PROJECT COMMITMENT-APPRAISAL DOCUMENT - World …documents.worldbank.org/.../663870PAD0P1110BA0Com… · Web viewExchange rate: YR 200 = US$1 as ... has set a target of full cost

GPOBA Commitment Paper OBA Water Yemen. March 30, 2010

PROJECT COMMITMENT-APPRAISAL DOCUMENT

Fact Sheet

Project Name: Water for urban centers - Output-based service provision by private operators in Yemen

Scope: Expanding access to peri-urban water supply through private operators developing and operating small water networks under a build-own operate contract initially in four areas (Phase 1).

Total project costs: Total investment costs Phase 1: US$3,433,800 (without supervision, output verification, and other consulting) with US$665,980 from GPOBA and US$1,586,500 from GoY/IDA. Total projected investment costs (Phase 1 and 2): US$24,175,300, with US$4,712,000 from GPOBA and US$11,100,000 from GoY/IDA.

Total GPOBA funding requested: US$5,000,000 Window 3 (Phase 1): US$785,980 (US$665,980 for subsidy funding and US$120,000 for

the IVA as recipient-executed activity) Window 3 (Phase 2): US$4,050,000 Window 1: US$168,000 to include (1) workshop/roadshow for bidders, (2) capacity

building for local operators, and (3) households surveys Supervision (Bank/GPOBA): US$100,000

GPOBA funding: financed by GPOBA contributions by DFID.

Additional funding sources: IDA and Government of Yemen (GoY) for Phase 1: US$1,586,500 and total commitment

of US$11,100,000 (US$9,100,000 from IDA and US$2,000,000 from GoY). Users: US$125,280 through 50% of connection cost for Phase 1 and estimated

US$879,000 in total (users required to pay 10% up-front). Private operators: US$1,066,000 for Phase 1 and estimated US$7,484,000 in total.

Outputs: (1) Water supply systems (wells, pumps, storage) and (2) main network and connections to water network. The total subsidy amount will be split on average 40% for output (1) and 60% for Output (2). The subsidy for output (1) will be paid in full upon verification of a functioning deep well. The subsidy for output (2) will be paid on a per connection basis as follows: 80% upon verification of the physical connections and 20% upon verification of three months service delivery.

Expected beneficiaries: 4,500 households in Phase 1 areas (38,000 people) and estimated 30,000 households (210,000 people) by 2014.

GPOBA subsidy efficiency: US$19 per person (without supervision and verification) and overall GoY/IDA per capita subsidy of US$42.

IRR and ERR: Over 15% IRR for private operators. Cost savings on monthly household water bills for users ranging from $21 to $52 and ERRs ranging from 50% to 600%

Targeting: Low income households in peri-urban areas currently not served by the water network or without a reliable water network.

Grant recipient: Government of Yemen who will delegate the project management to the Project Management Unit (PMU) of the Urban Component of the World Bank-funded Water Supply and

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Sanitation Project (WSSP) (currently the PMU of the Urban Water Supply and Sanitation Project (UWSSP)).

Financial management: GPOBA subsidies disbursed to private operators through a PMU-managed GPOBA Designated Account. FM clearance complied.

Disbursement: Subsidy paid over 4 years (until June 30, 20141) upon outputs (1) and (2) above realized and independently verified. Disbursement clearance complied.

Procurement: Private operators selected competitively for 15 year design-build operate contracts by PMU using acceptable Bank procurement rules, based on a fully satisfactory technical offer and the lowest subsidy. Procurement clearance complied.

"Environmental clearance: The project is classified as Category B although the associated IDA (UWSSP) project is category A. The more limited scope of the OBA project justifies the different classification. However the environmental and social safeguards framework and RPF developed under the UWSSP will be applicable to the OBA project as the same PMU will be in charge of both projects. Based on this understanding the Safeguards clearance has been obtained from the Regional Safeguards Advisor."

Government endorsement: Yes Ministry of Environment and Water Resources Ministry of Finance

Exchange rate: YR 200 = US$1 as of September 2009

1 Administrative Agreement with DFID closes on December 31, 2014.

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Executive summary

Project name: Water for urban centers - Output-based service provision by private operators in Yemen

The project aims to provide a viable alternative approach to increase the coverage of the water supply in urban and peri-urban areas, and to leverage private sector management skills and financing to complement the public sector in managing and funding urban water services. The project will use an OBA approach to provide partial subsidy to poor households who cannot afford the cost of connecting to the piped network, over four years, upon outputs being certified by an independent verification agent (IVA). The project will involve rehabilitation of existing infrastructure and development of new wells and networks, benefiting 30,000 households (210,000 people). The project targets low income households in peri-urban areas currently not served by the water network or without a reliable water network with inadequate water quality. The total estimated cost of is US$26 million.

Originally proposed as a US$1.3 million pilot in Al Qabel Village, the GPOBA operation was later integrated in the larger multi-donor funded Water Sector Support Program (WSSP), which supports the implementation of the government’s National Water Sector Strategy and Investment Program (NWSSIP) under a Sector Wide Approach for the water and wastewater sector. The World Bank (IDA)’s contribution to the WSSP’s urban component (UWSSP) is $18.1 million. In the expanded scheme under the UWSSP, GPOBA funding of $5 million now leverages US$2 million from the Government and US$9.1 million from IDA, a ratio greater than 1:2. Four initial areas have been selected for a first phase of investment in Sana’a City, Ibb City, Dham-ar Governorate and Hajah Governorate, benefiting 38,000 people.

Privately Managed Network Operators (PMNO) will be contracted for a period of 15 years by the LC currently operating in the service area to develop, and operate, maintain and manage a water supply and distribution network. The concession / BOOT contracts will be bid out based on lowest subsidy and the period could be extended if requested by the LC or a shorter period could be adopted if the water resource may be found insufficient for the full 15 year contract. At the end of the contract, unless renewed, the water supply network will transfer to the LC upon payment of appropriate compensation to the operators. The Project Management Unit (PMU) of the UWSSP/WSSP will coordinate the tender process, working closely with the Project Implementation Unit (PIU) in each identified area/local corporation. The PMNOs will charge a tariff that will cover O&M, depreciation of their own investments, interest on debt and profit. The tariff will be regulated by contract while quality standards and customer service standards will be regulated by the LC in consultation with the local government.

As capital costs to deliver the service are extremely high in Yemen (drilling a deep-well could cost anywhere between $250,000 and $500,000), intermediate outputs will be established to reduce the financial burden on the PMNOs. These intermediate outputs will still be defined in terms of serviceability of the assets delivered, such as functioning deep-well providing an appropriate flow of water. Final outputs will be defined as connections and three months of service. Subsidies will be paid on the delivery of the intermediary and final outputs, thus putting operational and financial risk on private providers.

For the four initial areas, the total investment is estimated at $3.4 million. The total subsidy amount will be split on average 40% for intermediate outputs and 60% for network and connections. For the intermediate outputs, a capital subsidy of 74% of the corresponding capital costs on average has been determined. The remaining 26% of capital costs will be paid by the PMNOs and recouped through the tariff. The subsidy for these outputs will be paid quarterly in full upon satisfactory completion, and respecting the ratio of funding of 1:2 for GPOBA and IDA/GoY funding. The per-connection subsidy covering networks and connections will be on average 65% of the

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corresponding capex. Eighty percent of that per-connection subsidy will be paid based on the number of connections built and 20% of the subsidy will be paid three months later after evidence that connections have received adequate service. As this subsidy covers 50% of the connection fee, the remainder of that fee will be paid by the users as follows: 10% upfront and remainder through lump sum or over a 36 months period.

All subsidy funds will be managed through the GPOBA Designated Account. This account will be opened and managed by the PMU and will be used solely to finance activities under the GPOBA project. This implementing arrangement allows for a rapid scale-up of Phase 1 to other areas in Yemen, based on the same model. Further suitable areas have been pre-identified for the follow-up phase, including areas in Ibb, and additional towns will be identified during the first year of implementation following similar selection criteria. This replication will be allowed through the capacity building of the LCs in the project areas (implemented under UWSSP and WSSP).

For the Phase 1 schemes, the F-IRR is 15% for the PMNOs. From the perspective of the users, cost savings on monthly household water bills range from $21 to $52 while health benefits and avoided costs of healthcare are also very high.

Recognizing the potential risks in the proposed scheme, and the lessons from similar GPOBA projects (e.g. Mozambique), the team submitted the above design as basis for discussion with the GPOBA Panel of Experts on December 16, 2009. The proposal was nevertheless endorsed for commitment. This commitment paper reflects the recommendations from the Panel at the December meeting.

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Clarifications sought by the PoE during eligibility meeting (April 23, 2008)

1. The nature and scope of the project. The TTL confirmed that this was a green field project covering the development of the supply source (wells), tanks, distribution network and household connections. The proposed subsidy of USD 1.4m would contribute to the cost of all the above scheme components. The overall scheme is expected to cost US$ 2m. Update/Reply: DFID subsequently approved the eligibility of the proposed pilot "Al Qabel Village water supply" in September 17, 2008 for an amount of US$1.3-1.4 million. However, based on discussion with the government, the GPOBA project was then integrated in the larger Yemen Water Sector Support Program, leveraging the GPOBA funds as follows: US$2 million from the Government, US$9.1 million from IDA, and US$5 million from GPOBA, and an addendum was communicated to DFID in September 2008. The overall scheme is now expected to cost US$25.6 million. During the feasibility study, four initial areas were selected for the first Phase of implementation within the cities/governorates of Sana’a, Ibb, Dhamar, and Hajah. The projects will involve rehabilitation of existing infrastructure, and development of some new wells.

2. Private sector capacity/interest. The Panel asked what the small scale private sector was doing in the water sector. The TTL confirmed that there was already some activity (well owners and water vendors) and that a number of potential contractors and investors had expressed interest in the OBA scheme. A study was currently being undertaken on the private sector which was due to be completed sometime in the next 2-3 months. Update/Reply: There is considerable small and medium scale private sector activity in drinking water distribution in Yemen. In Taiz, one of the largest entrepreneurs in Yemen is negotiating to provide bulk water to local water and sanitation corporation. A study of private local water service providers in Sana’a is now underway and is expected to be completed by end January 2010. The findings will be presented at a workshop on public-private participation in water and sanitation service provision in February. The workshop may also include a session describing the OBA project.

3. Institutional/Regulatory arrangements. It was confirmed that a law/bylaw will be passed for the project and that a regulator would be established. Tariffs are likely to be in line with exiting tariffs for Sana’a, which are around USD 0.7/m3. Tariffs at this level will be sufficient to cover O&M and capital investment. The only problem with tariffs is that they are not being adjusted (increased) as required by regulation due to political pressures.Update/Reply: Current regulation provide for tariffs to be established based on actual costs for each LC. The National Water Supply and Sanitation Investment Plan Update has set a target of full cost recovery including depreciation by 2015. However, political pressures continue to inhibit implementation of tariff policies. Under the proposed scheme, the tariff will be regulated by the contract.

4. Government support. The Panel raised the issue of supervision and the role of the government – it will be important that the government remain sympathetic to private sector participation. The TTL reported that the government is very supportive and in a meeting today had confirmed it would like to undertake 2 additional projects on an OBA basis. GPOBA suggested, since it would prefer a larger scheme, that the TTL consider increasing the scope of the scheme to include 2 or 3 additional locations, and include these locations in the TA feasibility/scheme design study.Update/Reply: The proposal has now been expanded to include a total of four locations during Phase 1, with the potential to expand during Phase 2.

5. Potential up-scaling and donor support. The TTL confirmed that the Bank was working on a SWAp (Sector Wide Approach) with other donors, which could lead to the development of an OBA fund. Indeed, representatives of the Yemen government were proposing to visit Tanzania on 9/10 July to investigate the proposed SWAp/OBA fund in that country. Since Yogita is working on

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the Tanzania scheme it was suggested that the TTL liaise with Yogita on the proposed trip arrangements (Yogita may be in Tanzania at the time).

6. Procurement and scheme costs. The POE wanted to ensure that there was a competitive process so as to ensure value for money/subsidy efficiency. It was confirmed that the intention was to bid out the project(s). The TTL had put the scheme proposal together using a unit cost estimate of USD 625/connection (based particularly on LAC experience), which is already low compared with KfW’s unit costing for Yemen of USD 2,000 for water supply and USD 5,000 for sanitation. The TTL will investigate unit costing in Yemen further as part of the detailed scheme design stage.Update/Reply: The feasibility study estimates the average capex per connection among the four initial locations proposed for Phase 1 to be US$610.

The Panel saw the project as a classic, straight forward scheme, but reminded the TTL that he would still need to produce a detailed scheme design which set out, inter alia: the role of the private sector; the project’s demonstration effect and up-scaling potential; the risk allocation to the private sector; the bidding procedures; and a sound economic analysis.Update/Reply: The feasibility study has responded to these requirements.

