FOR OFFICIAL USE ONLY - World Bank...Timor-Leste Water Supply and Sanitation Project (P167901) Page 7 of 64 I. STRATEGIC CONTEXT A. Country Context 1. Timor-Leste has made important

FOR OFFICIAL USE ONLY

Report No: PAD3490

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 18.2 MILLION (US$25.0 MILLION EQUIVALENT)

TO THE

DEMOCRATIC REPUBLIC OF TIMOR-LESTE

FOR A

WATER SUPPLY AND SANITATION PROJECT

April 1, 2020

Water Global Practice East Asia and Pacific 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 January 31, 2020)

Currency Unit = United States Dollar (US$)

SDR 0.72800 = US$1

US$1.37362 = SDR 1

FISCAL YEAR

January 1 – December 31

Regional Vice President: Victoria Kwakwa

Country Director: Satu Kristiina Kahkonen

Regional Director: Benoit Bosquet

Practice Manager: Sudipto Sarkar

Task Team Leaders: Christophe Prevost and Berta Macheve

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank

BCC Behavior Change Communication

CAFI Administrative Council of the Infrastructure Fund (Conselho de Administração do Fundo das Infra-Estruturas)

CDM Community Dialogue Manual

CESMP Construction Environmental and Social Management Plan

CPS Country Partnership Strategy

DA Designated Account

DBO Design Built and Operate

DED Detailed Engineering Design

DFAT Department of Foreign Affairs and Trade of Australia

DG Directorate General (Direcção Geral)

DGAS Directorate General for Water and Sanitation (Direcção Geral de Água e Saneamento)

DNGRA National Directorate of Water Resources Management (Direcção Nacional de Gestão de Recursos de Água)

DNSA National Directorate of Water Service (Direcção Nacional de Serviço de Água)

DNSB National Directorate of Basic Sanitation (Direcção Nacional de Saneamento Básico)

EIA Environmental Impact Assessment

EMP Environmental Management Plan

ESCP Environmental and Social Commitment Plan

ESF Environmental and Social Framework

ESIA Environmental and Social Impact Assessment

ESS Environmental and Social Standard

FM Financial Management

FSM Fecal Sludge Management

GAP Gender Action Plan

GBV Gender-based Violence

GHG Greenhouse Gas

GNI Gross National Income

GoTL Government of Timor-Leste

GRM Grievance Redress Mechanism

GRS Grievance Redress Service

IAU Inspection and Audit Unit

IEE Initial Environmental Examination

IFR Interim Financial Report

IPF Investment Project Financing

IRR Internal Rate of Return

JICA Japan International Cooperation Agency

JMP Joint Monitoring Programme

MCC Millennium Challenge Corporation

MoF Ministry of Finance

MoH Ministry of Health

MSA Ministry of State Administration

MPW Ministry of Public Works

MSG Mother Support Group

NPC National Procurement Commission

NRW Nonrevenue Water

O&M Operation and Maintenance

ODF Open-defecation Free

PDO Project Development Objective

PMU Project Management Unit

POM Project Operations Manual

PPSD Project Procurement Strategy for Development

RPF Resettlement Policy Framework

SANIMAS Community-based Sanitation (Sanitasi Berbasis Masyarakat)

SDG Sustainable Development Goal

SIP Sector Investment Plan

SMASA Municipal Water, Sanitation, and Environmental Services (Serviço Municipal de Água, Saneamento e Meio Ambiente)

SOP Standard Operating Procedure

STEP Systematic Tracking of Exchanges in Procurement

STP Septage Treatment Plant

UNDP United Nations Development Programme

UNICEF United Nations Children’s Fund

WASH Water, Sanitation, and Hygiene

WHO World Health Organization

WSS Water Supply and Sanitation

TABLE OF CONTENTS

DATASHEET ............................................................................................................................ 1

I. STRATEGIC CONTEXT ...................................................................................................... 7

A. Country Context ............................................................................................................................ 7

B. Sectoral and Institutional Context ................................................................................................ 9

C. Relevance to Higher Level Objectives ......................................................................................... 13

II. PROJECT DESCRIPTION .................................................................................................. 14

A. Project Development Objective .................................................................................................. 14

B. Project Components ................................................................................................................... 14

C. Project Beneficiaries ................................................................................................................... 19

D. Results Chain ............................................................................................................................... 20

E. Rationale for Bank Involvement and Role of Partners ................................................................ 22

F. Lessons Learned and Reflected in the Project Design ................................................................ 22

III. IMPLEMENTATION ARRANGEMENTS ............................................................................ 24

A. Institutional and Implementation Arrangements ....................................................................... 24

B. Results Monitoring and Evaluation Arrangements ..................................................................... 25

C. Sustainability ............................................................................................................................... 25

IV. PROJECT APPRAISAL SUMMARY ................................................................................... 26

A. Technical Analysis ....................................................................................................................... 26

B. Economic Analysis ....................................................................................................................... 27

C. Fiduciary ...................................................................................................................................... 29

D. Environmental and Social Management ..................................................................................... 30

E. Legal Operational Policies ........................................................................................................... 35

V. GRIEVANCE REDRESS SERVICES ..................................................................................... 35

VI. KEY RISKS ..................................................................................................................... 36

VII. RESULTS FRAMEWORK AND MONITORING ................................................................... 39

ANNEX 1: IMPLEMENTATION ARRANGEMENTS AND SUPPORT PLAN ................................... 47

ANNEX 2: FINANCIAL AND ECONOMIC ANALYSIS ................................................................. 55

ANNEX 3: MAP OF TIMOR-LESTE .......................................................................................... 64

The World Bank Timor-Leste Water Supply and Sanitation Project (P167901)

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DATASHEET

BASIC INFORMATION BASIC_INFO_TABLE

Country(ies) Project Name

Timor-Leste Timor Leste Water Supply and Sanitation Project

Project ID Financing Instrument Environmental and Social Risk Classification

P167901 Investment Project Financing

Substantial

Financing & Implementation Modalities

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

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

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

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

[ ] Project-Based Guarantee [ ] Conflict

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

[ ] Alternate Procurement Arrangements (APA)

Expected Approval Date Expected Closing Date

22-Apr-2020 29-May-2026

Bank/IFC Collaboration

No

Proposed Development Objective(s)

The project development objective is to increase access to safely managed drinking water and sanitation services in the municipality of Baucau.

Components

Component Name Cost (US$, millions)


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Component 1: Water Supply and Sanitation Infrastructure Development 21.00

Component 2: Infrastructure Sustainability Support 3.00

Component 3: Institutional strengthening and Project Management 1.00

Organizations

Borrower: Democratic Republic of Timor-Leste

Implementing Agency: Ministry of Public Works

PROJECT FINANCING DATA (US$, Millions)

SUMMARY-NewFin1

Total Project Cost 30.00

Total Financing 30.00

of which IBRD/IDA 25.00

Financing Gap 0.00

DETAILS-NewFinEnh1

World Bank Group Financing

International Development Association (IDA) 25.00

IDA Credit 25.00

Non-World Bank Group Financing

Counterpart Funding 5.00

Borrower/Recipient 5.00

IDA Resources (in US$, Millions)

Credit Amount Grant Amount Guarantee Amount Total Amount

Timor-Leste 25.00 0.00 0.00 25.00

National PBA 25.00 0.00 0.00 25.00

Total 25.00 0.00 0.00 25.00


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Expected Disbursements (in US$, Millions)

WB Fiscal Year 2020 2021 2022 2023 2024 2025 2026 2027

Annual 0.05 0.89 1.51 2.90 5.00 6.15 6.30 2.20

Cumulative 0.05 0.94 2.45 5.35 10.35 16.50 22.80 25.00

INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas

Water Climate Change, Education, Health, Nutrition & Population

Climate Change and Disaster Screening

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

SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)

Risk Category Rating

1. Political and Governance ⚫ Substantial

2. Macroeconomic ⚫ Substantial

3. Sector Strategies and Policies ⚫ Substantial

4. Technical Design of Project or Program ⚫ Moderate

5. Institutional Capacity for Implementation and Sustainability ⚫ High

6. Fiduciary ⚫ Substantial

7. Environment and Social ⚫ Substantial

8. Stakeholders ⚫ Substantial

9. Other

10. Overall ⚫ Substantial


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COMPLIANCE

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

[ ] Yes [✓] No

Does the project require any waivers of Bank policies?

