Documentof The World Bank FOR OFFICIAL USEONLY ReportNo: 28557-GH PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OF SDR71MILLION (USD 103MILLIONEQUIVALENT) TO THE REPUBLIC OF GHANA FOR AN URBANWATER PROJECT July 1,2004 Water and Urban2 CountryDepartment10 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (Exchange Rate Effective April 30,2004) Currency Unit = Cedi $8850 = US$1 US$1.4513 = SDR1 FISCAL YEAR January 1 - December31 ABBREVIATIONSAND ACRONYMS CAS CountryAssistance Strategy CFAA Country FinancialAccountabilityAssessment CPAR CountryProcurementAssessment Review DCA Development Credit Agreement EAMP EnvironmentalAssessment andManagement Plan FMR FinancialMonitoringReport FYIP FirstYear Investment Program GPRS GhanaPoverty ReductionStrategy GOG Government of Ghana GWCL Ghana Water Company Limited HIPC Highly IndebtedPoor Countries' Initiative IDA InternationalDevelopmentAssociation MDG Millennium DevelopmentGoals MOFEP Ministry of Finance andEconomic Planning MTR Mid-TermReview MWH Ministry of Works andHousing NDF NordicDevelopmentFund NGO Non-GovernmentalOrganization OED Operations EvaluationDepartment PHRD JapanesePolicy andHuman ResourcesDevelopmentFundGrant PMU Project ManagementUnit PPF Project PreparationFacility PPP Public PrivatePartnership PSP PrivateSector Participation PURC Public Utilities Regulatory Commission RAP ResettlementAction Plan RPF ResettlementPolicy Framework RRRF Repair, Replacement andRehabilitationFund SIP Subsequent InvestmentPrograms SOE Statement o f Expenditure TA Technical Assistance UWP UrbanWater Project Vice President: Callisto Madavo Country Director: Mats Karlsson Sector Manager: Inger Andersen Task Team Leader: Alex McPhail FOROFFICLALUSEONLY REPUBLICOF GHANA URBANWATER PROJECT CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE .................................................................. 1 1. Country and sector issues .................................................................................................... 1 2. Rationale for Bank involvement.......................................................................................... 2 3. Higher level objectives to which the project contributes .................................................... 3 B . PROJECTDESCRIPTION .................................................................................................. 3 1 . Lending instrument .............................................................................................................. 3 2. Project development objective and key indicators .............................................................. 3 3 . Project components .............................................................................................................. 4 4 . Lessons learned and reflected inthe project design ............................................................ 5 C . IMPLEMENTATION ........................................................................................................... 7 1. Partnership arrangements .................................................................................................... 7 2. Institutional and implementation arrangements .................................................................. 7 3. Monitoring and evaluation o f outcomeshesults .................................................................. 8 4. Sustainability ....................................................................................................................... 9 5. Critical risks and possible controversial aspects ................................................................. 9 6. Loadcredit conditions and covenants ............................................................................... 10 D APPRAISALSUMMARY . .................................................................................................. 11 1. Economic and financial analyses ....................................................................................... 11 2 . Technical ........................................................................................................................... 11 3. Fiduciary ............................................................................................................................ 12 4. Social ................................................................................................................................. 12 5. Environment ...................................................................................................................... 13 6 . Safeguard Policies ............................................................................................................. 13 7. Policy Exceptions and Readiness ...................................................................................... 15 This document has a restricted distribution and may be used by recipients only in the performanceof their official duties I t s contents may not be otherwise disclosed . \withoutW o r l d Bank authorization. . Annex 1: Country and Sector or Program Background .......................................................... 16 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ..................18 Annex 3: Results Framework and Monitoring ......................................................................... 20 Annex 4: Detailed Project Description ...................................................................................... 22 Annex 5: Project Costs................................................................................................................ 27 Annex 5: FinancingPlan ............................................................................................................. 28 Annex 6: ImplementationArrangements .................................................................................. 29 Annex 7: Financial Management and DisbursementArrangements ..................................... 31 Annex 8: Procurement ................................................................................................................ 38 Annex 9: Economic and Financial Analysis .............................................................................. 46 Annex 10: Safeguard Policy Issues ............................................................................................. 58 Annex 11: Project Preparation and Supervision ...................................................................... 62 Annex 12: Documents inElectronic Project File (IRIS) .......................................................... 64 Annex 13: Statement of Loans and Credits ............................................................................... 65 Annex 14: Country at a Glance .................................................................................................. 67 Annex 15: Private Sector Participation (PSP) Framework Paper .......................................... 69 Annex 16: Background of Consultations and Communication .............................................. 82 Annex 17: Description of GWCL Retrenchment Program ..................................................... 85 Map No 33216 . Map No 33236 . GHANA URBAN WATER PROJECT PROJECTAPPRAISAL DOCUMENT AFRICA AFTU2 Date: June 21,2004 Team Leader: Alexander A. McPhail Country Director: Mats Karlsson Sectors: General water, sanitation and flood Sector MangedDirector: Inger Andersen protection sector (100%) Themes: Project ID: PO56256 Environmental screening category: B-Partial Assessment Lending Instrument: Specific Investment Loan Safeguard screening category: S2 -- Limited imPact [ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ 3 Other: For Loans/Credits/Others: Total Bank financing (US$m.): 103.00 Borrower: Republic o f Ghana Responsible Agency: Project Management Unit E4Leshie Crescent Labone Water ResourcesCommission Bldg. Accra, Ghana EmmanuelNkrumah,Project Director Tel: +233 21 76 36 48 Fax:+233 21 76 36 50 E-mail:wsrs@,ghana.com I Estimateddisbursements(BankFY/US%m) FY 1 05 06 07 08 09 10 , 11 Annual , I 11.104 24.654 23.833 20.384 II 9.129 9.444 4.452 Cumulative 1 11.104 35.758 59.591 79.975 I 89.104 98.548 103.000 ,Project implementation period: Start October 14, 2004 End: June 30,2010 Expected effectivenessdate: September 30, 2004 Expectedclosing date: December31, 2010 , Does the project require any exceptions from Bank policies? Ref: PAD D.7 Have these beenapproved by Bank management? Component 2 - Public-Private PartnershipDevelopment. This component supports the payment of the private operator under the proposed management contract and technical and financial auditors to measurethe operator's performance. Component 3 - Capacity Building and Project Management for Training and Technical Assistance. Allocations for training in the GWCL and GWCL Headquarters, vehicles, office equipment, support for the PMUandensuringenvironmental safeguards. Component 4 - Severance Program. This component is to finance the anticipated severance program at the Ghana Water Company Ltd. Which safeguardpolicies are triggered, if any? Ref: PAD 0.6, TechnicalAnnex 10 OP 4.01 OP 4.12 OP 7.50 Significant, nonstandard conditions. Boardpresentation: 1.The private sector management contract request for bidshas beensent to biddersandthe bid opening date decided. 2. Completion o fthe Project ImplementationManual. Loadcredit effectiveness: 1. Signingo fthe subsidiary loanagreements. Covenants applicable to project implementation: None. A. STRATEGIC CONTEXTAND RATIONALE 1. Country and sector issues 1. Ghana has an estimated population o f 20 million people, o f which only approximately 10.3 million (51 percent) have access to improved water supply. Inthe country's urban areas, comprising about 8.4 million residents, just 61 percent o f the population have access to an improved water source. It is therefore, not surprising that water supply and sanitation plays a key role in the Ghana Poverty Reduction Strategy (GPRS, approved by Parliament in February 2003). The GPRS focuses on improving access in rural, peri-urban and poor urban areas and emphasizes (among other key points): effective management o f urban systems; sector restructuring to improve management and investment in water supply and sanitation; and improving financial solvency through charging appropriate tariffs. 2. Similar to the urban water sector in many developing countries, there are serious constraints to meeting the challenge to provide adequate water for all urban residents. InGhana, these include a steadily worsening financial condition over the last five years for Ghana Water Company, Limited (GWCL), the country's national urban water utility, which in part led to investment levels over the last decade that averaged only US$1.50 per capita per year; all of which was compounded by weak implementation capacity caused by a rate o f staff attrition and salary erosion. 3. To address these constraints, the Government o f Ghana (GOG) has undertaken several key initiatives. First, the GOG, inconsultation with a wide range o f stakeholders in 1996, opted to explore a significant public-private partnership arrangement for the urban water sector, both to restore financial stability and to lay the foundations for attracting private sector investment over the long run. Next, and in order to provide an adequate regulatory framework to support both public and private operations in the sector, Ghana established a multi-sector (water, electricity and gas) regulator in 1997. Finally, the Government has recognized the importance o f a qualified and adequately compensated staff and has committed itself to financing a large staff reduction program in GWCL, increased training for those remaining with the utility, and gradually restoring salaries to be in line with comparable skills and responsibilities in other sectors o fthe economy. 4. To summarize, those familiar with the urban water sector believe that a combination o f three critical actions are needed to: increase access and service, attract urgently needed investment and restore GWCL capacity. First, a re-orientation of the company to emphasize commercial and managerial expertise, as well as the current engineering skills i s required. Next, the debt structure o f GWCL is un-sustainable and a debt reorganization i s ongoing'. The restructuring should include a combination o f write-offs, conversion to capital and re-scheduling. Finally, GWCL i s overstaffed and a severance program to reduce the wage bill by about 40 percent i s indicated. If these three challenges can be overcome, there i s every indication that Ghana's urban water sector will quickly recover. ' The GOG iscurrentlyundertakinga debt-restructuringexercise for GWCL with the objective of reducingthe debt burden. 1 5. Finally, and as i s discussed in Annex 1, the collection, disposal and treatment o f wastewater remains a significant challenge in Ghana. Wastewater is the responsibility of municipalities under the Ministry o f Local Government, and thus institutionally and financially separated from the provision o f potable water. Furthermore, there appears to be little demand for centralized wastewater collection and disposal systems. Therefore, it i s also unclear about the willingness of urban residents to pay for improved wastewater handling. 6. Although the government acknowledges the wastewater challenge, it has chosen to put its current emphasis on expanding access to water supply. Various Bank-funded projects (Urban V, Urban Environment and Sanitation Projects 1 and 2) and some bilateral-assisted projects include substantial interventions on sanitation in major urban areas through latrine programs, sullage disposal via storm water drainage channels and minor sewage treatment facilities. These projects will serve to lay the foundation for a more comprehensive effort in the near fiture to develop formal wastewater policy and implementationprogram. 2. Rationale for Bank involvement 7. One o f the three pillars o f IDA'SStrategic Assistance Framework for Africa i s "serv,ice provision for human development". The GPRS and Country Assistance Strategy (CAS) for Ghana also both acknowledge that efficient basic service delivery i s a necessary ingredient to sustainable development. Along with energy, roads, telecommunications and sanitation, a reliable and affordable source o f clean water i s an essential component o f the basic infrastructure package neededfor robust economic activity and also necessary to ensure a healthy and vibrant population. Recognizing the central role that urban water supply plays in any country's growth and poverty reduction strategy, and in consideration o f the sector challenges highlighted in the previous section, the World Bank has for many years targeted a portion o f its assistance efforts to Ghana's urban water sector. 8. Although it has not always been the case, today IDA i s the only multilateral donor active inthe urbanwater sector. Bilateral participation is limitedto a few countries, most notably the Dutch and Spanish governments. In contrast, the rural water sector enjoys widespread support from both multilateral and bilateral donors. The difference between the urban and rural sectors can largely be explained by: (i) the long gestation period for a viable Private Sector Participation (PSP) option to be identified and implemented; (ii) the deterioration o f GWCL's balance sheet which made it un-attractive to some lenders; and (iii) inclusion o f selected previous donor the loans in the Highly IndebtedPoor Countries' Initiative (HIPC) process. Fortunately, the World Bank could consistently dedicate sufficient resources over many years to help the GoG work through the sector's difficult issues, and to assist in designing a project that fulfills the difficult requirements o f basic service provision plus a significant public-private partnership focus. In addition, given its extensive and world-wide experience with both PSP in infrastructure and the urban water sector, the World Bank Group brings a unique and valued added inputto the Project. 9. The World Bank has several advantages over other possible avenues o f assistance to the sector. First, the World Bank can make large investments and achieve significant impact in terms of physical rehabilitation and increasing access. The Bank Group also has a large staff with extensive experience and expertise in water engineering and the commercial operation of 2 utilities. As was mentioned above, it also has sufficient resources to permit engagement over a prolonged period, helping to ensure consistent policies and investments. Finally, urban water utilities will need substantial financing from private sources, and the Bank i s perhaps uniquely positioned in terms o f expertise and knowledge to assist the government in establishing the necessary conditions and environment to encourage non-public investment. 3. Higher levelobjectives to which the projectcontributes 10. The GPRS maps out the medium-term strategy for promoting growth and reducing poverty. The overarching goal o f the GPRS is to achieve sustainable, equitable growth, accelerated poverty reduction, and the protection o f the vulnerable and excluded within a decentralized democratic environment. The government set its poverty reduction goals in alignment with the MDGs, and articulated its strategy around five pillars. 11. The Ghana CAS (Report No. 27838-GH, dated February 20, 2004) is built on three strategic foundations in support o f the GPRS, namely: (i)sustainable growth and job creation; (ii) developmentandserviceprovision;and(iii) human governance and empowerment. 12. The proposed Ghana Urban Water Project contributes to two o fthe three CAS pillars viz, "sustainable growth and job creation" and "human development and service provision'' and i s specifically mentioned inthe CAS as one o f the major lendingoperations designed to contribute to the achievement o fthe country's developmental outcomes. B. PROJECT DESCRIPTION 1. Lendinginstrument 13. The lendinginstrumentis a Sector InvestmentLoan(SIL). 2. Projectdevelopment objectiveand key indicators 14. The Project's two principal development objectives are to: (i)significantly increase access to the piped water system in Ghana's urban centers, with an emphasis on improving access, affordability and service reliability to the urban poor; and (ii) restoring long term financial stability, viability and sustainability o fthe GWCL. 15. Progress toward these principal Project outcomes would be measured through the increase in the percentage o f the country's urban population with access to the piped water network; the decrease in the proportion of urban water service provided through informal vendors; the increase in average hours o f water availability at network distribution points; and GWCL's ability to obtain and afford private sector financing for infrastructure. 3 Poverty Focus of the Project The provision o f easily accessible potable water is a key component o f poverty alleviation in Ghana, as it is in every country. For the Urban Water Project, the Government has identified three areas o f poverty focus: Access, Affordability and Targeting. Access: Increasing access to improved water supplies is a major water sector policy objective o f the government. Therefore, over 75 percent o f Project funds (US$91 million) are for civil works and associated engineering. The government has set a Project goal at least 50,000 new household connections, the majority o f which will be to low income households and for the provision o f stand-posts. To complement these efforts, the proposed management contract will contain a performance criteria for increasing cubic meters sold at the "life line" portion of the tariff, thereby giving the private operator an incentive to extend service to as many new connections as possible. Affordability: The emphasis on new connections also means that poor households will buy less water from high price vendors, significantly lowering their average cost o f water. The Project supports efforts o f the Public Utility Regulatory Commission (PURC) to put in place programs to ensure that tanker trucks deliver water to consumers at affordable prices. This study must be completed by time o f the mid- term review and recommendations implemented inthe second halfo fthe Project. Targeting: The PURC has defined a program to ensure better targeting o f the poor with affordable delivery o f water supply services. PURC's pro-poor program consists o f actions to (i) rationalize lifeline tariff to better target poor consumers living in compound houses; (ii) improve affordable access to water supply for the very poor living in areas served by water vendors; and (iii)enhance the quality of tanker service delivery including rationalizing the cost o f service. To realize the pro-poor objectives o f the proposed project, the PURC will be supported to implement its set o f pro-poor actions including the setting up o f identified pilots in selected cities. 