Document o f
The World Bank FOR OFFICIAL USE ONLY Report No: 28825-KE
PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 10.2 MILLION (USD 15 .O MILLIONEQUIVALENT) TO THE REPUBLIC OF KENYA FOR THE NAIROBI WATER AND SEWERAGE INSTITUTIONALRESTRUCTURING PROJECT May 7,2004
Water and Urban Unit 1 (AFTU1) Kenya Country Department Africa Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization
CURRENCY EQUIVALENTS (Exchange Rate Effective March 3 1,2004) Currency Unit = Kenyan Shillings (Ksh) Ksh77.65 = US$1 US$1.47 = SDR 1 FISCAL YEAR July 1 - June 30 ADB AFD CAS CFAA DA ERSWEC GOK GTZ ICR IDA JICA KRA KfW MWRMD MDG NWCPC NCC NWSB NWSC O&M PPIAF PRSP PSP SIDA SPA SIG Ufw UNDB WSB WSD WSP WSP-AF
wss
WSTF WSTG WRM
wsm
ABBREVIATIONS AND ACRONYMS
African Development Bank Agence Francaise de Developpement Country Assistance Strategy Country Financial Accountability Assessment Development Agreement Economic Recovery Strategy for Wealth and Employment Creation Government o f Kenya German Technical Cooperation Implementation Completion Report International Development Association Japan International Cooperation Agency Kenya Revenue Authority Kreditanstalt fur Wiederaufbau Ministry o f Water Resources Management and Development Millennium Development Goal National Water Conservation and Pipeline Corporation City Council o f Nairobi Nairobi Water Services Board Nairobi City Water and Sewerage Company Operations and Maintenance Public-Private Infrastructure Advisory Facility Poverty Reduction Strategy Paper Private Sector Participation Swedish International Development Agency Service Provision Agreement Specific Investment Grant Unaccounted for Water United Nations Development Business Water Services Board Water and Sewerage Department Water Services Provider Water and Sanitation Program (Africa Region) Water Supply and Sanitation Water Services Trust Fund Water and Sanitation Technology Group Water Resources Management Water Services Regulatory Board
Vice President: Country ManagerDirector: Sector Manager: Task Team Leader:
Callisto E. Madavo Makhtar Diop Jaime M. Biderman Fook Chuan Eng
FOR OFFICIAL, USE ONLY KENYA Nairobi Water and Sewerage Institutional RestructuringProject CONTENTS
A
Page
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1
Rationale for Bank involvement ...................................................................................................
2
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STRATEGIC CONTEXT AND RATIONALE
Country and sector issues ............................................................................................................
Higher level objectives to which the project contributes ............................................................ Rationale for the use o f IDA grant: .............................................................................................
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B
PROJECT DESCRIPTION
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1 2
3 4
Lending instrument ......................................................................................................................
4
Project development objective and key indicators ......................................................................
4
Program Objective and Phases .................................................................................................... 4 Project components ...................................................................................................................... Lessons learned and reflected in the project design .................................................................... Alternatives considered and reasons for rejection .......................................................................
C
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IMPLEMENTATION
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............................................................................................................ Institutional and implementation arrangements .......................................................................... Monitoring and evaluation o f outcomes/results .......................................................................... Sustainability ............................................................................................................................... Critical risks and possible controversial aspects ....................................................................... Grant conditions and covenants ................................................................................................. Partnership arrangements
5 6 7 7 7
9 9
10 10
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Technical ...................................................................................................................................
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D
5
APPRAISAL SUMMARY
Economic and financial analyses ............................................................................................... 11 Fiduciary ....................................................................................................................................
Social .........................................................................................................................................
13
14
Environment .............................................................................................................................. 14
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Safeguard policies......................................................................................................................
15
This document has a restricted distribution and m a y be used by recipients only in the performance of their official duties I t s contents may not be otherwise disclosed without W o r l d Bank authorization.
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Policy Exceptions and Readiness ..............................................................................................
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.......................................................... 16 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ..................22 Annex 3: Results Framework and Monitoring......................................................................... 23 Annex 4: Detailed Project Description ..................................................................................... -25 Annex 5: Project Costs ................................................................................................................ 29 Annex 6: ImplementationArrangements.................................................................................. 30 Annex 7: Financial Management and Disbursement Arrangements ................... 36 Annex 8: Procurement................................................................................................................ 45 Annex 9: Economic and Financial Analysis .............................................................................. 50 Annex 10: Safeguard Policy Issues............................................................................................. 67 Annex 11: Project Preparation and Supervision...................................................................... 68 Annex 12: Documents in the Project File .................................................................................. 69 Annex 13: Statement of Loans and Credits............................................................................... 70 Annex 14: Country at a Glance.................................................................................................. 72 Annex 15: Summary of Communication Strategy.................................................................... 74 Annex 16: Training and Development....................................................................................... 84 Annex 1: Country and Sector o r Program Background
KENYA NAIROBI WATER AND SEWERAGE INSTITUTIONAL RESTRUCTURING PROJECT PROJECT APPRAISAL DOCUMENT AFRICA
AFTUl Date: May 7, 2004
Team Leader: Fook Chuan Eng Sectors: Water supply (100%) Themes: Other urban development (P) Environmental screening category: Not Required Lending Instrument: Specific Investment Loan Safeguard screening category: Project Financing Data [ ] Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other:
Country Director: Makhtar Diop Sector MangedDirector: Jaime M. Biderman Project ID: PO496 18
For Loans/Credits/Others: Total Bank financing (US$m.): 15.00 ProDosed terms:
IDA GRANT FOR POOREST COUNTRY Total:
6.60
8.40
15.00
7.41
9.40
16.81
Responsible Agencies: (1) Nairobi Water Services Board (NWSB) (2) Nairobi City Water and Sewerage Company (NWSC)
67 nnnn-5 4nnual 4.60 6.70 3.70 0.00 0.00 0.00 0.00 11.30 15.00 Sumulative 4.60 15.00 15.00 15.00 15.00 Prqiect implementation period: Start July 15,2004 End: December 31,2006 T . ^
finpcbicu C i i c L i i v c i i c m uaic. ~ u i yi d , ~ u u - t
Expected closing date: June 30, 2007
n-
0.00 15.00
n-
0.00 15.00
I
Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Ref: PAD A.3 Does the project require any exceptions from Bank policies? R ~ JPAD D. 7 Have these been approved by Bank management? [s approval for any policy exception sought from the Board? ]Yes [ IN0 Does the project include any critical risks rated “substantial” or “high”? [XIYes [ ] N o Ref: PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] N o Ref: PAD D. 7 Project development objective Ref: PAD B.2, TechnicalAnnex 3 The development objective o f the proposed project i s to build a strong governance, institutional and service delivery framework that will enable the efficient and sustainable delivery o f water and sewerage services to the population o f Nairobi. Project description [one-sentence summary of each component] Ref: PAD B.3.a, Technical Annex 4 1. Institutional Strengthening o f N e w Service Delivery Framework - operationalization and strengthening o f new institutions; 2. Immediate Services Delivery Improvement Program - strengthening commercial, financial and technical operations; 3. Project M&E, Consultations and Project Communications Program, and Preparation o f Follow-on Program Which safeguard policies are triggered, if any? Ref: PAD 0.6, TechnicalAnnex 10 None Significant, non-standard conditions, if any, for: Ref: PAD C. 7 Board presentation: None Loadcredit effectiveness: None Covenants applicable to project implementation: Specific covenants to avoid unsustainable transfer o f funds away from the service provision company and to require achievement o f sustainable operations by end o f project.
A. STRATEGIC CONTEXT AND RATIONALE Country and sector issues
At the national level, the delivery o f water supply and sanitation (WSS) services in Kenya i s currently fragmented into various regimes. The Ministry o f Water Resources Management and Development (MWRMD), the corporatized National Water Conservation and Pipeline Corporation (NWCPC) and local authorities are responsible for the supply o f water and/or sewerage services in various urban and rural areas. MWRMD and NWCPC do not operate wastewater facilities, leaving these (where they exist) to local authorities. Ten gazetted local authorities (including Nairobi) operate their own water and sewerage systems. ‘Self help’ groups (registered with the Ministry o f Gender, Sports, Culture and Social Services) operate piped water supply to several other urban and rural areas. Private water vending by small scale independent providers has also grown owing to the deterioration o f public piped water systems. In Nairobi, the service i s provided by the Water and Sewerage Department (WSD), a technical department within the City Council o f Nairobi (NCC). WSD’s lack o f operational and financial
autonomy has been determined to be a major factor causing poor and unsustainable operations. The service i s caught in a cycle o f declining investment, quality o f service and financial returns characterized by: (i) l o w coverage and unreliable service; (ii) high levels o f unaccounted for water (UfW) and o f unpaid bills; (iii) very poor financial management; (iv) a tariff insufficient to cover operations and maintenance (O&M) costs; and (v) inadequate commercial management. This has translated into inadequate service to the population, including to the informal settlements in Nairobi, where the vast majority o f the urban poor reside.
The Government o f Kenya’s (GOK) National Water Policy (1999) and the Government Action Plan for the implementation o f i t s poverty reduction strategy call for full coverage o f access to safe and clean water to the country’s population. The long-term goal as reflected in the CAS envisages the expansion o f services from the current estimated 60% to 90% by 2024. In the medium term, the (Millennium Development Goal) MDG target envisages about 70% coverage by 2015. The MDG also envisages access to improved sanitation reaching about 93% by 2015. Achieving these development goals represents a big challenge to the GOK. The GOK recognizes the need for comprehensive institutional reform and investments in the WSS sector in order to remove the bottlenecks to achieving i t s set poverty reduction objectives. Recent GOK efforts aimed at formulating a clear policy and strategy to address the fragmented institutional framework for service delivery has culminated in the enactment o f a new water and sewerage legislation. The Water Act (2002) i s aimed at providing for a harmonized and streamlined management o f water resources and water supply and sewerage services. It calls for a uniform service delivery institutional framework to be put in place country-wide, and clarifies the new mechanisms and the role o f the various actors within that framework. Responsibility for infrastructure development and the provision o f services will l i e with new Water Services Boards (WSBs). These Boards would contract out water delivery services to Water Service Providers (WSPs). WSPs can be public or private entities dedicated to water service provision. Sector regulation would be provided by a Water Services Regulatory Board (WSRB). A Water Services Trust Fund (WSTF) would assist in financing the provision o f water services to areas without adequate services.
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As described in the GOK’s Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC), the GOK has started implementing structural reforms to (i)make water and sewerage services autonomous (including introducing commercial and private sector principles), (ii) mobilize investment for construction and rehabilitation, and (iii) enter into partnerships with community based organizations to expand services to the urban poor and rural communities. These reforms are being carried out mainly through the implementation o f the Water Act (2002). To date, the WRSB, WSTF and seven WSBs, including the Nairobi Water Services Board (NWSB), have been established. Rationale f o r Bank involvement
WSS provision plays a critical role in the GOK’s economic recovery strategy. The Project will directly support the GOK’s policy and strategy in reforming i t s WSS sector. The Bank i s uniquely positioned to assist the GOK to reform and improve the WSS service in Nairobi, having had direct and substantial experience in supporting WSS projects in the primary cities in Kenya (Nairobi and Mombasa). Since closing i t s last operation in Nairobi in 1998, the Bank has kept an active dialogue with the GOK on issues and solutions to be addressed and implemented to ensure sustainability, reliability and affordability o f the WSS service. In late 2000, the Bank led (in collaboration with KfW, GTZ and AFD) a comprehensive review o f the WSS sector covering aspects such as demand assessment, pricing, decentralization, private sector participation, financing mechanisms and capacity building. The review was aimed in part to assist GOK in finalizing the Water Act that was under preparation at the time. The Bank played a key role in assisting GOK with the studies to investigate private sector participation options in Nairobi, Mombasa and the Coastal Region and Kisumu (financed by the Public-Private Infrastructure Advisory Facilities - PPIAF). The Bank i s also leading a review o f water resources management (WRM) issues jointly carried out with several financing agencies involved in the water sector. Under the Water Act, for the first time the GOK has adopted i t s own sector wide framework and i s committed to implement it. Given that this project represents one o f the f i r s t GOK action in implementing the Water Act, the Bank would be supporting the GOK at a crucial point o f sector reform. Success in implementing t h i s Project i s likely to lead to a scaling up o f the institutional reforms in the sector especially with regard to the urban centers in Kenya. It i s generally acknowledged among the GOK’s development partners community that the Bank has the comparative advantage in the large urban centers - e.g. Nairobi and Mombasa - and i t s
leadership i s most appropriate for supporting WSS in these areas. Discussion, cooperation and coordination among GOK’s development partners active in the WSS sector are provided through Water and Sanitation Technology Group (WSTG), comprising GOK’s development partners including the Bank. Other international agencies are active in secondary cities and small towns (AFD, KfW, ADB, Italy, Austria, JICA), and in rural areas (Finnida, Belgium, JICA, SIDA). Various NGOs are active in rural and informal settlements, including Kibera in Nairobi. H i g h e r level objectives to which the project contributes
The Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) - GOK’s PRSP document - calls for the implementation o f structural reforms to make water and sewerage
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services autonomous (including introducing commercial and private sector principles), the mobilization o f investment for construction and rehabilitation, and partnerships with community based organizations to expand services to the urban poor and rural communities. The Project directly contributes to GOK’s Poverty Reduction Strategy by supporting the implementation o f these reforms. The Water Act (2002) i s the main vehicle by which the GOK will carry out structural reforms in the sector. A successful implementation o f the Water Act (2002) would lead to a harmonized institutional and service delivery framework for the WSS sector in Kenya.