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Acronyms

IVA Independent verification agent

LC Local Water and Wastewater Corporation

MWE Ministry of Water and Environment

PMNO Privately managed network operator

PMNO Privately managed network operator

PIU Project Implementation Unit [of the LC]

PMU Programme Management Unit

O&M Operations and maintenance

NWSSIP National Water Sector Strategy and Investment Program

UWSSP Urban Water Supply and Sanitation Project

WSSP Water Sector Support Program

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Contents

Contents

A. STRATEGIC CONTEXT AND RATIONALE 2A.1 Country and sector issues 2A.2 Rationale for GPOBA involvement 2A.3 Higher level objectives to which the project contributes

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B. PROJECT DESCRIPTION 2B.1 Project development objective and key indicators 2B.2 Project description 2B.3 Economic and financial analysis 2B.4 Lessons learned and reflected in the project design 2B.5 Alternatives considered and rejected 2

C. IMPLEMENTATION 2C.1 Milestones for project implementation 2C.2 Partnership arrangements 2C.3 Institutional and implementation arrangements 2C.4 Monitoring and evaluation and reporting 2C.5 Sustainability 2C.6 Critical risks and possible controversial aspects 2

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A. STRATEGIC CONTEXT AND RATIONALE

A.1 Country and sector issues

The poorest country in the Middle East North Africa region, Yemen is an extremely water scarce country. With a population of around 22 million people it has one of the lowest rates of freshwater availability per capita in the world (135 m3 per capita per annum), compared to a regional average of 1,250 m3 per capita per annum. There are no perennial rivers. The Government of Yemen (GoY) is striving to address improved water resources management in order to achieve sustainable economic growth, and go as far as possible towards attaining the 2015 Millennium Development Goals (MDG) for the water and wastewater sector.

The urban water sector in Yemen faces many challenges ranging from scarcity of water resources to overexploitation of groundwater. Only 56% of the urban population has access to piped water only 31% to sewerage. Sana’a, the capital city, with a total population estimated at two million inhabitants, illustrates the severity of the access problems with only 45% of the city supplied with piped water through 80,000 network connections.

The GoY is fully aware of the challenges and, in 2005, approved a National Water Sector Strategy and Investment Program (NWSSIP). For urban areas, the Strategy adopts a decentralized approach for resolving the managerial and financial issues for the municipal sector. To put this into effect, Local Water and Wastewater Corporations (LCs) have been created in 13 urban areas, corresponding to about 85% of the total urban population. Policies for cost recovery and tariff adjustments have also been instituted,2 although the application remains inconsistent.

The GoY has requested that the World Bank and other interested development partners coordinate their assistance within a Sector Wide Approach (SWAP) for the water and wastewater sector. The core participating donors which endorse the SWAP—the World Bank/IDA, Germany, the Netherlands and the UK— consider the SWAP as a means to increase the momentum of sector reforms and development in a more integrated way within the NWSSIP framework and have signed a joint declaration to support its implementation. In 2006 and 2007, GoY has conducted two Joint Annual Reviews of NWSSIP’s implementation, pulling in donors as required and more recently, it has updated the NWSSIP to sharpen polices, financing needs and targets (the NWSSIP Update is summarized in Box 1 below).

Box 1: The NWSSIP Reform Policies at a Glance: Urban water supply and sanitation

Creating efficient and accountable utilities(i) completing the decentralization and corporatization process(ii) establishing a regulatory function(iii) phasing in PPP through management contracts and “Utility Support Programs”(iv) developing outsourcing to reduce over-staffing.

Investing in increasing coverage, with priority to the poor(i) maintaining levels of government and donor resource allocation(ii) developing criteria to prioritize investments that target the poor(iii) introducing lower cost technology

Making water and sanitation services affordable

2 The NWSSIP Update sets the target of full cost recovery including depreciation by 2015. To achieve this, the action plan provides for: a loss reduction program; improvements in collection efficiency; alignment of staffing to national benchmarks; and the introduction of replacement cost accounting. It envisages tariff adjustments over time while taking into account the governance structure of LC.

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(i) water charges based on cost recovery, gov’t pays for new schemes, replacements etc.(ii) revising the block tariff system with a pro-poor objective(iii) the poorest of the poor to be supported with by charity and social safety net

In 2008, GoY launched the Water Sector Support Program (WSSP), a partnership designed to support the NWSSIP updated investment program in the context of a coherent water sector strategy, defined by an appropriate institutional structure; a single collaborative work program; a unified budget framework; and a single overall monitoring framework. The SWAP development partners were asked to support the WSSP. The total estimated budget over 5 years is US$340 million, of which GoY is expected to provide US$140 million, IDA US$90 million, KfW US$60 million and the Netherlands US$49 million. WSSP financing is allocated to the NWSSIP investment program on a demand-driven basis according to approved annual operating plans.

The World Bank’s contribution to the urban component (UWSSP) of the WSSP is $18.1 million. The World Bank is also supporting resource management, irrigation improvement, rural water supply and sanitation, and institutional development under the WSSP.

The aim of the UWSSP is to support urban water sector reform and expansion of service coverage. In urban areas of Yemen, water sold by private tanker operators is currently an important source of supply for many households but the prices are typically ten times or higher than the price of piped water, and water quality is often poor and difficult to regulate. Since Yemen’s poor are typically located in the peri-urban areas without access to piped water, the poor tend to suffer disproportionately more than the higher income households. In planning for an expansion of piped networks, private water supply service providers are seen as potentially significant players to address the needs in areas not covered by the LCs, particularly in peri-urban areas of major cities. There are already a few localized successful partnerships such as the city of Ibb where the LC contracted with a private well owner to convert from selling water to tankers for qat3 production to a locally metered private network, and Sana’a where the local private sector supplies half of the market and is the natural partner of the LC.4

The GoY – through the Ministry of Water and Environment (MWE) - has shown great interest to develop privately operated projects in several peri-urban areas of major cities to close the gap of service provision and complement the efforts of the LCs, which are typically not able to expand the service to all potential beneficiaries within their areas of service, by using targeted subsidies to complement user contributions toward the cost recovery of the investments required, thus enabling the participation and financing of the private sector.

A.2 Rationale for GPOBA involvement

GPOBA’s mandate is to fund, design, demonstrate and document Output Based Aid (OBA) approaches to support the sustainable delivery of basic services to those least able to afford them and to those currently without access. GPOBA is thus ideally placed to assist the GoY in demonstrating the feasibility of working with private sector to increase piped water coverage.

3 Qat is a leafy narcotic from the Catha Edulis tree, originated in Ethiopia. Chewing qat leaves is a daily ritual for men in Yemen. When chewed, qat leaves produce feelings of euphoria and stimulation. 4 Further private sector participation for expanding services in Sana’a include: (i) regulating private wells selling water, (ii) regulating the tanker fleet and providing certificates to hygienically suitable tankers, (iii) providing water to tankers from specific municipal wells, (iv) regulating construction of cesspits (technical assistance and specifications), (v) providing sewerage network feeding points for vacuum trucks (against fees), (vi) stimulating private investment in small water networks and eventually decentralized cluster sewerage solutions, (vii) provision of output-based aid approaches, and (viii) promotion of rooftop rainwater harvesting.

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This project meets GPOBA operational criteria, as well as the core OBA principles of: explicit targeting of subsidies increasing accountability of service providers attracting increased private participation in operations and financing providing incentives for innovation and efficiency enhancing sustainability monitoring of results

This project helps to strengthen the role of the local private sector in the water sector. It puts operational and financial risk to the private providers by disbursing subsidies on the delivery of agreed outputs that can be easily monitored – taking into account the existing local capacities.

This project anticipates increased innovation and efficiency in the sector by using competitive tendering for the OBA contracts ultimately lowering unit investment costs, and increasing the potential market of operators in the sector – including participation of private investors and local banks in financing water sector operations.

The project enhances sustainability of private water systems as subsidies are one-off investment subsidies and tariffs, as per NWSSIP, will cover operations and maintenance (O&M) costs plus reasonable profit and depreciation.

Finally, the institutional setting of the project within the UWSSP allows for a funds flow mechanism through the PMU which has the required procurement and financial management capacity, and strong government support. Hence scale-up of Phase 1 can be expected to other areas in Yemen as early as year 2, based on the same model. Further suitable areas have been pre-identified for the follow-up phase, including areas in Ibb, and additional towns will be identified during the first year of implementation following similar selection criteria.

A.3 Higher level objectives to which the project contributes

The OBA project is an integral component (as part of the UWSSP) of the WSSP which provides financing over a five-year period (2009-2014) to support implementation of the government’s water sector program, in particular NWSSIP’s goal to “increase access to water supply and sanitation services.” With the scale-up envisaged after the proposed Phase 1, this OBA project should provide a viable complementary approach to increase the coverage of urban water supply services on a sustainable basis. As such, the project will directly contribute to GoY’s growth, development and poverty alleviation objectives as laid out in the current PRSP and reflected in the new Yemen 2010-2013 Country Assistance Strategy –which mentions expansion of water and sanitation coverage in peri-urban areas as one of its strategic objectives, and the mainstreaming of OBA for water supply.

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B. PROJECT DESCRIPTION

B.1 Project development objective and key indicators

The objectives of the project are: (i) to provide a viable alternative approach to increase the coverage of the water supply and possibly wastewater services in small urban and peri-urban areas, and (ii) to leverage private sector management skills and financing to complement the public sector in managing and funding urban water services.

The main development objective of increased access will be measured by the number of new individual household connections in good working conditions according to specified standards of quality.

To ensure that the project will result in least cost solutions, the project will involve competitive tendering for the private operators that will construct and operate the systems. The extent of success of the competitive tendering will be measured by the resulting lowest subsidy required to deliver the outputs and manage the systems.

Key project indicators will include:

Water supply coverage increase in the project areas Volumes of water consumed increase Reduction in non-revenue water Improved financial viability of the existing water supply systems, including cost recovery

or profit made

Detailed indicators are specified in the M&E framework (Annex 5), including: a) static information (e.g. the definition of project outputs); b) baseline information (average consumption, and its cost); and c) information that will be provided on an on-going basis as part of regular project monitoring (e.g. outputs delivered). The baseline information will be collected at the household (e.g. customer satisfaction, gender aspects) and project stakeholder levels.

B.2 Project description

Site selection

Four areas have been selected for Phase 1: Al Qabel in Sana’a City, Al Salabah in Ibb City, Sanaban in Dham-ar Governorate, and Al Sharis in Hajah Governorate) on the basis of the following criteria:

1) Availability of water resources: the initial schemes were selected based on availability of water resource in order to allow for access at a reasonable cost.

2) Poverty level and poor access to safe water supply: No reliable data on poverty levels are available for the four initial areas. Overall, all peri-urban areas are poor and not served by the public water supply. Anecdotal evidence (interviews with local administrations, private suppliers, and community elders) collected during the feasibility indicates that average monthly income of households range from YR30,000 to YR40,000 (US$150 - US$200), although this is likely to be underestimated. According to WB/UNDP “Yemen Poverty Assessment” (2007), only Al Sharis is located in a governorate classified as very poor (Hajjah) – up to 50-60% of the total governorate population was poor in 2005/2006, although here again, poverty levels differ greatly within a governorate depending on the location.

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Interest of potential operators and local corporations: Several private investors or operators have expressed interest in investing and operating a private water network in the four initial areas proposed.

Willingness-to-pay: Willingness-to-pay is typically high as most households in peri-urban areas are familiar with private water supply provided by tankers who charge prices often ten times the price from the public network.

Project cost and financing

Quantities and average unit costs of the schemes have been estimated based on the indicative engineering designs prepared for the four pilots. Costs are based on recent contracts in Yemen. The total investment cost (wells, pumps, connections) ranges between US$400 and US$1,090 per connection. However, the costing does not include the potential efficiency gains expected from the competitive tendering process which will put pressures for the selection of PMNOs (forcing them to select contractors offering the lowest prices in order to determine the least cost OBA subsidy required).

The tables below provide an overview of the technical scope, coverage, investment costs and financing of the four initial projects.

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Table 1: Project scope and costs for Phase 1

Al Qabel (Sana’a)

Al Salabah (Ibb)

Sanaban (Dham-

ar)

Al Sharis (Hajah)

Total

Population (2009) 8,483 12,150 4,362 13,047 38,042

Population (2025) 20,040 18,037 7,043 21,100 66,219

Household size 7.65 8 7.1 9.09

Water consumption/lpcpd 59 55 50 36

# new hh connections with project (2014) 823 1,684 330 1,506 4,516

Water supply capex (US$) 1/ 207,000 590,000 49,000 345,000 1,190,000

Main network capex excl. connections (US$)

531,000 1,049,000 155,000 146,000 1,882,000

Other capital costs (US$) 2/ 35,000 35,000 35,000 35,000 140,000

Connection costs to 2014 (US$) 49,000 77,000 24,000 83,000 232,000

Total capital cost to 2014 (US$) 822,000 1,750,000 263,000 609,000 3,444,000

Capex per connection to 2014 (US$) 541 973 352 349 593

PMNO investment over 4 years to 2014 (US$)

441,000 445,000 96,000 84,000 1,066,000

PMNO investment (US$/connection) 290 247 128 48 183

PMNO share of total investment (%) 54% 25% 37% 14% 35%

Capital subsidy (for deep wells, pumps, reservoirs and trunk mains) (US$)

332,255 1,229,019 142,875 441,735 2,145,884

Total subsidized capex excluding connection (%)

45% 75% 70% 90% 74%

Connection cost / household (US$) 53 43 63 51 50

Connection subsidy (50% of connection fee) (US$)

26 21 31 26 25

User contribution (connection fee) (US$) 26 21 31 26 25

Total OBA subsidy per person (US$) 56 94 65 35 60

IDA and GoY subsidy per capita (US$) 37 69 43 23 42

GPOBA subsidy per capita (US$) 19 25 22 12 19

Total GPOBA subsidy 117,991 336,792 51,076 160,018 665,977

1/ Wells, pumps, reservoirs irrespective of the source of financing.2/ Land, office, store, vehicle, etc.

