for official use only report no: pad3300 international...

FOR OFFICIAL USE ONLY

Report No: PAD3300

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF US$50 MILLION

TO THE

REPUBLIC OF HONDURAS

FOR A

TEGUCIGALPA WATER SUPPLY STRENGTHENING PROJECT

May 30, 2019

Water Global Practice

Latin America and the Caribbean 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 disclosed without World Bank authorization.

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The World Bank

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 11, 2019)

Currency Unit = Lempira (Lps)

24.5 Lps = US$1.00

1.00 Lps = US$0.041

FISCAL YEAR

January 1 – December 31

Regional Vice President: Axel van Trotsenburg

Country Director: Yaye Seynabou Sakho

Senior Global Practice Director: Jennifer J. Sara

Practice Manager: Rita E. Cestti

Task Team Leader: Marco Antonio Aguero

The World Bank

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ABBREVIATIONS AND ACRONYMS AMDC Municipality of Tegucigalpa (Alcaldía Municipal del Distrito Central) CABEI Central American Bank for Economic Integration (BCIE in Spanish) CERC Contingent Emergency Response Component COMAS Water and Sanitation Municipal Committee (Comité Municipal de Agua y Saneamiento) CPF Country Partnership Framework DLI Disbursement-Linked Indicator EEs Eligible Expenditures EPPs ERSAPS

Emergency Preparedness Plans Water and Sanitation Regulator (Ente Regulador de los Servicios de Agua Potable y Saneamiento)

ESA ESCP

Environmental and Social Assessment Environmental and Social Commitment Plan

ESMP ESRS FM

Environmental, Social, Management Plan Environmental and Social Review Summary Financial Management

FMA Financial Management Assessment Framework Law GDP

Drinking Water and Sanitation Sector Framework Law 2003 Gross Domestic Product

GoH Government of Honduras GRS Grievance Redress Service IDA International Development Association IDB Inter-American Development Bank IFR Interim Financial Report IVA Independent Verification Agent LAC Latin American and the Caribbean Lps Lempiras M&E Monitoring and Evaluation NPV Net Present Value NRW Non-Revenue Water O&M Operation and Maintenance PDO Project Development Objective PIE Project Implementing Entity POE POM

Panel of Experts Project Operational Manual

PCU/AMDC Project Coordination Unit PMC Project Management Consultant PPIAF Public Private Infrastructure Advisory Facility PPSD Project Procurement Strategy for Development SANAA National Autonomous Water and Sewer Service (Servicio Autónomo Nacional de Acueductos

y Alcantarillados) SCD Systematic Country Diagnostic SEFIN Ministry of Finance (Secretaría de Finanzas)

The World Bank

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SEP SIAFI

Social Engagement Plan Integrated Administrative and Financial Information System (Sistema de Administración Financiera Integrada)

SPA Service Performance Agreement STEP Systematic Tracking of Exchanges in Procurement TA Technical Assistance TOR Terms of Reference UEPEX External Project Unit System (Unidades Ejecutoras de Proyectos Externos) UMAPS Municipal Unit of Potable Water and Sanitation of the Central District (Unidad Municipal de

Agua Potable y Saneamiento) USD/US$ United States Dollar WRM Water Resources Management WSS Water Supply and Sanitation WTP Water Treatment Plant WWTP Wastewater Treatment Plant

The World Bank

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TABLE OF CONTENTS

DATASHEET............................................................................................................................................... 5

I. STRATEGIC CONTEXT ...................................................................................................................... 13

A. Country Context .................................................................................................................................... 13

B. Sectoral and Institutional Context ........................................................................................................... 14

C. Relevance to Higher Level Objectives ...................................................................................................... 18

II. PROJECT DESCRIPTION .................................................................................................................... 19

A. Project Development Objective .............................................................................................................. 19

B. Project Components ................................................................................................................................ 19

C. Other Design Aspects .............................................................................................................................. 22

D. Project Beneficiaries ............................................................................................................................... 22

E. Results Chain ........................................................................................................................................... 23

F. Rationale for Bank Involvement and Role of Partners.............................................................................. 23

G. Lessons Learned and Reflected in the Project Design .............................................................................. 24

III. IMPLEMENTATION ARRANGEMENTS ............................................................................................... 25

A. Institutional and Implementation Arrangements .................................................................................... 25

B. Results Monitoring and Evaluation Arrangements .................................................................................. 26

C. Sustainability ........................................................................................................................................... 26

IV. PROJECT APPRAISAL SUMMARY ...................................................................................................... 27

A. Technical, Economic and Financial Analysis ............................................................................................. 27

B. Fiduciary ................................................................................................................................................. 28

C. Legal Operational Policies ....................................................................................................................... 29

D. Environmental and Social ........................................................................................................................ 29

V. GRIEVANCE REDRESS SERVICES ....................................................................................................... 30

VI. KEY RISKS ....................................................................................................................................... 30

ANNEX 1: RESULTS FRAMEWORK, MONITORING AND VERIFICATION PROTOCOLS .................................... 32

ANNEX 2: DETAILED PROJECT DESCRIPTION ............................................................................................ 51

ANNEX 3: DISBURSEMENT-LINKED INDICATORS MATRIX......................................................................... 60

ANNEX 4: ECONOMIC AND FINANCIAL ANALYSIS ..................................................................................... 61

ANNEX 5: THEORY OF CHANGE ............................................................................................................... 67

ANNEX 6: IMPLEMENTATION ARRANGEMENTS ....................................................................................... 68

The World Bank TEGUCIGALPA: WATER SUPPLY STRENGTHENING PROJECT (P170469)

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DATASHEET

BASIC INFORMATION BASIC_INFO_TABLE

Country(ies) Project Name

Honduras TEGUCIGALPA: WATER SUPPLY STRENGTHENING PROJECT

Project ID Financing Instrument Environmental and Social Risk Classification

P170469 Investment Project Financing

Substantial

Financing & Implementation Modalities

[ ] Multiphase Programmatic Approach (MPA) [✓] Contingent Emergency Response Component (CERC)

[ ] Series of Projects (SOP) [ ] Fragile State(s)

[✓] Disbursement-linked Indicators (DLIs) [ ] Small State(s)

[ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country

[ ] Project-Based Guarantee [ ] Conflict

[ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster

[ ] Alternate Procurement Arrangements (APA)

Expected Approval Date Expected Closing Date

24-Jun-2019 15-Jan-2025

Bank/IFC Collaboration

No

Proposed Development Objective(s)

The Project Development Objective (PDO) is to increase the efficiency and reliability of water services in selected areas of Tegucigalpa.

Components

Component Name Cost (US$, millions)


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Component 1. Operationalization of the UMAPS 18,000,000.00

Component 2. Improved water production capacity and efficiency of the distribution network

27,000,000.00

Component 3. Project Management and Technical Assistance 5,000,000.00

Component 4: Contingent Emergency Response Component (CERC) 0.00

Organizations

Borrower: Ministry of Finance (SEFIN)

Implementing Agency: Municipality of Tegucigalpa (AMDC)

PROJECT FINANCING DATA (US$, Millions)

SUMMARY-NewFin1

Total Project Cost 126.00

Total Financing 126.00

of which IBRD/IDA 50.00

Financing Gap 0.00

DETAILS-NewFinEnh1

World Bank Group Financing

International Development Association (IDA) 50.00

IDA Credit 50.00

Non-World Bank Group Financing

Counterpart Funding 76.00

Borrower/Recipient 42.50

Municipalities of Borrowing Country 33.50

IDA Resources (in US$, Millions)

Credit Amount Grant Amount Guarantee Amount Total Amount


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National PBA 50.00 0.00 0.00 50.00

Total 50.00 0.00 0.00 50.00

Expected Disbursements (in US$, Millions)

WB Fiscal Year 2019 2020 2021 2022 2023 2024 2025

Annual 0.00 19.00 8.00 13.00 6.00 3.00 1.00

Cumulative 0.00 19.00 27.00 40.00 46.00 49.00 50.00

INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas

Water

Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks

Gender Tag

Does the project plan to undertake any of the following?

a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF

Yes

b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment

Yes

c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes

SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)

Risk Category Rating

1. Political and Governance ⚫ Substantial

2. Macroeconomic ⚫ Substantial

3. Sector Strategies and Policies ⚫ Low


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4. Technical Design of Project or Program ⚫ Moderate

5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial

6. Fiduciary ⚫ High

7. Environment and Social ⚫ Substantial

8. Stakeholders ⚫ Substantial

9. Other ⚫ Low

10. Overall ⚫ Substantial

COMPLIANCE

Policy Does the project depart from the CPF in content or in other significant respects?

[ ] Yes [✓] No

Does the project require any waivers of Bank policies?

[ ] Yes [✓] No


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Environmental and Social Standards Relevance Given its Context at the Time of Appraisal

E & S Standards Relevance

Assessment and Management of Environmental and Social Risks and Impacts Relevant

Stakeholder Engagement and Information Disclosure Relevant

Labor and Working Conditions Relevant

Resource Efficiency and Pollution Prevention and Management Relevant

Community Health and Safety Relevant

Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Relevant

Biodiversity Conservation and Sustainable Management of Living Natural

Resources

Relevant

Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional

Local Communities

Not Currently Relevant

Cultural Heritage Relevant

Financial Intermediaries Not Currently Relevant

NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential

environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review

Summary (ESRS).

Legal Covenants

Sections and Description Schedule 2. Section 1. A. 1. For the purposes of overall management, implementation and coordination of Parts 1 through 3 of the Project, the Recipient shall cause the Project Implementing Entity to: (a) establish, and thereafter operate and maintain the PCU, until completion of the Project, with staff, resources and terms of reference satisfactory to the Association and adequate for successful implementation of the Project; and (b) without limitation to the provisions of (a) above, not later than sixty (60) days after the Effective Date, employ environmental, social, and labor specialists with qualifications and under terms of reference acceptable to the Association.

Sections and Description Schedule 2. Section 1. A. 2. The Recipient shall cause the Project Implementing Entity under the terms of the Subsidiary Agreement: (a) to carry out Parts 1 through 3 of the Project in accordance with the Project Operational


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Manual, satisfactory to the Association, and setting out, inter alia, the institutional, disbursement, procurement and financial management arrangements for the implementation of said Parts of the Project (including Project-related internal control, budgeting, external auditing, financial reporting and accounting policies and procedures and the Verification Protocols); and (b) not to amend, suspend, repeal or waive any of the provisions of the Project Operational Manual without the Association’s prior written agreement.

Sections and Description Schedule 2. Section 1. B. 1. To facilitate the carrying out Parts 1 through 3 of the Project, the Recipient shall make the proceeds of the Credit allocated to Categories (1), (2)(a) and (2)(b) available to the Project Implementing Entity under a subsidiary agreement to be entered into between the Recipient and the Project Implementing Entity, under terms and conditions approved by the Association (“Subsidiary Agreement”), which shall include, inter alia, that the Credit shall be made available to the Project Implementing Entity on a non-reimbursable basis, and denominated in Dollars.

Sections and Description Schedule 2. Section 1.B. 2. The Recipient shall exercise its rights and carry out its obligations under the Subsidiary Agreement in such manner as to protect the interests of the Recipient and the Association and to accomplish the purposes of the Financing. Except as the Association shall otherwise agree, the Recipient shall not assign, amend, abrogate, waive, terminate or fail to enforce the Subsidiary Agreement or any of its provisions.

Sections and Description Schedule 2. Section 1. C. The Recipient shall cause the Project Implementing Entity under the terms of the Subsidiary Agreement to: (a) not later than sixty days after the Effective Date and in any event before submitting the first withdrawal application for Category (2)(a), hire a third party entity or entities, with qualifications, experience, and terms of reference satisfactory to the Association for the purpose of verifying the DLIs; (b) undertake, twice per calendar year and at such other additional times as the Association may agree, a verification process to ascertain whether the DLIs have been achieved for the period under review; and (c) furnish to the Association corresponding verification reports, in form and substance acceptable to the Association.

Sections and Description Schedule 2. Section 1. D. 1. The Recipient shall ensure, and shall cause the Project Implementing Entity under the terms of the Subsidiary Agreement to ensure, that the Parts of the Project under their responsibility are carried out in accordance with the Environmental and Social Standards, in a manner acceptable to the Association.

Sections and Description Schedule 2. Section 1. D. 2. Without limitation upon paragraph 1 above, the Recipient shall, and shall cause the Project Implementing Entity under the terms of the Subsidiary Agreement to ensure, that the Parts of the Project under their responsibility are implemented in accordance with the Environmental and Social Commitment Plan (“ESCP”), in a manner acceptable to the Association. To this end, the Recipient shall, and shall cause the Project Implementing Entity to, ensure that: (a) the measures and actions specified in the ESCP are implemented with due diligence and efficiency, and as further specified in the ESCP; (b) sufficient funds are available to cover the costs of implementing the ESCP; (c) policies, procedures and qualified staff are maintained to enable it to implement the ESCP, as further specified in the ESCP; and (d) the ESCP or any provision thereof, is not amended, revised or waived, except as the Association


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shall otherwise agree in writing and the Recipient has, thereafter, disclosed the revised ESCP.

Sections and Description Schedule 2. Section 1. D. 3. The Recipient shall, and shall cause the Project Implementing Entity to: (a) take all measures necessary on its part to collect, compile, and furnish to the Association through regular reports, with the frequency specified in the ESCP, and promptly in a separate report or reports, if so requested by the Association, information on the status of compliance with the ESCP and the management tools and instruments referred to therein, all such reports in form and substance acceptable to the Association, setting out, inter alia: (i) the status of implementation of the ESCP; (ii) conditions, if any, which interfere or threaten to interfere with the implementation of the ESCP; and (iii) corrective and preventive measures taken or required to be taken to address such conditions; and (b) promptly notify the Association of any incident or accident related to or having an impact on the Project which has, or is likely to have, a significant adverse effect on the environment, the affected communities, the public or workers, including explosions, spills, and any workplace accidents that result in death, serious or multiple injury, pollution, or any violent labor unrest or dispute between the Recipient or the Project Implementing Entity or security forces (assigned to protect the Project) and local communities, [or] any case of gender-based violence and violence against minors, in accordance with the ESCP, the instruments referenced therein and the ESSs.

Sections and Description Schedule 2. Section 1. D. 5. Without limitation upon paragraphs 1 and 2 above, the Recipient shall ensure that terms of reference for studies, capacity building and any other technical assistance provided under the Parts of the Project under their responsibility, including, but not limited to, dam safety assessments, dam safety plans and any other dam related activities, are prepared in a manner satisfactory to the Association and duly incorporate and take into consideration the requirements of the ESSs.

Sections and Description Schedule 2. Section 2. The Recipient shall cause the Project Implementing Entity, under the terms of the Subsidiary Agreement, to furnish to the Association each Project Report not later than forty-five (45) days after the end of each calendar semester, coveringthe calendar semester.

Conditions

Type Description

Effectiveness 5.01. The Additional Conditions of Effectiveness consist of the following: (a) the Project

Operational Manual has been adopted by the Project Implementing Entity in form and

substance satisfactory to the Association; (b) the Subsidiary Agreement has been entered

into by the parties thereto in form and substance satisfactory to the Association; and (c) The

PCU has been established in form and substance satisfactory to the Association, and the

Project coordinator, a financial management specialist and a procurement specialist have

been employed under terms of reference and with qualifications satisfactory to the

Association.

5.02.The Effectiveness Deadline is the date one hundred and twenty (120) days after the

Signature Date.


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Type Description

Disbursement Schedule II. Section III. B. 1. Notwithstanding the provisions of Part A above, no withdrawal

shall be made: (a) for payments made prior to the Signature Date, except that

withdrawals up to an aggregate amount not to exceed $ 10,000,000.00 may be made for

payments made prior to this date but on or after April 24, 2019, for Eligible Expenditures

under Category (1); or (b) for payments made under Categories (2)(a) and (2)(b) unless and

until the Recipient has furnished evidence that: (i) the Independent Verification Agent

has been hired; and (ii) the Recipient has achieved, with respect to the amounts of the

Financing set forth in the Annex to this Schedule for which disbursements are requested, the

applicable DLI in accordance with the Verification Protocols and in form and substance

satisfactory to the Association; (c) for payments made under Category (2) (b) unless and

until the Recipient has furnished evidence that, in form and substance satisfactory to the

Association: (A) the Recipient has committed an amount of $30,000,000 equivalent in form

and substance satisfactory to the Association; and (B) the Project Implementing Entity has

committed an amount of $28,500,000 equivalent in form and substance satisfactory to the

Association, both for severance payments for SANAA’s staff from their own resources and

excluding from said amounts those for which reimbursement will be requested under the

Credit; and (d) for payments made under Category (3) for Emergency Expenditures under

Part 4 of the Project, unless and until the Association is satisfied, and has notified the

Recipient of its satisfaction, that all of the following conditions have been met in respect of

said Emergency Expenditures: (i) he Recipient has determined that an Eligible Emergency has

occurred, has furnished to the Association a request to include said Eligible Emergency under

Part 4 of the Project in order to respond to said Eligible Emergency, and the Association has

agreed with such determination, accepted said request and notified the Recipient thereof;

(ii) the Recipient has prepared and disclosed all ESSs documents required for said Eligible

Emergency, and the Recipient has implemented any actions which are required to be taken

under said instruments, all in accordance with the provisions of Section E.1.(a) (i) F of this

Schedule;(iii) the Coordinating Authority has adequate staff and resources, in accordance

with the provisions of Section I.E.1(b) of this Schedule, for the purposes of said activities; and

(iv) the Recipient has adopted the Emergency Response Operations Manual in form,

substance and manner acceptable to the Association and the provisions of the Emergency

Response Operations Manual are fully current in accordance with the provisions of Section

I.E.1(a)(i) of this Schedule, so as to be appropriate for the inclusion and implementation Part

4 of the Project.


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I. STRATEGIC CONTEXT

A. Country Context

1. Although Honduras’ economy has experienced a moderate recovery since the 2008–09 global economic crisis, the country faces the highest level of economic inequality in Latin America and the Caribbean (LAC).

Honduras’ modest Gross Domestic Product (GDP) growth rate (0.3 points per year1) has been insufficient to significantly improve living standards, especially given the country’s accelerated population growth. In 2017, roughly 64 percent of households (69 percent of the country’s 8.3 million inhabitants) lived in poverty and an estimated 40.7

percent lived in extreme poverty.2 This level of extreme poverty is second only to Haiti’s in the LAC region. While income growth has been recovering—particularly for the bottom 40 percent of the income distribution, which posted an annual growth rate of 1.2 percent between 2011 and 2016, ahead of the rest of the population—preliminary data for 2017 suggest that inequality has been increasing over the last two years.

2. Honduras’ urban growth rate (3.2 percent in 2015) and percentage of urban poor (53 percent) are among the highest in the region. Nearly 54 percent of the population lives in urban areas and, based on the current growth rate, this figure is expected to reach 70 percent by 2050. However, investments in services have not kept pace with urban growth. Instead, urban development has largely lacked planning, regulation, and controls, subjecting a large and ever-increasing share of the population to critical shortages in terms of access to housing and public services, including water supply and sanitation (WSS), basic education, and health. Nowhere are the pressures of unchecked urban growth more apparent than in the capital of Tegucigalpa, which is home to 14 percent of the country’s population (1.2 million) and generates 32 percent of its GDP.