3. Project components 16. The Project comprises the following four components: i.SystemExpansionandRehabilitation(US$91.8 million). Thiscomponentisdesignedto support: (i) increasing the amount o f treated water for sale; (ii) extending service to low income areas; and (iii) rehabilitating existing network to reduce non-revenue water. It also includes dam safety upgrades, meters, engineering and vehicles and equipment for GWCL Regional and District offices. ii.Public-PrivatePartnershipDevelopment(US$6.5 million). Thiscomponentsupportsthe payment o f the private operator under the proposed management contract and technical and financial auditors to measure the operator's performance. iii.CapacityBuilding.andProjectManagement(US$7.7 million). Thelargestallocations in this component go for Training (US$2.0 million) and Technical Assistance (US$2.5 million). Details o f the Technical Assistance program are given in Annex 4. The Training component i s left un-specified because the Management Contract Operator will propose a training plan once it i s in place and can assess training needs. Also included 4 are allocations for training in the GWCL Headquarters, vehicles, office equipment, support for the P M U and environmental safeguards as well as support to the PURC. iv. Severance Program (US$l 1.O million). This component is to finance the anticipated severanceprogram at the GWCL. See Annex 4 for a detailed project description and Annex 5 for a detailed cost summary, 4. Lessons learned and reflected in the project design 17. Projects in the urban water sector have been undertaken by the World Bank in virtually every borrowing country since Bretton Woods. As a result, there is a wealth o f experience in this area, and a continually expanding list of important lessons learned. For example, inthe last four years the World Bank Operations Evaluation Department (OED) has issued over 40 evaluation reports for water projects, with the majority dealing with urban water supply. Moreover, there are 3 previous IDA urban water projects in Ghana since 1990 which provide specific lessons for this country. The World Bank Infrastructure Network i s also very active in researching and promoting best practice for this sector. From this large reference base, five lessons learned appear to be most relevant for the Project. PSP inthe Water Sector 18. World Bank experience shows that a properly designedPSP contract in the water sector can make a significant difference inutility sustainability. Inaddition, PSP mechanisms, such as Output Based Aid schemes, can also serve as a catalyst to extend the piped water distribution system, and inparticular to low income areas. It i s important that the expectations raised around a potential PSP intervention be realistic, and governments are increasingly aware that PSP should be seen as a process or tool to accomplish specific objectives, and not as a panacea to rectify years o f neglect and poor management. In this Project, the government has: (i) adjusted its expectations to the market (adopting a management contract instead o f affermage approach); (ii) tried to design a PSP intervention that emphasizes input from potential bidders as well as stakeholders; and (iii)it will use the PSP contract to help meet the limited, butpriority objectives to extend the distribution network to low income households and restoring financial stability to GWCL. Physical Infrastructure Design 19. Project evaluations generally reveal frequent over-estimation o f demand when planning for expansion inwater supply. Also, some projects inthe Water Decade were not synchronized well -while the pipednetwork expansion was completed, production capacity was not enhanced and as a result new pipes were under-utilized. In other cases, treatment and transmission capacities were expanded, but the distribution network remained insufficient for water delivery. For this Project; (i) order to better evaluate demand, and the need for an increase in water in production capacity, rehabilitation will precede network expansion; and (ii) extension works will include whole systems, from extraction to house connection, to ensure optimization o f benefits. 5 InstitutionBuilding 20. Experience in the sector, and inparticular with GWCL, has confirmed that strong utility management i s key to cost recovery, better service delivery and long term sustainability. Just as important i s the need for strong and capable sector institutions, including the capacity for effective communications and stakeholder outreach. The Project in its design has emphasized management improvement through introduction o f the private sector, and supported institution building and stakeholder outreach during preparation through the use o f a Project Preparation Facility (PPF) and a Japan Policy and Human Resource Development Fund (PHRD) grant to build up technical and managerial capacities, undertake stakeholder opinion analysis and communications plus train the Project Management Unit (PMU)-especially in financial management and procurement. During implementation, the Project will provide at least US$3 million to buildon these efforts to further strengthenthe sector regulator, improve P M U capacity to implement, monitor and evaluate progress, assist the Ministry o f Works and Housing (MWH) to develop and improve sector policies, build up technical capacity in the country's environmental agencies and support a wide range o ftraining programs. Enabling Environment 21. OED evaluations and related sector work emphasize the need for broader sector reform, rather than discrete investments, in order to have sustainable and measurable impact on service delivery. Thus, there is need for well functioning legal, institutional and regulatory agencies. Experience also indicates that tariff setting should be independent o f the service delivery ministry and the utility, in order to reduce political interference on utility finances. These core lessons have been fundamental to Project design. The sector reform focus o fthe Project includes support for the regulator and developing a national wastewater strategy. Finally, the Project also introduces a management contract with the private sector, which should establish a foundation for more complex Public-Private Participation (PPP) arrangements in the future that will bring private investments. Autonomy o f Implementing Agencies 22. Experience shows that utilities that can bill, collect and keep their revenues, have their own employees (i.e., that are not civil servants), can employ the best qualified people and set salary levels free from government interference, and that have the opportunity to develop their own procurement rules will generally perform better than utilities that are under close political control or part o f a large bureaucracy. Thus, the Project seeks to deepen the autonomy o f the GWCL through strengthening o f the regulatory framework, lessening its reliance on subsidies (especially for electricity and debt service) and increasing its commercial capacity. Alternatives considered and reasons for reiection 23. For this Project, a public versus private management regime was first examined and, once a private sector option was decided, two different PSP interventions were considered. The process, and accompanying external environment, for the selection o f the current Project design i s described below. 6 Public Sector Solution 24. Over the period 1973 to 1998, the IDA investedUS$152.4 million to improve Ghana's urban water supply infrastructure. The results over 25 years o f public sector management have been disappointing, and the urban water sector remains in a poor condition with the trend in service and sustainability currently worsening. Thus, the continuing with a public sector only regime for a new project was not recommended by IDA, nor was it chosen by the Government o f Ghana. Private Sector Participation 25. Given the rejection o f the public sector option, in 1994 the Ghana Water Sector Restructuring Study was commissioned by the MWH to evaluate options for private sector participation. The study recommended proceeding with a lease arrangement for the provision o f water supply services in major urban areas. At a major stakeholder workshop, in early 1995, this option was endorsed as the preferred mode ofPSP. 26. At that time, a PSP option was also thought likely to increase non-public sector investment in the urban water sector as a result of private sector led increases in efficiency. However, in the last nine years there has been a significant change in both the international financial markets and in the desire o f international operators to expand their business to developing countries. Today, financial markets have much less investmentmoney available than inthe late 199Os, and many ofthe private operators inthe water sector have suffered large losses ( e.g., inArgentina, Brazil and the Philippines). In2003, given the low likelihood of achieving financial closure, the lease option was therefore re-assessed by the Government. The PSP option now beingpursuedby the government i s a management contract o f up to 5 years. C. IMPLEMENTATION 1. Partnershiparrangements 27. The Projecthas potential co-financing from the Nordic Development Fund(NDF), which has committed approximately 4.0 million (about US$5 million). The NDF will support the rehabilitation o f existing dams and weirs, a need identified under the Dam Safety Study, and related consultant services. 2. Institutionaland implementationarrangements 28. The Project will be implemented by the GWCL through a dedicated PMU. The P M U is staffed with an IDA-project experienced Project Director. H e i s or will be assisted by a Project Engineer, a FinancialOfficer, a Public Relations Officer, a Low Income Customer and Safeguard Officer, and a secretary. During preparation, it was also agreed with the GOG that the MWH would be the primary contact for sector policy matters, but that the PMU, with technical support from GWCL would be incharge o f Project implementation. 7 29. The above arrangement was selected in order to have the most qualified agency, i.e. GWCL, ultimately responsible for implementingthe Project. Project management integrated in GWCL (i.e., without a separate PMU) was considered, but rejected given the complex PSP arrangements and the large amount o f civil works that will require substantial procurement using World Bank guidelines. 30. The P M U (and GWCL) will face considerable challenges in implementing a Project o f this size and complexity. Only the PMUProject Director has significant experience with World Bank projects and procurement, while no one has previous experience with World Bank financial management procedures. To address these constraints, the World Bank Country Office inAccra has during project preparation spent considerable time training the PMU. The PMU has also been gaining experience with procurement and financial management under the PPFs and the PHRD grant. Detailed job descriptions for each member o f the P M U were also developed, which include the provision for annual performance reviews and the identification o f areas for technical training. Finally, the Project contains substantial amounts for Technical Assistance, which should further strengthenthe capacity o f both P M U and GWCL. 3. Monitoring and evaluation of outcomes/results 31. Data for the Project's outcome and results indicators (as shown in Annex 3) will primarily be generated in three agencies. First, the P M U will track a number o f indicators including: civil.works progress; new low income households added to the pipedwater system as a result o f the Project and number o f employees retrenched, and the number remaining in service, at GWCL. Next, the independent financial and technical auditors will monitor performance o f the management contract Operator, as well as track progress GWCL makes in meeting its financial goals. Finally, IDA will be responsible for monitoring progress in the policy sensitive areas, bothwith the principal ministry(MWH) and the sector regulator (PURC). 32. Capacity strengthening for monitoring i s most indicated for the PMU, and the Project supports training and capacity building inthis regard for these individuals. Particular attention is given the TOR for each staff, and the ensuring o f regular progress reports with reporting on monitoring indicators required therein. The P M U is adequately funded under the Project to carry out monitoring responsibilities, and the Project also supports the payment o f independent technical and financial audits to track progress in meeting the Project's development objectives inbothGWCL and with regards to the management contract Operator. 33. Evaluation o f interim results indicators will be part o f regular IDA supervision missions, and the MTR also provides a firm date for progress to be evaluated. Policy makers in the government, and especially in the Ministry o f Finance and Economic Planning (MOFEP) and MWH, will monitor effectiveness by which polices actually are completed and implemented, including one or two PURC objectives. This i s an important indicator-given the long gestation period (often years) for policy initiatives to mature inthe past. See also Annex 3. 8 4. Sustainability 34. The Government has demonstrated its commitment to the Project and relevant polices through: (i) requesting and using US$2 million in PPF funds; (ii) requesting and disbursing US$0.6 million in PHRD funds; and (iii) committing to request proposals from qualified firms for a management contract prior to presenting the Project to IDA'SBoard for approval. 35. Ensuringthe financial stability of the GWCL over the medium term is also critical to the sustainability o f the Project's objectives. Inthis context, the GOG will: (i) that quarterly ensure pass-through adjustments o f the water tariff are implemented, and has(ii) agreed to borrow from IDA to finance the severance of several hundred GWCL staff; and (iii) to rationalize agreed GWCL's debt structure with a view to sharply reduce its debt service obligations. 36. The Project's design complements these sustainability measures by supporting a public- private partnership with a view to improving, especially, commercial management capacity in GWCL, by providing investment funds to augment the number o f customers and water available for sale. 5. Critical risks and possible controversialaspects Risks RiskMitigation Measures RiskRating with Mitigation ~ To project development objectives GWCL pays inadequateattention to Improve orientationof GWCL through Modest the pro-poor issues thus limitingthe capacity enhancementtowards addressingpro- impact of the project on improving poor issues. access to the urban poor. Weak political will to sustain the Project preparation has de-emphasizedthe PSP Substantial reforms particularly the PSP element element and instead increasedawareness of where quick gains are not realized. stakeholdersabout improving water supply infrastructure. Reluctance of donors to re-engage in Improving managementofthe utility will help Modest the sector thereby limiting the stabilize financial situation of GWCL. possibility of cheap source of Presence of IDA increasesconfidence of other investment funds. donors to re-ennane. Weak implementation capacity within Implementationof Financial Management and Modest GWCL to effectively disburse in a Procurement Assessment recommendations. timely fashion the investment funds. Furthertraininn ofPMUfunctions To componentresults Investment needs far outstrips Restoration of GWCL to sound financial Substantial available funding. footing will improve availability of funds for investments and attract further sector investments. GWCL does not internalize the Introductionof private operator and infusion of Substantial operational improvements and new corporate culture including performance- corporate orientation. based instruments. Policy reform including retrenchment Union support for, and involvement in, the Substantial exercise is highly politicized thereby retrenchmentprogram. Employment o fan 9 leadingto inaction. Administrator for implementation. Programis consistent with previous retrenchmentprogram sin Ghana. Possible Controversial Aspects 37. Duringthe years that the restructuring of the water sector in Ghana has beenunderway, many developments have taken place on the global scene as well as within the national and sectoral contexts. While the political dynamics around all reforms are highly contextual, many outside dimensions related to reform programs and changes in the international water market have had an impact on this Project. As a result, urban water reforms have become highly political, and this dimension i s often as strong as the technical and financing issues associated withthese types o fprojects. 38. The Project has also evolved over the years from a lease arrangement to a management contract. Questions have been raised by local and foreign NGOs regarding: (i) the participation o f the private sector (which in the Ghanaian context has had a mixed history o f success); (ii) issues related to the impact o f the Project on the poor; and (iii)the potential weakening o f Government control over delivery o f water services. 39. While these issues are common in Bank-financed projects which have a significant PSP input, inGhana they have the ability to create political and reputational risks to the Project. As described above and inAnnex 16, the Bank and Government have taken active steps to mitigate these risks. However, these issues will likely remain contentious throughout implementation. 40. The Project contains a large severance component, which may affect up to 2000 GWCL employees. Contrary to some severance programs, this one is welcomed by most o f the staff targeted for severance. As the severance program must conform to the existing collective bargaining agreement and local law, it i s expected to be both fair and in line with previous severance programs carried out in Ghana. Annex 17 contains more details on the proposed Severance Program, per the new guidelinesfor OPA3P6.00 on Bank Financing. 6. Loadcredit conditions and covenants Board Conditions i.Theprivatesectormanagementcontractrequestforbidshasbeensenttobiddersandthe bidopening date decided. ii.CompletionoftheProjectImplementationManual. Effectiveness Conditions i.Signingofthesubsidiaryloanagreement. ii.Provisionoflegalopinions. 10 D. APPRAISAL SUMMARY 1. Economic and financialanalyses 41. The Base Case financial and economic model, shown in Annex 9, returns the following results: Financial Economic INVP (OOO$) 12,388 22,07 1 IRR I 16% 121% I The difference betweenthe financial and economic results are the estimated effect oftaxes equaling 15 percent as included inthe total cost for Component 1 (which i s principally civil works and engineering). Annex 9 contains the description o fthe methodology used, the principal assumptions and the sensitivity analysis. 2. Technical 42. The investment programs for civil works component have beendividedas follows with tentative cost estimates shown inparenthesis: i.TheFirstYearInvestmentProgram(FYIP)(estimatedatUS$17million); ii.SubsequentInvestmentPrograms(SIPs)(estimatedatUS$70million); and iii.Repair,ReplacementandRehabilitationFund(RRRF)(US$5million). The objectives ofthe: i.FYIPweretoinitiateconstructionofminorworks,forwhichnomajorstudieswouldbe required,to achieve immediate impacts on improvedservice coverage, andto reduce un- accounted for water; ii.SIPswouldbetocomplementtheFYIPbycoveringforindividualwatersupplysystems the extension o f water production, transmission and distribution works taking into account long term requirements; and iii.RRRF,tobemanagedbytheOperator,wouldbetoenableminorandurgentlyrequired investmentsto take place on annual/quarterly basis and to facilitatehmprove operationand maintenance and distribution o f available water supplies. For the SIPs the following steps for investmentprioritizations are envisaged: i.Distributionofavailablefundsamongthe10regionswithallregionstobeincluded; 11 ii.Selectionofurbanareasorwatersupplysystemswithinindividualregionssinceitwillnot be feasible to cover all 85 urbanareas presentlybeingoperated by the GWCL; and iii.Basedonfeasibilitystudiesforindividualwatersupplysystemsselectionofproject components to be subject to detail engineeringdesignand subsequent execution. The above approach which is further elaborated uponunderAnnex 4, would ensure satisfactory prioritization among urban areas and technical solutions adjusted to local needs and appropriate service levels and standards. 3. Fiduciary 43. An assessment of the financial management capacity o f the PMU set up for the implementation o f the project was carried out and found to be adequate. GWCL has assigned a project accountant, who will be responsible for the day-to-day management o f the project funds. The project accountant has received training on World Bank disbursement procedures and is presently managing the project PPF and Recipient Executed Trust Fund. The auditing arrangements have also beenassessed to be adequate and the project audit will be covered as part of the audit o f GWCL. The overall fiduciary risk for financial management i s rated as moderate." 4. Social 44. During preparation of the Project, many issues emerged and evolved, both within the country and inside the water sector. For example, questions were raised by local and foreign NGOs regarding the entrance o f the private sector, which in the Ghana context has had a mixed history; issues related to pricing and servicing o f the poor; and the potential lack o f Government control o f water services. While these issues are common inWorld Bank projects with a private sector component, within the context o f Ghana they created significant political and reputational risksto the Project. 45. Applying the lessons of global experience inthe urbanwater sector, an innovative project development process was developed that completely integrated strategic social concerns and communications into project design. To support the government's water reform programs, respond to public concerns, and manage political and reputational risks related to the Project, the World Bank completed a Communication Needs Assessment and made recommendations to improve communications including the development o f a "communications committee" to develop an informed communications program between the various Ministries, NGOs, labor unions andthe GWCL andto improve communications with stakeholders andthe general public. 46. Inaddition several other initiatives have beenundertaken to keep citizens and interested stakeholders up-to-date on both the private-sector-partnership and the civil works component o f the project. Annex 16 discussesthese, and other stakeholder communication measures indetail. 47. As was discussed inthe Box inSection B. 2. above, a major concern is to ensure that the Project focuses on increasing access to the piped water system at affordable prices for all, and especially the urban poor. The correct targeting o f PURC tariffs i s also addressed under the Project, as i s an examination o f lowering the cost o f water delivered by vendors. 12 48. Social impacts of the Project will be monitored in three ways. First, the Project will undertake three national stakeholder surveys, one at Appraisal, one just before the MTR and one just prior to the Project Completion Date. These surveys will produce comprehensive social impact indicators and changes on stakeholder attitudes during implementation. Next, areas for distribution network expansionwill be selected based on field surveys to identify zones with the highest concentration of low income households. Finally, the Stakeholders Relations Office in the PMU will collect and monitor the number of low income household and stand-post connections made under the Project. It will also track stakeholder attitudes and perceptions as a result of the national stakeholder surveys. 5. Environment 49. The project will extend the availability of potable water to larger numbers of the urban poor, with expected consequent improvements to their health, wellbeing and livelihoods. Good environmental management of construction activities (rehabilitation and extension of the water transmissioddistribution systems, etc.) will be important, and thus guidance to construction management is a focus of the Environmental Assessment and ManagementPlan (EAMP) study. A potential environmental risk derives from the potential water quality and health risks of additional water supply due to the Project causing overloading of municipal wastewater collection, treatment and disposal systems. This issue i s addressed in the EA study. Recommendations from that study, and a National Wastewater Study under the Project, will contribute to identifyingthe potential risks involved, andto developing a strategy and action plan for addressingthe actual risks. 