[ ] Yes [✓] No

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

E & S Standards Relevance

Assessment and Management of Environmental and Social Risks and Impacts Relevant

Stakeholder Engagement and Information Disclosure Relevant

Labor and Working Conditions Relevant

Resource Efficiency and Pollution Prevention and Management Relevant

Community Health and Safety Relevant

Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Relevant

Biodiversity Conservation and Sustainable Management of Living Natural

Resources

Relevant

Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional

Local Communities

Relevant

Cultural Heritage Relevant

Financial Intermediaries Not Currently Relevant

NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS). Legal Covenants

Sections and Description Schedule 2, Section I. A (3). A Project Management Unit (PMU) under Directorate General for Water and Sanitation


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(DGAS) which shall be established to implement all donor funded water and sanitation projects with adequate staff and funds throughout the implementation of the Project.

Sections and Description Schedule 2, Section I.B The Recipient shall ensure that the Project is carried out in accordance with the arrangements and procedures set out in the Project Operations Manual acceptable to the Association.

Sections and Description Schedule 2, Section I. C The Recipient shall: prepare and furnish to the Association by September 30 in each year - beginning in the Fiscal Year 2021 - a proposed Project’s consolidated annual work plan and budget for the following Fiscal Year, thereafter ensure that the Project is carried out in accordance with such Annual Work Plan and Budget, in a manner satisfactory to the Association.

Sections and Description Schedule 2, Section I. D (1) The Recipient shall ensure that the Project is carried out in accordance with the Environmental and Social Standards, in a manner acceptable to the Association.

Sections and Description Schedule 2, Section I.D (3) The Recipient shall establish, publicize and operate an accessible grievance redress mechanism to receive and facilitate resolution of concerns and grievances of Project-affected people and take all measures necessary and appropriate to resolve, or facilitate the resolution of such concerns and grievances in a manner satisfactory to the Association.

Sections and Description Schedule 2 Section II.2 The Recipient shall carry out, jointly with the Association not later than three (3) years after the Effective Date or such other date as may be agreed with the Association, a mid-term review of the Project (the “Mid-Term Review”).

Sections and Description Schedule 2, Section IV.1 The Recipient through the Service Provider shall: (a) By December 31, 2022, prepare a rolling five-year Sustainability Improvement Plan, outlining how the Service Provider will improve its operational and financial status, including targets and necessary measures to meet the targets, in a manner acceptable to the Association; (b) Commencing on December 31, 2023, by December 31 of each year, in accordance with terms of reference acceptable to the Association, furnish to the Association for review and comments the draft updated Sustainability Improvement Plan; and (c) take all necessary actions to ensure that the Sustainability Improvement Plan, as updated, is carried out according to its terms.

Sections and Description Schedule 2, Section IV. 2 The Recipient shall cover all of the Baucau Service Provider’s operating costs not covered by tariffs for the infrastructure under the Project.

Conditions


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Type Description

Effectiveness Article IV, 4.01(A) That the Project Management Unit (PMU) has been duly established and

adequately staffed as per Section I.A.3 of Schedule 2 to this Agreement. Type Description

Effectiveness Article IV, 4.01 (B) That the Project Operations Manual has been prepared as per Section I.B.

of Schedule 2 to this Agreement.


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I. STRATEGIC CONTEXT

A. Country Context 1. Timor-Leste has made important strides toward securing lasting peace and stability since its independence in 2002. At the time it became a new sovereign state in May 2002, extreme poverty and hunger were high; public infrastructure (including schools, hospitals, roads, and water and sanitation systems) was nonexistent, destroyed, or severely dilapidated; institutional frameworks were weak; and conflict and violence were ongoing threats. Shortages of human capital were equally severe, with few Timorese having the necessary skills and formal education for civil service jobs or engaging in the private sector. While there remain political, economic, and social challenges, Timor-Leste is a more peaceful and democratic nation today, having gone through several parliamentary and presidential elections since its independence.

2. Timor-Leste is classified as a low-and middle-income country, with a gross national income (GNI) per capita (Atlas method) of US$2,096 in 2017. Timor-Leste is a resource-rich country that has saved much of its petroleum-related proceeds in a Petroleum Fund—with financial assets currently valued at over US$17 billion. However, the petroleum sector’s weight in the overall economy is declining—from 82 percent in 2012 to 36 percent in 2017—partly owing to the depletion of existing reserves. Growth in the non-oil sector is mainly driven by public spending, which is mostly financed by the Petroleum Fund. Non-oil gross domestic product growth has been decelerating since 2008, averaging less than 4 percent in 2013–2016, and even contracting in 2017–2018. The construction sector (dependent on public infrastructure investments), public services, commerce, and agriculture account for nearly 80 percent of the non-oil economy. Declining petroleum production has contributed to a fall in GNI from a peak of US$4.6 billion (in current prices) in 2011 to US$2.4 billion in 2017.

3. Poverty levels remain very high, with 41.8 percent1 of the population lacking the minimum resources needed to satisfy basic needs. In 2015, the total population was 1.1 million and growing at 2.37 percent per year, with an estimated 25 percent living in urban areas. Based on the latest Survey of Living Standards (2014/15), 42 percent of the population lives below the national poverty line, while 30 percent lives below the US$1.90 a day international poverty line. There are also high inequalities in access to water and sanitation service provision countrywide. Only 55 percent of people in the poorest quintile have access to water supply compared to 90 percent in the richest quintile. On sanitation, only 10 percent of people in the poorest quintile have access compared to 95 percent in the richest quintile.2

4. Malnutrition and poor health are widespread and continue to hamper the efforts of the people to improve their livelihood. At present, nearly half of the under-five children in Timor-Leste are stunted, a rate that is among the highest in the world. The three-year average of the prevalence of undernourishment in 2016 was 26.9 percent.3 About 40 percent of the children under five are underweight, as are 27 percent of women and 25 percent of men ages 15–49. Addressing the links

1 Government of Timor-Leste. 2014. Poverty in Timor-Leste. http://www.statistics.gov.tl/wp-content/uploads/2018/02/Poverty-Report-2014-final.pdf. 2 Timor-Leste: Timor-Leste Poverty Monitoring and Analysis (P165123). 3 Food and Agriculture Organization of the United Nations Aquastat Database 2017.


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between nutrition, water, and sanitation is especially important as access to safe quality water and adequate sanitation is among a core set of critical early child development interventions.4

5. Gender equality has been a fundamental principle in the country’s developmental efforts and remains key to achieving sustainable development into the future. Based on the 2015 Census, there is no significant disadvantage for female-headed households, compared to male-headed households, in having access to improved sanitation facilities and safe drinking water. However, significant gender inequalities remain—including high rates of violence against women and barriers to reproductive health care. Domestic violence is pervasive; maternal mortality remains high; barriers to reproductive health care are concerning; and significant gender gaps remain in women’s access to paid employment, wage parity, finance, and political participation.

6. Timor-Leste is vulnerable to natural disasters due to high risk of earthquakes, tsunamis, cyclones, droughts, and heavy rainfall, and climate change will likely increase the variability of water availability and the exposure to water-related disasters. Because of climate change, the country’s population faces increasing temperatures, droughts, increasingly erratic rainfall, and rising sea levels that threaten to exacerbate the storm, landslide, and flood risks. Climate projections5 for mid-century suggest (a) increased temperature of 1.25–1.75°C by 2050, (b) increased duration of heatwaves, (c) increased rainfall of 4–10 percent by 2050 with an increase of up to 100–120 mm in coastal areas and 260–300 mm in the mountains, (d) increased intensity of heavy rainfall events but decreased frequency, (e) increased sea surface temperatures of 0.6–0.8°C by 2030, (f) rise in sea level by 150–340 mm by 2050, and (g) increased cyclone intensity (higher wind speeds) but decreased frequency.

