

HiLuhl-vC. Borrower perfornance satisfactorv Satisfactory Deficient

Preparation E E El

Implementation E E El

Covenant compliance El ElOperation (if applicable) E El E

E]D. Assessment of outcome Satisfactorv Satisfaetorv Unsatisfactory Unsatisfactorv

El 0 El El

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Table 2. Related Bank Loans/Credits

Loan Title Purpose Year of approval Status

Previous operations

NA

Following Operations:

Water Supply and To promote greater sector efficiency and 1991 DisbursingSewerage Sector Project financial viability; improve quality of services;(L-3281-AR) encourage private sector privatization

Water Sector Reform To support the privatization process in several 1999 NegotiationsProject localities: rehabilitation of existing Expected

infstructure, elimination of bottlenecks inexisting waterworks, improvements on theoperational control and commercialization andemergency works

20

Table 3. Project Timetable

Steps in Project Cycle I Date Planned I Actual DateIdentificationl

Appraisal Nov. 1984 Feb. 25, 1985Negotiations Apr. 1985 Oct. 10, 1985Board Presentation May. 1985 Dec. 10, 1985Signing Nov. 26, 1986Effectiveness Apr. 24, 1987

roject Completion Jun. 30, 1997Disbursement Aug. 6, 1997

21

Table 4. Project Scope and Implementation

Project component Actual Status

ART A: National Water & Sanitaffon Planational Water and Sanitation Plan Jun-89 Studies prepared

tutional Streghitening of ETOSS Jun-95 Partially implemented

xpertPanel to review Master Plan Sep-96 Executed

ariff Study Not executed

ART B: Buenos Airesonsultants to privatize OSN May-93 Implemented

erational Improvement Promam

onsumption Metering (200.000) Dec-90 Not executed (*)oduction Metering Dec-89 Not executed

Pitometer Survey Mar-89 Not executedMapping Sep-89 Not executed

ater Distribution Renovation (700 Km) Dec-90 Not executedDistnbution System Management Jun-88 Studies preparedCommercial SystemUpgrading Dec-88 Studies preparedechnieal Assistanceechnical assistance to OSN Dec-88 Studies prparedARTC: Cordoba

nerational Improvement Prognamonsumption Metering (60.000) Jun-89 Not executedoduction Metering Mar-89 Not executed

itometer Survey Dec-88 Not executed[!dapping Dec-87 Not executed

aterDistribution Renovation (275 Km) Dec-88 Not executed*istnbution System Management Dec-87 Not executed

.CommercialSystem Upgrading Dec-89 Not executedeh& Ext. of Cordoba's water system

Molinos Channel construction Dec-92 Executed by MunicipalityMolinos water treatment plant Dec-93 90% executed

Suquia water treatment plant Dec-89 Not executedster pumping stations Dec-92 Not executed

Watermains Dec-91 Executed by MunicipalityTechnlea Assistanceechnical assistance to EPOS Dec-88 Not executedPART D: Rosario (Santa Fe)

Onerational Imurovement Prom-am

onsumptionMetering (4.000 Km) Jun-89 Executedoduction Metering Dec-87 Executedtometer Survey Mar-89 ExecutedMapping Dec-88 Not exeuted

ater Distribution Renovation (300 Krm) Dec-89 Executedstribution System Management Dec-89 Not executed

_mmercialSystem Ugang Dec-87 Executed

(') Funds reallocated to support the privatization of OSN and the institutional strengthening of ETOSS

Table 5. Project Cost and Project Financing(USS '000)

_____________________ | Estimated at appraisal Actual PercentCategory IBRD Local I Total IBRD I Local Total Change

Part A: SRH/COFAPYS/ENHOSAWorks 0 0 0 0

130 160 290 143 26 168 -42%Consulant's services andtraiing 870 0 870 4,515 813 5,328 512%Total Part A: 1,000 160 1,160 4,658 838 5,497 374%

Part B: OSN/Buenos Airesworks 4,100 5,218 9,318 0 0 -100%

10,000 9,122 19,122 0 0 -100%oultnt's services and training 1,900 0 1,900 10,636 1,915 12,551 561°/a