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Table 2: Total project financingPhase 1 Phase 2 Total

InvestmentsGPOBA $665,977 (19% capex) $4,046,023 (19% capex) $4,712,000 (19% capex)GoY/IDA $1,586, 466 (46% capex) $9,513,534 (46% capex) $11,100,000 (46% capex)Users $125,283 (4% capex) $754,194 (4% capex) $879,477 (4% capex)PMNOs $1,066,077 (31% capex) $6,417,711 (31% capex) $7,483,787 (31% capex)Total $3,433,803 $20,731,462 $24,175,264 Phase 1 and 2 consulting (GPOBA)IVA $120,000Publicity to investors $20,000Social surveyors $48,000Capacity building $100,000Supervision $100,000Total GPOBA:Window 1 (phase 1+2) $168,000Window 3 (phase 1) $785,977Window 3 (phase 1+2) 4,832,000Total $5,000,000

Competitive tendering of operators-investors

The contracts will be competitively tendered under World Bank procedures and be awarded to the bidders offering the lowest subsidy for investments based on a fixed tariff per m3 of water sold. Only entities that meet qualifying criteria (financial standing, relevant experience or qualifications) will be invited to bid.

Investors-operators contract main features

The potential investor-operators identified include (i) local entrepreneurs, (ii) Yemenis living abroad, and (iii) local companies involved directly or indirectly in the water and sanitation sector. The scheme will be publicized to these potential candidates through a “publicity campaign” involving a road show, direct contact, workshops, and/or the media. A session may also be dedicated in the February 2010 workshop PPP in water.

The operators will be contracted for a period of 15 years by the Local Corporations (LC) 5 currently operating in the service area through competitive tender organized by the PMU, to develop, and operate, maintain and manage a water supply and distribution network, and ensure a safe and reliable supply to all connections. The proposed build-own-operate-transfer contract period could be extended if requested by the LC or a shorter period could be adopted if the water resource may be found insufficient for the full 15 year contract. At the end of the contract, unless renewed, the water supply network will transfer to the LC upon payment of appropriate compensation to the operators. The compensation for the transfer of the assets will be based upon the depreciated value of the investment incurred by the operator, as set out in the contract. However the value of the assets that will serve as a basis for the compensation will reflect the reduction in the operators investment affected by the subsidies received by the operator. The compensation arrangements will be designed to ensure that the operator has the incentive to maintain the assets and expand the connections even as the end of the contract period approaches. The condition of the assets will be assessed by the IVA every five years and at the end of the contract period to verify that reasonable routine maintenance work has been undertaken by the operators against reasonable standard.

5 Through the LC’s Project Implementation Unit (PIU) in each area.

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Ultimately the best way to incentivize the private operators to maintain the assets would be to extend the contract if it proves successful.

The operators will be requested to take over the current network in the target areas that are currently partially supplied by the water network operated by the LC or the local council. In Al Qabel, the existing network is operated by the local council. In Sanaban, the “Sanaban area” is operated by the local council and Al Jamimah/Beit Al Masri is operated on a philanthropic basis by a private entity. In Al Sharis, the networks are operated by the local corporation (Hajah LC). However, the operator will also carry out additional drilling/searching for appropriate water sources, production (and possibly storage), conveyance, and final connections, in order to meet the expected demand and ensure a viable and continuous service. Since most existing networks are small and presently operate erratically, it is likely that some of these old networks are no longer used. In this case, the new operator will isolate the old network from the new network in order to avoid water losses. The operator will assess the feasibility of rehabilitating them or building new networks. Once the old networks are rehabilitated, or replaced, the operator will, at their judgment, interconnect the networks in the way considered most efficient for their operation.

When taking over the LC network, compensation to the local council and employment of existing staff of the local council or the LC may be negotiated with the LC or local council concerned. The bidding documents will incorporate this provision but will not make it conditional to the bidding.

Government policy considers that installing individual household meters as the most pro-poor measure6 . The operators will be expected to provide one connection and one meter per house as the standard (the per-connection subsidy will be specified in the contract). Since groupings of families (or even unrelated families) often live in the same house, the occupants will decide whether to install the connection according to their preferences (e.g. in the yard), and agree among themselves how to share water consumption charges. However, in the event households may request to have multiple connections with several meters, the operators will sign a service agreement with each household, and charge each household within the house separately, as well as the additional costs of the extra meters and pipework in order to recover actual connection costs.

Tariffs and connection fee

Tariffs

As the financial viability of each contract is determined by the setting of appropriate tariff levels, viable tariffs for each town will be agreed by the LC as a pre-requisite to the tendering process of the PMNOs who will be bidding on lowest subsidy required to undertake the OBA contract. The agreed tariffs will cover full operating costs of service under the contract, reasonable profits , and depreciation. The agreed initial tariff at the commencement date for each individual PMNO contract will be incorporated by the PMU and the relevant LC in the contracts which will form part of the tender documents.

Viable tariffs (Table 2a) under the OBA project have been preliminarily established (at October 2009 price level). The tariffs were designed to balance competing objectives of user affordability, viability for the PMNO (accounting both network and connection components so that the PMNOs can base their bid offer on the true value of all the investments), competitiveness against prices

6 Currently, most poor households share a water meter, and therefore cannot benefit from the low 10m3 bracket of consumption (according to the 2007 Customer Satisfaction Survey up to one third of the poor are consuming more than the 10m3 lifeline, and thus paying regular block tariffs).

16


charged in neighboring areas by the LCs, and GPOBA donor’s guidelines on the subsidy per connection.7

Table 2a Proposed initial fixed tariff

Al Qabel Al Salabah Sanaban Al Sharis

Water supply charge (US$/m3) 1.00 1.09 0.95 0.82

The high water charge proposed for Al Salabah is because of high capital cost per m 3 supplied (demand per capita is relatively low) and a high tariff is necessary to make the scheme viable. The water tariff proposed in Al Sharis breaches the affordability limit of US$0.62/m3 (see economic model) but this is necessary to make the scheme viable for the PMNO and at the same time it substantially reduces water bills for over 90% of households in the area.

In the event that the water table drops and the water source becomes unreliable more than five years after the start of the contract, the PMNOs may seek an adjustment to the tariff to cover the additional cost of developing supplementary water sources. Similar adjustments may also apply to other major cost factors outside the control of the PMNO (e.g., elimination of Government subsidy on diesel fuel). These adjustments are not likely to affect affordability as most households should be able to absorb the costs given the high capacity to pay derived from the prices they are paying today for water from tankers.

The contract will not require the PMNOs to offer lifeline tariffs in the first two years as it is felt that possible extra administrative and supervisory costs may discourage potential PMNOs. However, the contract will allow the possibility of a renegotiation of the tariff to permit a lifeline block if it turns out that consumers are obviously using subsidized large amount of water (or for non-residential purposes) and a rising block tariff is required to introduce greater water use efficiency. In this case, any revisions to the tariff will be revenue neutral to the PMNO.

Connection fee

The connection fee covers the actual costs incurred for connections from the common network to houses. It has been estimated based on unit costs obtained during preparation (as indicated page 13 above). Of the total connection cost, 50% will be subsidized and the household will pay the remainder to the operator. The household will pay 10% of this before the connection is made. The estimated connection fee for each pilot area is indicated in Table 2b.

Table 5 Proposed connection fees


Connection fee (US$/connection) 26.4 21.3 31.4 25.7

7 The following formula was used to calculate the tariffs: a base tariff (fixed monthly charges and charges per m3 accounting for the costs of common pipelines and

water consumption) annual indexation of the fixed charges on the basis of wage inflation annual indexation of water consumption charges on the basis of electricity or diesel prices and general inflation

to reflect the development in consumer, diesel and power prices. Socio-economic survey and technical auditing consulting costs

17


The direct connection costs is separated from the costs of the backbone network (common pipelines laid along roads) in order to avoid the risk that the PMNO will inflate their revenue by charging customers connection fees that cover the direct connection costs as well as the costs of common pipelines whose costs have already been assumed when calculating the fixed monthly charges and the water consumption charges. However as mentioned above both network and connection components are accounted for in the tariff so that the PMNOs can base their bid offer on the true value of all the investments.

The PMNOs will be required to offer households the option to pay the connection fee through monthly installments spread over several months. When calculating the monthly installments, the PMNO will be entitled to include charges to cover the cost of interest (or the Sharia equivalent) plus an allowance for bad debts. The method for calculating the monthly installments will be specified in the contract and will take into account:

annual indexation of the allowed connection charge per metre of pipe and water consumption meter on the basis of general inflation.

allowed base connection fees per metre from the common network plus a meter,

Capacity building

As part of the project, private operators will benefit from on-the-job training when the project starts. This component will be financed through separate funding (through the Technical Assistance window of GPOBA). The operator training will focus on billing and O&M and be provided by the forthcoming National Water and Sanitation Agency (NWSA). It is currently provided by GTZ.

Some capacity building of the private operators may also be provided by the LCs (through a service contract) if appropriate.

Local private operators might also form joint ventures with investors or local companies involved directly or indirectly in the water and sanitation sector.

In addition, under the WSSP, Local Corporations (and Autonomous Utilities) –who are in charge of technical planning of projects and their physical implementation, including the procurement of goods and services— are being supported by qualified local consultants, technical assistance and capacity building, coordinated by the MWE PMU. The capacity building outcome is expected by 2011 and focuses on 1) technical capacity, 2) financial management, and 3) preparation of business plans, and will entitle the LCs to receive capital grants to carry out a rehabilitation and network expansion program and the associated procurement. Under the UWSSP the LCs in Sana'a, Ibb and Dhamar (three of the four project governorates) have already benefited from training (including on Bank policies).

Geographic targeting

Consideration was given to targeting the subsidy on specific poor households instead of providing subsidies to all households in a peri-urban area. However, in Yemen centralized administrative controls and data collection systems are weak (targeted social protection, aimed at specific households, is provided primarily by the Social Welfare Fund (SWF) which aims to support the poor and vulnerable. But based on a recent World Bank assessment, 8 the SWF does not provide a robust targeting mechanism. In addition there are no existing administrative tools to target poor households within peri-urban areas where most of the poor live and are not connected to the network. It is thus proposed to provide subsidies for all connections within a village or peri-urban

8 Yemen Poverty Assessment, GoY, World Bank and UNDP, November 2007.

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area which is considered as poor, as a blanket coverage. As the site selection section above indicates, one of the selection criteria to identify OBA sites was the poverty level of the area.

Outputs and subsidy amount and disbursement

Two pre-defined outputs have been defined. The final outputs will be complemented by intermediary outputs in order to balance the incentive effect of output-based subsidies with the financial capacity of small operators in Yemen who do not have sufficient liquidity to bear delays in investment subsidy payment.

1) Major investments. The major water supply investments (i.e. wells, pumps and reservoirs) will constitute the first type of outputs (or “intermediate outputs”). A capital subsidy will be paid upon realization of the works. It will be on average 74% of the corresponding capital costs, but will depend on the scheme to reflect the specific characteristics of each town (it fluctuates in a range from 45% to 84% for the first four selected areas). The remaining 26% of capital costs will be paid by the PMNOs and recouped through the tariff. The subsidy for these outputs will be paid quarterly in full (100%) upon satisfactory completion, and respecting the ratio of funding of 1:2 for GPOBA and IDA/GoY funding.

2) Networks and connections. The per-connection subsidy covering networks and connections will be on average 65% of the corresponding capex and it will be a fixed amount per certified connection for all houses irrespective of the actual individual connection cost. Eighty percent of that per-connection subsidy will be paid based on the number of connections built and 20% of the subsidy will be paid three months later after evidence that connections have received adequate service for the past three months as certified by the IVA.9 As this subsidy covers 50% of the connection fee, the remainder of that fee will be paid by the users as follows: 10% upfront and remainder through lump sum or over a 36 months period. In the event that PMNOs build more connections than originally anticipated in their respective bid, the per-connection subsidy will be reduced to cover only 50% of the connection cost.

In order to pre-finance that part of capital investment costs and of customers’ connection costs covered by the subsidy, PMNOs may borrow from banks or other lenders. Extending credit guarantees to the private operators through a local bank may also be considered.

The Independent Verification Agent (IVA) will certify that the work has been completed in accordance with the defined quality criteria. For the respective above outputs, the IVA will verify:

- Water supply works: (i) engineering works have been undertaken by the PMNOs (as evidenced through e.g. certificate of commissioning), and (ii) the pumps are operating according to the technical standards defined in the PMNO’s contract.

- Connections: (i) connections are working for three months and (ii) main distribution network is providing reliable water supply (as evidenced through e.g. user test, interviews, and billing and collection records).

Where, in the view of the IVA, the connections, main pipeline network and water supply do not meet the required standards the IVA will also estimate the capital expenditure needed to meet the contract standards and the capital subsidies will be scaled back pro-rata until the problem is remedied.

9 This applies to the connections of new consumers and also those areas with existing connections on a network that needs to be fully rehabilitated.

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B.3 Economic and financial analysis

Financial and economic analyses for the four initial areas, from the perspective of the PMNO, the household, and the whole Yemeni society are summarized below.

Financial analysis (costs and benefits to the PMNO)

A summary of the results of the financial analysis are shown in Table 3.

Table 3 Financial analysis of PMNO


PMNO investment to 2014 net of subsidy (US$’000)

441 445 96 84

PMNO share of total capex to 2014 (%) 54% 25% 37% 14%

PMNO investment (US$/connection) 290 247 128 48

IRR 15,5% 15,7% 16,7% 15,1%

IRR without subsidy 4.5% 6.2% 11.1% 2.2%

The sensitivity of the resulting IRR to various assumptions was also investigated. These indicate that the scheme remains financially viable for the PMNOs over a reasonable range of assumed input values. With a 20% increase in estimated capital costs, provided these are identified before the contract is signed and subsidies can be adjusted accordingly, or provided that these additional costs relate to unforeseen water supply problems and can be recovered in part through contract terms, the FIRR would remain above 11%. The FIRR values are probably most sensitive to assumptions relating to O&M costs, which are within the PMNOs’ control, and to income levels, which are not. Income levels could fall if, for example, the collection rate is lower than anticipated or the tariff is kept low despite the contract or if sales of water are lower than predicted. However, on balance it is more likely that income levels will be higher rather than lower. On the positive side, if O&M costs are lower than expected or income is higher, then the FIRR for the PMNOs become very attractive.

