Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 58406-AO

PROJECT PAPER

ON A

PROPOSED ADDITIONAL CREDIT

IN THE AMOUNT OF SDR 74.1 MILLION (US$120 MILLION EQUIVALENT)

TO THE

THE REPUBLIC OF ANGOLA

FOR A

WATER SECTOR INSTITUTIONAL DEVELOPMENT PROJECT

June 06, 2011

Water and Urban Unit Country Department AFCS2 Africa Region

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 14, 2010)

Currency Unit = Angola Kwanza US$1 = Kwanza 92.28

US$1.55 = SDR 1.00

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AF AfDB AMU

Additional Financing African Development Bank Asset Management Unit

CPS DA

Country Partnership Strategy Designated Account

DNAAS DNRH EIRR EMRP I&II

National Directorate for Water Supply and Sanitation (Direcção Nacional de Abastecimento de Água e Saneamento) National Directorate of Water Resources (Direcção Nacional de Recursos Hidricos) Economic Internal Rate of Return Emergency Multi-sector Recovery Projects

ESMF ETA

Environmental and Social Management Framework Water Treatment Facility (Estação de Tratamento de Agua)

FCMU FM FWOP FWP

Financial and Contract Management Unit Financial Management Future Without Project Future With Project

GoA IBRD IDA

Government of Angola International Bank for Reconstruction and Development International Development Association

IP Implementation Performance ISR Implementation Status Report MDGs MICS

Millennium Development Goals Multiple Indicator Cluster Survey

MINEA NPV O&M

Ministry of Energy and Water (Ministério de Energia e Água) Net Present Value Operation and Maintenance

PAD Project Appraisal Document PDISA Water Sector Institutional Development Project (Projecto de

Desenvolvimento Institutional do Sector de Água) PDO PPF PWSU

Project Development Objective Project Preparation Facility Provincial Water and Sanitation Utility

RPF SOE

Resettlement Policy Framework Statements of Expenditure

iii

UNICEF

United Nations Children Fund

WHO World Health Organization WRM Water Resource Management

Vice President: Obiageli K. Ezekwesili Country Director:

Sector Director: Laurence Clarke

Jamal Saghir Sector Manager: Junaid Kamal Ahmad

Task Team Leader: Luiz Claudio Martins Tavares

 

iv

ANGOLA

WATER SECTOR INSTITUTIONAL DEVELOPMENT PROJECT ADDITIONAL FINANCING

CONTENTS

Project Paper Data Sheet

Project Paper

I. Introduction ................................................................................................................................ 1 

II. Background and Rationale for Additional Financing in the amount of US$120.0 million ...... 3 

III. Proposed Changes ..................................................................................................................... 9 

IV. Appraisal Summary ................................................................................................................ 11 

Annex 1: Results Framework and Monitoring and Monitoring Indicators .................................. 15 

Annex 2: Operational Risk Assessment Framework (ORAF) ...................................................... 20 

Annex 3: Detailed Description of Restructured Project ............................................................... 23 

Annex 4: Disbursement Arrangements ........................................................................................ 30 

Annex 5: Project Costs.................................................................................................................. 31 

Annex 6: Economic and Financial Analysis ................................................................................. 32 

Annex 7: Governance and Accountability Action Plan ................................................................ 56 

Annex 8: MAP (IBRD 35987) ...................................................................................................... 59 

 

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REPUBLIC OF ANGOLA

WATER SECTOR INSTITUTIONAL DEVELOPMENT PROJECT

ADDITIONAL FINANCING DATA SHEET

Basic Information - Additional Financing (AF)

Country Director: Laurence Clarke Sector Manager/Director: Junaid Kamal Ahmad/ Jamal Saghir Team Leader: Luiz Claudio Martins Tavares Project ID: P124511 Expected Effectiveness Date: September 30, 2011 Lending Instrument: Specific Investment Loan Additional Financing Type: Scale-up and Restructuring

Sectors: Water Supply (100%) Themes: Access to urban services and housing (90%); water resource management (10%) Environmental category: B- Partial Assessment Expected Closing Date: June 30, 2019

Basic Information - Original Project Project ID: P096360 Environmental category: B – Partial Assessment Project Name: Water Sector Institutional Development

Expected Closing Date: June 30, 2016

Lending Instrument: Specific Investment Loan

AF Project Financing Data [ ] Loan [ X ] Credit [ ] Grant [ ] Guarantee [ ] Other:

Proposed terms: IDA hardened terms, with 20 years maturity, including a grace period of 10 years.

AF Financing Plan (US$m) Source Total Amount (US $m)

Total Project Cost: Cofinancing: Borrower:

Total Bank Financing: IBRD

IDA

New

Recommitted

120.0

0.0

120.0

Client Information Recipient: Republic of Angola Responsible Agency: Ministry of Energy and Water

Contact Person: Luís Filipe da Silva, Secretário de Estado das Águas, Ministério da Energia e Águas

Telephone No.: +244222430831 Fax No.: +244222430453 Email: lfsilva_4@hotmail.com

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AF Estimated Disbursement (Bank FY/US$M) FY 12 13 14 15 16 17 18 19 Annual 2.0 5.0 17.0 18.0 24.0 24.0 18.0 12.0 Cumulative 2.0 7.0 24.0 42.0 66.0 90.0 108.0 120.0

Project Development Objective and Description Original project development objective: To strengthen the institutional capacity and efficiency of the agencies in the water sector to improve access and reliability to water service delivery. Revised project development objective: To strengthen the institutional capacity and efficiency of the Recipient’s agencies in the water sector to improve access to water service delivery Project description:

Component 1: Development of Institutions in the Water Supply and Sanitation Sub-Sector. Strengthening the institutional framework for the water supply sub-sector. The proposed Additional Financing (AF) will not bring any changes to the original activities.

Component 2: Water Resources Management. Support to the strengthening of the institutional framework for the water resources management sub-sector. No changes are expected other than the identification of alternatives to one of the basins originally proposed for piloting capacity building for river basin management. The original Project proposed the Cuanza and Cubango river basins as pilots; the AF proposes to substitute the Cubal da Hanha-Catumbela-Cavaco-Coporolo watersheds as pilots in place of the Cubango.

Component 3: Rehabilitation of Water Supply Systems. Support to the physical rehabilitation of selected urban water supply systems. The AF will scale-up the activities of this component and will rehabilitate the water supply production and expand the distribution systems through investments in the nine cities included in the original Project. These investments include: (a) rehabilitation of production and treatment facilities, (b) construction of new water distribution reservoirs, at existing water treatment plants; (c) construction of new facilities such as water quality laboratories and related equipment, at existing water treatment plants; (d) replacement of electro-mechanical equipment; (e) construction of new wells; (f) construction of about 403 kilometers of water supply networks1; (g) construction of about 60,000 domestic connections; and (h) provision of technical assistance, including for the supervision of construction contracts. The AF will also prepare the technical cadastre for about 60,000 connections to enable: (a) an information system for measuring water consumption; and (b) a system to process bills to customers and to record customer payments. Component 4: Capacity Building and Change Management. Capacity Building at technical and management levels to strengthen the ability of GoA to improve the efficiency of water supply. The proposed AF will not bring any changes to original activities.

1 The original project will support 240 kilometers, AF will support 403 kilometers. The Project (original and AF) will support 643 kilometers.

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Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

[ X ]Yes [ ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [X] Yes [ ] No [ ]Yes [ X ] No [ ]Yes [ X ] No [ ]Yes [ X ] No

Does the project require any waivers of Bank policies? Have these been endorsed or approved by Bank management?

[ ]Yes [X] No [ ]Yes [ ] No

Conditions and Legal Covenants: Financing Agreement Reference

Description of Condition/Covenant Date Due

Additional Financing

No later than April 30, 2015, or such later date as may be agreed upon by the GoA and IDA, the GoA and IDA shall carry out a mid-term review of the Project, covering the progress achieved in the implementation of the Project.

April 30, 2015

Original Project

The GoA shall cause an external auditor to perform a project procurement audit, under terms of reference satisfactory to IDA, of the procurement for all goods, works, consultants’ services, operating costs and performance payments required for the Project. Each such audit o f the Project’s procurement shall cover the period of two (2) calendar years, commencing with the calendar year in which the first withdrawal under the Project Preparation Advance was made.

Recurrent

Original Project

The GoA shall, not later than December 1 of each year during project implementation, or such later date as IDA may determine, starting in calendar year 2008, furnish to IDA for approval, an annual action plan (the Annual Action Plan),

Recurrent

Original Project

Disbursement for sub-component 1.2 and sub-component 4.2 will not begin for each individual utility (PWSU) until an agreement acceptable to IDA shall be signed between DNAAS and each provincial government in charge of the respective utility setting forth the rights and obligations of each party creating these entities in a form acceptable to IDA.

Prior to disbursement

Original Project

Disbursement for sub-component 4.2, related to performance payments for each individual utility (PWSU), will not begin until the PWSU is operational and exceeds the performance targets defined in the agreement acceptable to IDA.

Prior to disbursement

Original Project

Disbursement for sub-component 2.3, Component 3, and sub-components 4.1 and 4.2 will not begin until provisions of the ESMF and RPF have been complied with.

Prior to disbursement

 

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I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide an additional credit in an amount of US$120 million to Angola for the Water Sector Institutional Development Project (CR.4501-AO). As requested by the letter from the Government of Angola (GoA) dated October 11, 2010, the proposed Additional Financing (AF) will enable the Government to support improved water supply access by scaling-up the investments in the nine cities as originally designed and thus increase the impact of the original Project as described in the Project Appraisal Document (PAD) presented to the Board on July 31, 2008 at the time of the approval of the original Project. The AF instrument is the preferred mechanism to finance the proposed new activities as it permits additional or expanded activities that would scale-up the original Project’s impact and development effectiveness. The activities being proposed to be financed under the AF were initially identified to be financed under the original Project, but were deferred due to IDA limited funding capacity. Hence, there are significant cost-effectiveness gains in implementing the scaled-up activities as part of the ongoing operation, rather than under a new operation, thus building on implementation arrangements already in place. 2. This proposal also seeks Board approval to: (i) restructure the original Project to reflect the change in project development objective and changes in components 2 and 3; (ii) reallocate funds of the original Financing Agreement; (iii) adjust the Project indicators and targets; and (iv) extend the Closing Date of the original Financing Agreement from June 30, 2016 to June 30, 2019 so as to align it with that of the proposed AF. 3. The proposed AF would finance the rehabilitation of the water supply production capacity, extension of the water distribution systems and increase the number of domestic water connections in the urban areas in the nine cities (the Cities) identified to be beneficiaries under the Project. The majority of the connections will be in the peri-urban areas of the cities where poverty levels are high, and thus it is expected that the pro-poor impact of the Project will be high. While the activities supported by the AF would benefit all nine Cities, the majority of the new investments will occur in the Cities included in the second phase of the investment program (the Cities were divided into two phases to better manage the overall project implementation). They will translate into the latter investments being carried out towards the end of the implementation period following the original project design, and the natural sequence of implementation. 4. Specifically, the AF will finance the scaling-up of the activities included under Component 3 in order to carry out civil works for the rehabilitation of the water supply production systems and expansion of the water distribution systems through investments in the Cities. These investments include: (a) rehabilitation of production and treatment facilities, (b) construction of new water distribution reservoirs, at existing water treatment plants; (c) construction of new facilities such as water quality laboratories and related equipment, at existing water treatment plants; (d) replacement of electro-mechanical equipment; (e) construction of new wells; (f) construction of about 403 kilometers of water supply networks2; (g) construction of about 60,000 domestic connections; and (h) provision of technical assistance, including for the supervision of construction contracts. The AF will also prepare the technical

2 The original project will support 240 kilometers, AF will support 403 kilometers. The Project (original and AF) will support 643 kilometers.

2

cadastre for about 60,000 connections to enable: (a) an information system for measuring water consumption; and (b) a system to process bills to customers and to record customer payments. 5. With the proposed AF, the Project will expand its impact on the population in the Cities by increasing the number of connections, particularly for the urban poor, and through these additional connections, increase the sustainability of the newly created public water and sanitation utilities. As its Programa de Governo 2009-2012 (Government Plan) indicates, GoA is committed to the proposed AF so that it can achieve both its stated policy of providing improved water services and its Millennium Development Goals (MDGs). 6. Donor Coordination: The Project will be implemented in coordination with the other development partners supporting the water sector in Angola, including the European Union, African Development Bank (AfDB), UNICEF, and the Governments of the People's Republic of China and the Kingdom of Spain. GoA requested the Bank to provide the financing for access to water services for the poor, due to the fact that additional development partners’ funding for such purposes was not sufficient, while indicating the Bank’s strong value added to the sector. GoA shall lead the coordination among development partners. The Bank will share information, future plans, and programs with the development partners during the review missions of the Project. 7. On July 31, 2008, the Bank approved two credits to the Republic of Angola – the Water Sector Institutional Development Project (original Project) and the Smallholder Agricultural Development Project. Effectiveness of these projects was delayed by more than two years (until August 30, 2010 and September 20, 2010, respectively) primarily due to reasons external to the projects. The principal factors were: (i) parliamentary elections in September 2008 and the subsequent government re-structuring; (ii) budgetary and fiscal problems in 2008 and 2009 resulting from the international financial crisis and the sharp decline in the price of crude oil, and (iii) the adoption of a new constitution in 2010 and the subsequent uncertainty within government regarding institutional responsibilities and authorities resulting from the conversion from a parliamentary to a presidential form of government. An additional factor which contributed to delaying the effectiveness of the original Project was the discussions related to the change in the terms from IDA 14 to IDA 15. There is no reason to believe the effectiveness of the proposed AF will suffer the same delays as that of the original Project, since the only effectiveness condition will be that of issuance of a legal opinion acceptable to the Bank. 8. With the support of funding provided by the GoA and a number of bi-lateral and multi-lateral development partners, the water sector in Angola is undergoing a period of sizeable investment to rehabilitate and expand urban and rural water supply systems and the hydrological networks. While the physical and institutional conditions in the water sector are poor, they have been improving. In 1990, only about 30 percent of the urban population had access to drinking water from improved sources. By 2008, the share had increased to about 60 percent of which about 34 percent had access via piped water. During this same time period, the percentages for Sub-Saharan Africa remained constant at 83 percent. A similar situation exists in improved sanitation. In 1990, only about 58 percent of the urban population had access to improved sanitation services. By 2008, that figure had increased to about 86 percent. Over the same interval, the percentages for Sub-Saharan Africa increased from 43 percent to 44 percent3. The

3 Source: Progress on Sanitation and Drinking Water, 2010, WHO/UNICEF

3

urban water supply coverage will be improved as a result of the original Project and the proposed AF. It is expected that the original Project will finance approximately 72,000 connections and the proposed AF will fund approximately 60,000 more, resulting in approximately 840,000 people gaining access to potable water. 9. One of the Government’s Millennium Development Goals is to provide adequate access to water for 67 percent and 70 percent of the urban and rural population respectively. These goals were updated in the Government’s current policy, Programa de Governo 2009-2012, to 100 percent and 80 percent for urban population living in the “cement city” and for the population living in peri-urban areas. This program also includes policies regarding: (i) the sustainability of the expanded water supply systems by charging tariffs adequate to recover the costs of production and operations while protecting the most vulnerable members of society; (ii) providing proper management of the WSS systems and continuing the creation of utilities; and (iii) the management and integrated utilization of water resources and continued creation of river basin authorities. 10. The GoA is demonstrating strong commitment to the water sector. Its Programa de Governo indicates that the Government intends to establish a series of public companies to sustainably operate its urban water supply and sanitation systems, with tariffs collected from the customers to recover the costs. This commitment to establish sustainable water and sanitation services has been demonstrated by its progress in creating seven public companies to operate the rehabilitated urban water supply and sanitation systems. The commitment to the sector institutional reform agenda has also been demonstrated by the recent creation of the Institute for Water Resource Management (WRM), and government budget support for the procurement of technical assistance (TA) to design a river basin management program for the Cubango River Basin. In addition, the commitment of GoA is illustrated by the National Directorate for Water Supply and Sanitation (DNAAS) active implementation of a number of parallel projects to increase the coverage of water supply and sanitation services. These projects were funded by the GoA, the Bank through the Emergency Multi-Sector Recovery Project (EMRP I & II), the AfDB, and the Governments of the People's Republic of China and the Kingdom of Spain. All parallel projects identified in Angola that are financing increased coverage of water supply and sanitation services, some in the same cities as the original Project and the AF, are not essential for the Project to achieve its project development objective (PDO). As stand-alone investments, these projects are not subject to comply with Bank safeguard policies. The EMRP I & II financed by the Bank have their own arrangements in place.