ITotal Part B: 16,000 14,340 30,340 10,636 1,915 12,551 -59%

Part C: EPOS (Cordoba)Works 24,400 44,030 68,430 13,073 17,918 30,991 -55Goods 3,700 5,370 9,070 19 3 23 -100%Consulant's services and training 900 0 900 387 70 457 -49%ITotal Part C: 29,000 49,400 78,400 13,480 17,991 31,470 -60%Part D: DIPOS (Rosario) IWorks 950 1,209 2,159 4,336 4,929 9,265 329%Goods 3,950 3,331 7,281 431 883 1,314 -82%|Consultant's services and training 1,100 0 1,100 711 128 840 -24%[Total Part D: 1 6,000 4,540 10,5401 5,478 5,940 11,418 8%I[Interests & Other Charges 8,000 8,0001 4,078 4,0781 49%|Total j 60,000 68,440 128,4401 38,331 26,683 65,0141 -49%1

(*) Does not include US$ 46 million of investment cost of the Alimentador Sur and the Los Molinos Channel, bothfinanced by the Municipality of Cordoba

Table 6. Disbursements by Category: Original, Revised and Actual(US$ '000)

Orifinal Amendment Amendment Amendment Amendment Actual UndisbursedDec. 26, 1986 March 3,1991 June 25,1991 June 11, 1993 August 8, 1995 June 30, 1997 June 30, 1997

1 Part A of the Project 1,000 1,000 1,000 6,300 6,300 4,658 1,642(a) Goods 130 130 130 1,000 1,000 143 857(b) Consultants' services and training 870 870 870 5,300 5,300 4,515 785

2 Part B of the Project (OSN) 16,000 16,000 16,000 10,700 10,636 10,636(a) Works 4,100 4,100 4,300 0 0 0 0(b) Goods 10,000 10,000 3,300 0 0 0 0(c) Consultants' services and training 1,900 1,900 8,400 10,700 10,636 10,636 0

3 Part C of the Project (EPOS) 29,000 29,000 29,000 17,500 13,480 13,480 0(a) Works 24,400 24,400 24,400 16,200 13,073 13,073 0(b) Goods 3,700 3,700 3,700 100 19 19 0(c) Consultnts' services and training 900 900 900 1,200 387 387 0

4 Part D of the Project (DIPOS) 6,000 6,000 6,000 6,000 5,478 5,478 0(a) Works 950 4,200 4,200 3,900 4,336 4,336 0(b) Goods 3,950 700 700 800 431 431 0(c)Consulants'servicesandtraining 1,100 1,100 1,100 1,300 711 711 0

Interest & other charges 8,000 8,000 8,000 4,270 4,078 4,078 0

djustments 0 0 0 0 0 0

otal for all 13 categories 60,000 60,000 60,000 44,770 39,972 38,331 1,641

Table 7. Loan Disbursements: Cumulative, Estimated and Actual(US$ million)

FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97

A4praisal 6.00 14.80 27.90 35.90 43.20 50.70 55.50 58.30 60.00 60.00 60.00 60.00

6.00 11.43 19.52 24.46 28.97 33.60 36.56 38.26 39.97 39.97 39.97 39.97

ctuSal 2.30 6.58 12.06 17.85 23.27 30.40 34.44 37.60 38.33 38.33AtulD as %ofSAR 0.0% 0.0% 8.2% 18.3% 27.9% 35.2% 41.9% 52.1% 57.4% 62.7% 63.9% 63.9%

as %of Revised 11.8% 26.9% 41.6% 53.1% 63.6% 79.5% 86.2% 94.1% 95.9% 95.9%

D of findisbursement August 6,1997

Table 8. Key Indicators for Project Operations

Public Utilities Private Operator1986 1991 1997

Indicator City SAR/Actual SAR* Actual Actual

Employees per 1000/water connections Buenos Aires 9.9 7.5 7.4 2.0Cordoba 7.5 5.8 6.6 5Rosario 4.7 4.5 5.8 2.5

Number of water meters installed Buenos Aires NA 200,000 0 350,000Cordoba NA 60,000 0 30,000Rosario NA 4,000 7,500 25,000

|Kms of distribution network built/replaced/rehabilitated Buenos Aires NA 2,000 0 NACordoba NA 550 0 NA VRosario NA 400 181 248

Revenue collected to amount billed (/o) Buenos Aires 90 96 71 89Cordoba 86 96 60 70Rosario 86 96 89 91

Metered conections to total connections (°) Buenos Aires 10 22 3 10Cordoba 6 24 10 6Rosario 5 8 5 6

Table 9. Studies Included in the Project

No | Study |Exgec.y | Purpose | Impact of Study |Cost

The study was not implemented. A the time, it was completedNational Water and MOSP To permit the decentralized sector in October 1988, the country was facing difficult 1.0Sanitarion Plan to function efficently macroeconomics problems. The following year, the new

administradion, authorized the privatization of OSN

Recommendations were not implemented since the2 Operational improvement OSN mprote.mgent idn billing, t r8c tion° Government called for the privatization of OSN. The study 5.63

provided information to bidders for the concession.Preparation of the feasibility study

3 Pnvatztion OSN and bidding documents for the The results of this study allowed OSN to privatize the system, 4.1privatization and assist OSN in the which was transferred to the concessioner in May 1993process a.