A delay in the connection of customers by 12 months, with corresponding delays in the receipt of subsidies, would also impact negatively on the FIRR, but this is under the control of the PMNO. The FIRR is shown to be relatively insensitive to an extension of the duration of the contract from 15 years to 20 years.

Economic analysis (costs and benefits to the household)

The second analysis considers the purely monetary cost savings seen by consumers from the proposed water supply schemes.

In terms of cost savings, a comparison is made between the economic costs of water supplied through the OBA scheme and the economic costs of supplying water through private tankers. This analysis shows that there will be a large cost saving for poor households from consumption of water at lower costs, as water supplied through the network will have a lower price and be more readily available (Table 4). The calculation is based on the following principles:

(a) it includes the network connection fees

(b) is based on assumed household consumption of 8 m3 per month

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(c) affordability for water estimated at US$1/m3 or more which is below the standard 5% of income

(d) evidence that even the poor are willing to pay the cost of public or private network supply.

According to water tariffs estimated in Table 2a above, the project will be less attractive for households who currently have a connection to an LC supply, although since the existing network does not work or work occasionally these households also rely extensively on water from tankers, and thus these customers will be willing to pay the higher prices associated with improved supply quality resulting from the project investment made.

Table 4 Monthly household bills and cost savings (US$/month)


Households who currently have piped water

% of households 54% 0% 60% 9%

Current bill 5.00 n/a 2.75 5.66

New bill 8.26 n/a 7.91 6.82

Saving -3.26 n/a -5.16 -1.16

Households who currently purchase from tankers

% of households 46% 100% 40% 91%

Current bill 60.00 30.00 30.00 40.00

New bill 8.26 8.93 7.91 6.82

Saving 51.74 20.50 22.09 33.18

There will be additional economic benefits to households, over-and-above those shown in Table 4, since households that are newly connected to a functioning network will now have lower costs of water, and would be expected to increase the consumption of water. This benefit (consumer surplus) has not been reflected in the above analysis but, despite this, the scheme is shown to be very attractive to households and, as discussed below, very attractive to Yemen.

Economic analysis (national costs and benefits)

The final economic analysis considers the costs and benefits from the national perspective. This includes the monetary (lower costs of producing water and the cost savings to households) described above as well as a variety of non-monetary benefits from the provision of safe drinking water. These other benefits (based on WHO figures published in 200410 for the EMR-D region which includes Yemen), include time savings, gain in productive time from reduced illness, avoided costs of healthcare of diarrheal diseases, and the value of prevented deaths. Despite the difficulties in establishing an exact monetary value, benefits of about US$22 per capita per year in 2009 prices were assumed for households connected to piped water through the project, leading to very high economic rates of return. In terms of health specifically, a survey in 2007 found that incidence of diarrhoea was higher in towns poorly served by the network than in those where network coverage is high, and reducing water borne diseases as one of the benefits of water network connection most often cited by a majority of respondents. Anecdotal evidence obtained 10 Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the Global Level, WHO, 2004

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during the feasibility study suggest that the poorest residents in some of the initial areas drink water from aquifers used for irrigation or from shallow wells due to their inability to pay the connection fees and the costs to connect to existing networks. In terms of water quality, a household survey conducted by USAID in 200511 found that water borne diseases were common in Yemen (e.g. over four out of 10 families reporting diarrhea in an under-5 child within the past two weeks). It should however be noted that health benefits will only accrue if parallel hygiene promotion is undertaken.

Likewise, the 2007 Poverty and Social Impact Analysis (PSIA) conducted as part of the WSSP showed clear gender and education impacts of water supply connection. Most recently connected households (55%) reported that women’s chores had reduced since connection. One quarter of households also reported that there was more time for children to attend school as they no longer have to spend time fetching water.

Using an assumed benefit of US$22/capita per year, the economic rates of return (ERR) shown in Table 5a were estimated.

Table 5a National economic benefits (ERR)


98% 63% 72% 1,071%

The sensitivity of the ERR to alternative assumptions were tested. The tests included non-monetary benefit ranging from zero to $30/capita per year. The analysis shows that the proposed schemes are economically attractive from a national perspective even if non-monetary benefits are assumed to be zero. It also indicates that the schemes continue to remain very economically attractive over a wide range of assumptions.

B.4 Lessons learned and reflected in the project design

A single flat tariff is being proposed for the first years of implementation as a way to simplify the scheme for first-time, very small private operators, as opposed to lifeline tariff. Through a single flat tariff, (i) the operator would not be forced to provide separate meters for each household within a house and at the same time allowing the cost of the house connection to be shared among several households– often in Yemen poorest households live in the same house; (ii) meter reading is much simpler and flexible; (iii) the operators are incentivized to supply poor households whose water consumption will often be very low. However, recognizing that the NWSSIP encourages lifeline tariff block as a way to keep water costs for poor network-connected households below the 5% monthly expenditure threshold, such regime would ultimately be introduced if water consumption levels turned out to be high, where low consumers (0-10 m3 per household per month) would be charged below cost while higher consuming households will be charged higher tariff to full cost levels.12

Recent experience in Mozambique (i.e. failed bidding process) show there are inherent risks to the tendering of local operators (although the conditions are very different in Yemen, perceived risks for investors remain). This has been taken into account in project design by acknowledging the limited capacity of the potential private operators in Yemen and thus, the project has been designed

11 Household Hygiene Improvement Survey in Yemen: Knowledge, Practices, and Coverage of Water Supply Sanitation, and Hygiene, USAID-Partners for Health Reformplus, Abt Associates Inc. September 2005.12 Governmental guidelines regarding tariff indicate that the lifeline tariff should only apply to those in the first block, and that other consumers would pay the rate of their highest block for the entire bill . Currently, a very high proportion of consumers (up to three quarters), including many non-poor, are only paying the lifeline tariff, and even those consuming more than 10m3 a month benefit from the lifeline tariff for a large part of their consumption.

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to relax the constraint of subsidies disbursed only on final outputs, and has also incorporated capacity building for local private operators as an integral component of the project.

B.5 Alternatives considered and rejected

1) Subsidy structure

Consideration was given to having a subsidy only to cover the direct cost of connection of houses rather than subsidizing both the connection cost and the capital cost of the water supply and network. However, given the limited financing capacity of potential operators and the limited ability to pay on the part of most users the low affordability of users, a capital subsidy was considered to be necessary. This can be reviewed in Phase 2 with the roll out in other towns.

2) Tendering

Two main options were considered: (A) the tariff is specified and the bidder requesting the lowest subsidy is awarded the contract, or (B) the subsidy per connection is specified and the bidder offering the lowest tariff is awarded the contract. Given GPOBA experience in attempting the two forms of bidding, it was decided to choose (A), in particular because so fixing the tariff before the tender and inviting bids based on the subsidy may avoid the risk of underbidding and thus the need to renegotiate tariff, should future costs turn out to be higher than the ones used to win the contract. This would also the possible for greater equity in tariff across the country and the inclusion of a lifeline tariff with low charges at low levels of use. As far as capacity to bid on a subsidy, GPOBA’s experience shows that it is possible to explain the bidding variable and requirement to candidates prior to launching the tender. Finally, project financiers should be amenable to an eventual renegotiation of the subsidy.

3) Targeting

Consideration was given to targeting the subsidy on specific poor households relying on the existing Social Welfare Fund (SWF). However it was decided to provide subsidies to all households in a village or peri-urban area as better targeting accuracy would be achieved given the likely bias of the SWF.

C. IMPLEMENTATION

C.1 Milestones for project implementation

Table 6 Milestones for project implementation

Milestone Target date

Approval by GPOBA February 2010

Draft bidding documents and contracts February 2010

Approval by GoY and LCs May 2010

Issuance of bidding documents to prospective PMNOs June 2010

Publicity to invite interest of investor-operators June 2010

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Procurement of IVA August 2010

Deadline for receipt of tenders by PMNOs September 2010

Evaluations of bids September 2010

Negotiations with PMNOs and finalisation of agreements October 2010

PMNO design studies and financing plans Nov.-Dec. 2010

PMNO contract becomes effective February 2011

Capacity building of PMNOs begins March 2011

Disbursement Phase 1 begins April 2011

Disbursement Phase 2 begins October 2011

Disbursement ends June 2014

C.2 Partnership arrangements

The project is part of the larger WSSP under which GoY will contribute US$2 million to the OBA component and IDA US$9.1 million. Some additional areas have been identified for the second batch of towns where the scheme could be replicated based on the proposed model.

C.3 Institutional and implementation arrangements

The PMU of the UWSSP will be the scheme manager. After the UWSSP closes (December 2010), the PMU of the urban component of the WSSP will take over the OBA project management. It will appoint the IVA with IDA/GPOBA no-objection.

The OBA project funds (provided by GPOBA, GoY, and IDA) will be transferred from the grant account and from the WSSP Urban Component’s Designated Account and will be deposited into a GPOBA Designated Account to be opened. Transfers will be based on quarterly estimates of the project cash needs as estimated by the PMU based on amounts to be claimed by the private operators and consultants. Once the IVA has certified the outputs and when both the PMU and IDA/GPOBA have issued their no-objection, the PMU will pay the private operators.

The LCs will be responsible for routine monitoring of the water quality to ensure that it complies with the water quality standards set out in the operators’ contracts and with national standards. The LCs will also be responsible for monitoring customer service standards (for example, private operators will be required to complete the connections within [two] months of receipt of the advance connection fee from households). Although the water quality will be monitored by the LC, the private operators will ultimately bear responsibility for ensuring that the water quality meets national standards and will be liable if they fail to comply with those standards notwithstanding approval given by the LCs. The local councils will be entitled to request independent verification of water quality.

The economic regulation of the private operators will take place primarily through the contract while quality standards and customer performance standards will be regulated by the LC in

24


consultation with the local council in each area.13 The LCs will also be responsible for monitoring customer service standards (for example, private operators will be required to complete the connections within [two] months of receipt of the advance connection fee from households).

In addition, the LC may provide support services through contracting with the private operators. Such support services may include: maintenance services (e.g., maintenance of pumps and pipes), stores and supply of spares and parts, training (financial and technical), and technical support. The PMNO will not be obliged to contract with the LC for these services and may instead contract with other service providers (particularly for the maintenance of pumps and pipes as there exist many potential service providers for irrigation networks).

Figure 1 Implementing arrangement and flow of funds (example of Al Qabel)

Reporting

Execution

Payment

13 Provisions governing violation of contract terms by the PMNO, including arbitration and the possible early termination of the contract, will be covered in the contract.

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ConcessionContract

OBA Designated

Account

GPOBA

MOF

IDA

Al Shari

sIVA

MWE

Al Salaba

h

Al Qab

el

Sanaban

Urban PMU

Local Corporatio

nPIU

PMNO

HH

HH

HH

HH

HH

WSSP Urban

DA

XXX

3 month advances upon PMNO invoices

according to established percentage

IDA and government

funds denominated in foreign currency 3 month

advances upon PMNO invoices

according to established percentage

Output-based

disbursements


The roles and responsibilities of all the various stakeholders are summarized in Table 7 below.

Table 7. Roles and responsibilities or project stakeholders

Entity Role

Ministry of Environment & Water Resources

Oversees the programme. Provides subsidies on behalf of GoY. Reviews progress reports submitted by the PMU.

Local Corporations Sign contracts with PMNOs and eventually, after 15 years, take over the water networks. Provide technical support to PMNOs. Monitor water quality.

Provides data to GPOBA, World Bank and MWE via the PMU.

Privately managed network operator

Develops, owns, operates, maintains, renews and expands the water supply system and network and, after 15 years unless the contract is extended, transfers the water infrastructure assets and customers to the LC.

Local councils Reports concerns about water quality or customer performance to the LC. Review annual reports submitted by the LC and IVA to GPOBA and MWE via the PMU.

Independent verification agent

Inspects the works undertaken by the PMNOs and verifies that the work has been completed according to the standards specified in the contract. Monitors on-going maintenance of the PMNOs. Provides quarterly reports to the PMU.

WSSP Urban PMU Manages the tendering of the PMNOs.

Contracts IVA.

Contracts social surveyors annually and thereafter every other year to collect data on the schemes.

Channels information provided by LCs, PMNOs, IVA and social surveyors to GPOBA and MWE.

C.4 Monitoring and evaluation and reporting

M&E

An M&E framework is attached in Annex 5. It includes three types of indicators: a) static information (e.g. the definition of project outputs); b) baseline information (average consumption, and its cost); and c) information that will provided on an on-going basis as part of regular project monitoring (e.g. outputs delivered).

The baseline information will be prepared by a survey firm to be appointed by the PMU to collect household data, and conduct structured interviews with (a) the PMNOs to obtain feedback on problems encountered and support provided by the LCs, (b) the local councils to obtain feedback on the scheme and problems encountered with the PMNOs and LCs.

The household data will include:

Household information (e.g. individuals served per connection, customer satisfaction)

Updated baseline information as necessary

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Gender aspects: a) number of females in the households/community, 2) the impact of the project on the lives of women/girls.

This firm will make an annual survey during the project period (during this period it will be paid by the GPOBA grant), and at the end of the first year after completion and second year after completion, and thereafter every two years for the duration of the PMNO contract. In the latter period, the cost will be covered by the tariff.