II. Background and Rationale for Additional Financing in the amount of US$120.0 million 11. Consistency with World Bank Africa Strategy. Both the proposed AF and the original Project support the two pillars of the updated Africa Strategy of the World Bank4 as well as the Strategy’s foundation in governance and public sector capacity. Through significant savings gained by reducing the time spent fetching safe water (estimated at US$13.06 million per year by 2018)5, the Project supports Pillar 1 of the Strategy on competitiveness and employment. The Strategy refers explicitly to the inefficiency caused by “women in Africa spending a considerable portion of their day fetching water […] identification and prioritization of such issues will help 4 “Africa’s Future and the World Bank’s Support to It”, March 2011 5 Annex 6, Economic and Financial Analysis.

4

women better integrate and contribute to their economies”, which is one of the Project’s areas of focus. Through the significant reduction in the incidence of diarrhea and savings on diarrhea treatment costs (estimated at US$8.45 million per year by 2018)6, the Project supports Pillar 2 of the Strategy on reducing vulnerability and increasing resilience. The Strategy explicitly indicates that “health shocks require a combination of interventions. Public health interventions, such as immunizations and better water and sanitation, help prevent these shocks.” Through its water and sanitation focus that reduces, among other health shocks, water-borne diseases, the Project is fully consistent with the Bank’s Africa Strategy. Finally, the Project is fully aligned with the foundation of the Strategy which is comprised of governance and public sector capacity. By embedding the financial and contract management unit in the relevant department of the Ministry Water and Energy, which lacks the necessary capacity, the Project promotes the co-benefits of public sector capacity development. 12. Consistency with Country Partnership Strategy. The Water Sector Institutional Development Project and the proposed AF support all three pillars of the current Interim Strategy Note of April 26, 2007 which are: (i) strengthening public sector management and government institutional capacity; (ii) supporting the rebuilding of critical infrastructure and improving service delivery for poverty reduction; and (iii) promoting the growth of non-mineral sectors. The County Partnership Strategy (CPS) for the years starting in 2011 is under preparation. Working sessions with the GoA and the development partners have been conducted, and the final CPS should be completed in 2011. The various draft versions of the CPS indicate a strong focus on protecting vulnerable groups and targeting programs for the poor under the strategic objective of reducing poverty through human capital development. The said focus underscores the importance of reducing diarrhea and other water-borne diseases. Thus, the intervention is consistent with the draft CPS. 13. Rationale for the Additional Financing. The rationale for continued and further involvement of the Bank in the water supply and sanitation sector in Angola is to: (i) expedite the improvement and expansion of the asset base in the water sector to support the delivery of expanded water services; (ii) support efforts to increase the availability of potable water, mainly to the poor living in the peri-urban areas at reduced prices; and (iii) promote the financial sustainability of the newly created public water and sanitation utilities by increasing their customer and revenue bases. As capacity utilization of the water system increases, the average cost of water delivered to customers is expected to decrease by 25 percent in the original Project scenario, and by 50 percent in the Project (original Project + AF) scenario. 14. For this continued involvement, AF is the preferred mechanism as it would scale-up the original Project’s impact and development effectiveness, particularly increasing the number of people provided with access to about 840,000, mainly in peri-urban. While assessing the various possible mechanisms to meet the Government’s request for additional activities, a new project was considered sub-optimal because the proposed activities were identified as part of the original Project, but were deferred when the original Project was approved due to limited IDA 14 funding availability at the time. Since these activities were initially part of the original Project, there are significant cost-effectiveness gains in implementing the scaled-up activities as part of the ongoing operation, rather than under a new operation, and building on implementation arrangements already in place. In addition, there are considerable financial, economic, and

6 Annex 6, Economic and Financial Analysis.

5

social benefits resulting from the proposed AF. More domestic connections to the water supply network would be added sooner in each of the project cities, providing the newly- formed utilities with a more robust revenue stream, as well as providing the population with access to increased levels of potable water. 15. By scaling-up activities at this early stage in project implementation, the implementation unit will also be able to capture efficiency gains in procurement and contract management of the initial contracts since the full scope of the new work in the various project cities will be known. The procurement activities for these early contracts (cities included in the initial phase of project implementation) can be designed so that planned activities in each city are packaged in the most efficient manner. Therefore, even though the cities in the second phase of implementation will benefit most from activities in the proposed AF, all of the nine project cities will benefit from improved procurement planning and packaging and from the efficiency gains from more effective contract management. 16. Alternatively, preparation of a new project to achieve the same benefits would significantly reduce opportunities for efficiency gains in procurement and contract management, and would increase the administrative burden on the Government, the implementing agency, and the Bank, without any appreciable benefits. AF is considered the best means of maximizing the development impact and results in the sector, and minimizing the administrative burden on the Government by including all of the proposed activities within one project. Prior to agreeing with the Government’s request for the proposed AF, other alternatives were considered to finance part of the proposed investments. This included high level meetings with Agence Française de Développement in Luanda to discuss their participation in the investments and a preparation of new Sector Investment Loan to cover the activities included in the AF. All alternatives available were found sub-optimal because the original Project has gained effectiveness and has a functioning institutional arrangement system already in place. 17. Original Credit. The original Project (the Projecto de Desenvolvimento Institutional do Sector de Água [PDISA]) was approved by the Executive Directors on July 31, 2008 for US$57.0 million equivalent. Fifty percent (50%) of the estimated project costs of US$113.20 million is financed by the GoA. The original Project became effective on August 30, 2010. 18. Development Objective. The project development objective (PDO) of the original project is to strengthen the institutional capacity and efficiency of the agencies in the water sector to improve access and reliability of water service delivery.

19. A summary of the components of the original Project is presented below.

Component 1: Development of Institutions in the Water Supply and Sanitation Sub-Sector (US$21.7 million): The objective of this component is to strengthen the institutional framework for the water supply sub-sector at both the central and regional levels. The objective will be achieved through the implementation of three related sub-components: (i) the development of the Asset Management Unit; (ii) the creation of Provincial Water Supply and Sanitation Utilities; and (iii) the development of a Regulatory Agency for the water supply and sanitation sub-sector.

6

Component 2: Water Resources Management (US$12.0 million): The objective of this component is to support the strengthening of the institutional framework for the water resources management sub-sector. This objective will be achieved through three sub-components which are: (i) the development of an institution for water resources management; (ii) the development of systems for water resources management; and (iii) the rehabilitation of water resources management systems.

Component 3: Rehabilitation of Water Supply Systems (US$51.8 million): The objective of this component is to support the physical rehabilitation of selected urban water supply systems due to the critical need to reverse many years of inadequate investments and maintenance. This objective will be achieved through two sub-components: (i) the construction of approximately 240 kilometers of water supply networks and about 72,000 domestic house connections; and (ii) the preparation of technical cadastre and implementation of an information system.

Component 4: Capacity Building and Change Management (US$11.0 million): The overall objective of this component is to strengthen the ability of GoA to improve the efficiency of water supply in Angola by engaging stakeholders, managing and communicating change, and improving the ability of individuals to play their parts, especially at management—but also at technical—levels. Included in the technical level is the implementation unit, established by the Ministry for Energy and Water (MINEA), the Financial and Contract Management Unit (FCMU) to manage implementation of all projects in the sector regardless of the financing source. The objectives will be achieved through three sub-components: (i) capacity-building at the national and provincial levels; (ii) capacity building and training at the utility level; and (iii) technical assistance to facilitate change management and good governance, largely through communications.

20. Performance of the Original Project. The original project performance (IP and DO) is Moderately-Satisfactory (MS) or better in the last 12 months of implementation per the latest archived Implementation Status Report (ISR). The project activities described in Table 1 have been implemented (notwithstanding delayed effectiveness, using the government funds, project counterpart funds and PPA, as appropriate. The Implementation Performance (IP) rating is Moderately-Satisfactory (MS) given the current lack of progress and disbursement as a result of the delayed effectiveness, but all intermediate outcome indicators are on track to be achieved. To accelerate implementation of the Project, improve the IP rating to Satisfactory (S) or better, and to ensure that the PDO will be achieved on time; an action plan was agreed upon during the last Bank’s project review mission and is substantially implemented.

21. Compliance with Legal Covenants. Based on the findings of the supervision mission during the months of September and October 2010, the Project is in substantial compliance with the legal covenants of the original Project. The FCMU was established with structure, functions and responsibilities acceptable to IDA. The FCMU is equipped with a number of professionals exceeding the number identified at appraisal of the original Project. IDA accepted the Annual Action Plan prepared for Calendar Year 2011. IDA accepted the computerized accounting system installed in the FCMU. The project internal and external auditors were hired with qualifications and experience satisfactory to IDA. A procurement external auditor was hired under terms of reference (TOR) satisfactory to IDA. There are currently no outstanding

7

quarterly FMRs or audit reports. Thus, the activities under the AF are ready to be implemented as soon as the AF becomes effective.

22. Action Plan: The action plan emphasizes accelerating implementation and disbursements, and includes: (i) contracting with one additional procurement specialist for the FCMU; (ii) completing the procurement of an accounting system and of the internal auditor; (iii) forming a contract management team to accelerate the implementation of planned procurement packages; and (iv) implementing the revised procurement plan discussed during the October 2010 mission (published on the Bank external website on December 12, 2010) to accelerate the planned activities and actively proceed with the year-one implementation program. All activities are completed. This action plan will be followed closely to monitor progress, and the disbursement curve will be adjusted to reflect the 24-month delay in effectiveness. Since the original Project has been effective for a short period of time, the focus of the implementing agency has been on staffing the newly created implementing unit, procuring the needed project management systems and procedures, and completing those activities set forth in the Governance and Accountability Action Plan of the PAD for the original Project. The key accomplishments to date are presented in Table 1 below:

Table 1: Key Accomplishments

Component Activity Development of Institutions

Prepared proposals to create Water and Sanitation Utilities in five cities under the first phase of the Project and in two additional cities not in the Project but following the same principles Prepared a Beneficiary Assessment for project cities to support revisions to current tariff structures

Water Resources Management

Legally established the Institute for Water Resource Management Procured TA to design river basin management for the Cubango River Basin underway with Government budget

Rehabilitation of Water Supply Systems

Reviewed master plans for water supply in four project cities Procured six consultant contracts for Kuito, Uige, Malange, N’Dalatando, Huanbo and Lubango are ongoing

Capacity Building and Change Management

Contracted the staff of the Financial and Contract Management Unit Prepared the Environmental and Social Management Framework (ESMF) and Resettlement Policy Framework (RPF) Prepared the Operating Manual Acquired equipment for FCMU Contracted an external auditor Contracted for an accounting system Contracted a procurement auditor Contracted an internal auditor

23. Procurement compliance is satisfactory. Existing implementation arrangements, procedures, and staff currently employed by original Project for procurement, specifically established by the FCMU, will be maintained and will carry out procurement for the proposed

8

activities under the Project. The procurement unit performance has been assessed and determined to satisfactory. Furthermore, the FCMU is staffed with qualified, internationally recruited procurement officers whose experience is found to be satisfactory to the Bank. Due to the mission of the FMCU, additional staff resources in procurement are being recruited and are at an advanced stage, which will enhance the current capacity. The procurement plan published on the Bank’s external website on December 12, 2010, was reviewed during the February 2011 mission, in particular the procurement of large value works and associated supervision contracts, and is still on target. 24. Financial Management Performance is satisfactory. Similar to procurement, the DNAAS through its FCMU will be responsible for the financial management of project activities and has acceptable financial management systems in place. The project financial management matters are handled by an experienced and qualified Senior Financial Management Specialist, who is supported by a capable Project Accountant. In the October 2010 project review mission, the financial management performance rating was Satisfactory. This is a result of the successful implementation of the financial management (FM) conditions of effectiveness agreed during appraisal. There are currently no outstanding quarterly financial management reports (FMRs) or audit reports. 25. Since the original Project was only declared effective on August 30, 2010 it is too early to note significant progress toward achieving the intermediate outcome indicators agreed in the PAD as presented in Annex 1. However, the indicators presented in the PAD are realistic and achievable. The procurement plan published on December 12, 2010 indicates that the DNAAS intends to rapidly proceed with project implementation. 26. The risk rating for the Project (original Project and the proposed AF) is rated as MI because the original Project is now effective, the mitigating measures designed into the original Project are being implemented, and the GoA is proceeding with the agreed upon institutional development. The original Project identified the sustainable operation of the newly created provincial water and sanitation utilities to be the primary risk element. While this risk remains, the commitment demonstrated by the GoA to the creation of the needed institutions (the Water and Sanitation Utilities and the Institute for Water Resource Management) and to the sustainable operation of the sector has partially mitigated that risk.

27. The primary risk to the Project is further reduced by the fact that the residents of the peri-urban areas are generally paying rates far above those being charged for water from the official system. Since the rates to be charged by the newly established utilities should be less than the rates currently paid by residents in the peri-urban areas, the collection risk and the risk of political interference will be reduced. The construction risk will be mitigated by the fact that these new activities will be packaged with related works in the same cities of the original Project, thus reducing the complexity of managing numerous contracts. Also, the primary risks associated with procurement and financial management, will be mitigated by the fact that the implementing agency is experienced with Bank-financed projects under EMRP I & II, and the procurement and contract management staff are in place and experienced.

9

III. Proposed Changes 28. Project Development Objective: Due to the increased number of connections and coverage area included as a result of the AF and to make the results more measurable and realistic, it is necessary to change the development objective included in the original Project (see Table 2). Table 2: Project Development Objectives

Original PDO Revised PDO with Additional Financing The development objective of the original Project is to strengthen the institutional capacity and efficiency of the agencies in the water sector to improve access and reliability of water service delivery

The development objective of the Project is to strengthen the institutional capacity and efficiency of the Recipient’s agencies in the water sector to improve access to water service delivery

29. With the proposed AF, the expanded PDISA will continue with the original activities contained in project Components 1, 2 and 4. It will also scale-up the infrastructure investments to expand the water supply systems under Component 3 by increasing the number of connections in the peri-urban areas of the nine project cities. As a result of the increased number of connections, the sustainability of the utilities will be enhanced through the increased asset and revenue bases. The types of activities to be supported by the proposed AF are similar to those included in the original Project. The restructured project components are summarized below and presented in more detail in Annex 3:

Component 1: Development of Institutions in the Water Supply and Sanitation Sub-Sector – No changes are proposed.

Component 2: Water Resources Management – The only change proposed is the identification of alternatives to replace one of the basins originally proposed for piloting capacity building for river basin management. The original Project proposed the Cuanza and Cubango river basins as pilots; the A F proposes to substitute the Cubal da Hanha-Catumbela-Cavaco-Coporolo watersheds as pilots in place of the Cubango. The procurement to design river basin management for the Cubango River Basin is underway implementation with Government funding.

Component 3: Rehabilitation of Water Supply Systems – The AF will scale-up the

activities included in Component 3 and will rehabilitate the water production and expand the distribution systems through investments in the nine cities included in the original Project. These investments include: (a) rehabilitation of production and treatment facilities, (b) construction of new water distribution reservoirs, at existing water treatment plants; (c) construction of new facilities such as water quality laboratories and related equipment, at existing water treatment plants; (d) replacement of electro-mechanical equipment; (e) construction of new wells; (f) construction of about 403 kilometers of water supply networks in addition to those under C.1(a)7; (g) construction of about

7 The original project will support 240 kilometers, AF will support 403 kilometers. The Project (original and AF) will support 643 kilometers.

10

60,000 domestic connections; and (h) provision of technical assistance, including for the supervision of construction contracts. The A F will also prepare the technical cadastre for about 60,000 connections to enable: (a) an information system for measuring water consumption; and (b) a system to process bills to customers and to record customer payments technical cadastre and information systems for the increased number of connections.

Component 4: Capacity Building and Change Management – No changes are proposed.