6. Safeguard Policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP/GP 4.01) Natural Habitats (OPBP 4.04) PestManagement (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.11) Involuntary Resettlement(OPBP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4. IO) Forests(OP/BP 4.36) Safety of Dams (OPBP 4.37) Projects inDisputedAreas (OPBP/GP 7.60)* Projects on International Waterways (OP/BP/GP 7.50) 50. The Project is safeguardcategory S2 and environmental category B. The key safeguard policy issues raisedby the project are as follows: i.The potential water quality and health risks of additional water supply causing overloading of municipal wastewater collection, treatment anddisposal systems; By supporting theproposed project, the Bank does not intend to prejudice thefinal determination of theparties' claims on the disputed areas 13 ii.Ensuringthatnewinfrastructure(e.g.transmissionmains,distributionlines,boreholes) are locatedto avoid or minimize adverse environmental and social effects; iii.Managingconstructionactivitiestoavoidorminimizeadverseenvironmentaleffects; iv. Compensating land ownershsers for construction disturbances, and perhaps some resettlements; and v. The safety of dams. 51, Prior to appraisal, the Borrower prepared an EAMP for the first package of civil works, a Resettlement Policy Framework (RPF) for the entire Project, and a Dam Safety Report (DSR). It also developed and delivered a resettlement training plan for Ghanaian project staff and consultants so they could prepare resettlement action plans (RAPs). As needed, RAPs will be prepared and implemented, prior to the commencement o f construction, for the first and subsequent packages o f civil works. Similarly, EAMPs will be conducted for civil works packages in subsequent years as they are identified; they will be approved by the Bank and the Government o f Ghana before project funds are committed. 52. The EAMP found that potential adverse impacts of the project could be adequately avoided or minimized through normal construction management procedures and supervision. The RFP concluded that the project is likely to cause only minor impacts to assets and livelihoods, and established procedures for adequately managing those that are unavoidable. The DSA found that some dams needrehabilitation work urgently, andat least one dam (Owabi Dam near Kumasi) needs work immediately. Inaddition, the creation o f a National Dam Safety Unit (NDSU), and the preparation of Emergency Preparedness Plans (EPP) for larger GWCL dams were recommended. 53. The project will increase total water abstractions from all three o f Ghana's international waterways by about 4.3 million cubic meters per year. For each river basin, these incremental abstractions would equal less than one half o f one percent o f total runoff. These results were incorporated into an OP7.50 letter o f notification to the other riparian states sent prior to appraisal. 54. Borrower's capacity to implement the safeguard policies recommendations: Ghana has a relatively strong Environmental Protection Agency capable o f reviewing the adequacy o f environmental and social assessments, and monitoring the implementation o f consequent recommendations and plans. The P M U will be staffed with qualified personnel to manage the preparation and implementation o f EAMPs and RAPs, with the support o f regional staff. Additional training will be provided as neededto ensure they have the capability to fulfill these responsibilities. 55. Consultations conducted related to safeguard issues: The Borrower i s conducting an extensive, ongoing program to inform the public about the project and to identify their concerns with it. To date, expressed concerns have not included safeguard issues. Duringthe safeguards studies, the consultant undertook informal consultations with people in project areas. Consultations with potentially affected people will become more focused during the pre- construction surveys and the identification o f persons who will require compensation under the RPF. 14 Disclosure o f safeguardstudies in-country and at the InfoShop: 7 May 2004 7. Policy Exceptions and Readiness 56. No policy exceptions have been identified. The consulting engineers were hired under the Project's PPF and PHRD grant inMarch2004. They are expectedto have detailed designs and about eight tender packages, for about US$17 million in civil works, ready for bidding by July 2004. It is therefore expected that construction would be ready to commence in September/October 2004, or approximately at the time of effectiveness. 15 Annex 1:Country and Sector or ProgramBackground GHANA: URBANWATER PROJECT 1. Introduction 57. Ghana has an estimated population o f 20 million people, o f which approximately 10.3 million (51 percent) have access to improved water supply. In the country's urban areas, comprising about 8.4 million residents, about 61 percent o f the population had access to satisfactory water supplies. The estimated rural water supply coverage i s much lower, currently at some 46 percent. 58. The urban poor continue to bear the full brunt o f inefficient service delivery, having to pay more than ten times the price for a liter o f water they would otherwise have paid ifthey were adequately served by the Ghana Water Company Limited. Women and children spend valuable time searching for water each day, affecting productivity and school attendance. Industries that require large amounts o f water for production are not spared the effects o f inadequate and intermittent supply. 59. Sanitation coverage for both the urban and rural populations i s less than 40 percent, posing a huge challenge for the country in meeting the Millennium Development Goal (MDG) targets. Wastewater disposal remains a difficult environmental issue as collection systems are limitedand institutional responsibilities are currently split betweendifferent sectors. Waterborne and excreta related diseases are prevalent among the poor and Ghana unfortunately i s among the countries with the highest cases of Guinea worm. Diarrhea related diseases are the third most reported cases in health centers across the country. A combination o f all these factors contribute to the highinfant mortality rate inGhana. 2. Water in Ghana's PovertyReductionStrategy 60. Water supply and sanitation plays a key role in the Ghana Poverty Reduction Strategy (GPRS). The GPRS was completed inMarch 2003 and maps out the medium-term strategy for promoting growth and reducing poverty. The overarching goal o f the GPRS i s to: "achieve sustainable, equitable growth, accelerated poverty reduction, and the protection o f the vulnerable and excluded within a decentralized democratic environment". The government set its poverty reduction goals in alignment with the MDGs, and articulated its poverty reduction strategy around five pillars: (i) maintaining macroeconomic stability; (ii)increasing production and employment; (iii) promoting human resource development; (iv) implementing special programs for the vulnerable and excluded; and (v) ensuring good governance through accountability and transparency. 61. The GPRS focuses on improving access to safe water inrural, peri-urban and poor urban areas and emphasizes (among other key points): effective management o f urban water systems; sector restructuring to improve management and investment in water supply and sanitation, and improving financial solvency through charging appropriate tariffs. 16 3. Wastewater Disposal Strategy & Constraints 62. Responsibility for sewerage was, until the mid-1990s, the responsibility o f the GWCL. With the enactment o f the Local Government Act 462 and the adoption o f the National Urban Environmental Sanitation Policy, responsibility for sewerage passed on to the Municipalities. Sewerage infrastructure however i s limitedand the majority o f dwellings have on-site sanitation for disposal o f wastewater. Septic tank systems are often characterized by failed soak pits which invariably end up discharging into open roadside drains and ultimately into storm drains. In Accra where the largest central sewerage network i s located, the system covers only about 15 percent o f the city and mainly areas inthe central business district. There are close to 20 satellite systems serving neighborhoods but most have broken down. 4. Sector Restructuring 63. As was described in Section A.l., Ghana faces serious constraints to meeting the challenge o f providing adequate water for all urban residents. These include: a dire and worsening financial condition for GWCL, insufficient investment over the last ten years; and weak implementation capacity causedby staffing problems and low salary levels. 64. Several alternatives to improve the performance o f the utility have been investigated and the potential impact discussed by stakeholders as part o f the water sector reforms. This has included a 1995 study that examined a public sector option with greater decentralization to the regions. Despite this effort and several similar recent interventions, the public sector solution has largely failed to turn the utility around into a viable business service that can meet the needs o f the un-served. 65. To address these constraints, the Government has undertaken several key initiatives. First, the GoG agreed with a wide range o f stakeholders in 1996 to explore a public-private partnership (PPP) arrangement for the urbanwater sector. The objective o f a PPP contract would be to restore GWCL's financial stability and to make it possible to eventually attract private sector investment. Ghana also established multi-sector utility regulator in 1997. The Government also understands the need for a qualified and adequately compensated staff and i s therefore willing to undertake a significant staff reduction program in GWCL. The severance exercise would be accompanied by increased training for those remaining and increasing salaries to be comparable with the private sector. 66. As for wastewater, the Government's strategy and emphasis is less advanced than it is for water. The government has prepared a sanitation sector policy, but implementation i s proving difficult. There appears to be little demand for piped sewer service collection and treatment. Further, the country has serious operational capacity constraints in the area of treatment and finally, there i s a perceived, but as yet undocumented, inability to pay for this service among urbanresidents. 17 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies GHANA: URBANWATER PROJECT ~ R O J E C (Bank-Financed) T RATINGS SECTOR ISSUE ADDRESSED I Completed Projects OEDRATZNGS Outcome Sustain- ID Impact ability Water Sector RehabilitationProject (1998) U Likely Modest Water, sanitation and flood protection (Water supply) First Community Water and Sanitation S Likely Substantial Water and sanitation Project (2000) Local GovernmentDevelopment (2003) S Likely Modest General water, sanitation, and flood protection IIPRATING IDORATING I SecondCommunity Water and Sanitation, S Water supply and sanitation; Phase 1 decentralization Urban 5 S General water, sanitation, and flood protection Trade Gateway and Inv. S General water, sanitation, and flood protection Urban Environmental Sanitation Project S General water, sanitation, and flood I protection SecondUrban Environmental Sanitation (in Urban development preparation) SecondCommunity Water and Sanitation, Water supply and sanitation; Phase 2 (inpreparation) decentralization OTHER DEVELOPMENT AGENCIES AFD: DrainageImprovement Project, Accra Flooding andurban development (ongoing) Netherlands: 1) Drainage in Accra (inpreparation) 1) Flooding and urbandevelopment 2) Distribution Improvement of Western 2) Water and sanitation Accra 3) Sekondi-Takoradi Water Supply 3) Water supply and sanitation RehabilitationProject 4) Bafikrom Water Supply (Central Region) Belgium: Korle Lagoon RestorationProject Flooding and urban development 18 OTHERDEVELOPMENTAGENCIES European Union: 1) Capacity Building Program(ongoing) 1) Capacitybuilding for district assemblies 2) SmallTowns Water and SanitationProject 3) RuralWater and SanitationProject- 2) Water and sanitation NorthernRegion(ongoing) 3) Ruralwater and sanitation CIDA (Canada): 1) Local GovernmentReformStudy (ongoing) 1)Adoptingbudgetingandexpenditure managementreforms undertakenat the central levelto the locallevel. 2) FiscalDecentralization 2) Implementationof fiscal decentralization. DFID(UK): PerformanceImprovementProgram (ongoing) Supportscivil service reformfor the entire public sector (ministries, departmentsand agencies) Spain: 1) Towns Water Project(Eastern Region) 2) Towns Water Project(Easter Region) African Development Bank (ADB) 1) Accra Sewerage Study Denmark 1) Danishsupportto RuralWater Sector (Phase 19 Annex 3: ResultsFramework and Monitoring GHANA: URBANWATER PROJECT I PDO OutcomeIndicators Use of OutcomeInformation Residents intargeted urban centers Urban centers receiving civil works fl-Y2: Gauge financial progress have access to more affordable and add at least 50,000 new connections inder Management Contract reliable piped water. 3r standposts. f3: Assess performance targets of ManagementContract and change if Narranted GWCL is operated on a sound GWCL inthe five largest cities meet f6: Use positive results to expand commercial and financial basis. 100%of their cash obligations from ionor base in sector collected revenues IntermediateResults ResultsIndicatorsfor Each Use of ResultsMonitoring One per Component Component ComponentOne: ComponentOne: Component One: Investment program is fully At least US$SO million in civil works Y1-Y3: Low levels may flag PMU implemented is invested to extend and rehabilitate capacity constraints that should be the pipedwater network addressedat the MTR ComponentTwo: Component Two : Component Two: The urban water sector establishes a A 5-year Management Contract is bid, Y1: No PSP signal lack of successful PSP track record closed financially and carried out commitment to reforming the sector and need for renewed policy dialogue Y3: No PSP by MTRsignals restructuringo f Project is required Y6: Successful M C leadsto higher level PSP contract Component Three: Component Three: Component Three: The principal actors inthe country's M W H establishesa Water Y2: Lack ofprogress insector capacity urban water sector establish a Directorate that conceives and signal s re-orientation of TA under the reputation for capacity and implements policy and reform Project, from GWCL to Ministries and professionalism initiatives PURC. 2 well targeted pro-poor programs are Y3: Failure to better target tariffs to put inplace by PURC poor would signal insertion o f pro- poor policy triggers in adjustment instruments. ComponentFour: Component Four: Component Four: GWCL is efficiently staffed with Number o f GWCL staff per 1,000 Y2: Inability to achieve retrenchment capable employees connections targets signals lack of government commitment Average GWCL wage compared to equivalent post in private sector Y4: Low GWCL salaries highlights I continuing financial difficulties 20 4 ; s i 6 sE i g Q) 3 3 3 sa 3 c fi a a pa .I E L 0 .I I B I m CI 1 v1 Q) L 2I/ s L V 00 b-7 8 i CI, m 0 0 g z s E 8 0 2E 69 \o 3 b-7 CI 00 3 I- 2 0 z 0 s 3 0- rl w - 3 \o 64 10 . c c \o z . * g 4 z -.. z c B c: Annex 4: DetailedProjectDescription GHANA: URBANWATER PROJECT 67. The Project comprises the following four components: i.SystemExpansionandRehabilitation(US$91.8million). Thiscomponentisdesignedto support: (i) increasing the amount o f treated water for sale; (ii) extending service to low income areas; and (iii)rehabilitation o f the existing network to reduce non-revenue water. It also includes dam safety upgrades, meters, engineering and vehicles and equipmentfor GWCL Regional and District offices. ii.Public-PrivatePartnershipDevelopment(US$6.5million). Thiscomponentsupportsthe payment o f the private operator under the proposed management contract and technical and financial auditors to measure the operator's performance. iii.CapacityBuildingandProiectManagement(US$7.7million). Thelargestallocationsin this component are for Training (US$2.0 million) and Technical Assistance (US$2.5 million). The Training component is left un-specified because the Management Contract Operator will propose a training plan once it i s inplace and can assess training needs. Also included here are allocations for training in the GWCL Headquarters, vehicles, office equipment, support for the P M U and ensuringenvironmental safeguards as well as support to the Public Utilities Regulatory Commission. iv. Severance Program (US$ll.O million). This component is to finance the anticipated severancepayments at the Ghana Water Company Ltd. 68. System Expansion and Rehabilitation. The 6-year investment program for physical works have been divided into three sub-components: i.TheFirstYearInvestmentProgram(FYIP)-US$17million-toinitiateconstructionof minor works, for which no major studies would be required, and to achieve immediate impacts on improved service coverage and reduce un-accounted for water. The FYIP covers 14 water supply systems in 7 out o f 10 regions. The investment components mainly refer to rehabilitatiom`extension o f distribution systems and to a minor extent rehabilitatiodreplacement o f existing wells; ii.SubsequentInvestmentPrograms(SIPS) US$70million-prioritizationofinvestments - will be determined and guided by the objective to increasehmprove service coverage with emphasis on low income groups.; and iii.Repair.ReplacementandRehabilitationFund(RRRF)-US$5million-willbemanaged by the Operator for execution on an annual/quarterly basis. It will include minor works that will be identifiedduringthe course o f works operationand maintenance. 22 69. The proposed FYIP is presently under preparation with detail design and tender documents being prepared by an engineering consulting firm. Tenderingi s expected to take place by July 2004 with appointment of contractors by October 2004 or about the time o feffectiveness. For the SIPSthe following steps for investmentprioritizations are envisaged: i.Distributionofavailablefundsamongthe10regionswithallregionstobeincluded; ii.Selectionofurbanareasorwatersupplysystemswithinindividualregionssinceit would not be feasible to cover all 85 urbanareas presentlybeingoperated by the GWCL; and iii.Basedonfeasibilitystudiesforindividualwatersupplysystemsselectionofwork components to be subject to detail engineeringdesignand subsequent execution. 70. For the distribution of available funds between the 10 regions the following selection criteria are proposed to be applied: i.Urbanpopulationforeachregionaccordingtolatestcensuswiththemostpopulous region to be given a factor o f 1.O with factors to be given for other regions to be indirect proportionto relevantpopulations; ii.TheGDPexpressedinUS$percapita(oranyotherfeasiblemeasure)withtheregion withthe lowest US$ per capita to be given a factor o f 1.O with factors to be given for other regions to be indirect proportionto relevant US$/capita; this should give due weight to the economic situation inthe respective region; iii.Theservicecoverage,percentagepopulationconnectedtoawatersupplysystem, compounded on regional basis with a factor o f 1.O to be givento the region with the lowest service coverage and with factors to be given for other regions to be indirect proportion to relevant service coverage; and iv. Parallelinvestmentstakenplace or proposed to take place duringthe course ofproject implementation expressed inUS$/capita with a factor o f 1.O to be given to the region with the lowest US$/capitaandwith factors to be givenfor other regions to be indirect proportion to respective US$/capita. The proposed allocation o ffunds amongregions would thus bebasedon a blendofrepresentative indicators that would ensure cross-regional equity to the extent possible. 71. For the prioritization of urban areas or water supply systems in individual regions the following selection criteria are proposed to be applied: i.Wateravailability(orproductioncapacity)percapita(totalurbanpopulation) (litedcapita and day (l/c.d) with a factor o f 1.O to be given to a water supply system with lowest l/c.d and with factors to be given to other urbanwater supply systems to be in direct proportion to relevant l/c.d.; 23 ii.Populationcoveragebyserviceconnectionsasapercentageoftotalpopulationwiththe water supply systemwith the lowest coverage to be given a factor o f 1.O and with factors to be givento other water supply systems to be indirect proportion to relevant population coverage; iii.Investmentpercapita(tobebasedonpreviouslypreparedproposedinvestmentsfor urban water supply systems) with the water supply systemwiththe lowest investment per capita to givena factor o f 1.O and with factors to be givento other water supply systems to be indirect proportionto relevant investment per capacity; and iv. Water borndiseases (one representative indicator to be selected) with the water supply system with the highestincidence (cases per 1000) to be givena factor o f 1.O and with factors to be givento other water supply systems to be indirect proportion to relevant incidence. 72. Urban areas with incidences o f guinea worm infections should be included irrespective o f ranking with investmentsat least to cover what will be needed for its eradication. 73. For selected urban areas, feasibility studies will be prepared for individual water supply systems. These studies will cover a planning horizon through 2020 with proposals to be made on first phase investments for the period through 2010. Based on conclusions to be reached under the feasibility studies for individual regions a final prioritization would be made to ensure that proposed investments will not exceed the allocations o f funds. This prioritization should take the following into account: Any investmentsina water supply system should ensure that productioncapacity will . match the distribution capacity; The per capita water demand and relevant designcriteria shouldbe matched to the costs . and the affordability to pay for the services; and The populationcoverage should correspond to 100percent butwith stand-posts to be provided where it mightnot be feasible to fully extend distribution systems initially. 74. The pro-poor emphasis will be a major objective inthe designo f water supply systems in terms o f maximizing the supply to low-income households within the existing service areas as well as prioritizing extension of water supply services to predominant low-income areas, either by house-connections and/or stand-posts. The design consultants will carry out socio-economic surveys, sub-contracted through qualified survey firms, inorder to determine the current status o f water supply to low-income households in each o f the selected water systems. The surveys will be carried out duringthe early stages o fthe feasibility studies inorder to maximize the impact o f the scheme designs onwater services to the poor. The feasibility studies will clearly describe this pro-poor design process and indicate the numbers o f new low-income households that will be served by the schemes as well as the method o f service: Le. house-connection or stand-post. The actual requirements under the RRRF will be determined during the course o f project implementation. 