The PMU will also conduct technical audits of the project. For this purpose, the IVA contract could be extended as technical auditor after the project end (in this case, it will be funded by the tariff).

Reporting

Reporting obligations are outlined below and will be described in detail in the project Operational Manual.

PMU: Provides quarterly reports to GPOBA, IDA and GoY detailing outputs realized and subsidies provided to the PMNOs, as well as post-completion reports. The PMU channels information provided by LCs, PMNOs, IVA and social surveyors to GPOBA and MWE.

LCs: Provide annual reports to the PMU detailing inspections undertaken of water quality, investigation of customer complaints, services requested and provided by the LC to the PMNOs, and charges made for such services. A copy of the LC report will be provided to the PMNO and local council for comment.

PMNO: The PMNOs will be required to provide annual financial reports and statistics on customer numbers and water consumption to the PMU (reporting obligations will be kept to a minimum to avoid excessive paperwork and cost). Lenders providing loans to the PMNOs will require regular financial reporting by the PMNOs.

IVA: Provides quarterly reports to the PMU copying IDA/World Bank certifying that the works undertaken by the PMNO are in accordance with the specified technical standards.

Socio-economic survey firm: Provides the results of stakeholder surveys to the PMU and copied to the World Bank and GPOBA for monitoring and tracking purposes.

C.5 Sustainability

Per design, the subsidy is contingent on the PMNO providing a sustainable water supply and the tariffs covering O&M, profit and depreciation, combined with a low incremental cost of house connections (once the core network has been completed), ensures that the operators have financial incentives to continue to connect new houses after the 4 year project, and to supply water to houses for the duration of the contract.

On completion of the contract term and if the contract is not renewed, the assets will be transferred to the LC and the LC will continue to operate the network as part of a broader urban water supply system. The PMNO will have financial incentives, through the contract, to continue to maintain the assets through to the end of the contract. The technical standards for the PMNO will be designed to ensure consistency with LC standards.

For new areas, at current income levels, it is unlikely that new schemes will be feasible without capital subsidies. It is thus expected that further subsidies will continue to be provided by GoY although the level of subsidy required in other areas may be less once the scheme has been demonstrated successfully in the four Phase 1 areas, thereby lowering the perceived risks.

For new households coming into the same areas (natural growth and rural-urban migration resulting in growing demand for new connections that might require additional investments even

27


after the project ends –but not accompanied with subsidies any more), it is envisaged to structure the tariffs so that the private operators are able to continue to expand the network with the tariff paying for the expansion capex, and expand the service without subsidies after the large initial investments have been made. (The main remaining risk would thus be if there is a need to pay for unforeseen capital investments such as the drilling of new wells if it turns out that the existing ones cannot cater for extensions due to population growth.). The bidding documentation will include this information when defining coverage obligations in order not to deter private operators from bidding. The project will also provide for economic regulation through the contract with the option to review and revise the tariff every five years to allow for adjustments to cover for additional investments among other elements. Thus, as mentioned above, if demand grows beyond what is currently foreseen, in such a way that heavy investments are required (i.e.: new deep-wells, etc), a block tariff with a low bracket of consumption (say up 10m3) could be retained while increasing the unit price beyond that level of consumption can provide funds to cover the new, unforeseen, investment costs. This option could be used to cater for additional investments required cover expansion capex. Again such option will be included in the bidding documents so that private operators can account for it when making their offers. This will also avoid the need for an ex-post renegotiation of the tariff.

Institutionally, after the end of the WSSP, Local Corporations (and Autonomous Utilities) are expected to have built sufficient technical capacity to planning and implement projects, including the procurement of goods and services which will enable them to continue to manage the PMNO contracts.

C.6 Critical risks and possible controversial aspects

The risks to the realization of the project are summarized in Table 8 below.

Table 8. Risk Matrix

Risk Risk mitigation measure Rating with mitigation

There is no interested bidder

The whole project is based on the finding that the private sector is very active, and already an important provider of water supply and sanitation services in Yemen.Creation of partnerships with private operators within the sector new regulatory framework is a government priority. While in the past the private sector kept a low profile, avoiding contact with LCs, several private investors-operators expressed, including during recent consultations, to enter into a formal contract relation with the LC, provided that it did not undermine their business.

Low

There are few bidders

Roadshow/publicity to explain project conditions will be organized prior to launching the tenders.

Low

LC are not cooperative

Although historically, development of the sector has crowded out the private sector, utilities now recognize its comparative advantage notably in the peri-urban areas and are ready to support partnerships with private operators (October 2008 Stakeholder Workshop and recent consultations with the four initial LC managers).

Low

PMU/MWE does not fulfill its obligation under the

Clear roles and responsibilities embedded in the OM and will be delineated in GA.

Low

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GAPMNO fails to maintain the network and pumps toward end of the contract.

The contract will incentivize the PMNO to maintain the network by reducing the termination compensation if the network is in poor condition. Conditions of the assets will be evaluated every 5 years and at the end of the contract by an independent third party and an assessment will be made of investments needed, if any, to reach standards. Also, five years before contract closure, a performance bond will be provided by the PMNO, if deemed necessary.

Medium

Water table falls and supply dries up

Latest World Bank’s assessment of water resource in Yemen shows that Sana’a has a very deep aquifer (+/- 1000 meters) sufficient for the projected demand in Sana’a basin for about 100 years. As per NWSSIP Update, WSSP and Water Law, National Water Resources Authority has now more authority to manage water resources nationally and to control drilling (any new wells will need to be authorized by NWRA, and the authorization will only be provided if data indicate that the resource is sufficient for the intended use).Careful selection of water source through the MWE water availability maps and well pumping tests. Subsidy and tariff enhanced to attract private interest.

High

Tariff raised Willingness to pay is typically high and even poor households should be able to absorb costs.

Low

Outputs are not sustained beyond the contracts

Institutional development and capacity building maybe envisaged to enhance LCs’ capacity to operate and maintain investments if and when they take over the networks at the end of the PMNO contracts.

Medium

More specific implementation risks (company performance risks, technical risks, environmental risks, commercial risks, and regulatory risks) and mitigation measures built into the design are outlined in Annex 8.

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GPOBA Commitment Paper OBA Water Yemen. Draft Mach 30, 2010

TECHNICAL ANNEXES

1. Project costs schedule of OBA payments

2. Financial management (OP/BP 10.02) and Disbursement (OP/BP 12.00)

3. Procurement (OM, July 15, 2002)

4. Environment and Social (OP/BP 4.01)

5. Results framework and monitoring mechanisms

6. Project preparation and supervision

7. Maps and general information on the four areas

8. Implementation risks

9. Documents in the Project file

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Annex 1. Phase 1 costs schedule

The schedule of payments for Phase 1 is outlined in the Table 9 below.

Table 9 Phases 1 and 2 investments disbursement schedule (US$)

Item 2011 2012 2013 2014 TotalGPOBASubsidies Phase 1 175,681 339,453 148,697 2,146 665,977 Subsidies Phase 2 1,250,000 1 380 000 1,046,023 370,000 4,046,023Subsidies Phase 1 and 2 1,425,681 1,719,453 1,194,720 372,146 4,712,000 Workshop to attract investors 20,000 - - - 20,000 Independent Verification Agent (IVA) 10,000 50,000 40,000 20,000 120,000 Social survey team 12,000 12,000 12,000 12,000 48,000 Capacity building of local operators 100,000 - - - 100,000 Total GPOBA subsidies and RE expenses

659,000 3,067,000 1,177,000 157,000 5,000,000

GOY/IDA subsidies 222,000 9,990,000 510,000 378,000 11,100,000 Total GPOBA + RE expenses and GOY/IDA

881,000 13 057 000 1 687 000 535 000 16,160,000

Project supervision (Bank executed) 25,000 25,000 25,000 25,000 100,000

The social survey team contracted by the PMU will continue to monitor the four areas every other year for the duration of the 15 year contract.

Table 10 Project costs by component (US$)

Component LocalUS$

ForeignUS$

TotalUS$

Installation of water networks and household connections

GoY: 2.0 mUsers: 879,477PMNOs: 7.5 m

4.7 m (GPOBA)9.1 m (IDA)

24.2 m

Bank/GPOBA supervision100,000 100,000

(i) Workshop/Road show; (ii) Consulting services for household survey; (iii) Consulting services for output verification; (iv) capacity building

(iv) 20,000(ii) 48,000(iii) 120,000(iv) 100,000

288,000

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Annex 2. Financial Management (FM) (OP/BP 10.02) and Disbursement (OP/BP 12.00)

A. General

Allocation of Proceeds: GPOBA funds will be disbursed over a 4-year period. Disbursement will be made against the following expenditure categories: (1) output-based subsidies paid to private water operators for the (a) rehabilitation of existing infrastructure and development of new sources and networks for water supply and (b) construction of household connections, and (2) consulting services.

Implementation Arrangements: The OBA project will be managed by the PMU of the Component 2: “Urban Water Supply and Sanitation” of the WSSP (currently the PMU of the UWSSP). The WSSP project is a project financed by several donors and the government of Yemen. The WSSP project has four components and each of these components has a separate implementing entity (PMU) and a separate Designated Account (DA) used to pool donors funds. Under special arrangements agreed under WSSP, government funds are deposited also into the WSSP DA of component 2 and are denominated in foreign currency. The WSSP project was declared effective in December 2009 and its project appraisal document (PAD) describes the OBA financing under component 2. As IDA and the government of Yemen are also co-financiers of the OBA project, the flow of funds generates certain risks that will be mitigated through the financial arrangements. The implementation arrangements for the OBA project and the relationship between GPOBA and the PMU and the WSSP are detailed in the Project Operational Manual and the Grant Agreement. Disbursements may begin as soon as the Grant Agreement becomes effective and after contracts have been procured and signed.

B. Financial Management

Financial Capacity: The PMU’s financial management arrangements were assessed during the preparation of the WSSP and were found to be satisfactory. These arrangements will allow the PMU to manage the OBA project funds and periodically generate financial reports reflecting the financial status of the OBA project. The PMU is staffed with a financial officer and is equipped with an accounting system that will be used to follow on the OBA project accounts and generate reports for monitoring and decision making. The controls that are followed under the WSSP will apply to the OBA project. These controls will be subject to one enhancement consisting of the independent verification of the output units authorizing the payment of subsidy to the water operators.

PMU Responsibilities: The Grant Recipient, represented by the MWE, has assigned the PMU as the unit to coordinate and supervise the overall OBA project implementation including the financial management activities. The operating costs of the PMU are covered under the UWSSP (and thereafter the Urban component of WSSP), and, accordingly the OBA project will not finance any PMU costs or expenditures. For the purpose of financial management of the OBA project, the PMU has the following responsibilities:

(a) Prepares the budget and books of accounts, maintains record and carries out the reporting function of the project;

(b) Contracts key implementing functions to the LCs and the private operators; (c) Opens a “GPOBA Designated Account” (DA) at the Central Bank of Yemen; (d) Replenishes the GPOBA DA including submits quarterly (or as needed) withdrawal

applications to the project’s Grant Account to the World Bank/GPOBA on behalf of

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the beneficiary households, based on the works and number of new connections expected for the next period ;

(e) Shares with the MWE, MoF, World Bank and GPOBA, for information and tracking purposes, the outputs quarterly projections as submitted by each PMNO and the corresponding allocations;

(f) Appoints an auditor to carry out the annual financial audits of the project; (g) Appoints the IVA to perform technical audits of completed new outputs, including

the verification of corresponding infrastructures and installations, works certificates, and for water connections, billing records of the households benefiting from the said new connections.

The PMU financial management department will assign one of the accountants to follow on the project accounts. Training to the department’s staff will be provided by the PMU Financial Management Specialist and the Bank team as needed and will include information about the OBA project and the guidelines followed under such projects.

Financial Management Arrangements: The PMU will disburse funds from the GPOBA DA to the PMNOs per the details provided in the Operational Manual, based on the following procedure:

1) The PMU will release the funds into the GPOBA DA every three months or as needed based on outputs projections and corresponding subsidy amounts to be claimed for each contract (sub-project), and IUFRs (as detailed in the Disbursement section below).

2) While the IVA verifies the connections and work undertaken, the funds will flow from IDA pooled Designated Account (see below) and from the Grant Account to the GPOBA DA.

3) Once the IVA has certified the outputs and submitted his report, and upon no-objection by the PMU and IDA/GPOBA, the PMU will issue the payments to the PMNOs from the GPOBA DA.

Audit reports: The PMU will assign an external financial independent auditor, acceptable to the Bank, to perform the audit of the project accounts and financial statements. The audit will be performed under TORs acceptable to the Bank and in accordance with International Accepted Auditing Standards.

C. Disbursements

As the subsidies corresponding to the works (installation of water networks and household connection) will be financed from three sources, i.e. GPOBA, IDA and the GOY, the flow of funds under the OBA project takes into consideration the various environments of the financing sources. It was decided to pool the funds from the three sources into a GPOBA pooled Designated Account (to be managed by the PMU) in order to: i) ensure that government and IDA funds are available on timely basis to pay the operators as any delay in payments would have a direct impact on the OBA project progress; ii) issue a single payment to the operators and consultants.

Request for Advances: IDA and government funds will be transferred quarterly from the WSSP “pooled” Designated Account under component 2 to the GPOBA DA upon receipt by the PMU of the operators’ invoices and cash flow projections.

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The PMU will submit withdrawal applications for advances to the GPOBA DA on a quarterly basis together with the corresponding Interim Unaudited Financial Report (IUFR). The IUFR used for WSSP will be adapted to the GPOBA grant and it will meet standard Bank requirements. The amount requested will be based on the difference between the current GPOBA DA balance and the forecasted disbursements for the next three months.