The proposed Project i s fully consistent with the strategy outlined in the Country Assistance Strategy (CAS). The CAS aims to support the ERSWEC. The CAS determines that deteriorated infrastructure based services including water and sewerage seriously impact the private sector’s ability to contribute to Kenya’s economic growth. The CAS targets the Bank’s contribution to GOK’s sector strategy by focusing on the setting up, operationalization and strengthening o f new autonomous and professionally managed service delivery institutions in Nairobi capable o f delivering sustainable service. This would set up a conducive environment for sustainable large capital investment, cost recovery operations and/or private sector participation in the future. In this way, the Bank envisages to contribute to the successful sector reform through the full implementation o f the Water Act (2002), leading to a harmonized and sustainable institutional and service delivery framework for the WSS sector in Kenya. Rationale for the use o f IDA grant: In accordance with the IDA 13 implementation guidelines, Kenya will receive part o f i t s future I D A allocation in the form o f grants. A part o f the total FY04 grant allocation o f US$24 million
will be applied towards the full amount o f the project. financing for the following reasons:
The project was selected for grant
Importance of improved service delivery framework to poverty reduction in urban Nairobi. The project will create sustainable service delivery institutions that can expand provision o f services into unserved areas. In Nairobi, these areas are mainly the informal settlements where the majority o f the urban poor lives. The continuing deterioration o f the operational and financial situation translates into informal settlements that are thus cut o f f from the benefits o f an affordable and safe public water system. The existing utility system i s bankrupt with an increasing unserviced debt burden, Until this cycle o f operational and financial deterioration i s broken through the project, the operations cannot assume investment financing in a sustainable manner and hence i s unable to extend i t s networks to the poor. Many people now rely on privately vended water o f questionable quality at a high price. While consumers with direct access to WSD piped water typically pay about Ksh250 per month for 10m3 o f water, consumers without this service typically consume less than half t h i s amount o f water, paying a monthly cost o f between Ksh720 to Ksh1200 per month. A strong and financially viable water utility i s key to resolving t h i s problem. Importance of visible positive results. The water and sewerage sector in Kenya has historically been unviable and laden with debt. Poor management, lack o f maintenance o f infrastructure, l o w tariff and increasingly worsening debt situation combine to create a downward spiraling effect to service provision. The sector cannot sustain i t s current debt
3
0
levels l e t alone incur further debt. Neither i s it socially or politically possible to increase tariff levels without any demonstration o f improving services to the public. The project will support improvement in management and maintenance to bring about visible improvements in these areas as a means o f breaking the cycle o f deterioration. Demonstrative and mrcltiplicative effect. The project supports one o f the f i r s t GOK action in implementing the Water A c t (2002). The relatively small resources invested in this project could create a sustainable service delivery framework in Nairobi. A successful implementation o f this project would likely lead to a scaling up o f the institutional reforms in the sector especially with regard to the large urban cities.
B. PROJECT DESCRIPTION Lending instrument
A Specific Investment Grant (SIG) i s proposed for the project. Program Objective and Phases
The Project will be a self-standing SIG focused mainly o n institutional restructuring - setting up new institutions for Nairobi, operationalizing and strengthening them to ensure they function properly. It i s envisaged that a successful implementation o f this project t o create sustainable service delivery institutions could lead to further Bank support t o the overall GOK program o f sector reform and investment consistent with the Water Act. It should be noted that any followo n support will take the form o f a separate self-standing project. A future Bank supported follow-on project will be subjected to a separate project preparation and appraisal, including the meeting o f all fiduciary and safeguard requirements. Project development objective and key indicators
The development objective of the proposed project i s to build a strong governance, institutional and service delivery framework that will enable the efficient and sustainable delivery o f water and sewerage services to the population o f Nairobi. The project will support the creation and strengthening o f new autonomous and ring-fenced service provision utilities - with clear roles, responsibilities and contractual arrangements. The key outcome will be an institutional framework that is capable o f delivering safe, clean and affordable services t o all strata o f the Nairobi population in accordance with commercial and sustainable principles. Progress towards achieving the development objective will be monitored principally through the improvement in operating sustainability o f the service delivery institutions throughout the project implementation period. The results framework and the arrangements for results monitoring and progress measurements for the project are presented in Annex 3.
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Project components
The project has the following three major components, with a total project cost o f US$16.8 million equivalent, o f which IDA will finance US$l5.0 million. The remaining US$1.8 million will come from direct Government contribution and internal revenue o f the water and sewerage operations. Component 1: Institutional Strengthening of New Service Delivery Framework (about $6.1 million including contingencies). This component will support the operationalization and strengthening o f (i) a new autonomous asset holding entity - Nairobi Water Services Board (NWSB); and (ii)a new autonomous and ring-fenced water and sewerage service provision company for Nairobi - Nairobi City Water and Sewerage Company (NWSC). The new institutions will be appropriately strengthened to ensure professional management and commercial operations. Component 2: Immediate Services Delivery Improvement Program (about US$7.0 million including contingencies). This component will support selected activities aimed at strengthening the commercial, financial and technical operations o f NWSC. The focus will however be on strengthening the commercial operation o f the six areahusiness centers. Some tangible service improvements to consumers are expected and specific service improvement targets will be set for the new institutions for the duration o f the Project. Component 3: Project M&E, Consultations and Communications, and Preparation of Followon Program (about US$3.7 million including contingencies). This component will support monitoring o f project activities, implementation of a complementary communication program in support o f the new institutional transformation in services provision. In particular, the progress and interim results emanating from the Project would be communicated to the public and these would be discussed, debated and feedback obtained. This component will also support the preparation o f follow-on investment programs in Nairobi, Mombasa and possibly other urban centers. Lessons learned and reflected in the project design
The Bank closed its last Kenya WSS project in 1998 with an unsatisfactory outcome rating. While construction components were generally carried out successfully, improvements o f operational and financial efficiency, maintenance o f infrastructure and sustainability had not been successful. The clear lesson learnt was: without a strong institutional development to create an autonomous and dedicated service delivery framework where investments and revenue are protected for use in maintaining and improving the services, major investments in the WSS sector are likely to be unsustainable (Third Nairobi Water Supply and Sanitation Project Implementation Completion Report [ICR], Cr. 2060-KE, Document No. 18708 dated December 17, 1998). This lesson led to the decision to focus the Project on institutional restructuring by creating dedicated and autonomous service delivery institutions. Project size i s limited to an amount adequate to create, operationalize and strengthen the new service delivery framework, The risk o f unsustainable capital investment i s avoided by excluding significant infrastructure
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investments from the project and reserving the consideration for them to a future period when the creation o f a sustainable service delivery framework can be verified.
The Project i s consistent with lessons learned from past WSS projects in Nairobi, Mombasa and in the region: Project should be compatible with and complementary to overall Government activities: Ownership and commitment i s obtained by directly supporting the GOK’s sector structural reforms outlined in the GOK’s PRSP document i.e. implementation o f (i) the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC), and (ii) the Water Act (2002). There should be an effective champion: Leadership for sector reform has been earnestly taken on board by MWRMD, who i s spearheading the implementation o f the Water Act (2002). WSS operational autonomy is critical for success: The project design aims to ensure autonomous operations, protection o f revenue and safeguarding investments in WSS through the formation o f separate and ring-fenced service delivery institutions, i.e. the Project executing agencies NWSB and NWSC. N W S B has been formed by MWRMD. I t s autonomy and legal authority to carry out i t s service provision mandate i s embedded in the Water Act (2002). NWSC has been formed by NCC. It will have autonomy from NCC by virtue o f being a separate company formed under the Companies Act (Cap 486) and having a Chairman as well as a majority o f Board o f Directors from outside NCC. Stakeholder consultation is important for success: The project will include a significant communications program aimed at building wide stakeholder support and consensus for the water sector reform. At the same time, the progress and interim results emanating from the project would be communicated to the public. These would be discussed, debated and feedback obtained. This will result in the development o f an efficient and widely accepted long-term management solution, including the consideration o f the role the public as well as private sector can play, in the provision o f water and sewerage services to Kenyans.
Alternatives considered and reasons f o r rejection a. Country-wide Institutional Restructuring. Early consideration was given to a project that would encompass reform and investments in the WSS sector in Kenya as a whole. However, it was recognized that the implementation o f the Water Act (2002) i s in i t s early stages. A focused project with manageable components would ensure effectiveness and probability o f success, ultimately serving to provide a model for the implementation o f the Act in other areas. This i s also consistent with the GOK’s own approach to focus i t s initial efforts at implementing the Act in Nairobi. Other GOK development partners are also active in supporting GOK’s sector programs in various other regions and areas e.g. AFD in Kisumu; ADB in Nakuru; and GTZ and K f W in the Nzoia Drainage Basin area.
b. Institutional Restructuring and Capital Investment. The need for both institutional reform and investments in the WSS sector in Kenya as a whole i s very large. The joint Bank-donor sector review (2000) estimated long term investment needs for piped WSS infrastructure to be
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about $1,100 million for the next ten years. A project that would include institutional restructuring followed by capital investment activities was considered but rejected. Lessons from previous operations (see Section B.5) underscore the inherent difficulty to ensure that institutional restructuring i s carried out satisfactorily prior to investment activities within the same project. However, it should be noted that a successful implementation o f the institutional restructuring should in itself be expected to result in service improvement through efficiency gains and improved maintenance (see Section D.l). c. Private Sector Operations ofSewices. With funding support from PPIAF, the GOK carried out an investigation o f options for private sector participation (PSP) in water and sewerage services in Nairobi in 2001. The study indicated that significant PSP in the form o f a lease was possible in Nairobi. Following this study, a project that will support the implementation o f a PSP-led lease option in Nairobi was proposed. An initial project with the main objective o f procuring the PSP contract could be followed by another project o f large capital investment, within an Adaptable Programmatic Loan (APL) lending instrument. However, the study noted and recommended that significant institutional restructuring, revision o f various legislations, tariff revisions and a range o f investments aimed at commercial improvements were needed prior to the introduction o f PSP in the operations o f services. At the same time, significant publicly financed capital investments would be required during the PSP-led lease period. The study was also done prior to the enactment o f the Water Act (2002). After a review o f the proposal for consistency and compatibility with i t s policy and the Water Act, the new GOK decided to adopt a phased approach to sector reform. To avoid complexity and enhance probability o f success, initial focus will be on institutional restructuring aimed at developing a sustainable framework that would create the conducive environment for long-term investments from bilateral and multilateral sources and attract private sector interests.
C. IMPLEMENTATION Partnership arrangements The Grant will be financed solely by IDA and no parallel or co-financing are proposed. However, several development partners contributed to the GOK's preparation o f the project. The Belgium Technical Corporation (BTC) supported GOK in preparing the Human Resources and Organizational workplans for NWSB and NWSC. The development o f the Transitional Business Plans for the NWSB and NWSC was supported by the AFD study fund. GTZ assisted the GOK in the preparation o f the Communication Plan for the project as part o f their overall support to the GOK sector reform effort. The Water and Sanitation Program (WSP-AF) provided technical assistance to assist the GOK in drafting the various legal agreements and documents required for the new institutional framework. Institutional and implementationarrangements
The Grant w i l l primarily support NWSB and NWSC. NWSB was gazetted by the Minister o f Water Resources Management and Development on March 21, 2003. NWSC was formed by N C C on December 2, 2003 under the Companies Act (Cap 486). Key interim staff have been appointed at NWSB. On an interim basis, the management staff at WSD in NCC has been
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transferred to NWSC. By Project Effectiveness, permanent key management staff at NWSB and NWSC will have been appointed.