7. The overall risk in Timor-Leste also depends on how climate change will influence the El Niño Southern Oscillation. El Niño has a significant impact on rainfall and thus water availability. El Niño events can cause greatly reduced rainfall in some areas, increased rainfall in others, and a drop in sea level (up to 20 cm) which can affect the start of the wet season. Conversely, La Niña events induce a general increase in rainfall, an increase in sea level (10–20 cm), and an increase in wave height which can again affect the timing of the wet season.6

8. The projected climate change impacts pose significant risks to water supply and sanitation (WSS) in Timor-Leste. Key risks include (a) reduced water supply, which lowers the water table, leading to droughts; (b) decline in water quality due to contamination of wells by storm surges and flooding of surface fittings; and (c) flash floods. The projected climate change thus places the delivery and management of water at risk. It will be required to achieve the Sustainable Development Goal (SDG) 2030 target of increased use of adaptation measures,7 such as climate-proof designs for infrastructure development, revision of regulations and standards to enhance climate change resilience of critical infrastructure, enhanced government and community strategies to respond to climate change-

4 Chase, C., and F. Ngure. 2016. Multisectoral Approaches to Improving Nutrition: Water, Sanitation, and Hygiene. 5 United States Agency for International Development. 2017. Climate Risk in Timor-Leste: Country Profile. 6 Wallace, Luke, Baskaran Sundaram, Ross S. Brodie, Sarah Marshall, Samantha Dawson, John Jaycock, Gerard Stewart, and Lindsay Furness. 2012. Vulnerability Assessment of Climate Change Impacts on Groundwater Resources in Timor-Leste Summary Report. Australian Government Department of Climate Change and Energy Efficiency. 7 2016 Timor-Leste’s Intended Nationally Determined Contributions of the United Nation Framework Convention on Climate Change.

http://documents.worldbank.org/curated/en/881101468196156182/pdf/102935-WSP-Box394845B-PUBLIC-ADD-SERIES-Water-and-Sanitation-Program-WSP.pdf


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exacerbated drought, and enhanced water distribution systems and management systems at all levels to avoid shortages.

B. Sectoral and Institutional Context 9. Timor-Leste has made progress in increasing access to water supply, but more needs to be done to improve infrastructure, service quality, and sustainability. Efforts are ongoing to rebuild the country infrastructure, but WSS infrastructure for domestic, commercial, and industrial end users remains underdeveloped and requires substantial investment. In 2017, although 93 percent8 of the urban population had access to improved water supply,9 only 47 percent among the urban dwellers had individual connections with piped water in their premises. Urban public water supply systems in all municipal capitals of the country are constrained by aged infrastructure, highly intermittent supplies and low pressures, inadequate operation and maintenance (O&M), and a high record of illegal connections resulting in nonrevenue water (NRW)10 estimated to be higher than 90 percent of the total volume supplied.11 In addition, there is generally no water quality monitoring, limited or no regular water treatment, and inadequate billing and collection systems.

10. In 2017, 75 percent of the urban population had access to improved sanitation.12 However, most of the improved sanitation facilities in urban areas are on-site without a properly functioning fecal sludge management (FSM) service. Most households’ improved sanitation facilities comprise simple pit latrines, septic tanks (generally not built up to environmental standards), or direct discharge to public surface water, contributing to major contamination of the environment and water bodies. Bacteriological analyses regularly indicate widespread contamination in surface water and groundwater and in water supply networks. The other sections of the urban population use shared sanitation facilities (15 percent) or unimproved sanitation facilities13 (9 percent) or practice open defecation (1 percent). There is one septage treatment plant (STP) in Timor-Leste located in Tibar on the outskirts of Dili, which was inaugurated in 2015 to treat sludge from septic tanks. Fecal sludge is collected by private operators based on septic tank owner requests. There is no centralized off-site wastewater system in the country.

11. The Ministry of Public Works (MPW) is responsible for the design, execution, coordination, and evaluation of policies in the areas of urban planning, public works, housing, electricity, water supply, sanitation, and drainage. The MPW’s responsibilities for the water sector are delivered through the Directorate General for Water and Sanitation (Direcção Geral de Água e Saneamento, DGAS) and its three national-level directorates: (a) the National Directorate of Water Resources Management (Direcção Nacional de Gestão de Recursos de Água, DNGRA), (b) the National Directorate for Water Supply (Direcção Nacional de Serviço de Água, DNSA), and (c) the National Directorate of Basic Sanitation (Direcção Nacional de Saneamento Basico, DNSB). According to the Decree Law 4/2004, (a) the DNGRH is

8 World Health Organization (WHO)-United Nations Children’s Fund (UNICEF) Joint Monitoring Programme (JMP) 2017. 9 Access to an improved water source refers to the percentage of the population with reasonable access to an adequate amount of water from an improved source, such as a household connection, public standpipe, borehole, protected well or spring, and rainwater collection. 10 NRW is defined as the percentage of water produced that is not ultimately billed to consumers. Water not billed to consumers results from water losses (physical and commercial losses) as well as unauthorized consumption that is not billed. 11 WaterAid Report 2010. 12 WHO-UNICEF JMP 2017. 13 A household has access to basic sanitation services when it uses sanitation facilities that are designed to hygienically separate excreta from human contact and are not shared with other households. This includes flush/pour flush to piped sewer system, septic tanks or pit latrines, ventilated improved pit latrines, composting toilets, or pit latrines with slabs.


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responsible for monitoring and research on the quality and volume of water resources to support current water supply needs and future development of the water resources; (b) the DNSA is responsible for establishing national policy priorities, financing capital investments of public water supply systems, and operating water infrastructure in the capital of Dili; and (c) the DNSB has the mandate to construct wastewater treatment facilities and drainage systems and construct public toilets in urban areas. The Ministry of Health (MoH), through the National Directorate for Public Health, is responsible for water, sanitation, and hygiene (WASH); health; and nutrition behavior change communication programs.

12. The provision of the WSS services is the responsibility of the municipalities placed under the Ministry of State Administration (MSA). The MSA is responsible for promoting municipal sustainable development, aimed at improving the efficacy, efficiency, and quality of basic service provision, including water and sanitation services, in the municipalities. In addition, the MSA is responsible for collecting information and data for evaluation of service quality provided by the municipal authorities (Decree Law 3/2016). The WSS infrastructures are operated by the Municipal Water, Sanitation, and Environmental Service (Serviço Municipal de Água, Saneamento e Meio Ambiente, SMASA) that reports directly to the municipal administration. SMASA also provides support to community water management groups (Grupu Maneja Fasilidade) for the delivery of service in rural communities.

13. The level of investment in the water and sanitation sector has been low in the past years compared to the needs. The overall sector budget, excluding donors’ contributions, for 2016 and 2017 varied between US$27 million and US$28 million per year with 79 percent of the funding for urban water supply, 18 percent for drainage, 2 percent for sanitation, and 1 percent to develop and manage water resources. Donor funding reached US$8 million in 2016 and US$10 million in 2017. Historically, the Government of Portugal, the Asian Development Bank (ADB), and Japan International Cooperation Agency (JICA) have been supporting the urban water and sanitation sector, while United Nations Children’s Fund (UNICEF), United Nations Development Programme (UNDP), Department of Foreign Affairs and Trade of Australia (DFAT), World Vision, Plan International, and Water Aid have been supporting the rural WSS sector.