The IUFRs will be subject to a review and approval by the PMU Finance Manager and the PMU General Manager before submission to the World Bank. Variances in the cash forecasts above 15% will need to be adequately explained.

GPOBA Designated Account: This account will be opened at the Central Bank of Yemen and denominated in US dollars.

1) Advances from the GPOBA Grant Account will be directly deposited into the GPOBA DA.

2) This account will also receive transfers for the IDA and government contribution from the WSSP Designated Account of component 2, also opened at the Central Bank of Yemen. As IDA and the government are the only financiers for the OBA component (in addition to GPOBA), IDA and government funds to be paid to the GPOBA DA will only be from the IDA and government portions deposited into the “pooled” Designated Account of component 2. The below percentage of the IDA and government funds applying to the WSSP Designated Account will be used when transferring these funds to the GPOBA DA:

Financing percentages: GoY US$2.0 million (12%) IDA US$9.1 million (58%) GPOBA US$4.7 million (30%)

The PMU will maintain separate ledger accounts for the funding of the project, which will provide details on the status of each of the OBA contract.

Types of Payment: There are two types of payments to be made through the Grant Agreement:

1. Subsidy payments against agreed outputs and milestones2. Payments for consulting services related to training, workshops, monitoring and

verification.

All required payments shall be included in the appropriate requests from the PMU to GPOBA/World Bank (e.g. initial advance or subsequent advances).

The subsidy payments for the installation of water networks and household connections will be made on an output-basis, after verification of installation and adequate functioning per acceptable standards.

Withdrawal Schedule

Allocations of grant proceeds

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CategoryAmount of the

Financing Allocated (expressed in USD)

Percentage of Expenditures to be Financed

(GPOBA’s share)

(1) Subsidy payments for goods and works for the rehabilitation and/or construction of new water sources and supply networks, and construction of household connections and service delivery

4,710,000 30%

(2) Consulting services 290,000 100%

TOTAL AMOUNT 5,000,000

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Annex 3. Procurement

A. General

As is laid out in the WSSP Appraisal Document, the agency responsible for procurement and overall management of the OBA scheme will be the Project Management Unit (PMU) of the urban component of the World Bank-funded Water Supply and Sanitation Project (WSSP) (currently the PMU of the Urban Water Supply and Sanitation Project (UWSSP)). The PMU is staffed with experienced procurement specialists, and will be responsible for the procurement requirements of the entire WSSP project.

Procurement for the OBA component of the project will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 revised October 1, 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 revised October 1, 2006, and the provisions stipulated in the Grant Agreement.

There will be two main categories of procurement:

Privately managed network operators: The development of the networks and connections will be carried out by the PMNOs, as established under a build-own operate transfer contract between the LC and the PMNO. The operators will competitively selected through national competitive bidding in accordance with World Bank guidelines, with no-objection by the Bank’s procurement department.

Consulting services to include:

Independent verification agent: The connections and the main network will be reviewed by IVA to check that the connections have been made, that water is supplied and that the correct standards have been followed. Every five years, the IVA will also review the maintenance practices of the PMNOs to ensure that proper routine maintenance has been undertaken. The IVA will be contracted for the duration of the project following national competitive bidding. A budget of US$120,000 has been allocated for this purpose.

Social and economic surveyors: Every year (starting at the end of the first year of the PMNO contracts) and thereafter every two years for the duration of the PMNO contract, a firm will be contracted by the PMU to conduct an assessment of the outcome of the project.

PMNO training on billing and O&M: This training may be contracted to the LCs (through a service contract) or it may be provided by the forthcoming National Water and Sanitation Agency (NWSA).

Each consultancy contract will stipulate the terms of payment for the services performed as well as the payment instructions to the respective consultant, per Bank guidelines. The PMU will ensure that payments to the consultants are made in accordance with the terms of the respective contracts.

B. Assessment of PMU’s capacity to implement procurement

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Procurement activities under the proposed project will be the responsibility of Project Management Unit (PMU) of the urban component of the World Bank-funded Water Supply and Sanitation Project (WSSP) (currently the PMU of the Urban Water Supply and Sanitation Project (UWSSP). The UWSSP is under the responsibility of the Ministry of Water and Environment. The UWSSP is headed by a General Manager who is accountable to the Project Steering Committee.

An assessment of the procurement performance of UWSSP was conducted in the view to implement procurement actions under the GPOBA-funded component, building on the review of efficiency and transparency carried out in October 2009. The assessment reviewed amongst others the organizational structure, procurement staffing levels, and procurement administration and filing and system.

The Procurement Department in the UWSSP is staffed with 4 employees responsible for the procurement of works, goods, and consultancy services. A Sr. Procurement Officer with long experience in IDA procurement was hired at the start of the project however she left in 2009.

Despite some institutional limitations, the UWSSP is one of the prominent agencies in the Yemen context that has been able to deliver its projects efficiently and in a cost-effective manner. In contrast with the rest of the Ministry of Water and Environment and other government agencies, UWSSP has a reasonable degree of autonomy which helped it to maintain a reasonable degree of transparency in handling the important volume of procurement for consultancy services and civil works that it has to carry out.

Since the start of the UWSSP in 2002, the procurement capacity of the UWSSP has been satisfactory overall despite some clear deficiencies identified during the Procurement Post Review (PPR) in the area of procurement filing, and compliance with DCA with respect to publicity and invitations. The PMU delivered many subprojects in reasonable time. The procurement of works is handled responsibly with good maintenance of subproject procurement administration. This should help to address the deficiency in procurement filing and monitoring of timely advertisements strictly as per the thresholds on procurement methods stipulated in the DCA. On the other hand, the Bank has recommended to the UWSSP that the training program should be conducted as soon as possible as this is part of the donor requirements. However, so far nothing has been undertaken to raise the capacity of the procurement staff.

The overall project risk for procurement is substantial, particularly regarding possible delays in the early part of project. Mitigation measures for the risks identified are included in the updated Procurement Capacity Assessment dated March 2010.

C. Procurement plan

The procurement and consultant selection methods, estimated costs, prior review requirements, and time frame will be agreed upon between MWE and the Bank in the Procurement Plan (see Table 10 below). The Procurement Plan will be updated in agreement with the Bank as required to reflect the actual project implementation needs.

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Table 11. Preliminary procurement plan

Contract No. & Type

TotalUS$.

Method Preparation & Invitation

Evaluation Award & Signing

Selection of private operators

Several contracts

4,712,000 NCB 5/30//2010 7/15/2010 8/15/2010

Output verification/workshop/capacity building services

Several contracts

240,000 QCBS 6/30/2010 8/15/2010 9/15/2010

Household survey consulting firm

One contract

48,000 CQ 5/30/2010 7/15/2010 8/15/2010

A comprehensive dynamic procurement plan will be prepared in parallel, including the final number of contracts and the schedule and prior review requirement for each contract.

D. Procurement of output-based aid private operators

The contracts for the selection of the water operators, estimated to cost more than US$50,000, will follow World Bank’s procurement guidelines relating to the procurement of goods, works, and services (other than consultant services). National Competitive Bidding (NCB) procedures as per Paragraphs 3.3 and 3.4 of the guidelines will be followed. NCB opportunities will therefore be published in Yemen’s main newspapers. However, if foreign firms bid, they would not be excluded from consideration.

Procurement for the sub-projects will be conducted by the water operators following their procurement practices as they have been competitively selected on the basis of lowest subsidy for the project.

In some exceptional cases, direct contracting with existing water operators will be permitted, following Bank’s procurement guidelines for direct contracting, and detailed procedures established in the Operational Manual.

E. Consultant services

Consulting Services will include services to be provided by firms and individual consultants, such as: (i) capacity building for PMNOs; (ii) workshop; (iii) verification of outputs; and (iv) project monitoring and evaluation through annual monitoring household surveys.

The following selection procedures would be used for Consultants' Services:

(a) Quality-and-Cost-based Selection and Least-Cost Selection: All consulting service contracts valued at more than US$50,000 equivalent would be awarded through the Quality and Cost Based Selection (QCBS) and Least-Cost Selection (LCS) methods. To ensure that priority is given to the identification of suitable and qualified national consulting firms, short-lists for QCBS and LCS contracts may be comprised entirely of national consultants, provided that at least three qualified firms are available. However, if foreign firms have expressed interest, they would not be excluded from consideration.

(b) Consultant's Qualification Selection (CQ) may be used for Consultants' Services contracts below an estimated contract amount of US$50,000 equivalent for the bidders’ publicity workshop and household surveys.

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In some exceptional cases, direct contracting will be permitted, following Bank’s procurement guidelines for Single source contracting.

F. Procurement processing

All procurement packages will be prepared by the PMU, and will be carried out in accordance with the Procurement Plan as agreed with the Bank. The PMU will forward the procurement packages to the MWE for endorsement and for onward forwarding to the Bank for prior review and no objection, as required.

The technical specifications for the output-based aid contracts will be written by the PMU and reviewed by appropriate MWE Specialists. The PMU will be responsible for preparing the Terms of Reference for the consultants needed for (i) capacity building of the PMNOs, (ii) independent output verification, and (iii) household social surveys.

F. Prior review

The World Bank will conduct a prior review according to the Procurement Plan to be detailed in the Operational Manual. To streamline output-based project operations, the Bank will not review any contract of the water operators. These contracts will be subject to ex-post review by the World Bank.

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Annex 4. Environment and Social (OP/BP 4.01)

Introduction: The Water for urban centers - Output-based service provision by private operators in Yemen is associated with the ongoing IDA Urban Water Supply and Sanitation Project (UWSSP) and under the Water Supply and Sanitation Project WSSP launched by GoY in 2008. The WSSP is classified as environmental category A project, and a Sector-wide Environmental and Social Assessment (SwESA) was prepared dated October 8, 2008. The SwESA does not specifically mention GPOBA being included under Component 2 of the WSSP (Urban Water Supply and Sanitation – UWSS) as this funding was not confirmed during the SwESA preparation. However, the Project Appraisal Document (PAD) for WSSP dated January 28, 2009 mentions that sub-component on “support to private providers” under the UWSS will come from GPOBA. Therefore all activities under GPOBA (as stated in this GPOBA Commitment Paper) will be required to comply with the SwESA.

The aim of the OBA project is to increase the coverage of urban water supply services on a sustainable basis. Outputs for the project include: (i) water supply systems (wells, pumps, storage); and (ii) main network and connections to water. This involves rehabilitation of existing infrastructure and development of some new wells and networks (benefiting 30,000 households –210, 000 people), targeting low income households in peri-urban areas that are currently either not served by the water network, are without a reliable water network. Four initial areas have been selected based on certain criteria, for a first phase of investment benefiting 38,000 people: Al Qabel (in Sana’a City), Al Salabah (in Ibb City), Sanaban (in Dhamar Governorate) and Al Sharis (in Hajah Governorate). Phase two will follow immediately and will cover other cities in these governorates and/or other governorates. Project implementation period is four years, from 2010 to 2014.

Environment and Social Assessment: The OBA project is classified as environmental category B and the World Bank Safeguard Policies OP 4.01 on Environmental Assessment and OP 4.12 on Involuntary Resettlement are triggered. OP 4.12 is triggered as some of the activities related to the project may result in land acquisition. A Resettlement Policy Framework (RPF)14 dated December 2008 was prepared for the WSSP, which will applicable to this project as well. No further environmental and social assessment or public consultations are required during preparation of this project. However, as per the World Bank disclosure requirements, the SwESA and RPF will be re-disclosed under this project 30 days before signing of the Grant Agreement.

The SwESA has concluded that the overall environmental and social impacts of the WSSP interventions are expected to be positive, with no significant, irreversible, cumulative or long-term adverse impacts anticipated. However because of the scale of the sector-wide approach adopted by the WSSP, environmental category A was considered most appropriate in this case, in accordance Bank Policy OP 4.01. This approach presents the GOY with a singular opportunity to address management of Yemen’s critical water resources in a holistic manner and thus realize significant environmental and social benefits for the country. The SwESA identifies mitigation measures for any potential adverse environmental impacts. Any such impacts are not expected to be significant and can be effectively prevented, minimized, or eliminated by implementing

14 An RPF is the instrument used because the nature and extent of land acquisition are not known at appraisal. The purpose of the RPF is to establish resettlement objectives, organizational arrangements and funding mechanisms for any resettlement operation that may be necessary. When during implementation the exact extent of land acquisition becomes known, a Resettlement Action Plan (RAP) or abbreviated RAP- depending on the scale and severity of impacts - will be prepared. The various steps in preparing a RAP have been outlined in the RPF. It should also be emphasized that the resettlement process should be completed prior to the start of physical works.

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appropriate preventive actions and/or mitigation measures as identified in the SwESA. At the sub-project level, SwESA recommends a range of measures for managing: (i) public safety, (ii) site access, (iii)health and safety of workers, (iv) impacts from off-site facilities, (v) impacts from construction camps, (vi) impacts on noise, air, and water quality, (vii) storage of construction materials, and (viii) loss of land or vegetation."

The SwESA also includes an environmental and social management framework (ESMF) as the precise type and location of proposed interventions (sub-projects) are not known, and hence potential environmental and social impacts cannot be identified upfront. The ESMF therefore provides a mechanism for enabling the potential environmental, social, and economic impacts of the interventions to be identified, assessed, and mitigated appropriately. It includes: (i) mitigation measures for reducing/offsetting/ eliminating the potential adverse environmental and social impacts at the project level; and (ii) an M&E plan. The ESMF also sets out the operational procedures for preparing an Environmental Management Plan (EMP) for sub-projects where the specific details are not known. The sub-project specific EMPs will be prepared by the LCs and included in the contracts for the Privately Managed Network Operators (PMNO).