30. Disbursements: The AF will augment the original funds and will be made available to counterparts under the same disbursement procedures as under the original FA. A description of the disbursement arrangements and the related disbursement tables are presented in Annex 4. 31. Cost and Financing Plans: The costs by component, for the original Project with reallocation and for the proposed AF are presented in Table 3 and 4 below and are presented in details in Annex 5. Table 3: Estimated Reallocation of Original Project Costs (US$ million)

Component Original Cost Original Cost

(w/reallocation) 1. Development of Institutions in the Water

Supply and Sanitation Sub-Sector 21.7 25.7 2. Water Resources Management 12.0 13.0 3. Rehabilitation of Water Supply Systems 51.8 56.8 4. Capacity Building and Change Management 11.0 16.9

Project Preparation Facility 0.8 0.8 Contingencies 15.9 0.0

Total Project Cost (US$ million) 113.2 113.2 (The reallocation is to mitigate increase in costs)

Table 4: Estimated Project Costs (US$ million)

Component Original Cost

(w/reallocation) Add'l Cost Revised cost

1. Development of Institutions in the Water Supply and Sanitation Sub-Sector 25.7 0.0 25.7

2. Water Resources Management 13.0 0.0 13.0 3. Rehabilitation of Water Supply Systems 56.8 100.0 156.8 4. Capacity Building and Change

Management 16.9 0.0 16.9

Project Preparation Facility 0.8 0.0 0.8 Contingencies 0.0 20.0 20.0 Total Project Cost (US$ million) 113.2 120.0 233.2

(The original Project cost includes $56.20 million for the GoA, the counterpart funding)

11

32. The allocation of financing, by source, for the original Project and for the proposed AF is presented in Table 5 below. Table 5: Project Financing Allocation (US$ million)

Source Original AF Total

Borrower/Recipient 56.2 0.0 56.2 International Development Association (IDA) 57.0 120.0 177.0 Total Project Cost (US$ million) 113.2 120.0 233.2 (Most beneficiaries of the AF are in the peri-urban areas and have low-income)

33. Intermediate Outcome Indicators: The project intermediate outcome indicators proposed for this AF will build on the ones approved for the original Project. The indicators are presented in Annex 1. IV. Appraisal Summary 34. Economic Analysis: The economic analysis demonstrates that the economic internal rate of return (EIRR) of the investments included in the AF is approximately 18 percent and the net present value is about US$37.6 million. The Project is, therefore, economically viable. Further, the sensitivity analysis demonstrates that if the cost reductions due to economies do not materialize in a range of 10-15 percent off the target value, the Project remains economically viable. Also, the sensitivity analysis shows that if reductions in the incidence of diarrhea do not materialize in a range 10 to 15 percent off the target value the Project remains viable. 35. Financial Analysis: The financial analysis has shown that the likelihood of the PWSUs achieving financial sustainability depends on the utilities paying for their operating expenses from collections, and that the collections are based on an affordable tariff structure. The analysis has demonstrated that it is possible to reduce the operating expenses due to the expected economies of scale that can be achieved by the investments from the Project. As capacity utilization increases, the average cost of water delivered to customers decreases by 25 percent in the original project scenario and decreases by 50 percent in the Project (original Project + AF) scenario. The larger scale of operations also results in declines in the cost of energy and chemicals from about US$0.25/m3 in the original project scenario to about US$0.18/m3 in the project (original Project + AF) scenario. However, achieving economies of scale will not be easy and will not be sufficient to realize financial sustainability. The average PWSU will also need to improve its billing and collection efficiency, and work actively with the various community groups to promote a culture of paying for the services delivered. 36. Institutional and Implementation Arrangements and Schedule: The AF will be implemented using the same management, supervisory, and fiduciary arrangements as the original Project described in the original Financing Agreement (FA). The implementation schedule will take place over the subsequent eight years. In order to plan for the procurement and implementation of the expanded work in the cities included in the second phase of implementation, the closing date of the original Financing Agreement is being extended until June 30, 2019.

12

37. The Ministry of Energy and Water (MINEA) and its DNAAS have established and staffed an implementation unit, the FCMU, within MINEA. This unit is responsible for the management and implementation of all rehabilitation and expansion projects in the urban water sector throughout the country, regardless of the source of financing (development partners and government). The FCMU is implementing the needed management systems and procedures including financial management, procurement, monitoring and evaluation, environmental safeguard policies, and social safeguards, along with the needed oversight and auditing. The government staff in the FCMU is supported by a team of short-term local and international consultants with the assistance from the various development partners. This unit was established by MINEA/DNAAS to develop critical project management skills (including financial management, contract management, procurement, monitoring and evaluation) within the government cadre. It is the intention of MINEA/DNAAS that in the future the government staff will assume full responsibility for the management of future water and sanitation projects with reduced external consulting support. 38. The Project will support the operations of the FCMU by providing financing for local and international consultants, equipment, and needed operating costs. As of October 2010, the FCMU has contracted with 14 professionals to support the implementation of the projects in the urban sector. 39. Procurement: Procurement would be carried out in accordance with the Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised through May 2010; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised through May 2010. Additionally, the following will apply: Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15, 2006 and revised in January 2011. Existing implementation arrangements of the original Project (described in the original FA), procedures, and staff currently employed under DNAAS and its FCMU will be maintained and will be used to implement procurement for the activities included under the AF. The implementation of the procurement activities is entrusted to an experienced, internationally-recruited procurement specialist. In addition, the FCMU Executive Coordinator possesses relevant experience in procurement procedures funded by the Bank and other development partners. 40. The aim of FCMU is to proceed with the procurement activities in such a manner that the implementation is accelerated and some or most of the lost time is recovered. It is estimated that the A F will increase the number of procurement packages by about 20 percent, but since this additional workload will be executed over a longer period of time, the impact on the staff is assessed to be minimal. A separate procurement capacity assessment is, therefore, not required. The capacity assessment and recommendations carried out for the original Project is adequate to meet the needs of the AF. The Procurement risk rating is ML. 41. Financial Management: Similar to procurement, the financial management arrangements under the original Project, described in the original FA will be maintained. The DNAAS and its FCMU will be responsible for the financial management of the activities supported by the A F for Component 3. The October 2010 project review mission determined that the FCMU is adequately staffed with qualified accountants, systems and procedures acceptable to IDA. Thus,

13

the FCMU-DNAAS as the implementing agency for the proposed AF satisfies the Bank’s minimum requirements under OP/BP 10.02. Therefore, the FM assessment carried out for the original Project and the conclusion that the DNAAS and the FCMU satisfies the Bank’s minimum requirements under OP/BP 10.02 applies to the AF. The FM risk rating is ML. 42. Technical: During the preparation and appraisal process, a structured investigation and quantification took place based on field conditions and the existent master plans. The project designs are based on meetings with elected officials and the Directors of Water Services at national and provincial level. Following these discussions and a review of the available information, assessments were made at the intake facilities and distribution centers, and in the various city and peri-urban areas. Consolidated peri-urban areas that lack water supply services tend to be comprised of low- income households. The criteria for assessment took account of : the number of targeted potential customers, the cost and level of difficulty of installation, the lack of obvious negative environmental and social impacts, and the areas where the majority of the consumes are poor. During the mid-term review (MTR) the Beneficiary Assessment Survey for the cities will review the poverty impact of the Project. To minimize costs and environmental impacts, pipe-work will be installed within existing un-surfaced road reserves at most locations. 43. From these reviews, the most suitable interventions were provisionally selected and a preliminary design concept was applied to these interventions based upon an assessment of the number of houses, site visits, and the existent master plans. The generic designs were quantified into notional lengths and diameters of pipe-work and then priced out using analogous rates from similar works currently being carried out in Angola under EMRP I & II. Some of the sites were then visited by specialist consultants to review the environmental and social safeguard policy implications of the investments proposed at each site. This information will form the technical basis to procure the design and build contracts. See Annex 3 for a more detailed description of the restructured Project.

44. Environmental and Social Safeguards: The original Project is classified as Category B under the Bank’s social safeguards policies, as planned urban water system rehabilitation and improvements may result in minor environmental impacts and land compensation for losses and damages to property during the construction phase of water works rehabilitation. Two safeguard policies were triggered by the original Project: Environmental Assessment (OP/BP 4.01) and Involuntary Resettlement (OP/BP 4.12). The nature and scope of physical investments supported by the AF are the same as the infrastructure investments under the original Project. The investments will occur in the same list of cities as originally proposed in the original Project; in some cases the investments will occur in cities and neighborhoods initially considered but postponed because of the funding constraints discussed earlier in this paper in other cases, the investments provided under the AF may allow investments in additional neighborhoods. The physical design of network extensions will consider alternative alignments to avoid and/or minimize any potentially adverse environmental and social impacts. The likelihood of large scale, significant, adverse, cumulative and/or irreversible impacts is considered to be slim. On this basis, the Category B rating is maintained for the AF. The Environmental and Social Management Framework (ESMF) and the Resettlement Policy Framework (RPF) were prepared and disclosed in the country and at the Bank’s InfoShop on February 21, 2008. The frameworks prepared and disclosed for the original Project remain fully valid for the AF. The updated appraisal stage Integrated Safeguards Datasheet (ISDS) was disclosed at the InfoShop on January

14

24, 2011. Prior to award of any construction or rehabilitation activities, the respective contractors will be required to prepare and submit acceptable Environmental and Social Management Plans and either full or Abbreviated Resettlement Action Plans if and as required. International Waterways (OP/BP 7.50) does not trigger since the river basins that will be used as pilots in developing capacity for river basin management planning under Component 2 of the Project, are not considered international waterways under OP/BP 7.50. None of the Cities are dependent on their water supply from dams or reservoirs. All are either supplied by well fields, springs, or river-side water intake systems. 45. Governance and Accountability: The original Project has an extensive set of governance and accountability actions presented in detail in the original Project Appraisal Document. These activities include enhanced public disclosure program, enhanced compliance mechanisms, and improved implementation of procurement oversight, mitigation of collusion risks and forgery, and fraud risks. This paper updates the dates mentioned in the comprehensive plan (Annex 7). The management of MINEA/DNAAS recognizes the importance of these actions and will review the status of the key actions regularly to determine if new items should be included to strengthen the overall governance environment in the unit. This plan strengthens the supply side of governance in the MINEA/DNAAS. On the other hand, the activities under Component 4, which aim at bringing higher transparency to the transactions of the utilities and increase the level of communication between the government/utilities and the communities, support the gradual development of demand- side governance and accountability.

46. Project Readiness for Implementation: The FCMU is fully equipped and staffed to implement the Project, with the FM electronic systems installed. The Project Implementation Manual for the original Project will be used in the Project, including all procurement, safeguards and FM procedures. Procurement packages for six consultant contracts for Kuito, Uige, Malange, N’Dalatando, Huanbo and Lubango are ongoing, and procurement for civil works contracts can be launched after approval of the AF for about 76 percent of the total distribution network and 88 percent of the new connections proposed in the Project, complementing the already constructed production systems. Additionally, while the original Project had significant delays in effectiveness, the AF is not expected to face similar delays. This is because, as explained in detail in paragraph 7 of this document, the delays in the original Project were mostly external and not project specific. Similar external issues are not foreseen at this stage. In light of these factors, as well as the absence of conditions of effectiveness, the AF is substantially ready for implementation. 47. The Bank will ensure sustained and intensive implementation support, including through higher than average supervision budget, for three missions per year, including Environment, Procurement, FM, technical, and institutional experts. The missions will aim to visit each of the nine cities once a year to verify the institutional development and ongoing contracts.

15

Annex 1: Results Framework and Monitoring and Monitoring Indicators Revisions to the Results Framework Comments/

Rationale for Change PDO

Current (PAD) Proposed To strengthen the institutional capacity and efficiency of agencies in the water sector to improve access and reliability of water service delivery.

To strengthen the institutional capacity and efficiency of the Recipient’s agencies in the water sector to improve access to water service delivery.

Revised - To make the results more measurable and realistic.

PDO indicators

Current (PAD) Proposed change* 1. 66% of PWSUs achieving annual profitability targets

1. Percentage of PWSUs achieving annual profitability targets

Continued – Indicator clarified

2. 80% of hydrometric stations operational

2. Percentage of hydrometric stations providing information to DNRH

Revised – Indicator clarified

3. 72,000 households with connections to the piped water supply network managed by utilities in pilot cities

3. Number8 of people in urban areas provided with access to improved Water Sources under the Project (core indicator)

Revised - The PDO indicator of the PAD was adjusted to a Core Indicator

Intermediate Results indicators

Current (PAD) Proposed change* Component 1: Development of the Institutions in the Water Supply and Sanitation Sector

Component 1: Development of the Institutions in the Water Supply and Sanitation Sector

Asset management unit is established and operational

Asset management unit is established and operational

Continued

66% of annual Independent Financial and Performance Audits of the Performance Contracts reporting positive results

Percentage of annual Independent Financial and Performance Audits of the Performance Contracts reporting positive results

Continued – Indicator clarified

Water utilities that the project is supporting (core indicator)

New - Core Indicator

Regulatory Agency is established and operational

Regulatory Agency is established and operational

Continued

Revised tariff policy for delivery of water supply and sanitation services approved and operational

Dropped – New framework approved by Government

Component 2: Water Resource Management

Component 2: Water Resource Management

8 The number of people provided with access to improved water sources is also the number of direct project beneficiaries. Hence, this indicator will also provide data for the core indicator: Direct project beneficiaries (number), and the percent of which are female. The number of direct project beneficiaries is determined by the number of new and rehabilitated household connections, multiplied by the average household size of about 6.3. The number of female beneficiaries is estimated according to national level at 50 percent.

16

Revisions to the Results Framework Comments/ Rationale for Change

Framework for “Institute for Water Resource Management” defined and agreed to by stakeholders

Framework for “Institute for Water Resource Management” defined and agreed to by stakeholders

Continued

MIS developed incorporating sectoral information from 2 river basins supporting the integrated management of water resources

MIS developed incorporating sectoral information from river basins supporting the integrated management of water resources

Continued – Clarified

Component 3: Rehabilitation of Water Supply Systems

Component 3: Rehabilitation of Water Supply Systems

240 kilometers of water supply networks rehabilitated

643Kms of water supply networks installed or rehabilitated

Revised – To include new assets financed by the AF

132,000 New piped households water connections that are resulting from the project intervention (core indicator)

New - To include new assets financed by the AF

* Indicate if the indicator is Dropped, Continued, New, Revised, or if there is a change in the end of project target value

17

Revised Project Results Framework

Project Development Objective (PDO): To strengthen the institutional capacity and efficiency of agencies in the water sector to improve access to water service delivery.

PDO Level Results Indicators9

Cor

e

UOM10

Baseline Original Project Start (2010)

Progress To Date (2010)11

Cumulative Target Values12 Frequency

Data Source/ Methodology

Responsibility for Data Collection

Comments

2011 2012 2013 2014 2015 2016 2017 2018

1. Percentage of PWSUs achieving annual profitability targets

% 0 5 Studies completed

Studies completed

Installation of utility

1/5 20%

1/5 20%

3/5 60%

4/9 44%

5/9 55%

6/9 66%

Annual Audit reports

FCMU/ DNAAS

2.Percentage of hydrometric stations providing information to DNRH

% 0 0 Procurement completed

10% 20% 30% 45% 60% 80% 80%

Quarterly

Progress reports

FCMU/ DNRH

3. Number of people in urban areas provided with access to improved Water Sources under the project (cumulative and female) (core indicator) Phase 1 and 2

Number

0

0

0

Procurement completed

105,000

230,000

369,000

520,000

678,000

840,000

Quarterly

Progress report

FCMU/ DNAAS

Beneficiaries13

Direct Project beneficiaries,

Number

0

0

0

Procurement completed

105,000

230,000

369,000

520,000

678,000

840,000

Quarterly

Progress report

FCMU/ DNAAS

Of which female (beneficiaries)

Percent r

0

0

0

Procurement completed

50%

50%

50%

50%

50%

50%

Quarterly

Progress report

FCMU/ DNAAS

9 Please indicate whether the indicator is a Core Sector Indicator (for additional guidance – please see http://coreindicators). 10 UOM = Unit of Measurement. 11 For new indicators introduced as part of the additional financing, the progress to date column is used to reflect the baseline value. 12 Target values should be entered for the years data will be available, not necessarily annually. Target values should normally be cumulative. If targets refer to annual values, please indicate this in the indicator name and in the “Comments” column. 13 All projects are encouraged to identify and measure the number of project beneficiaries. The adoption and reporting on this indicator is required for investment projects which have an approval date of July 1, 2009 or later (for additional guidance – please see http://coreindicators).

18

Intermediate Results and Indicators

Intermediate Results Indicators

Cor

e Unit of Measurement

Baseline Original Project Start (2010)

Progress To Date (2010)

Target Values Frequency

Data Source/ Methodology

Responsibility for Data Collection

Comments 2011 2012 2013 2014 2015 2016 2017 2018

Component 1 - Development of the Institutions in the Water Supply and Sanitation Sector

1. Percentage of annual independent financial and performance audits with satisfactory results

%

0

0

Studies Completed

Installation of utility

1/5 20%

2/5 40%

3/5 60%

4/9 44%

5/9 55%

6/9 66%

Annual Audit reports

DNAAS

2. Number of water utilities that the project is supporting (core indicator)

Number

0

0

Studies completed

1

2

3

5

7

9

9

Annual Progress Report

DNAAS

3. Regulatory Agency is established and operational

Number

0

0

0

0

Procurement completed

Studies completed

Regulatory Agency established under legal instrument

Regulatory Agency staffed

Regulatory Agency fully operational

Annual Progress Report

MINEA

4. Asset management unit is established and operational

Number

0

0

0

0

0

Procurement completed

Studies completed

Unit established under legal instrument

Unit staffed Unit fully operational

Annual Progress Report

MINEA

Component 2 - Water Resource Management

5. Framework for “Institute for Water Resource Management” defined and agreed to by stakeholders

Number

0

Institute established under legal instrument

Institute established under legal instrument

Entity staffed

Entity staffed

Entity staffed and operational

Annual Progress Report

DNRH

6. MIS developed incorporating sectoral information from river basins supporting the integrated management of water resources

Number

0

0

0

0

Procurement completed

Assessment of MIS & definition of data requirements initiated

Assessment of MIS & definition of data requirements completed

Sectoral information from IBMP incorporated

Basin level MIS operational

Annual Progress Report

DNRH

Component 3 - Rehabilitation of Water Supply Systems

19

Intermediate Results and Indicators

Intermediate Results Indicators

Cor

e Unit of Measurement

Baseline Original Project Start (2010)

Progress To Date (2010)

Target Values Frequency

Data Source/ Methodology

Responsibility for Data Collection

Comments 2011 2012 2013 2014 2015 2016 2017 2018

7. Kms of water supply networks installed or rehabilitated

Kilometers

0

0

0

Procurement completed

100

250

360

440

540

643

Monthly Contract Progress Reports

Progress Report

MINEA/ DNAAS

8. New piped households water connections that are resulting from the project intervention (core indicator)

Number

0

0

0

Procurement completed

16,600

36,200

58,100

81,700

106,500

132,000

Monthly Contract Progress Reports

Progress Report

DNAAS

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Annex 2: Operational Risk Assessment Framework (ORAF)

Negotiations and Board Package Version

 

Project Development Objective(s)  The project development objective is to strengthen the institutional capacity and efficiency of agencies in the water sector to improve access of water service delivery. The achievement of the PDO will be measured in terms of the following indicators:  

  PDO Level Results Indicators: 

1. Number of  people in urban areas provided with access to improved water sources under the project (core indicator) 

2             Percentage of hydrometric stations providing information to DNRH (customized indicator)3.            Percentage of PWSUs achieving annual profitability targets (customized indicator)

 Is  

ORAF Risk Levels Risk Rating  Risk Description  Proposed Mitigation Measures 

1. Project Stakeholder Risks

ML

Public perception that the project is not pro-poor. Also, collection risk for utilities (suitable operation) due to the lack of history of many residents paying for services.