3. In addition to facing poverty and shortages in basic services, Honduras has been significantly affected by extreme weather events and climate risks. According to the Global Climate Risk Index for 2015 (Germanwatch), Honduras was the country most affected by climate change between 1996 and 2015. Its accelerated urbanization has increased the country’s overall exposure and vulnerability to natural disasters, many of which are exacerbated by climate change. On average, Honduras loses 2.6 percent of its national GDP each year to climatic events.3 The combination of observed and anticipated climate change impacts and increased climatic variability are likely to exacerbate the country’s exposure to hurricanes, floods, erosion, landslides, and droughts, as most recently evidenced by the 2014–15 El Niño weather event. Projected reductions in annual precipitation across the country of 20 percent by 2050 and 30–40 percent by 2090, combined with rising temperatures4 are expected to reduce water availability.

4. Over the past two decades, Honduras has made significant progress in closing the WSS coverage gap. Whereas in 1990 less than 75 percent of the population had access to improved water and less than half to improved sanitation,4 Honduras succeeded in meeting the Millennium Development Goals of halving coverage gaps by the end of 2012. By 2015, 91 percent of Hondurans had access to improved water, and 83 percent had access to improved sanitation. Despite the substantial headway made in terms of overall WSS coverage, significant inequities

1 Source Central Bank of Honduras. 2 Instituto Nacional de Estadísticas (INE), Encuesta Permanente de Hogares de Propósitos Múltiples, June 2017. 3 “The Central America urbanization review: Making cities work for Central America” (World Bank, 2017). 4 Honduras: Strategy Program for Climate Resilience (2017). Ministry of Environment (Mi Ambiente). By 2090, average temperatures are projected to increase by 4°C in most parts of the country. An increase in atmospheric pressure is also projected and is expected to give rise to other climate-change related impacts, including rainfall deficits and annual temperature increases.


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in access to these services persist and service quality is generally low. Whereas only 7 percent of the country’s non-poor lacked access to water and 12 percent lacked access to sanitation in 2015, 20 percent of its poor lacked access to these services.5 Furthermore, it is estimated that only 38 percent of the water delivered in urban areas is potable.

B. Sectoral and Institutional Context

Diverse Factors Threatening Water Security in Tegucigalpa

5. The quality of WSS services in the capital city falls far below acceptable levels. Latest figures indicate that only 70 percent of Tegucigalpa’s population has access to piped water and 50 percent to sewerage, significantly lagging behind national averages. Year-round water rationing results in highly intermittent service, particularly during the summer months. None of Tegucigalpa’s residents enjoy continuous water service from the network and the frequency of services varies between neighborhoods. On average, households receive water twice a week for two to four hours each day and in extremes cases, only once every two weeks. Affluent households have recourse to coping mechanisms to soften the impact, while lower-income families are vulnerable to water rationing.

6. Projected reductions in annual precipitation across the country combined with a rising temperature are expected to reduced water availability in the nation’s capital. Tegucigalpa has experienced a reduction in precipitation of 7 to 10 mm annually over the last 50 years. Average precipitation is expected to decline further (by up to 39 percent) and average monthly temperatures are expected to be 1.2oC higher by 2030. The frequency and severity of storms and related flooding are also predicted to rise over time. This, coupled with deforestation, causes high levels of siltation in the two dams that supply water to Tegucigalpa’s population.

7. The deterioration in service quality is largely rooted in inadequate governance arrangements coupled with insufficient water supplies and infrastructure investments. Although the government has long recognized that decentralization of water services is pivotal to improving service quality, the lack of political support and funding has prevented the transfer of water services delivery in Tegucigalpa. Furthermore, the combined impacts of climate change, pollution from ever increasing urban sprawl, and lack of funding to develop new water resources and reduce leakage have decreased the availability of raw water to meet the demands of Tegucigalpa’s growing population.

8. Persistent management problems have also caused water services in Tegucigalpa to deteriorate to almost unbearable levels. The national utility, Servicio Autónomo Nacional de Acueductos y Alcantarillados (SANAA), set up an organizational structure that grew beyond its financial viability,6 depriving it of the financial resources necessary to develop new water sources, reduce water losses throughout the system, or merely maintain existing infrastructure under acceptable operational conditions. Constrained by politically motivated caps on tariffs, management decisions on resource allocation prioritize payroll over investments in operational efficiency improvements and infrastructure maintenance. Funding for water services in the capital is further limited by an institutional setup that allows revenues generated in Tegucigalpa to be diverted to subsidize smaller systems serviced by SANAA throughout the country.

Reallocation of Responsibilities through Institutional Reform

9. Over the past two decades, the Government of Honduras (GoH) has pursued a decentralization program aimed at reducing poverty levels and improving basic services, including WSS, by delegating more responsibilities

5 Based on 2015 household survey (Encuesta Permanente de Hogares de Propósitos Múltiples, EPHPM) data. 6 SANAA’s average of 10.4 employees per 1,000 connections significantly exceeds the regional average of 3.49 employees per 1,000 connections and salaries and benefits expenditures amount to 95 percent of operations and maintenance (O&M) costs.


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to local governments. By early 2000, the WSS sector institutions, including Honduras’ largest service provider, SANAA, were locked in a vicious cycle of: (i) inefficient public spending largely driven by high staffing levels, which more than doubled the regional average and associated high working capital costs; (ii) weak performance incentives; (iii) low and financially unsustainable tariffs; (iv) insufficient funding; (v) asset deterioration; (vi) squandering of financial resources; and (vii) political interference. It was clear that effectively meeting the needs of a burgeoning population amidst ever-increasing water scarcity would require far-reaching institutional reforms accompanied by large-scale infrastructure investments.

10. The GoH’s ambitious decentralization effort included issuing the 2003 Drinking Water and Sanitation Sector Framework Law (the Framework Law), which redefined WSS provision in Honduras. Recognizing that the institutional setup at the time accounted for poor service levels, the Framework Law mandated, among others, the decentralization of SANAA, which managed and provided water supply services to 30 rural and urban areas; called for the transfer of its assets to the municipalities by 2013; required municipalities to set up autonomous service providers; and established a Water and Sanitation Sector Regulator (Ente Regulador de los Servicios de Agua Potable y Saneamiento, ERSAPS), among other sector entities, to ensure more effective sector governance. Following the decentralization and transfer of its assets to municipalities, SANAA is intended to become a technical assistance (TA) agency providing support to municipal service providers.

11. Substantial progress has been made toward strengthening WSS sector governance since the launch of the decentralization program. In 2005, with the support of the Bank and the Public-Private Infrastructure Advisory Facility (PPIAF), the GoH developed a Strategic Plan for the Modernization of the Water and Sanitation Sector, which set forth a policy and action plan to support the decentralization of local WSS services. Subsequently, between 2007 and 2017, the World Bank–financed Water and Sanitation Modernization (PROMOSAS, for its acronym in Spanish) Project helped advance the decentralization program by directly supporting implementation of the Framework Law, focusing on mid-sized cities. The project also included TA pivotal to strengthening the capacities of key sector agencies such as SANAA to assume the new roles called for in the Framework Law and allowed the development of key policies, regulations, and tools necessary to improve oversight, monitoring, and transparency.

12. Important headway has been made in promoting citizen engagement, as called for in the Framework Law, in those systems that have already been decentralized. The Board of Directors of the newly created municipal service providers and corresponding Municipal Water and Sanitation Committees (Comisión Municipal de Agua y Saneamiento, COMAS) include representatives of civil society and municipal officials. These COMAS oversee local policy and planning issues in urban and rural areas within their respective jurisdictions. In the case of Tegucigalpa, a COMAS was established and approved by the Municipal Council in 2017. To become fully operational, it will require additional tools, training, and guidance to effectively monitor the performance of urban and rural providers operating within the municipal territory and address the female perspective through women’s organizations.

The Unfinished Agenda: Completing WSS Reform in Tegucigalpa

13. Completion of the decentralization process in Tegucigalpa is pending the revision of institutional arrangements and the award of severance obligations to SANAA staff. In May 2015, the Municipal Unit of Potable Water and Sanitation of the Central District (Unidad Municipal de Agua Potable y Saneamiento, UMAPS) was instituted via municipal decree to serve as the local entity responsible for delivering WSS services to the metropolitan area of Tegucigalpa. However, fiscal constraints prevented the planned transfer. The fact that the GoH and the Municipality of Tegucigalpa (Alcaldía Municipal del Distrito Central, AMDC) now agree on the urgency of operationalizing the new institutional arrangements for service provision coupled with the predisposition of multilateral agencies to support the required actions create an environment conducive to complete the decentralization process in Tegucigalpa.


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14. Although officially instituted in 2015, UMAPS has yet to be operationalized. The approved service model established UMAPS as a deconcentrated entity of the AMDC, with administrative autonomy as well as its own budget and accounting system, while AMDC remained the asset holder. This model was adopted to avoid the social risks associated with a corporatization model, which could be mistaken for privatization by the public at large. The governance framework set out in the municipal decree largely resembles that of SANAA. However, since poor and inefficient governance was identified as one of the root causes of deteriorating WSS service provision in the metropolitan area, AMDC has decided to revise UMAPS’ governance arrangements and organizational structure (as set out in paper) to ring-fence the provider from political interference and ensure it is adequately equipped to meet the needs of its burgeoning population in a financially and environmentally sustainable manner. UMAPS itself will need to develop the policies, manuals, and operations and management plans for efficient service provision.

15. Severance payments represent the main binding constraint to the transfer of the Tegucigalpa system’s functions and assets. Honduras’ labor law requires that all dismissed staff be duly compensated, while the Framework Law requires that systems be free of debt at the time of transfer to the municipalities. As service provision and billing and collection are transferred to UMAPS, SANAA staff serving Tegucigalpa will no longer be required. The amount to be paid each employee will be calculated as stated in the collective bargaining agreement and no additional sum will be paid above what the agreement stipulates. To date, SANAA has awarded US$17.5 million in severance obligations to 456 employees identified as redundant. An estimated 1,366 staff remain to be compensated to transfer services to UMAPS which will require approximately US$89.0 million to cover remaining severance obligations. AMDC will contribute US$28.5 million, while the central government will contribute the balance.

16. A gradual transfer of functions, coupled with coordinated efforts to award severance payments, represent the most viable path to complete the transfer. Although a simultaneous transfer of all functions and associated assets would constitute the most desirable course of action, AMDC and SANAA have signed a gradual transfer agreement that will allow the process to advance as far as funding allows. Should any functions remain to be transferred, these would be completed as funds become available. This mechanism provides the flexibility to expedite the launch of UMAPS’ operations, while reducing the rate of increase in severance liabilities.

17. AMDC and SANAA have identified both staff eligible for recruitment by the new service provider and those considered redundant. The 2018 Business Plan envisages a workforce of 900 UMAPS employees—significantly lower than SANAA’s Tegucigalpa Metropolitan WSS System-based workforce. UMAP’s staff will comprise both new hires and some current SANAA employees who will be dismissed due to the transfer process.

18. While the Framework Law does not require providers to adopt a gender approach, AMDC is committed to advancing gender equality and empowerment of women in the workforce. The inclusion of female staff is considered critical to promoting economic opportunities and voice for Tegucigalpa’s growing female workforce. At the national level, female participation in high-level positions is roughly 48.5 percent7 while the proportion in SANAA lags considerably behind at 15.2 percent.8 To narrow the gender gap, UMAPS will adopt a gender policy that will ensure greater participation of women in high-level decision making and technical positions, targeting a 10-

7 World Economic Forum. 2017. The Global Gender Gap Report 2017. The percentage is calculated based on the female/male ratio of 0.94 for legislators, senior officials, and managers at the national level. 8 Based on the questionnaire included in the “Global Study on Female Employment in Water Utilities.”


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percentage point increase from current SANAA levels to at least 25 percent for high-level and mid-level positions by project completion.9

19. Prevailing information gaps prevent deeper understanding of the impacts of intermittent water supply on women and girls in Tegucigalpa. Although there is ample global evidence that lack of access to reliable water service particularly affects females—as they bear primary responsibility for both water collection and domestic chores, which rely heavily on water availability—there are no household surveys to measure the actual impacts in Tegucigalpa. A better understanding of these impacts would allow for more informed decision making in planning network improvements and water distribution schedules to minimize the negative impacts on women.

Addressing Water Resources and Infrastructure Challenges in Honduras’ Capital

20. Climate variability and pollution, coupled with insufficient investments in the water system and inefficient operational practices, have also contributed to the deterioration of service levels in Tegucigalpa. The issues undermining water services relate to: (i) downward precipitation trends; (ii) insufficient water sources; (iii) contamination of the two main catchment areas, Guacerique and Río Grande; (iv) deterioration of infrastructure; and (v) physical and commercial losses throughout the distribution network.

21. Water demand exceeds the capacity of Tegucigalpa’s supply sources. Although the population has more than doubled since 1990 (from 540,000 to over 1.2 million in 201610), Tegucigalpa continues to rely on the same water sources. The Guacerique and Río Grande watersheds, which feed into the Laureles and Concepción reservoirs and water treatment plants (WTPs), respectively, supply 81 percent of Tegucigalpa’s demand. The third most important WTP, Picacho, receives good quality water from four springs, Jucuaras, Carrizal, San Juancito, and Jutiapa, through four gravity fed aqueducts. While the existing population requires approximately 3.5 m³/sec, the combined production capacity of these three main WTPs is estimated at 2.00 m³/sec (1.67 m³/sec during the dry season). Given their critical importance, the three sources require close attention to preserve their capacity. However, the Laureles and Concepción dams have not been adequately maintained and lack dam safety protocols. While the dams exhibit minimal structural issues, no emergency plans nor instruments are in place to ensure the overall security of the infrastructure and of the roughly 2,000 people settled downstream along their riverbanks. In the case of Picacho, irregular connections to the Jutiapa aqueduct significantly reduce the volume of raw water that reaches its WTP, rendering it almost worthless.

22. Increasing levels of contamination put further stress on scarce water resources, undermining operational efficiency. Agricultural activity in the catchment area and urban sprawl have increased both demand for water and the contamination of sources, further undermining water quality and availability. The discharge of untreated wastewater into water bodies exacerbates the issue of water quality and raises water treatment costs.11 The installed capacity for wastewater treatment in Tegucigalpa is barely 13 percent. Population growth and water demand trends reveal that pressures on resources and, thus, also water deficits will only worsen.

23. Tegucigalpa’s persistent water supply coverage gaps are likewise attributable to deteriorating infrastructure resulting from insufficient investments in the maintenance and rehabilitation of production and distribution networks. Over the past decade, the Bank and other agencies have financed improvements to water networks in a number of neighborhoods, upgrades to the Picacho WTP, the transfer of water from the Laureles to the Concepción reservoir, and the reduction of non-revenue water (NRW) in pilot areas. However, the impact of these investments

9 World Bank. Promoting Women’s Employment in Infrastructure Sectors (forthcoming). 10 Based on 2016 data from the Honduras’ National Institute of Statistic (INE). 11 Caracterización de la Vulnerabilidad de los Embalses Laureles y Concepción Ante el Cambio Climático, AMDC, 2019.


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has been limited due to the lack of both a scale up plan and necessary funding. Furthermore, poor organizational and management practices have eroded many of these improvements. To lay the groundwork for increased system efficiency, the Municipality has hired an international firm to map the primary water and sewerage networks, assess the condition of WTPs, recommend improvements to them, and design a pilot project for network sectorization, district metering, and NRW reduction. These activities will inform the formulation of a long-term water, sanitation, and drainage master plan for Tegucigalpa.

24. Water losses, wastage, and excessive consumption also contribute to extreme water scarcity and rationing. Old network infrastructure combined with limited sectorization, illegal connections, insufficient number of consumption meters, lack of pressure management, and inadequate telemetry prevent accurate diagnosis and reduction of water losses (both physical and commercial), estimated at 45 percent. Prevailing water collection practices—which make use of plastic drums, makeshift containers, and/or domestic reservoirs with overflows instead of automatic shut-off valves—result in water wastage and the direct discharge of high volumes of unused potable water into sewerage networks. The limited adoption of water-saving appliances leads to excessive water consumption. Since the development of new water sources will require both significant investments and long lead times, reducing water losses and wastage are regarded as a more practical course of action to increase water availability at this juncture.

C. Relevance to Higher Level Objectives

25. The proposed Project responds to Government efforts to set the WSS sector on track to meet the 2030 Sustainable Development Goals related to access, quality, and sustainability of WSS services in urban and peri-urban areas. It is likewise aligned to the GoH’s 2010 National Climate Change Strategy and a Water, Forest and Land Master Plan for 2017 to 2030. The Project will also support the 2018-2022 Strategy Program for Climate Resilience, which includes strategies to build the capacity of local governments to manage water resources and to conserve water for human consumption, among other goals. In so doing, the Project will increase the resilience of the city’s water supply sector to climate risks.

26. The Project is also well-aligned with the World Bank Group’s FY2016–20 Country Partnership Framework

(CPF) for Honduras.12 It will specifically support Pillar 2: Bolstering Conditions for Growth, by directly contributing to Objective 1: Improve Reliability of Key Infrastructure through investments in the rehabilitation of three key WTPs in Tegucigalpa. The Project will likewise support Objective 2: Strengthen the Regulatory Framework and Institutional Capacity through, inter alia, the operationalization of an autonomous municipal service provider and the development of the policies, regulations, and tools necessary to strengthen the capacity of the key sectoral agencies to carry out their roles. The project intends to address the risks of droughts, floods, and landslides, thereby increasing the WSS sector’s resilience to climate change. More specifically, the proposed investments will directly support Pillar 3: Reducing Vulnerability, particularly Objective 3: Boost Resilience to Disasters and Climate Change by improving the security, quality, and efficient management of key water resources. The latter are all critical to promoting water security amidst ever-increasing climatic pressures, including the anticipated reductions in precipitation levels and rising temperatures.

27. The Project will also contribute to the World Bank’s twin goals of ending extreme poverty by 2030 and promoting shared prosperity. Moreover, the Bank’s 2016 Honduras Systematic Country Diagnostic (SCD) highlights the lack of access to potable water among key factors that limit inclusion and the equal distribution of wealth. The

12 Report No. 98367.


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coping costs associated with the need to complement insufficient household water provision through the purchase of water from tankers is particularly burdensome to the poor, who have to allocate up to 15 percent of their household income to purchase water at prices that can be as high as 250 percent of the price paid by domestic users connected to the network. The increased availability of water in the distribution network is expected to reduce dependency on these costlier coping mechanisms, thereby increasing the disposable income of poorer households for other uses. The Project’s focus on establishing the local institutional foundation to gradually improve the access and reliability of water supply services will contribute to the above.

II. PROJECT DESCRIPTION

A. Project Development Objective

PDO Statement

28. The Project Development Objective (PDO) is to increase the efficiency and reliability of water services in selected areas of Tegucigalpa.

29. This will be done by contributing to: (i) the operationalization of a new service provider; and (ii) improvements in infrastructure and resource management tools.

PDO Level Indicators

30. Achievement of the PDO will be measured through the following key indicators:

• New municipal water and sanitation provider operational, also a disbursement-linked indicator (DLI);

• People receiving at least 12 hours of water per day in targeted areas under the Project;13

• Number of hydraulic sectors complying with NRW targets.14

• Priority WTPs operating at 95 percent capacity or higher in compliance with internal process standards;15

B. Project Components

31. The overall cost of the proposed Project is US$126.0 million, financed by a US$50.0 million credit from IDA and US$76.0 million in counterpart funding from the central government and AMDC. The Project will contribute to the Government’s ongoing decentralization program and to the first phase of AMDC’s longer-term WSS improvement program by directly supporting the transfer of services to an independent municipal provider and addressing critical issues in the metropolitan system in a sustainable manner. The Project will constitute an Investment Project Financing (IPF) with DLIs, which will provide incentives to ensure implementation of critical institutional reforms and achievement of key operational targets.