NWSB and NWSC will be the project implementing agencies with responsibilities for the project’s procurement and financial management requirements for their respective project components. Project preparation activities for follow-on support in the Nairobi area will be carried out by NWSB. Activities outside NWSB’s area o f jurisdiction will be carried out by MWRMD or the relevant services board. Under a special arrangement, NWSB will be responsible for the selection o f consultants and entering into contracts. IDA will have separate Project Agreements with NWSB and NWSC. The GOK will sign separate subsidiary agreements with NWSC and NWSB to pass them the proceeds o f the IDA Grant as GOK grants. The subsidiary agreements will specify the terms and conditions under which the components o f the Project w i l l be financed by GOK and implemented by NWSB and NWSC respectively. I t i s expected that working capital to finance operations and counterpart funding will be sourced from revenue generated from current ongoing operations. At Project Effectiveness, NWSB and NWSC w i l l be required to have minimum cash balances equivalent to about six and three months o f their respective operating expenses. The relations between WSRB, NWSB, NWSC, NCC and the customers are defined in a series o f documents (Acts, agreements and license) that w i l l constitute the overall framework for the provision o f WSS services in Nairobi. These documents provide for (i) transparency in role and responsibilities; (ii)separation between asset ownership/control and operations; and (iii) autonomy o f the service delivery institutions. These are key premises embodied in the Water Act (2002) which are being supported by the Project.
WSRB has issued NWSB with a License to enable it to provide services. Fixed WSS assets w i l l be leased by NCC to NWSB. NWSB has entered into a Lease o f Fixed Assets, Resolution o f Fixed Liabilities and Transfer o f Customer Contracts Agreement with NCC and NWSC (the Tripartite Agreement) whereby it will obtain (i)the use and control o f the fixed WSS infrastructure assets currently owned by NCC, and (ii) unrestricted access to all WSS customers currently served by NCC. NWSC will be NWSB’s Water Service Provider (WSP). Operational WSS assets and liabilities will be transferred from NCC to NWSC. NWSC has entered into an agreement with NCC whereby it will obtain the operational asset and liabilities as well as operational staff from NCC. NWSC and NWSB have signed a Service Provision Agreement (the SPA) effective for five years. The SPA specifies terms and conditions under which the water and sewerage services are to be provided to customers, consumption has to be metered and billed, and bills to be collected. The SPA also specifies performance targets to be achieved by NWSC and should be designed to encourage NWSC to maximize i t s collections and profits by reducing commercial losses through improved billing and collection, and operating costs through limiting physical losses. Customers will enter into a ‘Customer Contract’ with NWSC that will stipulate the major terms o f responsibility o f NWSC to provide services to the customer as well as the responsibility o f the customer to pay for services provided. The terms and conditions by which NCC, NWSB and NWSC are to be remunerated from the collection o f bills and other income, and the mechanics o f funds collection and transfers (including provision for audits) are defined in the SPA and the Tripartite Agreement. NWSC
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will be entitled to a percentage o f revenue collected (to cover all i t s operating and financial expenses and provide for some profit margin) and the rest should be remunerated to NWSB (to cover for its expenses and financial obligations). NWSB will also remit a percentage o f i t s revenue to N C C for the use o f NCC owned assets. Monitoring and evaluation o f outcomeshesults
Monitoring and Evaluation (&I@ A series ). o f reports b y NWSB, NWSC and WSRB will allow M/E o f the implementation o f the project and achievement o f i t s objectives. e
e
e
e
NWSB and NWSC will each report on a quarterly basis to their Board and IDA on implementation o f all the components o f the project, in particular: (a) implementation schedules updated by component; (b) commitment and disbursement by component; (c) findings, recommendations, agreement reached, main issues and decisions sought. NWSC will report to NWSB on an annual basis on key indicators, including: (a) water produced at the treatment plants, available at the Nairobi reservoirs, sold, and unaccounted for; (b) water pressure and quality; (c) waste water collected and treated; (d) effluent quantity and quality; (e) meters installed, meters read and billing established on actual reading; ( f ) bills collected; accounts receivable by category o f customers; (g) illegal connections regularized; (h) implementation o f delegated activities. Simplified interim reports (quarterly) will be available for selected indicators. The performance o f the parties under the Service Provision Agreement will be audited, at a minimum annually, and the results made public (including progress towards achieving performance targets). NWSB will hold workshops (at least on an annual basis) to discuss the results o f these audits, obtain feedback and agree on actions and way forward. All stakeholders will be invited to this discussion. It i s envisaged that these workshops will form part o f an integrated communication and consensus building exercise to arrive at an efficient and sustainable services delivery framework that i s acceptable to all stakeholders. A mid-term review o f the project performance will be carried out about 18 months after Effectiveness. An ICR will be prepared within six months o f the project closing. GOK, NWSB, NWSC and WSRB will contribute their own project evaluation.
Sustainability
The project undertakes to directly support the GOK’s sector reform agenda that will lead to a harmonized service delivery framework underpinned by service delivery institutions that are efficient and sustainable over the long term. Given the fragmented state o f the sector and the complexity o f the reform process, the project i s focused on the f i r s t step o f the reform (i.e. institutional restructuring) in one Water Service Board area (Le. Nairobi). This would enhance the probability o f successful implementation yet can lead to a scaling up o f the institutional reforms in the sector. Sustainable service delivery institutions are a pre-requisite for the creation o f a conducive environment for sustainable long-term capital investments and attracting private sector participation. The project also undertakes to ensure extensive stakeholder consultation and involvement in the reform process through the project’s communications program. The GOK i s committed to the sector reform and M W R M D has taken an active role in spearheading the implementation o f the Water Act. 9
Critical r i s k s and possible controversial aspects Potential R i s k s 1 Failure o f GOK to set up the new institutions. 1 New institutions do not have autonomy to execute their mandates.
B
Failure to agree on long-term management option for sustainable operations and safeguard investments.
Risk MitigationlMinimization Measures The WSRB, NWSB and NWSC have already been legally Low set up. Key permanent management staff o f institutions will be in place prior to effectiveness. Signing/issuance o f all documentdagreements requiredto Substantial legally establish the relationships between the new service delivery institutions prior to Project Effectiveness. New institutions are separate legal entities and autonomous. WSRB and NWSB’s mandate derives from the Water Act (2002). NWSC has been formed under the Companies Act (1962). Various stakeholders will be represented at the Board levels o f NWSB and NWSC. The majority o f NWSC Board Members will be from outside NCC. Project covenants will restrict the transfer o f funds out from NWSC. Strong communications o f the reform process and public dissemination o f project progress will encourage transparency. Dissemination o f information and implementation o f the Substantial public information campaign. Stakeholder consultations to encourage broad support o f processes and decisions. The limitation o f current project in size and scope to avoid unsustainable investments. Deferment o f decision on any significant capital investment to a future period when sustainability has been verified.
Grant conditions and covenants
Effectiveness conditions:
NWSB has appointed permanent key staff i.e. the Chief Executive Officer and other key staff (Heads o f Technical Services, Financial Services, Legal and Administrative functions); NWSC has appointed permanent key staff i.e. the Managing Director, Company Secretary and other key staff (Heads o f Technical Services, Financial Services, Legal and Administrative functions); GOK has signed respective subsidiary agreements with NWSB and NWSC; Legal Opinions on the negotiated Legal Documents and all other legal agreements forming the framework for service delivery have been forwarded to the Bank; NWSB and NWSC have opened Project Accounts and shown minimum deposithalance o f K s h l 2 million and Ksh22 million respectively; Establishment o f adequate financial management system in NWSB and NWSC; NWSB and NWSC have adopted project P I M acceptable to IDA.
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Other specific conditionsfor Legal Agreement: 0 NWSB and NWSC to achieve a positive net income, excluding depreciation and amortization charges, by the end o f the Project; 0 NWSB and NWSC will not incur any debt other than short-term borrowing facilities from commercial banks required in the ordinary course o f business for working capital (including Letters o f Credit in respect o f suppliers credits) up to an aggregate amount equivalent to 50% of the company’s shares, receivables, cash and marketable securities provided that immediately after incurring such debt the Current Ratio shall be no less than 1.2; 0 NWSB and NWSC shall not pay any cash dividends except out o f net income and then only ifimmediately after giving effect to such action, i t s Current Ratio shall not be less than 1.2. Dated covenants: NWSB and NWSC shall submit for review, not later than three months after the closing o f their fiscal year, annual progress reports summarizing the progress in implementing the project and the evolution o f the various performance indicators o f the WSS service; NWSB and NWSC shall submit for review, no later than six months after the closing o f their fiscal year, audit reports o f their financial statements and the project accounts; NWSB shall submit for review and make public, no later than six months after the closing o f i t s fiscal year, the results o f the annual financial and technical audits o f the Service Provision Agreement. Such audits will be carried out at the end o f each o f NWSB’s fiscal years; NWSB and NWSC assets will be revaluated by June 30,2006; M W R M D shall have published a complete plan for the transfer o f the management and operation o f water services to Nairobi Water Services Boards as per the provision o f Section 113 o f the Water Act within one year after Effectiveness.
D. APPRAISAL SUMMARY Economic and financial analyses Background. Given the institutional restructuring nature o f this Project, i t s major components involve technical assistance and the purchase o f goods and equipment not involving actual capital investments in expanding the WSS production or network infiastructure. The project will not support any expansion o f the existing production or distribution systems. Only limited refurbishment and replacement o f deteriorated components o f the existing systems are expected, comprising less than 10% o f the project. Specific economic and financial investment analysis are not proposed for this Project. However, a detailed discussion o f the economic benefits o f the Project i s provided, including an elaboration o f the tangible benefits expected from the Project. A financial forecast o f the service delivery operations was also carried out to assess the viability o f the operations. Details o f the economic and financial analysis are presented in Annex 9. Economic Analysis. The economic justification for this project i s mainly predicated on incremental consumption by existing customers (domestic and non-domestic) made possible by the reduction o f Unaccounted-for-Water (UfW) as the operations improve under the new incentives and autonomy afforded by the new service delivery framework. I t i s expected that UfW will fall from the estimated 50% to 45% in 2005; 39% in 2006; 33% in 2007 and to 27% in 2008. If these targets are achieved, an additional 34.4 million m3/year would be available for
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distribution. This i s expected to translate to an additional 21 liters/connection/day (lcd) for the existing 164,172 domestic connections, leading to a water use level o f 68 lcd over the current 47 lcd. This increased water use level i s s t i l l low relative to earlier estimates, made in 1967, o f 105 lcd. Reduction in UfW i s also expected to result into an additional 700 lcd for the existing 18,123 non-domestic connections. Increased sales from this expected reduction in UfW will also be critical to the financial performance o f the operations. Being a project focused on institutional restructuring aimed in the first instance at creating a framework where sustainable operations and investment can occur, it i s clear that the demand for water will s t i l l far outstrip that available from the piped network. In the absence o f capital investments, users o f all categories will continue to have fairly l o w consumption levels from the piped networks. Significant dependence on expensive alternatives to supplement utility supply will s t i l l exist. Further, those living in areas that do not yet have a network will remain unserved by the utility. This project therefore has an important role in ensuring a credible institutional framework and preparing the groundwork to attract and safeguard future capital investments, The Household Survey Water for the Urban Poor: Insights from Household Surveys in Kenya, (World Bank 2001) has already demonstrated empirically that an overwhelming majority o f households: (a) rate water supply improvement as their top development priority and that there i s significant latent demand for such improvement; (b) perceive clear economic benefits fiom improvements in water supply, mainly through private piped connections and yard taps, and are thus more likely to be willing to pay for such improvements; and; (c) consider Ksh200/m3l to be generally “fair” and thus a proxy for acceptability or feasibility. These factors would indicate considerable potential for cost recovery and need to be taken into account in designing the follow-on project. Due to the l o w water use levels even after this project has been implemented, it i s expected that residents will s t i l l need vendor services and other independent providers to supplement utility services and to serve areas that currently don’t have a network. This project i s therefore not expected to impact negatively on this parallel market. In the meantime, it will be useful during implementation o f this first project to get a good understanding o f the operations and volumes o f business o f private vendors, as they could be major losers under the follow on project, which will be expected to have significant capital investments covering major rehabilitation and expansion o f production and distribution facilities. Financial analysis. While operational data are very limited, a financial forecast over a 10-year horizon was prepared using available data to reflect the likely impact o f the project on the financial viability o f NWSC and NWSB. The pro-forma financial statements show that both NWSC and NWSB could remain financially viable throughout the duration o f the analysis. This suggests that if the long-term WSS-related loans from GOK are not factored in, the water and sewerage operations could achieve operational sustainability (Le. break-even in terms o f i t s cash operations) within the timeframe o f the project. A small percentage o f collections could be channeled to (i) NWSB to cater for i t s operating expenses and internally funded investments, (ii) WSRB to cater for i t s operating expenses, and (iii) N C C as a payment for the use o f i t s fixed WSS assets. The financial viability forecasted implies that current operations should be able to finance adequate maintenance o f its infrastructure if revenues are protected fiom unauthorized
’ This level i s almost 10 times the current average tariff o f KSh2l/m3, 12
transfers. The funding o f normal maintenance activities from internally generated funds i s a prerequisite for a well running water utility. It i s critical that the design o f the Project should not discourage NWSC or NWSB from setting up the operational, financial and management systems to ensure that this occurs. The Project (as well as any other external financing envisaged) should limit any financing for rehabilitation activities that are o f normal recurrent maintenance in nature. The relatively low disbursement percentage for works as reflected in Table C in Annex 8 reflects this conclusion.