Implement communication program included in the project to explain rationale for utilities and need for cost recovery

Assist in establishment of a Water Regulator to monitor costs and tariffs

Update beneficiary assessments to ensure tariffs are affordable Select areas for the new connections mainly based on levels of

poverty

2. Implementing Agency Risks

ML The risk in all departments in MINEA is

that activities will be delayed due to low levels of institutional and human capacity and that weak governance increases the opportunities for fraud and corruption.

Complete staffing of FCMU with qualified staff Train the local staff in use of standardized procedures and

change management Promote use of standardized operating procedures in FCMU to

strengthen procedures and increase transparency Use FM and procurement specialist to monitor procedures used

on contract management in FCMU Implementation of communication programs

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3. Project Risks

3.1 Design

L

The technical complexity of the project is low and the activities will be packaged with related works in the same cities, thus reducing the complexity of managing numerous contracts. Also, the number of project cities provides significant flexibility in the design and implementation.

Bank staff and supervising engineers to make frequent field visits to monitor activities with a consistent team of specialists

Implement communication program to explain reason for utilities and need for cost recovery

3.2 Social and Environmental

L

The main safeguard considerations are known and pertain to construction phase impacts that are manageable and time bound, for which appropriate screening tools and guidelines have been prepared to avoid and/or mitigate any adverse environmental or social impacts.

Bank staff to make frequent field visits to monitor activities with a consistent team of specialists

ESMF and RFP have been prepared to minimize the environmental and social risks associated with the project

3.3 Program and Donor

MI

MINEA and DNAAS have started to establish the institutions needed to ensure sustainable operations in the sector, but the continued development of this program will be confronted by political and fiscal obstacles which, though anticipated, may still prove difficult to overcome effectively. Little formal donor coordination exists.

Bank specialists and consultants to actively work with the GoA counterpart to explain proposed institutional framework and stress importance of timely implementation

Use communication programs and training to ensure understanding of concepts by officials and other stakeholders

Coordination with donor is done during the Bank missions

3.4 Delivery Quality

MI

The political risk associated with requiring people – the poor especially – to pay for water is always high; the impact of this risk preventing or delaying needed tariff increases or operational improvements to ensure sustainable delivery of water would impact the sustainability of the utilities and the impact of the project.

Bank specialists and consultants to actively work with the GoA counterpart to explain proposed institutional framework, and stress importance of timely implementation

Use communication programs and training to ensure understanding of concepts by officials and other stakeholders. At national level, institutional messages about what the reforms will provide. At provincial level, implement communication program to explain reason for utilities and need for cost recovery

3.5 Other - Financial Sustainability

MI

Risk to the sustainable operation of the newly created provincial water and sanitation utilities is due to an inability to control expenses and to collect tariffs charged to consumers

Implement communication program included in the project to explain rationale for utilities and need for cost recover

Technical assistance to install and train management on effective and simple commercial systems

The project will support part of utilities’ operations and maintenance costs with goods and services for early years

22

Overall Risk Risk Rating at Preparation

Overall Risk Risk Rating at Implementation

Comments

  

MI

MI

The risk for the project has been reduced by the progress made in establishing the FCMU and critical institutions such as the utilities. The critical risks to the project remain institutional while project risks, in particular the construction risks, are generally low. The staffing of the FCMU and the start-up operations of the unit, including procuring critical systems and procedures, are positive, as is the commitment shown to the project and the proposed institutional reform by the management in MINEA/DNAAS.

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Annex 3: Detailed Description of Restructured Project Background 1. The proposed Additional Financing (AF) will enable the GoA to support improved water supply access by scaling-up the investments in the original nine cities and thus increase the impact of the original project as described in the PAD presented to the Board July 31, 2008. The proposed AF will rehabilitate the production capacity, extend the distribution systems, and increase the number of domestic connections in the peri-urban areas in the nine project cities. While the activities supported by the AF will benefit all nine project cities, the majority of the new investments will occur in the cities included in the Phase 2 of the project, and will thus be implemented towards the end of the implementation period. The proposed activities are similar in type and scope to the original investment program, comprising no major changes to the initial project design, and only expanding and strengthening the ongoing activities. The proposed investments were identified and studied during the design and preparation of the original project but were deferred due to limited funding capacity. 2. With the proposed AF, the combined project will expand its impact on the population in these nine urban areas by financing more connections, particularly for the urban poor, and with these additional connections, increase the sustainability of the newly created public water and sanitation utilities. As its Programa de Governo indicates, the Government is committed to the proposed AF so that it can achieve both its stated policy of providing improved water services and its MDGs. Proposed Changes in the Restructured Project 3. The original Project consists of these components: Component 1: Development of Institutions in the Water Supply and Sanitation Sub-Sector (US$21.7 million): The objective of this component is to strengthen the institutional framework for the water supply sub-sector at both the central and regional levels. The objective will be achieved through the implementation of three related sub-components: (i) the development of the Asset Management Unit; (ii) the creation of Provincial Water Supply and Sanitation Utilities; and (iii) the development of a Regulatory Agency for the water supply and sanitation sub-sector. Component 2: Water Resources Management (US$12.0 million): The objective of this component is to support the strengthening of the institutional framework for the water resources management sub-sector. This objective will be achieved through three sub-components which are: (i) the development of an institution for water resources management; (ii) the development of systems for water resources management; and (iii) the rehabilitation of water resources management systems. Component 3: Rehabilitation of Water Supply Systems (US$51.8 million): The objective of this component is to support the physical rehabilitation of selected urban water supply systems due to the critical need to reverse many years of inadequate investment and maintenance. This objective will be achieved through two sub-components: (i) the construction of approximately

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240 kilometres of water supply networks and about 72,000 domestic house connections; and (ii) the preparation of technical cadastre and implementation of an information system. Component 4: Capacity Building and Change Management (US$11.0 million): The overall objective of this component is to strengthen the ability of GoA to improve the efficiency of water supply in Angola by engaging stakeholders, managing and communicating change, and improving the ability of individuals to play their parts, especially at management--but also at technical--levels. The objectives will be achieved through three sub-components: (i) capacity-building at the national and provincial levels; (ii) capacity building and training at the utility level; and (iii) technical assistance to facilitate change management and good governance, largely through communications. 4. With the additional financing provided by IDA, the restructured Project would have the following components with the following amounts: Component 1: Development of Institutions in the Water Supply and Sanitation Sub-Sector (US$25.7 million): The objective of this component is to strengthen the institutional framework for the water supply sub-sector at both the central and regional levels. The objective will be achieved through the implementation of three related sub-components: (i) Provision of technical assistance to MINEA to develop regulatory frameworks and studies to enable the creation of the AMU as a public enterprise responsible for managing both the water and wastewater public assets located in provinces and in municipal urban centers in the Recipient’s territory; (ii) provision of technical assistance to Participating Provinces to develop regulatory frameworks and studies for purposes of creating PWSUs; and (iii) provision of technical assistance to MINEA to develop regulatory frameworks and studies to enable the creation of a national water regulatory agency, as a public institute responsible for the economic regulation of the PWSUs. Component 2: Water Resources Management (US$13.0 million): The objective of this component is to support the strengthening of the institutional framework for the water resources management sub-sector. This objective will be achieved through three sub-components which are: (i) provision of technical assistance to MINEA to develop regulatory frameworks and studies to enable the creation of a water resources institute responsible for the policy reforms and financial sustainability of the water resources management sub-sector in the Recipient’s territory;. (ii) provision of technical assistance to MINEA to: (a) formulate pilot schemes designed to develop integrated basin management plans of the Cuanza and Cubal da hanha-Catumbela-Cavaco- Caporolo rivers; and (b) review the framework of safety of dams in the Recipient’s territory; and (iii) rehabilitation of the Recipient’s: (a) approximately 189 hydrometric stations; (b) hydrometric network; and (c) information management system. Component 3: Rehabilitation of Water Supply Systems (US$156.8 million –w/o contingencies): The objective of this component is to support the physical rehabilitation of selected urban water supply systems due to the critical need to reverse many years of inadequate investment and maintenance. This objective will be achieved through four sub-components: (i) (a) Construction of approximately 240 kilometers of water supply networks and about 72,000 domestic connections in urban and peri-urban areas; and (b) provision of technical assistance including for the supervision of construction contracts, (ii) development of a technical cadastre for about 72,000 connections to enable: (a) an information system for measuring water consumption; and (b) a system to process bills to customers and to record customer payments; (iii) Rehabilitation of the production and expansion of the distribution system of water supply including: (a) rehabilitation of production and

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treatment facilities, (b) construction of new water distribution reservoirs, at existing water treatment plants; (c) construction of new facilities such as water quality laboratories and related equipment, at existing water treatment plants; (d) replacement of electro-mechanical equipment; (e) construction of new wells; (f) construction of about 403 kilometers of water supply networks in addition to those under C.1(a): (g) construction of about 60,000 domestic connections; and (h) provision of technical assistance, including for the supervision of construction contracts.; and (iv) development of a technical cadastre for about 60,000 connections to enable: (a) an information system for measuring water consumption; and (b) a system to process bills to customers and to record customer payments Component 4: Capacity Building and Change Management (US$16.9 million): The overall

objective of this component is to strengthen the ability of GoA to improve the efficiency of water supply in Angola by engaging stakeholders, managing and communicating change, and improving the abilities of individuals to play their parts, especially at management—but also at technical—levels. Included in the support to the technical level is the implementation unit established by MINEA, the Financial and Contract Management Unit (FCMU), to manage the implementation of all projects in the sector regardless of the financing source. The objectives will be achieved through five sub-components: (i) (a) provision of technical assistance, training, and goods to MINEA’s central and provincial staff to strengthen their: (i) management capacity; and (ii) technical capacity to develop systems for water quality testing and monitoring; and (b) Rehabilitation of the Recipient’s Onga Zanga research and survey center. (ii). Carrying out of environmental and resettlement assessments and corresponding environmental and resettlement action plans in connection with the carrying out of Components 2(iii); 3; 4(i) and (iii) of the Project. (iii) (a) provision of technical assistance and training to PWSUs’ management staff to enhance their administrative and technical capacities; and (b) formulation and implementation of pilot schemes designed to build institutional capacities and support activities benefiting the poor in peri-urban areas served by the PWSUs; (iv) provision of technical assistance to MINEA to implement the GAAP and corresponding risk management plans; and (v) strengthening of PWSUs’ management capacities through the provision of Performance Payments.

5. Specifically, the changes included with the AF are in Components 2 and 3 of the project:

Component 2: The only change proposed is the identification of different river basins to replace one of the basins originally proposed for piloting capacity building for river basin management. The original project proposed the Cuanza and Cubango river basins as pilots; the AF proposes to substitute the Cubal da Hanha-Catumbela-Cavaco-Coporolo watersheds as pilots in place of the Cubango. Component 3: Scaling-up the activities will: (i) rehabilitate water production systems and expand distribution systems through investments in the nine cities included in the original project, including: (a) rehabilitation of production and treatment facilities, (b) construction of new water distribution reservoirs, at existing water treatment plants; (c) construction of new facilities such as water quality laboratories and related equipment, at existing water treatment plants; (d) replacement of electro-mechanical equipment; (e) construction of new wells; (f) construction of about 403 kilometers of water supply networks; (g) construction of about 60,000 domestic connections; and (h) provision of technical assistance, including for the supervision of construction contracts; and (ii) prepare the technical cadastre for about 60,000

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connections to enable: (a) an information system for measuring water consumption; and (b) a system to process bills to customers and to record customer payments

Detailed Description of Investments in the Cities 6. For the first phase of five cities as described in the PAD, equipment and works will be financed in Malange, Kuíto, N’Dalatando, Huambo, and Uíge in order to increase the capacity of water distribution centers and establish additional distribution networks and household connections. These cities have already received funding from other programs, EMRP, and assistance from China.

Malange Two significant interventions were undertaken in Malange in the past six years. The first involved the rehabilitation, with government funds, of the existent water supply system and the construction of a new line to the water distribution center. The second involved the establishment of networks in the urban area and the rehabilitation of the water distribution center using EMRP I funds. At the moment, the contracting process is under way, along with an expansion of networks using EMRP II funds. With the new production capacity under construction under EMRP I & II, the following new infrastructure would be financed by the AF: New hydraulic and electromechanical equipment to boost the capacity of the

pumping station; New distribution reservoir with a capacity of roughly 2,500 m3; Installation of distribution networks with pipes diameters 62-300 mm and total

length of about 20 kilometers; Installation of about 10,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage, etc. Kuito Kuito was recently the beneficiary of a complete water supply system (water treatment plant, water distribution center, and primary distribution networks) financed by EMRP I. With the new production capacity constructed under EMRP I, the following new infrastructure would be financed by the AF:

New distribution reservoir (water tower) with a capacity of roughly 200 m3 at the

water distribution center, along with the respective pumping station; Installation of distribution networks with pipes diameters 62-90 mm and total

length of about 20 kilometers; Installation of about 2,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage, etc.

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N´Dalatando N´Dalatando was the beneficiary of similar works through the EMRP I & II as in Malange. With the new production capacity under construction under EMRP I & II, the following new infrastructure would be financed by the AF: Installation of distribution networks with pipe diameters 62-90 mm and total

length of about 15 kilometers; Installation of about 2,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage, etc. Huambo

Using the Chinese line of credit, significant interventions took place in Huambo in the areas of production, water distribution centers, and primary distribution networks. However, no plans were made for significant expansion of distribution networks and household connections. With the new production capacity, the following new infrastructure would be financed by the AF: Rehabilitation of the existing distribution reservoirs at the water distribution

center and construction of new distribution reservoirs with a total capacity of roughly 5,000 m3, along with the respective pumping station;

Installation of distribution networks with pipe diameters 62-150 mm and total length of about 50 kilometers;

Installation of about 10,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage, drying beds, etc. Uíge Uíge was recently the beneficiary of works similar to those in Huambo funded with the Chinese line of credit. With the new production capacity, the following new infrastructure would be financed by the AF: Construction of a water distribution center with a total capacity of roughly 2,500

m3, along with the respective pumping station; Installation of distribution networks with pipes diameters 62-150 mm and total

length of about 60 kilometers; Installation of about 4,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage, drying beds, etc.

7. For the second phase of four cities, as described in the PAD, M'Banza Congo, Menongue, Lubango, and Luena, equipment and works will be financed to rehabilitate existing production systems, including rehabilitation and construction of wells, increase the capacity of water distribution centers, replace worn out networks, and installation of networks and household connections. These cities have not yet received resources to upgrade systems.