32. The Project will support the first phase of AMDC’s longer-term service improvement program to secure WSS services to all residents of the nation’s capital in a financially and environmentally sustainable manner. To this end, it will focus on supporting the operationalization of the municipal WSS service provider in Tegucigalpa (UMAPS) and resolving urgent and critical issues in the Tegucigalpa system. The Project will comprise four components as follows:

13 This indicator will measure improvements in reliability in targeted areas (listed in Annex 2) 14 This indicator will measure improvements in efficiency in targeted areas (listed in annex 2). 15 To ensure adequate results, production efficiency will be measured during the rainy season to ensure sufficient water at the source.


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33. Component 1. Operationalization of the UMAPS (total cost US$89 million, of which US$18 million IDA financing). In an effort to encourage a focus on results, this component will use DLIs. Disbursement of US$18 million will be linked to the achievement of the following targets:

• DLI 1: Adoption of governance arrangements and gender policy of UMAPS

• DLI 2: Transfer of administration and finance functions from SANAA to UMAPS.

• DLI 3: Transfer of commercial function from SANAA to UMAPS.

• DLI 4: Transfer of the Picacho subsystem from SANAA to UMAPS.

• DLI 5: Transfer of the Laureles subsystem from SANAA to UMAPS.

• DLI 6: Transfer of the Concepción subsystem from SANAA to UMAPS.

• DLI 7: Transfer of the sanitation system from SANAA to UMAPS.

34. DLI 1 seeks to update UMAP’s regulatory framework by: (i) defining the service provider’s governance structure, duties and responsibilities, and inter-institutional relationships;16 (ii) supporting the operationalization and staffing of the key departments and units of UMAPS—among others, the financing of severance payments to SANAA staff to enable the transfer of functions as well as the development and implementation of policies, manuals, instruments, and operations and management plans for each of these units; and (iii) developing and implementing a gender policy to incentivize a gender-sensitive work environment that includes improving gender equality.

35. For DLIs 2 to 7, the transfer of functions also involves the transfer of associated assets. This will be formalized through: (i) signing of a transfer agreement between SANAA and AMDC; (ii) the development and implementation of policies, procedures, manuals, systems and other management, operational and administrative tools to deliver such functions in a professional manner; and (iii) the dismissal of staff delivering such functions at SANAA including signing of a severance agreement by each of the dismissed employees.

36. Component 2. Improved water production capacity and efficiency of the distribution network (total cost US$31 million, of which US$27 million IDA financing). This component will strengthen the resilience of the city’s water service to climate change–related risks by increasing water availability and reliability and reducing the risk of dam failure of the city’s two reservoirs.

a. Subcomponent 2.1. Improving water availability (total cost US$24 million, of which US$20 million IDA financing). This subcomponent will make households more resilient to droughts and rising temperature (which increases demand for water and evaporation rates, thereby exacerbating the impact of droughts). It will finance: (i) rehabilitation/upgrading of WTPs to increase flexibility in redistributing water among the three main subsystems, recover water from sludge and filter backwash, and improve energy efficiency17 throughout the system; (ii) implementation of district metered areas (DMAs) in Picacho and other targeted areas to isolate specific sectors of the distribution network, regularize pressure throughout the water mains, and diagnose the main causes of water losses within these sectors; and (iii) activities to improve the efficiency of the gravity-fed distribution network by reducing NRW, with emphasis on physical losses, thus increasing water availability. All the above will be complemented by a communications campaign emphasizing the benefits of responsible

16 The SPA will specify the parameters, indicators, and goals to be achieved by UMAPS within and beyond the project term, the contributions to be made by the AMDC toward achievement of these goals, and the involvement of the Regulator in approving this SPA and any modification to it. The Regulator will issue a certification stating whether: (i) the SPA reflects an efficient approach to operating the systems; and (ii) any shortfalls exist in the financial viability of the proposed actions to achieve the goals stated in the SPA. 17 According to data provided by SANAA (2019), the energy intensity of the operation of the WTPs can improve from a current 0.0134 kWh/m3 to 0.01134 kWh/m3.


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domestic water consumption and conservation, to be financed under component 3. These activities are expected to reduce the energy used per cubic meter of water delivered.18

b. Subcomponent 2.2. Strengthening the safety of the Laureles and Concepción dams (total cost US$5 million, all IDA financing). To ensure the ongoing security of these two dams for providing water to the Tegucigalpa water supply system, the following activities will be carried out as part of a dam safety action plan: (i) establishment and operation of a Dam Safety Panel of Experts (POE) to review and advise AMDC on the studies, from terms of reference elaboration to final design review, and works to be carried out; (ii) comprehensive dam safety assessments, including a risk assessment of the impact of climate change on the dams’ structural integrity and definition of safety measures; (iii) elaboration of dam safety plans including instrumentation, operation and maintenance (O&M); (iv) emergency preparedness; (v) construction supervision and quality assurance plan for the minor remedial works; (vi) immediate minor remedial works such as downstream slope clearing in Laureles and water tightening of the Concepción spillway slab joints as well as the implementation of early warning systems in both dams; and (vii) dam safety capacity building for UMAPS and other stakeholders.

c. Subcomponent 2.3. Developing tools for enhanced watershed management and climate resilience (total cost US$2 million, all IDA financing). This subcomponent will improve planning to manage key watersheds in UMAP’s jurisdiction with a view to enhance climate change adaptation in the sector. Well-managed and healthier, less contaminated watersheds will reduce the probability and impact of extreme weather events and erosion. Activities will include: (i) assessment of the impact of climate risks identified in the water resources diagnostic for the Laureles watershed carried out by AMDC; (ii) update of the diagnostic on the impact of anthropogenic interventions in selected watersheds; (iii) assessment of the climate risks and development of a strategy and plan to build the resilience of Tegucigalpa’s water services; (iv) development of a watershed management and conservation plan for selected watersheds that will include activities to increase forest coverage and land use regulation while acting as a potential carbon sink, which will help reduce the rate of erosion; and (v) activities aiming to reduce pollution in key water bodies near Tegucigalpa. The latter will include: (i) development of a city-wide inclusive sanitation strategic plan; (ii) prefeasibility, feasibility, preliminary design, and safeguard studies for select infrastructure; and (iii) installation of instruments and equipment to monitor the quality of water flowing into the reservoirs prior to treatment.

37. Component 3. Project Management and Technical Assistance (total cost US$6 million, of which US$5 million IDA financing). This component will finance goods, operating costs, and consulting services associated with overall project management and oversight, including compliance with agreed DLIs. To this end, two international consulting firms will be hired—a Project Management Consultant (PMC) to support AMDC’s oversight of the Project’s fiduciary, technical, and environmental and social aspects, including implementation of activities under the Environmental and Social Commitment Plan (ESCP); and an Independent Verification Agent (IVA) to evaluate compliance with the respective DLIs (including checking the eligibility of expenditures and calculating disbursements against the DLIs). This component will also finance TA to: (i) explore financing options for larger investments; (ii) carry out a gender gap analysis to explore disparities related to WSS services in targeted areas; and (iii) design and implement a communications campaign targeting beneficiaries in the services areas, including support to citizen participation through the COMAS to promote transparency, accountability, and responsiveness of UMAPS to its client base.

18 This will be achieved by reducing leakage or recovering water from filter backwash and settling tanks sludge resulting in the delivery

of more water without increasing energy consumption, and by using more energy-efficient equipment and reducing the load factor

(thus reducing active and reactive energy load).


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38. Component 4: Contingent Emergency Response Component (CERC) (US$ 0.0 million). Reflecting the strategic approach taken in Honduras across the Bank’s portfolio, this component will provide immediate response to eligible emergencies. As such, in the event of such an eligible emergency, as defined in the Contingency Emergency Response (CER) operational manual prepared and adopted by the GoH, this component would finance emergency activities and expenditures through the reallocation of funds from the Project.

C. Other Design Aspects

39. Citizen engagement. The Project includes citizen engagement mechanisms comprising communications campaigns and public consultations to: (i) raise public awareness and understanding of the municipalization process; (ii) induce knowledge, attitude, and behavioral changes related to domestic water conservation practices; and (iii) raise necessary commitment of both parties to care for service infrastructure including responsibility of the municipality to invest in rehabilitation and maintenance, and of the public to pay for services to cover associated costs. Citizen engagement will also be ensured through representation of civil society, including women’s organizations, in both UMAPS’ Board of Directors and in the corresponding COMAS, while implementing the Consultation and Citizen Participation Plan. Furthermore, the use of beneficiary assessment surveys will promote overall accountability and responsiveness of the Project to beneficiaries (see Annex 2 for details).

40. Gender. The Project will contribute to reducing the gender gap by supporting the development and implementation of a gender policy that will increase women’s employment in high-level decision-making and technical positions at UMAPS. Progress will be incentivized and measured against compliance with DLI1 on approval of the gender policy for UMAPS aimed at increasing female representation in those two categories from 15 to 25 percent. The Project will also support a gender gap analysis of the impacts of intermittent services on male and female household members in target areas. Well-sampled data mainly derived from focal group and household surveys could be used by UMAPS to inform a future strategy prioritizing service improvement intervention in areas where women would most benefit.

41. Climate and disaster risk screening and climate co-benefits. The Project is climate-informed. The potential impact of climate and geophysical hazards on the Project’s water supply investments was evaluated based on exposure ratings for the Project’s potential intervention areas and its historical and future sensitivity to these risks. Projected increases in temperature, extreme precipitation and flooding, and heavy droughts are expected to pose moderate risks to the areas supplied by the Tegucigalpa metropolitan WSS system and to achievement of expected outcomes under the Project. Gains in water availability from network improvements in target areas, increased flexibility in water resource allocations, and TA for watershed management and climate adaptation are expected to build resilience to the aforementioned risks. Additionally, the Project will invest in the rehabilitation of an existing zero-emissions, gravity-fed system that is still within its original economic life, thus locking in the continued use and viability of a zero-emissions system. The NRW reduction activities under subcomponent 2.1 will also increase the viability of the gravity-fed systems. Beneficiaries’ resilience to climate-induced droughts will likewise improve due to both increased availability of water and reduced wastage resulting from communications campaigns.

D. Project Beneficiaries

42. The Project is expected to benefit roughly one million people. The Project is expected to directly improve the quality of water services for at least 180,417 residents in the Picacho pilot area through extensive network improvements, which will increase the availability of water in this area. Furthermore, the rehabilitation/upgrading of the three WTPs (in Laureles, Concepción and Picacho) will contribute to increased water production capacity, efficiency, and flexibility of the system. This, together with the improvements in the Picacho network, is expected to


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indirectly benefit the remaining 203,738 households or 855,700 inhabitants of the Tegucigalpa metropolitan area that are currently connected to the networks.

E. Results Chain

43. Attainment of the PDO hinges on the achievement of three main outcomes: (i) operationalizing the municipal service provider; (ii) improving water availability to users; and (iii) securing the main water sources. The first outcome requires the development of institutional, administrative, and operational tools as well as the staffing and transfer of functions and associated assets to the new service provider. The second outcome depends on investments in infrastructure (WTPs and network improvements) and behavioral changes to reduce water wastage. The third outcome relies on two sets of actions—one aimed at equipping the service provider with the tools necessary to monitor the condition of the dams and another one aimed at implementing planning tools for reducing pollution in the catchments affecting the sources (see Annex 5 for a detailed illustration of the Theory of Change).

F. Rationale for Bank Involvement and Role of Partners

44. The World Bank has been actively involved in the Honduran WSS sector by supporting implementation of the Framework Law, institutional reforms, and infrastructure investments through implementation of the PROMOSAS Project, broad-based TA, and knowledge sharing. The Bank will likewise bring to bear extensive global experience and specialized staff to support the institutional process related to the transfer of the system, including the organization of the new WSS municipal provider (UMAPS), the enhancement of water services, and the design of water resources management tools. In addition to leveraging sector knowledge, the Bank will play an important role as an honest broker in the process and agreements associated with the transfer of service provision from SANAA to the municipality as well as in providing TA to UMAPS to secure financing for additional infrastructure investments.

45. The World Bank has likewise supported Honduras’ WSS decentralization program through advisory and analytical services that have informed ongoing dialogue underlying future transfer of the Tegucigalpa system to a municipal service provider in the district. TA provided under the PPIAF and the Spanish Fund for Latin America and the Caribbean (SFLAC) supported the development of a business plan. Completed in April 2018, the plan includes both a financial assessment as well as short- and medium-term recommendations to ensure that the financial and operational performance of the new service provider will surpass that of SANAA, resulting in rapid improvements in the quality of services.19

46. Choice of financing instrument. A number of instruments were considered in preparing the proposed operation, including use of a traditional Investment Project Financing (IPF), Program for Results (PforR), and a hybrid IPF-DLI instrument. The IPF option was rejected based on past experience with this instrument—although substantial progress was made on the infrastructure front, little traction was gained in implementing reforms necessary to ensure sustainability of advancements made. Use of the PforR option as a means of incentivizing institutional reforms was also considered but set aside given the requirement that it be anchored in an ongoing government program and use of country systems. Absence of such a program and capacity constraints associated with the lack of counterpart experience implementing Bank projects ruled out the use of this instrument. The IPF/DLI option was ultimately selected as it combines input-based support to critical sector investments with institutional reforms incentives through output-based disbursements.

19 Plan de Negocios Ajustado de la UMAPS-AMDC, April 19, 2018.


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47. Role of partners. The business plan developed with World Bank support provides a framework for partners to structure and coordinate their investments. Table 1 outlines the interest expressed by other development partners in investments for the coming years.

Table 1. Expected Projects from Development Partners Partner Project / Main activity Amount

IDB Policy-Based Loan to support the institutional framework of the WSS Sector in Tegucigalpa, including the transfer of functions from SANAA to UMAPS.

US$30 million to be approved October 2019. A second phase is expected to start 2 or 3 years after the beginning of the first phase, depending on the performance of the latter.

Additional US$0.5 million TA to design the city’s water, sanitation, and drainage master plan is under preparation.

JICA Study and design of rapid impact infrastructure projects with emphasis on sanitation.

US$24 million

CABEI Prefeasibility studies and final design of the wastewater collector along the Choluteca river including the design of the rehabilitation of the waste water treatment plant.

Interest has been expressed in possible co-financing of the proposed Tegucigalpa Water Supply Strengthening Project.

US$1.4 million

Note: CABEI=Central American Bank for Economic Integration; IDB=Inter-American Development Bank; JICA=Japan International Cooperation Agency.

G. Lessons Learned and Reflected in the Project Design

48. The Project incorporates some global and country-specific lessons that can be summarized as follows:

a. Institutional reforms and capacity building must accompany infrastructure investments to promote prospects for efficient and sustainable water services going forward. Investments in the WTP network and, to lesser degree, reservoir improvements will be combined with a strong focus on furthering sector reforms. This will be done by combining the use of DLIs, which will incentivize the transfer of the WSS system to the municipality and operationalize an independent service provider, with investments in traditional infrastructure and TA to meet key performance indicators.

b. Wide-ranging reform requires firm commitment at the government level and the participation of key stakeholders. Both GoH and AMDC acknowledge the urgency of addressing ever-deteriorating service levels in the nation’s capital. These stakeholders believe that completing the transfer of services is critical to establishing a more effective and financially and operationally sustainable service model. The proposed Project seeks to capitalize on recent central and municipal government consensus (including their commitment to finance severance payments) and the disposition of IFIs to support it. Since civil society’s commitment and participation are also considered crucial to success, Project design requires that the COMAS include representatives of beneficiary communities. The Project will include a broad-based communications campaign explaining the merits of the municipalization process and promoting water conservation practices.

c. A simplified project scope makes effective implementation more likely. Recognizing that the volatile and disperse operating environment under PROMOSAS put considerable strain on financial and human resources throughout implementation, and given the much larger target service area, this Project focuses on a single jurisdiction to reduce uncertainties.

d. The impact of advances in NRW hinges on proper geographic reach coupled with adequate asset maintenance and commercial practices. Although PROMOSAS was successful in demonstrating tangible


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benefits of implementing sound NRW strategies in pilot areas, the lack of a scale-up plan and network maintenance and commercial practices limited the pilot’s overall impact. Drawing on this lesson, the proposed Project will implement NRW reduction activities in a pilot area, design a scale-up plan, and promote adoption of adequate maintenance and commercial practices to significantly increase the overall impact and sustainability of these interventions.

e. Project design likewise builds on the World Bank Group’s global engagement. The proposed Project is informed by a suite of tools, including a comprehensive framework developed by the Water and other GPs, which are contributing to sustainable urban utilities, among others: (i) the “Effective Results-Based Financing Strategies Guide”; (ii) the “Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services” Report; and (iii) the “Water Utility Turnaround Framework.” The Bank is promoting the use of the latter document as a best practice approach to understand the drivers and incentives of institutional reforms and improve the water utilities’ performance and efficiency, while increasing their ability to access finance.

III. IMPLEMENTATION ARRANGEMENTS

A. Institutional and Implementation Arrangements

49. The Recipient will be the Republic of Honduras, through the Ministry of Finance (SEFIN). The Project will be implemented under the overall coordination of AMDC, which will host the Project Coordination Unit (AMDC/PCU). The AMDC/PCU will oversee all technical, administrative, and fiduciary aspects. It will ensure compliance with Bank environmental and social policies and will be responsible for monitoring and evaluation (M&E) of progress under the Project. The AMDC/PCU will work in close coordination with the Mayor’s office and UMAPS. Different municipal units within the current municipal structure will provide advisory and technical support in different areas, as deemed necessary. A Financing Agreement will be signed between SEFIN, in its capacity as Recipient for purposes of the Credit, and IDA and a Subsidiary Agreement will be signed between the Recipient and AMDC to allow the latter to take on the responsibilities of Project implementation.

50. Additionally, AMDC and UMAPS will enter into a Service Performance Agreement (SPA),20 which will define their respective roles and responsibilities, among others, performance targets to be achieved by UMAPS and any contributions to be made by AMDC toward achievement of these goals.

51. The AMDC will recruit a Project Coordinator to head the AMDC/PCU, following World Bank procurement guidelines. The latter will have responsibility for the day-to-day management of the Project. In addition to the Project Coordinator, the PCU will comprise key staff, including: (i) a procurement specialist; (ii) a financial management specialist; (iii) an environment specialist; (iv) a labor and occupational health specialist; and (v) a social development specialist; as well as (vi) administrative and support personnel.

52. An international consulting firm will be hired with Project funds to serve as a PMC to support the AMDC/PCU. In this capacity, the PMC will be responsible for assisting the AMDC/PCU and UMAPS in the management and implementation of activities envisaged within the Project’s scope and in compliance with all Bank standards. The firm will also provide extensive senior managerial and operational experience to the AMDC/PCU to: (i) ensure that all goods, works, and services to be procured by AMDC comply with sound engineering principles, and

20 The SPA between the AMDC and UMAPS will stress aspects such as operational efficiency, sustainable revenue strategies, improved cost recovery, and enhanced SPA accountability, as a means of improving the delivery of WSS services in the urban perimeter of Tegucigalpa.


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environmental and social standards; (ii) monitor and improve management systems; (iii) provide technical advice; and (iv) ensure the transfer of knowledge to UMAPS so as to enhance the professional and operational capacities of the institution and its staff beyond the Project’s duration. To further the transfer of knowledge, a specific clause will be included in all contracts related to increasing operational efficiencies, NRW reductions, and commercial operations that will require knowledge transfer to the staff of UMAPS.