Monitoring: The Project Management Unit (PMU) of the WSSP (currently the PMU for the urban component of the UWSSP) will be responsible also for managing the urban component after the UWSP closes in December 2010. Implementation of each individual OBA contract will be carried out by utilities (Local Corporations- LC and Autonomous Utilities -AU). Monitoring of implementation of sub-project specific EMP will be undertaken and reported in periodic reports to be submitted to the PMU. Monitoring of water quality is also a requirement of the SwESA (and also noted under the ‘risks’ section of the PAD) and will be carried out by the project as follows: The LCs will be responsible for routine monitoring of water quality to ensure that it complies with the water quality standards set out in the operators’ contracts and with national standards. Although the water quality will be monitored by the LC, the private operators will ultimately bear responsibility for ensuring that the water quality meets national standards and will be liable if they fail to comply with those standards notwithstanding approval given by the LCs. The local councils will be entitled to request independent verification of water quality.

Reporting: Appropriate EMP will be prepared by the LC at the sub-project level and included in the contracts for the PMNO, as per environmental and social mitigation measures from the SwESA. The Independent Verification Agent (IVA) is responsible to verify that works undertaken by the PMNO has been completed according to the standards specified in the contract (including compliance with environmental and social safeguards). The IVA will provide quarterly reports to IDA and GPOBA through the PMU, which will include information on compliance with SwESA (sub-project specific EMPs) and RPF (RAPs as necessary).

Capacity Building: As part of the UWSSP the LCs in Sana'a, Ibb and Dhamar (three of the four project governorates) have already benefited from training on Bank policies—including compliance with Bank’s environmental safeguard policy. This will enable the LCs to undertake the following:

draft sub-project specific EMPs that will be included the contracts for the PMNOs monitor implementation of the EMPs

A $100,000 training budget will be secured from GPOBA for PMNOs which will include training relating to billing and operation and maintenance of water systems. The PMU will assess whether training on safeguards compliance will be required for the PMNOs, to successfully implement EMPs, and if additional training will be required for the LCs to prepare and monitor EMPs.

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In summary, the OBA project will be limited to small civil works for installing new water connections, and the following specific measures will be taken with regards to its implementation:

(a) The “Sector-wide Environmental and Social Assessment” (SwESA) dated October 9, 2008 and “Resettlement Policy Framework” (RPF) dated December 2008 will be used for monitoring and reporting of any environmental and social safeguards aspects related to the OBA scheme.

(b) The Local Corporation will be responsible for preparing EMPs for sub-projects, routine monitoring of water quality, and will provide periodic reports to the PMU detailing inspections undertaken of water quality.

(c) The quality standards for PMNO contracts will include sub-project level EMPs, as per the relevant sections of environmental and social mitigation measures from the SwESA.

(d) The IVA will be asked to confirm that works undertaken by PMNO comply with environmental and social safeguards.

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Annex 5. Results and Monitoring

In addition to the monitoring and verification of outputs undertaken by the IVA, the following information will be collected through the IVA and a survey firm, for monitoring and tracking purposes. The PMU will also conduct audits of the project as designated in the Grant Agreement, and will provide the necessary information to report on the project indicators (see tables below).

Table 11. M&E Framework

COLOR LEGEND blue = Added/changed following DB redesign

= data to fill

Monitoring and Tracking Indicators for OBA Projects

Static data

Project Name:

Is this a standalone? (y/n)

Linked to Non-OBA Project? (y/n)

Define type of project (pilot, replication, scaling up)

Indicate other related WBG projects if any (e.g. P012345)

Definition of OBA Output (plaese fill section for each output relevant in the contract)

Static data Remarks/Comments

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Define the principal "output" on which the defined subsidy is paid? (e.g. NEW hh water connections (#))

*(see MICRO-OUTPUT definition in following sheet for reference).*Describe in detail what the output entails (e.g. - last 10 m of the connection)*If there are multiple outputs like household connections and public standpipes, specify all of them.

OBA Project planned beneficiaries

How many hh are served per output? // if n.a., how many beneficiaries are served per output?

OBA Project targeting

Define targeting Mechanism used (geographic, means tested, self selection, community based or other existing method)

% of total subsidy that is reaching the poor

Specify how "poverty" is defined / poverty threshold adopted (E.g. : income less than $4 per day (per capita))

Subsidy Disbursement Schedule Static data

- Indicate whether output(s) are linked to disbursement milestones ; specify the relevant output; & the corresponding subsidy (as a % of total subsidy).

MACRO- Outputs (check if

appropriate)

Specify MICRO-Output trigger

specify Corresponding

Subsidy

(see MACRO-OUTPUT definition in following sheet for reference)

Advances (contract signature, procurement,...)

%

Construction/Implementation

(upstream infrastructure, SP set up…)

%

Final output (hh water connections, community water points, …)

%

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Service delivery? (m3 of water consumed, quality std, verification of services over time…)

%

Pre-post basic figures on Project area BASE-LINE data End-line Remarks/Comments

TOT Number of people in the project area assumed =

Number of people per household in the project area

assumed =

Average income of beneficiary HH ($ per day / per month)

specify currency & periodicity

% of "poor" in the project area

(Specify how "poverty" is defined / poverty threshold adopted)

Access to service % of population in targeted area with ACCESS to the service in question

% of population with TAKE-UP of service when households have access

% of population with ILLEGAL access to service

Collection efficiency (Amount billed/amount collected)

Alternative service

% of population in targeted area with access to Alternative service

(Specify alternative service description )

Cost of alternative service provision per household, per unit

e.g. expenditure on alternative energy sources like kerosene or fuel wood or alternative water sources like water vendors

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Affordability and Sustainability OBA output BASE-LINE data End-line Remarks/Comments

Average consumption or use per OBA household (e.g. kWh per day/per month)

Average expenditure on OBA service by beneficiaries (as a percentage of total hh expenditure)

provide annual figures if variable

Average residential tariff for OBA beneficiaries (For non-utilities or off-grid solutions, cost of maintenance) (in US$ per unit of service or corresponding to avg consumption)

Specify if different than tariff for other consumers.

Type of tariff (connection/consumption) assumed =

Is tariff regulated? (y/n) assumed =

Is tariff subsidized independent of OBA? (y/n) assumed =

Tariff regulatory regime ((Increasing Block Tariff; Volume Differentiated Tariff; Two Part Tariff; Cross Subsidy))

assumed =

Do Tariffs cover O&M? y/n)

If tariff does not cover O&M costs, how is the gap being funded? Is transitional or ongoing consumption subsidy being used? // For non-utilities and off-grid solutions, are maintenance costs being covered and by whom? (Specify source of funding.)

Is there a dedicated Fund/Subsidy for OBA? (y/n)

Service Quality BASE-LINE data End-line Remarks/Comments

Average hours per day of access to service./ Frequency of interruptions of service? (fill with applicable info)

Is there a difference between the service level provided to consumers through the OBA scheme and service levels provided otherwise?

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Results of consumer survey tracking service quality / satisfaction (fill with applicable info)

Define the indicator/ index that was tracked in the survey. (e.g. consumer satisfaction of water quality, safety, etc)

Selection of Service Provider STATIC / BASE-LINE data

End-line Remarks/Comments

How is the Service Provider identified in the OBA project area? (Incumbent; Competitive Bidding; International bidding; Multiple small scale providers / accreditation; Other)

Is there private sector involvement in OBA service provision? (Specify private profit / non profit (CBOs, NGOs))

Is there competitive bidding process? (y/n)_

If yes, What bidding variable is used as criterion? (subsidy amount, tariff, connection charges, no of connections)

What is the expected efficiency gain (% subsidy decrease; % tariff decrease; % connection # increase)

there could be changes vs expected

Number (and name, if possible) of prequalified firms and final bidders. Specify local/international, if possible

there could be changes vs expected

Contract Type of contractual agreement with the OBA service provider (BOT or BOO, DBO, management contract, lease contract, concession contract, service provider agreement, medium term sevice, Public Utility, Performance-based road maintenance contracts, Performance-based road rehabilitation and maintenance contract)

Contract duration (# of years // Provide dates if possible.)

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Aid Efficiency STATIC / BASE-LINE data

year 1 year2 year 3

End-line Remarks/Comments

Maximum Allowable Subsidy under project design/ tender documents

Actual Subsidy required (based on winning bid)

Subsidy Savings (in US$ or the % gain in the number of households/users being served)

How are the savings, if any, being used?

Projected Total Project costs Could be also done x Output unit (provided that Output has been adequately defined above) ??

- Projected Subsidy

- Projected up-front User Contribution

- Projected funding from Other Sources (Specify the source of funds, e.g. share covered by Service Provider (through payment scheme or tariff), or borrowed from Financial Institution (such as microcredit), etc, ….)

Amount of ADDITIONAL private financing leveraged by OBA project (specify amount in $ or % of subsidy)

annual data if available

(please specify form, e.g. debt, equity, etc)

Actual Total Project costs Could be also done x Output unit (provided

that Output has been adequately defined above) ??

- Actual Subsidy (preferably broken down by source of funds)

provide total subsidy required for entire project, and provide annual figures if possible.

- Actual up-front User Contribution

- Actual funding from Other Sources (Specify the source of funds, e.g. share covered by Service Provider (through payment scheme or tariff), or borrowed from Financial Institution (such as microcredit), etc, ….)

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Comparator: average subsidy required for providing similar output under similar circumstances, if available

Time (months) to design OBA scheme (e.g. from project concept note)

From GPOBA Eligibility to Grant Agreement

Cost of project design (e.g. TA) -- please specify how calculation is made

Development Impacts STATIC / BASE-LINE data

End-line

Average hours of water supply service per day by utilities targeted by the project (number)

intermediate outcome

Average time or distance spent procuring service good to have comparison between Pre-program and POST-program indicators

Health benefits recorded (e.g. estimate % reduction in incidence of water borne disease, respitory illness, etc)

good to have comparison between Pre-program and POST-program indicators

Economic benefits from reduction of medical expenses to treat water-borne disease (estimate $ per month or % of hh income)

Economic benefits from increased productivity and capacity to work due to reduction of water-borne disease (estimate $ per month or # of additional days at work,etc)

Other development impacts expected / realized (e.g. reduction in poverty headcount among beneficiaries; increase in % school enrollment among beneficiaries, or % children who attend school regularly, etc)


Specific benefits regarding women / girls (e.g increase in school attendance etc)

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Number of new jobs created by the project in the project location


National Country Performance Rating good to have comparison between Pre-program and POST-program indicators

Progressive Indicators tracking table year1 year2 [1] Please adjust so that each reporting

period corresponds to one column.

PLANNED/ REVISED/ ACTUAL SCHEDULE

P1 P2, … P1 P2, …

Outputs delivered (pls. add line for each output)

Specify output levels separately for each output type (e.g. - household/individual phone connections and public payphones)

Number of hhs benefiting from OBA projects

Number of people benefiting from OBA projects

Subsidy disbursed

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Annex 6. Project preparation and supervision

A. Institutions responsible for project preparation:

1) World Bank and GPOBA

2) MWE, Ministry of Water and Environment, Government of Yemen Primary contacts:

B. GPOBA/World Bank Team:

Core Team:

Name Title UnitRichard Pollard Task Team Leader

Senior Water and Sanitation Specialist

MNSSD

Robert Bou Jaoude and Moad M. Alrubaidi

Senior Financial Management SpecialistFinancial Management Specialist

MNAFMMNAFM (Country Office)

Ayman Ibrahim El-Guindy Procurement Specialist MNAPR (Country Office)Ghada Youness Senior Counsel LEGAF (Country Office)Banu Setlur Operations Analyst MNSENKnut Opsal Senior Social Scientist MNSSO

Advisory team:

Name Title Role UnitPatricia Veevers-Carter

Program Manager Peer Review/ Advisory

GPOBA

Irving Kucynski Panel of Experts Advisory GPOBAAlejandro Jadresic Panel of Experts Advisory GPOBAMario Suardi Sr. Infrastructure Specialist Advisory GPOBAEsther Loening Infrastructure Specialist Advisory GPOBA

C. Project Preparation Costs

The total expenses to date for project preparation are US$105,000 including external consultants.

Total preparation budget including consultants is US$230,000.

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Annex 7. Maps and general information on the four areas

The four initial locations selected on the basis of judgments of water sector experts and experts from the LCs and the selection criteria are shown in Table 11 and Figure 2.

Table 11. Locations of four demonstration projects

Name of Governorate/ City Recommended area/ village

Sana’a City Al Qabel

Ibb City Al Salabah

Dhamar Governorate Sanaban

Hajah Governorate Al Sharis

Figure 2 Location map of the four demonstration projects

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Al Qabel – Sana’a

Al Qabel is located to the north-west of Sana’a, about 20 km from the city centre. Though it is on the outskirts of the city, it is still effectively a large village - see Figure 3 (though labeled Al Qabil in the map). A panoramic view of Al Qabel Old Village is provided in Figure 4.

Public networks were introduced in 1973 with galvanized pipes in part of the village through community participation and this gradually expanded to other parts of the area and improved. In 2001 it was taken over by the local council and since then some improvements and extensions have been made.

There are plans to introduce a sewerage system in Al Qabel. This could additionally be managed by the PMNO.

Figure 3 Location of Al Qabel (or Al Qabil)– Sana’a

Source: Google Maps

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Figure 4 View of Al Qabel Old Village

Source: HS&A photograph

Al Salabah – IbbAl Salabah is located in the Al Dhohra District of Ibb city, about 1.4 km southwest of Ibb city centre. It is on flat ground. The proposed area for the Al Salabah demonstration project is shown in yellow in Figure 5.