14. The financial viability of the urban water supply sector is nowadays undermined by the lack of adequate revenue stream for its activities. Water tariffs were established in 2004 by the Ministry of Finance (MoF) (Decree Law 4/2004) and have never been revised. For households, the tariff is US$0.2 per m3 from 0 to 14 m3 (per month) and US$0.4 per m3 over 14 m3; for public institutions, the tariff is US$0.2 per m3; for industry, restaurants, and other commercial businesses, the tariff is US$0.6 per m3; and for public taps, the tariff is US$0.1 per m3. However, tariff billing has never been implemented beyond the capital of Dili. In the other 12 municipal capitals and 65 administrative posts, public water supply service is provided free of charge. To cover O&M costs associated with the water supply service, substantial subsidies from the Government of Timor-Leste (GoTL) are required. Improving the sector financial viability will require, among other things, (a) improving infrastructure and assets management to minimize operating costs, (b) establishing efficient billing and collection systems, (c) restoring adequate tariff levels, (d) improving service quality to stimulate willingness to pay, and ultimately (e) increasing service providers’ autonomy and accountability.

15. WSS infrastructure development has been identified as a priority in the Timor-Leste Strategic Development Plan 2011–2030, the VIII Constitutional Government Program 2018–2023, and the National Adaptation Programme of Action to Climate Change. By 2022, the GoTL aims at providing 60 percent of the urban population with access to 24/7 water supply and 80 percent of the rural villages with

https://www4.unfccc.int/sites/NAPC/Country%20Documents/Parties/tls01.pdf


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access to a functioning water system. By 2030, the GoTL aims at providing 100 percent of the urban population with 24/7 access to water supply and 100 percent of the rural villages with access to a functioning water supply system. For sanitation, the GoTL aims at reaching open-defecation free (ODF) status countrywide by 2020 and 100 percent access to hygienic toilets and improved hygiene behavior by 2030. Investing appropriately in the water and sanitation sector will have a significant positive impact on the health and well-being of the people and will contribute to economic growth.

16. The MPW has prepared a Sector Investment Plan (SIP)14 to accelerate water and sanitation infrastructure development. To achieve the SIP targets, investments of US$1.323 billion are needed to (a) improve the water production, storage, and treatment capacity; (b) rehabilitate and expand the distribution network of the urban water supply systems in Dili and 12 other municipalities; (c) develop the sewerage collection and treatment and drainage systems in Dili; and (d) construct rural water supply systems. As part of this planning exercise, the MPW prepared, with ADB support, a series of master plans in 2016 to address the most urgent sector priorities.15 The GoTL requested the World Bank to support the implementation of the SIP by financing WSS infrastructure in the capital city of the municipality of Baucau.

17. The capital city of the municipality of Baucau is the second largest city in the country. The capital city of Baucau had a population of about 17,400 inhabitants in 2015,16 with high poverty17 and stunting ratios.18 The water supply infrastructure in Baucau is aged and underdeveloped. The existing infrastructure has been constructed over a period involving four separate administrations (Portuguese, Indonesian, United Nations transitional, and in the early years of the independent Timor-Leste) and is now in need of substantial rehabilitation and expansion to serve an increasing urban population. Access to WSS in the municipal capital of Baucau is a major issue. The infrastructure provides only 56 percent of the population with improved water supply. For the remaining population, 39 percent rely on small-scale private water service providers delivering water by trucks, 4 percent on springs and irrigation channels, and 1 percent on tube well. Rainwater collection is also used as a supplementary source by many. The infrastructure comprises 1,536 registered water connections, of which 48 percent are domestic. There are no bulk meters and household meters. There is no tariff billing and collection system. The service is free of charge for all customers. There is no water treatment. Supply is intermittent with six seasonal variations ranging from 10 hours of service a day between January and April (dry season) to 16 hours a day between July and December (rainy season). However, in some areas of the city, supply is only provided two days a week for one hour. Households without regular water supply from the public infrastructure pay to private water service providers on average US$2.4 per m3.

18. The operation of the water supply infrastructure in the capital city of the municipality of Baucau is poor and customers’ satisfaction is low. SMASA has limited administrative and financial autonomy, lack of human resources in the form of shortage in number and skilled management and technical staff, and it has limited accountability and incentives for sustaining services. SMASA has 22 permanent staff, including 12 community and sanitation mobilizers working mostly in the 59 rural villages of the municipality. Out of the 22 SMASA staff, seven are female. In addition, the capacity of SMASA to operate and maintain the system is also constrained by the limited annual budget to fund O&M. The total SMASA 2019 budget allocation provided by the municipality of Baucau was US$151,000, of which 50 percent was for salaries

14 The Sector Investment Plant 2018–2030 for Water Supply and Sanitation in Timor-Leste was approved on January 25, 2018. 15 2016 Master Plan - Second District Capital Water Supply Project Master Plan. 16 Based on Timor-Leste Population and Housing Census 2015 - Preliminary Results Report. 17 According to the 2014 Timor-Leste Poverty Report, 32.6 percent of the population of Baucau was poor. 18 47.2 percent of under-five children were stunted based on Timor-Leste Demographic and Health Survey 2016.


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and overtime and 50 percent was to cover, among other things, office building, administrative, O&M, and training expenditures. Consequently, due to lack of funds, water asset maintenance programs are not implemented, and system functionality and service quality are substandard. Because of the low coverage and suboptimal service, customers’ satisfaction in Baucau with the quality of water supply service is low: 78 percent of the customers are dissatisfied with the frequency and duration of water supply, 60 percent are dissatisfied with the water pressure, and 54 percent are dissatisfied with the quantity of water supplied.19

19. Households’ sanitation situation in the capital city of the municipality of Baucau is particularly critical. In 2014, only 26 percent of the households had access to improved sanitation facilities, 36 percent of the households had access to unimproved sanitation facilities, and 38 percent of the population was practicing open defecation.20 In 2016, 88 percent of the households in Baucau wanted to improve their current sanitation facility, including having new pit latrines (17 percent), new pour flush external toilets (18 percent), new pour flush internal toilets (38 percent), and new or improved bathrooms (24 percent).21 While there is a clear community demand for improved sanitation facilities in Baucau, there are also major issues mentioned by the population, including lack of financial resources (49 percent), lack of time (27 percent), and lack of adequate water supply (18 percent). The municipality of Baucau had an STP in Seasal, on the outskirts of Baucau, but it is no longer functional.

20. The MPW is preparing a sector institutional reform to improve service delivery and sustainability across the country. The reform aims to clearly separate the policy making, service provision, and regulation functions, which is consistent with international best practices. It foresees the establishment of a national public WSS utility that would be responsible for infrastructure development, O&M, and commercial activities across the country while DGAS would become the regulator for WSS, and the DNGRH the regulator for water resources. The Government of Portugal, through its national water utility, Águas de Portugal, has provided technical assistance to the MPW to develop the framework for the creation of a national public utility (Empresa Pública - Bee Timor), including (a) the Decree Law and the utility functional organigram, (b) a feasibility study assessing the financial and economic viability of the reform, and (c) a detailed road map of priority activities to develop the sector institutional framework and the new utility’s operational capacity and procedures during the first two years after its creation. The reform proposal will be submitted in2020 to the Council of Ministers for approval, following which a start-up committee will be formed to initiate reform road map activities toward the creation of the national water utility, expected in 2021. It is therefore important to note that the national public water and sanitation utility could take over the provision of WSS services from SMASA in the municipality of Baucau during project implementation.22

21. The reform foresees the establishment and operations of a national utility, possibly supported by development partners. In parallel to the implementation of the SIP, the start-up committee and then the newly formed national utility are expected to lead the rollout of countrywide reform road map activities, including staffing development and capacity building; the deployment of utility O&M hardware and management software; the establishment of standard operating procedures (SOPs), performance-

19 2016 Master Plan - Second District Capital Water Supply Project Master Plan. 20 2014 Assessment Stage Household Surveys. 21 2016 Master Plan Household Survey. 22 Given that SMASA could be replaced during project implementation by the national public water and sanitation utility to operate the water and sanitation infrastructure in the municipality of Baucau, from now on in the Project Appraisal Document, the term ‘service provider’ will be used to refer either to SMASA or to the national public water and sanitation utility.


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oriented human resources policies, and billing policies and procedures; and the preparation of a utility business plan. The MPW will conduct in 2020 consultations with key development partners to secure financial and technical assistance support for the implementation of these road map activities.