53. The AMDC/PCU will also retain the services of an IVA for activities that trigger disbursements against the agreed DLIs. The IVA will be responsible for verifying progress made under each activity, as reported by contractors or consultants together with their requests for payment, which will include the calculation of the corresponding DLI. The hiring of an IVA will be a disbursement condition for activities under DLIs for Component 1.

B. Results Monitoring and Evaluation Arrangements

54. M&E functions will be undertaken by the AMDC/PCU, with the support of the PMC and taking into account information gathered by the IVA, to be selected competitively and financed under Component 3, which will verify progress toward achievement of the DLIs. The AMDC/PCU, in consultation with the PMC, will be responsible for coordinating and reporting progress toward achievement of the PDO and results indicators, including DLIs. The AMDC/PCU, assisted by the PMC, will also be responsible for ensuring compliance with all safeguards and legal requirements as stipulated in the Financing Agreement. The M&E functions will represent a core element of the TA to be provided by the PMC to the AMDC/PCU. The latter will prepare semiannual reports, which will reflect progress under the Project against the performance indicators and DLIs defined in the Results Framework and the Project Operational Manual (POM).

C. Sustainability

55. The GoH has put in place a new legal framework for sector reform and made significant progress in its implementation. The Framework Law was approved in 2003, launching a series of administrative and operational measures to transfer all SANAA systems to municipalities throughout the country. These steps included the creation of the regulator and other sector institutions, the adoption of a service provision model by each local authority and securing funds for severance payments of employees of the systems to be transferred. Since 2009, SANAA has transferred nine small- and medium-sized systems to municipalities throughout the country with generally positive results. Tegucigalpa is one of only four systems that remain to be transferred, and GoH, the AMDC, the Inter-American Development Bank (IDB) and the Bank have come together to expedite its transfer. The current legal framework and institutional momentum both show the authorities’ commitment to the reform process and provide adequate foundations for sustained service improvement.

56. The Project articulates the GoH’s and AMDC’s vision and goals with measurable indicators and demonstrates commitment to ensuring increased access and sustainability of water services by supporting institutional reforms together with infrastructure and operational improvements. On the institutional side, in addition to the creation of an independent municipal service provider, the Project will provide it with the operational and administrative tools necessary for efficient service provision.

57. The Project will support investments to enhance the security of water reservoirs and increase the efficiency of WTPs and networks in select areas. These investments will not only improve the financial sustainability of the service provider but also serve as the first step for further operational improvements as outlined in Tegucigalpa’s WSS business plan.


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58. The new service provider’s adoption of staffing levels in line with more efficient operators in the region will free up financial resources that can be allocated to maintenance, rehabilitation, and expansion. This will further enhance the financial and operational sustainability of the municipal service provider.

59. The Project will also address sustainability through education and communication programs to induce changes in attitude and behavior related to individual responsibility to support sustainable water provision through rational water use and payment of services.

IV. PROJECT APPRAISAL SUMMARY

A. Technical, Economic and Financial Analysis

Technical

60. Proposed Project activities are based on a sound and comprehensive business plan carried out within the framework of a recently concluded technical assistance operation supported by the Bank.21 The key recommendations of the business plan are, among others: (i) support SANAA/AMDC in designing a sound transfer strategy that includes a sustainable financial solution to the severance payments required for SANAA’s staff; (ii) support AMDC authorities in identifying ways to set the conditions to leverage commercial or private financing for the larger WSS investments in Tegucigalpa; (iii) revisit the current WSS Provision Model defined for Tegucigalpa; (iv) support UMAPS in gathering financial information that meets the quality standards required by private, commercial, and donor partners willing to invest; and (v) help determine sound tariff structures.

Economic Analysis

61. Rationale for public sector investment. The Project will invest in increasing the efficiency and reliability of water services in select areas of Tegucigalpa through two main action lines: (i) the establishment of a new service provider; and (ii) improvements in infrastructure and resource management. This is expected to generate economic benefits that will accumulate to both individuals and the municipality in terms of improvements in the value of water distributed, water stored (security), and water consumed, as well as in progressive reductions in O&M costs and containment of increasing costs derived from inefficient services and infrastructure. The investments in the Laureles and Concepción dams will generate additional benefits in term of improving the safety of these two major water sources for the nation’s capital.

62. Rationale for Bank Involvement. The Bank, with its global experience, is uniquely positioned to support WSS institutional transformation as well as water infrastructure investments that could result in cost-effective development outcomes (water availability, service efficiency improvements, safety enhancement, mitigation of negative environmental externalities). The Bank invests in these areas since lack of investment in water infrastructure reflects market failures and contributes to negative externalities on the population and the environment.

63. The financial and economic analysis put special emphasis on the viability of activities to be supported by the Project. Economic benefits from Project investments will materialize by (i) rehabilitating and upgrading three WTPs which will increase flexibility to redistribute water among the city’s three main subsystems resulting in improvements in service continuity, and (ii) by reducing physical and commercial losses which will improve the

21 World Bank. 2018. PPIAF TA: Tegucigalpa’s Municipal Water Supply and Sanitation Services Diagnostic, Completion Report No:

AUS0000187.


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system’s efficiency. These, will in turn, boost economic opportunities and growth. The reduction of physical losses will make more water available for current and/or future users.

64. Cost Benefit Analysis – Methodology. Costs and benefits are estimated at current prices. Financial flows are then converted to economic flows. The main approach used for the economic analysis is to compare the costs and benefits with and without project scenarios over the entire life of the Project.

65. Results. The total net present value (NPV) of the net benefits of the Project using a discount rate of 6 percent is estimated at US$43.5 million. The benefit-cost ratio is 1.7 and the internal economic rate of return of the Project reaches 15.1 percent. Based on two scenarios, which account for different reductions in severance payment costs and avoidance of excessive staff costs, the NPV of severance payments could reach at least US$21.49 million (pessimistic) and go up to US$39.6 million (optimistic) during the lifetime of the project. Total NPV of the project could add up to US$ 70.1 million when including the NPV of the optimistic scenario of severance payments.

B. Fiduciary

Financial Management

66. The Bank conducted a financial management assessment (FMA) of the financial management (FM) arrangements for the Project. The FMA was carried out in accordance with Bank Policy: Investment Project Financing and Bank Directive: Investment Project Financing and the Financial Management Manual for World Bank-Financed Investment Operations (effective March 1, 2010 and revised February 10, 2017) as well as the Program-for-Results and Investment Project Financing with Disbursement-Linked Indicators (effective October 1, 2018).

67. The scope of the FMA includes: (i) an evaluation of existing FM systems to be used for Project monitoring, accounting, and reporting; (ii) a review of staffing arrangements; (iii) a review of the flow of funds arrangements and disbursement methods to be used; (iv) a review of internal control mechanisms in place, including internal audit; (v) a discussion of reporting requirements, including the format and content of unaudited interim financial reports (IFRs); and (vi) a review of the external audit arrangements.

68. The FMA concluded that the AMDC has an adequate financial management system for funds flow and financial reports are generated in a timely, accurate, and reliable manner. However, it recognized that the AMDC does not have previous experience implementing World Bank projects. The AMDC’s FM Unit will be strengthened via the recruitment of a seasoned FM specialist with experience in World Bank FM procedures to ensure compliance with applicable World Bank requirements.

Procurement

69. Procurement will be conducted in accordance with the World Bank’s Procurement Regulations for IPF Recipients, issued in July 2016 and updated in November 2017 and August 2018, for the supply of goods, works, and non-consulting and consulting services under the Project. The AMDC/PCU, hosted in the AMDC, will be responsible for all procurement processes, including the technical aspects and contract management. In view of this, the AMDC/PCU will ensure proper coordination of procurement actions pertaining to the Project, with all units of the AMDC involved in such processes and will providing timely information and reports that reflect the status of each procurement activity.

70. A procurement assessment was performed to appraise the capacity of the AMDC to implement procurement actions and determine the resources needed, considering the AMDC’s organizational structure for project implementation. The AMDC has a well-functioning procurement unit, with vast knowledge and experience in procuring goods, works and services, following local procurement law. Current staff of the Procurement Unit have some experience implementing projects at a different government institution under the previous World Bank


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Procurement Guidelines. This will be the first World Bank–funded project to be implemented by the AMDC. However, recruitment of an experienced Project Coordinator and contracting of an international PMC is expected to mitigate the risk of protracted delays in procurement processes resulting from lack of direct experience in implementing World Bank financed operations.

71. The Recipient has developed a Project Procurement Strategy for Development (PPSD) and based on this PPSD, an 18-month Procurement Plan was prepared and agreed with the Recipient during Negotiations.

C. Legal Operational Policies . .

Triggered?

Projects on International Waterways OP 7.50 No

Projects in Disputed Areas OP 7.60 No .

D. Environmental and Social22 .

.

72. The Project is considered Substantial risk from an environmental and social perspective, due to the risks

associated with the safety of the existing Laureles and La Concepcion dams, and project activities to address

these risks. All other environmental and social risks of the Project are considered to be moderate. To manage

negative risks and impacts, AMDC has developed, consulted and disclosed an Environmental and Social

Assessment and Environmental and Social Management Plan (ESA and ESMP), as well as a Stakeholder

Engagement Plan (SEP) and Labor Management Procedures, prior to appraisal. A Dam Safety Preliminary

Assessment was also carried out to assess dam safety risks at the two existing water supply reservoirs

(Laureles and La Concepcion), and is summarized in the ESA. For all activities that will only be designed and

executed later during project implementation, the Environmental and Social Commitment Plan (ESCP) specifies

that the detailed site-specific planning shall include corresponding ESA and ESMP development, which must in

turn be consulted with relevant stakeholders and disclosed prior to initiation of corresponding activities. The

ESCP further specifies that, to address dam safety risks at Laureles and La Concepcion dams, ADMC will, under

the project: (i) hire a dam safety Panel of Experts (POE) to periodically review and advise AMDC on the studies

being elaborated, ensuring the relevant Environmental and Social Standards are taken into account; (ii) carry

out a comprehensive study for the dam safety review of both dams; (iii) elaborate dam safety instruments and

plans (instrumentation, O&M and EPP); and (iv) undertake immediate minor remedial works at both dams

including the implementation of an early warning system in both. The municipality's existing environmental

and social capacity will be strengthened through the project to ensure adequate management of all relevant

environmental and social risks and issues. The ESCP additionally specifies that AMDC will ensure that the

relevant Environmental and Social Standards are taken into account in watershed planning and management

studies envisaged under the project. There are no impacts on international waterways. (Refer to the

Environmental and Social Review Summary (ESRS-Report No: ESRSC00235) for further details). .

22 All the appraisal requirements were met by April 29, 2019, including the preparation, consultation and disclosure of the ESA & ESMP,

SEP, Labor Management Plan and the ESCP.


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V. GRIEVANCE REDRESS SERVICES

73. Communities and individuals who believe that they are adversely affected by a World Bank–supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate GRS, please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

VI. KEY RISKS

74. Overall risk. The overall risk rating is assessed as substantial.

75. Political and Governance risk is rated Substantial. At the national level, political instability and uncertainty, especially during electoral cycles and following transition periods, have led to macroeconomic instability and undermined operational engagement in the past. To mitigate these challenges, the team will engage in early and regular high-level dialogue with GoH, municipal authorities and other multilaterals (IDB, CABEI) to expedite implementation of those project activities most exposed to political risks. At the municipal level, the Project currently enjoys strong high-level support. However, a change in administration could result in a change in priorities, undermining implementation. To ring-fence the operation from changing political directions, Project design calls for the SPA between AMDC and UMAPS stating the responsibilities of both parties, including performance targets and mechanisms to modify key clauses of the SPA, which will require the Regulator’s approval and public consultations prior to adoption of any changes.

76. Macroeconomic risk is rated Substantial. IMF position in the latest article IV consultations stressed the need for continued ambitious fiscal reforms and revenue mobilization efforts to reduce public sector deficits and boost growth. Stronger efforts to resolve the financial situation of the state electricity company, right‑size the wage bill, and enhance the transparency and efficiency of public expenditures will also be critical to ease the substantial macroeconomic risks. The GoH aims to strengthen fiscal sustainability through consolidation of Central Government finances. The persistent deficit of the state-owned electricity company (ENEE) threatens Honduras’ fiscal position. Failure to reduce ENEE’s debt could lead to limited fiscal space, which may affect the proposed Project’s budget and viability. The team will closely track these issues with the GoH and, if necessary, modify the Project’s disbursement projections.

77. Institutional Capacity for Implementation and Sustainability risk is rated Substantial. The choice of an innovative instrument that blends standard IPF implementation with disbursements triggered upon the completion of DLIs could prove challenging for the implementing agency, the AMDC. To manage this risk and promote the new agency’s capacity for implementation, a DLI workshop to acquaint AMDC staff with the proposed mechanism took place during project preparation. In addition, an international consulting firm will serve as the PMC to support the PCU. The World Bank, the IDB, the GoH and AMDC counterpart teams are actively coordinating efforts to ensure complementarity in the design and timing of the two projects that are scheduled to be approved during second semester CY19 to expedite the award of severance payments of staff to be dismissed from SANAA and complete the transfer of operations to UMAPS. Should IDB funding not become available and only a limited number of functions transferred, an interim agreement would be entered into between UMAPS and SANAA establishing the operational,

http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service

http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service


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commercial, and financing arrangements to ensure ongoing service provision while new funding for severance payments is secured.

78. The Fiduciary Risk is rated High. The new PCU and AMDC do not have experience with Bank operations, which increases the risks of delays in the procurement of key activities and associated disbursements under the Project. The AMDC procurement unit does, however, have experience in implementing operations financed by other multilateral financial institutions and donors. Technical aspects of the envisaged procurement activities will require appropriate coordination among the technical and procurement units. To avoid protracted delays, the design calls for the recruitment of an experienced Project Coordinator to be supported by a consulting firm to serve as PMC. This arrangement is expected to ensure that: (i) procurement is undertaken with propriety and in accordance with World Bank procurement principles; and (ii) technical and operational knowledge will be transferred from the PMC to UMAPS. The use of DLIs may create additional challenges given the AMDC’s lack of experience in tracking and reporting progress toward achieving DLIs. The hiring of an IVA will be critical to support AMDC in verifying achievement of DLIs and to trigger corresponding disbursements. The DLIs have been designed based on prevailing capacities and critical sectoral priorities as a means of incentivizing and awarding key reforms.

79. Stakeholder Risk is rated Substantial. Some members of civil society may react negatively to the municipalization of WSS services, mistaking it as an initial step toward privatization and may refuse to pay for the services. However, this Project will support a comprehensive communications strategy and consultation plan during the transfer process, including stakeholder workshops, information campaigns, public hearings, interactive group meetings, and community dialogue to emphasize that service provision will be the sole responsibility of AMDC—which will remain the asset holder—while UMAPS will serve as a wholly-owned, single-purpose public agent to discharge this responsibility. SANAA’s labor union could, likewise, seek to delay the transfer of operations to the new service provider. To mitigate this risk, severance payments will be awarded prior to the transfer of functions in compliance with both Honduras’ Labor Law requiring due compensation and the Framework Law’s requirement that systems be free of debt upon transfer.

.


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ANNEX 1: RESULTS FRAMEWORK, MONITORING AND VERIFICATION PROTOCOLS

Results Framework

COUNTRY: Honduras TEGUCIGALPA: WATER SUPPLY STRENGTHENING PROJECT

Project Development Objectives(s)

The Project Development Objective (PDO) is to increase the efficiency and reliability of water services in selected areas of Tegucigalpa.

Project Development Objective Indicators

RESULT_FRAME_T BL_ PD O

Indicator Name DLI Baseline Intermediate Targets End Target

1 2 3

Operationalization of the UMAPS

A new Municipal Water and Sanitation Provider (UMAPS) operational (Text)

DLI 1, 2, 3, 4, 5, 6, 7

UMAPS is not operational UMAPS Organizational structure approved and Managerial Team appointed

Administrative and Finance functions transferred Commercial functions transferred

Operations and maintenance functions transferred

UMAPS operational

Improve the reliability and eficiency of water services in selected areas

People receiving at least 12 hours of water per day in targeted areas under the Project (Number)

0.00 0.00 90,000.00 180,417.00 180,417.00

Priority WTPs operating at 95 percent capacity or higher in compliance with internal process standards (Number)

0.00 1.00 2.00 3.00 3.00

Number of hydraulic sectors (District Metered Areas) complying

0.00 4.00 9.00 14.00 14.00


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RESULT_FRAME_T BL_ PD O


1 2 3

with non-revenue water (NRW) targets (Number)

PDO Table SPACE

Intermediate Results Indicators by Components

RESULT_FRAME_T BL_ IO


1 2 3 4

Component 1: Operationalization of the UMAPS

Adoption of Governance Arrangements and Gender Policy (Text)

UMAPS is not operational

UMAPS New governance structure in place, organizational structure approved, Managerial Team appointed, Service Performance Agreement has been signed and Gender policy prepared, approved, implemented and disseminated

Participation of women in high-level decision-making positions > 5% and participation of women in medium-level technical positions > 5%

Participation of women in high-level decision-making positions > 10% and participation of women in medium-level technical positions >10%

Participation of women in high-level decision-making positions >18% and 25% and participation of women in medium-level technical positions >18% and 25%

UMAPS New governance structure in place, organizational structure approved, Managerial Team appointed,the Service Performance Agreement has been signed and the UMAPS gender policy adopted and its first actions implemented

Component 2: Improved water production capacity and efficiency of the distribution network

Staff per thousand connections (Number)

10.40 6.00 5.50 5.00 5.00

A risk assessment (including potential climate hazards) and emergency preparedeness plan for Los Laureles and Concepción approved by the Panel of Experts (Number)

0.00 0.00 1.00 2.00 2.00


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1 2 3 4

Water Resources Management Strategy (WRM) (diagnostic, plans and infrastructure designs to improve sanitation) for Los Laureles Reservoir is prepared, endorsed by the Municipal Council and UMAPS Board (Text)

-- Tors WRM strategy approved

WRM Strategy under preparation: Water shed Management component prepared

WRM Strategy under preparation: Sanitation Plan component prepared.

Overall WRM Strategy approved

Number of dams operating in compliance with a dam safety action plan (Text)

--

POE hired and operational delivering at least two progress reports per year on the implementation status of dam safety action plan.

Final progress report of implementation status of dam safety action plan delivered.

Communication strategy and water loss reduction campaigns implemented incentivizing citizen participation in domestic water loss reduction and rational water consumption (Text)

-- Communication strategy developed and approved by AMDC

• Communications campaign published/broadcasted •Trainers trained and population reached • At least, 30% percent of households adopt rational water consumption practices (survey)

40% percent of households adopt rational water consumption practices (survey)

50% percent of households adopt rational water consumption practices (survey)

Component 3: Project Management and Technical Assistance

Reports on Performance of WSS services in Tegucigalpa endorsed by the WSS Local Comission (COMAS) and published by the Regulator and IBNET on an annual basis (Yes/No)

No Yes Yes Yes


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1 2 3 4

Public consultations on planning, service standards and funding sources carried out as required by Service Performance Agreement (Yes/No)

No Yes

Stakeholder consultation and engagement plan implemented (Yes/No)

No Yes

Grievances addressed and resolved within the agreed timeframe (Yes/No)

No Yes

IO Table SPACE

UL Table SPACE

Monitoring & Evaluation Plan: PDO Indicators

Indicator Name Definition/Description Frequency Datasource Methodology for Data Collection

Responsibility for Data Collection

A new Municipal Water and Sanitation Provider (UMAPS) operational

The UMAPS new governance structure has been adopted by the Recipient and the PIE, the UMAPS organizational structure has been approved by the AMDC’s council, the managerial team has been appointed (general,

Annual

AMDC /UMAPS/ SANAA Secretary of Labor/ ERSAPS

The IVA will verify progress towards achievement of intermediate target. Since this Indicator is related to DLIs 1-7, more detail about the verification protocols could be found the correspondent annex.