4 Training OSN Train OSN's staff 0.156 Organization and assistance Assist in organization, Helped ETOSS in its organization and staffing, in

6 to stengthen ETOSS ETOSS establisment of procedures and establishing procedures for the regulation activities and intraining of ETOSS's staff training of its staff

Table 9. Studies Included in the Project

No Study Exec. Purpose Impact of Study Cost__ . P~~~Alency] lms

The study recommends: to prepare a sanitation master plan forReview of.the expansion AdvisETOSSontheexpansio Bs. As., establish a suitable tariff structure, improve data on

7 plan of the AdvseETlSETOSSplnosthe water use, build the 4th cloaca maxima (4th main sewercolector) and provide primary and secundary treatment atBerazategui

To have a description and analysis8 OSN' concession process ETOSS of the process of consession and the 0.1

lessons learnt from it

9 Operational Improvement of EPOS Improvement in billing, collection, The consultant prepared the diagnostic for the operational 0.1lEPOS accounting and system operation improvement program. It was not implemented

10 Operafional bImprovement DIPOSImprovement in the System DIPOS improved the efficiency of its system operation 0.20operationFeasibility for

11 Rehabilitation of the DIPOS To increase the daily production Rehabilitation works are being executed. The concessioner is 0.45Rosario water treatment from 350,000 to 485,000 m3 in charge of these worksplant

Total 0.85

Table 10. Status of Legal Covenants

Loan Agreement

Executing agency: COFAPYS

Section I Covenant Present Description of covenant CommentsType Status

2.02 3 C Opening and maintaining a Special Account

3.01 10 C To maintain the Unidad Coordinadora del Proyecto

4.01 (b) (i) 2 CD Furnish audit report of Part A of the Project

4.01 (b)(i) 2 CD Furnish audit report of Special Account

Project Agreement

Executing agency: OSN

Section I Covenant Present Description of covenant CommentsType Status

2.02 9 C Furnish an investment, operational and financial recovery plan 00

2.03 (a) 9 CP Progress Report

2.03 (b) 9 CP Furnish an annual purchase program

3.01 5 C Carry out operations with appropriate public utility practices

4.01 (a) I CP Maintain financial records of OSN and the Project

4.01 (b)(c) 1 CD Furnish annual audit reports

4.02 (a) 2 C Total revenues equivalent to not less than the sum of its operating expenses and debt serice

4.02 (b) 9 CD Furnish financial projections for the current and following three years

Table 10. Status of Legal Covenants

Project Agreement

Executing agency: EPOS

Section Covenant Present Description of covenant CommentsType Status

2.01(b)(ii) 10 CD Complete the Los Molinos Channel Executed by Provincial Government

2.02 9 C Furnish an investment, operational and financial recovery plan



3.01 5 CP Carry out operations with appropriate public utility practices

4.01 (a) 1 CP M_ntain financial records of EPOS and the Project

.01 (b)(c) 1 CD Furnish annual audit reports

.02 (a) 2 NC Toal revemues equivalent to not less than the sum of its operatingexpenses and debt service

.02 (b) 9 CD Fumish financial projections for the cut and followingthree years

Table 10. Status of Legal Coveamts

roject Agreementiuting agency: DIPOS

Section Covenant Present Description of covenant CommentsType Status

.02 9 C Furnish an investment, operational and financial recovery plan



3.01 5 C Carry out operations with appropriate public utility practices

.01 (a) 1 C Maintain financial records of DIPOS and the Project

.01 (b)(c) 1 CD Furnish annual audit reports

.02 (a) 2 C Total revenues equivalent to not less than the sum of its operating expenses and debt service

CD Furnish financial projections for the current and following three years

Coenant Tvoes Present statusI = Accounts/audits C = Covenant complied with2 = Financial performance/revenue generation from beneficiaries CD = Complied with after delay

3 = Flow and utilization of project funds CP = Complied with partially

4 = Counterpart funds NC = Not complied with

5 = Management aspects of the project or executing agency6 = Environmental covenants

7 = Involuntary resettlement

8 = Indigenous people

9 = Monitoring, review and reporting

10 = Project implementation

11 = Sectoral or cross-sectoral budgetary or other resource allocation12 = Sectoral or cross-sectoral policy/regulatory/institutional action

13 = Other

31

Table 11. Resources: Mission.