22. The application of volumetric water tariff across the country will be critical to ensure the sustainability of the reform. The GoTL has demonstrated its commitment to this aspect of the reform with the MPW’s recent decisions to open three billing counters in the capital Dili to facilitate and increase water bill collection and implement existing water tariffs in all municipal capitals, starting in the municipalities of Suai and Maliana, and at a later stage in the municipal capitals of Manatuto, Baucau, Viqueque, Liquica, Ainaro, and Aileu. This is consistent with the Water Supply for Public Consumption Decree Law 4/2004 providing the legal framework for managing public water supply systems in a sustainable manner, including recovery of costs from customers. In addition, according to the economic and financial feasibility study prepared by Águas de Portugal, the future O&M costs of the new national utility could be fully covered with a marginal increase of the current water tariff. This is largely because most urban centers can be supplied by gravity from good quality water sources and do not require significant pumping and treatment costs. The reform road map foresees the preparation of a more detailed tariff study, as one of its priority activities, to confirm the recommended tariffs across the country.

C. Relevance to Higher Level Objectives 23. The project will contribute to the World Bank Group’s twin goals of ending extreme poverty and promoting shared prosperity, by increasing access to safely managed drinking water and sanitation services in the capital city of the municipality of Baucau. The project is fully aligned with the World Bank Group’s Country Partnership Framework (CPF) for Timor-Leste, FY2020–2024 (Report No. P134792 – TP) and with the Government’s SIP and National Adaptation Programme of Action to Climate Change. The CPF focuses on reducing poverty and promoting shared prosperity organized around three focus areas: (a) strengthening the foundations for private sector-led growth and economic stability; (b) investing in human capital, public services, and social protection; and (c) raising productivity though investment and connectivity. The project is aligned with Focus Area 2 (Invest in Human Capital and Service Delivery) of the CPF.

24. Improving access to safely managed drinking water and sanitation services in the municipality of Baucau will help Timor-Leste meet its SDG targets. The project will contribute to multiple benefits on health, productivity and income, mortality rates, educational attainment, and time and opportunity costs—particularly for women, small children, and vulnerable populations—as well as on reducing stunting. People will save time from not having to queue at public water points or sanitation facilities, being ill, or having to take care of someone sick due to water and sanitation-related illnesses, thereby increasing the time spent at school or on productive activities. Moreover, the project seeks to increase the resilience of the Baucau municipality residents to droughts and floods. In addition, the project will contribute to increase economic outputs as well as job creation in sectors dependent on clean water supply (industry, tourism, and recreational activities).

25. The proposed project is also part of a coordinated World Bank effort to support the Human Capital development agenda in Timor-Leste. Along with the Public Expenditure Review covering Health, Education, and Stunting (FY19); the Basic Education Strengthening and Transformation Project (P166744); the Human Capital Development Strategy (FY20); the Nutrition and Stunting Project (FY21); and the

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Sustainable Agriculture Productivity Improvement Additional Financing (FY23), the project is part of the World Bank’s support to the GoTL to improve access to basic services and nutrition.

II. PROJECT DESCRIPTION

26. The project will support the Government’s SIP comprising major infrastructure development and institutional sector reforms. As a first engagement of the World Bank in the water and sanitation sector in Timor-Leste, the project provides an opportunity for knowledge transfer and an entry point for further work in Timor-Leste. The project aims at (a) addressing the infrastructure and sustainability gaps to increase access to and quality of drinking water and sanitation services in the capital city of the municipality of Baucau and increase resilience of the services to climate change and (b) supporting the MPW, in collaboration with other development partners, to implement the institutional reforms to improve service delivery and long-term sustainability of the infrastructures.

A. Project Development Objective PDO Statement

27. The Project Development Objective (PDO) is to increase access to safely managed drinking water and sanitation services in the municipality of Baucau.

PDO Level Indicators

28. The PDO will be measured against the following indicators:

(a) People with access to safely managed drinking water services23 under the Project, disaggregated by gender (number)

(b) Customer satisfaction with the quality of the water supply service24 under the project (percentage)

(c) People with access to safely managed sanitation services25 under the Project, disaggregated by gender (number)

B. Project Components 29. Implementation of this project will involve the following three components: Component 1: Water Supply and Sanitation Infrastructure Development, Component 2: Infrastructure Sustainability Support, and Component 3: Institutional Strengthening and Project Management.

23 Safely managed drinking water service is defined as one located on premises, available when needed, and free from contamination (SDG definition). 24 Quality of service refers to the continuity of water supply, pressure, and quality of water provided. 25 Safely managed sanitation facility is one where excreta is safely disposed of in situ or treated off-site (SDG definition).


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Component 1: Water Supply and Sanitation Infrastructure Development (Cost: US$23 million; Financing: IDA - US$21 million; Counterpart financing - US$2 million)

30. This component will finance:

• The construction of the centralized water supply system in the municipal capital of Baucau to increase access to safely managed drinking water services to 25,000 people through the installation in household premises of 5,000 connections delivering continuous water supply meeting water quality standards, as currently, only half of the population has access to water supply a few hours a day and with no water treatment;

• The construction of a Septage Treatment Plant (STP) to support the existing and planned on-site sanitation using septic tanks to ensure that fecal sludge, from schools, hospitals, government and commercial offices, hotels, and households, is safely managed and treated, as currently, there is no solution to safely dispose and treat fecal sludge in the municipality of Baucau contributing to the contamination of the environment and water bodies; and

• The construction of three simplified, community-based decentralized sewerage network and treatment systems to increase access to safely managed sanitation service to an estimated 500 households with toilets in the most densely urbanized areas of the city. These three community-based systems will be implemented as a pilot at the request of the MPW to test the feasibility of the community-based approach and technology in Timor-Leste before a possible scale-up across the city and country.

31. The estimated cost is US$22 million for the construction of the water supply infrastructure, US$0.5 million for the construction of the STP, and US$0.5 million for the construction of community-based decentralized sewerage network and treatment systems.26

32. The construction of the centralized water supply system would include (a) the construction of existing and new intakes and the protection of the respective sources; (b) increase in storage capacity, including construction of bulk water reservoirs and ground-level and elevated water reservoirs to guarantee continuous supply; (c) the installation of chlorination facilities for improved water quality; (d) construction of buildings for storage and water quality laboratory; (e) the replacement and extension of the transmission and primary distribution mains, including installation of bulk meters; and (f) the construction of the distribution network, with household water connections and micro-metering. The construction of the water supply system in the capital city of the municipality of Baucau will mitigate the impact of extreme heat and droughts by increasing the supply of water—by tapping additional water sources,27 developing additional storage, improving the distribution systems and in parallel contributing to water conservation (by reducing operational water losses and introducing tariff and metering) and making water services more efficient and reliable. The project will also induce beneficiaries to shift away from untreated water delivered by tankers, which is a relatively unreliable method of water service

26 Master Plan - Second District Capitals Water Supply Project - January 2016. 27 The Government has developed policies and programs to address knowledge gaps and foster best-practice for the management of water supplies; this includes integrating groundwater and surface water management. Moreover, through its national hydrogeological framework, local water managers have received training to precisely monitor changes to groundwater resources (from a document produced by the Australian Government’s Pacific Adaptation Strategy Assistance Program (PASAP 2016).


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delivery during droughts and floods, toward piped treated potable water. An estimated half of the distribution system will be gravity-based systems that require no energy use.

33. The construction of the STP will include (a) primary treatment units operating through two facultative lagoons operating in parallel which allow for the sludge to settle and digest and (b) a minimum of two secondary lagoons operating in series. By 2025, the plant is expected to receive a septage inflow of 900 m3 per year covering the estimated demand. The collection, desludging, and transportation of the septage will be by trucks to be financed under the project and managed by the service provider in Baucau.