IVA


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administrative/financial, commercial and operational managers), the Service Performance Agreement has been signed and the UMAPS gender policy adopted and its first actions implemented.

People receiving at least 12 hours of water per day in targeted areas under the Project

Number of beneficiaries benefiting from the improvements in the systems and receiving water at least 12 hours per day

Annual

Data loggers installed in representative areas in the network

Data collected by UMAPS and verified though monitoring visits carried out by an independent consultant

UMAPS

Priority WTPs operating at 95 percent capacity or higher in compliance with internal process standards

It will be considered that a plant has been improved when its production is measured, and it is working at 95 percent of its design capacity or higher, provided that all processes are complying with the corresponding internal operational standards. Production efficiency will be measured during seasons when water is abundant at the sources to make sure that WTPs can work at full capacity. Production process shall comply with internal

Annual

WTP operations department

First, data will be collected by an independent consultancy firm to determine WTP current capacity. Second, an independent firm will verify annually information collected and processed (during seasons when water is abundant at the sources to make sure that WTPs can work at full capacity).

UMAPS


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operational standards to ensure that each element of the treatment process is working properly, avoiding that one process stage is forced to compensate for shortcomings of the previous process stage (i.e.: filters have to compensate poor flocculation or sedimentation performance).

Number of hydraulic sectors (District Metered Areas) complying with non-revenue water (NRW) targets

Number of hydraulic sectors (District Metered Areas) complying with non-revenue water (NRW) targets. Table 5 in Annex 2 shows the agreed targets depending on the baseline NRW value. It is expected that this activity will achieve reductions in NWR percentages of between five and fifteen percentage points annually depending on the baselines values.

Annual

UMAPS operations department

UMAPS will prepare a report using internal data sources. An independent agency (firm or individual consultant) will verify against internal databases and reading made in the micro-meterers.

UMAPS

ME PDO Table SPACE


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Monitoring & Evaluation Plan: Intermediate Results Indicators

Indicator Name Definition/Description Frequency Datasource Methodology for Data Collection

Responsibility for Data Collection

Adoption of Governance Arrangements and Gender Policy

The UMAPS new governance structure has been adopted by the Recipient and the PIE, the UMAPS organizational structure has been approved by the AMDC’s council, the managerial team has been appointed (general, administrative/financial, commercial and operational managers), the Service Performance Agreement has been signed and the UMAPS gender policy adopted and its first actions implemented.

Annual

AMDC/UMAPS SANAA Secretary of Labor/ ERSAPS

The IVA will verify progress towards achievement of intermediate target. Since this Indicator is related to DLIs 1-7, more detail about the verification protocols could be found the correspondent annex.

IVA

Staff per thousand connections This indicator measure staffing efficiency

Annual

Staff database and commercial system (UMAPS)

Analysis and revision of the internal database and calculations carried out by UMAPS staff. Results will be verified by the WB team during monitoring missions.

UMAPS

A risk assessment (including potential climate hazards) and emergency

A risk assessment (including potential climate hazards)

Annual

Final risk assessment

Project progress report verified by the WB

UMAPS


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preparedeness plan for Los Laureles and Concepción approved by the Panel of Experts

and emergency preparedeness plan for Los Lauerels and Concepción approved by the Panel of Experts

plan elaborated by consultancy firm and approved by the Panel of Experts

team

Water Resources Management Strategy (WRM) (diagnostic, plans and infrastructure designs to improve sanitation) for Los Laureles Reservoir is prepared, endorsed by the Municipal Council and UMAPS Board

Intermediate target 1: Tors WRM strategy approved Intermediate target 2: WRM Strategy under preparation. Watershed Management component prepared Intermediate target 3: WRM Strategy under preparation. Sanitation Plan component prepared. End target: Overall WRM Strategy approved

Annual

Final WRM Strategy elaborated by consultancy firm and endorsed by the Municipal Council and UMAPS Board

Project progress report verified by the WB team

UMAPS

Number of dams operating in compliance with a dam safety action plan

Number of dams operating in compliance with a dam safety action plan. (Resilience)

Annual

Final Dam Safety Plan elaborated by consultancy firm and endorsed by a dam safety Panel of Experts (POE)

Project progress report verified by the WB team

UMAPS


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and UMAPS Board

Communication strategy and water loss reduction campaigns implemented incentivizing citizen participation in domestic water loss reduction and rational water consumption

This indicator aims to measure changes in water comsumption behaviours, measuring % of households adopting rational water consumption practices

Annual

A household survey in the areas benefiting from the campaign to collect data and to measuring

M&E process will rely both on official statistical data and first-hand data collection at the local level on a random sample basis in selected areas.

UMAPS

Reports on Performance of WSS services in Tegucigalpa endorsed by the WSS Local Comission (COMAS) and published by the Regulator and IBNET on an annual basis

Reports on Performance of WSS services in Tegucigalpa endorsed by the WSS Local Comission (COMAS) and published by the Regulator and IBNET on an annual basis

Annual

Reports elaborated by UMAPS, endorsed by COMAS and published by ERSAPS

Report verified by the WB team

UMAPS

Public consultations on planning, service standards and funding sources carried out as required by Service Performance Agreement

Public consultations on planning, service standards and funding sources carried out as required by Service Performance Agreement

Annual

Records, as aide memoires, of public consultations carried out by COMAS

Records verified by the WB team

UMAPS

Stakeholder consultation and engagement plan implemented

Stakeholder consultation and engagement plan implemented

Annual

SEP plan elaborated by UMAPS.

Plan and records verified by the WB team

UMAPS


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Records of stakeholders events (meetings, public consultations, etc.)

Grievances addressed and resolved within the agreed timeframe

Grievances and claims addressed and resolved within the agreed time frame

Annual

Report showing grievances and claims received and how has been addressed and resolved

UMAPS will report on grievances and claims and will be verified by the WB team during supervisory missions

UMAPS

ME IO Table SPACE

Disbursement Linked Indicators Matrix

DLI_T BL_MATRIX

DLI 1 Adoption of Governance Arrangements and Gender Policy

Type of DLI Scalability Unit of Measure Total Allocated Amount (USD) As % of Total Financing Amount

Output No Text 3,000,000.00

Period Value Allocated Amount (USD) Formula

Baseline Inadequate UMAPS governance arrangements


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2020 0.00

2021 UMAPS New governance structure in place, organizational structure approved, Managerial Team appointed, Service Performance Agreement agreed and Gender policy implemented

3,000,000.00

2022 0.00

2023 0.00

2024 0.00

DLI_T BL_MATRIX

DLI 2 Transfer of Administration and Finance functions from SANAA to UMAPS




Baseline Function currently performed by SANAA

2020 0.00

2021 0.00

2022 Function performed by UMAPS 5,000,000.00

2023 0.00

2024 0.00


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DLI_T BL_MATRIX

DLI 3 Transfer of Commercial function from SANAA to UMAPS





2020 0.00

2021 0.00

2022 Function performed by UMAPS 5,000,000.00

2023 0.00

2024 0.00

DLI_T BL_MATRIX

DLI 4 Transfer of the Picacho subsystem from SANAA to UMAPS





2020 0.00

2021 0.00

2022 0.00


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2023 Subsystem operated by UMAPS 1,000,000.00

2024 0.00

DLI_T BL_MATRIX

DLI 5 Transfer of the Laureles subsystem from SANAA to UMAPS





2020 0.00

2021 0.00

2022 0.00


2024 0.00

DLI_T BL_MATRIX

DLI 6 Transfer of the Concepcion subsystem from SANAA to UMAPS





2020 0.00


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2021 0.00

2022 0.00


2024 0.00

DLI_T BL_MATRIX

DLI 7 Transfer of the Sanitation system from SANAA to UMAPS





2020 0.00

2021 0.00

2022 0.00

2023 System operated by UMAPS 1,000,000.00

2024 0.00


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Verification Protocol Table: Disbursement Linked Indicators

DLI 1 Adoption of Governance Arrangements and Gender Policy

Description

To support (i) the setting up of sound governance arrangements that foster accountability and professionalism on the part

of the service provider and its management team; and (ii) the application of gender- sensitive policies that address gender

equality in the workplace, equal pay for equal work, and gender-based violence prevention, this DLI will disburse the set

amount upon verification that the statutes and other governing instruments of UMAPS have been revised as necessary and

approved and the gender policy has been developed, approved, and implemented. It is anticipated that this will: (i) ensure

that the utility will be managed in a professional way, with staff selected through open, competitive, and merit-based

processes and operations; planning and tariff-setting procedures and decision-making processes likewise being conducted

professionally; and (ii) advance gender equality in terms of women’s participation in high-level decision-making and mid-

level technical positions and equal pay for equal work; and prevent gender-based violence at UMAPS.

Data source/ Agency AMDC/ UMAPS/ ERSAPS

Verification Entity IVA

Procedure

Verification protocols to be implemented by the IVA

Governance Structure approved and adopted. The revision of the current Statutes and other governing instruments shall

include a confirmation or modification of UMAPS governance set-up, its managerial and operational structure, staff

selection procedures for high-level decision-making and mid-level technical positions, and the SPA signed including the tariff

calculation procedures agreed with ERSAPS. The assessment of the governance arrangements will take into account

whether the governance documents provide an adequate framework to ensure that UMAPS will operate in a professional

and efficiency-oriented manner where revenues, operating and capital expenditures are balanced and adequate to achieve

all service targets set forth in the SPA. The Statute and the SPA must be approved by the Municipal Council, and shall be

accompanied by a report prepared by the IVA, explaining how these governance instruments make UMAPS more

professional, accountable and independent.

Gender policy. The IVA will verify that the UMASPS’ gender policy has been issued, approved, and adopted by the municipal

council, and assess whether the gender policy will achieve the following objectives: (a) improve women’s participation in

high-level decision-making and mid-level technical positions, balancing this advancement with the required professionalism

and competence for the position; (b) achieve equal pay for equal work; and (c) prevent gender-based violence at UMAPS.


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Besides approving the policy, the IVA will verify that UMAPS has carried out the preliminary actions, defined as: (i) running a

widespread advertisement and recruitment campaign targeting women; (ii) providing staff training on gender equality

aspects; and (iii) designing and implementing career mentoring programs for women. It will also check progress on women’s

status at UMAPS using the Women in Water Utilities questionnaires, which track the state of gender representation at

UMAPS in the first year. IVA will prepare semiannual reports informing the World Bank and UMAPS on the progress made

and/or the completion of these initial activities. UMAPs itself will continue to check the state of female representation at

UMAPS on an annual basis and report to the Bank.

Although the deadline for this DLI is set at the end of the first year after effectiveness, the PCU may require the IVA to carry

out the verification earlier if all required activities under this DLI are completed before the deadline.

DLI 2 Transfer of Administration and Finance functions from SANAA to UMAPS

Description

To help set up the UMAPS, this set of DLIs (2- 7) will trigger disbursements considering the progress in transferring

administrative and financial, commercial and operational functions and associated assets from SANAA to UMAPS. Transfer

of each function requires severance payments to all SANAA staff of the units currently delivering such function. To

implement the transfer, all SANAA staff will be dismissed providing the opportunity for many of them to join the UMAPS

based on merits and following a competitive process. Severance payments related to the transfer of functions from SANAA

to UMAPS will be made in accordance with the terms of the individual agreements entered into between each employee

and SANAA. The AMDC will define the order of priority of the units to be transferred from SANAA to UMAPS. To help set up

the UMAPS, DLI - 2 will trigger disbursements considering the progress in transferring the administrative and financial

functions and its associated assets, from SANAA to UMAPS.

Data source/ Agency AMDC/UMAPS SANAA


Procedure

Before any function can be transferred, the AMDC has to define the managerial and operational structure of UMAPS. At the

time of transfer of each function, UMAPS shall have approved the specific key operational and policy instruments for each

of the corresponding units. The units will use these instruments —which may include policies, strategies, norms,

information systems, manuals, plans, procedures, and hydraulic models—to support their daily operations. A list of basic


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instruments required for each function is presented in Annex 2.

During verification process the IVA will assess whether UMAPS managerial and operational structure has been approved

and will confirm that the appointment of UMAPS’ Managerial Team (all hired through an open and competitive process

based on professional qualifications); that the policies, procedures, manuals, system and other managerial tools have been

approved and follow sound operational practices; that the proper location and adequate assets and equipment have been

assigned for the performance of each function; that each function is being undertaken by UMAPS; and that all severance

payments have been made or committed for the purpose of transferring each function.The documentation to evidence the

commitment may include copies either physical or digitized, of the aggregate of severance payment agreement signed

and the confirmed allocation in SANAAs and AMDCs budget lines for severance payments.

The IVA will likewise verify that the Central Government and the AMDC have committed US$30 million and US$28.5 million

equivalent, respectively for severance payment, as a prerequisite to trigger disbursements of DLIs 2 to 7.

Overall, progress under the DLIs 2 - 7, will be verified at UMAPS’ request during any of the verification missions to be

undertaken by IVA, whenever the service provider considers a function has been transferred in compliance with all

requirements set forth in the project design, and the amount to be disbursed will depend on which function was transferred

during each period, as indicated in the Financing Agreement, Annex 1 and 3. This verification protocol will be valid for DLI 2

to DLI 7.

For DLI 2, the IVA will receive reports from SANAA and AMDC about dismissed employees and severance payments made

and from UMAPS about operational and management instruments developed and implemented, evaluate satisfactory

performance of each function transferred (including administrative and financial functions) and report on achievements.

DLI 3 Transfer of Commercial function from SANAA to UMAPS

Description To help set up the UMAPS, this DLI will trigger disbursements considering the progress in transferring commercial functions

and its associated assets, from SANAA to UMAPS.




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Procedure

The IVA will receive reports from SANAA and AMDC about dismissed employees and severance payments made and from

UMAPS about operational and management instruments developed and implemented, evaluate satisfactory performance

of each function transferred (including commercial functions) and report on achievements.

DLI 4 Transfer of the Picacho subsystem from SANAA to UMAPS

Description To help set up the UMAPS, this DLI will trigger disbursements considering the progress in transferring administrative and

operational functions, including the El Picacho subsystem and its associated assets, from SANAA to UMAPS.



Procedure



of each function (including El Picacho Subsystem) and report on achievements.

DLI 5 Transfer of the Laureles subsystem from SANAA to UMAPS

Description To help set up the UMAPS, this set of DLIs will trigger disbursements considering the progress in transferring of operational

and administrative functions, including Los Laureles subsystem and associated assets from SANAA to UMAPS.



Procedure



of each function (including Los Laureles subsystem) and report on achievements.

DLI 6 Transfer of the Concepcion subsystem from SANAA to UMAPS


operational functions, including the subsystem of La Concepción and its associated assets from SANAA to UMAPS.


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Procedure



of each function (including La Concepción subsystem) and report on achievements.

DLI 7 Transfer of the Sanitation system from SANAA to UMAPS


operational functions, including the sanitation system and its associated assets from SANAA to UMAPS.



Procedure



of each function (including sanitation services) and report on achievements.


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ANNEX 2: DETAILED PROJECT DESCRIPTION

1. The overall cost of the Project is US$126.0 million, financed by a US$50.0 million credit from IDA and US$76.0 million in counterpart funding from the Central Government and AMDC.

Table 2.1: Indicative Project Cost and Financing (US$ million)

Project Components Project

Costs IDA Credit

Counterpart Funds

Central Government AMDC

Component 1. Operationalization of the UMAPS 89.0 18.0 42.5a 28.5

Component 2. Improved water production capacity and efficiency of the distribution network

31.0 27.0 0.0 4.0

Component 3. Project management and technical assistance 6.0 5.0 0.0 1.0

Component 4. CERC 0.0 0.0 0.0 0.0

Total costs 126.0 50.0 42.5 33.5

Note: a. An amount of US$30 million is financed through IDB’s policy-based loan (PBL).

2. Component 1. Operationalization of the UMAPS (total cost US$89 million, of which US$18 million IDA financing). To encourage a focus on results, this Component will use DLIs to achieve seven specific targets associated with the transfer of Tegucigalpa’s WSS system from SANAA to UMAPS and the strengthening of UMAPS’ administrative, operational, commercial, and financial capacity to effectively manage the system. This component will focus on: (i) updating of the statute defining the service provider’s governance structure, duties and responsibilities, and inter-institutional relationships; (ii) developing and implementing a gender policy to incentivize a gender-sensitive work environment including improving gender equality, equal pay for equal work, and preventing gender based violence at UMAPS; and (iii) supporting the operationalization and staffing of the key departments and units of UMAPS, which may include, among others, the development and implementation of policies, manuals, instruments, and operation and management plans for each of these units.

3. This Component will disburse US$18 million of the IDA credit according to the progress or completion of eligible activities established in the DLI protocols (see Annex 1 and 3) for the seven DLIs.

DL1: Adoption of governance arrangements and gender policy of UMAPS

4. Governance instruments and management structure to support efficient and sustainable professional service delivery. UMAPS was legally constituted by the AMDC through Agreement #011 included in Act #008 dated May 8, 2015, as modified by Agreement #008 included in Act #008 dated May 8, 2017. These instruments establish governance arrangements and an organizational structure for UMAPS that shall be analyzed and revised if so required to provide an independent and professional decision-making framework. The revised instruments shall protect UMAPS from political interference, putting the sustainability, efficiency, and efficacy of service provision above political and sectorial interests and aimed at improving service standards while caring for the low-income population in a sustainable manner.

5. In addition, AMDC and UMAPS will sign a “Service Performance Agreement” (SPA) that will specify, among other responsibilities of the parties: (i) the operational and financial parameters, indicators, and goals to be achieved by UMAPS within the term of the Project and beyond; (ii) the contributions, if any, to be made by AMDC toward the achievement of these goals; and (iii) the involvement of ERSAPS in approving the tariff-setting mechanism, the SPA, and any modification to it. 23 ERSAPS will issue a certification stating whether: (i) the SPA reflects an efficient approach to

23 For these tasks, ERSAPS will rely on support from an international consulting firm specialized in technical auditing or strategic planning for regulated water services.


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operating the systems; and (ii) any shortfalls to the financial viability of the proposed actions to achieve the goals stated in the SPA. This will contribute to ensuring that operation, planning, and tariff-setting procedures and decision-making processes are conducted professionally and aimed at improving service quality, efficiency, and sustainability. The SPA, the regulator’s certification, and any changes to the SPA will be published as part of UMAPS’ transparency policies and presented for discussion in public consultations (Cabildos) to keep the public informed of the most relevant aspects of service provision.

6. The revision of the statutes and other governing instruments will include, among others, a confirmation or modification of UMAPS’ governance set-up, its managerial and operational structure, its staff selection procedures for decision-making positions, and the SPA including tariff calculation procedures agreed with ERSAPS.

7. Gender policy. To support AMDC’s commitment to improve gender equality and incentivize the application of gender-sensitive policies—incorporating gender equality in the workplace, equal pay for equal work, and gender-based violence prevention—the Project will support the adoption of a gender policy in UMAPS as well as the implementation of initial steps in this context. These steps will include running a widespread advertisement and recruitment campaign targeting women; staff training on gender equality aspects; and the design and launch of career mentoring programs for women.