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8. The following new infrastructure would be financed by the AF:

Menongue Hydraulic and electromechanical equipment for rehabilitation of the current raw

water pumping station and the corresponding replacement of the pipeline to the water treatment plant (ETA);

Hydraulic and electromechanical equipment for the rehabilitation of the existing treatment plant and pumping station for treated water;

Rehabilitation and construction on the existing R1 and R2 reservoir sites - a total capacity of 8,500 m3 and provision of the respective equipment for the switching chamber, along with the respective pumping station;

Construction of a reservoir with a capacity of roughly 800 m3 for the Pandera community and provision of the respective equipment for the switching chamber, along with the respective pumping station;

Construction and provision of equipment for the pumping station in the eastern area of the city;

Installation of distribution networks with pipe diameters 62-400 mm and total length of about 55 kilometers;

Installation of about 9,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage, etc. M’Banza Congo Hydraulic and electromechanical equipment for rehabilitation of the existent raw

water pumping station and the corresponding replacement of the raw water pipeline to the ETA;

Hydraulic and electromechanical equipment for the rehabilitation of the existing treatment plant and pumping station for treated water;

Construction of a reservoir for treated water with a capacity of roughly 500 m3 and the respective equipment for the switching chamber, along with the respective pumping station;

Installation of distribution networks with pipe diameters 62-250 mm and total length of about 28 kilometers;

Installation of about 3,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage, etc. Lubango Hydraulic and electromechanical equipment for rehabilitation for the existing

boreholes in the Nossa Senhora do Monte well field, in order to guarantee production of at least 10,000 m3 per day during the dry season;

New boreholes in the Nossa Senhora do Monte well field, with the aim of increasing production to roughly 17,000m3/per day during the dry season;

Replacement of an existing pipeline from the reservoir in the borehole field roughly 0.5 kilometers long;

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Construction of the pH correction system and provision and assembly of the respective equipment;

Construction of four reservoirs, with a total capacity of almost 115,000 m3, with the respective switching equipment, along with the respective pumping station;

Installation of distribution networks with pipe diameters 62-500 mm and total length of about 100 kilometers;

Installation of about 17,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage, etc.

Luena Hydraulic and electromechanical equipment for rehabilitation and modernization

of the current intake, pumping, and treatment system with the aim of guaranteeing its original production capacity of almost 200 m3 per hour of treated water;

Replacement of the raw water pipeline, beginning at the pumping system, with the aim of restoring its original capacity of 200 m3;

Construction of a reservoir with a capacity of roughly 8,500m3, with the respective switching chamber, along with the respective pumping station;

Installation of distribution networks with pipe diameters 62-150 mm and total length of about 55 kilometers;

Installation of about 3,000 connections; and Minor rehabilitation and construction of facilities for administrative services,

laboratory services, storage of chemical products, site drainage etc.

9. The table below provides a summary of the approximated quantities studied for the original Project and the proposed AF:

Cities Connections Networks

Units Km Original AF T0TAL Original AF TOTAL

Menongue 3,900 9,000 12,900 12 55 67 M’B.Congo 1,200 3,000 4,200 5 28 33 Lubango 7,600 17,000 24,600 27 100 127 Luena 3,200 3,000 6,200 8 55 63 Malange 12,600 10,000 22,600 16 20 36 Kuito 3,700 2,000 5,700 25 20 45 N’Dalatando 4,400 2,000 6,400 22 15 37 Huanbo 30,000 10,000 40,000 66 50 116 Uige 5,400 4,000 9,400 59 60 119 Total 72,000 60,000 132,000 240 403 643

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Annex 4: Disbursement Arrangements

1. Disbursements from IDA would be made on the basis of incurred eligible expenditures (transaction-based disbursements). IDA would then make advance disbursement from the proceeds of the Credit by making deposits into the implementing agency operated Designated Account (DA) to expedite project implementation. The advance to DA would be used by the implementing agency to finance project expenditures under the proposed Credit. Another acceptable method of withdrawing funds from the Credit is the direct payment method, involving direct payments from the Credit to a third party for works, and goods and services upon the implementing agency’s request. Payments may also be made to a commercial bank for expenditures against IDA special commitments covering a commercial bank’s Letter of Credit. The Disbursement Letter stipulated a minimum application value for direct payment and special commitment procedures determined during negotiations. 2. Upon Credit effectiveness, the implementing agencies would submit withdrawal applications for an initial advance to the DA, drawn from the IDA Credit, in amounts agreed to in the Disbursement Letter. Additional advances of funds from IDA to the DA will be made upon evidence of satisfactory utilization of the previous advances, reflected in Statements of Expenditure (SOE) and/or on full documentation for payments above SOE thresholds. Withdrawal applications documenting expenditures would be required to be submitted monthly.

Disbursements per Expenditure Category to be financed by IDA and the Additional Financing (US$ million and %)

Category Original IDA Credit

Percentage of Expenditures to be

Financed by the Original IDA

Credit (Inclusive of Taxes)

Additional IDA Credit

Percentage of Expenditures to be Financed by the Additional IDA

Credit (Inclusive of Taxes)

1 Civil Works 18.4 50% 76.0 100% 2 Goods and Operating Costs 10.5 50% 9.0 100% 3 Consultants’ Services and training 100% (a) under Components A.2 and D.3

of the Project 5.2 50% 0.0

(b) under Components A.3 and B.1 of the Project

1.3 50% 0.0

(c) under Components A.1, B.2, B.3, C, D.1 (a), D.2 and D.4 of the Project

20.3 50% 15.0 100%

4 Goods, Consultants’ Services and Training under Performance Payments and covered by the Annual Plan

0.5 50% 0.0

5 Project Preparation Facility 0.8 Amount payable pursuant to Section 2.07 of the General

Conditions

0.0

6 Unallocated 0.0 20.0 Total 57.0 120.0

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Annex 5: Project Costs (US $million)

Project Cost By Component

Original Project (w/

reallocation)

Additional Financing

Total Project

Development of the institutions in the Water Sector 25.7 0 25.7Phase 1 18.3 0 18.3Phase 2 7.4 0 7.4Water Resource Management 13.0 0 13.0Rehabilitation of Water Supply Systems 56.8 100.0 156.8Phase 1 40.4 28.0 68.4Phase 2 16.4 72.0 88.4Capacity building and change management 16.9 0 16.9 Total Baseline Cost 112.4 100.0 212.4

Project Preparation Facility (PPF) No. Q5620 0.8 0 0.8Physical and Price Contingencies 0 20.0 20.0

Total Project Costs 113.2 120 233.2

Indicative Financing Plan Original Project

Additional Financing

Total Project

Republic of Angola 56.2 0.0 56.2 IDA 57 120.0 177.0 TOTAL 113.2 120.0 233.2

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Annex 6: Economic and Financial Analysis

Economic Analysis 1. The development objective of the Additional Financing (AF) is similar to that of the original Water Sector Institutional Development Project (PDISA), i.e. to strengthen the institutional capacity and efficiency of the Recipient’s agencies in the water sector in order to improve access to sustainable water service delivery. To do so, the project (original Project + AF) introduces commercial principles for the management of the newly established provincial water and sanitation utilities, and rehabilitation and construction of distribution networks in the nine project cities. 2. The AF scales-up activities of the original PDISA in order to provide water services to a larger population. The following economic analysis examines the impact of the scaling –up activities included in the AF on the continued economic justification of the project. The economic analysis uses a standard incremental cost-benefit analysis to assess whether the incremental economic benefits of the project justify its incremental economic costs.

A. Main assumptions and methodology for the economic analysis 3. The project will finance 132,000 connections, which includes 72,000 connections by the original PDISA and a further 60,000 by the AF (Table 1). About 840,000 people are expected to gain access to potable water as a result of the AF and the original PDISA, with about 480,000 beneficiaries, mainly in peri-urban project areas, attributable to the AF. Table A5.1: Household connections financed by original PDISA and AF project (thousand)

2012 2013 2014 2015 2016 2017 2018 TotalConnections under original Project 6.0 14.6 10.3 10.3 10.3 10.3 10.3 72 Connections financed by AF 0 0 12.1 16.7 19.7 5.7 5.7 60 Total number of connections 6.0 14.6 22.4 27.0 30.0 16.0 16.0 132 4. Benefits from the original project and the AF include the reduced incidence of water borne diseases, reduced time allocated to fetch safe water for domestic consumption, and improvements in the operating efficiency of water utilities in the project cities. Benefits from improved access to safe water are estimated using information from the First Multi-Indicator Cluster Survey (MICS-1), commissioned by UNICEF and published in 2004; benefits from improved operating efficiency are estimated using technical engineering parameters. The economic costs are the opportunity cost of resources used to increase and maintain access to water services in the project cities. 5. To calculate the incremental benefits, a counterfactual and an original PDISA plus AF scenario are defined. The counterfactual scenario (future without project, FWOP) is the same as that defined for the original PDISA; i.e., the Government of Angola (GoA) does not receive Bank support to improve water access to potable water in the project areas. The original PDISA plus AF support scenario (future with project, FWP) is defined as one in which the GoA receives support for both the original PDISA project and the AF to improve access to potable water in the project areas.

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6. The economic viability is assessed using the Economic Internal Rate of Return (EIRR) and the Net Present Value (NPV). For this purpose, the incremental benefits of the project (the difference between the FWP and the FWOP) are compared with the incremental economic costs. The original PDISA and AF is considered to be viable from an economic point of view if the benefits exceed the investment costs, assessed using the EIRR and NPV. A.1. Assumptions for the assessment of benefits from reduced water-borne diseases and reduced costs expenses to fetch water 7. The assessment of the benefits related to the control of water-borne diseases that result from improved access to potable water focuses on a target population of children under five years of age. These benefits are further limited to controlling diarrheal diseases as a result of improved access to safe water, excluding any other water-borne diseases. The reason for taking into account the population of children under five, and limiting the analysis to diarrheal diseases is due to the reliability and availability of information, e.g. the 2001 Multi-Indicator Cluster Survey (MICS-1)14 for Angola has specific statistics about diarrhea incidences in children under five. The assessment of benefits related to reduced time allocated to fetch safe water for domestic consumption assumes that the average household in the project areas will allocate about 20 minutes per day to fetch safe water in the FWOP; in the future with the project they will spend close to zero as they will have a household connection. Table A5.2: Parametric assumptions to assess benefits from access to potable water services Diarrhea incidence,

Children under five (Incidents per year)

Expense to treat children diarrhea* (US$/household)

Annual expense to fetch water (US$/person)

Access to safe water in

project area Present situation 6.6 30 10 2% FWOP 6.3 30 10 10% FWP (PDISA + AF) 3 15 0 47% Difference between FWOP and FWP -3.3 -15 -10 + 37%

* includes monetary value of time spent by grownups taking care of children with diarrhea.

8. Parametric assumptions derived from MICS-1 to assess the benefits from access to potable water are presented in Table A5.2. The incidence of diarrhea in the project areas is expected to decrease from 6.3 incidents per year in the FWOP to 3 incidents per year in the FWP (original PDISA + AF). The cost to treat a child with diarrhea is assumed to be US$30 per incidence, at 2010 constant prices, which includes the value of the time adults spend taking care of children with diarrhea plus the costs of medication assumed to be the same for the whole evaluation horizon. The annual expense associated with fetching water is estimated to be US$10 per person in the FWOP scenario and zero in the FWP scenario; this expense is calculated using per capita national income adjusted for the project area. Access to safe water in the project area is assumed to be 10 percent in the FWOP scenario and increase to 47 percent in the FWP scenario.

14 UNICEF is currently processing the information from the Angola MICS-3 implemented during 2008.

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A.2. Main assumptions for the assessment of benefits from improved operating efficiency 9. The assessment of benefits related to the improvement in operating efficiency focuses on the cost reductions derived from economies of scale and from savings in energy and chemical costs in the operations of the water supply systems. Cost reductions due to economies of scale are expected to arise from the fact that the costs of management and the installed production capacity will remain fixed for the whole period of analysis; as the fixed costs are kept constant, increased scale of production will result in lower average cost of each additional cubic meter of water delivered to customers. Based on the appraisal mission estimates, capacity utilization will increase from 6 percent in the FWOP scenario to about 62 percent in the FWP scenario. As capacity utilization increases, the average cost of water delivered to customers decreases from about US$1.08/m3 in the FWOP scenario (to about US$0.81/m3 in the original PDISA scenario) to about US$0.52/m3 in the FWP scenario. Savings in energy and chemicals are expected to come from controls in systems losses taken, with the cost of energy and chemicals decreasing from US$0.31/m3 in the FWOP scenario to about US$0.18/m3 in the FWP scenario (see Table A5.3). Table A5.3: Assumptions to assess improvements in operating efficiency of water utilities Average Capacity

utilization Average cost of water delivered to customers

(US$/m3*)

Energy and Chemical cost

(US$/m3) Present situation 6% 1.08 0.313 FWOP 6% 1.08 0.313 FWP (PDISA+ AF) 62% 0.52 0.18 Difference FWP and FWOP 56% -0.56 -0.133 * Average costs were estimated based on DNAAS information, including master plans and engineers estimates. B. Assessment of the benefits and estimation of project viability 10. The Bank appraisal team, in close cooperation with the Government’s project team, developed financial spread sheet models for each of the nine PWSUs that will receive assistance under the project. The key pieces of information generated by those models include production capacity in each city, number of beneficiaries, volumes of production, systems losses, unit cost achieved at various level of production, and improvements in operating efficiency of water and sanitation utilities. All monetary valuations are at constant US$ 2010. B.1. Assessment of benefits due to reduction of water-borne diseases 11. Projected population data for each participating province was de-aggregated according to age, using the demographic pyramids in Annex 9 of the original PDISA PAD. The incidence of diarrhea for the FWOP and FWP scenarios were projected using the parameters in Table A5.2. Monetary savings for the population in the project areas, due to the reduction of incidents of diarrhea, were estimated using the cost of treating diarrhea and the monetary value of the time spent by adults taking care of children with diarrhea. As indicated in Table A5.4 below, the annual incremental savings attributable to the project increases from US$0.42 million in 2012 to US$13.06 million in 2018. After 2018, this savings are kept constant for the rest of the horizon of evaluation.

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Table A5.4: Incidence of diarrhea and savings on diarrhea treatment cost in the project area (US$ million, constant prices 2010) 2012 2013 2014 2015 2016 2017 2018 FWOP diarrhea incidence 1.44 1.48 1.52 1.56 1.61 1.65 1.69 FWP diarrhea incidence 1.43 1.42 1.39 1.34 1.27 1.27 1.26 FWP minus FWOP (0.01) (0.06) (0.14) (0.23) (0.33) (0.38) (0.44) Savings due to project 0.42 1.81 4.07 6.85 9.97 11.51 13.06 B.2. Assessment of benefits due to reduction of time spent to fetch water 12. Households who will receive new water supply connections in participating provinces will stop allocating time to fetching safe water daily for consumption. The monetary valuation of time savings allocated to fetching water will increase from US$.38 million during 2012 to US$8.45 million during 2018 (Table A5.5). After 2018, this figure is kept constant for the rest of the horizon of evaluation as the number of connections financed by the project stop growing that year. Table A5.5: Household savings due reduction of time spent fetching safe water (constant prices 2010) 2012 2013 2014 2015 2016 2017 2018Cumulative connections per year (thousands) 6.0 20.6 43.0 70.0 100.0 116.0 132.0Saving per household (US$/year) 64 64 64 64 64 64 64 Value of savings due to project (US$ million/year)

0.38 1.32 2.75 4.48 6.40 7.42 8.45

B.3. Assessment of benefits due to improved operating efficiency 13. The reduction in the cost per cubic meter of water in the FWP scenario is attributed to economies of scale achieved as a result of larger volumes of water delivered and billed to customers. The cost advantage achieved from economies of scale is then multiplied by the volume of water delivered to customers to estimate the incremental cost savings attributable to the project. In addition, cost savings in energy and chemical inputs due to lower technical losses are also included as benefits. The summary of main estimates of these benefits is presented in Table A5.6. Table A5.6: Cost savings due to economies of scale and savings from productivity improvements (US$, constant prices 2010) 2012 2013 2014 2015 2016 2017 2018 Saving in unit costs due to economies of scale, FWP - FWOP (US$/m3)

0.88 0.60 0.61 0.59 0.44 0.50 0.56

Savings in energy & chemical costs, FWP - FWOP (US$/m3)

0.07 0.08 0.09 0.10 0.11 0.12 0.13

Demand for water FWP (m3 million) 3.32 4.89 7.40 9.94 2.44 15.94 19.58 Savings from improved operations (US$ million)

3.16 3.35 5.22 6.91 6.89 9.99 13.56

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C. Estimation of project viability 14. To estimate project viability, the valuation of health and productivity improvement benefits were added and compared to the incremental project costs. The incremental costs include the incremental operation and maintenance (O&M) cost and the investment costs. The incremental O&M costs were estimated using the market prices of inputs used for operating and maintaining the water infrastructure in the various cities; the market prices in Angola are considered to be an accurate reflection of the economic opportunity cost of inputs. The dollar value of the investment costs of water supply infrastructure funded under this project is assumed to reflect the economic cost of investment inputs at Angolan market prices. Table A5.7 presents a summary of flows of economic benefits and costs for the estimation of the net present value (NPV) and the economic internal rate of return (EIRR).