Technical Given the Project’s institutional restructuring nature, no major works nor increase in water abstraction are expected. The Project will support the refurbishment o f office space and set up o f equipment, replacement o f components on distribution systems, spare parts for electromechanical equipment, replacement and provision o f new laboratory equipment, transport vehicles and utility equipment. The replacement o f major components and equipment i s expected to lead to a reduction in water leakages. However, Project funding for small normal recurrent maintenance will be limited (see section D.l) and the utility will be expected to finance these from internally generated funds. The project will support preparatory activities for a future investment program that could be considered for Bank support through a follow-on but separate project. These preparatory activities will include water resources assessments, engineering studies and design, demand and investment analysis, and environmental and social assessments.
Specific technical assistance will be given to help NWSB and NWSC develop into modern, efficient and effective organizations that are appropriately structured, equipped with modern management systems and well-trained workforces. Management specialists in the areas o f utility management, financial management, commercial management, infrastructure planning, procurement and environmental management will be provided. They will work under the general direction o f the NWSC and NWSB Chief Executive OfficerManaging Director and directly with their counterparts, teaching and transferring their knowledge and experience and providing general management counseling and advice. Management Information Systems will also be provided. This form o f training and development o f senior personnel by partnering will be supported by training programs defined in annual plans prepared by NWSB and NWSC, aimed at all areas and levels o f the workforce. Further details are provided in Annex 16. Fiduciary The assessment o f the financial management arrangements o f the project included a review o f the systems o f accounting, reporting, auditing, flow o f funds and internal controls. The project’s financial management arrangements are considered acceptable to IDA if, at a minimum, they are capable o f recording correctly all transactions and balances, supporting the preparation o f regular and reliable financial statements and safeguarding assets.
The Project does not currently satisfy minimum IDA financial management requirements. In order to establish an acceptable control environment and to mitigate financial management risks the various measures should be taken by the due dates as indicated the Financial Management Action Plan set out in Annex 7.
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Social Communication plan. The project includes significant communications to disseminate information to all stakeholders and build wide stakeholder support and consensus for the water sector reform. The progress and interim results from the project will be made public. The project will support forums to discuss and debate these results and obtain feedback from a broad array o f stakeholders. A comprehensive Communication Plan that will support a series o f communication and consensus building activities will be implemented over the period o f the project. A summary communication strategy i s provided in Annex 15. The plan defines: (a) objectives and how their achievement will be measured; (b) key stakeholders, issues and messages to be addressed, tools and mechanisms that will be used to deliver the messages; and timefiame for implementation; (c) modalities for building the communication function within the NWSB for purposes o f the project and beyond; and (d) cost estimates for implementation.
Redeployment of WSD staff About 2,200 water and sewerage related WSD staff will be transferred to NWSC. I t i s not expected that any NCC retrenchment will result directly from the Project. Staff roles may change in line with NWSC’s human resources policy. Consultation o f the WSD staff has taken place prior to appraisal. A workshop was held with staff fiom the 18 areas to discuss the project and map out a strategy for decentralization o f functions, relocation to new offices and redeployment o f staff. A committee that includes union representatives has also been set up to organize for other meetingdworkshops to deliberate on redeployment issues in greater detail. An all WSD workshop took place in January 2004 to communicate and discuss the creation o f NWSC and the implications to WSD staff. The ongoing GOK consultancy for preparation o f a communication plan will contain an element o f communication support to the WSD to deal with redeployment issues. Illegal connections. I t i s expected that new customer billing and collection systems, consumer surveys and database cleanup will identify customers previously not captured by the existing database or illegally connected to the system. It i s likely that these customers will be offered to be regularized as legal customers. Illegal offtakes may exist along the main transmission lines reducing the quantity o f water available in Nairobi. It i s likely that these will be identified and the illegal users be offered to be regularized as legal customers. Illegal offtakes on the main transmission lines will need to be rationalized using appropriate pressure reduction systems etc. TarijJ The Project will commence under the current tariff structure (unadjusted since 1996). The Project will focus on ring-fencing the revenues for use to operate and maintain the system. The Project will support demand surveys, willingness to pay, and tariff studies. During the period o f the Project, the operations will not be expected to service the long-term debt currently owed to the GOK for water and sewerage asset investments. This i s designed to provide a period for the operations to be stabilized, data gathered and decisions taken after broad consultations on the long-term management options, tariff structure and debt rescheduling. These long-term decisions are envisaged to be implementedunder a separate Bank follow-on support, Environment The project i s rated C under the Bank’s Environmental Assessment Category. It does not trigger any environment related safeguards policies. As a means o f mainstreaming environment into the day-to-day operations o f the service delivery framework, an environmental monitoring unit will
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be formed within NWSC to provide environmental monitoring as a part o f the normal operations o f the services delivery function. Provision will also be made for technical assistance consultancy for environmental specialists to advise and support NWSC and NWSB. Safeguard policies The project has been categorized as C/S3, meaning that no safeguard policies are triggered and as such no environmental requirements need to be met. The appraisal stage ISDS, approved by ASPEN, was disclosed to InfoshopPIC on January 28, 2004. This i s meant to be a short institutional restructuring project in preparation for possible larger future capital investment activities. The implementation o f these investments will not be done under t h i s project but instead be considered for support under a separate follow-on project. The project i s not likely to have any adverse environmental impact and none o f the safeguard policies w i l l be triggered. Safeguard Policies Triggered by the Project Environmental Assessment (OPBP/GP 4.01) Natural Habitats (OPBP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.1 1) Involuntary Resettlement (OPBP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OPBP 4.36) Safety o f Dams (OPBP 4.37) Projects in Disputed Areas (OPBP/GP 7.60)* Projects on International Waterways (OPBP/GP 7.50)
Yes [I [I
[I [I [I [I
11 [I [I [I
No [XI [XI [XI [XI [XI [XI [XI [XI [XI [XI
Policy Exceptions and Readiness 0 The Project does not require any exceptions from Bank policies; 0 The General Procurement Notice (GPN) was published on January 31, 2004. The preparation o f bid documents for the first year’s procurement expected to be largely completed by M a y 2004, except for technical improvement works where optimum requirements can only be assessed during implementation; 0 Interim key management staff at NWSB and NWSC appointed. Permanent key staff expected by June 2004 assisted by human resources consultancy funded through the Belgian Technical Fund; 0 The draft Project Implementation Plan (PIP) has been submitted (including procurement plan) and finalized Project Implementation Manual (PIM) acceptable to Bank will be submitted prior to Effectiveness; 0 Except for an initial deposit into NWSB’s project accounts, other counterpart funding will be sourced from the revenue o f the ongoing water and sewerage operations.
* By supporting theproposedproject, the Bank does not intend to prejudice thefinal determination of the parties’ claims on the disputed areas
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Annex 1: Country and Sector or Program Background
KENYA: Nairobi Water and Sewerage Institutional Restructuring Project K e y Sector Issues at National Level
1. Fragmented Institutional and Service Delivery Framework for Urban and Rural WSS. At the national level, the delivery o f WSS services in Kenya i s currently fragmented into various regimes under the direct responsibilities o f the Ministry o f Water Resources Management and Development (MWRMD), the corporatized National Water Conservation and Pipeline Corporation (NWCPC) and local authorities. A joint Bank-donor WSS sector review in 2000 found that the M W R M D operates 73 piped ‘urban’ water systems serving a total o f about 52,000 connections and 1.4 million people. M W R M D also operates about 555 piped water systems in rural areas serving a total o f 230,000 connections and 4.7 million people. NWCPC (a parastatal created in 1988 to take over operations from M W R M D in areas considered to be commercially viable) operates piped systems in 221 urban centers totaling 93,000 connections and a population o f about 2.2 million. These include Mombasa and the Coastal Region. M W R M D and NWCPC do not operate wastewater facilities, leaving these (where they exist) to local authorities. Meanwhile, ten gazetted local authorities (including Nairobi) operate their own WSS systems. It i s only in these ten urban centers that water supply and sewerage systems are operated by the same entity. Outside these areas, ‘self help’ groups (registered with the Ministry o f Gender, Sports, Culture and Social Services) operate about 355 piped water supply systems in urban and rural areas serving about 2.3 million people and about 10,000 water points serving about 2.6 million people. The deterioration o f public piped water systems has also catalyzed the growth o f a water vending industry o f small scale independent providers. K e y Sector Issues at Nairobi Level
2, Deteriorated Situation of the WSS Service and W R M in the Nairobi Area. In Nairobi, the services provided by the Water and Sewerage Department (WSD) o f the Nairobi City Council (NCC) i s caught in a cycle o f declining investment, quality o f service and financial returns characterized by: (i)low coverage and unreliable service; (ii) high levels o f unaccounted for water (UfW) and o f unpaid bills; (iii) very poor financial management; (iv) a tariff insufficient to cover operations and maintenance (O&M) costs; and (v) inadequate commercial management. Groundwater sources located in the Nairobi area are often used by individuals as a substitute for public piped water and exploited in a sub-optimal manner. Groundwater abstraction licenses are issued by MWRMD, but the subsequent abstraction activities are not coordinated nor controlled. Steady degradation o f catchment areas i s becoming a threat to Nairobi’s surface water sources. A summary o f the existing situation o f Nairobi water and sewerage services i s presented in the box at the end o f this Annex. 3. Informal Settlements Worst Hit by Service Deterioration and Shortfall. This has translated to inadequate service to the population, including to the informal settlements in Nairobi, where the vast majority o f the urban poor reside. Informal settlements constitute the fastest growing group o f WSS customers in Nairobi. The joint Bank-donor sector review (2000) found that only 10% o f those in informal settlements have access to water from a private connection, compared with 56% o f other low income households with either an in-house or yard connection. Only 10% 16
o f households in informal settlements have access to a flush toilet compared to 56% o f low income households in Nairobi. Currently, the majority o f households in informal settlements rely on alternative water supply sources (mainly private vendors) bought at a much higher cost compared to piped water. While consumers with direct access to WSD piped water typically pay about Ksh250 per month for 10m3 o f water, consumers without this service typically consume less than half this amount o f water, paying a monthly cost o f between Ksh720 to Ksh1200 per month.
4. WSD Autonomy is Restricted. The WSD operates as a department within the NCC. The control o f the Water Accounts (mainly through accounts signatories) and WSS assets are effectively held by the NCC. While the WSD produces i t s own financial statements the accuracy o f these statements i s questionable (the last audit o f these statements was done in 1996/97). In practice, the WSD relies on the central NCC treasury to process bills, collect payments and manage the Water Accounts transactions. Some customer accounts o f WSD have also been permanently attached by the Kenya Revenue Authority (KR4) as a result, o f nonpayment o f tax related obligations by NCC.
5. WSD Operations are not Sustainable. Commercial management o f WSD i s inefficient and obsolete and unreliable billing systems; (ii) incomplete and largely ineffective, resulting from (i) unreliable customer database; (iii) non-functioning meters; and (iv) current l o w tariff level (tariff last revised in 1996 and real tariff now less than 50% i t s 1996 value). Only about 58% o f billings are collected. NCC i s currently in default o f i t s WSS related term loans from GOK. As o f June 30, 2001, outstanding principal o f these loans was US$51.5 million. If arrears o f principal and interests are accrued, the total amounted to US$152.5 million, Government Response
6. GOK’s WSS Access Targets. The Government o f Kenya’s (GOK) National Water Policy (1999) and the Govemment Action Plan for the implementation o f i t s Poverty Reduction Strategy envisage reaching full coverage o f access to safe water to the country’s population, This i s an ambitious target. The long-term goal as reflected in the CAS envisages the expansion o f services from the current estimated 60% to 90% by 2024. In the medium term, the MDG target envisages about 70% coverage by 2015. The MDG also envisages access to improved sanitation reaching about 93% by 2015. Achieving these development goals represents a big challenge to the GOK. 7. Formulation of Sector Strategy. The GOK recognizes the need. for comprehensive institutional reform and investments in the WSS sector in order to remove the bottlenecks to achieving i t s set poverty reduction objectives. In recent years, GOK has engaged in a series o f efforts aimed at formulating a clear policy and strategy to address the fragmented institutional framework for service delivery as a first step to reform the sector. The National Policy on Water Resources Management and Development and the Country Strategy Paper for the Water Sector were drafted. Efforts were started to formulate a comprehensive and integrated new water supply and sanitation and water resources management legislation to replace the various existing legislations under which water and sanitation services were governed [including the old Water Act (Cap 372) and Local Government Act, among others]. In 2000, the World Bank in
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conjunction with other development partners (KfW, GTZ, AFD and the Water and Sanitation Program - WSP) carried out a comprehensive review o f the WSS sector covering aspects such as demand assessment, pricing, decentralization, private sector participation, financing mechanisms and capacity building. The review represented development partners’ contributions to the dialogue and effort towards sector reform and was aimed in part to assist the GOK to finalize the new legislation. The GOK also secured financing from the Public Private Infrastructure Advisory Facility (PPIAF) to investigate the options for private sector participation (PSP) in water and sewerage services in Nairobi, Mombasa and Kisumu. These studies indicated that significant PSP (Le., a lease) i s possible in Nairobi and Mombasa while lower forms o f PSP (Le., a service or management contract) may be possible in Kisumu. These studies further advised and recommended significant institutional restructuring, revision o f legislations, tariff revisions and considerations for a range o f commercial improvement investment (e.g., improvements to commercial systems, improvements to technical and financial data and urgent rehabilitation o f critical infrastructure) prior to the introduction o f PSP in operations. 8. Water Act (2002). Water Act (2002) i s aimed at providing for a harmonized and streamlined management o f water resources and water supply and sewerage services. With regards to the WSS services, the Water Act (2002) calls for a uniform service delivery institutional framework to be put in place country-wide. It also clarifies the new mechanisms and the role o f the various actors within that framework. Responsibility for infrastructure development and the provision o f service will l i e with new Water Services Boards (WSBs) that are to be created. These Boards would contract out water delivery services to Water Service Providers (WSPs). WSPs can be public or private entities dedicated to water service provision. A local government cannot assume directly the role o f a WSP but could form a legally separate WSP company. A Water Services Regulatory Board (WSRB) would regulate the service provisions and among others, would determine applications for licensing o f WSBs, advise on tariffs and levies, and determine and monitor service delivery standards. The WSRB reports to the Minister o f Water Resources Management and Development. The Water Act (2002) also provides for the creation o f a Water Services Trust Fund (WSTF) to assist in financing the provision o f water services to areas without adequate water services.