24 75. Public-PrivatePartnership Development. The Project supports the puttinginplace and implementation o f a five-year management contract with a private company (Operator) to operate GWCL's 85 urban water supply systems. The overall objective o f the management contract i s to restore GWCL to a sound financial footing and make a significant improvement inthe GWLC's commercial operations. The contract, still to be drafted, will provide incentives for the Operator to achieve these goals. The Operator will be in charge o f day-to-day operation and maintenance o f the GWCL water supply systems and report to a Director in GWCL Headquarters. Staff not assigned to H Q will report to the Operator and will also be formal employees o f the Operator. 76. The Project will pay 100 percent of the Operator's fees in the initial four years of the contract and 75 percent o f its fees inyear five. Inyear five, the Operator i s expected to obtain 25 percent o f its fees from the improved cash flow o f the urban water systems. A complete description o f the proposed management contract, including its pro-poor measures, i s included in Annex 15, which is the government endorsed PSP Contract Framework Paper. 77. This component also provides support for the independent financial and technical auditors that will be hired under the Project to measure and confirm the performance o f the Operator. These consultancies are required because much o f the Operator's performance i s linked to its remuneration and therefore, an independent and qualified third party i s needed to review and determine its achievements under the management contract. Capacity Buildingand Proiect Management 78. As was mentioned in Section A.l. above, GWCL faces a major constraint in implementation capacity. To assist the government in addressing the issue, this component contains over US$2.0 million for training, and another US$2.5 million in technical assistance. This technical assistance (TA) is intendedto support overall capacity buildingand training inthe MWHand the GWCL Headquarters, as well as monitoring and evaluation of IDA projects inthe MOFEP. Givenbest practice inthe sector, the training component remains un-specified and will be determinedin detail after the management contract has started and the Operator has had an opportunity to design an appropriate program. The technical assistance component would include the following: Technical Assistance US$ Key Studies , (000) National Wastewater Strategy 200 Debt Rationalization Study 200 Tanker Truck Rationalization 100 2 Stakeholder Pollings 100 GWCL Regionalization Study 200 Technical Assistance Corporate Planning 500 Other TBD 1,200 25 Total 2,500 79. As was mentioned inSection A.l. and inAnnex 1,assisting the government to develop a viable wastewater strategy i s highlighted in this component. It is anticipated that the recommendations of this study could be implemented in an eventual follow-on project. This component also contains support for the tanker truck rationalization study. SeveranceProgram SO. GWCL i s considered by industry experts to be overstaffed. Today, GWCL employs 4,750 staff and has about 320,000 connections. Based on industry benchmarks and the widespread nature o f the company's service area, GWCL believes that it should employ not more than 10 staff per 1,000 water connections. The current ratio i s 15 staff per 1,000 connections. To reach the target o f 10 staff per 1,000 connections, the number o f employees would have to be about 3,200 (a reduction o f 1,550 workers), however GWCL would like to provide for the eventual retrenchment of about 1600 staff in total. A reduction o f 1600 employees equates to approximately 40 percent decrease instaffing. 81. The severanceprogram component will assistthe Government implementthe needed staff reductions through providing financing for the negotiated retrenchment package and the cost o f administering the program. The severance program has the full support o f the workers and their union with the full understanding that they will receive fair and adequate compensation. The proposed Urban Water Project has allocated up to $ l l m to help finance the cost o f the retrenchment exercise. It has been agreed with GWCL that up to $ l m o f this amount will be used for financing the costs associated with administering the program. 82. The contract framework endorsed by the Government o f Ghana prescribes the formation o f a Retrenchment Committee to oversee the exercise. Key principles to be followed include respect for the current Collective Bargaining Agreement betweenthe union and GWCL, agreeing on a compensation framework that i s based on precedents in the public sector in Ghana, agreements based on negotiations and mutual consent, counseling services to be provided by the project to help affected staff reorganize their lives, and training inemployable skills. The Bank and Government are obtaining expert advice inorder to ensure that the Social Program conforms with all applicable legislationandother legalrequirements. See also Annex 17. 26 Annex 5: ProjectCosts GHANA: URBAN WATER PROJECT Local 1 Foreign 1 Total I PercentI (US$OOO) (US$OOO) (US$OOO) ofTotal 1.SystemExpansion& Rehabilitation Production, Transmission & Distribution 36,150 36,150 72,300 60 Repair, Replacement & RehabilitationFund 2,500 2,5 00 5,000 4 DamSafety Upgrades 2,550 2,550 5,100 4 Vehicles & Eauipment(Regions & Disrtricts) 1.000 1.000 1 Meters 1,500 1,500 1 EngineeringDesign 270 2,430 2,700 2 EngineeringSupervision 320 2,880 3,200 3 Engineeringfor Follow-onProject 100 900 1.000 1 I 42.890 1 48.9101 91.800/ 77 I 2. Public-PrivatePartnershipDevelopment 1 PrivateOperator Fees 6,000 6,000 5 I 1 Technical & FinancialAudits 1 I 500I I 5001 0 I Total 500 1 6,000 1 6,5001 5 3. CapacityBuilding& ProjectManagement Training 200 1,800 2,000 2 TechnicalAssistance 250 2.250 2.500 2 PURC Support 100 900 1,000 ' 1 Vehicles & OfficeEquipment(PMU/MWH) 900 900 1 PMU 600 600 1 I 1 EnvironmentalSafeguards I I 701 6301 7001 1 I Total 2,1201 5,5801 ' 7,7001 6 4. SeveranceProgram 1 StaffSeverance 11,000 11,000 9 Total 11.ooo 11.000 9 ' Unallocated 500 500 1,000 1 Re-PavPPF 2,000 2,000 2 Pro:ect Total 57,010 62,990 120,000 100 'Identifiable taxes and duties are US$14.1 million, and the total project cost, net o f taxes, is US$120.0 million. Therefore, the project cost net o f taxes is 88.3% o f the total project cost. 27 Annex 5: FinancingPlan GHANA: URBANWATER PROJECT IDA NDF Government Total 1. SystemExpansion& Rehabilitation Production, Transmission & Distribution 62,410 9,890 72,300 Repair. Replacement& RehabilitationFund 5.000 5.000 2. Public-PrivatePartnershipDevelopment Private Operator Fees 6,000 6,000 Technical& FinancialAudits 500 500 Total 6,500 6,500 3. CapacityBuilding& ProjectManagement Training 2,000 2,000 TechnicalAssistance 2,250 250 2,500 PURC Support 900 100 1,000 Vehicles & OfficeEauioment(PMUMWH) 810 90 900 I /PMU I 5401 I 601 600I EnvironmentalSafeguards 630 70 700 Total 7,130 570 7,700 14. Severance Program StaffSeverance 11,000 11,000 Total 11,000 11,000 Re-PayPPF 2,000 2,000 [ProjectTotal 1 103,000/ 5,0001 12,000 1 120,000~ 28 Annex 6: ImplementationArrangements GHANA: URBANWATER PROJECT 1. PartnershipArrangements 83. The Project will receive parallel financing of approximately 4.0 million (about US$5 million) from the Nordic Development Fund (NDF). The NDF will support all work related to addressing dam safety concerns including design, management and execution o f rehabilitation works, the preparation o f Emergency Preparedness Plans for large dams, and an implementation study for aNationalDam Safety Unit. 2. InstitutionalResponsibilitiesFor Implementation 84. The Project will be financed through an IDA credit agreement with the Ministry of Finance and Economic Planning (MFEP) that will on-lend to the Ghana Water Company Limited (GWCL). GWCL will implement the Project through a dedicated Project Management Unit (PMU). The PMU is staffed with Project Director complemented by a Project Engineer, a Financial Officer, a Public Relations Officer and a secretary. A Safeguard Officer will be appointed once the Project i s effective. Duringpreparation, it was also agreed with the GOG that the Ministry o f Works and Housing (MWH) will be the primary contact for sector policy matters, and the PMU, with technical support from other parts o f the GWCL, will be in charge o f day-to- day Project implementation. 85. This implementation arrangement was selected inorder to have the most qualified agency, i.e. GWCL, ultimately responsible for implementingthe Project. Havingthe Project integrated in GWCL (Le,, without a separate PMU) was considered, but then rejected given the complex PSP arrangements and the large amount for civil works that will require substantial procurement using World Bank guidelines. 86. The PMU (and GWCL) will face considerable challenges in implementing a Project of this size and complexity. Only the PMU Project Director has significant experience with World Bank projects and procurement, and no one in the P M U has previous experience with World Bank financial management procedures. To address these constraints, during preparation the World Bank Country Office in Accra has spent considerable time training the PMU. The PMU has also been gaining experience with procurement and financial management under the PPFs and the PHRD grant. Detailed TOR for each member o f the P M U were also developed, which include the provision for annual performance reviews and the identification o f areas for increased technical training. Finally, the Project contains substantial amounts for Technical Assistance which should further strengthen P M U capacity. An outline organizational chart i s presented below: 29 MinistryofWorks and Housing I ConstructionContract Limited 4 Contractors (asset holding company) * OperatingCompany ~l Regional 30 Annex 7: FinancialManagementand DisbursementArrangements GHANA: URBANWATER PROJECT 1. ExecutiveSummary 87. The objective o f the Financial Management Assessment i s to determine whether the entity identified for the implementation of the Urban Water Project (UWP) has acceptable financial management arrangements in place. The assessments include reviews o f the entity's system o f accounting, reporting, auditing and intemal controls. The entity's arrangements are acceptable if they are considered capable o f accurately recording all transactions and activities, support the preparation o f regular and reliable financial statements, safeguarding the entity's assets, and are subject to satisfactory auditing processes. 88. Financial management assessments were carried out for the Ghana Water Company Limited (GWCL) and in particular the projects accounts section o f the Finance Division. The assessments were carried out jointly by a World Bank Financial Management team and persons responsible for financial management inthe project accounts section and the Finance division o f GWCL. Financial management intemal control questionnaires and interviews o f key financial personnel were used as part o fthe assessment. 89. The P M U will be responsible for overall project implementation including financial management, while the day-to-day financial management responsibility for the project will be vested in the project accountant. H e will report to the Director o f Finance on technical financial matters o f and accounting. On day to day work, he will report to Director o f the Project Management Unit.The project accountant, a partly qualified accountant, has received training on World Bank disbursementprocedures and i s currently managing the PPFs under the project and a Recipient ExecutedPHRD grant. 90. The financial management system of the project is part o f the system of GWCL which is fully documented in a procedures manual. The staff assigned to the project have received the requiredlevel o f training, including training on World Bank disbursement procedures, to perform the finance and accounting functions under the project. 91. The conclusion o f the financial management assessment is that the arrangement put in place to manage the financial resources o f the project are satisfactory and meet the minimum financial management requirements o f the World Bank. 2. Country Issues 92. A Country Financial Accountability Assessment (CFAA) for Ghana, conducted in 2001, was updated in 2004, and i s in the process o f being discussed with the government and stakeholders. This document clearly identifies the main accountability issues in Ghana and provides recommendations to address them. It also recognizes some o f the ongoing actions that when fully implemented will address some o f the identified weaknesses. Some o f the issues identifiedinthe CFAA include the following: 31 i.Fragmentedlegalframework (mostly addressedintheFinancialAdministrationAct) and development o fthe related Regulations; ii.Inadequacyofenforcementofpenaltiesfornoncompliance; iii.Ineffectiveandinefficientinternalauditingfunctions(partiallyaddressedwiththe enactment o f the Internal Audit Act). This i s yet to be implemented; iv. Weak human resource capacity due to poor public sector remuneration; Summaryof FinancialAccountability RiskAnalysis Risk Risk Risk Mitigation Measure Rating InherentRisks: Country a) Fragmented legal framework. M Although Government has introduced a comprehensive legal framework for public financial management through the Financial Administration Act (FAA), the absenceo f the related regulations had affected its implementation. Government has now developed the related Regulations, and the next stage is to train financial management staff at all levels. b) Non-compliance o f statutory Government needs to institutemeasuresthat ensure the regulations and non-enforcement of systematic review, update and enforcement o f penalties penalties. for non-compliance. Inadequacy o f legal framework to Government has passedlegislationto establish a regulate internal audit functions in modern internal audit function, The Internal Audit Act country (IAA). The next critical steps will be the implementation o f this Act and the establishment o f the required statutory institutions for effective oversight. The government will need assistancein its implementation. Overall Inherent Risk M Control Risks Ghana Water Company Lid (GWCL)-Projects Unit Staffing at the GWCL a) The accounting staff seconded to M Agreements would be reached for GWCL to designate GWCL's projects units may not be a qualified staff to be head ofthe projects finance unit. adequate, and may be transferred GWCL management should ensure that new staff sent after they have beentrained. to the project unit are trained and acceptable to IDA. b) The Staff secondedto the project M Agreements reached with GWCL will also ensure that unit may be called uponto carry out staff secondedto the projects unit are dedicated to the other duties thereby affecting their project activities. Derformance on the oroiect. AccountingSystems at GWCL a) Procedures and accounting policies M GWCL will be required to update and revise its have not beenupdated for a long accounting procedures manual. time. Likelyto make policies and b). What is the state o f GWCL's M 32 I fixed Assets Register?? Funds Flow a) Delays inthe submissionoftimely M Accounting staffwill receive training in World Bank withdrawal applications for the disbursementproceduresincludingthe preparationof purpose of specialaccount withdrawalapplications. reDlenishment. M Trainingwill be providedfor accountingstaffand actions takento strengthenthe financialmanagement system of Assemblies. Internal Audit a) GWCL has an internalaudit unit. S That recommendationsprovidedwill not be implemented. External Audit Audited financial statements of M The project will institutea mechanismwhere GWCL GWCL and that o fProject are likely completesthe selection of their auditors prior to year to be submitted late. end. The project will ensure that GWCL and their auditors agree ontheir audit programfor eachyear to ensure timely completion of audit. The agreed programcan also providea basis for monitoringprogressof audit work betweenthe two parties. Reporting and Monitoring Delays inthe submissionofFinancial M The FMRformats and contentsto be agreed for the Monitoring Reports(FMRs) and Project will be simple and easy to prepare. Project will other projectreports. be assistedto automatethe preparationthrough the use o f simple accountingsoftware. Information Systems Accountingsystem at GWCL is not M GWCL expects to computerize its accountingsystemin computerized. This is likely to leadto future. It is not clear the time frame for this work and delays in financialreportingunder to what extentthe projectwill benefit.Inthe absence of the project. this uncertainty,the projectunit will be assisted to computerize its accountingsystem, by purchasinga simple offthe shelfpackagefor its use. Any introducedcomputerizedsystem should be consistentwith the company's overall future computerization strategy. Overall ControlRisk M Ratings: H- High, S - Substantial, M- Modest, N-Negligible 3. ImplementationArrangements For detailed implementation arrangementsrefer to annex 6. 33 4. FinancialManagementSystem of GWCL 93. GWCL i s a revenue earning company owned by the Government o f Ghana. It has a Board o f Directors, who have the overall responsibility for ensuring the financial viability o f the Company. The day to day management i s vested ina Managing Director, assisted by two General Managers. The first i s incharge o f Operations and the second o f Finance and Administration. 94. The Finance Department (FD), which has responsibility for the maintaining the accounting records and books o f the Company i s headed by a Director o f Finance, who reports to the General Manager F&A. The FD i s sectioned into: i)budgeting, costing & consolidation; ii) general accounts; and iii)projects accounts. The financial year o f the Company, follows that o f the Government o f Ghana, from January to December ofeachyear. Budgeting 95. The financial year starts with its budgeting cycle. In August each year, guidelines are provided to the Regional Offices o f the Company for their submission o f their estimates. Regional Offices are then requested to justify their submissions and after adjustments are made, the Company's budget is finalized and submittedto the Company's Board for approval prior to the beginningo fthe financial year to which it relates. Although this i s the laid down rule, GWCL i s unable to meet this processing timetable and in practice, budgets are approved inthe year to which they relate. Revenue 96. Customers are billed monthly on arrears basis, Le., bills sent to customers relate to their consumption for the previous month. As soon as the bills are ready for distribution, they are recognized as income and taken into the books o f the company. Customers are expected to pay their bills within 14 days of issue, at customer points and increasingly through the banking systems. Monies received from customers are paid into the company's revenue bank accounts. Expenditure 97. Based on the approved budgets, Regional Offices set their expenditure limits within which they can initiate, authorize and effect payments for all incurred and eligible expenditures. Regional Offices are mandated to retain from the collected revenues amounts equal to their approved expenditure limits for the purpose o f executing their approved budgets. For regional offices with weaker revenue base, where revenues collected are insufficient to meet their approved expenditure limits, the head office transfers additional funds to them. 98. Monthly financial reports are sent to the head office for consolidation. The financial reports received are further analyzed and quarterly variance analysis reports prepared, including explanations and justifications for unfavorable variations, and subsequently, for management reviewand actions. 34 5. FinancialManagementFor the Project 99. The Projects Accounts Section (PAS) o f the Finance Department will have financial management responsibility for the project. The head o f the PAS, the project accountant, i s a partly qualified accountant. H e has received training on World Bank disbursement procedures and i s currently managing the PPFs under the project and a Recipient Executed PHRD grant. H e will report to the Director o f Finance on technical matters o f finance and accounting, and on day to day work he will report to the Director o fthe Project Management Unit. 100. Since the project will use the financial management system o f GWCL, the Director o f Finance will be responsible for ensuringthat all the accounting policies and procedures inGWCL are followed by the project accounts section. H e would also ensure that project activities are also subject to periodic internal audit reviews. 101. The project accountant will be responsible for maintaining adequate accounting records, preparing financial reports and statements, and ensuring that the project's financial management arrangements are acceptable to the Government and the World Bank at all times. The project accountant will also be responsible for ensuring that the project financial reports including the financial monitoring reports are submitted to government and World Bank on time. H e will be assistedto perform these duties by an accounts officer. 102. The project will operate a centralized management o f funds whereby all requests for payment will be sent to the projects accounts section for processing and payment. No funds will be sent to any decentralized unitfor activities. 6. Process for SeverancePayment 103. It is expected that a consultant (or Administrator) would be engaged to assist GWCL in producing the required severance packages to be paid to retrenched staff. To ensure that the resources provided in the project are solely used for these payments, the procedures to be followed will differ from the standard payment process under the project. The procedures to be followed will include; i.Theadministratorwillopenabankaccountinthecurrencyinwhichtheseverance payment will be denominated; ii.Uponagreementonapackageforeachgroupofemployees,theadministratorwill request funds from the credit through the project to meet the payment at hand; iii.Therequestwillbesupportedbyaschedulelistingtheemployeesandamountsagreed for each; iv. the project on receipt will either transfer the amount to the administrator's bank account, or prepare a request for direct payment by the Bank, to be made to the administrator's bank account; 35 v. the administrator will maintainall detailed records ofdocumentation, including evidence o f receipt by each employee, on the process inaccordance with contract and the practice o f profession; vi. Uponcompletion of assignment, the process will be audited to confirm all payments made, identify all balances and possible transfers, if any, back to the project. 