Stage or project Moily Number Days in Specialized staff skillscycle M of persons the field represented

roueh annralsalreparation 1 May-79 3 ENG, 2 ECONreparation 2 Jul-79 4 2 ENG, ECON, FAeparation 3 Dec-79

reparation 4 Jun-80 3 ENG, ECON, FAreparation 5 Sep-96 1 15 ECONreparation 6 Feb-81 1 5 ECONreparation 7 Feb-84 1 5 ENGreparation 8 May-84 4 56 ENG, ECON, 2 FAeparation 9 Aug-84 4 36 ENG, ECON, 2 FA

raisalission 1 Feb-85 5 105 2 ENG, ECON, 2 FA

Aunraisal through Board anorovalMssion I Dec-85 2 ENG, FASupervisionsMission 1 Mar-86 2 24 ENG, FA

ission2 Jul-86 2 18 ENG,FAission 3 Oct-87 3 57 ENG, ECON, FAssion 4 Mar-88 2 20 ENG, ECON

ission 5 Apr-89 1 7 FAission6 Jul-89 2 30 ENG, FAssion 7 Jun-90 3 38 2 FA, 1 ECOission8 Aug-90 1 9 ENG

Mission 9 May-91 2 34 ENG, FAMission 10 Nov-91 2 22 ENG, FAMission 11 Dec-91 2 16 ENG,FA

ssion 12 Mar-92 4 44 ENG, 3 FAission 13 Dec-92 2 22 ENG, FAMssion 14 Oct-93 2 22 ENG,FAssion 15 Aug-94 1 15 ENGMssion 16 Mar-95 2 5 ENG, FAission 17 Apr-95 1 12 FAssion 18 Jun-95 1 2 ENGMision19 Jul-95 6 12 3 ENG, 2 FA, ECONssion 20 Nov-95 2 4 ENG, FAission 21 Mar-96 3 3 ENG, FA, ECONssion 22 Aug-96 1 2 ENGMsion 23 Mar-97 2 4 ENG, FAssion 24 Jun-97 1 2 ENG

Note: The above list aempt to include a11 fomal and informal field vii to the calnt, howeversome aditional shoht vim fim Bank daffmemben and consultants made ither from the Bank

ofce in Buenos Aires at the oppounity of odher Bank maons may have been onmited&

32

Table 12. Bank Resources: Staff Imputs a/

| Actual

Stage of Project Cycle Weeks | US$(000)Peparation to appraisal 31.7 52.9Appraisal to Baord approval 91.4 171.6Supervsion 185.5 463.2Completion 8.6 18.6Total 317.2 706.3

a/ Does not include inputs for preparation from 1979 to 1983.

@ 33 Appendix A

9D1eW.M14 4 IG :A98 1.998s

Buenos Aires, i1 2 MAY 1998

Ing. Abel Mejfa BentacourtBANCO MUNDIAL (I 5149)

REF: Prestamo 2641- Informe Evaluaci6n FinalPrimer Proyecto Argentino de Suministro de Agua Potable

El documento preliminar presentado por el Banco refleja adecuadamente elperiodo de crisis institucional transitado por el Estado Nacional y Provincial enla administraci6n de sus empresas prestadoras de servicios publicos.

En particular el sector saneamiento con una imperfecta descentralizaci6n de laex OSN, efectuada en 1980, origin6 un deterioro que no pudo ser paliado con elapoyo de operaciones crediticias como la referida ni con el aporte tecnico de losorganismos multilaterales.

Ello promovi6 ia decisi6n politica de transformar los servicios a partir de suconcesionamiento al sector privado. Esta transici6n ha sido caracterizada por lasdificultades propias de todo proceso de cambio estructural.

Sin embargo ha permitido mejorar operativa y comercialmente la empresaprovincial DIPOS - SANTA FE, que en una posterior operaci6n financiada por elBIRF ha concluido su proceso de privatizaci6n.

Asimismo se establecieron las bases y condiciones necesarias para transformarotros Entes provinciales y municipales como el caso de la provincia de Misiones.

Por otra parte el Credito permiti6 detectar las dificultades existentes en el SectorSaneamiento, sus prestadores y la relaci6n entre el Banco y el Gobiemo Federal.Con las iecciones aprendidas en el desarrollo de los Programas Aguas I y 11,que financiara el Banco Mundial, se esta formulando un nuevo prestamodestinado a extender la privatizaci6n de servicios en ciudades medianas.

Atentamente

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