9. Implementation of the Act. As described in the GOK’s Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC), GOK has started implementing structural reforms to make water and sewerage services autonomous (including introducing commercial and private sector principles), mobilize investment for construction and rehabilitation, and enter into partnerships with community based organizations to expand services to the urban poor and rural communities. These reforms are being carried out mainly through the implementation o f the Water Act (2002). The M W R M D has taken up the lead role to implement the Act. Implementation o f the Water Act 2002 entails the establishment o f Water Service Boards, the WSRB and the WSTF, as well as the transfer o f water assets from the M W R M D to the Water Boards (Kenya Gazette Notice, 18th March 2003). These institutions effectively separate the functions o f policy formulation, service delivery and regulation o f the water and sanitation sector, and open the door for private investors and service providers. The WSRB, WSTF and the Nairobi Water Services Board (NWSB) were established in March 2003.
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10. Focus of Initial Implementation. Given the current state o f the sector, the reform process will be complex. The large magnitude and range o f activities in various areas that are necessary to carry out the sector reform in full to arrive at a uniform, efficient and sustainable service delivery entails implementation through a phased approach. Initial GOK efforts are aimed at institutional restructuring - the creation, operationalization and strengthening o f the new institutions (e.g. WRSB, WSBs, WSPs and WSTF) and the smooth transfer o f responsibilities from existing asset owners and service providers to the new institutions. The WSRB and WSTF have been formed. With respect to WSBs, the GOK has initially focused on the Nairobi area, by forming the Nairobi Water Services Board (NWSB). The NCC has formed a WSP (Nairobi City Water And Sewerage Company - NWSC) as a separate company under the Companies Act, with the intention that it will be contracted by NWSB to provide service delivery. The GOK has requested the assistance o f the World Bank to support i t s efforts in Nairobi.
11. Development of Efficient and Sustainable Systems. A comprehensive communications program will be implemented in parallel with the institutional restructuring effort to inform and involve stakeholders in the reform process. Having brought about the structural changes, the next challenge would be to create long-term efficient and sustainable operational and management systems within this structural fiamework. This would include the consideration for the implementation o f enhanced private sector participation option acceptable to all stakeholders as a means to increase efficiency and sustainability. The long-term system/option will be developed with full stakeholder participation through the communications program to ensure strong support. Premises for the Project
12. The project will focus on institutional restructuring by operationalizing and strengthening new’institutions for Nairobi to ensure they function properly. This process must go hand in hand with the implementation o f the Water Act (2002), thus it i s imperative that this project commence as quickly as possible. The end point would be properly functioning autonomous institutions capable o f delivering services sustainably. The size o f the project will be limited to mitigate against the risk of unsustainable heavy investment. On the other hand, the building o f a sustainable service delivery framework i s intended as a prelude to a future comprehensive IDA support to the GOK program o f capital investments in Nairobi (and possibly Mombasa) to meet the demand and extend services to areas currently not served by the network. These larger investments can only be sustained and safeguarded once the new institutions and service delivery framework have been put in place. 13. Experience shows that for a utility operating in the region, sustainable service provision framework implies the ability to operate viably as an ongoing concern without having to resort to external funding for normal operations and recurrent investments e.g. connections to new customers, repairs o f leaks, etc. In principle, only long-term and large investments should be funded externally. The determination of large investments that could be appropriately funded through external financing (e.g. development agencies) and which will not ‘crowd out’ nor discourage investments from internally generated funds can only be done once the new institutions (i)are in control of water and sewerage revenue and expenses i.e., they are have gained sufficient capacity for investment planning and appraisal. autonomous, and (ii)
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14. The Bank i s adopting a phased approach to support the overall GOK program for restructuring and investments in the sector. Further IDA support including major capital investments i s envisaged in a follow-on project that would be consistent with the foregoing premises. Activities to be carried out in the Project to prepare the follow-on project will include the preparation o f the investment plan for Nairobi and the determination o f appropriate finding sources for each investments. It should be noted that any follow-on support will take the form o f a separate self-standing project. A Bank supported follow-on project i s subject to the normal self-standing project preparation and appraisal and could only be contemplated with the successful implementation o f this project. Issues Addressed through the Project
15. At the National level, the Project will support one o f the first GOK action in implementing the institutional arrangements in the Water Act (2002) through (i) the creation o f a Nairobi WSS Board responsible for the Nairobi WSS asset who will contract out the operations to a separately created service provider (service provision will no longer be provided by the WSD), (ii) the development and building o f further consensus among key stakeholders (including the new institutions) on the suitable long-term management option for the service provision in Nairobi. A successful implementation o f the Water Act (2002) would lead to a harmonized institutional and service delivery framework for the WSS sector in Kenya. Success in implementing this Project i s likely to lead to a scaling up o f the institutional reforms in the sector especially with regard to the large urban cities.
16. At the Nairobi level, the project w i l l address the institutional development and reform requirements o f the Nairobi WSS services culminating in a strong governance fiamework being established which will enable the sector institutions to operate in a truly autonomous regime and have a chance o f becoming sustainable entities. This will be achieved through the creation o f the governance framework and financially and commercially ‘ring-fenced’ institutions required for the effective provision o f the WSS service, including (i) the Nairobi Water Services Board (NWSB) that i s in full control o f the WSS infrastructure assets, dedicated to be responsible for service ,provision and infrastructure development and; and (ii)the Nairobi City Water and Sewerage Company (NWSC) that i s legally separated from NCC, contracted by NWSB to operate and manage the service delivery to customers. 17. The project will also support the improvement o f the commercial, financial and technical operations o f NWSC. I t will focus on improving commercial and financial management in the operations. Through technical improvements on the existing transmission and distribution systems, it i s expected to reduce the currently high level o f unaccounted for water (Ufw).
20
Existing Situation o f Nairobi W a t e r and Sewerage Services
I
Service Levels Only about 42% o f households have actual water connections serviced by NCC's Water and Sewerage Department (WSD). Almost all other households obtain water from kiosks, vendors and illegal connections. Water purchased from third party sellers are mostly sourced originally from the WSD system, but typically sells for about Ksh2 - 3 per 20 liters. This i s about 10 times the WSD tariff to domestic customers. Given that it i s the poorer strata ofthe population that tend to not have direct connections, they tend to suffer disproportionately. O f the existing customers, about 40% do not receive 24-hour service - 30% receives water about once every two days, while 10% receives water only once a week. In addition to frequent unscheduled interruptions caused by bursts and plant failures, it i s also understood that significant parts o f the reticulation network and trunk sewers are non-functional due to hydraulic inadequacy or collapses and blockages. Operations and the State o f W a t e r Infrastructure Total unaccounted for water (UfW) i s over 50% o f the total volume o f treated water produced that i s put into supply. While accurate data i s lacking, NCC estimates that anything between 40 - 70% o f this total volume unaccounted for i s lost through physical leakage in the WSS infrastructure (the rest being unaccounted for due to commercial reasons such as failure to bill, water theft, etc.). Management and H u m a n Resources 0 WSD staff feel frustrated by poor pay and the lack o f motivation. It i s understood that many key professionals are moving to the private sector resulting in skill shortage,'especially in the financial and commercial areas. Source: A Study o f Options for Private Sector Participation in the Nairobi Water and Sanitation Services in Nairobi (June 2002)
21
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies KENYA: Nairobi Water and Sewerage Institutional RestructuringProject
BANK-FINANCED: No operations in the last five years. OTHER DEVELOPMENTAGENCIES:
A j D (France): 1. Four Towns Water Project (2000 - 2003): Kandara, Kahuti (Central Prov.), Iten (Rift Valley), and Siaya (Nyanza Province). 2. El Nino Emergency Project (2002 - 2003) Nyeri and Muranga (Central Prov.), Koibatek and Kericho (Rift Valley Prov.), Kisii, Nyamira and Gucha (Nyanza Province). FINNIDA: 3, Community Water Supply Management Project (1997 - 2003): All districts in Western Province KfW: 4. Eldoret Sanitation Project (August 02 - 2004): Eldoret Municipality in Rift Valley Province Sida: 5. Policy and Institutional Reform support 6. WSS schemes for communities and formation o f water resources users associations
French Embassy Co-operation Service 7. Capacity Building DFID 8. Water schemes in Nyanza, Garissa, Kitui and ASAL JICA 9. Borehole program in 10 districts
10. Meru WSS project
Water Sumlv: Construction o f intakes, treatment, distribution, and meters. Water Sutmlv: Construction and repair o f intakeshoreholes, treatment works, distribution systems and provision o f pumps. Water Supply: Various facilities - 165 shallow wells equipped with pump and 10 piped water schemes. Sanitation: 5 km o f trunk line, 40 km o f sewer lines, and treatment works (10,000m3) WSS and WRM: Support to; -the Water Sector Reform Secretariat o f the MOWRMD and capacity building o f the new institutions -the WRMA and the WSTF -Area programs focusing on community based development o f piped and point source WSS systems and formation o f water resources user associations. WRM and WSS: Support to Human Resources development to improve professional capacity in WRM. Water supply: development o f sand dams and other types o f facilities, capacity building o f communities through NGOs focusing on the ASAL areas. Water Supply and Sanitation: Drilling and equipping o f boreholes in 10 districts; financing WSS investments in Meru Town and capacity building o f the Trust.
22
Annex 3: Results Framework and Monitoring KENYA: Nairobi Water and Sewerage Institutional Restructuring Project Results Framework Use o f Outcome Information
PDO Build a strong governance, institutional and service delivery framework that will enable the efficient and sustainable delivery o f water and sewerage services to the population o f Nairobi
Volume o f water sold
Results Indicators for Each Component
Yr 1 - Yr 3: Gauge ability o f new service delivery framework to increase delivery o f water to customers (overall proxy o f ability to reduce leaks, increase water supply, ability to bill for water sold)
Component One:
Component One:
Component One:
N e w institutions created and service delivery agreements between them result in revenue being protected and used for 0 & M and investment in operations.
Ratio o f Operating Expenses divided b y Operating Revenue
Yr 1 - Yr 3: Gauge the success o f new framework ring-fencing o f revenue Yr 3 feed into service delivery framework strategy for follow-on support
Component Two:
Component Two :
Component Two:
NWSC achieve service delivery improvements
Billing efficiency increases - Billing efficiency % - Average lateness in billing
Yr 1 - Yr 3: Billing efficiency as a proxy for commercial efficiency. Collection efficiency as a proxy for commercial efficiency. U f W as a proxy for operational as well as commercial efficiency
Collection efficiency increases - Collection efficiency % Unaccounted-for-Water (UfW) -%UfW Component Three:
Component Three:
Component Three:
Consensus on long term management option acceptable to all stakeholders reached
Annual workshop report on stakeholder consensus on way ahead.