7. AuditingArrangements 104. Independent and qualified auditors acceptable to the Bank would carry out the audit o f the Urban Water Project. In addition, a copy o f the audited financial statements for Ghana Water Company, the implementingagency for the project, will be submittedto the Bank. 105. The selection o f auditors shall be on competitive basis in accordance with the Bank's guidelines and would be inplace by effectiveness o f the project. It is recognized that although it i s the responsibility o f the Auditor General o f Ghana to audit these government entities, agreements have been reached in the past for the Auditor General to recruit qualified private sector auditors to carry out the audit o f GWCL. Presently, GWCL has one such auditor in place acceptable to the Bank. GWCL will ensure that the activities o f the project are included intheir audited financial statements and an additional report issuedon it. 106. The audited financial statements for both GWC and project, including the management letter for the project audit would be furnished to the World Bank within six months of the close o f each fiscal year. 107. Presently, the audited financial statements o f GWCL are in arrears. The audited financial statements for the year ended December 2001, although completed have not been signed. Those for the years ending 2002 and 2003 are also unlikelyto be signeddue to the same reason. Reporting and Monitoring 108. The Bank requires projects to prepare quarterly financial monitoring reports (FMRs) in the areas o f finance, procurement including contract details and project progress. The quarterly FMRsinclude; i.QuarterlyFinancialReports: consistingofSourcesofFundsandtheirUses,Statementof Uses o f Funds by Project Components and Activities, Special Account Reconciliation Statement and a six months Project Cash Forecast as needed; ii.QuarterlyProjectProgressReport: consistingofOutputMonitoringReportoncontract management and on Unito f Output by project activity; iii.QuarterlyProcurementReport: consistingofProcurementProcessMonitoringand Contract ExpenditureReports for Goods, Works and Consultants' Services. The report compares procurement performance against the planagreed at negotiations and appropriately updated at the end o f each quarter. The report should also provide any 36 informationon complaints by bidders,unsatisfactory performance by contractors and any contractual disputes. 8. DisbursementArrangements 109. The proceeds of the Credit would be disbursed over a 6 year period. A grace period of four months after the closing date would be granted to make disbursements for expenditures incurred on or before the Credit closing date. Use o f Statement O f Expenditures(SOEs) 1IO. Disbursements for all expenditures would be against full documentation, except for items o f expenditures under contracts and purchase orders below US$500,000 equivalent each for goods; US$1,000,000 equivalent each for works; and US$200,000 equivalent each for consulting firms, and U S $ l00,000 for consultant services (individuals), training and incremental costs for which disbursements would be claimed on the basis o f statement o f expenditures (SOEs). Supporting documentation for SOEs would be retained by the Borrower/Agency for review by IDAmissions and external auditors. Special Account 111. To facilitate disbursements, a Special Account would be established and operated inUS$ at a commercial bank, under terms and conditions satisfactory to the IDA. Upon Credit effectiveness, a sum o f US$ 2.5 million would be deposited by the IDA into this account, and increased to the Authorized Allocation o f US$ 4 million, when the aggregate amount o f withdrawals from the Credit Account and all outstanding commitments are equal to or exceed the equivalent o f SDR 10 million. Further deposits would be made into the account against withdrawal applications supported by appropriate documentation. 37 Annex 8: Procurement GHANA: URBANWATER PROJECT 1. Ghana's ProcurementEnvironment 112. Procurement in Ghana i s ina reform stage. The Parliament o f Ghana approved the Public Procurement Bill on December 18, 2003 and the President signed it into a Public Procurement Act December 31, 2003. Preparation o f the bill began in2000 and was presented to Parliament in November 2002. The Parliamentary Accounts Committee (PAC) invited public input in March 2003 and received comments from a broad cross-section o f stakeholders, including the Bank. The Billwas widely discussed inthe media, inround table conferences, and inmeetings with the PAC. The final version o f the Public Procurement Act i s assessed as a good UNICTRAL-based procurement law. 113. The Act includes most o f the features of good public procurement practice Le.: (i) effective and wide advertising o f upcoming procurement opportunities; (ii) opening o f public bids; (iii) pre-disclosure o f all relevant information including transparent and clear bid evaluation and contract award procedures; (iv) clear responsibilities and accountabilities for decision making with segregation of executive and oversight responsibilities ; and (v) an enforceable right of review for bidders when public entities breach the rules. The Government is also preparing a set o f Standard Tender Documents and Standard Request for Proposals to be used in the country. The Public Procurement Act is comprehensive and covers all procurement in the public sector (Le. Central Management Agencies, Ministries, Departments and Agencies and in Metropolitan, Municipal and District Assemblies as well as parastatal organizations and State-Owned Enterprises. The Bank has advised Government by a letter from the Country Director that the procedures in the Act should be used in World Bank financed procurement instead o f using specially prepared procurement Procedures Manuals for projects. 114. The Bank carried out a Country Procurement Assessment Review (CPAR) in 2003 and submittedit Government on June 30, 2003. The main findings of the CPAR include (i) of a lack comprehensive legal framework; (ii)use of merit point system for evaluating bids for works contracts; (iii) use o f "bracketing" for evaluating bids for works contracts; (iv) excessive use o f single source; (v) repetitive use o f same firms under selective tendering procedures; (vi) lack of procurement planning; (vii) poor record keeping; (viii) weak oversight o f procurement; (ix) poor contract management; (x) poor stores management; (xi) weak procurement capacity and (xii) weak budget commitment control leading to contract payment arrears. The CPAR contains an agreed Action Plan and other recommendations for improvements in public procurement. Implementation o f the Public Procurement Act i s a key action o f the CPAR. Such implementation, commencing with the establishing and making operational the institutions created by the Act (Public Procurement Board and its Secretariat, Entity Tender Committees and Tender Review Boards) and is one of the triggers for the proposed Second Poverty Reduction Support Credit (PRSC-2), which i s scheduled for Board Presentation inJuly 1,2004. 38 2. Use of BankGuidelines 115. All works and goods financed under the IDA credit will be procured inaccordance with the Guidelines for Procurement under IBRD Loans and IDA Credits, May 2004. Consultants will be selected in accordance with the bidding, and all non-QCBS/QBS assignments, the procedures described in the Public Guidelines: Selection and Employment of Consultants by World Bank Borrowers, May 2004. Under the Guidelines, it is mandatory that Bank's Standard Bidding Documents (SBD) would be used for all International Competitive Bidding (ICB) and that the Bank's Standard Request for Proposals (SRFP) would be used for consulting assignments under Quality and Cost Based Selection (QCBS) assignments as well as Quality Based Selection (QCBS) assignments, as appropriate. The Ghana Water Company Limited (GWCL) should ensure they are using the most current version of the appropriate SBD or SRFP and standard forms of evaluation. Less competitive bidding and selection procedures should not be usedas an expedient to by-pass more competitive methods and fractioning of large procurements into smaller ones should not be done solely to allow the use of less competitive methods or to avoid administrative or IDA review. 116. For all non-ICB contracts, Le., National Competitive Bidding (NCB), shopping and selective Procurement Act would be followed. Until Parliament approves the "Standard Tender Documents'' and "Standard Request for Proposals'' requiredunder the Public ProcurementAct as per Schedule 4, the Banks SBDs andSRFPs wouldbe used, with appropriatemodifications. 3. Advertising 117. A General Procurement Notice (GPN) was publishedin UNDevelopment Business No. 605 of April 30, 2003 and inDevelopment Gateway Market (DgMarket). Specific Procurement Notices (SPN) will be required for contracts to be procured under ICB and NCB procedures and for consultant contracts (estimated to cost more than USD 100,000) to obtain expressions of interest (EOI) prior to the preparation of the shortlist. The SPNs will (as a minimum) be published in a newspaper of wide national circulation. All ICBs and Consultant contracts estimated to cost USD 200,000 or more shall be advertised in Development Business online and in DgMarket. Sufficient time would be allowed (not less than six weeks for ICB and not less than 30 days for NCB and 14 days for EOI) to allow adequate time for bidders and consultants to obtain documentsandrespondappropriately. 4. ProcurementCapacity 118. The implementationunit for the project i s the PMUofthe GWCL. This unithas only been recently established and has gained some experience in Bank procurement procedures having managedthe PPF for the project. The unit is staffed with engineers who have attended the Bank supported regional procurement course at the Ghana Institute for Management and Public Administration (GIMPA). 119. The summary assessment shows an "Average risk" for the project and the prior review thresholds have been set to reflect this rating. Procurement Post Reviews (PPRs) will be carried out annually by Bank staff and/or independentauditors and based on the findings of the reviews, 39 the prior review thresholds will be reviewed. The main risks identified are: (i) insufficient familiarity with the Bank's procurement guidelines and the Public Procurement Act; (ii) delays in processing procurement; and (iii) public perception o f the Company. The actions planned to poor address the deficiencies are included inthe project activities and include (i) preparation o f a PIP with clear procurement procedures and responsibilities; (ii) training o f GWCL staff in the application o f the procurement procedures; (iii)setting o f standard processing times; (iv) establishment o f quarterly reporting requirements; (v) institutionalization o f annual procurement audits; and (vi) annual review o f prior review thresholds based on findings of the procurement audit. 120. A project launch workshop will be held for key staff of the GWCL including the tender committee o f GWCL and GWCL Board members. The workshop will include sessions on Bank procurement policy as well as the Public Procurement Act. The focus will be to orient key staff on the principles o f good public procurement practice and to discuss the procurement arrangements under the project. The project also includes finding for key staff in GWCL to attend Bank supported regional procurement training in GIMPA or ESAMI. Other areas o f training supported under the project include contract management and project management. 5. ProcurementPlans 121. The GWCL will prepare an annual work planconsisting o f a procurement planwhich will be submitted to IDA. The procurement plan will be for the first eighteen months o f the project showing individual contract packages, and for each package its estimated cost, procurement method and processing times for key activities till completion. The procurement plan for the first 18-month period was completed. Three months prior to the start o f each subsequent fiscal year, GWCL will submit an updated version o f the procurement plan in respect o f the following eighteen months for IDA review. 122. Any revisions to the formally agreed procurement plan shall require the concurrence o f IDA. GWCL shall apply the most competitive method o f procurement appropriate to the circumstances o f the specific procurement as described in the Table below and in accordance with the Public Procurement Act. GWCL may select a more competitive method for a particular procurement if it wishes to do so. IDA concurrence will be required to use a less competitive method other than the one set out in the agreed Procurement Plan. Absence o f this concurrence may result inmisprocurement. 123. Training, workshops, conference attendance, and study tours will be carried out on the basis o f approved annual programs that will identify the general framework o f training and similar activities for the year, including the nature o f traininghtudy tours/workshops, the number o fparticipants, and cost estimates. 6. Contract Managementand ExpenditureReports 124. As part o f the FMR, the GWCL will submit quarterly reports to IDA not more than three calendar months after the end o f every quarter. The FMR should include the status o f (i) implementation o f the procurement plan, and (ii) progress and expenditures on contracts. 40 7. ProcurementImplementationArrangements 125. See the Institutional Responsibilities for Implementation inAnnex 6. 8. Scope of Procurementand Procurementmethods 126. Contracts for civil works estimated to cost individually USD 2.0 million or more will be procured using ICB procedures. Works estimated to cost between USD 2.0m and USD 50,000 equivalent per contract; shall be procured usingNCB procedures. Very small contracts estimated to cost less than USD 50,000 equivalent may be procured by way o f soliciting quotations through written invitations from not less than three qualified contractors. RegistratiodClassificationo f contractors may be usedto identifycontractors for such very small contracts. The invitation shall include a detailed description o f the works, basic specifications, the required completion date, a simple form of agreement acceptable to the Bank, and relevant drawings. Inall cases the award o f contract shall be made to the contractor who offers the lowest price for the requiredwork, and who has the experience and resources to successfully complete the contract. 127. To the extent possible, goods that could be procured from one supplier would be grouped into contract packages, and packages estimated to cost the equivalent o f USD 250,000 or more would be procured under ICB procedures. Procurement o f goods packages estimated to cost more than USD 30,000 but less than USD 250,000 would be procured using N C B procedures. Goods packages estimated to cost less than USD 30,000 would be procured by shopping on the basis o f comparison o f quotations from at least three eligible and qualified suppliers. Requests for such quotations will include a clear description and quantity o f the goods, as well as requirementsfor delivery time and point o f delivery. 128. Software, spare parts and accessories which are o f proprietary nature may with IDA concurrence, be procured under contracts negotiated directly with the manufactures/suppliers or their authorized agents. 129. Consulting Services and Training will consist o f various engineering and design studies, construction supervision and technical assistance to be carried out by both national and international consultants as well as workshops and group discussions. As a general rule, consulting firms for all assignments estimated to cost the equivalent o f USD 100,000 or more will be selected though Quality and Cost Based Selection (QCBS) methodology. Other selection methods may be used provided the proposed selection method is in accordance with the relevant provisions in the Consultant Guidelines. Assignments estimated to cost the equivalent o f USD 200,000 or more would be advertised for EO1 in Development Business (UNDB), in DgMarket and in at least one newspaper of wide national circulation. In addition, EO1 for specialized assignments may be advertised in an international newspaper or magazine. In the case of assignments estimated to cost less than USD 200,000 but more than USD 100,000 the assignment will be advertised nationally. The shortlist o f firms for assignments estimated to cost less than USD200,000 may be made up entirely of nationalconsultants ifat least three qualified firms are available at competitive costs in Ghana. However, foreign consultants who wish to participate should not be excluded from consideration. Consultant services estimated to cost less than the equivalent o f USD 50,000 may be contracted by comparing the qualifications o f consultants. Auditors would be selected using Least-Cost-Selection procedures. In case o f assignments 41 requiring individual consultants, the selection will follow the procedures stipulated in Section V of the Consultants Guidelines. 130. Training programs and workshops would be packaged in the project's work plans and budget and items thereinprocuredusingappropriate methods. IDA will reviewand clear training packages as found appropriate. 9. IDAReview 131. All works contracts estimated to cost USD 1,000,000 or more and goods contracts estimated to cost USD 500,000 or more will be subject to the Bank's prior review in accordance with the procedures inAppendix Io f the Procurement Guidelines. Any amendments to existing contracts raising their values to levels equivalent or above the prior review thresholds are subject to IDA review. All contracts awarded on basis o f direct contracting will require prior review and clearance o f IDA. 132. All single source selection will be subject to IDA prior review. Consultancy contracts with firms with estimated value of USD 200,000 or more, and consultancy contracts with individuals estimated value o f USD 100,000 or more will be subject to prior review by the IDA in accordance with the procedures in Appendix Iof the Consultants Guidelines. All out of country training/workshops will be subject to IDA review. 133. Contracts which are not subject to prior review will be selectively reviewed by the Bank duringproject implementation and will be governed by the procedures set forth inparagraph 4 of Appendix Ito the relevant Guidelines. Monitoring and evaluation o f procurement performance would be carried out for procurement during IDA supervision missions and through annual ex- post procurement audits. At a minimum, 1 out o f 5 contracts will be subject to post review. In addition, Post-reviews o f in-country training will be conducted from time to time to review the selection o f institutions/ facilitators /course contentdtrainees and justifications thereof, and costs incurred. Annual independenttechnical audits (ex-post procurement audits) would: (a) verify that the procurement and contracting procedures and processes followed for the projects were in accordance with the Development Credit Agreement (DCA); (b) verify technical compliance, physical completion and price competitiveness o f each contract in the selected representative sample; (c) review and comment on contract administration and management issues as dealt with by participating agencies; (d) review capacity o f GWCL inhandlingprocurement efficiently; and (e) identify improvements in the procurement process in the light o f any identified deficiencies. The Borrower and IDA will review all thresholds stated in this section on an annual basis. Amendments may be agreed upon based on performance and actual values o f procurement implemented.Amendmentsto the DCA may beproposed accordingly. 10. Publicationof Resultsand Debriefing 134. Publication o f results o f the bidding process will be required for all ICBs, NCBs, LIBs and Direct Contracting. Publication should take place as soon as the no objection i s received, except for Direct Contracting and N C B which may be done quarterly and ina simplifiedformat. For selection o f consultants disclosure o f results is also required. All consultants competing for the assignment should be informed o f the result o f the technical evaluation (number of points that 42 each firm received) before the opening o f the financial proposals, and at the end o f the selection process the results should be published. The publication of results in selection o f consultants applies to all methods, however for CQS and SSS the publication may be done quarterly and ina simplified format. GWCL shall debrieflosing bidders/consultants on the reasons why they were not awarded the contract, ifthe losing biddersiconsultants request for explanation. Table A: Project Costs by Procurement Arrangements (US$ 000 equivalent) 'Figures in parenthesesare the amounts to be financed by the Credit. All costs include contingencies. 21ncludescivil works and goods to be procuredthrough national shopping, consulting services, services of contracted staff o fthe project managementoffice, training, technical assistance services, and incrementaloperatingcosts related to (i)managingthe project, and (ii)re-lending project funds to local government units. 43 Table B: Thresholds for ProcurementMethods and Prior Review Expenditure ContractValue Contracts Subject Category (Threshold) to USD Prior R e v i d Works >=2,000,000 All contracts >=50,000 - <2,000,000 NCB Contracts>= 1,000,000 < 50,000 Shopping None All values Direct contracting All contracts Goods and >=250,000 ICB First contractand all Services other than contracts>= 500,000 Consulting Services >= 30,000 - <250,000 NCB First Contract <30,000 Shopping None All values Direct Contracting All contracts Consulting >= 50,000 firms QCBSIQBSILCSIFBS First contractand all Services contracts>=200,000 <50,000 firms QCBSIQBSILCSIFBSICQS First contract >= 100,000 individuals Individual All contracts < 100,000, individuals Individual First contract All values Single-SourceSelection All contracts OverallProcurementRiskAssessment: High U Average jv/l Low U Frequencyof procurementsupervisionmissionsproposed: One every 6 month(s) (includes procurement workshops and training) * All single source contractsand the first contract for consultants' services with respect to the Resettlement Framework Policy, Environmental ManagementPlan and Dam Safety Reportwill be subjectto prior review. 