Table A5.7: Summary of incremental economic benefits and costs (US$ million, constant prices 2010)

2012 2013 2014 2015 2016 2017 2018 2019 2020*Health & productivity benefits (a)

3.97 6.47 12.05 18.24 23.26 28.93 35.07 35.07 35.07

Incremental O&M costs (b)

1.73 2.54 3.85 5.17 6.47 8.29 10.27 10.27 10.27

Investments (c ) 5 9 15 25 35 36.2 29.6 22 - Net benefit /cost (a – b – c )

(3.23) (5.80) (17.17) (15.06) (14.09) (0.78) 5.27 2.80 24.80

* Figures in this column are maintained constant per year up to the year 2032. 15. Net present value and economic internal rate of return. Using a 10 percent discount rate over a 20 year project appraisal horizon, the estimated NPV of US$37.64 million indicates that the GoA will realize a $37.64 million economic gain in addition to recovering the US$176.8 million it allocates to expand the water systems in the nine project cities rather than allocating it into alternative ventures that make a 10 percent rate of return. Using the same incremental benefits and costs, the estimated EIRR of 18 percent is well above the 10 percent opportunity cost of capital in Angola (see details of calculation in Appendix A5.1). 16. The impact of the project (original PDISA + AF) over the original PDISA is summarized in Table A5.8. The net present value goes from US$25 million in the original PDISA to US$37.6 million in the project (original PDISA +AF), resulting in a gain of US$12.6 million that can be attributed to the additional financing. The economic rate of return of the project is 18 percent compared with 17 percent in the original PDISA; resulting in a 1 percent gain in the economic internal rate of return which can be attributed to the additional financing.

37

Table A5.8: Summary of impact of AF on continued economic performance

Original PDISA * Original PDISA +

AF Impact of AF

Net Present Value (NPV) US$25 million US$37.6 million US$12.6 million

Economic Internal Rate of Return (EIRR)

17% 18% +1%

* Figures taken from PDISA PAD D. Sensitivity analysis 17. The above estimates of the economic viability of the project are considered as the base case scenario. In order to evaluate the impact of the AF on the continued economic performance of the project, sensitivity tests were conducted on the two primary outcomes of increased project financing: (i) the impacts of achieving economies of scale (i.e., lower unit costs); and (ii) impact of increased reduction of diarrhea in children under five years of age. 18. Sensitivity of achieving economies of scale. If there is underachievement in pursuing economies of scale and the unit cost of water goes down to US$0.58/m3 rather than to US$0.52/m3, then the EIRR decreases to 16 percent and the net present value goes down to US$26 million, which results in a negligible positive impact of the AF. If, on the contrary, there is an over achievement in pursuing economies of scale and the cost of water declines to US$0.47/m3, the EIRR increases to 21 percent, which is a significant increase in the rate of return compared with the original PDISA. The NPV in this case goes up to US$49 million resulting in a US$25 million gain compared with the original PDISA. In both cases the investments in the project are still better than original PDISA (NPV>0), but the sensitivity analysis shows that the impact of the AF over continued economic performance is sensitive to achieving lower cost of water savings due to economies of scale (Table A5.9).

Table A5.9: Sensitivity table for effects of lower unit cost of water supply due to economies of scale

Economies of scale

Indicator Original PDISA*

Original PDISA +AF

Impact of AF

US$0.58/m3 NPV US$25 million US$26 million US$1 million

EIRR 17% 16% -1%

US$0.47/m3 NPV US$25 million US$49 million US$24 million

EIRR 17% 21% +4%

* Figures taken from PDISA PAD

19. Sensitivity to achieving reduction in diarrhea outcomes. If the rate of diarrhea incidence does not decrease from 6.3 to 3 events per year per child (see table A5.1) but decreases only to 3.5 events per year per child, the project EIRR declines to 16 percent and the net present value to US$26 million, which results in a negligible positive impact of the AF. If, on the contrary,

38

diarrhea incidence decreases to 2.5 events per year, per child, the EIRR increases to 21 percent, four points above that achieved in the original PDISA. The sensitivity analysis shows that the impact of the AF on the continued economic performance of the project is sensitive to achieving diarrhea reduction outcomes (Table A5.10).

Table A5.10: Sensitivity table for effects of safe water supply on reduced diarrhea incidence

Diarrhea events Indicator Original PDISA * Original PDISA +AF Impact of AF

3.5 per year per child

NPV US$25 million US$26 million US$1 million

EIRR 17% 16% -1%

2.5 per year per child

NPV US$25 million US$49 million US$24 million

EIRR 17% 21% +4%

* Figures taken from original PDISA PAD

E. Conclusion 20. The economic analysis demonstrates that, given the assumptions discussed above, the economic internal rate of return of the investments included in the project is approximately 18 percent and the net present value is about US$37.6 million. The project is, therefore, economically viable. Further, the sensitivity analysis demonstrates that if the cost reductions due to economies of scale do not materialize in a range of 10 percent to 15 percent off the target value, the project remains economically viable. Also, the sensitivity analysis shows that if diarrhea incidence reductions do not materialize in a range 10 percent to 15 percent off the target value the project remains viable. Financial Analysis 21. While separate economic analyses were prepared for the investments included in the original PDISA and for those in the project (original PDISA + AF), the following financial analyses are prepared on a combined basis because the various provincial utilities will be operating the investments financed by the project as one system. The following financial analyses focus on assessing the likelihood that each of the nine provincial water and sanitation utilities (PWSUs) supported by the investments in the project (original PDISA + AF) will be financially viable.

A. Present situation, assumptions and methodology for the financial analysis A.1 Present situation 22. Investments in the production capacity have been completed or are currently underway in the five provincial capitals (Huambo, Kuito, Malange, N’Dalatando, and Uige) and similar investments are included in the project for the other provincial capitals (Lubango, Luena, M'Baza Congo, and Menongue). With the support of the original PDISA, the GoA is currently in the process of legally establishing Provincial Water and Sanitation Utilities (PWSUs) in seven

39

provincial capitals including five of the project cities. The mandate of these PWSUs is to operate and maintain the water and sanitation infrastructure and deliver sustainable services to the residents of these provincial capitals. At present, the infrastructure is managed and services are delivered by the Provincial Water Departments. Normally, however, the Departments lack the institutional and financial capacity to provide adequate levels of water supply services and to ensure the adequate operation and maintenance of the water system networks. 23. The average utilization of the installed production capacity in the nine project cities is only about 6 percent. The cities of Kuito, Menongue, N’Dalatando and Uige have production capacity that is not yet utilized because their distribution networks and storage infrastructure are not in place. The project will finance the needed distribution networks and storage infrastructure in the nine cities. In doing so, the utilization of the existing water production capacity will improve from about 6 percent in 2011 to about 62 percent by the year 2018 (see Table A5.11). Table A5.11: Design system capacity and current and projected capacity utilization

Provincial capitals

Design capacity (m3/day)

Current and projected capacity utilization

2011 2018 2018 (hours per

day) Huambo 29,147 6% 85% 20.4 Kuito 6,912 0% 50% 12.0 Lubango 23,333 15% 52% 12.5 Luena 9,000 3% 38% 9.1 M´Banza Congo 2,640 0% 67% 16.1 Malanje 14,133 13% 87% 20.9 Menongue 9,504 0% 61% 14.6 N´Dalatando 7,067 0% 55% 13.2 Uíge 13,952 0% 33% 7.9 Average - 6% 62% 14.9 Source: DNAAS A.2. Assumptions 24. The PWSUs will be managed according to commercial principles within a delegated management framework. Under the delegated management framework, the management in each of the PWSUs would sign a performance contract with an Asset Management Unit (AMU), to be created under this project. In the interim, contracts will be signed with the project Financial and Contract Management Unit. Part of the performance contracts will be related to the financial management of the PWSUs. 25. Commercially managed PWSUs will become financially viable only after achieving minimum economies of scale. As water delivered to customers increases from about 3 million m3/year (in 2012) to about 20 million m3/year (in 2018), unit costs will decrease from about US$1.6/m3 in 2012 to less than US$0.6/m3 in 2018. Minimum economies of scale will be achieved when customers’ demand for water reaches about 11.7 million m3/year, or 37 percent capacity utilization. While some economies of scale will be achieved by selling water to customers through networks finance by the original PDISA, the majority of the benefits (economies of scale) will be achieved through the networks financed by the AF. As unit costs

40

decline due to these economies of scale, it can be assumed that the average tariff will increase over time from about US$0.6/m3 in 2012 to US$0.75/m3 by 2018 (see Figure A5.1) Figure A5.1: Economies of scale, average unit cost and average tariff

26. Financing of recurrent costs of PWSUs during start up will include an operational subsidy financed by the project. During the initial years of operations, all PWSUs will receive subsidies to finance a portion of their operational and maintenance expenses which are in excess of their collections (revenue). These expenses include wages of qualified management and technical staff. This operational subsidy is essential because during the initial years of operations tariff revenues will not be sufficient to finance all of the operating and maintenance expenses. The PWSUs will receive these recurrent subsidies based on estimates developed using the following key assumptions: Tariffs Fixed Assets

For towns that have a water tariff, the tariff at the time of appraisal is taken as the starting point. For towns not charging a tariff, an affordable tariff (referenced on the other towns) has been assumed. In all cases, a schedule of tariff adjustments is proposed to achieve an O&M cost coverage ratio of at least 120 percent; Depreciation of the plant and equipment in each of the project cities is not included in the financial analyses since these assets belong to AMU/FCMU;

Water system Operating costs are estimated as follows: (i) fixed component (plant

Water sold (m m3/year) 0.00    

3.00      4.70

    8.40

   11.70

   14.94

   17.36

   19.74

    19.74

    19.74

   Unit cost, WSID+AF (US$/m3) ‐

     1.62      1.12

    0.77

   0.65

   0.59

   0.55

   0.52

    0.52

     0.52   

Average tariff (US$/m3) ‐     0.62

     0.65    

0.68   

0.71   

0.74   

0.75   

0.75     

0.75     0.75

   Average unit cost 1.12 0.89 0.73 0.68 0.66 0.65 0.64 0.64 0.64

‐

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

1.40 

1.60 

1.80 

3.00  4.70  8.40  11.70  14.94  17.36  19.74  19.74 

Unit cost, original PDISA+AF (US$/m3)

Average tariff (US$/m3)

m3 Million

Water delivered to customers byInfrastructure builtunder PDISA 

Water delivered to customersby infrastructure built under PDISA + AF

 

41

operating costs technical management) covering wages and salaries of personnel in each water production plant for the PWSU; assumed to be one-half in small systems compared to those in large systems; and (ii) direct costs made including labor, energy and chemicals based on parameters provided by DNAAS;

Sales/Commercial costs

These are costs related to building and maintaining the PWSU customer base, including: (i) fixed component covering wages of commercial management team; assumed to be one-half in small systems compared to those in large systems; and (ii) variable costs that support the work of the commercial management team, increasing per each three thousand connections;

Administrative expenses

These are costs related to the overall management of the PWSU, including: (i) fixed costs covering wages of the chief executive officer and associated staff and expenses of the board of directors; estimated for three utility sizes as per number of connection in target year 2020 (<10,000, greater than 10,000 and smaller than 20,000, and greater than 20,000); and (ii) variable costs to support the work of the chief executive office, increasing per each 6,000 connections;

Infrastructure maintenance costs

Estimated as 0.5 percent of the value (excluding depreciation) of investments;

Collection efficiency

Given that the culture of paying for services provided by public entities is not pervasive in Angola, the estimates for operational support to these utilities have taken into consideration a gradual level of improvement in collection efficiency; and

Connections Overall, about 132,000 connections are planned in the nine cities that will receive operational support from the project. In addition, connections that have already been contracted for some of the cities in EMRP (about 11,300) are also included.

27. The customer base is expected to grow as the connections financed by the project are physically implemented; however, since the concept of a connection – from a financial point of view - is when the customer begins to pay for the service received, it is assumed that the number of financial connections will lag the number of physical connections. The customer base in the nine PWSUs is expected to increase from about 11,300 in 2011 to about 143,300 in 2018, i.e. an additional 132,000 in seven years (See Table A5.12). Currently, a small percentage of the population is accustomed to receiving water from the piped network and an even smaller percentage is then accustomed to paying for what was received. Therefore, the management of the PWSUs needs to work with and educate the customers to understand their obligation of paying for the service received. This education process will require a number of months between the point when the customers are physically connected to the network and receiving water to the point when customers become accustomed to receiving water bills reflecting their micro-metered consumption and paying the PWSU. Hence the financial analyses assume a lag between the

42

installation of the physical connection and when the customers begin paying for the service provided (financial connection). The number of financial connections, the related billing efficiency (i.e., billed water as proportion of produced water), and the collection efficiency (i.e., bills paid as a proportion of bills issued to customers), is presented in Table 5.9 below. Table A5.12: Customer base, billing efficiency, and collection efficiency

2012 2013 2014 2015 2016 2017 2018 Number of connections (thousand) 18.30 28.06 47.62 69.48 93.04 117.81 143.3Billing efficiency (water billed/water prod)

66% 67% 68% 70% 71% 72% 73%

Collection efficiency (bills paid/bills issued)

26% 33% 45% 69% 81% 90% 94%

Source: Assumption for financial model agreed with DNAAS staff A.3. Methodology for the financial analysis 28. The financial analysis for each of the nine PWSUs is based on their forecasted income statements and their estimated net cash flows from operations according to the above key assumptions. The purpose of the forecast is to: (i) assess the magnitude of operational subsidies needed by the PWSUs during their start-up period and the duration of such start-up period; and (ii) determine a minimum payback period upon which the PWSUs can enter into a sustained growth path. To determine both the operational subsidies and the length of the start-up and payback periods, a cash curve analysis is used. The cash curve is defined simply as the accumulated cash from operations. 29. The cash curve is defined as the accumulated cash from operations, and is presented as a graph depicting the accumulated cash from operations at various points in time. So defined, the cash curve reflects the impact the project is intended to have on improving operational efficiency (lower system losses) and financial efficiency (increased collection efficiency). For example, the cash curve helps to find out both the time needed to achieve the breakeven point (operation income equal to operation expenses) and the time needed for the water utility to accumulate cash that is equivalent to the operation subsidies it will receive (see Figure A5.2). B. Estimation of operational subsidies, length of the start-up period and payback

period 30. The estimation of the operational subsidies was developed separately for each PWSU and the results are summarized in Table A5.13 and presented in detail in Appendix A5.2. The totals for the nine PWSUs, estimated based on the above assumptions, have been added to present the aggregate cash curve and to estimate the aggregate start-up and payback periods (see Figure A5.2). 31. Based on the estimates in the consolidated financial model for the nine PWSUs, the start-up period will last about four years, from 2011 to 2016. During this period, the PWSUs will need operational subsidies estimated to accumulate to about US$15 million by the year 2016, at which point the cash curve reaches its lowest point (see Figure A5.2). During this start-up period, the PWSUs are expected to increase the number of connections under their responsibility from about 11,300 to about 93,000 thereby delivering more water services to customers and improving their

43

cash from operations. Gradually, these operational subsidies are expected to decrease from about US$3.82 million in 2012 to about US$0.09 million in 2016 (see figures in Table A5.10). After 2016, the PWSUs as a group will enter their actual commercialization phase, and will be financed purely by revenues collected from their customers. Figure A5.2: PWSCs start-up and payback periods

Table A5.13: Operational subsidies (US$ million)

2011 2012 2013 2014 2015 2016 Total Huambo 0.83 0.93 1.02 0.93 0.55 0.00 4.26 Kuito 0.30 0.33 0.25 0.16 0.07 0.00 1.11 Lubango 0.00 0.58 0.56 0.53 0.43 0.00 2.09 Luena 0.00 0.27 0.27 0.20 0.12 0.00 0.86 M´Banza Congo 0.00 0.25 0.24 0.22 0.17 0.09 0.97 Malanje 0.70 0.64 0.63 0.55 0.42 0.00 2.94 Menongue 0.00 0.31 0.28 0.23 0.12 0.00 0.94 N´Dalatando 0.27 0.24 0.18 0.09 0.00 0.00 0.78 Uíge 0.33 0.28 0.25 0.20 0.11 0.00 1.17 Total 2.43 3.82 3.67 3.10 1.99 0.09 15.11 32. Until 2015, all PWSUs will need operational subsidies. Starting in 2016, all PWSUs are expected to have positive cash flows and will need about four more years in order to fully repay the operational subsidies they received, which will happen by the year 2020 (see cash curve in Figure A5.2). C. Financial Sensitivity Analysis 33. As described above, operational subsidies will be needed during the first four years of operation of the PWSUs. This is because the economies of scale which are needed for efficient operations will not be present and because the PWSUs will require time to develop a base of customers willing to pay the PWSU for the service received. In addition, the PWSUs will need

‐20

‐15

‐10

‐5

0

5

10

15

20

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

The cash curve (million US$)

Start up period

Payback period

44

time to develop a culture of issuing bills and of customers paying the bills that reflect the micro-metered consumption of water by customers. Those assumptions were outlined, including numeric targets, above, and will need to be accepted on a case-by-case basis by each PWSU, and incorporated into their performance contracts as targets to be achieved. The sensitivity analysis herein will assess WHAT IF some of those targets are not achieved. 34. Financial sensitivity to less than expected improvements in collection efficiency. When estimating the projected financial results summarized in the cash curve in Figure A5.2, it was assumed that the collection efficiency would improve slowly (during years 2012 and 2013) and accelerate in the years 2014 and 2015. Beyond 2015, it assumed an improvement of 12 percentage points for 2016, nine percentage points in 2017, and four percentage points in 2018. The impact of a slower rate of improvement in collection efficiency beyond 2015 (i.e., six percent for 2016, three percent for 2017, and four percent for 2018) is presented in Table A5.14.