Yr 1 - Yr 2: Gauge progress towards consensus on acceptable service delivery framework. Yr 3: Final consensus informs design o f follow-on operations
23
2
2
2
2
22 v v
n
22
-2% E=
s
v v
22 v v
I
Annex 4: Detailed Project Description KENYA: Nairobi Water and Sewerage InstitutionalRestructuringProject Project components and cost details are as follows: Component 1: Institutional Strengthening of New Service Delivery Framework (about US$6.1 million including contingencies). This component will support the operationalization and strengthening o f (i)a new autonomous asset holding entity Nairobi Water Services Board (NWSB); (ii) a new autonomous and ring-fenced water and sewerage service provision company for Nairobi - Nairobi City Water and Sewerage Company (NWSC); and (iii)a new Regulator - Water Services Regulatory Board (WSRB). The new institutions will be appropriately strengthened to ensure professional assets and investment management, sustainable commercial operations and effective regulation consistent with the Water Act (2002).
1.1 Support to Operationalization and Strengthening of the Nairobi Water Services Board (about US$2.5 million including contingencies): 1.1.1 Office Rehabilitation. Refurbishment o f office space including office partitioning and provision o f furniture. 1.1.2 Vehicles. Purchase o f vehicles for the day-to-day running o f NWSB. 1.1.3 Office Equipment. Purchase o f a set o f computers, photocopiers and accessories. 1.1.4 Office Management Expenses. Limited support to the incremental running cost o f the Board. Expenses will include utilities costs, communication cost, report reproduction cost, etc. 1.1.5 Technical Assistance. Procurement o f a range o f consultancy services in the areas utility management, financial management, infiastructure planning and procurement, and environmental management. These will be packaged into a comprehensive technical assistance consultancy. Technical assistance in the form o f legal services will also be provided. 1.1.6 Training and Capacity Building. Includes targeted workshops, courses and study tours for Board Directors and staff o f the Board. 1.2 Support to Operationalization and Strengthening of the Nairobi City Water and Sewerage Company (about USS3.5 million including contingencies): 1.2.1 Office and Rehabilitation. Refurbishment o f Kampala Road corporate headquarters as well as the 6 areas offices and other existing service facilities (laboratories and production and sewerage plant offices). This will include the refurbishment o f billing centers in all the area offices to allow the installation o f IT and communication equipment. 1.2.2 Operational Vehicles. Purchase o f operational vehicles for the corporate head office and the 6 area offices. 1.2.3 Office Equipment. Purchase o f sets o f computers, photocopiers and relevant accessories for corporate head office, areas offices and service facilities. 1.2.4 Transitional Establishment and Operation Expenses. Limited working capital support to cushion the operations o f NWSC. To be used in the procurement o f
25
1.2.5
1.2.6 1.3
1.3.1
1.3.2
operational goods, works and services including electricity, chemical and other incidental items. Technical Assistance. Procurement o f a range o f consultancy services in the areas utility management, financial management, commercial management and environmental management. These will be packaged into a comprehensive technical assistance consultancy. Training and Capacity Building. Includes targeted workshops, courses and study tours for Board o f Directors and staff o f NWSC. Support to Activities of the Water Services Regulatory Board - WSRB (about US$O.1 million including contingencies): Regulatory Design Review Advisory Services. Involves the procurement o f technical assistance to assist the WSRB review aspects o f the regulatory design and in particular assist the WSRB in any potential tariff review with regards to the Nairobi WSS services provision. Consumer and Social Protection Assessment. Procurement o f technical assistance to assist WRSB in carrying out data collection and analysis o f consumer and social protection concerns with regards to services to the poor and to propose mitigation measures for compliance by NWSB and NWSC.
Component 2: Immediate Services Delivery Improvement Program (about US$7.0 million including contingencies). This component will support selected activities aimed at strengthening the commercial, financial and technical operations o f the service provision company - NWSC. However the focus will be on strengthening the commercial operation o f the six areaibusiness centers.
2.1
2.2
2.3
Improvements in Commercial Operations (about US$3.3 million including comprehensive customer contingencies), This sub-component will include (i) survey, GIs based block mapping (using state-of-the-art satellite imagery) and development o f a customer care charter; (ii) the introduction o f a new and GIs linked billing system and customer care program in all 6 business centers; (iii) support for the customer care program through an appropriate I T and communication platform and necessary equipment - real time and on-line billing and receipting system, services, and communication system; and (iv) procurement and installation o f bulk and zonal meters at all major nodes o f the WSS network as well as the purchase o f about 15,000 new customer meters. Improvements in Financial Operations (about US$0.5 million including contingencies). This sub-component will cover (i) the introduction o f a new financial management software with the possibility o f interface with the commercial billing and customer care system; (ii) injection o f consulting services aimed at the overhaul o f the financial management and records system in the company and (iii) carry out an assets revaluation o f all movable and non-movable WSS assets in the Nairobi service area. Improvement o f Technical Operations (about US$3.2 million including contingencies). This sub-component will include (i) the procurement o f essential spare parts for various categories o f electro-mechanical equipment at the main
26
production and sewerage plants, pumping stations, and operational equipment for the laboratories, workshops, sewer maintenance unit, effluent sampling and quality assurance, etc); (ii) minor civil works aimed at reduction of unaccounted for water - replacing appurtunances on the transmission mains and removal o f system bottlenecks in the distribution system; and (iii) procurement o f services for the modeling of the WSS network in order to enhance programmed operations and maintenance. Component 3: Project M&E, Consultations and Communications, and Preparation of Follow-on Program. (about US$3.7 million including contingencies) This component will support monitoring o f project activities, implementation o f a complementary communication program in support o f the new institutional transformation in services provision as well as support the preparation o f follow-on investment program in Nairobi, Mombassa and possibly other urban centers. Project Monitoring and Evaluation (about US$l.0 million including contingencies). This sub-component will cover activities aimed at (i) ensuring compliance with fiduciary arrangements for the project. This will involve the carrying out o f annual independent financial audits by the appropriate National Audit Agency; (ii)systematic quarterly technical, financial and operation carry performance review o f both new institutions - NWSB and NWSC; and (iii) out mandatory mid-term review and final review o f the project. Stakeholder Consultation and Communication Campaign (about US$0.3 million including contingencies). Include (i)implementation o f multi-media communication strategy and campaign aimed at specific stakeholders and the general public on the new WSS services arrangements in Nairobi and well as build consensus for the follow-on support program; (ii)finance for the participation o f stakeholders at the annual project performance review workshops; (iii) donor consultation around the Capital Investment Program (CIP) for Nairobi, Mombasa and/or other urban centers; and (iv) thematic consultation around specific aspects o f process and outputs o f the CIP. Preparation of the follow-on WSS Program (about US$2.4 million including contingencies). This sub-component will involve technical assistance for the preparation o f CIP for Nairobi, Mombasa and/or other urban centers. The consultancy services will cover (i)water resources assessment, (ii)services demand and investment forecast, (iii) institutional and legal review, (iv) capacity building and institutional development, (v) environment and social assessment and mitigation plan, and (vi) preparation o f tender documents for a follow-on project. Key components o f the investment plans will consider the extension o f services to the currently un-served informal settlements where the majority o f the urban poor lives and rehabilitation o f key infrastructure including those damaged in the recent floods.
27
Summary Project Details (including contingencies) & ImplementingAgency Arrangements
1 3 Support to Actkltks of Weter Sewices Regu/etwSoerd Reiulatcry D m g n and Review Ad*lsory SeMces Consumer and Social Prctectlon Assessment Services
kWSB "B
I
I
3 O'Prolscl M.%E. Consultalions and Cpmmyalcations. and PreDarallon of Follow-on Proaram
28
I
I I I
36,imoo I
I
I
l
I
I
27,10000
I
38",
Bmm
I
Annex 5: Project Costs KENYA: Nairobi Water and Sewerage Institutional Restructuring Project Local
Foreign
Total
$million 2.31
$million 3.19
$million 5.50
us
Project Cost By Component and/or Activity
1. Institutional Strengthening o f New Service Delivery Framework
us
us
2. Immediate Services Delivery Improvements Program
2.26
3.82
6.08
3. Project M&E, Consultations and Communication, and Preparation o f Follow-on
1.21
2.03
3.24
Total Baseline Cost Physical Contingencies Price Contingencies
5.78 0.16 1.45 7.39 7.39
9.04 0.05 0.33 9.42 9.42
14.82 0.21 1.78 16.81 16.81
Program
Total Project Costs
Total Financing Required
29
Annex 6: Implementation Arrangements KENYA: Nairobi Water and Sewerage Institutional Restructuring Project Current Institutional Arrangement
1. Water Supply and Sewerage (WSS) services in Nairobi are currently provided under an undertakership arrangement between the Ministry o f Water Resources Management All assets and and Development (MWRMD) and Nairobi City Council (NCC). operations are vested in N C C which provides WSS services through a municipal department - Water and Sewerage Department (WSD) o f NCC. Revenue collection goes through the central treasury department o f NCC. Over the years, the general mismanagement o f the WSS services by NCC and the lack o f ring-fencing o f WSS revenues has resulted in poor technical, financial and commercial management, inadequate incentives to attract and retain professional staff, non-servicing o f debts, collapsing infiastructure and poor services delivery even though most o f the city’s key WSS infrastructure i s less that 10 years old. New Institutional Framework
2. The project will support the reorganization o f the provision o f the WSS service in Nairobi by supporting the implementation o f the Water Act (2002) which’ seeks to put in place the regulatory framework for water resources and services planning, provision and their management in Kenya. On the services provision side, the Act establishes (i) a Water Services Regulatory Board (WSRB), (ii)the Nairobi Water Services Board (NWSB), and (iii) Nairobi City Water and Sewerage Company (NWSC). Key premises embodied in the Act are (i) transparency in role and responsibilities; (ii)separation between asset ownershipkontrol and operations; and (iii) autonomy o f the service delivery institutions.
-
3. Transitional arrangements NWSB. Subject to developments in the implementation o f the Water Act or associated regulations, NWSB shall conclude a Tripartite Agreement with N C C and NWSC, on terms and conditions acceptable to the Association, which ensures that (i) NCC shall lease the fixed WSS assets to NWSC and permit NWSC to assign entirely its right and obligations over the assets to NWSB in order for NWSB to assume full control o f the said assets to fulfill i t s statutory obligations under the Water Act through i t s License with WSRB; (ii) NWSB shall allow the NWSC the right to use the fixed WSS assets to fulfill its contractual obligation under the SPA NCC and through the Deed o f Handover executed between NWSB and NWSC; and (iii) NWSC will allow NWSB unrestricted access to existing and future customer contracts and accounts for the exercise o f i t s statutory responsibility. The terms and conditions o f the Tripartite Agreement shall supersede all other side agreements made between the parties including the Agency Agreement concluded between NCC and NWSC which i s annexed to the Tripartite Agreement. In particular, the only flow o f funds from NWSC to both NWSB and NCC for the compensation or otherwise for the use o f the fixed assets shall be based on the lease fees as may be revised from time to time and i t s distribution to NWSB and NCC as set out in the Tripartite Agreement. 30
I
4. Transitional arrangements - NWSC. NCC will transfer all WSS operational assets, operational liabilities and staff o f WSD to NWSC through a transfer agreement between the two parties. 5. The relations between WSRB, NWSB, NWSC, NCC and the customers i s defined in a series o f documents (Acts, agreements and licenses) that will constitute the overall framework for the provision o f the WSS service in Nairobi. Role of the Regulator (WSRB). WSRB was gazetted by the Minister o f Water Resources Management and Development on March 21, 2003. The Chief Executive Officer and other executive staff are yet to be appointed. WSRB will be responsible for, among other matters, the issuance o f licenses, determination o f tariffs, determination and monitoring o f quality and standards o f service, as well as the development o f various guidelines, gathering and dissemination o f information and the promotion o f water conservation and demand management measures. It i s expected that WSRB activities will be funded from a ‘fee’ from the operations o f water services boards. Technical Assistance (TA) to WRSB i s expected to be financed fiom bi-lateral sources (a small component o f TA i s provided for in the Project). WSRB will employ technical, financial and economic consultants, inspectors or auditors, as required. License to be granted by WSRB to NWSB. Under the provisions o f the Water Act (2002), NWSB cannot provide water services in Nairobi unless it has been issued with a license for the provision o f such services by WSRB. WRSB has issued a License to NWSB mandating the latter to ensure the provision o f services in the operation area. Relationship between GOK and NWSB. N W S B has been established by the Water Act (2002) as a public authority mostly responsible for managing, financing and developing WSS facilities in Nairobi service area - which covers Nairobi City, Kiambu Municipal Council, L i m m Town Council, Kikuyu Town Council, Karuri Town Council, Ruiru Town Council, Thika Municipal Council, and Olekejuado Town Council (including the export processing zone). NWSB was gazetted on March 21,2003. It i s expected that permanent key management staff will be in place by June 2004, in time for the projected Effectiveness o f the Project. In the meantime, interim key management staff has been seconded from MWRMD. For the purposes o f the Project, the GOK and NWSB will have a subsidiary financing agreement specifying the terms and conditions under which the components o f the Project will be financed by GOK and implemented by NWSB. Relationship between NWSB and NWSC. NWSB will lease the WSS assets as well as sub-contract technical, financial and commercial operations to the newly established Nairobi City Water and Sewerage Company (NWSC) effective for the duration o f the Project. This has been effected through a Service Provision
31
Agreement (SPA) that specifies how: (a) the WSS service has to be provided; (b) the WSS assets have to be operated and maintained; (c) connections have to be provided to new customers; (d) consumption has to be metered and billed; and (e) bills have to be collected. The SPA encourages NWSC to maximize i t s profits by reducing commercial losses (through improved billing and collection) and operating costs (by limiting physical losses). To minimize coordination problems between NWSB and NWSC, improvement works for the assets under the responsibility o f NWSB and financed by the IDA Grant will be delegated to NWSC. The SPA will specify how NWSC i s to be remunerated for (i) operating the services on behalf o f NWSB, and (ii) performing delegated works on behalf o f NWSB. Relations between the GOK and NWSC. Part o f the proceeds o f the credit are earmarked to directly support the setting up and strengthening o f NWSC. The GOK and NWSC will have a subsidiary financing agreement specifying the terms and conditions under which the components o f the Project will be financed by GOK and implemented by NWSC. Relations between the NWSC and Customers. Customers will enter into a "Customer Agreement" with the NWSC. NWSC will thus bear the commercial risk as i t s revenues will largely come only from bills collected. While the collection o f payments from non-government customers are purely under the control o f the NWSC, it i s envisaged that the collection o f payments from Government agencies and will depend on proper Government budgeting and disbursement procedures. Non-payment o f utility bills by GOK agencies that NWSC may not be able to disconnect may require remedies through WSRI3.