34. The construction of the community-based decentralized sewerage network and treatment systems will include a combination of a simplified sewerage network (constructed using smaller diameter pipes laid at a shallower depth and at a flatter gradient than conventional sewers) and of simple treatment facilities. Simplified sewers are designed for the scale of a housing area involving the end users in planning and implementation. Treatment facilities are based on simple design, non-dependent on energy, reliable, long-lasting, tolerant toward inflow fluctuation, and low in capital and O&M costs. Standard treatment applications are based on four basic steps: flocculation, sedimentation, and anaerobic and aerobic treatment using different filters and ponds. Septage from these treatment facilities will be collected and safely treated at the STP.

35. Decentralized sewerage network and treatment systems will be managed by dedicated community-based organizations, building on regional experience. Communities will participate in the design and O&M of the systems with technical support from the service provider and the municipal authorities. Communities will take charge of O&M costs through the payment of a sanitation fee. The project will provide training to the communities, the water and sanitation service provider, and municipal authorities to ensure appropriate design and sustainable services arrangements are in place.

36. The construction of a resilient STP and community-based decentralized sewerage network and treatment systems will reduce the impact of floods, by reducing the localized contamination of water bodies by unmanaged fecal sludge.

Component 2: Infrastructure Sustainability Support (Cost: US$4 million; Financing: IDA - US$3 million; Counterpart financing - US$1 million)

37. The new water supply system and STP will be operated by the service provider in charge of WSS services in the Municipality of Baucau. The decentralized sewerage network and treatment systems will be managed by a dedicated community-based organization, with oversight from the Baucau service provider.

38. This component is designed to ensure the sustainability of water and sanitation infrastructures financed under Component 1. This component will finance the supervision of the construction contract and provision of technical assistance, capacity building, training, and goods for (a) designing and implementing a Community Engagement Plan to secure community participation, buy-in, and support for the project’s sustainability; (b) strengthening service provider’s capacity, systems, and procedures to manage, operate, and maintain the new water supply system and the STP according to international quality standards; (c) preparing a rolling five-year Sustainability Improvement Plan to ensure the technical and financial sustainability of the investments financed under the project; (d) supporting the municipal authorities and service provider to develop and implement the appropriate institutional, regulatory, and

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financial arrangements for FSM; and (e) supporting beneficiary communities and community-based organizations to design, operate, and maintain, with support from the service provider, a sustainable decentralized sewerage network and treatment systems. The cost of the supervision of the main construction contract and embedded technical assistance and capacity-building activities to support infrastructure sustainability is estimated at US$4 million.28 Specific detailed activities to be implemented are as follows:

• Community engagement. Technical assistance and capacity building will be provided to the service provider in Baucau to design and implement a Community Engagement Plan to secure community participation, accountability, buy-in, and increased user willingness to pay for the services. Specific activities will include public consultations, focus groups, and household discussions to address a wide range of issues, including water conservation, FSM, water chlorination, connection policy, metering, and tariffs. The Community Engagement Plan will be critical for the smooth implementation of water tariffs, as introducing tariff is normally a difficult undertaking and even more difficult as tariffs have never been applied since 1975 in Baucau. As part of this activity, a substantive female participation (at least 50 percent) will be promoted in community discussions, consultations, and training events. In addition, adequate number of women trainers will be hired and both male and female trainers will be trained on gender sensitivity and inclusion.

• O&M of the infrastructure. Technical assistance, capacity building, and training will be provided to improve the service provider’s capacities, systems, and procedures to operate and maintain the water supply system and the STP in a technically and financially sustainable way. The scope of activities is harmonized with and complements the sector reform road map implementation, covering priority topics such as (a) preparation of service provider business plans; (b) preparation of a human resources development plan; (c) development of a customer database; (d) establishment of a billing and collection system; (e) establishment of a management and operational monitoring system; (f) design and implementation of a customer relations management system; (g) establishment of an asset management system; (h) development of planning and budgeting tools; and (i) training on water network management (including NRW management and energy efficiency), water quality improvement, water sources protection, commercial management, and customer relations.

• Financial sustainability. Technical assistance will be provided to the service provider in the municipality of Baucau to prepare a rolling five-year Sustainability Improvement Plan to ensure the technical and financial sustainability of the infrastructures financed under the project. The plan will outline actions to (a) increase the service provider’s revenues (through efficient volumetric metering, billing, and collection and the increase in the customer database) and (b) reduce possible operations costs through efficiency measures aiming at a gradual financial equilibrium and a steady reduction of dependency on central government subsidies. The Sustainability Improvement Plan will also consider a medium-term transition to the national public utility service provision, following the sector reform road map. As indicated previously, the reform road map foresees the preparation of a detailed water tariff study based on a detailed forecast of future O&M costs, with the objective of ensuring the financial sustainability of the future utility. Before the completion of construction activities,

28 Master Plan - Second District Capitals Water Supply Project - January 2016.


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the project will review the tariff recommendation from the reform road map and, if needed, will carry out complementary analyses and socioeconomic surveys to refine the water tariff in Baucau.

• Institutional, regulatory, and financial arrangements for FSM. Technical assistance and capacity building will be provided to support the municipal authorities and the service provider in Baucau to prepare and implement a comprehensive FSM plan, including appropriate institutional, regulation, and financing arrangements for fecal sludge collection and transport, treatment, and reuse to ensure a safe and sustainable FSM service chain in Baucau.

• Community participation for decentralized sewerage network and treatment systems management. Technical assistance and training will be provided to the beneficiary communities and community-based organizations to design, operate, and maintain, with support from the service provider, sustainable decentralized sewerage network and treatment systems.

39. This component will support activities to ensure sustainability and resilience of WSS services considering climate change-exacerbated risk of extreme heat, droughts, and floods. This will include professional management and efficiently operated services (based on training, technical assistance, and so on) to carry out an effective water demand management strategy that includes NRW, energy efficiency, water pricing, water conservation, enhanced water resources monitoring, preventive maintenance, and asset management, among other activities. This will contribute to reduce both the risk and impacts of service disruptions related to climate shocks. Moreover, a well-maintained, efficiently, and professionally operated STP will reduce the impact of floods by reducing the local communities’ exposure to

contaminated floodwaters.

Component 3: Institutional Strengthening and Project Management (Cost: US$3 million; Financing: IDA - US$1 million; Counterpart financing - US$2 million)

40. This component aims both at strengthening sector institutions’ capacity to implement project activities and support sector institutional reforms to improve service delivery and promote long-term sustainability of the investments. This component will finance operational costs associated with (a) technical, environmental, and social supervision of subprojects’ implementation (including the implementation of the Gender Action Plan [GAP]); (b) project audits and monitoring and evaluation activities under the project; and (c) provision of administrative and operational support to the Project Management Unit (PMU), including personnel and equipment for its operationalization.

41. In addition, this component will finance activities to support MPW-led sector stakeholders’ collaborative platform to develop and implement the sector institutional reform, including the establishment of the national public water and sanitation utility and the regulatory agencies for WSS and water resources. Specific activities to be financed under the project to support the implementation of the sector road map will be defined once the reform process is approved by the Council of Ministers in 2020. General activities envisaged to be supported by this component could include, among others, staffing development and capacity building; the development of utility O&M management system; the establishment of Standard Operating Procedures (SOPs), performance-oriented human resources policies, and billing policies and procedures; and the preparation of the national utility business plan.


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42. Project-related greenhouse gas (GHG) emissions analysis. The project’s total net emissions are 6,649 metric tons of carbon dioxide equivalents (tCO2-eq) for the 20-year economic lifetime, with gross emissions of 24,371 tCO2-eq and average annual net emissions of 333 tCO2-eq.

• The net emissions for the water supply investment of the project are estimated at –10,988 tCO2-eq over the 20-year life of the water supply project, an average net emission of –549 tCO2-eq annually, and gross emissions of 3,117 tCO2-eq. The expected elimination of trucks for delivery of water is expected to lead to the net emission reductions mentioned earlier, while the use of zero-emission gravity-fed systems for half of the distribution system limits the component’s net emissions.