8. To ensure that UMAPS implements the gender policy, the principles of that policy will be embedded in its human resources procedures, especially for the staff selection process. While no information is available on the gaps related to women working in utilities nationwide, key AMDC officials interviewed during preparation expressed confidence that the targets set for women’s participation in high-level decision-making and mid-level technical positions (see results framework) are achievable because the pool of potential female applicants is large enough. The Project will work with the utility to avoid the risk of having few or no female applicants for these positions by running a solid advertisement and recruitment campaign targeting women. In addition, the Project will provide training to existing staff in gender equality aspects and help UMAPS’ management organize mentoring programs for women to accelerate their career development. UNAPS will only be able to determine women’s participation rates in the specified positions after the Municipal Council has approved its managerial and operational structure.

9. The adoption of governance arrangements and a gender policy will trigger disbursements upon verification of their gender policy implementation as described in Annex 1 and 3.

DLI 2–7: Transferring functions from SANAA to UMAPS

10. Prior to any transfer, the AMDC and UMAPS will need to define the managerial and operational structure of UMAPS. Likewise, by the time each function is to be transferred, UMAPS will have approved specific key operational and policy instruments for each of the corresponding units. These instruments will be used to support the units’ daily operations. Instruments may include, among others, policies, strategies, rules and regulations, information systems, manuals, plans, procedures, and hydraulic models. Table 2.2 presents a tentative list of the instruments to be developed and approved before the transfer of the indicated functions.


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Table 2.2. Operational and Administrative Instruments to Be Approved Prior to Transfer

Function Subfunction Required instruments

Administration and finance (related to DLI 2)

Accounting Charter of accounts, accounting principles, accounting manual and procedures, and cost accounting policy and procedures

Asset management

Asset inventory and updating procedures, and asset management policy and procedures

Consumables management

Storage policy and procedures (spare parts, networks accessories and pipes, chemicals) and stock management policy and procedures

Treasury Financial management and reporting policy and procedures

Human resources

Human resources policy and procedures, hiring procedures and career development based on gender principles, including remuneration/health and safety policies and procedures

Commercial (related to DLI 3)

General Commercial policy (general guidelines for billing, categorization of customers, dealing with debtors, etc.) and information technology policy and procedures

Billing Tariff regime; schedule of customer categories; customer database updating procedures; billing system and procedures; meter reading, maintenance and replacement policies and procedures

Collection Collection policy including all collection mechanisms, collection procedures for each channel, and account management procedures; procedure to cut off services to bad debtors

Customer service

Customer relations policy call center policy and procedures, customer service policy and procedures, back-office procedures, and customer communication campaigns emphasizing the adoption of water conservation practices and individual responsibilities for payments

Operations (related to DLIs 4 to 7)

General

Operations and maintenance policies (general guidelines on service operations for each subsystem and interaction with other subsystems, isolation or overlapping of subsystems, and maintenance of equipment; hydraulic modeling policy, manuals and procedures; information technology policy and procedures; and principles for resilience in WSS planninga

Water resources management

Catchment protection policy and procedures to minimize the exposure of the Laureles and Concepción reservoirs to the impacts of climate change associated with heavy rainfall, flooding, and droughts as well as pollution resulting from uncontrolled urban and agricultural activity

Water production

Production policy and procedures for each subsystem; operational manual for each production subprocess and quality standards at each interface; quality control procedures and manual; laboratory procedures and standards; and maintenance policy, procedures, and manuals

Distribution Network operations policy; sectorization/district meter area policies and procedures; water balance procedure; network maintenance; repair, rehabilitation, and renovation policies and procedures; and network water sampling policy, procedures, and quality standards

Wastewater collection

Network operations policy; pollution monitoring and handling policy and procedures; and network maintenance, repair, rehabilitation, and renovation policies and procedures

Wastewater treatment

Treatment policy and procedures, operational manual for each treatment subprocess and quality standards at each interface, quality control procedures and manual, laboratory procedures and standards, and maintenance policy, procedures, and manuals

Energy efficiency

Bringing best practices to reduce energy intensity of the water treatment plant and other key energy components of the system


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Note: a. World Bank Group. 2018. Building the Resilience of WSS Utilities to Climate Change and Other Threats: A Road Map. Washington, DC: World Bank. https://hubs.worldbank.org/docs/imagebank/Pages/docProfile.aspx?nodeid=30732776.

11. The proper transfer of each function requires that SANAA dismiss all staff working at the units currently delivering that function and making the corresponding severance payments to them, regardless of whether they will join UMAPS. Once the administrative and operational instruments for a certain function have been approved and the corresponding staff dismissed, the transfer can take place. These activities will be associated with DLIs 2 to 7, which will trigger disbursements based on progress made in transferring commercial, administrative, and operational functions from SANAA to UMAPS.

12. Component 2. Improved water production capacity and efficiency of the distribution network (total cost US$31 million, of which US$27 million IDA financing). Tegucigalpa continues to rely on the same water sources it relied on in 1990. The Concepción, Laureles, and Picacho facilities are Tegucigalpa’s main sources of drinking water. All three are vulnerable to a series of impacts caused by extremes of climate variability and human activity that affect water availability.24 This situation is exacerbated by uncontrolled rapid urbanization, which, coupled with a crumbling infrastructure and decaying WSS institutions, contribute to high water losses and irrational water usage. Consequently, the volume of water available at the three facilities is insufficient to meet Tegucigalpa’s current consumption levels.

13. The Laureles Reservoir is located in Tegucigalpa’s Guacerique watershed to the north, one of the basins most vulnerable to the impacts of climate change and unrestrained human encroachment. Since Hurricane Mitch (1998), the reservoir—which supplies 25 percent of Tegucigalpa’s water—has lost an estimated 15 percent of its storage capacity to increased sedimentation. In addition to its decreased storage capacity, urban development and several tropical storms following Mitch have resulted in rapid deforestation of the watershed, leading to greater soil erosion, increased runoff, and less water captured by the reservoir. Meanwhile, despite laws designating the watershed as a protected public forest and a smaller part of it as a biological reserve, farmers have steadily encroached onto the protected area. Between 1993 and 2008, an estimated 15 percent of forests in the watershed were converted to agricultural use, increasing the level of contaminating agents and progressively undermining the efficiency of the WTP. While an adaptation plan designed to increase the water supply originating from the Guacerique watershed was approved by SANAA in 2012, the ongoing decentralization from SANAA to the municipality of Tegucigalpa has distracted institutional attention away from this issue. This, coupled with a lack of funding and community buy-in, have prevented implementation of the plan.

14. Located in the Río Grande Basin to the south of the city, the quality and quantity of La Concepción Reservoir’s water supply are increasingly vulnerable to inefficient water resources management and unchecked encroachment. La Concepción provides water to approximately 56 percent of Tegucigalpa’s population, and is currently threatened by deficiencies in SANAA’s management of water resources in the Río Grande Basin. Although its distance from the capital’s urban area (12 kilometers) gives it an advantage over the Laureles reservoir, rapid urbanization poses an ever-increasing threat to the quality and quantity of water produced by this source. According to SANAA, human activity in the upper part of the Río Grande Basin—particularly related to deforestation—are contributing to increased levels of siltation.25 Moreover, budgetary constraints are largely to blame for SANAA’s minimal surveillance and control of the reservoir’s water quality.

15. The Picacho subsystem receives its raw water from springs of varying production and quality levels throughout the year. The main catchment for this subsystem is La Tigra, which is also affected by pollution caused by human

24 The frequency and severity of storms and related flooding is also predicted to rise over time. 25 Siltation of water bodies is most often caused by soil erosion or sediment spill. It acts as a pollutant of the water source and results in the water requiring tertiary treatment to make it safe for consumption.

https://worldbankgroup-my.sharepoint.com/personal/ipakulski_worldbank_org/Documents/Additional%20contracts%20FY2019/PAD%20Tegucigalpa/Bank.%20https:/hubs.worldbank.org/docs/imagebank/Pages/docProfile.aspx?nodeid=30

https://worldbankgroup-my.sharepoint.com/personal/ipakulski_worldbank_org/Documents/Additional%20contracts%20FY2019/PAD%20Tegucigalpa/Bank.%20https:/hubs.worldbank.org/docs/imagebank/Pages/docProfile.aspx?nodeid=30


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activity, despite the efforts of an NGO dedicated to conservation work in the catchment. In general terms, the raw water at Picacho is considered of better quality than that of Concepción and Laureles. The four springs—Jutiapa, Jucuaras, Carrizal, and San Juancito—are connected to the WTP through four gravity-fed aqueducts. However, water from the Jutiapa spring rarely reaches the plant because of unmetered offtakes en route. Some of these offtakes supply water to the owners of the fields through which the aqueduct passes as payment for the right of way. Others are unregistered connections that supply water (albeit raw) to settlements along the aqueduct. The latter situation creates a health risk for these communities while depriving the Picacho WTP of raw water.

16. This Component aims to improve the resilience and reliability of water services in targeted areas of Tegucigalpa, and will be implemented through three subcomponents:

17. Subcomponent 2.1. Improving water availability (total cost US$24 million, of which US$20 million IDA financing). Given the above-mentioned vicious cycle (description of Component 1), water infrastructure deteriorated to the point that WTPs are both unable to ensure an equitable distribution of water produced and are further left struggling to produce water of adequate quality, given the characteristics of the incoming raw water. The WTPs are showing some operational inefficiencies due to imbalances between the capacity of the various production and storage elements, while networks are in such poor condition that water losses are estimated at around 50 percent. Table 4 shows the difference between the current average production capacity of each WTP and its design capacity, showing that there is significant room for improvement.

Table 2.3. Estimated Water Production Capacity of Tegucigalpa's Main WTPs (m3/sec)

Water Sources Estimated Current

Capacitya

Estimated Design

Capacity

Picacho 0.45 m3/sec 0.90 m3/sec

Laureles 0.50 m3/sec 0.85 m3/sec

Concepción 0.95 m3/sec 1.70 m3/sec

Note: a. Values are estimated because measurement instruments are either not in place or need maintenance.

18. These poor infrastructure conditions lead to water rationing marked by an uneven pattern. While some users receive water once every second or third day, many receive it only once a week and, in extreme cases, only once every two weeks. The lowest-income households are usually the ones in the latter situation.26

19. This has forced users to seek different coping mechanisms, depending on their financial standing. Those with sufficient resources have built underground storage tanks to store enough water to meet their consumption needs until the next time they receive water; while low-income families have resorted to storing water in plastic containers, rudimentary rain harvesting, and buying water from tankers at prices several times over the price charged by SANAA for water distributed through the network.

20. These practices have exacerbated the problem as many underground storage tanks lack automatic shut-off valves. Low-income households keep their taps open to allow their containers to fill up when it is their turn to receive water, even if they are not home. This results in water wastage due to uncontrolled overflows, including some directly into the sewerage system. Consequently, water losses grow beyond those caused by deteriorated pipes, illegal connections, and consumption meters in poor condition.

26 The distribution of WSS services in Tegucigalpa is highly inequitable. The price of water for the peri-urban users (normally segment 5) is US$0.15 (HNL 3.69) per m3, which is 250 percent of the price applied to the domestic users of segment 1. Families in segment 5, on average allocate almost 15 percent of their household income to buy water.


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21. Although the last major water source developed for Tegucigalpa was commissioned in 1993 (La Concepción), this does not, in and of itself, justify the extreme rationing that is affecting users throughout Tegucigalpa.

22. To support the initial steps necessary to overcome the issues described above, this component will finance (i) the rehabilitation/upgrading of WTPs to increase flexibility in redistributing water among the three main subsystems ; (ii) investments to improve energy efficiency of WTPs from 0.0134 kWh/m3 to 0.01134 kWh/m3; (ii) the establishment of district metered areas (DMAs), and regularization of water pressure in the main pipelines in a pilot area through the installation of pressure-reducing valves and reconfiguration of the network; (iii) the improvement of network efficiency in the same area by reducing physical and commercial losses, thus increasing water availability and revenues, while locking in the continued use of a zero-emissions gravity-fed system still within its economic life; and (iv) reduction in wastage and overconsumption through education and communication campaigns, creating awareness about the actions that can be taken to save water through modification of household infrastructure and habits.

23. Improvements to WTPs. Improving infrastructure conditions and operations at the WTPs encompasses several activities, including the effective measurement of 100 percent of the water produced at Concepción, Laureles, and Picacho before entering the distribution network as well as various actions at each WTP to improve control over the production process (and the safety of employees, people living close to the WTPs, and the environment), while increasing efficiency. Treatment will be enhanced, quality control procedures will be revised and enforced, equipment will be upgraded as necessary, and hydraulic synergies between the treatment plants will be improved to increase overall system flexibility. These efforts will require TA, equipment, and minor infrastructure works in each of the three WTPs.

24. A plant’s production will be considered improved if its actual production level is at least 95 percent of its design capacity and all processes comply with internal operational standards. Production efficiency will be measured during seasons when water is abundant at the sources to ensure that WTPs can work at full capacity. This is generally the case between September and November. However, the verification period will be adjusted, if necessary, so that the efficiency can be verified under optimal conditions. The production process will comply with internal operational standards to ensure that each element of the treatment process is working properly, and that none of the process stages is forced to compensate for any shortcomings of the previous process stage (e.g., filters having to compensate for poor flocculation or sedimentation performance).

25. At the three WTPs, the Project will support rectification of the poor operational conditions of chlorine dosing facilities through the provision of adequate equipment and storage facilities; the change of strainer nozzles in filters; improvements in sludge management and recirculation of backwash water; general improvements in operational and energy efficiency; effective water production metering; and purchase of office and laboratory equipment. At the Laureles WTP, the Project will also support the construction of a dynamic filter and the change of filter media from sand only to sand and anthracite. At the Concepción WTP, the Project will also support improvements to chemical dosing facilities, the reversibility of flow between the Laureles and La Concepción WTPs and the covering of settling tanks. At the Picacho WTP, the Project will also support the rehabilitation of the Jutiapa-Picacho aqueduct and regularization of en route offtakes; improvements to chemical dosing facilities; improvements to flocculators; and replacement of valve actuators, gates, and filter media.

26. Implementation of District Metered Areas (DMAs). A very effective and proven methodology to reduce water losses is to divide the water network in manageable sectors known as DMAs to identify the major causes of water losses in each DMA and address these. The works involved in implementing a DMA includes, among other activities, installing valves (including pressure-reducing valves where appropriate), inflow meters, and new feeder lines if necessary; cutting


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and plugging old networks and installing consumption meters;27 and setting the baseline value for NRW. It is envisioned that initially a total of 14 DMAs will be implemented in a pilot area of the Picacho subsystem. Full DMA implementation involves not only the installation of all valves, meters, and network improvements in accordance with engineering designs, but also conducting an isolation test to confirm that each individual DMA implemented is actually isolated from the surrounding network and that all inflows and outflows have been identified and measured. The improvements in the distribution network will lock in the continued use of a zero-emissions gravity-fed system within its original economic life, ensuring that is still technically and economically viable.

27. Non-revenue water reduction in targeted areas. After implementing the DMAs, the water balance for each sector will be calculated, setting the baseline value for NRW and allowing the probable causes of water losses in each sector to be identified. NRW reduction activities can then be planned and executed. Depending on the baseline value for NRW in each sector, different targets will be set for each DMA at the end of each verification period, taking into account that the lower the starting level, the more difficult and expensive it will be to reduce NRW.

28. The water volume recovered from the networks will be measured against the baseline value determined after isolation of the DMAs. This activity is expected to achieve a reduction of 5 percentage points in the volume of water supplied to the target area in each year after its starting date. NRW reduction activities to be implemented include step tests, zero pressure tests, active leak detection, pipeline repairs and replacements, service pipe replacements, regularization of illegal connections, cutting and plugging of old networks and replacing defective consumption meters.

29. Subcomponent 2.2. Strengthening the safety of the Laureles and Concepción dams (total cost US$5 million, all IDA financing). This subcomponent will finance the following activities: (i) a comprehensive dam safety review of both dams that will include, a risk assessment including climate change related impacts on the dams’ structural integrity (hydrologic analysis of extreme events), failure mode analysis of the system, detailed review of the spillway capacity of Laureles and drainage of Concepción, elaborate rainfall/runoff stations model for early warning systems and seismic verification; (ii) the hiring of a dam safety Panel of Experts (POE) to periodically review and advise AMDC on the studies being elaborated and dam safety issues throughout the life of the Project; (iii) development of dam safety instruments and plans (instrumentation, O&M and emergency preparedness plans); (iv) immediate remedial works in Laureles (slopes clearing, spillway concrete base restoration, water conveyance valves, early warning system) and Concepcion (spillway slab joints watertight, protection operation systems of spillway ages, review of bottom outlet intake and early warning system) and (v) training for staff in O&M and safety of dams. The dam safety plans, immediate remedial works, and/or dam safety capacity building28 are expected to incorporate climate change considerations based on the comprehensive dam safety assessments.

30. Subcomponent 2.3. Developing tools for enhanced watershed management and climate resilience (total cost US$2 million, all IDA financing). This subcomponent will finance: (i) inventory and characterization of wastewater discharges (location, discharge flow, source as well as an assessment of sanitation and wastewater treatment systems (O&M, treatment capacity), focusing on the wastewater treatment plant (WWTP) located at a military base in Laureles; (ii) prefeasibility and preliminary design, including social/environmental studies for select infrastructure, among others, on the upgrade/improvement and O&M of the WWTP located at a military base (which is currently discharging to Laureles); and new sewerage infrastructure to be connected to the WWTP at the military base, thus reducing environmental pollution, increasing wastewater treatment capacity, and recovering water resources for water

27 AMDC has decided that all meters to be installed in the city will be read remotely (1,600 ft range) to improve reading efficiency and avoid potential risks to the staff reading the meters. This policy will also protect the integrity of the meters, as the meter boxes will remain locked unless they are being recalibrated or replaced. 28 Training may cover, among others, climate risk management, assessment, and planning as well as methods and tools for integrated climate risk assessment.


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production; (iii) development of a watershed management and conservation plan for selected watersheds, which will include activities to improve forest coverage,29 afforestation, fire control, soil management and land use regulation, while acting as a potential carbon sink; (iv) instruments and equipment to monitor the quality of water flowing into the Laureles and Concepción reservoirs prior to treatment; (v) TA to assess climate risks and develop a resilience strategy for Tegucigalpa’s water services; and vi) technical assistance to address climate risks such as an increased temperature, droughts, torrential rains, and floods, and develop a resilience strategy for Tegucigalpa’s water services.

31. Component 3. Project management and TA (total cost US$6 million, of which US$5 million IDA financing). The Project will finance goods, works, operating costs, and consulting services for the management of the Project at fiduciary, technical, and safeguards levels, including M&E. AMDC will be responsible, among others, for: (i) coordinating, implementing, supervising, and conducting M&E activities related to the Project; (ii) conducting procurement and financial management, including Project external audits and evaluations; (iii) managing social and environmental standards, including organizing public consultations; (iv) preparing and publishing performance indicators; (v) conducting independent evaluations of DLI achievements (IVA); (vi) preparing Project reports, including but not limited to semiannual progress reports, preparation of the project mid-term review, and preparation of the implementation completion report; (vii) collecting data and conducting studies for baseline beneficiary surveys; (viii) developing and implementing a Project communications strategy; (ix) conducting studies to explore financing options for larger investments; (x) preparing a gender policy for WSS service delivery in Tegucigalpa and exploring gender disparities related to water supply services in targeted areas; (xi) promoting citizen participation to ensure transparency, accountability, and responsiveness of UMAPS through the COMAS; and (xii) organizing capacity-building training events.