6. Shareholders and Board o f the Services Provider. The Nairobi City Council will initially own 100% o f the shares o f NWSC. The Board o f Directors will consist o f 11 members a majority o f which are external from NCC. The Board members will be (i) the Mayor; (ii) the Town Clerk; (iii) the City Treasurer; (iv) the Water Committee chairman (NCC); (v) the Finance Committee chairman (NCC); (vi) representative o f the Hotel Keepers and Owners Association; (vii) representative o f the N G O Council; (viii) representative o f the Kenya National Chamber o f Commerce and Industry; (ix) representative o f Plan International (an NGO); (x) representative o f the Institute o f Certified Public Accountants; and (xi) representative o f Amref (an NGO). Over time and through arrangements pertaining to the Company Act, NCC could broaden i t s shareholder base by floating or transfer o f shares to local/foreign shareholders and investors. Project Implementation Responsibilities.
7. Execution. NWSB and NWSC will have the responsibilities for implementing their respective parts o f the project, expected to cover the first three years o f the new institutional arrangement. Under a special arrangement, NWSB will also be the contracting agent for the sub-components (expected to be small) o f the project for the benefit o f WSRB and MWRDM or other water services boards (Le. outside the service
32
delivery area o f NWSB). As a new entity, NWSB's performance cannot yet be assessed. It i s expected to be limited to two lean departments: a "Technical Department" responsible for managing construction activities and preparing technical studies and a "Financial Department" responsible managing the finances o f the WSS service, monitoring the Services Provision Agreement and dealing with WSRB. NWSC will be organized along the lines o f business units responsible for each o f its six operational areas. It will have the benefit o f operational knowledge from i t s existing staff transferred from WSD. The project will include TA to strengthen NWSB's and NWSC's capacity as well as regular technical and financial audits.
8. Financing. The project i s estimated to be financed as follows: 0 IDA w i l l cover the cost associated with the three project components up to about US$15 -00 million; 0 NWSB will contribute from internal sources about US$1.33 million equivalent towards financing the costs o f the project not financed by IDA; 0 NWSC will contribute from internal sources about US$0.49 million equivalent towards financing the costs o f the project not financed by IDA. Financing made available to GOK for the project by IDA will be passed on by the M O F to NWSB and NWSC respectively, as grants. 9. Accounting, financial reporting and auditing. Given the nature o f the Project and the inexperience o f the new institutions, specific TA inputs will be maintained for the duration o f project implementation. The project will be expected to reach Financial Monitoring Reporting (FMR) status for project monitoring purposes by effectiveness. Disbursement will follow the traditional methods for IDA financed projects. In order to streamline auditing and reporting processes, a common auditor will be used to carry out the respective annual external audits. All details o f financial management and formats for quarterly FMRs for project monitoring purposes has been discussed and agreed on during negotiations. 10. Monitoring and Evaluation (M&E). A series o f reports by NWSB, NWSC and WSRB will allow M/E o f the implementation o f the project and achievement o f its objectives. 0
0
NWSB and NWSC will each report on a quarterly basis to their Board and IDA on implementation o f all the components o f the project, in particular: (a) implementation schedules updated by component; (b) commitment and disbursement by component; (c) findings, recommendations, agreement reached, main issues and decisions sought. NWSC will report to NWSB on an annual basis on key indicators, including: (a) water produced at the treatment plants, available at the Nairobi reservoirs, sold, and unaccounted for; (b) water pressure and quality; (c) waste water collected and treated; (d) effluent quantity and quality; (e) meters installed, meters read and billing established on actual reading; (f) bills collected; accounts receivable by category o f customers; (g) illegal connections regularized; (h) implementation o f delegated activities. Simplified interim reports (quarterly) will be available for selected 33
0
0
indicators. The performance o f the parties under the Service Provision Agreement will be audited, at a minimum annually, and the results made public (including progress towards achieving performance targets). N W S B will hold workshops (at least on an annual basis) to discuss the results o f these audits, obtain feedback and agree o n actions and way forward. All stakeholders will be invited to this discussion. It i s envisaged that these workshops will form part o f an integrated communication and consensus building exercise to arrive at an efficient and sustainable services delivery framework that i s acceptable to all stakeholders. A mid-term review o f the project performance will be carried out about eighteen months after effectiveness. An Implementation Completion Report will be prepared within six months o f the project closing. GOK, NWSB, N W S C and WSRB will contribute their own evaluation o f the project.
34
Summary o f Institutional and Financing Arrangements under Project
KEY
N e w Service Delivery Framework
------------
Transition from Current Service Delivery Framework to N e w Framework Project and Financing Framework
35
Annex 7: Financial Management and DisbursementArrangements KENYA: Nairobi Water and Sewerage InstitutionalRestructuring Project A.
FINANCIAL MANAGEMENT ARRANGEMENTS
Country issues The results o f the latest Kenya Country Financial Accountability Assessment (CFAA) dated April, 2001 indicated that “...fiduciary risk in public spending is assessed as high. While a lack of compliance with established financial and procurement regulations have completely rendered many initiatives aimed at strengthening the control environment ineffective, issues of limited execution, inadequate monitoring, insuflcient capacity and lack of enforcement also need to be resolved. ”
There are high financial management risks due to a weak control and low capacity environment. Government accounts are regularly late and incomplete. Inter-agency reporting i s slow and sometimes difficult to achieve, where hierarchical lines are blurred or are foreign to the day-today structures and management o f the institution. Accountability chains are weak, and penalties are extremely light or nonexistent. Mitigating measures A new government i s now in place with a commitment to ensuring compliance with legislation, strengthening regulatory institutions and fighting corruption.
With the support of a number of donor assisted initiatives, including the IDA-funded Public Sector Management Technical Assistance Project (PSMTAP), Government i s seeking to rapidly enhance the financial accountability framework in order to: 0 0 0 0
mitigate fiduciary risk in public expenditure management; achieve economy, efficiency and effectiveness in the use o f public funds; enhance transparency and accountability; and enhance staff capacity in public financial management
36
Project Risks
Risk Mitigation Measure
Risk Adequate counterpart funds are not allocated in a timely manner
M
Successful establishment o f the N W S B and NWSC, notably the determination o f their legal status, income tax status, ownership o f assets and liabilities brought forward from the existing entity, board and management composition and structures.
M
Implementation o f a financial budgetary control system, accounting and internal control systems and reporting mechanisms considered acceptable to IDA and sustainable following completion o f project implementation Financial viability o f the NWSB and NWSC Note: M: Moderate; H: High
H
Inclusion o f capacity buildingand support components in the project.
H
Government commitment to financially support N W S B and NWSC.
Advance assurance from Government followed by quarterly joint reviews with MOF. imdementinrr entities and IDA Government commitment to implementingreforms in the Water sector and institution o f legal agreement for the establishment o f N W S B and NWSC.
Mitigating measures
Given the nature o f the project and the relatively weak capacity o f the new institutions, a technical assistance component has been included in the project and will be maintained for the duration o f project implementation. These are aimed at developing NWSB and NWSC into modern, efficient and effective institutions that are appropriately structured, equipped with modern management systems and well trained personnel. Financial management issues to be addressed are: Appointment o f appropriately qualified and experienced financial management personnel, commissioning o f a financial management information system, development o f a business plan and activity work plans, and charting the strategic direction o f NWSB and NWSC. This activity i s also being supported by the Belgian Technical Cooperation (BTC). Institution o f a number of legal agreements between Government and Nairobi City Council (NCC) regarding the transfer o f operational assets, liabilities and human resources from the existing Water Department of NCC, the lease o f fixed assets, resolution o f fixed liabilities and transfer of customer contracts, and the licensing o f NWSC and NWSB operations.
37
A number o f project-specific risk mitigation arrangements have been proposed in order to address noted country concerns: a) Independent Boards o f Directors have been established with membership drawn from stakeholders and interested parties from both the public and private sectors. The Boards are responsible for overall project implementation supervision, monitoring and reporting.
b) The proposed appointment o f independent auditors for the institutions’ annual financial statements.
c) The project will be subject to regular IDA supervision missions aimed at closely monitoring performance and the timely resolution o f issues. Financial,management system The objectives o f the project’s financial management system are: 0
0
0
0 0
to ensure that finds are used only for their intended purposes in an efficient and economical manner; to ensure that funds are properly managed and flow smoothly, adequately, regularly and predictably in order to meet the objectives o f the project; to enable the preparation o f accurate and timely financial reports; to enable project management to monitor the efficient implementation o f the project; and to safeguard the project assets and resources.
Furthermore, the following are necessary features o f a strong financial management system: 0
0
0
0
0 ’
the project implementing agencies should have an adequate number and mix o f skilled and experienced staff; the internal control system should ensure the conduct o f an orderly and efficient payment and procurement process, and proper recording and safeguarding o f assets and resources; the accounting system should support the project’s requests for funding and meet i t s reporting obligations to the GOK and IDA; the system should be capable o f providing financial data to measure performance when linked to the output o f the project; and an independent, qualified auditor should be appointed to periodically review the Project’s financial statements and internal controls.
Institutional and implementation arrangements The Board o f Directors o f NWSB and NWSC will be responsible for the overall financial management o f the project, in accordance with somd and standard guidelines acceptable to IDA. They will oversee the management o f special and project accounts, the preparation o f FMR and annual financial statements, Withdrawal Applications and other financial requirements o f IDA.
They will be responsible for the statutory audits o f project’s financial statements, ensuring that the process i s carried out efficiently and in line with the terms o f funding and project agreements,
38
They will also be responsible for ensuring that matters arising from audits are dealt with expeditiously. The project will be fully integrated into the activities o f the respective implementing entities, including compatibility with existing accounting and budgeting systems. Flow o f Funds Special Accounts - GOK will establish two US dollars special accounts under the IDA Grant, managed by GOK on behalf of NWSC and NWSB respectively. The special accounts will receive dollar deposits/transfers from the main IDA grant account. Signatories Permanent Secretary (MOF). Director -ERD (MOF) Desk Officer World Bank, ERD (MOF), Accounts Controller (MOF)
Comments Any one o f the Authorized Representatives (Signatories) to be valid authority for SOEs and Form 1903, for the purpose o f withdrawal o f Grant proceeds.
Project Accounts - NWSB and NWSC will open their respective project accounts. An initial deposit o f K s h l 2 million and Ksh22 million w i l l be deposited in the NWSB and NWSC project accounts respectively before Effectiveness. This i s equivalent to about six and three months’ working capital for NWSB and NWSC respectively.
Funds flow arrangements for the project shall be as follows: 0
0
0
IDA will make an initial advance disbursement from the proceeds o f the Grant by depositing into the Recipient-operated Special Accounts. Actual expenditure will be reimbursed through submission o f Withdrawal Applications together with Financial Monitoring Reports (FMR)/ Statements o f Expenditure (SOE). GOK counterpart funds and transfers from the Special Accounts (for payment o f transactions in local currency) will be deposited in respective agencies’ project accounts in accordance with GOK exchequer control and funding arrangements. GOK counterpart funds will be allocated through the normal central government budgetary process.