• For the STP, the net emissions are estimated to be 955 tCO2-eq over the 20-year economic lifetime, given that it is initially designed to collect, transport, and treat septage only from schools, hospitals, government and commercial offices, hotels, and households that have septic tanks, with average annual net emissions of 25 tCO2-eq and gross emissions of 955 tCO2-eq.

• The community-based decentralized sewerage network and treatment systems have estimated net emissions of 17,133 tCO2-eq across a 20-year period, while the average annual net emissions are estimated at 857 tCO2-eq and the gross emissions are 20,299 tCO2-eq.

43. Project cost and financing. The total IDA support to the GoTL under the Water Supply and Sanitation Project will be SDR 18.2 million (US$25 million equivalent). The estimated project costs by component are shown in Table 1. Counterpart funds from the GoTL will be included in the 2021 budget.29The Municipality of Baucau is not expected to provide any counterpart funds.

Table 1. Estimates of Project Costs and Financing, by Components (US$, millions)

Components IDA Credit Counterpart Total Costs % of IDA Financing

1. Water Supply and Sanitation Infrastructure Development

21 2 23 91

2. Infrastructure Sustainability Support 3 1 4 75

3. Institutional Strengthening and Project Management

1 2 3 33

Total project costs 25 5 30 83

Note: The counterpart funds for Component 1 will be provided by the Infrastructure Fund while the counterpart funds for Components 2 and 3 will be provided by the MPW

C. Project Beneficiaries 44. The population of the capital city of the municipality of Baucau will benefit from increased access to safely managed drinking water and sanitation services. First, by 2026, 25,000 people across the capital city of the municipality of Baucau will have house connections and will enjoy continuous and safe drinking water supply at a satisfactory pressure level and complying with national quality standards. Second, an estimated 500 households in Baucau will benefit from access to safely managed sanitation services through the community-based decentralized sewerage network and treatment systems, and there is the

29 For 2020 implementation, IDA credit financing will suffice for the initial activities.


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prospect of scaling up this sanitation model to other Baucau areas and other cities in the future. Third, all residential and institutional owners of septic tanks will be able to have their septic tanks’ sludge safely collected, transported, and treated. Finally, service provider staff in Baucau will benefit from the project through technical assistance, capacity building, and training to improve their operational performance. As an indirect benefit, the water and sanitation services model that will be developed in Baucau could also be replicated to other cities in the country through the planned new national water utility.

D. Results Chain 45. The main challenge that the proposed investments would address is the lack of adequate WSS services for the population of the Baucau, including strengthening the sector institutions that manage these services.

46. The theory of change is presented in figure 1. The construction of the water supply system will provide access to continuous and safe water supply to all the households in the project area. The construction of an STP will ensure safe management and treatment of on-site septic tanks’ fecal sludge for the area it serves. The construction of community-based decentralized sewerage network and treatment systems will increase access to safely managed sanitation for households located in the most urbanized areas of the city. These proposed investments will cumulatively help increase access to safely managed drinking water and sanitation services in the Municipality of Baucau. To ensure sustainability of the infrastructure (that is, continued access to good quality services), the project will support (a) the implementation of a Community Engagement Plan to secure community buy-in and increase users’ willingness to pay for services; (b) strengthening of the water and sanitation service provider’s capacity, systems, and procedures to operate and maintain the WSS infrastructure; and (c) preparation of a Sustainability Improvement Plan to ensure long-term technical and financial sustainability. Support will be also provided to the MPW to improve the implementation of its institutional sector reforms which will contribute to improved service delivery and long-term sustainability of the sector investments across the country. These activities will contribute to the overall GoTL’s strategy to increase access to improved water and sanitation services in Baucau. The investments will also improve Baucau’s resilience to climate change.

47. The success of the project is premised on the assumptions that (a) the authorities are willing to commit to introducing tariffs and subsidy for services delivery, (b) the beneficiaries will understand the need for tariffs and contribute for payment of service provision, (c) the authorities are committed to operate and maintain the WSS infrastructure in a manner which will ensure long-term sustainability of the service delivery, and (d) the sector reforms will be implemented by 2021 as expected.


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Figure 1. Project Theory of Change


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E. Rationale for Bank Involvement and Role of Partners 48. The World Bank’s engagement in Timor-Leste’s water and sanitation sector adds value by bringing in global experience of water and sanitation service provision, infrastructure development, and associated activities and measures to ensure services sustainability. The World Bank project will also support the GoTL and develop its capacity to address environmental and social management issues related to WSS services provision. Good practices to be developed in Baucau through the project interventions could be replicated in other areas of the country. Moreover, this project allows the World Bank to support the sector reforms by providing global best practices for sector structuring and water utility establishment.

49. The World Bank project will collaborate with the MoH to ensure synergies and convergence between interventions in the municipality of Baucau to adequately address the multisectoral nature of stunting. The MoH with support from UNICEF is implementing in parallel and in the same area of the project a comprehensive WASH, Health, and Nutrition Social and Behavior Change Communication (SBCC) program aiming at improving early childhood development. The WASH subprogram aims at eliminating open defecation and sustaining ODF status; promoting improved toilets construction; and ensuring that the population (a) builds and uses a hygienic toilet, (b) ensures safe disposal of child and infant excreta, and (c) practices improved hygiene behaviors, particularly handwashing with soap and safe water management. The health subprogram aims at training health workers and midwives to tackle maternal and newborn health issues, including immunization, malnutrition detection, and management of severe acute malnutrition; management of diarrhea and pneumonia cases; and the safe delivery of babies. The nutrition subprogram supports the Mother Support Groups (MSGs). The role of the MSG is to support the mothers to adopt recommended infant and young child feeding practices including breastfeeding promotion and complementary feeding practices and in providing equipment, supplies, training, and infrastructure to deliver essential nutritional information, counseling, and support to under-five children, mothers, and adolescent girls. Collaboration will include joint supervision visits, advocacy workshops, and knowledge exchange activities to be agreed with the MPW and MoH.

50. The World Bank project will also collaborate with MPW and other donors to advance the implementation of the SIP (2018–2030), which includes infrastructure development in Dili and 12 municipal centers and institutional reforms. The World Bank, in collaboration with other development partners including the ADB, DFAT, JICA, and Millennium Challenge Corporation (MCC), is supporting the GoTL to modernize the sector institutional framework. The implementation of the sector reforms road map, including the creation of an autonomous and accountable national public water utility and independent regulator, will allow technical, financial efficiency, and sector governance improvements by supporting the implementation critical activities, as mentioned in Component 3. The institutional activities under the project will draw on national-level discussions that are under way for the SIP.

F. Lessons Learned and Reflected in the Project Design 51. Improving water utility performance is neither quick nor easy. Improving performance requires developing virtuous cycles that stop downward spirals and create credibility, accountability, and autonomy. Recent studies30 show that the actions taken by countries and utilities that did manage to

30 Bender. 2017. Introducing Commercial Financing into the Water Sector in Developing Countries.; Kolker et al. 2016. Financing Options for the 2030 Water Agenda.; World Bank. 2017. Crowding-in Commercial Finance in World Bank Water and Sanitation


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improve their utilities’ performance tended to implement the same key actions in roughly the same order. In most cases, the utilities established a baseline in the early stages of the turnaround as a key input for their business plan. Utilities under severe financial distress tended to focus first on achieving financial sustainability by either increasing revenues or reducing costs. Next, they set objectives through multiyear targets incorporated into sustainable business plans. In almost all cases, the first actions in their business plan involved improving human resource and management information systems. The World Bank-financed Honduras Water and Sanitation Sector Modernization Project (P103881) promoted the creation and strengthening of municipal water utilities through a coordinated and gradual approach of institutional reforms, capacity building, and improvements in the service provision. Therefore, technical assistance, capacity building, and training will be systematically provided to the service provider in Baucau to develop its capacity to implement the required actions to improve its technical, operational, and commercial performance, in parallel to the works to substantially improve the quality of the WSS services delivery.