Table A5.14: Collection efficiency, base and poorer achievement case scenarios

2012 2013 2014 2015 2016 2017 2018 Collection efficiency (base case) 26% 33% 45% 69% 81% 90% 94% Poorer collection efficiency 26% 33% 45% 69% 75% 78% 82% 35. Poorer collection efficiency sensitivity on financial viability. Using the cash curve graph presented in Figure A5.3, it can been seen that poorer collection efficiency increases the payback period, i.e. the average PWSU will take three more years to generate funds equivalent to those they receive as operational subsidies. Instead of achieving a payback period of eight years, they will extend their payback period to 11 years (38% more time).

Figure A5.3: Effects of poorer collection efficiency

36. Sensitivity to poorer billing efficiency. Achieving poorer performance in billing efficiency (i.e., larger systems losses) will also increase the payback period for the PWSUs. For example, if billing efficiency is kept at 65 percent, rather than gradually increasing to 75 percent, it will result in a payback period of 12 years for the average PWSU. It should also be noted that

‐20

‐15

‐10

‐5

0

5

10

15

20

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Payback period with lower collection efficiency

Base case payback period

45

these results include the assumption that tariffs will be above average unit cost, just as the water utility has achieved a minimum level of production to gain enough economies of scale. By the year 2015, tariffs for the average PWSU will be above its average costs and by the year 2018 about 25 percent above average unit costs. D. Conclusions 37. The financial analysis has shown that the likelihood of the PWSUs achieving financial sustainability depends on the utilities paying for their operating expenses from collections, and that the collections are based on an affordable tariff structure. The analysis has demonstrated that it is possible to reduce the operating expenses due to the expected economies of scale that can be achieved by the investments from the project. However, achieving economies of scale will not be easy and will not be sufficient. The average PWSU will also need to improve its billing and collection efficiency, and work actively with the various community groups to promote a culture of paying for the services delivered.

46

Appendix A5.1: Summary calculations for the economic analysis

Note: Figures in year 2019 are kept constant until year 2032 years assuming project life is 20 years, except investment which is zero afterwards.

47

Appendix A5.2 Draft Financial Projections

Huambo2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 504,558    518,181    532,172     546,540       561,297    576,452      592,016      608,000       624,416       641,276   

% Periurban 75% 75% 75% 75% 75% 75% 75% 75% 75% 75%

Number of connections 2,200         5,847         10,137       15,156         20,175      25,175        33,428        42,203          42,203         42,203     

Population served by network 11,000      29,236      52,613       86,420         119,368    152,677      202,026      254,430       254,430       254,430   

Water produced (m3/year) 544,805      1,452,708     2,525,761    3,844,765       4,712,506    5,369,235      7,181,921      9,039,707      8,905,587     8,892,393   

System losses 35% 34% 33% 32% 30% 28% 27% 26% 25% 25%

Water sold (m3/year) 354,123    960,401    1,697,873   2,627,256   3,319,699 3,841,986  5,218,863  6,669,295    6,669,295    6,669,295

Average tariff (US$/m3) 0.26 0.34 0.41 0.47 0.53 0.58 0.62 0.63 0.64 0.65

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue 91,806      330,040    697,272     1,237,589   1,744,360 2,245,510  3,228,482  4,190,949    4,296,556   4,311,785

Expenses 859,110    1,036,315     1,296,446  1,592,148   1,780,275 1,983,230  2,397,501  2,833,300    2,814,524   2,812,677

Operating expenses 239,473    366,579    516,807     701,467       822,951    914,893      1,168,669  1,428,759    1,409,982    1,408,135

Sales/commercial expenses 115,400    159,800    248,600     337,400       381,800    470,600      603,800      737,000       737,000       737,000   

Administrative expenses 400,800    400,800    415,200     429,600       444,000    458,400      472,800      501,600       501,600       501,600   

Maintenance expenses 103,438    109,136    115,839      123,681         131,524      139,337        152,232        165,942       165,942       165,942     

Profit/(loss) (767,304)   (706,275)   (599,174)    (354,560)     (35,915)     262,280      830,981      1,357,648    1,482,032   1,499,109

Collection rate 30% 33% 39% 53% 71% 84% 90% 93% 95% 95%

Cash surplus/(deficit) (831,504)   (926,697)   (1,021,151)   (933,008)     (545,525)   (99,467)      507,667      1,078,460    1,268,956   1,294,699

Cost recovery (collection based) 3% 11% 21% 41% 69% 95% 121% 138% 145% 146%

Average cost (US$/m3), 

PDISA+ADFIN 2.43           1.08           0.76             0.61               0.54             0.52              0.46              0.42              0.42              0.42            

Average cost (US$/m3),    PDISA 

only 2.43           0.98           0.72             0.68               0.68             0.66              0.66              0.65              0.64              0.64            

0.35           0.96           1.70            2.63             3.32           3.84            5.22            6.67              6.67              6.67          

Unit cost, PDISA+ADFIN (US$/m3) 2.43           1.08           0.76            0.61             0.54           0.52            0.46            0.42              0.42              0.42          

Average tariff (US$/m3) 0.26           0.34           0.41            0.47             0.53           0.58            0.62            0.63              0.64              0.65          

‐

0.50 

1.00 

1.50 

2.00 

2.50 

3.00 

0.35  0.96  1.70  2.63  3.32  3.84  5.22  6.67  6.67  6.67 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff (US$/m3)

m3million/year

48

Appendix A5.2 Draft Financial Projections (Continued)

KuitoDraft financial projection

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 107,021      109,910    112,878      115,926       119,056    122,270      125,571      128,962     132,444       136,020    

% Periurban 79% 79% 79% 79% 79% 79% 79% 79% 79% 79%

Number of connections 3,000          3,470         4,051          5,101           6,151         7,284          8,030          8,524           8,524            8,524         

Population served by network 15,000        17,352      20,587        27,576         34,565      42,216        46,776        49,318         49,318         49,318      

Water produced (m3/year) 488,960       701,544      1,032,924    1,301,255       1,543,460    1,732,188      1,882,588      1,997,247      1,963,395     1,930,672   

System losses 35% 35% 34% 33% 31% 30% 29% 28% 26% 25%

Water sold (m3/year) 317,824      456,004    684,312      878,347       1,061,129 1,212,532  1,341,344  1,448,004  1,448,004    1,448,004 

Average tariff (US$/m3) 0.80 0.70 0.69 0.67 0.66 0.64 0.63 0.61 0.60 0.58

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue 254,259      319,203    468,945      588,983       695,928    777,374      840,212      885,708     864,392       843,076    

expenses 381,332      436,754    431,039      471,288       566,419    594,728      617,288      634,487     629,409       624,501    

Operating expenses 146,032      146,032    195,739      235,988       272,319    300,628      323,188      340,387     335,309       330,401    

Sales/commercial expenses 124,300      124,300    124,300      124,300       168,700    168,700      168,700      168,700     168,700       168,700    

Administrative expenses 111,000      111,000    111,000      111,000       125,400    125,400      125,400      125,400     125,400       125,400    

Maintenance expenses 55,422        55,422      56,330        57,971         59,611      61,381        62,547        63,319         63,319         63,319      

Profit/(loss) (127,073)    (117,551)   37,906        117,695       129,509    182,646      222,924      251,221     234,983       218,575    

Collection rate 33% 33% 39% 53% 71% 84% 90% 93% 95% 95%

Cash surplus/(deficit) (297,426)    (330,735)   (245,892)     (157,596)     (73,804)     57,412        138,781      192,218     192,115       178,607    

Cost recovery (collection based) 24% 43% 67% 87% 110% 122% 130% 131% 129%

Average cost (US$/m3), 

PDISA+ADFIN 1.20            0.96           0.63             0.54               0.53             0.49              0.46              0.44              0.43              0.43            

Average cost (US$/m3),    

PDISA only 1.20            1.00           0.91             0.89               0.90             0.88              0.87              0.85              0.84              0.83            

0.32            0.46           0.68            0.88             1.06           1.21            1.34            1.45             1.45              1.45           

Unit cost, PDISA+ADFIN (US$/m3) 1.20            0.96           0.63            0.54             0.53           0.49            0.46            0.44             0.43              0.43           

Average tariff (US$/m3) 0.80            0.70           0.69            0.67             0.66           0.64            0.63            0.61             0.60              0.58           

‐

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

0.46  0.68  0.88  1.06  1.21  1.34  1.45  1.45  1.45 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff (US$/m3)

m3million/year

49

Appendix A5.2 Draft Financial Projections (Continued)

Lubango2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 186,513      191,549    196,721     202,032       207,487    213,090      218,843      224,752       230,820       237,052   

% Periurban 84% 84% 84% 84% 84% 84% 84% 84% 84% 84%

Number of connections ‐               1,157         2,294          5,588           9,683         13,711        19,015        24,632          24,632         24,632     

Population served by network ‐               5,787         16,677       43,506         75,926      107,881      149,494      193,747       193,747       193,747   

Water produced (m3/year) ‐               805,133        797,309        973,639          1,322,395    1,801,637      2,471,879      3,154,409      3,107,607     3,103,004   

System losses 35% 34% 33% 32% 30% 28% 27% 26% 25% 25%

Water sold (m3/year) ‐               532,282        535,969          665,320             931,554          1,289,172         1,796,232         2,327,253        2,327,253    2,327,253

Average tariff (US$/m3) 0.68 0.70 0.72 0.74 0.75 0.77 0.79 0.81 0.82 0.84

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue ‐               373,427    385,310     489,843       702,018    993,882      1,415,958  1,874,929    1,915,301   1,955,672

Expenses ‐               770,378    770,980     846,978       1,008,889 1,145,869  1,357,893  1,572,248    1,565,228   1,564,537

Operating expenses 202,370    201,196     227,646       279,959    351,846      452,382      554,761       547,741       547,051   

Sales/commercial expenses 115,400    115,400     159,800       248,600    293,000      381,800      470,600       470,600       470,600   

Administrative expenses 400,800    400,800     400,800       415,200    429,600      444,000      458,400       458,400       458,400   

Maintenance expenses 51,808      53,584       58,732         65,130      71,423        79,711        88,487          88,487         88,487     

Profit/(loss) ‐               (396,952)   (385,670)    (357,135)     (306,871)   (151,987)    58,065        302,681       350,073       391,134   

Collection rate 50% 51% 56% 66% 82% 93% 97% 99% 99% 98%

Cash surplus/(deficit) ‐               (580,570)   (555,674)    (525,952)     (431,294)   (216,884)    18,518        276,384       327,045       350,053   

Cost recovery (collection based) 25% 28% 38% 57% 81% 101% 118% 121% 122%

Average cost (US$/m3), 

PDISA+ADFIN 1.45           1.39             1.27               1.08             0.89              0.76              0.68              0.67              0.67            

Average cost (US$/m3),    

PDISA only 1.45           1.11             1.04               1.03             1.00              0.98              0.96              0.95              0.93            

‐               0.53           0.54            0.67             0.93           1.29            1.80            2.33              2.33              2.33          

Unit cost, PDISA+ADFIN (US$/m3) ‐               1.45           1.39            1.27             1.08           0.89            0.76            0.68              0.67              0.67          

Average tariff (US$/m3) 0.68            0.70           0.72            0.74             0.75           0.77            0.79            0.81              0.82              0.84          

‐

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

1.40 

1.60 

0.53  0.54  0.67  0.93  1.29  1.80  2.33  2.33  2.33 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff (US$/m3)

m3  million/year

50

Appendix A5.2 Draft Financial Projections (Continued)

Luena2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 57,193        58,738      60,323        61,952         63,625      65,343        67,107        68,919         70,780         72,691      

% Periurban 80% 80% 80% 80% 80% 80% 80% 80% 80% 80%

Number of connections ‐               314            659             2,152           3,645         5,341          6,091          6,231           6,230            6,230         

Population served by network ‐               1,568         3,888          14,905         26,016      38,736        44,009        43,262         43,262         43,262      

Water produced (m3/year) ‐               155,810      156,209        432,355          659,555        880,639         1,000,946      1,166,402      1,149,009     1,147,307   

System losses 35% 34% 33% 32% 30% 28% 27% 26% 25% 25%

Water sold (m3/year) ‐               103,008    105,007      295,443       464,620    630,146      727,354      860,546     860,480       860,480    

Average tariff (US$/m3) 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.84 0.84

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue ‐               86,719      88,378        248,586       390,824    529,912      611,488      723,261     723,005       722,803    

Expenses ‐               318,061    318,660      362,415       443,229    479,041      557,059      582,096     579,486       579,231    

Operating expense 64,171      64,231        105,653       139,733    172,896      190,942      215,760     213,151       212,896    

Sales/commercial expense 79,900      79,900        79,900         124,300    124,300      168,700      168,700     168,700       168,700    

Administrative expense 111,000    111,000      111,000       111,000    111,000      125,400      125,400     125,400       125,400    

Maintenance expense 62,990      63,529        65,862         68,195      70,845        72,017        72,236         72,235         72,235      

Profit/(loss) ‐               (231,342)   (230,282)     (113,829)     (52,404)     50,872        54,429        141,165     143,518       143,572    

Collection rate 50% 51% 56% 66% 82% 93% 97% 99% 99% 98%

Cash surplus/(deficit) ‐               (273,983)   (269,276)     (199,501)     (121,673)   16,270        37,350        131,021     134,826       128,389    

Cost recovery (collection based) 14% 15% 45% 73% 103% 107% 123% 123% 122%

Average cost (US$/m3), 

PDISA+ADFIN 1.53           1.50             1.23               0.95             0.76              0.77              0.68              0.67              0.67            

Average cost (US$/m3),    

PDISA only 1.53           1.48             1.43               1.40             1.36              1.33              1.30              1.35              1.32            

‐               0.10           0.11            0.30             0.46           0.63            0.73            0.86             0.86              0.86           

Unit cost, PDISA+ADFIN (US$/m3) ‐               1.53           1.50            1.23             0.95           0.76            0.77            0.68             0.67              0.67           

Average tariff (US$/m3) 0.84            0.84           0.84            0.84             0.84           0.84            0.84            0.84             0.84              0.84           ‐

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

1.40 

1.60 

1.80 

0.10  0.11  0.30  0.46  0.63  0.73  0.86  0.86  0.86 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff (US$/m3)

m3  million/year

51

Appendix A5.2 Draft Financial Projections (Continued)

Malange2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 367,749      377,678    387,876      398,348       409,104    420,149      431,493      443,144     455,109       467,397    

% Periurban 93% 93% 93% 93% 93% 93% 93% 93% 93% 93%

Number of connections 2,500          2,842         4,016          5,719           8,923         12,749        18,168        25,011         25,011         25,011      

Population served by network 12,500        14,211      22,572        38,814         63,666      93,399        133,619      185,397     185,397       185,397    

Water produced (m3/year) 631,731      706,152    1,000,456   1,166,811   1,698,391 2,316,083  3,359,987  4,520,058  4,452,088    4,386,131 

System losses 35% 34% 33% 32% 31% 29% 28% 27% 26% 25%

Water sold (m3/year) 410,625      466,845    672,528      797,321       1,179,438 1,634,125  2,407,991  3,289,598  3,289,598    3,289,598 

Average tariff (US$/m3) 1.00 0.96 0.92 0.88 0.84 0.81 0.77 0.73 0.69 0.65

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue 410,625      448,690    620,221      704,300       995,970    1,316,379  1,846,126  2,394,096  2,266,168   2,138,239 

Expenses 828,066      785,323    873,868      898,822       1,037,359 1,233,212  1,492,998  1,770,209  1,760,013   1,750,120 

Operating expense 257,960      269,123    313,268      338,222       417,959    510,612      667,198      841,209     831,013       821,120    

Sales/commercial expense 115,400      115,400    159,800      159,800       204,200    293,000      381,800      470,600     470,600       470,600    

Administrative expense 400,800      400,800    400,800      400,800       415,200    429,600      444,000      458,400     458,400       458,400    

Maintenance expense 53,906        54,441      56,275        58,936         63,942      69,920        78,388        89,079         89,079         89,079      

Profit/(loss) (417,441)    (336,633)   (253,648)     (194,521)     (41,389)     83,166        353,128      623,888     506,154       388,119    

Collection rate 30% 33% 39% 49% 62% 75% 86% 92% 95% 95%

Cash surplus/(deficit) (704,591)    (636,297)   (628,995)     (550,505)     (415,300)   (245,144)    100,443      441,828     393,770       286,751    