32. Communications strategy with a citizen engagement and adaptation approach. Given the significant role that users will play in the transformation that will be initiated with the municipalization of WSS services supported by this Project, a strong and well-planned communications strategy is critical to the successful implementation of this Project. For this reason, the Project will support the design and implementation of a communications strategy specifically targeting beneficiaries in the service areas. The communications strategy will seek to raise awareness about the municipalization of WSS services and the activities to be carried out to improve service quality and encourage behavioral change aimed at reducing excess water consumption, domestic leakage, and wastage. The communications strategy will include several campaigns targeting populations at all socioeconomic levels, with different service provision modalities focusing on: (i) explaining the transfer process and asserting the role of AMDC as the agency responsible for service provision through UMAPS; (ii) informing consumers of activities under implementation or to be implemented to improve service quality; and (iii) highlighting the role of all users and promoting their participation by adopting good water conservation practices and service payment habits.

33. Public consultations. The Consultation and Citizen Participation Plan requires that stakeholders be consulted throughout Project preparation and implementation. During preparation, a number of consultations were carried out, culminating in the first townhall, which took place on March 22, 2019. All consultations dealt with the scope of the Project and the environmental and social management plans. The consultation rounds were attended by representatives from the Central Government, the mayor of Tegucigalpa, municipal officials, and representatives of beneficiary communities. Participants acknowledged the importance of holding consultation rounds in the target areas, among others, to ensure broad-based understanding of Project interventions, responsibilities, and expected results. The environmental and social standard instruments were also made available through the Project’s website (http://www.amdc.hn) since March 13, 2019.

29 The catchment areas of the Laureles and Concepción reservoirs cover approximately 334 hectares.


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34. Civil society representation in the COMAS will further ensure that local policy and planning duly reflect and respond to beneficiaries in the areas served by the Project in a timely fashion. The use of beneficiary assessment surveys will both gauge levels of satisfaction with the services rendered by UMAPS and behavioral changes resulting in reduced water consumption and wastage. Survey information will be collected on a sample basis and analyzed once a year after effectiveness.

35. Gender gap analysis. The Project will explore gender disparities related to water supply services in targeted areas to help provide strong data that could help UMAPS define the best strategy to improve women’s and girls’ quality of life through reliable water supply. The gap analysis will determine whether poor water supply affects female household members more than male household members. It will be backed up with solid data or well-sampled perception information for Tegucigalpa from related reference sources.

36. Strengthening the Municipality’s project implementation capacity. A PMC firm with relevant national and international experience will be hired to help AMDC’s PMU and UMAPS comply with the Project’s scope of work. The PMC will play an essential role in overall project management and coordination and provide critical support on planning of projects and activities, supervision, assistance in procurement processes, environmental and social safeguards, and quality assurance relating to Project implementation. The PMC firm will be hired through the Project.

37. Component 4: Contingent Emergency Response Component (CERC) (total cost US$0.0 million). Reflecting the strategic approach followed for Honduras across the Bank’s portfolio, this Component will provide immediate response to eligible emergencies. In the event of such an eligible emergency, as defined in the Contingency Emergency Response (CER) Operational Manual prepared and adopted by the GoH, this Component would finance emergency activities and expenditures through the reallocation of Project funds.


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1. To verify progress made by UMAPS against the expected achievements set for each DLI to authorize disbursements under component 1 of the Project, the AMDC/UMAPS shall select, hire, and retain an Independent Verification Agent (IVA) with qualifications and experience, and under terms of reference acceptable to the Bank, no later than 60 days after Project effectiveness.

2. Every six months or at dates agreed between AMDC/UMAPS and the Bank, the IVA will carry out a technical verification of the level of achievement of the DLIs described below and prepare independent verification reports covering a period and scope as set forth in the POM, which will also describe the verification protocols in more detail. The IVA will submit each independent verification report to the AMDC/UMAPS, which will include them as part of the disbursement requests.

3. Following are the DLIs to be achieved under Component 1. The verification protocols are described in Annex 1:

Table 3.1 Disbursement-Linked Indicators Matrix

DLI

Amounts of Category (2)

subject to the respective DLI

(expressed in USD)

Expected to be achieved within one

year from the effective date

Expected to be achieved within two

years from the effective date

Expected to be achieved within three

years from the effective date

DLI 1: UMAPS’ new governance structure has been adopted by the Recipient and the PIE, UMAPS’ organizational structure has been approved by the AMDC’s council, the managerial team has been appointed (general, administrative/financial, commercial and operational managers), the service performance agreement has been signed and UMAPS’ gender policy adopted, and its first actions implemented

3,000,000 x

DLI 2: SANAA’s administration and finance functions have been transferred to UMAPS under transfer agreements satisfactory to the Association

5,000,000 x

DLI 3: SANAA’s commercial functions have been transferred to the UMAPS under transfer agreements satisfactory to the Association

5,000,000 x

DLI 4: SANAA’s Picacho water subsystem has been transferred to UMAPS under transfer agreements satisfactory to the Association

1,000,000 x

DLI 5: SANAA’s Laureles water subsystem has been transferred to UMAPS under transfer agreements satisfactory to the Association

1,500,000 x

DLI 6: SANAA’s Concepción water subsystem has been transferred to UMAPS under transfer agreements satisfactory to the Association

1,500,000 x

DLI 7: SANAA’s sanitation functions have been transferred to the UMAPS under transfer agreements satisfactory to the Association

1,000,000 x

TOTAL 18,000,000

Note: AMDC = Municipality of Tegucigalpa; DLI = disbursement-linked indicator; PIE = project implementing entity; SANAA = National Autonomous Water and Sewer

Service; UMAPS = Municipal Unit of Potable Water and Sanitation of the Central District;

ANNEX 3: DISBURSEMENT-LINKED INDICATORS MATRIX


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ANNEX 4: ECONOMIC AND FINANCIAL ANALYSIS

Rationale for Public Sector Investment

1. The Project will invest in tranforming institutions and in critical water infrastructure, with the aim of improving water availability and efficiency in Tegucigalpa.30 These interventions will generate economic benefits that accumulate to both individuals and the municipality in terms of improvements in the value of water distributed, water stored (security) and water consumed. The investments in the Laureles and Concepcion reservoirs, three WTPs, and sectorization and rehabilitation of the water network in selected areas of Tegucigalpa will make available additional water volumes currently lost in the system, with the ultimate goal of improving service continuity in select areas of the city, supplying piped water to those customers currently served by tanquers and meeting the increasing demand for this service in the nation’s capital31.

Rationale for Bank Involvement

2. The Bank, with its global experience in the areas of water management and investing in transforming water and sanitation institutions, will be able to target funding that could result in cost-effective development outcomes (water availability, service efficiency improvements). Investments from IDA resources will aim to target service efficiency improvements and enhanced water availability to make the citywide system viable for potential expansion of safely-managed services in the poorerst areas of the city. Because the Bank has worked with many utilities around the world, it provides additional value in being able to advise the transition from poor-performing agency SANAA to directly provide services through the municipality, and hence improve water services in a cost-effective way.32 The Bank will combine investment financing with a program of measures with DLIs to accelerate the delivery of specific outputs and provide strong incentives for service provision reform.

Overview

3. The economic analysis puts emphasis on the viability of subprojects to be supported by the project. The economic value from project’s investments will materialize by rehabilitating and upgrading three water treatment plants that will increase flexibility and availability in redistributing water among the three main subsystems in the city; and by improving system’s efficiency through a reduction of physical and commercial losses.

4. The Project will also invest, with other sources of financing, in the remaining severance obligations, which will produce tangible economic benefits. Investments of approximately US$85.5 million will cover remaining severance obligations, out of which AMDC has committed to finance US$28.5 million (33 percent), while the Central Government will contribute the remaining US$56.9 (67 percent). IDA will contribute with US$18 million to the Central Government funding.

30 Water services in Tegucigalpa are public goods that rely on public sector’s investments to run operations, under a structure low water

tariffs, increased water scarcity and pollution, and pressing water demand. It is relevant to highlight that the investments under the project

have been identified due to their impacts in Tegucigalpa’s water sector and the subsystems that provide service in the city. 31 These investments are necessary but cannot be met by the private sector given the regulatory framework in place and the limited

incentives to make these investments financially viable. In addition, the lack of commercial financing available for water services in

Tegucigalpa is a binding constraint for private sector’s investment. 32 The Bank also has experience transforming institutions and make local service providers more resilient against water scarcity issues, by

targeting performance on the operational and financial fronts. This new project will build on this experience and will include a component

establishing and strengthening WSS operations under the stewardship of the municipality of Tegucigalpa.


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Cost Benefit Analysis

5. Project Development Objective. The PDO is to increase the efficiency and reliability of water services in select areas of Tegucigalpa.

6. This will be done by contributing to: (i) the operationalization of the new service provider; and (ii) improvements in infrastructure and water resource management tools. By improving water availability and distribution efficiency, the Project will directly contribute to reducing the burden that the water systems presently place on city dwellers. The Project will result in a decline of the real costs of service provision, and hence improve the efficiency with which the services are provided.

7. Methodology. The main approach used for this economic analysis is to compare the costs and benefits with and without project scenarios, total project’s investments per subcomponent and associated recurrent costs are considered, and all costs associated with a situation without the project are based on information provided by SANAA and based on the Updated Tegucigalpa’s Water and Sanitation Services Diagnostic in Tegucigalpa (CETI, 2018) that includes an assessment of current levels of expenditures and economic costs of service provision33. The with-project scenario considers parameters based on each subcomponent’s objectives, a technical assessment of the infrastructures and the UMPAS business plan (2018). The without-project scenario considers current situation of interrupted services and limited water availability. Both benefits and costs were appraised measuring their flow of costs and benefits for the lifetime of the project, estimated as 20 years. Costs and benefits were expressed in constant prices as of 2018 at an exchange rate of 24.5 Lempiras per US dollar. The discount rate is the minimum recommended by the World Bank guideline34 of 6 percent.

8. Benefits. The benefits are associated to investments per selected subcomponents of the Project. By improving the quality and efficiency of selected water supply infrastructure in Tegucigalpa, the project will contribute directly to reducing the economic weight that the water service presently places on SANAA and consumers. The expected benefits of the project will include: (i) the economic value from rehabilitation of water systems in Tegucigalpa to ensure that water is available for distribution among the three main subsystems (cubic meters of bulk water transferred, valued at unit cost per cubic meter)35; (ii) value from increasing water revenues (value of expected increase in sales36 based on average tariffs) based on projected average consumption; (iii) improved efficiency measured through changes in NRW (commercial and physical losses); and (iv) economic savings from reductions in O&M costs, and containment of increasing costs derived from inefficient services and infrastructure. Greenhouse gas emissions derived from the project were estimated and added to the economic analysis using the social value (shadow price) of carbon, with estimates of GHG increments of 8,540 tCO2-eq for subcomponent 2.1 and reductions of -74,800 tCO2-eq for subcomponent 2.3.

9. Increased treated water availability. Due to the rehabilitation and expansion of water supply infrastructure, it is expected increased reliability and flexibility of water production and distribution. Investments in the three WTPs will

33 Benefits are associated with economic value increased water availability and storage, and gains in system’s efficiency. The net benefit of

the project assumes differences between the incremental benefits and the changing costs on a yearly basis using the situation without and

with the project. 34 Discounting Costs and Benefits in Economic Analysis of World Bank Projects (2016) 35 This will allow to make sure that water is there where the system needs it and will be critical enough water to carry out the leak

detection and non-revenue water reduction. 36 Sales are assumed to increase in the last 10 years of project’s lifetime by 15 percent. To estimate consumption, the total metered

consumption of the entire system is utilized (17.2 million m3/year) and adjusted based on the areas reached by the project (Picacho) which

consumes close to 23 percent of total metered consumption. A unit cost per m3 of 4.9 lps/ m3 is assumed (difference between consumer

tariff of Lps 13.9/m3 minus the production cost of Lps 9.0/m3).


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allow increased transfers of water from Concepción to the Laureles reservoir by around 0.9 m3/sec (28.4 million m3/year) for storage/distribution with a unit cost of US$ 0.11/m3.

10. Value of additional water provided continuously. Water recovered from the network through NRW reduction activities will be used to satisfy part of the existing unsatisfied demand and it is expected to generate additional sales for the beneficiaries based on consumption levels and projected increases37. Only residential consumption is considered for this benefit. The value estimates using the installed capacity of 2.2 l/s (69,425 m3/year) of continuous service valued at US$0.41/m3, which is the average residential tariff of all four socioeconomic segments in Tegucigalpa. These benefits net out the costs of connections per household, estimated at US$25 per connection.

11. Cost savings with rehabilitated treatment plants. Currently, the Laureles, Concepcion and Picacho WTPs are operating with low quality water extractions and increasing operating costs. One important factor increasing the economic costs of the situation without the Project is that the infrastructure is old and most of the pumping stations are supplied from the Laureles transmission system, which is 15 to 20 percent costlier to operate38, compared to rehabilitating the WTPs with pumping stations from each reservoir’s location39.

Savings from declining commercial and physical losses with the Project and reduction in operation and maintenance

costs40. The Project (particularly component 2) will invest to reduce physical and commercial losses of water systems.

Only the scenarios under the Project of changing current physical and commercial losses is considered. A 10 percent

reduction in physical and commercial losses is assumed to take place per year for the purpose of this analysis, with an

average cost of water produced and distributed of US$0.57/m3 to existing connections. The expected reductions in

O&M costs add up to US$2.7 million over the lifetime of the Project.41

SANAA's physical and commercial losses Total losses (m3/year) 29,676,324

Physical (m3/year) 27,173,068

Commercial (m3/year) 2,503,256

Estimated loss from illegal connections (m3/year) 472,864

Estimated consumption per illegal connection (m3/year) 297

Metering errors (m3/year) 106,390

Source: SANAA, 2018.

12. The Project will generate additional benefits by paying out the severance packages and containing the increase

in working capital liabilities that are currently accrued at SANAA. Per the World Bank’s guidelines,42 the amount of

severance payments and other compensations to separated workers is based on an estimate of the marginal product

value of these workers prior to restructuring, compared to the estimated marginal product value of freed-up resources.

37 For 2017 metered consumption for entire Tegucigalpa was estimated at 17.2 million m3/year (32 percent of total consumption), and non-metered consumption was estimated at 36.6 million m3/year. Direct beneficiaries that will have increased water available reach 190,000 and these are assumed to pay average tariff and based on the volumes of metered consumption with an increase. 38 All SANAA’s operating costs in 2017 reached Lp$451.7 million (US$18.4 million). 39 In addition, energy savings from rehabilitation could lead to a reduction of 22 percent of the 4,320 kwh/month consumption (11,400 kwh/year), and energy costs representing 16 percent (US$0.04/m3) of operating costs of treated water (US$0.25/m3), and pumping 2130 m3/year, representing potential savings of US$972,000/year. 40 Based on 2018 study of AQUARUM/ANI for water demand, consumption and losses in AMDC. 41 The reduction in costs come predominantly from fewer repair work orders due to improved infrastructure. 42 Specific Eligibility Expenditure and Cost Sharing Requirements for Investment Projects in Countries Without Approved Country Financing Parameters dated March 23, 2007. (updated 2012)


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With the Project the number of employees in SANAA will be reduced from 1,366 to 70043, transferring the latter to the

UMAPS. The reduction in employees will be result from retaining employees based on productivity and efficiency

criteria.

13. The payment of US$85.5 million to eligible SANAA staff would bring the following benefits: (i) a reduction in

labor liability (estimated at US$1.87 per year and increasing at a rate of 4 percent); and (ii) a reduction in salary cost

(estimated at US$6.83 million resulting from the excessive number of employees). The net present value of severance

payments at a discount rate of 6 percent has been estimated at US$76.35 million and the net present value of benefits

at US$97.84 million over a period of 15 years. Thus, the cost-benefit analysis has indicated a net present value of

benefits of US$21.49 and a financial rate of return of about 10 percent. Savings resulting from dismissals under the

proposed Project will be available to both improve asset condition and gain overall efficiency. Moreover, new

recruitment conditions under the Project will allow for hiring of better qualified and more productive staff.

Furthermore, the proposed severance payments are expected to enhancing efficiency by limiting the number of workers

per water connections thereby avoiding overstaffing. The sum of these factors is expected to contribute to the long-

term financial sustainability of the new provider.

14. Costs. The investment costs for each subproject were estimated based on preliminary designs44. Economic

investment costs include: (i) the costs of investments in subcomponent 2.1 that improve water availability; (ii)

improvements in distribution efficiency by tackling commercial and physical losses; and (iv) any additional costs to the

consumer (connection charges) and rest of investments of spillways, drainages and slopes of the dams/changes in

storage capacity. The capacity-building activities are important because they help to improve the governance and

performance of AMDC/UMAPS in the future, and they help improve the efficiency and quality of services, because they

improve the institutional set up needed to strengthen and improve performance.

15. Operation and Maintenance Costs (O&M). Annual operation and maintenance costs of the Tegucigalpa WSS

system total US$2.9 million45. O&M costs include materials, tools, equipment, supervision, and administrative costs to

ensure serviceability of assets employed in service provision. O&M costs are adjusted yearly based on a 4.5 percent

annual rate of reduction.

16. Results. The table below shows that the cost-benefit analysis for all subcomponents analyzed revealed that they

generated economically-viable rates of returns. The total NPV of the Project is US$43.5 million, with benefits accruing

to US$105.3 million and costs reaching US$61.8 at present values. The cost benefit ratio is 1.7. The economic rate of

return (ERR) of the Project with NPV reaches 15.1 percent.

43 A total of US$18 million would be financed out of the World Bank loan proceeds of US$50 million representing 36 percent of the total Bank loan. 44 For this Project there are investments to upgrade water distribution infrastructures, combined with measures to improve efficiency and reduce losses. The costs that are taken into consideration will include investment costs and operation and maintenance costs. Financial figures do not consider taxes to avoid any over estimation of costs. 45 The maintenance costs of the new investments will represent 14 percent of total costs.


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Results of the Economic Analysis

Subcomponent (sc) PV (US$ million)

[DELTA=6%]

ERR % of NPV per sc and total for the project

Benefit 1: Improvement in water distribution/water service to consumers

$30.8 12.3

Benefit 2: Value of increased available water $30.1 18.6

Benefit 3: Efficiency improvements (commercial and physical losses) and other O&M savings

$32.1 15.5

Benefit 4: Cost savings $12.4 13.8

Total Costs $61.8 Total NPV (Benefits – Costs) $43.5 15.1

Total project costs

PV (US$ million) [DELTA=6%]

Cost: investments (sc 2.1 & 2.2) 30.7

Cost: recurrent/O&M (with O&M cost reductions overtime) (sc 2.1 & 2.2)

31.1

17. Severance Payments. The award of severance obligations to SANAA staff represents the most significant binding constraint to the transfer of the system to AMDC. Although the UMAPS was instituted via municipal decree in May 2015, fiscal constraints prevented the transfer to go ahead as planned. The national labor law requires that all staff, transferred or dismissed, be duly compensated, while the Framework Law requires that WSS systems be free of debt at the time of transfer. To date, SANAA has awarded US$17.5 million in severance obligations to 456 employees identified as dismissed. An estimated 1,366 staff remain to be compensated to transfer services to UMAPS which will require approximately US$85.5 million46 to cover remaining severance obligations. Of this amount, AMDC has committed to finance US$28.5 million (33 percent), while the Central Government will contribute the remaining US$56.9 (67 percent). To this end, an IADB financed US$30 million Policy Based Loan is currently under preparation and expected to be approved on or around October 2019. The recent consensus between GoH and AMDC on the urgency of operationalizing the new institutional arrangements for service provision coupled with the predisposition of multilateral development agencies to support the required actions creates an environment conducive to complete the decentralization process in Tegucigalpa. Based on two scenarios, which account for different reductions in severance payment costs and avoidance of excessive staff costs, the NPV of severance payments could reach at least US$21.49 million and go up to US$39.6 million during the lifetime of the project. Adding both scenarios of severance payments to the NPV of the project (without severance) will increase the economic value from US$43.5 million to US$ 70.1 million. The rate of return of the severance payment with in the first scenario is 10%, while in the second scenario the ERR is 12.6%.