44 Table C: Allocation of Credit Proceeds Amountin US$million Percentof Expenditures to be Financed Civil Works 64.4 Repair, Replacementand RehabilitaitonFund 5.O 100 % ~ 100 % of Foreign Goods - Vehicles, equipment Expendituresand 90 % of II 2-A and meters 3.3 local expenditures Services Engineeringdesign - 3-A and Supervision 8.7 90% Services PrivatePartnership - Development 6.0 100% Technical Audits of ManagementContract 0.5 100% Training andworkshops 1.5 100% OperatingCosts 0.7 90% SeveranceProgram 11.0 100% PPF Refinancing 2.0 100% Total 103.0 45 Annex 9: Economic and FinancialAnalysis GHANA: URBANWATER PROJECT 135. Water tariffs are determined independently by the Public Utilities Regulatory Commission (PURC) and are set at levels which are considered affordable by all customers, including the urban poor. Giventhe existing laws inGhana, the PURC i s independent and tariffs will not be affected by any form o f public-private partnership that GWCL adopts. Further, because investmentsover at least the next five years are expected to come from very low cost and concessional donor funds (and not higher cost private sector sources, such as commercial banks), any tariff increases put inplace by the PURC are likely to be very modest and largely related to keeping up with inflation. Given this regulatory context, there is no conditionality in the proposed IDA project on the level o f tariffs. 136. The Task Team constructed the financial model for GWCL based on audited accounts for FYOO, andthendraft audited accounts for FYOl and FY02, draft accounts for FY03 and a budget for FY04. The model contains forecasts for FY03-FY15 and some assumptions differ from GWCL provided forecasts. Generally, IDA'S financial model provides more conservative forecasts than GWCL budgets. 137. GWCL is currently barely generating sufficient cash for maintenance and necessary investment and refurbishmentcosts. As a result, IDA finds the maintenance budget i s squeezed and will require adjustment as soon as an Operator could take over and assess the correct needs. Most o f the generated cash surplus (over and above cash cost levels) i s utilized to repay existing domestic debts, necessary maintenance costs and minor investmentprograms. Larger investments are carried out through a GOG grant or bilateral donor support. 138. PURC does not allow debt service on existing GWCL debts in the water and sewerage tariffs. As a result, GWCL has for some years now only serviced a few o f its 40 loans. The Project therefore includes, as a priority, support for a debt rationalizationinGWCL. Base Case Assumptions 139. The following sheets contain the World Bank's structure for the Base Case financial forecasts for GWCL subject to change as FY02and FY03 becomes final, audited accounts for the utility provider. The Base Case models the situation as it looks at the end of FY03 with the following main characteristics: Non-revenue for water at approximately 52 %, only moderate increases inraw water extraction from own financial sources, and the continued growth innew connections (approximately 1,000 per month) primarily to the existing network with very little expansion o f this; Collection efficiency at 75% as un-audited accounts for FY03 demonstrate; 46 . Tariffs kept at same level inUSDdue to quarterly inflationary adjustments from PURC but no real increases inUSDto cover outstanding debts, the need for refurbishmentor system . expansion, and Normal, inflationary increases incosts. Conclusions on Base Case Scenario 140. The present level of commercial and technical performance in GWCL are such that affordable tariffs cannot provide sufficient coverage for GWCL costs, refurbishment and debt service. A change in both technical and commercial approach i s necessary to turn around the utility and enable expansion of services to greater parts of the Ghanaian population. The Base Case projections identifies the following main issues: i.GWCLunabletoservicethecurrentdebt,bothinterest,exchangelossesanddebt repayments; ii.GWCLunabletoengageinpropermaintenanceofexistingassets,partlybecauseof overstaffing that absorbs necessary financial resources for maintenance; and iii.GWCLlackingthefinancialresourcestocompletetheseveranceprogramfor approximately 40% o f all employees With Project Case Assumptions3 141. The last 3 sheets marked "With Project Case" contain the projected situation during and after project completion in GWCL. The Project Case models the situation inthe Base Case with the following main changes: Non-revenue for water goes down to 44% after introduction o f the Management Contractor, water resources and an additional 50,000 connections become available and the newwater resources are sufficient to service both new customers andthe growth inexisting connections; Collection efficiency increases to 85% from FY06 as one o f the results o f introducing a . Management Contract; Tariffs are increased a total o f 20% inreal USD terms, first time in2005 and secondly in 2013. Subsequenttariff increases bringingthe price o fwater delivery up by approximately 30 to 40% from its current level are necessary to service soft loan project debts and for GWCL to participate with own resources infurther investmentprograms. It i s still assumed that old debts to a highextent will never be repaid by GWCL, although interest on this debt i s charged to and paid by GWCL. A separate debt restructuringexercise involvingMOFEP, MWHand GWCL has been initiated to restructure the capital base o f GWCL; This model is basedon World Bank estimates and does not necessarily reflect PURCactions that may or may not take place over the analysis period o f the model. 47 ... . Normal, inflationary increases incosts; Additional charges to depreciation costs as project assets come on-line inGWCL; Debt service to IDA, GOG andNDF onthe funds made available for this project (USD 120 . million); and A severance program addressesthe needto retrench about 2000 workers (some 40 % of existing staff). Conclusions on Project Case Scenario 142. The assumptions made do not include other areas, where the management contract arrangement and the investmentprogram could benefit GWCL, e.g. reduction inunaccounted for water, additional water resources made available for sale to existing customers, benefits from proactive maintenance schemes or increased training, improved commercial management and improved human resource skills in GWCL. Based on these assumptions, the forecast shows the following: i.GWCLwillbeabletoservicetheinvestmentprogramdebtstoWB,NDFandGOG; ii.GWCLwillimpressivelyimprovetheirfinancialresultsandquicklymovetowardfull coverage o f all costs, including depreciation (FY 06) and toward positive cash flows (FY06); iii.GWCLwouldnolongerneedbudgetaryorothertypesofsupportfromGOG(FY07) unless GOG wants to substantially extend delivery systems to poor neighborhoods without a commercial basis; and iv. GWCL will become a sustainable utility provider for Ghana. 48 - . I 3 w w W In4 'I vv w 3 IA O W U m o o o v i - m - 0 3 "." 0r---, OA - r-o d 9 l 0 a w w w 3 3 \o 2 2 W N \o N *-* --I- w w ww w" N"Ni "t w w -r( s s nn m v i m m w w w m vv a w hn 0 0 m v i G-7 w w \ O W fwC nn m d S C w w Y L -w a Base Case Results for Financial andEconomic Net Present Values and Rates o fReturn 143. The World Bank estimated Base Case financial and economic model, shown on the following page, returns the following results: Financial Economic INVP (OOO$) 12,388 22,07 1 IRR I 16% 121% I The difference betweenthe financial andeconomic results are the estimated effect o ftaxes equaling 15 percent as included inthe total for Component 1, which i s principally civil works and engineering. Methodology & Principal Assumptions 144. The Base Case model uses a with and without project methodology, over a 10-year analysis period and with a 10 percent discount rate for the Net Present Value calculation. The electricity bill i s heldconstant at Cedi 5.0 billionper month (US$7.0 million per year equivalent) in the with project case for the entire period (as per the proposed handling of the power bill under the Management Contract), and Cedi 4.0 billion per month (US$5.6 million per year equivalent) inthe without project case. 145. Inthe with project case, the principal assumptions are: Project costs of US$103 million and US$15 million are included; 13 million m3 o f new water i s added to the system; the management contract costs $1.0 million per year for the first four years and then $0.75 million for the last year (consistent with anticipated Management Contract payment regime); during the Project period, Unaccounted For Water (UFW) decreases from 44 to 33 percent, and then rises to 34 percent after the Project closes; staff and HQcosts reduce by 40 percent from current levels as a result o f the planned Retrenchment program; and there are modest reductions, 5 percent and 2 percent, respectively, inthe cost o fFuel, Oil, Chemicals and Treatment Costs. 146. Inthe without project case, the principal assumptions are: no new water is added to the system; UFW increases about 1percent per year from 44 percent in2004 to 52 percent in2013; staff and HQcosts rise by 5 percent per year (much less than the average 22 percent they increased over the last four years); fuel, oil and treatment costs rise by 5 percent and 2 percent, respectively. Sensitivity Analysis 147. Based on the discussion o f the above assumptions and an examination o f the Project's critical risks as shown inSection C.5, three scenarios are developed for the sensitivity analysis as follows: 55 i.Expected effects of the PSP contract. For this scenario: (a) the performance improvements in fuel costs are reduced from 5 percent inthe Base Case to 1 percent per year; (b) treatment costs do not reduce from the Base Case 2 percent assumption; and (c) UFW reduces by 0.5 percent per year for 2006-2010 (to reflect the effect o fthe Project's civil works) butthen increases by 0.5 percent per year from 2011to 2017. ii.EffectsoftheRetrenchmentProgram. IntheBaseCase,payrollcostsreduceonetimeby 60 percent in 2006 to reflect a staff reduction o f about 1,600 workers. This scenario assumes the staff retrenchment does not take place. iii.EffectofCivilWorksonNewWaterProduction. UndertheBaseCase,theProjectis assumed to add 13 million m3 o f new treated water. With this scenario, it i s assumedthat not all the civil works are completed and only 60 percent o f this amount (Le., 7.8 million m3) i s actually achieved under the Project. Results o f the three sensitivity scenarios are shown below: 1 -1 4 2 6 10 148. The sensitivity analysis confirms the observations made in Section A.l. Le., increasing commercial and managerial expertise (accomplished through the PSP contract), as well as carrying out o f the retrenchment program, are key ingredients for the overall success o f the Project. 56 Base Case Economic Model 1 Retrenchment 0 0 Total Flows 19,099 17,247 14,857 12,378 9,803 7,1251 4,336 1,430 Net Flows With -Without -1,386 -22,368 -10,698 -4,116 -4,936 -4,582 14,347 31,558 Annex 10: SafeguardPolicyIssues GHANA: URBANWATER PROJECT 149. Prior to appraisal, the Borrower contracted a qualified Consultant to prepare an Environmental Assessment and Management Plan (EAMP) for the first package o f civil works, a Resettlement Policy Framework (RPF) for the entire UWP, and a Dam Safety Report focusing on the first year civil works. The Consultant also carried out a 5-day training program for GWCL and PMU staff, and Ghanaian consultants, on implementing the RPF and preparing RAPs. Preparation and implementation o f RAPs, and preparation o f EAMPs for subsequent civil works packages, will be carried out duringUWP implementation. Environment 150. The EAMP identified a number o f potential adverse impacts from the civil works. All are readily avoided or minimized with adequate attention and management during planning and constructiono f the works. They include: . soil erosion; .. safety o f the public; temporary disturbance and interruption o f commercial and social activities; conflicting demands for water use inthe dry northern part o f Ghana; and public healthrisks to water users as a result o f contaminated water from improperly planned, constructed and maintainedboreholes. 151. The proposed site for disposal o f dredging spoils from the BrimsuDam was found to be acceptable, but the operation will have to be carefully planned and managed to minimize ecological and landuse impacts, and avoid water quality impacts to the Kakum River. 152. The potential water quality and health risks o f additional water supply causing overloading o f municipal water drainage, treatment and disposal systems was assessed. It i s expected to be minimal since the initial civil works package will have limited implications for increased wastewater production. Nevertheless, the linkages between water supply and wastewater production calls for special national attention to adequately address concerns about existing capacity to manage wastewater. Thus, the UWP includes provisions for a comprehensive wastewater sector study. 153, The Environmental Management Plan in the EAMP provides comprehensive guidance for avoiding or minimizing adverse impacts due to the civil works for use in completing the engineering planning and design, and in preparing the construction tender documents and TOR for the supervising engineer. Together with planned environmental training for Borrower and contractor personnel, and planned environmental supervision o f construction, these measures should be sufficient to avoid or minimize adverse impacts o fthe project. 58 Resettlement 154. It is expected that, overall, the Project will have limited impacts on assets and livelihoods. Impacts on land will be limited since most land required for Project construction appears to be available in existing right-of-ways (existing road reservations where pipelines, mains, and distribution are to be sited and constructed). Provisions are made in the RPF to minimize impacts; specifically any proposed civil works entailing impacts on inhabited dwellings need to be rerouted or redesigned to eliminate such impacts wherever practical. Since the exact locations of civil works were not known at the time of preparing the RPF, provisions were made in the RPF to accommodate all potential situations, including cases that may entail actual displacement/resettlement, and livelihood restoration assistance, in accordance with WB policy. The expected impacts o f the initial civil works package include: The acquisition or use o f about 25 hectares o f land near Cape Coast to accommodate . the needs o f a dredgingspoil disposal site; The temporary displacement of a number o f displaceable structures (containers, kiosks) located alongside roads within road reservations for construction o f pipelines. These . displaceable structures are usedfor business purposes (shops, workshops, etc.); N o impact on inhabited dwellings; and N o impact on livelihoods o f a magnitude to require livelihood restoration assistance. Dam Safety 155. O f the approximately 80 water systems included in the UWP, about 20 rely entirely or partly on surface water sources. These sources range from large dams and reservoirs (e.g. on the Volta River) to relatively low weirs with little storage. The dam safety study involved a reconnaissance level safety assessment o f GWCL dams and weirs involved in the UWP. It included a sample o f 11 dams and weirs, field inspection o f 8 o f them, examination o f existing inspectionreports, and reconnaissance-level cost estimates for requiredrehabilitation works. All 8 inspected structures were found to need rehabilitation, usually enhanced maintenance. Some dams need work urgently, and at least one dam (Owabi Dam near Kumasi) needs work immediately. Dredgingrequirements were neither estimated nor costed. 156. The study assessedthe present dam management and made recommendations for future dam safety management o f the GWCL dams, including the establishment o f a National Dam Safety Unit (NDSU) and the preparation o f Emergency Preparedness Plans (EPP) for dams. It recommended investigating as a follow-up activity whether the NDSU would consider only GWCL dams or whether it should also include the Volta River Authority Akosombo Dam and/or the Irrigation Development Authority dams, and how stakeholders would be represented in the NDSUandparticipate indecisionmakingprocesses. 59 157. The study provided TOR for follow-up activities including: a) a dam stability design check, including rehabilitation cost estimates to feasibility level; b) a dredging design, including cost estimates to feasibility level; c) an NDSU implementation study; and d) an Emergency Preparedness Plan for large dams. Consultation 158. The Consultant carried out field reconnaissance o f construction sites for the initial civil works program, including consultations with GWCL, land valuation and other officials. People who may be directly affected by construction activities will be identified and consulted during the pre-constructionsurveys andpreparation ofRAPs. InternationalWaterways 159. The project will increase water abstractions from all three o f Ghana's international waterways. An analysis o f potential increases in water production has indicated that the project could increase total abstractions from all three international river basins by about 4.3 million cubic meters per year. For each river basin, these incremental abstractions would equal less than one half o f one percent o f total runoff. These results were incorporated into an OP7.50 required letter of notification to the other riparian states that was sent prior to appraisal. Implementingsafeguardrequirements 160. The PMU will be staffed with a Safeguards Officer (SO) to oversee and manage all activities related to the following: i.implementingtheEMPforthefirstpackageofcivilworks; ii.preparingandimplementingEAMPsforsubsequentcivilworkspackages; iii.preparingandimplementingRAPsforcivilworkspackages;and iv. carrying out dam safety follow-up studies and civil works. 161. The SO will work with GWCL regional engineers to supervise field activities. As required,the SO and engineers will receive additional training to ensure they are fully capable to carry out the assigned responsibilities. The project plan includes contracting out the preparation of safeguards studiesheports, implementation o f the results, and field supervision o f construction. 162. Before civil works are approved for funding, the Bank and the Ghanaian government will review and approve all EAMPs, EMPs and RAPs. Government capabilities to undertake these reviews is adequate. The project budget includes funds for the implementation o f all safeguards requirements, including the following: i.StaffingthePMUwithaSafeguardsOfficer; 60 ii.PreparingandimplementingRAPs; iii.PreparingandimplementingEAMPsandEMPsforfuturecivilworkspackages; iv. Designing, managing and executing rehabilitation works for dams andweirs; v. Preparing an Emergency Preparedness Planfor large GWCL dams containing reservoirs just upstreamofpopulatedareas; and vi. Training PMU and GWCL staff infulfilling their responsibilities for managementof safeguards i ssues. 163. Implementation of EMPs and RAPs will be monitored by the Supervising Engineer, GWCL regional engineers, and/or Safeguards Officer as appropriate. The Ghanaian EPA will also undertake periodic inspections. 61 Annex 11:ProjectPreparationand Supervision GHANA: URBANWATER PROJECT Planned Actual PCN review Initial PIDto PIC Initial ISDS to PIC Appraisal May 10-17,2004 Negotiations May 18-21,2004 Board approval July 27, 2004 Planneddate of effectiveness September 30,2004 Planneddate of mid-termreview June 30,2007 Plannedclosing date December31,2010 Key institutions responsible for preparationofthe project: MinistryofWorks andHousing Ghana Water Company, Limited Bank staff and consultants who workedon the project included: Name Title Unit Alexander McPhail Task Team Leader AFTU2 Arthur Swatson Engineer AFTU2 Lars Rasmusson Engineer AFTU2 (Consultant) Wiebe Moes Engineer AFTU2 HassanKida Engineer AFTU2 Jan Franck FinancialAnalyst AFTU2 (Consultant) John Boyle Environmental Specialist AFTS1 Kofi Awanyo Procurement Specialist AFTS4 FredYankey Financial Management Specialist AFTFM Ayman Abu-Haija Financial Management Specialist LOAGl Tracey Osborne Communications Specialist EXT Kofi Tsikata Communications Specialist AFTPX SharonFelzer Stakeholder Specialist EXT (Consultant) Lydia Sam ProgramAssistant AFC10 Ernestina Attafuah ProgramAssistant AFTU2 Maya El-Azzazi Program Assistant AFTU2 Karen Hudes Country Lawyer LEGAF Peer Reviewers Matar Fall Senior Sanitary Engineer AFTU2 Jane Walker Lead Water and Sanitation Specialist AFTUl Barbara Miller Lead Water Resource Mgt. Specialist AFTNL Peter Koenig Senior Water Resources Specialist LCSER UrbanWater Cluster Leader RichardVerspyck Lead Water and Sanitation Specialist AFTU2 62 Bank funds expendedto date on project preparation: 1. Bank resources: US$985,000 2. Trust funds: US$671,000 3. Total: US$1,656,000 EstimatedApproval and Supervision costs: 1. Remainingcosts to approval: US$lO,OOO 2. Estimatedannual supervision cost: US$90,000 63 Annex 12: Documents in ElectronicProjectFile (IRIS) GHANA: URBANWATER PROJECT A largenumber of documentsare available, including the following: A. Reports and Studies 1, Water Supply Policy Paper 2. Environmental Impact Assessment Report 3. Project Concept Document 4. Report of the International FactFindingMissiononWater Sector Reform inGhana 5. UrbanWater Sector - Q & A Paper B. Other Official DocumentslCorrespondence 1. Project InformationDocument 2. Status ofNegotiations Notice 3. SeverancePayment Approval 4. Integrated Safeguards Data Sheet (ISDS) 5. Appraisal MissionAide Memoire 6. OP 7.50 Memorandum from Regional Vice President 7. OP 7.50 NotificationLetter from BurkinaFaso 8. No Objection Letter to RFP and Contract Package for Law Firmsto draft a Management Contract. 9. Advertisement indgMarket for InterestedBiddersto attendaManagement Contract Meeting. 10. Letter from DFID on transmission draft report capturing recommendations of the water reviewmission inNovember 2003. 11. Terms of Reference- Statement of MissionObjectives for Pre-Appraisal Missionof January 2004. 12. Letter to Public Citizenreferring to International Fact FindingMission. 13. PSP Contract Framework Paper 14. Correspondencefrom NDF confirming management's endorsement ofNDF component. 64 Annex 13: Statement of Loans and Credits GHANA: URBANWATER PROJECT Difference between expectedand actual OriginalAmount in US$Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO71157 2004 GH Land Administration 0.00 20.51 0.00 0.00 0.00 21.59 0.00 0.00 PO71399 2003 Partnershipsw/ Traditional Authorities 0.00 0.00 0.00 0.00 0.00 4.78 -0.11 0.00 PO73649 2003 2nd Health Sect. Prog.Support 0.00 57.30 0.00 0.00 0.00 86.80 0.55 0.00 PO67685 2002 Ghana:GEF-Northern Savanna - TF050723 0.00 0.00 0.00 7.90 0.00 8.13 2.95 0.00 PO50623 2002 GH ROAD SECTORDEVELOPMENT 0.00 220.00 0.00 0.00 0.00 218.90 47.97 0.00 PROGRAM PO00968 2001 Ghana:AGRIC SERVICES 0.00 67.00 0.00 0.00 0.00 56.58 72.88 0.00 PO71617 2001 AIDS Response Proj.