Cost recovery (collection based) 15% 19% 28% 39% 60% 80% 107% 125% 122% 116%

Average cost (US$/m3), 

PDISA+ADFIN 2.02            1.68           1.30             1.13               0.88             0.75              0.62              0.54              0.54              0.53            

Average cost (US$/m3),    

PDISA only 2.02            1.75           0.98             0.87               0.85             0.80              0.81              0.76              0.75              0.71            

Water sold (m m3/year) 0.41            0.47           0.67            0.80             1.18           1.63            2.41            3.29             3.29              3.29           

Unit cost, PDISA+ADFIN (US$/m3) 2.02            1.68           1.30            1.13             0.88           0.75            0.62            0.54             0.54              0.53           

Average tariff (US$/m3) 1.00            0.96           0.92            0.88             0.84           0.81            0.77            0.73             0.69              0.65           

‐

0.50 

1.00 

1.50 

2.00 

2.50 

0.41  0.47  0.67  0.80  1.18  1.63  2.41  3.29  3.29  3.29 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff (US$/m3)

m3million

52

Appendix A5.2 Draft Financial Projections (Continued)

Mbasa Congo2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 74,091        76,092      78,146       80,256         82,423      84,649        86,934        89,281          91,692         94,168     

% Periurban 96% 96% 96% 96% 96% 96% 96% 96% 96% 96%

Number of connections ‐               65              296             1,035           1,774         2,638          3,419          4,285            4,285            4,285        

Population served by network ‐               323            1,980          7,792           13,559      20,313        26,282        32,923          32,923         32,923     

Water produced (m3/year) 73,529      74,759       193,364       304,619    422,678      529,369      663,129       651,889       641,024   

System losses 35% 34% 33% 31% 30% 29% 28% 26% 25%

Water sold (m3/year) ‐               47,794      49,528       130,521       209,426    295,875      377,175      480,768       480,768       480,768   

Average tariff (US$/m3) 1 1.0375 1.075 1.1125 1.15 1.1875 1.225 1.2625 1.3

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue ‐               47,794      51,385       140,310       232,986    340,256      447,896      588,941       606,970       624,999   

Expenses 264,007    264,614     289,490       312,896    337,857      404,816      432,921       430,673       428,500   

Operating expense 55,506      55,752       79,473         101,724    125,336      146,674      173,426       171,178       169,005   

Sales/commercial expense 79,900      79,900       79,900         79,900      79,900        124,300      124,300       124,300       124,300   

Administrative expense 111,000    111,000     111,000       111,000    111,000      111,000      111,000       111,000       111,000   

Maintenance expense 17,601      17,962       19,117         20,272      21,622        22,842        24,196          24,196         24,196     

Profit/(loss) ‐               (216,213)   (213,229)    (149,180)     (79,910)     2,399          43,080        156,020       176,297       196,498   

Collection rate 33% 39% 49% 62% 75% 86% 92% 95% 95%

Cash surplus/(deficit) ‐               (248,133)   (244,327)    (220,099)     (167,378)   (82,463)      (18,225)      111,234       146,196       166,869   

Cost recovery (collection based) 6% 8% 24% 47% 76% 95% 126% 134% 139%

Average cost (US$/m3), 

PDISA+ADFIN 4.79           3.84             2.22               1.49             1.14              1.07              0.90              0.90              0.89            

Average cost (US$/m3),    

PDISA only 4.79           2.87             2.28               2.19             2.12              2.04              1.97              1.91              1.85            

Water sold (m m3/year) ‐               0.05           0.05            0.13             0.21           0.30            0.38            0.48              0.48              0.48          

Unit cost, PDISA+ADFIN (US$/m3) ‐               4.79           3.84            2.22             1.49           1.14            1.07            0.90              0.90              0.89          

Average tariff (US$/m3) ‐               1.00           1.04            1.08             1.11           1.15            1.19            1.23              1.26              1.30          

‐

1.00 

2.00 

3.00 

4.00 

5.00 

6.00 

0.05  0.05  0.13  0.21  0.30  0.38  0.48  0.48  0.48 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff (US$/m3)

m3million

53

Appendix A5.2 Draft Financial Projections (Continued)

Menongue2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 82,540        84,769      87,058       89,408         91,822      94,301        96,848        99,463          102,148       104,906   

% Periurban 86% 86% 86% 86% 86% 86% 86% 86% 86% 86%

Number of connections ‐               327            1,125          3,923           6,721         9,872          11,376        12,988          12,988         12,988     

Population served by network ‐               1,635         7,037          28,441         49,844      74,070        85,119        97,040          97,040         97,040     

Water produced (m3/year) ‐               82,626      307,049     822,512       1,280,171 1,727,265  1,993,868  2,198,077    2,160,821    2,124,807

System losses 35% 34% 33% 31% 30% 29% 28% 26% 25%

Water sold (m3/year) ‐               53,707      203,420     555,196       880,118    1,209,085  1,420,631  1,593,606    1,593,606    1,593,606

Average tariff (US$/m3) 1 0.97 0.94 0.91 0.88 0.84 0.81 0.78 0.75

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue ‐               53,707      197,063     520,496       797,607    1,057,950  1,198,657  1,294,805    1,245,004   1,195,204

Expenses 324,605    359,515     485,606       617,427    733,814      776,155      868,106       862,517       857,115   

Operating expense 53,194      86,857       164,177       232,826    299,890      339,880      370,511       364,923       359,521   

Sales/commercial expense 79,900      79,900       124,300       168,700    213,100      213,100      257,500       257,500       257,500   

Administrative expense 111,000    111,000     111,000       125,400    125,400      125,400      139,800       139,800       139,800   

Maintenance expense 80,511      81,758       86,130         90,502      95,425        97,774        100,294       100,294       100,294   

Profit/(loss) (270,898)   (162,452)    34,889         180,179    324,135      422,503      426,699       382,487       338,089   

Collection rate 33% 39% 49% 62% 75% 86% 92% 95% 95%

Cash surplus/(deficit) ‐               (306,767)   (281,711)    (228,191)     (119,261)   60,279        258,439      328,235       320,744       281,427   

Cost recovery (collection based) 5% 22% 53% 81% 108% 133% 138% 137% 133%

Average cost (US$/m3), 

PDISA+ADFIN 1.75           1.57             0.87               0.70             0.61              0.55              0.54              0.54              0.54            

Average cost (US$/m3),    

PDISA only 1.75           1.24             1.10               1.07             1.05              1.02              1.00              1.08              1.06            

Water sold (m m3/year) ‐               0.05           0.20            0.56             0.88           1.21            1.42            1.59              1.59              1.59          

Unit cost, PDISA+ADFIN (US$/m3) ‐               1.75           1.57            0.87             0.70           0.61            0.55            0.54              0.54              0.54          

Average tariff (US$/m3) ‐               1.00           0.97            0.94             0.91           0.88            0.84            0.81              0.78              0.75          

‐

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

1.40 

1.60 

1.80 

2.00 

0.05  0.20  0.56  0.88  1.21  1.42  1.59  1.59  1.59 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff (US$/m3)

m3million

54

Appendix A5.2 Draft Financial Projections (Continued)

N'Dalatando2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 123,486      126,820    130,244      133,760       137,372    141,081      144,890      148,802      152,820       156,946   

% Periurban 85% 85% 85% 85% 85% 85% 85% 85% 85% 85%

Number of connections 2,000         2,405         2,992          4,349           5,706         7,198          8,056          8,435           8,435            8,435        

Population served by network 10,000        12,027      15,505       25,142         34,779      45,503        51,154        52,963         52,963         52,963     

Water produced (m3/year) 308,320      607,832    803,492      1,141,157   1,418,114 1,654,608  1,851,582  1,925,964  1,893,320    1,861,765

System losses 35% 34% 33% 31% 30% 29% 28% 26% 25%

Water sold (m3/year) 308,320      395,091    532,314      770,281       974,954    1,158,226  1,319,252  1,396,324  1,396,324    1,396,324

Average tariff (US$/m3) 1.20 1.16 1.11 1.06 1.00 0.95 0.90 0.85 0.80 0.75

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue 369,984      457,473    589,222      813,356       979,764    1,104,886  1,191,232  1,189,631  1,118,437   1,047,243

Expenses 391,242      391,242    411,724      492,011       521,826    606,608      627,646      635,675      632,411       629,256   

Operating expense 101,583      101,583    121,149      154,916       182,611    206,261      225,958      233,396      230,132       226,976   

Sales/commercial expense 79,900        79,900      79,900       124,300       124,300    168,700      168,700      168,700      168,700       168,700   

Administrative expense 111,000      111,000    111,000      111,000       111,000    125,400      125,400      125,400      125,400       125,400   

Maintenance expense 98,758        98,758      99,675       101,795       103,915    106,247      107,588      108,179      108,179       108,179   

Profit/(loss) (21,258)      66,232      177,498      321,345       457,938    498,279      563,586      553,956      486,026       417,987   

Collection rate 33% 33% 39% 49% 62% 75% 86% 92% 95% 95%

Cash surplus/(deficit) (269,147)    (239,298)   (179,090)     (89,759)       90,111      222,716      400,538      463,490      430,560       368,340   

Cost recovery (collection based) 31% 39% 57% 82% 117% 137% 164% 173% 168% 159%

Average cost (US$/m3), 

PDISA+ADFIN 1.27            0.99           0.77             0.64               0.54             0.52              0.48              0.46              0.45              0.45            

Average cost (US$/m3),    

PDISA only 1.27            0.99           0.88             0.87               0.85             0.82              0.77              0.75              0.74              0.76            

Water sold (m m3/year) 0.31            0.40           0.53            0.77             0.97           1.16            1.32            1.40             1.40              1.40          

Unit cost, PDISA+ADFIN (US$/m3) 1.27            0.99           0.77            0.64             0.54           0.52            0.48            0.46             0.45              0.45          

Average tariff 1.20            1.16           1.11            1.06             1.00           0.95            0.90            0.85             0.80              0.75          

‐

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

1.40 

0.31  0.40  0.53  0.77  0.97  1.16  1.32  1.40  1.40  1.40 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff

m3million

55

Appendix A5.2 Draft Financial Projections (Continued)

Uige2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Key assumptions

Population 135,401      139,057    142,811     146,667       150,627    154,694      158,871      163,160       167,566       172,090   

% Periurban 85% 85% 85% 85% 85% 85% 85% 85% 85% 85%

Number of connections 1,600          1,869         2,488          4,597           6,705         9,076          10,221        10,992          10,992         10,992     

Population served by network 8,000          9,344         13,493       29,555         45,616      63,778        72,131        77,493          77,493         77,493     

Water produced (m3/year) 248,674      472,237    617,657     1,003,920   1,344,026 1,673,309  1,871,271  2,092,361    2,056,897    2,022,616

System losses 35% 35% 34% 33% 31% 30% 29% 28% 26% 25%

Water sold (m3/year) 161,638      306,954    409,198     677,646       924,018    1,171,316  1,333,280  1,516,962    1,516,962    1,516,962

Average tariff (US$/m3) 1.00 1.00 0.96 0.92 0.88 0.84 0.81 0.77 0.73 0.69          

Profit and loss (US$)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue 161,638      306,954    393,320     625,058       816,456    989,518      1,074,610  1,163,794    1,104,933   1,046,071

Expenses 380,456      380,456    403,236     508,870       621,981    719,478      750,961      785,330       780,010       774,868   

Operating expense 111,636      111,636    133,448     191,388       242,404    291,796      321,491      354,654       349,335       344,192   

Sales/commercial expense 79,900        79,900      79,900       124,300       168,700    213,100      213,100      213,100       213,100       213,100   

Administrative expense 111,000      111,000    111,000     111,000       125,400    125,400      125,400      125,400       125,400       125,400   

Maintenance expense 77,920        77,920      78,888       82,182         85,477      89,182        90,971        92,175          92,175         92,175     

Profit/(loss) (218,817)    (73,502)     (9,917)        116,187       194,475    270,040      323,649      378,464       324,923       271,204   

Collection rate 30% 33% 39% 49% 62% 75% 86% 92% 95% 95%

Cash surplus/(deficit) (331,964)    (278,505)   (247,947)    (199,743)     (112,042)   23,250        176,563      289,964       270,127       221,612   

Cost recovery (collection based) 13% 27% 39% 61% 82% 103% 124% 137% 135% 129%

Average cost (US$/m3), 

PDISA+ADFIN 2.35            1.24           0.99             0.75               0.67             0.61              0.56              0.52              0.51              0.51            

Average cost (US$/m3),    

PDISA only 2.35            2.10           1.31             1.00               0.85             0.85              0.81              0.80              0.79              0.78            

Water sold (m m3/year) 0.16            0.31           0.41            0.68             0.92           1.17            1.33            1.52              1.52              1.52          

Unit cost, PDISA+ADFIN (US$/m3) 2.35            1.24           0.99            0.75             0.67           0.61            0.56            0.52              0.51              0.51          

Average tariff (US$/m3) 1.00            1.00           0.96            0.92             0.88           0.84            0.81            0.77              0.73              0.69          

‐

0.20 

0.40 

0.60 

0.80 

1.00 

1.20 

1.40 

0.31  0.41  0.68  0.92  1.17  1.33  1.52  1.52  1.52 

Unit cost, PDISA+ADFIN (US$/m3)

Average tariff (US$/m3)

m3million

56

Annex 7: Governance and Accountability Action Plan Objectives Key Actions to Achieve Objectives Responsible Party Target

Date

Enhanced public disclosure program

1. A program will be developed so that the PWSUs can communicate all decisions related to procurement, contract award, service levels, and more to the communities. 2. The Learn-By-Doing program will strengthen the capacity of the PWSUs to work with the communities in developing/extending networks and services to various communities to ensure that the communities’ needs and opinions are considered. 3. A summary of evaluations must be published by the project in Development Business online and in dgMarket and sent to those who submitted bids. 4. Issue a notice to the general public through local media for all new procurement, to invite any interested party to participate. 5. Make available to any member of the public, promptly upon request, all short-lists of consultants or pre-qualification of contractors.

DNAAS and the various PWSUs with support from project unit

Sept 2012 June 2013 Dec 2011 Sept 2011 Dec 2011

Enhanced compliance mechanisms

1. Recruit qualified staff for all fiduciary positions in DNAAS and in the project unit. 2. Contract with private sector professionals to staff the PWSUs – using private sector salaries to attract better qualified staff. 3. Design and implement regular training and capacity building

DNAAS July 2010 (completed) Sept 2011 Sept 2011

57

programs for the fiduciary staff. 4. Annual updates by the management of the Risk Management Plans to monitor progress in achieving specified mitigation measures. 5. Preparation and utilization of a FM manual and an appropriately sized accounting software package. 6. Utilization of an independent consulting firm to function as the internal auditor for the project.

(To be updated quarterly) Dec 2011 March 2011 (completed) March 2011 (completed)

Improved implementation of procurement oversight

1. DNAAS and the provincial governments will actively encourage representatives of civil society to attend public bid openings and other key procurement steps. 2. With the communication program DNAAS will establish a mechanism whereby the media and civil society groups can become involved in monitoring the progress of the various contracts and the operations of the PWSUs.

DNAAS Sept 2011 Sept 2012

Mitigation of collusion risks

1. The project will contract with a consultant to perform procurement audits every two years. 2. The project unit will contract with qualified procurement staff to support DNAAS with all project procurement and to participate in the training and capacity building programs for the staff in the FCMU.

DNAAS June 2011 (completed) July 2010 (completed)

Mitigation of forgery and fraud risks

1. Timely payment of interim payments strictly following the terms and conditions in the contracts. 2. The use of independent consultants for both annual external audit and the internal audits.

DNAAS Dec 2010 On-going) May 2010 (completed)/ March 2011

58

3. The use of qualified staff paid competitive salaries. 4. Use of an accounting software package with appropriate controls built-in along with an acceptable Financial Management and Accounting Procedures Manual. 5. Regular training and capacity building programs for management and all project staff. 6. Oversight by the communities of all project related activities and the operations of the various PWSUs

July 2010 (completed) March 2011 (completed) September 2011 March 2012

Strengthen human resource capacity

1. Change management programs will be implemented to support efforts by MINEA/DNAAS to improve the capacity to operate the sector on a sustainable basis 2. Formal training programs will be implemented to strengthen the technical capacity of the staff in the sector.

DNAAS June 2012 June 2012

Improve institutional capacity to manage the sector

1. The capacity to manage the implementation of projects will be addressed by strengthening the capacity of the FCMU

2. The technical assistance to the PWSUs will address the technical and managerial capacity of the operating utilities

DNAAS Sept 2011

Dec 2011

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This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

IBRD 35987

FEBRUARY 2008

ANGOLAWATER SECTORINSTITUTIONAL

DEVELOPMENT PROJECTPROJECT CITIESPROVINCE CAPITALSNATIONAL CAPITALRIVERSMAIN ROADSPROVINCE BOUNDARIESINTERNATIONAL BOUNDARIES

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