52. Community-based decentralized sewerage network and treatment systems could be an effective approach to improve sanitation in poor communities31 as long as local context and existing capacities are carefully considered. The simplified wastewater collecting network and treatment system coupled with participatory planning and community management ensure a high rate of household connections, as demonstrated by the World Bank-financed Nicaragua Greater Managua Water and Sanitation (P110092), which had a solid community engagement process applied for simplified sewerage development. Capital and O&M costs are lower than conventional sewerage. The sewerage system can be easily extended as the community grows. However, sustainable services require professional design and construction, enough water for flushing, and regular maintenance as blockages arise more frequently than with conventional gravity sewer and necessitate regular desludging of tanks. Finally, while community management seems appropriate, experience shows that such infrastructure needs a comprehensive community capacity-building program through the project implementation cycle and continuous technical support and oversight from the local service provider and/or municipal authorities in supporting community-based organizations to deliver sustainable services.32 Therefore, the project will support beneficiary communities to actively participate in the design of these systems and provide training to the community-based organizations to operate and maintain these systems with oversight from the municipal authorities.

53. The role of women is particularly important in creating demand for higher levels of water and sanitation services. Women play an important role in community mobilization for creating awareness and acceptance of construction of new WSS systems. As such, they are also key stakeholders to influence the willingness to pay for better water and sanitation services. The women’s contribution in demand creation for better water and sanitation services must be considered to increase the overall services sustainability. Community engagement tools such as participatory planning and consultations, with adequate representation of women, will be an important mechanism under Component 2.

Operations - A How-to Guide for World Bank Task Teams; and Mumssen, Saltiel, and Kingdom. 2018. Aligning Institutions and Incentives for Sustainable Water Supply and Sanitation Services. 31 SANIMAS (Sanitasi Berbasis Masyarakat or community-based sanitation) was initiated in 2003 with focus on community empowerment to improve the access to sanitation, especially communal systems (decentralized wastewater treatment facilities), in urban densely populated areas. 32 Water Environment Partnership in Asia. 2013. “Community-based Sanitation Lessons Learned from SANIMAS Programme in Indonesia.”

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54. Addressing policy, institutional, and regulatory issues and political economy is critical for water and sanitation sector reform. Despite large investments in the WSS sector by governments and their development partners over the last 10–15 years, the sustainable delivery of WSS services in developing and emerging economies has not significantly improved.33 A holistic approach to the issues affecting the sector is needed, such as establishing and/or improving the sector’s institutional, financial, and governance arrangements in parallel to improving the quality of the service provided to the population through addressing the utilities’ operational performance issues. Moreover, the approach needs to be grounded in countries’ contextual realities, drawing lessons from approaches that were successful or failed to achieve specific objectives. Therefore, the project will support the service provider in Baucau to develop its capacity, and in parallel, in collaboration with other development partners, support the development and implementation of sector structural reforms to improve the long-term sustainability of services across the country.

III. IMPLEMENTATION ARRANGEMENTS

A. Institutional and Implementation Arrangements 55. The Administrative Council of the Infrastructure Fund (Conselho de Administração do Fundo das Infra-Estruturas, CAFI) will have the overall oversight responsibility of the project implementation. The MPW will be the executing agency, with DGAS responsible for implementation of the project, consisting of planning, contract administration, financial management (FM), supervision of environmental and social safeguards, and monitoring.

56. A PMU will be established in Dili under DGAS to implement the project activities with adequate staff and funds throughout the implementation of the project. The establishment of the PMU is a legal covenant. Key PMU professional staff will include, among others, a coordinator, a water supply engineer, an urban sanitation specialist, a safely managed sanitation specialist, a water operation specialist, a social specialist, an environmental specialist, a gender specialist, an FM specialist, a procurement specialist, and monitoring specialists all of whom with experience, qualifications, and terms of reference satisfactory to the Association. Effective coordination between the PMU and the Baucau municipality is pivotal for the success of the project, and clear roles and responsibilities for each have been agreed and will be reflected in the Projects Operations Manual (POM).

57. The MSA will support project implementation by promoting efficacy, efficiency, and quality of drinking water and sanitation services and by ensuring that the municipal authorities of Baucau contribute to the implementation of the project as needed. The MSA and MPW have agreed on the roles and responsibilities of the Baucau municipality in the implementation of the project. Details will be specified in the POM.

58. The municipality of Baucau, through the WSS service provider (currently SMASA), has an important role to play in the project implementation in relation to (a) strengthening beneficiaries’ participation and support to the project and building consensus at the community level, whenever

33 Soppe, Gerard, Nils Janson, and Scarlett Piantini. 2018. Water Utility Turnaround Framework.


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necessary; (b) promoting and regulating the management of fecal sludge; and finally (c) supporting and overseeing the service provider.

59. The existing Inter-ministerial Technical Working Group, co-chaired by the MPW and MoF that includes the MSA, MoH, Ministry of Education, Ministry of Planning and Strategic Investments, and Secretary of State for Environment to coordinate WSS development interventions, will provide overall policy guidance during project implementation.

60. The PMU will implement the project following the POM, which contains detailed information on the project implementation arrangements and processes, including procurement, FM, and environmental and social management and relation between functions of the PMU and Baucau municipality.

B. Results Monitoring and Evaluation Arrangements 61. To ensure effective monitoring and evaluation, several measures will be taken. Members of the PMU will be required to have skills in data collection and reporting. This expertise will be bolstered through advice from the World Bank through the provision of reporting templates and feedback on reports prepared by the PMU.

62. DGAS will issue biannual progress reports that will be due the last day of June and December each year. These will be submitted to the World Bank within 30 days of the end of each calendar semester. A midterm review will be prepared in mid-2023 (expected), and an Implementation Completion and Results Report will be completed within six months of the end of the project implementation.

63. In addition, the PMU will support the service provider in Baucau in developing its monitoring system, which will be later also used by the national water utility to report on the technical, financial, and commercial management. A set of indicators will be defined, agreed upon, and reported on a yearly basis.

C. Sustainability 64. The borrower’s commitment to sustaining the infrastructures and the service provision is ensured by the strong alignment between the project’s investments, the SIP, and the institutional reforms recently initiated to improve service delivery and sector governance across the country. Overall, the project’s financial sustainability will be achieved through the implementation of critical measures, by (a) designing project infrastructure in a climate-resilient manner considering the long-term impacts of climate change on water resources and demand; (b) strengthening the service provider’s operational efficiency to minimize operating costs and increase its capacity to collect revenues, building on Component 2 activities; (c) expanding services to new customers to increase the revenue base of the service provider; (d) promoting a water tariff allowing to sustain the recovery of O&M costs and building on the tariff-setting activities undertaken under the national reform road map; (e) implementing a Community Engagement Plan to stimulate users’ willingness to pay for improved services and acceptance of metered billing and tariff payment; and (f) achieving further progress on the planned sector reform that would set the basis for long-term service provisions by establishing a professional nationwide national utility and regulation arrangements. After project completion in 2026, the service provider and community-based organizations in Baucau, with support from the national and municipal authorities, are expected to build on this strengthened capacity and operate the systems without external support.


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65. In addition to the activities listed above, the GoTL will be required to

(a) Prepare, by December 31, 2022, a rolling five-year Sustainability Improvement Plan, outlining how the service provide in Baucau will improve its operational and financial status, including targets and necessary measures to meet the targets, in a manner acceptable to the Association;

(b) Update, by December 31 of each year commencing on December 31, 2023, in accordance with the terms of reference acceptable to the Association and furnish to the Association for review and comments, its draft updated Sustainability Improvement Plan;

(c) Take all necessary actions to carry out its Sustainability Improvement Plan as prepared or updated; and

(d) Cover all operating costs for the service provider in Baucau which are not covered by tariffs.

IV. PROJECT APPRAISAL SUMMARY

A. Technical Analysis 66. The proposed project activities are based on the Water and Sanitation Master Plan prepared in 2016. The World Bank has reviewed the master plan and considers it acceptable for the design of this project. The master plan’s technical design and estimated construction costs will be reviewed during the preparation of