(GARFUND) 0.00 25.00 0.00 0.00 0.00 16.63 -10.77 0.00 PO50624 2000 URBAN 5 0.00 10.83 0.00 0.00 0.00 4.25 3.98 0.66 PO50616 2000 COMMUNITY WATER I1 0.00 25.00 0.00 0.00 0.00 14.56 -10.89 0.00 PO69465 2000 Ghana:RURAL FINANCIAL SERVICES 0.00 5.13 0.00 0.00 0.00 4.67 16.43 0.00 PROJECT PO00974 1999 Nat. Func. Lit. Program 0.00 32.00 0.00 0.00 0.00 24.26 14.49 7.64 PO00970 1999 TRADE GATEWAY & INV, 0.00 50.50 0.00 0.00 0.00 24.98 19.99 0.00 PO40659 1999 Community-basedPov.Red. 0.00 5.00 0.00 0.00 0.00 3.38 3.12 0.72 PO45188 1998 Ghana:FOREST BIODIVERSITY 0.00 0.00 0.00 8.90 0.00 6.63 4.79 0.00 PO41150 1997 Ghana:VILLAGE INFRASTRUCTURE 0.00 30.00 0.00 0.00 0.00 5.58 7.53 0.00 PO00973 1996 URBAN ENVIRONMENTAL 0.00 71.00 0.00 0.00 0.00 1.80 9.13 5.84 SANITATION PO42516 1996 PUBLIC ENTERPRISEPR 0.00 26.45 0.00 0.00 0.00 5.59 7.23 -17.44 PO00926 1995 GH THERMAL (P-VII) 0.00 175.60 0.00 0.00 0.00 23.13 27.38 26.67 Total: 0.00 821.32 0.00 16.80 0.00 532.24 216.65 24.09 GHANA STATEMENTOF IFC's HeldandDisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1993 AEF Afariwaa 0.16 0.00 0.00 0.00 0.16 0.00 0.00 0.00 1995 AEF AntelopeCo. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 AEF Computer Sch 0.15 0.00 0.00 0.00 0.15 0.00 0.00 0.00 2001 AEF GPPI 1.70 0.00 0.00 0.00 1.70 0.00 0.00 0.00 1998 AEF NCS 0.00 0.00 0.53 0.00 0.00 0.00 0.53 0.00 1997 AEF PTS 0.00 0.00 0.31 0.00 0.00 0.00 0.31 0.00 1999 AEF PharmaCare 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.00 1994 AEF Shangri-la 0.93 0.00 0.00 0.00 0.93 0.00 0.00 0.00 1996 AEF Tacks Farms 0.43 0.00 0.00 0.00 0.43 0.00 0.00 0.00 1989/91/93 ContAcceptances 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 DiamondCement 5.00 1.oo 0.00 0.00 0.00 0.00 0.00 0.00 2000 ELAC 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.00 GAGL 0.00 0.00 3.26 0.00 0.00 0.00 3.26 0.00 1990191/96 1991 GHANAL 0.00 0.44 0.00 0.00 0.00 0.44 0.00 0.00 2001 MFISSLC 0.00 0.49 0.00 0.00 0.00 0.49 0.00 0.00 Totalportfolio: 8.55 2.03 4.10 0.00 3.55 1.03 4.10 0.00 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2000 GAGL IV-Restr 0.00 0.00 0.00 0.00 Total pendingcommitment: 0.00 0.00 0.00 0.00 66 Annex 14: Countryat a Glance GHANA: URBANWATER PROJECT Sub- POVERTY and SOCIAL Saharan Low- Ghana Africa income Development diamond' 2002 Population, mid-year(millions) 20.1 688 2,495 Lifeexpectancy GNIper capita (Atlas method, US$) 270 450 430 GNi (Atlas method, US$billions) T 5.4 306 1,072 Average annual growth, 1996-02 I Population (%) 2.1 2.4 1.9 Laborforce (%) 2.4 2.5 2.3 GNI Gross per primary M o s t recent estimate (latest year available, 1996-02) capita nroliment Poverty(% of population belownationalpovedyiine) Urbanpopulation(%of totalpopulation) 37 33 30 Life expectancyat birth (years) 55 46 59 Infant mortaiity(per 1000livebidhs) 55 105 81 Chiid malnutrition (%ofchildren under5) 25 Access to improvedwater source Access to an improvedwatersource(%ofpopulation) 73 58 76 1 iiiiteracy(%of population age 159 26 37 37 Gross primaryenroliment (%of scho01-agepopulation) 80 66 95 -Ghana Male 84 92 103 Low-lncome grou~ Female 76 60 87 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 I992 2001 2002 Economic ratios' GDP (US$ billions) 4.0 6.4 5.3 6.O Gross domestic investmentlGDP 3.4 Q.6 24.0 22.7 Exports of goods and services/GDP 3.3 17.2 52.2 51.0 Trade Gross domestic savings/GDP 3.7 13 5.8 6.5 Gross national savings/GDP 3.5 3.6 18.2 16.6 Current account baiance/GDP -4.6 -9.2 -7.3 -8.1 Interest paymentslGDP 0.7 13 13 2.1 Total debt/GDP 36.8 70.3 P7.5 Total debt serviceiexports 15.5 26.2 12.8 1 Presentvalueof debt/GDP 74.4 Presentvalue of debt/exports 160.4 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (averageannualgrowth) GDP 4.7 4.2 4.0 4.5 5.0 -Ghana GDP oercaoita 1.1 2.0 19 2.8 3.6 Lowincomegroup ~ STRUCTURE of the ECONOMY I 1982. 1992 2001 2002 Growth o f investment and GDP (Oh) (%of GDP) Agriculture 57.3 44.8 35.9 34.7 20 industry 6.2 V.4 25.2 24.9 0 Manufacturing 3.6 9.3 9.2 9.4 Services 36.4 37.8 36.9 40.3 -20 Private consumption 89.6 86.6 78.7 79.1 Generalgovernment consumption 6.5 Q.1 15.6 w.4 Importsof goods and services 3.0 26.8 70.5 67.1 -GDI &GDP - 1982-92 1992-02 2001 2002 Growth o f exports and imports (Oh) (average annualgrowth) Agriculture 2.1 3.8 3.7 4.1 T Industry 7.1 3.7 4.0 6.3 Manufacturing 7.3 12 7.6 0.0 Services 7.3 4.8 4.3 4.4 Private consumption 4.7 4.2 1.4 0.3 Generalgovernment consumption 4.5 4.5 15.O -10.7 Gross domestic investment 7.1 1.9 -1.1 10.1 I Imports of goods and sewices 7.4 9.4 2.0 6.6 -Exports -imports 67 Ghana ~~ ~ PRICES and GOVERNM ENT FINANCE 1982 1992 2001 2002 Domestic prices (%change) Consumer prices 22.3 ll.0 33.0 15.9 implicit GDP deflator 27.9 11.2 34.6 20.2 Government finance (%of GDP, includes current grants) Current revenue 6.0 18.5 20.7 22.3 97 98 99 00 01 Current budget balance -3.2 4.2 2.9 3.O Overall sumlus/deficit -6.1 -5.4 -4.5 -GDP deflator -CPI TRADE 1982 1992 2001 2002 Export and import levels (US$ mill.) (US$ millions) Totalexports (fob) 986 2,380 2,681 Cocoa 302 503 535 I Timber 114 215 265 Manufactures Total imports (cif) 1,589 3,781 4,099 Food 38 Fueland energy 162 257 275 ! Capital goods 277 Export price index(1995=WO) 85 78 81 96 97 98 99 00 Import price index(1995=WO) )33 99 96 Exports glmports Terms of trade (8951110) 83 79 85 BALANCE o f P A Y M E N T S 1982 1992 2001 2002 (US$ millions) Current account balance t o GDP (Oh) Exports of goods and Services 711 1,105 2,433 2,607 imports of goods and Services 8t3 1,645 3,428 3,662 Resource balance 433 -740 -995 -1,055 Net income -89 -)36 -l78 -185 Net current transfers -1 255 787 750 Current account balance -82 -592 -386 -490 Financing items (net) 8 1 467 465 559 Changes in net reserves 1 a 4 -79 -69 Memo: Reserves includinggoid (US$ millions) 431 679 Conversion rate (DEC, local/US$) 21.4 437.1 7,VO.E 7,932.7 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) :omposition of 2001 debt (US$ mill.) Total debt outstandinganddisbursed 1,484 4,508 6,759 iBRD 131 87 6 IDA P 5 1631 3.l72 Total debt service 111 3 8 3 6 IBRD 6 21 4 IDA 1 14 59 Compositionof net resourceflows Official grants 30 218 305 Official creditors 58 309 269 Privatecreditors 14 45 154 Foreigndirect investment 6 23 69 Portfolio equity 0 0 0 World Bank program Commitments 0 375 433 \ i8RD - ~ E - Biiaterd Disbursements 24 l70 8 3 3 IDA F Private ~ D Othermultiiateral ~ Principalrepayments 8 15 37 > - I M F G- Short-ter 68 Annex 15: PrivateSector Participation(PSP) FrameworkPaper GHANA: URBANWATER PROJECT The purpose of this annex is to provide a framework of the operation of the Management ContractinGhana's urbanwater sector. Descriptionof the PlannedManagementContract ApplicableLaw, Applicable lawfor the ManagementContractwill bethe laws of Ghana. Bid -Defined. The "Bid" is the amount of money (for the first four years of the Management ContractdenominatedinUS dollars, then, for year five of the ManagementContract, 25 percent denominated in Cedis and 75 percent in US dollars; see "Payment to Operator" paragraphs below)that the Operatorrequiresto carry out the ManagementContract. BiddingMethodologyand Process. Procurementfor the ManagementContract will be carried out accordingto WorldBank"Guidelines". Step 1. In March, 2004, the GOG will agree on the issues described in this PSP Contract Framework Paper (Framework Paper). During March 2004, the GOG will place a notice of Management Contract in the DgMarket and the UN DevelopmentBusiness and selected local media, including the planned date for a public meeting to discuss the Framework Paper. The Framework paper will then be discussed in the public meeting between the GOG, the World Bank andpotentialbidders. Potentialbidders are expectedto provide feedback on the elements which should be clarified, enhancedor modified. The GOG will analyze the recommendations received, anddecide onthose it considersrelevantfor the ManagementContract. Onthe basisof comments and discussion a revised Framework Paper will be finalized by the GOG in consultationwith the WorldBank. Step 2. The GOG will hire a lawyedlawfirm to preparea draft biddingdocuments, includinga draft Management Contract (Contract) in accordance with the FrameworkPaper, which would have taken into account the relevantcommentsandrecommendationsfrom the bidders' meeting as statedinStep 1above. Step 3. As soon as the biddingdocument (including the draft contract) is finalized by the GOG after receipt of `no objection' from the World Bank, the GOG will publisha Specific Invitation to Bid in the DgMarket, UN DevelopmentBusiness and the local newspapers inviting eligible biddersto obtainthe biddingdocuments.Potentialbidderswill have 60 days to preparea bidand submit to the GOG. Prior to submitting their bids, the bidders will have a time-window for seeking clarifications (if any) on the bidding documents (details will be stated in the bidding document). The bids must containa detailedplan(the "Roll Out" plan) on howthe Operatorwill assume operating the entire Ghana Water Company, Limited system (i.e., all 10 regionsB0 systems)within a periodnot to exceed 18 months. The planwill includehowthe regionsnot yet under the Operator's management will be supported financially if they are not already self- financingon an O&M basis. 69 The type of bidding, whether single stage or two-stage4,will be decidedprior to the preparation ofthe biddingdocumentsandpublicationo fthe Specific ProcurementNotice. Bid Security. Bidders will be asked to submit a US$500,000 bid security together with their bids. The Bid security will be inthe amount and form specifiedinthe bidding documents5and will remainvalid for a periodof four weeks beyondthe validity period for the bids, inorder to providereasonabletime for the Borrowerto act ifthe security is to be called. Bidsecuritywill be releasedto unsuccessfulbidders once the contracthas beensignedwith the winningbidder. CapitalInvestmentProgram. The capitalinvestmentprogram, financedby the WorldBank is determined and carried out by the GOG through the Ghana Water Company, Limited. The Operatorwill be requiredto submit a SuggestedCapitalWorks Program(SCWP) once per year, basedon his professionaland operational experience,to advisethe GOG on the plannedCapital InvestmentProgram. The GOGwill reviewthe Operator's SCWP, however it is not obligatedto undertake any investments proposedor suggested by the Operator. It is also intendedthat the Operator's performance will not be tied to the Capital InvestmentProgramimplementedby the GOG Civil Works - Tendering Assistance. The GOG may employ the Operator to assist it inthe tendering and the evaluation of bids for: (i) engineering feasibility and design of proposed the civil works; (ii) contractor bids for the civil works; and (iii) construction supervision. For these services, the Operatorwill be paid0.3 percent ofthe lowestevaluatedbidfor the applicablecivil works. Paymentto the Operator will be basedon actual contract signed, without regardto later variationordersthat do notrequireadditionalengineering. Consumer Protection. Under existing law and regulations, the GOG protects the right of consumers to be fairly treated in all business and policy matters. Ghana has many active consumer advocacy and protection entities, and the Operator will be expected to deal with GWCL customers in a professional manner and with respect. To this end, the Ghana Water Company has in preparationa Consumer Charter. The Charter will be adopted by March 31, 2004, and placed in the DataRoom. The principles outlined in the Charter shall be reflected in not only the Operator's day-to-day running of GWCL systems, but also in its employeetraining programs. Data Room. The GOGhas compileda largenumber ofrelevantdocuments for Operatorreview in a "Data Room". The Data Room will open to bidders. Bidders and the GOG will jointly 4 Under which first un-priced technical proposalson the basis of a conceptualdesignor performancespecifications are invited, subjectto technical as well as commercial clarifications and adjustments, to be followed by amended bidding documents and the submissiono f final technical proposalsand priced bids inthe second stage. Inrevising the bidding documents inthe second stage the borrower shouldrespect the confidentiality ofthe bidders' technical proposals used inthe first stage, consistentwith requirementsoftransparencyand intellectual property rights. 5 The format ofthe bid security shall be in accordance with the standard bidding documentsand shall be issuedby a reputablebank or financial institution selected by the bidder. Ifthe institution issuingthe security is locatedoutside the country of the Borrower, it shall have acorrespondentfinancial institution locatedinthe country of Borrower to make it enforceable. 70 determine an appropriate time schedule. It i s anticipated that the Data Room will be open to the public. Upon request, Bidders can ask for exclusive access to the Data Room (Le., with only GWCL staff present) for reasonable periods o ftime. Debt - Existing. Ghana Water Company, Limited has extensive debt, both Cedi and forex denominated. The GOG i s currently (January 2004) undertaking a debt rationalization exercise for the energy sector. This exercise involves an examination o f all debts owed by the energy sector and then classifying them according to source, currency, term and use o f the funds provided. The GOG i s now working out how to rationalize these debts. It i s expected that some will be written off, some reduced inamount, some will have their terms re-negotiated and some converted into equity contributions to the energy utilities and some left unchanged. It is expected that the GOG will also undertake a similar exercise for the GWCL. Debt Service. Debt service on GWCL's existing loans and credits (after a debt rationalization exercise i s completed) will be paid from the Operator's Revenue Collection Account according to a pre-determined priority. See "Hierarchy o f Payments" section below. Electricity Bill. Currently (February 2004) GWCL receives electricity bills every month from ECG. The bill i s based on consumption and the current tariff. The GWCL jointly read all its electricity meters with ECG personnel. The current electricity bill o f GWCL i s about Cedi 10.0 billion per month, out o f which GWCL directly pays Cedi 4.0 billion. The remainder i s paid by the Ministry o f Finance to the ECG as a set off o f the public sector water consumption bill. Under the Management Contract, this arrangement shall be maintained but the monthly amount increased to Cedi 5.0 billion six months after the Management Contract Effective Date, and will be adjusted to suit the Service Territory RollOut. The Cedi 5.0 billionwill be adjusted on a pro- rata basis for increases in the electricity tariff as periodically determined by the Public Utility Regulatory Commission. Evolution of Management Contract to Affermage - Procedure. It i s the GOG's intention to eventually enter into a long term affermage arrangement with a private operator for the urban water sector. Assuming satisfactory performance, the Operator under the Management Contract will be eligible to bid for the affermage contract, but this does not mean it will have the right of first refusal. Evolution of Management Contract to Affermage - Timing. The Management Contract i s initially expected to be for five years. Giventhe GOG's intention to move to an affermage for the sector, it may wish to implement an affermage sooner than five years after the Management Contract i s signed. Therefore, the GOG reserves the right to inform the Operator that the Management Contract will be cancelled if it i s successful in entering into an affermage contract for the urban water sector. Inthis instance, the Management Contract would end on the day the Affermage Contract become effective. Compensation for early termination o f the Management contract under these circumstances will be explained in the Terms and Conditions section o f the Contract. (see "Right o f Early Termination Clause" section). 71 The GOG will be required to give the Operator six months notice o f its intention to cancel the Management Contract for reasons o f entering into an Affermage Contact. However, the six month notice cannot be givenearlier than the end o f month42 o f the Management Contract. Form of Contract. The contract to be bid and executed by the GOG is best described as a "Management Contract". Salient features o f the proposed Contract are given throughout this Framework Paper. Form of Operating Company. The Operator will be required to form a Limited Liability Company under Ghana law. The Company will then enter into the Management Contract with the GOG. The parent company of the winning firm will be expected to sign the Management Contract, as well as the locally created Company for purposes o fthe Management Contract. Hierarchy of Payments. The Revenue Collection Account will be used to pay costs in the following order: (i)fixed amount for GWCL HQ operating costs, including the amount determined necessary to support regions not under control o f the Operator during the Roll Out; (ii)chemicals; (iii)staffsalaries; (iv) staffpensionsandbenefits; (v) reasonable andprudent maintenance costs; (vi) operating costs other than maintenance; (vii) general and administrative costs; (viii) the portion o f Operator Fee not covered by the World Bank inyear 5 o f the Contract; (ix) debt service; and (x) all other costs. The surplusremainingafter items ithrough x is paidto the GWCL. Incentive Compensation. The Management Contract will contain the possibility of Incentive Payments in addition to the Monthly Fee. Incentive Compensation can be earned for achieving specific performance targets above those described as Baseline Performance Targets in the Management Contract. The source o f funding for the payment o f Incentive compensation can come from two sources. First, the following incentive payments will be paid from an increase in cash flow through the Revenue Collection Account: (i)percentage o f the increase incash flow a from improvements in customer collection efficiency; (ii) reductions inchemical usage; and (iii) increase inthe percentage o f cash collected from billings under the Lifeline Tariff. Inaccordance with the agreed formula inthe Contract, incentive payments will be paid from the proposed World Bank Urban Water Project (as long as the Project i s on-going) for the following: (i)reductions in power consumption; and (ii)decrease in water consumed by the public sector (see Public Sector Billing section). Insurance. The Operator will be required to have, at a minimum, all insurance required by Ghanaian law. It i s expected for the Operator to arrange and pay for all insurance. The GWCL will prepare, and make available inthe Data Room, a schedule o f all requiredinsurance and the required monetary coverage for each risk and/or policy. A summary will made available as part o f the RfP. Investment Required from the Operator. Within 10 days o f the start of the Management Contract, the Operator must deposit into the RevenueCollection Account at least US$500,000 as working capital. The GOG may require a Bank Guarantee for this amount prior to award o f the Contract. This amount i s refundable at the end o f the Management Contract. The Operator may 72 make other investments as it sees fit. Investment in assets that are buried, cemented in place, bolted in place or are effectively permanently affixed or installed (e.g., pipes, pumps, meters, standby generators, transformers and associated electrical panels, etc.) made by the Operator from its own funds become property o f the GOG as soon as they are commissioned. All other assets (e.g., office equipment and computers, vehicles and other rolling stock, etc.) paid for by the Operator with its own funds remain property o f the Operator. IntellectualProperty. Any proprietary and copyrighted intellectual property that the Operator installs during the Management Contract remains the property o f the Operator. GWCL may negotiate to purchase any intellectual property from the Operator at any time during the Management Contract. Low Income Customer Policy. The GOG considers service to existing and new low income customers to be a major water sector priority. As such, it continually evolves policies to promote low income householdconnections to the pipedwater network and it charges for water according to a tariff schedule (both for connections and at standpipes) that recognizes low income household budget constraints. It also directs a major part o f its annual investment program to increase the number o f low income households with access to its piped water network. The Operator will be expected to adopt the spirit o f GOG's low income household policies and to reflect these polices: (i)in its day-today operation o f the water system; and (ii) in its annual Suggested Capital Works Program. ManagementContract SupervisionProcedure. The Management Contract will be supervised by the HQo f Ghana Water Company, Limited(GWCL) through the Director o f Operations. [PartialRisk Guarantee. Needto discuss with the Operators and see what they want a PRG to cover, if anything.] Payment to Operator - Adjustment Procedures. The Operator Fee will be adjusted every twelve months for inflation according to an appropriate inflation index publicly available from the Ghana Statistical Service. Except for the result o f events taking place under the Force Majeure provisions o f the Management Contract, or inthe case o f Incentive Compensation, or in the case of Operator performance below the Performance Standards, no other adjustments to the Operator Fee will be permitted. However, see also "Right o f Early Termination Clause" section. Payment to Operator - Amount. The Operator will be paid on a monthly basis according to the Contract. For the Management Contract, the World Bank's proposed Urban Water Project will contain amounts specifically reserved for the Operator's Fee. The Operator will be paid a Base Fee and may earn the right to Incentive Compensation. Operator Performance below the Performance Standards will result ina reduction to the Base Fee. Paymentto Operator - Methodology. Duringyears one to four of the Management Contract, the Operator will be paid 100 percent o f the monthly Operator Fee from funds lent to the GOG by the World Bank. For year five o f the Management Contract, the Operator will be paid seventy-five percent o f the monthly Operator Fee from funds lent to the GOG by the World Bank. For the portion of the Operator Fee not paid by the World Bank, the Operator Fee will be 73 paid from the Revenue Collection Account. However, the Operator Fee can only be paid from the Revenue Collection Account according to the priority as described in the "Hierarchy o f Payments" Section. See also "Right o f Early Termination Clause" and "Evolution Management Contract to Affermage -Timing" sections. Performance Bond Amount. Throughout the term of the Management Contract, the parent company o f the Operator will be required to maintain a Performance Bond acceptable to the GOGinan amount ofnot less than US$lO million. Performance Standards. Under the Management Contract, the Operator will be required to follow all applicable laws o f Ghana. It will also be requiredto operate the specified urban water utilities ina professional manner, with respect to management and quality, that meets or exceeds generally accepted international utility practices. It must also operate the specified utility systems according to generally accepted