18. Sensitivity and Risk Analysis. The areas tested for the sensitivity analysis of the Project were: (i) investment cost

overrun (20 percent) and a reduction of 20 percent in benefits; and (ii) take up of only 50 percent of users and without

cost reductions. Also, the Project’s NPV was estimated using a 10 percent discount rate. The sensitivity analysis also

46 Given that the actual amount for severance payments required to transfer the services in Tegucigalpa depends on the actual transfer date and the conditions stated in each individual dismissal agreement to be signed between SANAA and each dismissed employee, the GoH agreed to identify the sources of funds to cover the remainder of severance payments if actually needed. In such case, if additional funding sources are not identified in the short term, a partial transfer of services will take place as foreseen in the project design. The transfer of services will advance as additional funds become available.


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included the estimated ERR and NPV based on a net reduction in GHG emissions due to the Project of close to -66,280

tCO2-eq valued at the minimum (40) and maximum (80) levels of the social price of carbon of USD per tCO2-eq with an

increasing rate of 2.26 percent47.

19. Results of the sensitivity analysis show that cost overruns and benefit reductions of 20 percent, and changes in

connections take up have impacts on the project’s rates of return (e.g. assuming a take up rate of only 50 percent and

no cost savings reduces the NVP to US$15.8 million). In addition, using a discount rate of 10 percent reduces the NPV to

US$16.8 million. The Project’s NPV is likely very sensitive to the discount rate used given the fragile public expenditures

and macro-economic conditions and inflation rate used, that make cost of capital in the country expensive over time. A

summary of the Project’s sensitivity analysis is as follows:

• The benefits are concentrated in the effectiveness of the works in the Picacho subsystem under subcomponent

2.1, so any cost overrun and delay in implementation may take a toll on overall Project efficiency.

• Also, cost overruns of 20 percent decrease the NPV to US$31.2 million and a benefit reduction of 20 percent

results in a NPV of US$22.4 million. The Project, hence, is more sensitive to benefit reductions.

• The two most critical factors associated with water infrastructure investments are cost overruns and the

probability that households will connect to the new networks.

• The avoided costs of severance payments result in an increase of the Project’s NPV from US$43.5 million to

US$50.1 million, considering only the IDA contribution. The entire NPV of the severance payments is US$39.6

million.

• The NPV of the Project with the GHG increases marginally to US$44.7 million, with an ERR of 15.4 percent.

Risk Analysis

20. Implementation and management risks. The Project’s efficiency can be harmed if implementation of Component

1 and subcomponent 2.1 is delayed or postponed. These initial investments will constitute the basis to render the

system more efficient. In addition, inadequate management of ADMC/UMAPS can reduce the effectiveness of water

recovery efforts and general improvements in the subsystems48.

21. Some risks entail different stakeholders capturing different benefits, resulting in potential changes in efficiency

of the Project depending on how benefits materialize. For consumers, some benefits are linked to a reduction in

coping costs as people who are currently accessing water for limited hours a day face significant rationing of supplies

which could exacerbate households financial burden by managing access to water through other non-conventional

sources at higher costs. Finally, the risk of not mitigating the high working capital costs, can place substantial financial

risks and reduce cost recovery margins. 49

47 Based on World Bank’s Guideline on the Social Price of Carbon (2017). For each component of the project, the GHG emissions were estimated in tCO2eq using the World Bank’s Water GP’s GHG Accounting Tool (developed in Excel), version 2.0, and the FAO’s EX-ACT Tool. 48 Furthermore, managing properly all infrastructure works will create better conditions for spillovers in other subsystems that are

interconnected to the ones that will be financed by the project. 49 In addition to the risk analysis and given that the Project encompasses the transfer of service provision responsibilities from SANAA to

UMAPS, a financial analysis was carried out considering both entities together to capture the impact of all interventions. The financial

analysis is available as part of the Project working documents.


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ANNEX 5: THEORY OF CHANGE

________________________________________________________________________

Note: 1. Including gender policy.

Assumptions:

A1.: GoH and AMDC provide the funds necessary to complete the transfer of all functions.

A2.: Rehabilitation will focus on increasing production and efficiency, including energy efficiency.

A3.: A systematic approach will be taken to continue to reduce NRW.

A4.: All dam operations and safety-related functions will be transferred to UMAPS.

A5.: Panel of experts will transfer its knowledge to UMAPS staff.

A6.: Watershed management function will be transferred to UMAPS.

A7.: Authorities will enforce environmental and other watershed-related regulations.


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ANNEX 6: IMPLEMENTATION ARRANGEMENTS

Financial Management (FM)

1. Implementing agency: The PCU, within AMDC, will be responsible for implementing the Project—that is, oversee the management, coordination, and M&E of all Project activities—and assume the primary fiduciary responsibilities for the Project. These responsibilities include: (i) preparing and obtaining approval of project FM arrangements; (ii) coordinating and supervising Project implementation; (iii) submitting disbursement requests and documentation of expenditures to the Bank; (iv) preparing and submitting Project interim unaudited financial reports (IFRs) to the Bank; (v) preparing and providing all financial documentation and Project reports requested by external auditors and the Bank; and (vi) preparing and updating the POM, and ensuring that all Project executors follow it.

2. Staffing: The FM staff in the PCU have previous experience in executing other external financed operations, however no previous experience with disbursements based on the achievement of the agreed DLIs/Eligible Expenditures (EEs). Proper training and close supervision by the Bank during first years of Project implementation is planned. 3. Planning, budgeting, and accounting: The PCU, with the support of a dedicated financial staff for the Project, will be responsible for preparing and monitoring the annual operating plan and the corresponding budget, the latter integrated into the annual budget. The Project’s budgeting and accounting transactions will be processed through SIAFI (Integrated Administrative and Financial Information System)—the Government’s official Financial Management Information System). The SIAFI accounting structure captures Project information by component and subcomponent. All payments will follow the official commitment, verification, and payment routine. SIAFI (interfaced with UEPEX—the External Project Unit System) data will form the basis for the preparation of the Project’s Interim Unaudited Financial Reports (IFRs) and the monitoring of the Project’s physical progress and contract management.

4. The severance payments that will be supported by this Project can be tracked/identified by SIAFI, using budget/accounting codes to keep track of all sources and uses of funds. Reports will be formatted and generated for that purpose. The Bank evaluated the robustness of SIAFI and concluded that the system can provide the necessary financial information to support this Project.

Internal Controls

5. The SIAFI/UEPEX system features built-in controls that help ensure that transactions are properly authorized and that payments are made once goods or service are confirmed as delivered. All transaction processing uses the country’s institutions, processes, and systems, which provide for separation of duties, supervision, quality control reviews, and reconciliation. The process flows appear to be clear and well understood by staff. Although AMDC has well-established internal controls and procedures, the POM must be prepared to strengthen internal controls.

6. Funds flow and disbursement arrangements: The proposed funds flow and disbursement arrangements are streamlined within the Project to facilitate execution, avoid unnecessary incremental operational arrangements, and rely as much as possible on existing country public financial management (PFM) systems. Payments for all components will be made by AMDC, using the SIAFI/UEPEX system, once payment obligations have been incurred, verified, and properly documented. To make payments, the system requires that funds be committed by source, allowing for the tracking of credit disbursements to Project expenditures.


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Figure 3.1 Flow of Funds

Component 1 (DLIs/EEs)Single Treasury Account

SEFIN / AMDC

WBWashington, DC

USD

SIAFI / UEPEXWB

Client Connection(Brasilia)

IFRs AMDC

IFRs/SOEs

SIAFI / UEPEX

$

Reports

Currency

System

PIU

Component 2 and 3 (TA)Designated Account

SEFIN / AMDC

Operating Account SEFIN / AMDC

HNL

Vendors, Suppliers and Contractors *Goods, Works

and Services)HNLUSD

Note: AMDC = municipality of Tegucigalpa; DLIs = disbursement-linked indicators; EEs = eligible expenditures; IFR = interim financial report; PCU = project implementation unit; SEFIN = Ministry of Finance; SIAFI = Integrated Administrative and Financial Information System; UEPEX = External Project Unit System; WB = World Bank.

Disbursement Arrangements

7. The disbursement arrangements for this Project will take into consideration the FM and procurement assessments of AMDC, the Project’s flow of funds, the cash flow needs of the Project and the Recipient’s experience with Bank operations. The disbursement of Project funds will be processed in accordance with Bank procedures, as stipulated in the Financing Agreement and Disbursement and Financial Information Letter. Withdrawal applications and the required supporting documentation will be submitted to the Bank electronically, through the Client Connection website.

8. The minimum application size for direct payments and reimbursements is defined in the Disbursement and Financial Information Letter (DFIL). The Project will also have four months after the closing date to document expenditures incurred prior to the Closing Date.

Component 1. Severance payments detailed disbursement arrangements:

9. For the severance payments component, disbursements will be made based on the achievement of agreed DLIs (as defined in Table 2, Annex 3) and documentation of expenditures made under the agreed severance payments in the verification period. The IVA will verify the achievement of the DLIs.

10. Disbursements will be report-based (i.e., based on IFRs) and include a severance payments spending report stating spending status of the severance payments and DLI compliance, which will follow the methodology described in Table 2, Annex 3 and verified by the Bank every semester and / or in accordance with the verification protocols, as


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detailed in Error! Reference source not found. and included in the POM. AMDC will submit to the Bank a withdrawal application for reimbursement in the amount corresponding to the allocation of the DLIs achieved per semester, as shown in the disbursement schedule (Table 2, Annex 3).

11. The amount eligible for disbursement and calculated after verification of compliance with the expected DLI achievement dates will be verified by the IVA every six months or at a date mutually agreed between AMDC and the Bank.

12. If any of the DLIs have not been met by the expected date, the allocated amount not disbursed due to DLI noncompliance may be: (i) disbursed at the end of the subsequent verification period, if the Bank is satisfied that the DLI in question has been fully met; or (ii) reallocated to other DLIs, if the Recipient so requests.

Components 2 and 3. Detailed disbursement arrangements

13. The following disbursement modalities may be used to withdraw funds from the loan for Component 2: (a) reimbursement, (b) advance, and (c) direct payment, with the advance method being the primary disbursement method. Payments will be processed through SIAFI, which is interfaced with UEPEX. Funds from the Designated Account will be transferred to the operating account (libreta) in Honduran lempiras or U.S. dollars, as applicable, for payment to vendors.

14. Financial Reporting: AMDC, with support from the PCU, will ensure the timely production of semester unaudited IFRs, to be submitted within 45 days of the end of each reporting period. These IFRs, prepared in the currency of the Recipient, will be generated from the SIAFI/UEPEX system, following Project design, and will consolidate the Project’s financial data for all components. Accordingly, the format and content of the IFRs, on a cash accounting basis, agreed with the Recipient will cover the following items:

• IFR 1-A: TA statement of sources and uses of funds, by Project component and category, respectively (Project-to-date, year-to-date, and for the period), actual vs. budgeted expenditures, including a variance analysis for Component 2; • IFR 1-B: EEs statement of sources and uses of funds and DLIs for Component 1; • IFR 1-C: Designated Account Activity Statement.

15. The POM will document these processes and serve as an important source for processing steps to be followed during Project implementation. It will contain detailed procedures and guidelines for disbursements, payments, approvals, commitments, and reporting. The POM is an effectiveness condition of the Project.

16. External Auditing: The external audit will be undertaken by a private external audit firm, to be selected in accordance with agreed Terms of Reference (TOR) acceptable to the Bank and the International Standards on Auditing (ISAs, issued by The International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) or national auditing standards if, as determined by the Bank, these do not significantly depart from international standards. The audited financial statements will also be prepared in accordance with accounting standards acceptable to the Bank (i.e., issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants or national accounting standards where, as determined by the Bank, they do not significantly depart from international standards. The auditors will be required to issue an opinion on the Project’s IFRs, and produce a management letter, where any internal control weaknesses will be identified, contributing to the strengthening of the control environment.

17. The auditor’s report will be submitted to the Bank no later than six months after the end of the fiscal year . The Bank will review the audit report and periodically determine whether the audit recommendations have been satisfactorily implemented. The Bank also requires that the Recipient disclose the audited financial statements in a


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manner acceptable to the Bank and following the Bank’s formal receipt of these statements from the Recipient, the Bank will also make them available to the public in accordance with the World Bank Policy on Access to Information.

18. The scope of the audit terms of reference will include, but not be limited to: (i) fully reviewing the IFRs and use of the Designated Account; (ii) reviewing the appropriate observance of the FM arrangements included in the POM, the PAD, the Financing Agreement, as well as any other official Bank documentation; (iii) reviewing the use of the Integrated Financial Management System (SIGEF) and other FM monitoring systems; (iv) ensuring internal control arrangements are adequate; (v) observing agreed disbursement arrangements; and (vi) ensuring that amounts disbursed were used for eligible goods, works, and services and are supported by the disbursement of loan proceeds.

19. All supporting records will be maintained at the PCU for at least (i) two years after the Closing Date; or (ii) one year after the Bank has received the audited financial statements covering the period during which the last withdrawal from the Loan Account was made, whichever is later. 20. FM supervision during implementation: FM supervision will include, among others, the (i) review of the IFRs; (ii) review of the auditors’ reports and follow-up of issues raised by auditors in the management letter, as appropriate; (iii) follow-up on any financial reporting and disbursement issues; (iv) response to Project team’s questions, and (v) update of the FM risk and performance rating in the Implementation Status and Results Report (ISR).

Procurement

21. During Project preparation and based on the Project Procurement Strategy for Development (PPSD), specific needs for resources and strengthening actions were identified. The procurement team of AMDC has experience and knowledge of procurement processes of other multilateral organizations/agencies, but limited knowledge and experience related to World Bank procurement regulations.

22. Procurement will be carried out in accordance with the “World Bank Procurement Regulations for IPF Borrowers” (July 2016, revised November 2017 and August 2018) (“Procurement Regulations”). A PPSD was prepared by the Recipient, describing how procurement in this operation will support the PDOs and deliver value for money under a risk-based approach. The PPSD provides adequate supporting market analysis for the selection methods detailed in the Procurement Plan. The mandatory procurement prior review thresholds detailed in Annex I of the Bank’s procurement procedure will be observed. All procurement procedures, including the pertinent roles and responsibilities of the various units involved, will be defined in the POM.

23. It has been agreed that, to carry out the required procurement functions for the project, AMDC will hire two procurement specialists to implement procurement processes, including contract management support. Additionally, AMDC has determined in its PPSD the need to purchase software and hardware to enhance its capacity to monitor the different stages of procurement processes and digitally store all related documentation (to be financed under this Project).

24. Procurement plan. In accordance with paragraph 5.9 of the Procurement Regulations, the World Bank’s Systematic Tracking and Exchanges in Procurement (STEP) system will be used to prepare, clear, and update procurement plans and conduct all procurement transactions for the project. The procurement plan was prepared by the Recipient in accordance with the results provided by the PPSD and was agreed with the Bank as part of the appraisal stage. The summary of the PPSD includes the recommended procurement approach for higher-risk/-value contracts.

25. Civil works. The Project will finance civil works. These include minor works, particularly on structures adjacent to or part of dams and the maintenance of dams, among other minor works. ToRs underlying the contracting of firms will specifically require that all hiring address gender equality in the workplace, equal pay for equal work, and gender-based violence prevention.


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26. Goods. Goods to be financed under this Project will include purchase of micro- and macro-measurement devices, pumps, valves, other measurement equipment, diverse software, solar panels, and electric generators, among others.

27. Non-consulting services. The Project will finance services such as implementation of communication campaigns, printing materials, etc.

28. Selection of consulting services. Consulting services to be financed under the Project will focus on the hiring of a project management consultant, strengthening services for dam management, software design, hiring of a verification agent, and development of watershed management plans, among other services.

29. Procurement Bidding documents. Standard Procurement Documents will be used for all contracts subject to international competitive procurement and those contracts shall be drafted as specified in the procurement plan tables in STEP. For bidding processes with a national market approach, the bidding and request of quotation documents were agreed with World Bank at negotiation.

30. Operating costs. Operating costs refer to reasonable recurrent expenditures that would not have been incurred by the AMDC/PCU in the absence of the Project. The Project will finance operating costs such as insurances, fuel, maintenance and repair of vehicles and equipment, per diems, etc.

31. Capacity assessment. The Bank has performed a capacity assessment to evaluate the adequacy of AMDC’s procurement arrangements. The assessment focused on how AMDC will be organized to undertake procurement using credit funds, in terms of staffing structure, procurement records system, internal controls, roles and responsibilities, etc.

32. The key issues and risks concerning procurement for Project implementation include: (i) the current structure and workload of AMDC; (ii) coordination between the technical and procurement units; and (iii) limited experience and knowledge of the AMDC procurement unit regarding the Bank’s Procurement Regulations. To manage these risks, the following has been agreed: (i) the PCU and the procurement unit will be staffed with the required number of qualified staff; (ii) the roles and responsibilities of the technical and procurement units will be clearly defined in the POM; and (iii) during the first years of Project implementation, the Bank will provide proper training and closely supervise implementation.

33. Frequency of procurement supervision. In addition to prior reviews, the Bank will perform annual post-procurement review supervision missions based on a minimum sample of 20 percent of all post-review contracts.

Summary of PPSD (Recommended Procurement Approach for Higher-Value Contracts)

Description

Estimated cost

(US$)

Prior/Post Review

Market approach

Procurement method

Goods

Supply and installation of SCADA system equipment 253,866 Post National Request for bids

Supply and installation of Degremont equipment 2,458,282 Prior International Request for bids

Supply and installation of Dosification equipment 358,442 Post National Request for bids

Supply and installation of water flow measurement systems 63,899 Post National Request for bids

Supply and installation of electric gates in the WTPs 28,978 Post National Request for quotes

Purchase of vehicles and equipment 252,421 Post National Request for bids

Works

Construction of minor works and maintenance of dams 2,700,000 Post National Request for bids

Non-consultant services


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Implementation of communications strategy 2,000,000 Prior International Request for bids

Services for the development and implementation of sectorization 7,000,000 Prior International Quality- and cost-based selection

Consultant services

Services for preparation of complementary studies (integral planes and risks for dams) 1,500,000 Prior International Quality- and cost-

based selection

Services for strengthening municipal capacity in dam management 800,000 Prior International Quality- and cost-based selection

Individual consultants to serve on expert panel for dams, among others, to advise on hydraulics, dam structure, and security issues (more than one consultant)

500,000 Prior International Individual consultants’ selection

Project management consultant 2,000,000 Prior International Quality- and cost-

based selection

Consultant to serve as verification agent for DLIs 500,000 Prior International Quality- and cost-based selection

Note: DLI = disbursement-linked indicator; PPSD = project procurement strategy for development; SCADA = supervisory control and data acquisition.