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Figure 5 Boundary of the Al Salabah project area

Ibb Local Water and Sanitation Corporation constructed a water supply network in the Al Dhohra Al Soflah area in 2004 with a total network length of 5,000 meters using ductile iron pipes (with 1”, 2” and 3” diameters). The water network covers around 20% of the existing area and about 300 households. Those not connected to the LC network either rely on water from a private network or from water tankers. Those connected to the private network are charged YR 200 per m3 based on estimated consumption (typically 10 m3).

Sanaban District – DhamarThe area proposed for this demonstration project includes Sanaban, Al Jamimah and Beit Al Masri in the Sanaban District of Dhamar city, about 15 km east of the city centre. The scheme is located on flat terrain with an area of approximately 525 ha.

The Sanaban, Al Jamimah and Beit Al Masri boundaries are shown in Figure 6.

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Figure 6 Sanaban, Al Jamimah and Beit Al Masri

Population statistics of each of the areas within Sanaban are shown in Table .

Table 11 Population statistics – Sanaban (2008)15

Area Houses Population

Seneban 463 2,606

Jamimah 202 1,343

Beit Al Misri 57 284

Total 722 4,233

The Sanaban water network was constructed in 1980 using ductile iron pipes (¾ ”, ½”, 2” and 3” diameter). The network is in a good condition. The existing area consists of about 500 households. The main water resources are two existing wells, one is located at Al Safa and the other is in the Al Ghool valley. The two wells operate for 6 hours/day on two shifts (three hours each) giving a total production of 173 m3 per day.

15 Population statistics here differ from those in Annex Error: Reference source not found but have been shown since they include information on the distribution of the population between the sub-areas.

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The Al Jamimah and Beit Al Masri water network was implemented some years ago (date unrecorded) using ductile iron (¾”, ½”, 1”, 2” and 3” diameter). The network is in bad condition. However, because the pump is not currently operable, the public water network is not currently in use.

The remaining zones of Sanaban, Al Jamimah and Beit Al Masri areas are being served by water-tankers.

Al Sharis – HajahAl Sharis area is located at Al Sharis district in the Hajah Governorate, about 5 km east Hajah city centre. It is located on flat terrain. The area includes 1,852 household and 17,712 people16 in total distributed over six zones: Sudan, Al Jobiah, Al Marid, Al Kadeh, Al Kabri and Al Sharis Al Asfal. Further details are shown in Figure 7.

Figure 7 Al Sharis area, Hajah Governorate

The Hajah Local Water and Sanitation Corporation is managing and operating a public water supply network for 300 households using a network of ductile iron pipes constructed in 1984 with a total length of 4,880 meters and spread over the six main zones as follows:

Sudan - 1,600 metersAl Jobiah - 150 metersAl Marid - 130 metersAl Kadeh - 100 metersAl Kabri - 300 meters

16 Not all are covered by the scheme.

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Al Sharis Al Asfal - 2,600 meters

The existing water network is in poor condition and covers only around 30% of the existing area and about 300 households. The remaining 1,582 household of Al Sharis area are served by tankers.

The water produced from the water wells and the rainwater pit in Al Sharis is pumped through 16 km of transmission lines to a central concrete water reservoir in Hajah city centre.

Demographic information on the four areas

Estimates of the population and household numbers in the four areas are provided in Table .

Table 12 Population and household numbers (2009)


Population 8,478 12,150 4,362 13,047

Households 1,115 1,518 614 1,435

Average household size 7.6 8.0 7.1 9.1

Population growth rate (% per year) 5.6% 2.5% 3.0% 3.1%

Consultant estimates based on 2005 census and official statistics.

Population growth rates are based on extrapolation of recent trends taking account of the rural-urban migration patterns. The schemes are, apart from Al Salabah on the fringes of the expanding cities where growth rates tend to be highest. Although the overall average growth rate of the cities may moderate over time, during the 15 year period of the contract relatively high growth rates are expected to be maintained.

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Annex 8. Implementation risks

a) Company performance risks

There are risks that a PMNO will fail to perform satisfactorily in terms of expanding the pipeline network or, despite obligations in its contract, supplying water of an adequate reliability and quality.

Table 13 Company performance risk

Risk Effect of risk and parties affected

Mitigation measures Level of risk w/o mitigati

on

PMNO fails to maximize water coverage in the villages/peri-urban areas.

A proportion of households will be without piped water and will have to obtain supplies from private operators.

Without a lifeline tariff, the subsidy scheme provides equal incentives to the PMNO to supply all houses.

If the PMNO fails to expand the trunk network to part of the village the subsidy payments will be scaled back accordingly.

Medium

PMNO fails to maintain an adequate reliability and quality of water supply.

All households will suffer from poor quality or unreliable water supply.

Local councils will complain to the LC and the LC will take enforcement action including, after allowing a reasonable time, charging the PMNO for remedying the problem. The ultimate sanction will be the early termination of the contract.

Local councils will comment on the annual reports provided by the LC to the PMU which detail actions taken to enforce PMNO quality standards. This allows the local councils a channel of complaint.

Low

PMNO collects connection fees but there are long delays in connection of the houses.

Consumers will face long delays in connection to the water supply.

Local councils will complain to the LC and the LC will take enforcement action including, after allowing a reasonable time, charging the PMNO for remedying the problem. The ultimate sanction will be the early termination of the contract.

Medium

LCs do not have capacity to conduct water quality monitoring.

Households may suffer from poor quality water supply.

Water quality testing could be outsourced to independent laboratories (if available).

Low (in Phase 1 areas)

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Mitigation measures Level of risk w/o mitigati

on

PMNO fails to maintain the network and pumps toward end of the contract.

LC must rehabilitate the network on hand-over, or supply quality and reliability will deteriorate and households will suffer.

The contract will incentivize the PMNO to maintain the network by reducing the compensation if the network is in poor condition. Conditions of the assets will be evaluated every five years and at the end of the contract by an independent third party and an assessment made of investments needed if any to reach standards. Also, five years before contract closure, a performance bond will be provided by the PMNO.

Medium

PMNO fails to continue to expand the network toward the end of the contract.

New houses or new areas will not receive water supply.

Compensation will be paid on handover based on the investments made by the PMNO.

Medium

b) Technical risks

The primary technical risk is the risk that the water table will drop and the productivity of the wells will fall.

Technical risks can be sub-divided into the two broad categories of construction risks and operational risks.

Construction risks may arise from delays in delivery of materials and equipment, delays due to contractor performance or difficult conditions encountered when drilling (where necessary).

Operational risks are normally associated with failure of equipment due to poor design or deterioration. Design risks can be mitigated by application of appropriate standards. Deterioration can be avoided by maintenance of essential components.

Table 14 Technical risk matrix


Mitigation measures Level of risk w/o

mitigation

Water table falls and supply dries up.

Unexpected costs in drilling for or finding additional water resources.

Or the water supply reliability will deteriorate, households will be affected and the contract may

Careful selection of water source may help and well pumping test.

Policies to reduce over exploitation of water resources for agriculture

High

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mitigationbe terminated early. may also help but cannot be

guaranteed.

This is an unavoidable risk. The contract will specify that the PMNO will be allowed to recover the additional costs through higher tariffs.

Construction risk: delays in delivery of materials and equipment or poor contractor performance.

Commissioning delay resulting in increased capital cost, higher interest costs and delayed revenues.

PMNO will suffer financially. Households will suffer delays in receiving piped water.

Selection of reliable suppliers and competent contractors.

Penalty clauses in contractor’s contract.

The framework gives the PMNO incentives to select its suppliers and contractors carefully.

Medium

Operational risk: failure of pumps, leakage

Increased costs to replace or rehabilitate pumps and to stem leaks; higher borrowing to cover costs and consequential interest costs. Or losses will be higher, resulting in higher pumping costs.

PMNO will suffer financially.

Households will suffer from poor service.

Selection of reliable suppliers and competent contractors for the initial works and penalty clauses in contractor’s contract.

Continuous maintenance of pumps.

The framework gives the PMNO incentives to select its suppliers and contractors carefully and to adequately maintain equipment.

Low (with diesel pumps)

Operational risk: unreliable power supply (for electric pumping).

Water supply reliability will deteriorate. The PMNO will suffer financially.

The tariff and subsidies assume that power supply is unreliable and the PMNO must therefore introduce diesel pumps. Adoption of electric pumping will be at the PMNO’s own risk. Water supply reliability must be maintained notwithstanding the poor power supply.

High

c) Environmental risks

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Environmental risks are those primarily associated with contamination of the water at source that is not removed through normal treatment.

Table 15 Environmental risk matrix



mitigation

Contamination of water sources by nitrates used in agriculture

Households, particularly babies using bottled milk (blue baby syndrome), will suffer from high levels of nitrates.

Policies to reduce over-use of fertilizers exist.

The costs of removing nitrates from drinking water would be excessive and a cheaper solution would be to encourage mothers using bottled milk to use alternative sources of water.

Low-Medium

Bacterial contamination of water entering through the pipe network

Households would suffer from contaminated water.

Few leaks with new pipes. Disinfection with chlorine. LCs responsible for routine monitoring of water quality through sample testing. LC will take enforcement action.

Low

d) Commercial risks

All risks (political, technical and environmental) may impact directly or indirectly on the commercial performance of the companies but here the focus is on other risks facing a PMNO: market risk and risk of cost over-run. These risks are under the control of the PMNOs and the costs should generally be borne by the companies.

Table 16 Commercial risk matrix



mitigation

PMNO gets into (general) financial difficulties

The owner of the PMNO will risk losing the business.

The selection of the PMNO will take account of the financial standing of the PMNO and the qualifications, including business qualifications.

In the event that the contract is terminated, the LC will take over until a replacement PMNO is found.

Medium

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mitigation

PMNO is unable to finance the upfront connection costs and main water supply system and network

The scheme would be in jeopardy, affecting the PMNO and households.

The selection of the PMNO will take account of the financial standing of the PMNO.

The capital subsidies will be substantial so that the financing requirements will be moderated.

Low

Household numbers and water demand are lower than predicted

PMNO revenues will be lower than predicted while costs will by broadly the same.

There is a balancing risk that demand will be higher and revenues will be higher than expected while costs will be broadly the same.

The PMNO will have factored this risk into its bid.

Low

Customers unable or unwilling to pay the contracted water charges

PMNO will have poor cash flow. Bad debts may be written off.

An allowance is built into the tariffs in the expectation that some customers will have payment difficulty.

PMNOs will be responsible for reasonable debt management practices, including disconnection of water supply, to recover water charges.

Medium

Interest rate movements cause an increase in the cost of loan servicing

Debt servicing costs rise for the PMNO.

The tariff adjustment formulae take account of interest rates so that there may be no effect on profits or the effect may be small.

Low

Inflation, wages and other (non-fuel) local costs increase

Costs rise for the PMNO. The tariff adjustment formulae take account of inflation rates so that there may be no effect on profits or the effect may be small.

Low

The subsidy on diesel prices removed or reduced

Costs rise for the PMNO. The removal of the subsidy on diesel prices may be linked to improvements in the reliability and availability of power, allowing the PMNO to switch to electric pumping.

If not, the contract will allow an adjustment to the tariff.

Low

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mitigation

Local councils seek to pressure the PMNO into lowering the tariffs or into not increasing tariffs in response to allowable cost increases

Lower revenues could jeopardize financial viability of the scheme and discourage the roll-out of the scheme

Tariff is set in the contract. High

e) Regulatory and other risks

The arrangements will be regulated primarily through contracts and there should be few regulatory risks.

Table 17 Regulatory risk matrix



mitigation

Interference, through the LCs, by local councils in the operation of the service

Burden on the PMNO in responding to complaints or requests.

Generally, the interest of the local councils and the PMNO are balanced with the local council happy to have a reliable water supply with water prices lower than those charged by water tankers, and the PMNO happy to be operating a profitable business.

High

LCs terminate the contract early in order to take over the service

Additional legal costs for the PMNO or, if successful, early termination of the contract.

LCs have allowed the isolated networks to fall into disuse and are not strongly motivated to take over these networks early.

Early termination of contracts with PMNOs will send negative signals to other potential investors in other schemes. To the extent that LCs wish to encourage the development of water networks, this should discourage them from early termination unless it is absolutely necessary because of breach of contract.

Subsidies will not be available to LCs and there will be high compensation to PMNO so that taking over the PMNOs

Low

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mitigationtoo early will increase the financing burden on LCs.

Pass-through costs (interest rates, inflation or diesel fuel costs) increase leading to tariff increases

Household water bills increase to unaffordable levels for some households.

Lifeline tariff will be introduced. High

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Annex 9. Documents in the project file

1. World Bank, Project Appraisal Document for Water Sector Support Project (P107037) - Report No: 4680 1-YE, January 28, 2009.

2. Ministry of Water and Environment and World Bank, Equity and Efficiency in Yemen’s Urban Water Reform – A Sector Study and Poverty and Social Impact Analysis, Main Report, March 2009.

3. Update of the National Water Sector Strategy and Investment Programme (NWSSIP) December 17, 2008, Final Draft.

4. HS and Associates, Yemen: Urban Water Supply OBA Project, Engineering Report, October 2009.

5. World Bank, Procurement Capacity Assessment of the Project Management Unit UWSSP, October 2009 updated March 2010.

6. Republic of Yemen, Ministry of Water and Environment and Ministry of Agriculture and Irrigation, Sector Wide Environmental and Social Assessment (SwESA) for the Water Sector Support Program, Final report, December 2008.

7. Republic of Yemen, Ministry of Water and Environment and Ministry of Agriculture and Irrigation, Resettlement Policy Framework (RPF), for the Water Sector Support Program, Final report, December 2008.

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