commercial and accounting practices including selected Performance Indicators. A preliminary list o f Performance Indicators would be: (i) maintaining water quality at, or above, that requiredunder the laws o f Ghana; (ii) a yearly reduction in non- revenue water (see Annex 2); (iii)increasing annually the volume o f water produced from existing installations until installed capacity is achieved; (iv) annual reduction inthe time taken to respond to customer requests for service or complaints; and (v) maintaining the level o f non- public sector customer accounts receivable below the equivalent o f 3 months o f sales. ProcurementProcedures. Procurement for all civil works, goods and services financed with proceed from the World Bank shall follow World Bank Procurement Guidelines. Priority Customers. The GOG intends to designate under the Management Contract a small number of customers as "Priority Customers". Priority Customers cannot be cut-off from the piped water network for non-payment o f the water bill, and must receive water service on the same level as any other customer. Priority Customers will be limitedto medical or health centers and hospitals and first cyclehasic schools owned by the GOG or non-profit religious entities. Public Sector Billing. Currently, public sector entities' water bills are settled inthe Ministry of Finance, and are based on actual meter readings. Thus, public sector entities do not pay their bills directly. The present arrangement will be followed the entire Management Contract. Upon taking over management o f a specific urban water region, the Operator has up to six months to establish a 12-month Baseline Consumption for public sector entities in that water system. The Baseline Consumption will be certified by the independenttechnical auditor. Once the Baseline Consumption i s established, the Operator will be paid from the proposed World Bank Urban Water Project an incentive payment for reductions in public sector water usage. It i s intended that the annual capital works program supported by the proposed World Bank Project, which shall be procured by the GOG according to World Bank Procurement Guidelines, would provide for adequatemetering o f public sector entities inorder to timely establish the baseline. Repair, Replacement and Rehabilitation Fund. An amount o f US$5 million can be used by the Operator to make efficiency investments in the urban water systems. The US$5 million 74 Repair, Replacement and Rehabilitation Fund will be provided for in the World Bank proposed Urban Water Project. Eligible expenditures under the RRR Fund will be defined in the Management Contract. Examples could include: (i)urgent system repairs costing in aggregate above US$lO,OOO; (ii)distribution network (Le., less than or equal to 100 mm/4 inch diameter pipe) repair, replacement or extension; (iii) non-office equipment required on an urgent basis costing more than US$5,000; or (iv) plumbing improvements and repairs in public sector entities. All expenditures under the RRR Fund must be made following World Bank procurement procedures and guidelines. The Operator's planned use o f the RRR will be described in the Suggested Capital Works Program submitted to the GOG for consultation and advice. Revenue Collection Account. Upon effectiveness o f the Management Contract, the Operator will establish in a commercial bank in Ghana, and acceptable to the GWCL, the Revenue Collection Account. The Operator will be the sole signatory on Revenue Collection Account. The Operator will deposit all collections from customers and other defined activities of the GWCL into the Revenue Collection Account. The Operator will pay for all required expenses under the Management Contract for the specified water systems from the Revenue Collection Account, according to the description in the "Hierarchy o f Payments" Section. All surpluses remaining in the Revenue Collection Account, after the payment o f required expenses will be transferred monthly to the GOG according to the methodology described in the Management Contract. Right of Early Termination Clause. The GOG will have the right o f termination [to be completed by consulting lawyers, standard clauses are expected]. The operator will have the right to compensation ifthe Contract is terminated early for reason o f moving to a lease contract (see Evolution o f Management Contract to Affermage-Timing Section). Scope of Operator's Service. The Operator will be responsible for operating existing and future assets ofthe Ghana Water Company, Limited, inthe specified areas, on a day-to-day basis to deliver potable water. The Operator will assume responsibility for directing and managing the staff o f the Ghana Water Company, and all staff (except those people assigned by the GOG to work inthe new HQunit) will report to the Operator. The Operator will bill for water services and collect money owed from customers. The Operator will be authorized to disconnect customers (except Priority Customers) from the piped water for non-payment o f their bill or for other reasons permittedunder Ghana law. Service Area. The Management Contract will cover the 80 urban water systems currently operated by GWCL. Staff Retrenchment Procedure. With Effectiveness o f the World Bank Urban Water Project, a Staff Retrenchment Steering Committee will be established. Members o f the Committee will include GWCL H Q staff, GOG officials and representatives o f the union in GWCL. The Steering Committee will be responsible for designing the Staff Retrenchment Program including setting out the overall policy and timing o f the staff retrenchment program. Applicable law and existing union collective bargaining agreements will be used as the basis from which to determine the retrenchment amount and procedures. Funds to finance the retrenchment plan will 75 be providedthrough the proposed World Bank Urban Water Project up to a specific amount, and then Government funds, if required. The proposed schedule is: (i) retrenchments are initial carried out by GWCL, but not before January 1, 2005; (ii)Operator joins the Staff Retrenchment Steering Committee; (iii) Operator submits within six months o f the Management Contract start date a list o f additional employees proposed for retrenchment; (iv) Operator hires all employees not retrenched. After the World Bank (and GOG, if required) financed Staff Retrenchment Program i s completed, then the Operator can retrench workers according to the existing law and union contracts at its own expense. Staff Rules. GWCL employees are not civil servants. All GWCL staff will, after the Staff Retrenchment is completed, become employees o f the Operator without interruption in service. All GWCL staff will report to the Operator (after Roll Out in region where they are assigned), except for those assigned to the GWCL Headquarters prior to the Management Contract Effective Date. The Operator will be free to assign duties, work location and to manage the staff to accomplish the objectives of the Management Contract. The Operator will manage the staff according to applicable Ghanaian Law and the collective bargaining agreement, including the right to hire, fire and retrench staff, as described above. Most GWCL employees are currently working under a collective bargaining agreement, which expires in December 2004. The Operator will be expected to negotiate the subsequent collective bargaining agreement with the union upon commencement o fthe Management Contract. Taxes. The Operator will be subject to all applicable taxes under Ghana law. The local lawyer employed as part o f the legal team to prepare the Management Contract will prepare a brief for Bidders to outline the likely tax implications o f the Management Contract. However, the brief is non-binding on the government and Biddersmustperform their own due diligence on this topic. Technical and Financial Audits. Separate independent financial and technical audits will be carried out each year by an accounting and engineering firms. These consultancies will be supported by the proposed World Bank Urban Water Project as long as that Project i s effective. For years when the Project i s not effective, then the cost o f these audits will be paid from the Revenue Collection Account. The audits will be used to determine performance under the Management Contract and will serve as the basis for determining the Operator's Incentive Compensation or reduction inthe Base Fee. Term for Management Contract. The Management Contract will be for five years. However, see discussion under "Evolution Management Contract to Affermage - Procedure", "Evolution Management Contract to Affermage -Timing" and "Right o f Early Termination" sections, 76 Appendix 1: List of UrbanWater Systemsto be Includedinthe ManagementContract Item System Region Installed Capacity m31d 28 DaludNawuni N/Region 19550 29 Yendi N/Region 3240 30 Damango N/Region 1320 77 Appendix 1: List of UrbanWater Systems to be Includedinthe ManagementContract (Con?) Item System Region Installed Capacity m3/d 41 Agbozume VIRegion 411.2 42 Abor VIRegion 368 43 Avenopeme VlRegion 272 44 Jasikan VIRegion 320 45 Worawora VIRegion 124.8 47 Abesim BIAhafo 6799.92 48 Berekum BIAhafo 1822.24 49 Biaso BlAhafo 3600 50 Dwomo BIAhafo 1080 51 Acherensua BIAhafo 1080 78 Appendix 1: Listof UrbanWater Systems to beIncludedin the ManagementContract (Con't) Item System Region Installed Capacity m'ld 61 Bolgatanga U/East 7200 62 Bawku U/East 1648 79 Appendix2: Calculationof Non-RevenueWater ComputationofNon-RevenueWater (NRW) and Unaccounted-for-Water(URW) Definitions QP Quantity Produced QS Quantity Sold-Total o f metered and un-metered (estimated) Quantities sold. NRW Non Revenue Water QFS Fire Service Consumption Q FL Quantity Used inFlushing Q GWCL Consumption inGWCL Premises Q L Technical Leakage Q THEFT Theft (Through illegal connection) Q EST Inaccuracies Arising from Under-estimation of consumption. UFW Unaccounted-For-Water Q AUTH Authorized Water Usage QMINAC Meter Inaccuracies (Under-registration of Consumer Meters) Equations (1) "7 - QP - (Qs+QFS) (2) UFW - - QL + QTHEFT + QEST + QMINAC (3) QAUTH = QFL +QGWCL (4) NRW - UFW +QAUTH 80 Appendix2: Calculationof Non-RevenueWater (Con?) Applicationof the Equations i.ComputeNRWfromEquation(1) after estimatingQFSandQGWCL. Currently, GWCL charges 1% of the total volume of water sold to take care of water used for fire-fighting. QFS i s therefore computed by dividing the Cedi value of 1% charge by the average water tariff. QGWCL is computed by estimating or metering the volume of water consumed in GWCL offices and residential properties of the Company. ii.EstimateQFLbyassumingaflushingflowvelocityofsay0.5-1.Om/sandapplyingthe continuity equation Discharge = Cross-SectionalArea x Velocity for the relevant size of pipelineandduration flushed. iii.ComputeUFWusingEquation(4). AnnualReductionofNRW NRW shall be reducedat a rate of 5% per annumuntilthe UltimateNRW (uNRW) of 25% i s reachedfor each system. This shall be achievedby reducing the components of UFW which are namely, QL ,QTHEFT ,QEST ,and QMINAC . Certificationof NRW by TechnicalandFinancialAuditor As with all other performance standards to be monitored, NRW shall be certifiedthrough the monitoring of all data on the parametersthat go into the computation ofthe parameter. Where estimation of a component is necessary, the basis of estimation may needto be agreedbetween the Operator andGWCL. 81 Annex 16: Backgroundof Consultationsand Communication GHANA: URBANWATER PROJECT 1. Introduction Duringthe years that the restructuringof the water sector inGhana has been underway, many developments have taken place on the global scene as well as within the national and sectoral contexts. While the political dynamics around all reforms are highly contextual, many outside dimensions related to reform programs and changes in the international water market have had an impact on this Project. Urban water reforms have become highly political and this dimension i s often stronger than the technical and financing issues associated with these types o fprojects. The Project has also evolved significantly over the years from a lease arrangement to a management contract; questions have been raised by local and foreign NGOs regarding the participation o f the private sector which inthe Ghanaian context has had a mixedhistory; issues related to the impact o f the Project on the poor have beenraised and the potential weakening o f Government control over delivery o f water services has also been o f concern. While these issues are common in Bank-financed projects which have a private sector component, within the context o f Ghana they have the ability to create significant political and reputational risks to the project. Learning from the lessons o f global experience and analysis in the urban water sector, a different project development process that completely integrated strategic communications into project design, was developed. 2. Communicationsin the Early Years Initial work on the Ghana Urban Water Project began in 1995, and even then, attention to public involvement and communications was a feature o f the project. In 1995 for example, a range o f NGOs and other stakeholders attended a workshop to discuss and debate options for private sector participation (PSP). Again, in 1997, the Minister o f Works and Housing and other stakeholders undertook a highly visible visit to several West Africa countries which have adopted PSP intheir water supply. In 1999, Parliamentarians, trade unions and key public sector representatives attended a workshop to reviewvarious studies looking at the possible options and outcomes for PSP. A "International Fact Finding Mission," coordinated by Public Citizen, a Washington-based NGO, visited Ghana in May 2002 to assess the project and also wrote a detailed statement elaborating their concerns about private sector participation such as tariff adjustments, payment o f the private operator, conditionality, policies for protecting the poor, terms o f the management contract, etc. Project documentation and Q&A's were developed to fully respond to questions and concerns by stakeholders and those raised by the "International Fact Finding Mission." A number o f meetings were held with both the Public Citizen and ISODEC (representing the National Coalition o f Against Privatization) to discuss the Project components. 82 3. ProjectPreparationAccelerates To manage communications surrounding the issues related to the Project, communications staff were hired by the Project Management Unit to manage consultations and dissemination o f information between 2001 and 2003. Numerous community meetings, workshops, radio talk shows, and media events were held to inform the public about the Project and constant consultations with consumer groups, labor groups, and other associations were completed In addition, an Advisory Committee with wide membership including the chief whip of the rulingparty inParliament, leadership of the Public Utility Workers' Union, private businessmen from Ghana, civil servants including GWCL representatives and the Ministry o f Finance and the PURC and representatives from consumer groups was set up by the Ministry o f Works and Housing to provide guidance to the Government on the design o f the PSP transaction. The Advisory Committee represented many o f the interested stakeholders inthe proposed Project and provided a forum for discussion. As project preparation accelerated in2003, efforts were made to improve communication around the Project and to keep citizens up-to-date on the civil works. The Ministry o f Works and Housing held a series o f eight consultation workshops on PSP inthe urban water sector inJuly, 2003 and Bank staff involved with the project had many meetingswith stakeholders culminating ina public forum in2003 with civil society parties who were mostvocal intheir questions about the Project. The Project Management Unitcontinues to meet with community representatives to share informationabout the Project's objectives andthe role o f a private provider. 4. CommunicationsProgram To support the ongoing water sector reform and ensure adequate response to public concerns the World Bank Development Communications Unit completed a Communication Needs Assessment and made several recommendations to improve communications on the project. This included the development o f a "communications committee" to develop an informed communications program between the various Ministries, NGOs, labor unions and the Ghana Water Company, Limited and to improve communications with stakeholders and the general public. The World Bank DevComms Division had also been working with the government duringthe latter part o f 2002 and 2003 providing technical support to the communications group A public opinion poll is currently underway and will be completed in June 2004 to help the Government better understand the attitudes o f consumers around service delivery and the involvement o f the private sector and to provide a baseline document that can also be used to measure some aspects o f project implementation., In addition several other initiatives have been undertaken to keep citizens and interested stakeholders up-to-date on both the private-sector-partnership and the civil works component o f the project: 83 A briefing pack was developed by the Government to respond to questions related to the Project. This included the scope o f the civil works, opportunities for public participation and updates on the management contract and made available to the public; The document library was re-opened to make all documentation available to the public; A Project web site was designed to make sure that relevant information was posted on a timely basis; Meetings with community groups have been organized to communicate citizens who will benefit from the civil works construction or who will be affected bypossible resettlement or loss o f income; Media training workshops have been held to educate journalists about the management contract and other aspects o f the Project. 5. MovingForward A Communication Strategy will be completed by June 2004 to develop a long-term program that responds to questions and concerns about the Project. The Communication Strategy will be designed and implemented by the Communications Officer in the Project Management Unit. The Officer will continue to hold stakeholder consultations, respond to media inquiriesand meet with NGOs to be responsive to any concerns about the management contract or civil works. Ultimately capacity will be built both within the Ministry and the water company to carry out a more comprehensive developed communications and customer service programs. The close integration o f communications into the project design process has built a much stronger public consensus around the water sector reforms, provided alternatives to project design and managed political risks associated with the project both inside and outside the country. 84 Annex 17: Descriptionof GWCL RetrenchmentProgram GHANA: URBANWATER PROJECT The Government o f Ghana has set itself the objective o f restructuring the urban water sector in order to make it more responsive to the increasing demand for better service delivery and to enable the utility attain financial sustainability. Inthis context, the Ghana Water Company Ltd., which i s considered overstaffed by industry experts, desires to reduce its number o f employees to levels consistent with an more efficient operation. GWCL initially had responsibility for operating 210 water systems nationwide until the late 1990s, when it transferred most o f the smaller systems to the Local Government Authorities and retained management of the 85 larger systems. In part as a result o f this legacy, the current number o f staff is 4,750. Given that the utility currently has a customer base o f 320,000 connections, the staff to connection ratio i s about 15 staff per 1,000 connections, or more than twice the industry norm. Given the national scope o f GWCL, its large number o f small independentsystems, and current degree o f managerial capacity and technology, it is considered that a connection ratio o f about 10 staff per 1,000 connections would be appropriate. This implies the number of employees should be reduced to about 3,200, meaning about 1,600 staff should be retrenched. The retrenchment exercise has wide support of the GWCL workers and the full backing from their union-with the provisothat retrenched workers receive fair and adequatecompensation. The proposed Urban Water Supply Project has allocated up to $11 million to finance the cost of the retrenchment exercise. It has been agreed with GWCL that about $lmillion o f this amount will be usedfor financing the costs associated with employing an impartial company or NGO to administer the agreed retrenchment program (the Administrator)6. The broad outlines of the retrenchment program have beenendorsed in writing by the Ministry o f Works and Housing as part o f the PSP Contract Framework Paper to be used to engage a private sector operator under a 5-year management contract (see Annex 15). Key principles to be followed for the retrenchment exercise have been discussed by the GWCL, the worker's . union and the World Bank and include: ... consistency with the current Collective Bargaining Agreement between the union and GWCL; agreeing on a compensation framework that i s based on precedents in the public sector in Ghana; individual retrenchment decisions based on negotiations and mutual consent; preservinga qualified core employee group to continue operatingthe GWCL system; The proposedRetrenchmentProgramis in linewith the new guidelinesfor OPA3P6.00onBank Financing. 85 ... use o f an Administrator to manage the retrenchment program for three years, including a comprehensive tracking o f retrenched workers; workers will be eligible for World Bank financed retrenchment for not longer than 12 months after the management contract Operator starts; and counseling and other services will provided by the Administrator, and supported by the Project, to help affected staff reorganize their lives, including facilitating acquisition o f entrepreneural and vocational skills, etc. To carry out the retrenchment component o f the Project, the GWCL and unions have agreed to form a retrenchment committee (the Committee) to decide on: (i)individuals that will be retrenched; (ii) standard formulas for the retrenchment compensation packages; and (iii) for TOR the Administrator. Inthe likely event that the management contract Operator i s inplace before the retrenchment exercise is completed, then the GWCL and unions have agreed that the Operator willjoin the Committee. Itis understood by GWCL and the unions that retrenched staff can never be re-hired by GWCL. The tracking study by the Administrator will confirm adherence to this World Bank policy for the initial three years after the retrenchment program commences, but it will be up to the GoG to monitor retrenched workers after this date. 86