Accountability NWSB and NWSC will utilize the funds to meet the eligible expenditure based on approved budget and work plans, following the accounting procedures to be outlined in respective Financial Management Manuals. Quarterly accountabilities to IDA will be made in form o f FMRs, including projected procurement plans and funding requirements for the ensuing 6 months. Staffing NWSB and NWSC will respectively assign Finance Managers to be responsible for the project’s financial management. The Finance Managers will have various level accounting personnel reporting to them and assigned various accounting responsibilities as will be detailed in Financial Management Manuals. The project’s key accounting personnel will be expected to
39
attend procurement, financial management and disbursement training sessions conducted by IDA. Description o f Financial Management Arrangements Internal Controls and Financial Management Manual The project’s accounting and internal control systems will be developed and documented in the Financial Management Manuals. The manuals will be subject to review by the Bank FMS.
The procedures to be used by the project to maintain i t s records will include the requirement for cross-referencing to supporting documentation in the SOE supporting schedules in order to facilitate the inspection o f these schedules and improve the maintenance o f the project’s records. Project Financial Management Manual The Manual will describe the accounting system: the major transaction cycles o f the project; funds flow processes; the accounting records, supporting documents, computer files and specific accounts in the financial statements involved in the processing o f transactions; the l i s t o f accounting codes used to group transactions (chart o f accounts); the accounting processes from the initiation o f a transaction to i t s inclusion in the financial statements; authorization procedures for transactions; the financial reporting process used to prepare the financial statements, including significant accounting estimates and disclosures; financial and accounting policies for the Project; budgeting procedures; financial forecasting procedures; procurement and contract administration monitoring procedures; procedures to be undertaken for the replenishment o f the Special Account; and auditing arrangements. Planning and Budgeting Budgeting for the project has been undertaken by Management and approved by respective Boards o f Directors. IDA reporting guidelines provide for periodic activity, cash flow and procurement projection analysis and review on an ongoing basis by way o f Financial Monitoring Reports. Books of accounts and list of accounting codes The project’s accounting records will be maintained on computerized accounting systems. A l i s t o f accounts codes (Chart of Accounts) for the project will be integrated. This will match the classification o f expenditures and sources and application o f funds to be set out in the Grant Agreement. The Chart of Accounts will be developed in a way that allows project costs to be directly related to specific work activities and outputs o f the project. This process i s required to be in place by Grant Effectiveness, along with the Financial Management Manuals. Audit arrangements Internal Audit
NWSB and NWSC will develop an intemal audit function to carry out periodic reviews o f activities, compliance with accounting and internal control procedures and ad hoc investigations and reviews under the direction o f Board o f Directors’ Audit Committees to whom they will report. The Committees will also be responsible for ensuring that audit recommendations are followed up and implemented.
40
External Audit
NWSB and NWSC will appoint professionally qualified independent auditors who should meet IDA'S requirements in terms o f independence, qualifications and experience. Separate Annual Audited Financial Statements, taking into consideration the new Audit Policy Guidelines o f the World Bank should be submitted to IDA within six months after end o f each financial year. The appointment o f auditors should be completed immediately following grant effectiveness. Reporting and monitoring Financial Monitoring Reports
Formats o f the various quarterly financial monitoring reports (FMR) to be generated from the financial management systems will be agreed during Negotiations. There will be clear linkages between the information in these reports and the Chart o f Accounts. The financial reports will be designed to provide quality and timely information to IDA, management, and various stakeholders on project performance. FMRs must be submitted to IDA withing 45 days following the end o f the quarter to which they relate. Primary contents o f FMRs comprise:-
'
Financial Reports: o o
'
Sources and Uses o f Funds by Funding Source Uses o f Funds by Project Activity/Component
Physical Progress (Output Monitoring) Report
' Procurement Report
Financial Statements Annual Financial Statements will be prepared ,in accordance with International Financial Reporting Standards. The IDA Grant Agreement will require the submission o f audited financial statements to the Bank within six months after the year-end.
Project Financial Statements will comprise: 1. A Statement o f Sources and Uses o f Funds/Cash Receipts and Payments for each funded phase which recognizes all cash receipts, cash payments and cash balances controlled by the entity; and separately identifies payments by third parties on behalf o f the entity.
2. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement o f Cash Receipts and Payments being cross-referenced to any related information in the notes for each funded phase. Examples o f this information include a summary o f fixed assets by
41
category o f assets, and a summary o f SOE Withdrawal Schedule, listing individual withdrawal applications; and
3. A Management Assertion that Bank funds have been expended in accordance with the intended purposes as specified in the relevant World Bank legal agreement for each funded phase. Indicative formats o f these statements will be developed in accordance with IDA requirements by Grant Effectiveness. Supervision plan A Financial Management supervision mission will be conducted at least every six months. The mission’s objectives will include that o f ensuring that strong financial management systems are maintained for the project throughout i t s life. Reviews will be carried out regularly, upon receipt o f quarterly FMRs to ensure that expenditures incurred by the project remain eligible for IDA funding. The Project Status Report (PSR) will include a financial management rating for the component. This will be arrived at by the Country Office Financial Management Specialist after an appropriate review. Overall Risk Assessment ~~
I Risk Assessment
I High
* **
I Substanti I Moder I Negligib I Comments
These will be mitigated by completion o f the business implementation plan, adoption o f comprehensive Financial Management Manuals and inclusion o f capacity building components in the Project. These items are considered non-significant as long as mitigating factors, as described in the FM Action Plan, are put in place.
42
***
The new Government i s currently implementing major reforms in corruption, governance and the judiciary, with the expectation that these risks will be mitigated.
Overall Risk Assessment The Project does not currently satisfy minimum World Bank financial management requirements. In order to establish an acceptable control environment and to mitigate financial management risks the various measures indicated in the table below should be taken by the due dates: Financial Management Action Plan Action Recruitment o f appropriately qualified and experienced financial officer and staff.
Due Date Effectiveness
Conditionality Condition o f Effectiveness
2
Complete training for Finance Managers and accountants o n World Bank FM and Procurement procedures.
Effectiveness
Condition o f Effectiveness
3
Financial management system installed at the N W S B and NWSC. This includes: 0 Financial Management Manual m Procedures Manual m Information System Training
1
Effectiveness
~
Project accounts opened and initial deposits o f counterpart funds made.
Effectiveness
Relevantly qualified external auditor for the entire project identified and appointed on approved terms o f reference.
6
Ability o f N W S B and N W S C to prepare Financial Monitoring Reports in a format acceptable to IDA
Condition o f Effectiveness Effectiveness
Effectiveness
Condition o f Effectiveness
‘ource: CFf ireport o f 2002
B
DISBURSEMENT ARRANGEMENTS
Requests for disbursement from IDA will initially be made on the basis o f approved work plans cash flow projections for eligible expenditures (report-based disbursements). IDA will make advance disbursement from the proceeds o f the Grant by depositing into Recipient-operated special accounts to expedite project implementation. The advance to the special accounts will be used by the borrower to finance IDA’s share o f project expenditures under the proposed Grant. Another acceptable method o f withdrawing funds from the Grant i s the direct payment method, involving direct payments from the Grant to a third party for works, goods and services upon the borrower’s request. Payments may also be made to a commercial bank for expenditures against IDA special commitments covering a commercial bank’s Letter o f Credit. IDA’s Disbursement
43
Letter stipulates a minimum application value for direct payment and special commitment procedures. Alternatively, upon grant effectiveness, N W S B and N W S C will be required to submit a withdrawal application for an initial deposit to the special account, drawn f r o m the IDA Grant, in an amount to be agreed to in the Development Grant Agreement. Replenishment o f funds from IDA to the special account will be made upon evidence o f satisfactory utilization o f the advance, reflected in SOEs and/or o n full documentation for payments above SOE thresholds. Replenishment applications would be required to be submitted regularly o n a monthly basis.
If ineligible expenditures are found t o have been made from the special account, the borrower will be obligated to refund the same. If the special account remains inactive for more than six months, the Recipient may be requested to refund to IDA amounts advanced to the special account.
IDA will have the right, as to be reflected in the Development Grant Agreement, to suspend disbursement o f the h d s if reporting requirements are not complied with.
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Annex 8: Procurement
KENYA: Nairobi Water and Sewerage Institutional Restructuring Project
The last Kenya Country Procurement Assessment Review (CPAR) was conducted in 1997. Following the findings and recommendations o f the CPAR, the Government o f Kenya (GOK) applied for the Bank’s support to implement the recommendations o f the CPAR, and subsequently received from the Bank an IDF grant which was approved in 1998. Using the proceeds o f the grant, GOK started a procurement reform program. One o f the main outcomes o f the reform program was the establishment and gazettement in March 2001 o f National Public Procurement Regulations, which govem all public procuring entities, and production o f standard bidding documents for works and goods. The Public Procurement Regulations allow the Bank procedures to take precedence over any contrary provisions in the national regulations. Therefore there are no contradictions between the Government Procurement Regulations and the Bank Guidelines. Scope o f IDA Financed Procurement under the Project
IDA will contribute US$l5.0 million towards the financing of: Goods towards the operationalization costs o f NWSB and NWSC including office space/ rehabilitation, office equipment, vehicles, billing and commercial software and hardware, information technology and communications systems. Goods and minor works to support immediate services delivery improvements including bulk, zonal and domestic meters and spares, minor works on appurtenances and service delivery bottlenecks. Technical Assistance (TAs), audits, studies, training, workshops and consultation meetings. Operating costs to support the initial working capital o f NWSB and NWSC including purchases o f chemicals and electricity.
This Annex describes the procurement and disbursement arrangements that apply to IDA financing only. Details o f overall procurement arrangements will be provided in the project implementation manual. Procurement Capacity (NWSB and NWSC)
The management o f NWSB and NWSC will each include a manager responsible for procurement activity as well as a procurement officer. The manager responsible for procurement will report directly to their respective Chief Executive Officer or General Manager. Training on procurement will be provided to these procurement personnel. U s e o f Bank Guidelines
Procurement o f goods and works will be carried out in accordance with the Guidelines: Procurement under IBRD Loans and IDA Credits (January 1995 edition, revised January and
45
August 1996, September 1997 and January 1999). Bank SBD and standard bid evaluation form will be used for works and goods procured under ICB. Selection o f consultants will be carried out in accordance with the Guidelines: Selection and Employment of Consultants by World Bank Borrowers (January 1997 edition, revised September 1997, January 1999 and May 2002). Bank standard request for Proposals (RFP) and evaluation forms will be used where applicable. Advertising
A General Procurement Notice (GPN) was published online in the United Nations Development Business (UNDB) on January 8, 2004 and in the UNDB print edition on January 31, 2004 (edition No. 623). Publication o f the GPN will be at least 60 days prior to the issuance o f any bid documents. The GPN will be updated annually for outstanding I C B and large consultancy services. Specific Procurement Notices (SPN) for goods and works to be procured under ICB and N C B and Expressions o f Interest (EOI) for consultant services will be published in a daily national newspaper o f wide circulation. Procurement Planning
The procurement planning schedules for works, goods and consultancies covering the entire project period i s included in the Project Implementation Manual (PIM). The final version o f the procurement planning schedules will be submitted to IDA for review and approval prior to Effectiveness. NWSB and NWSC will submit for review by June 30 every year specific annual procurement plans for the 12 months to come that will include contract packaging, estimated costs, types o f contract, procurement methods and procurement schedules. ImplementationArrangements
Details o f the implementing agency for each project component and subcomponent are given the table at the end o f Annex 4.
NWSC Acting on Behalf of NWSB. For these items (as described in the table at the end o f Annex 4), procurement will be carried out by NWSC on behalf o f NWSB i.e. NWSB will delegate to NWSC the full responsibility for implementing these activities. NWSC will id en ti^ the projects and w i l l be in charge o f the preparation o f detailed designs, standard bidding documents, pre-qualification o f contractors, specific bidding documents, evaluation o f bids, preparation and award of final contracts and supervision o f contract execution. The contract will be approved and signed by NWSB however, NWSB may delegate the signing o f contracts to NWSC. NWSB w i l l conduct regular audits o f the performance o f NWSC with regards to the implementation o f these components focusing on the adherence to selection and design criteria, compliance with procurement procedures and the overall quality o f supervision.
46
Procurement Methods Equipment (Goods). The total cost o f IDA-supported equipment i s estimated at $3.89 million. These costs are expected to consist o f office space/rehabilitation, office equipment, billing and commercial software and hardware, information technology and communications systems, bulk, zonal and domestic meters and spares. The contracts for the procurement o f goods (individual contract value more than US$250,000) will be awarded on the basis o f ICB. Smaller value goods procurement contracts (individual contract value less than US$250,000) will be awarded on the basis o f N C B or International Shopping. Vehicle (Goods). The total cost o f IDA-supported vehicles i s estimated at $0.30 million. The contracts for the procurement o f vehicles will be awarded on the basis o f NCB. Works. The total cost o f IDA-supported works i s estimated at $2.53 million. These costs are expected to consist o f office refurbishment, minor works on appurtenances and service delivery bottlenecks. Larger works contracts (individual contract value more than US$500.000) will be awarded on the basis o f ICB. Smaller value works contracts (individual contract value less than US$500,000) will be awarded on the basis o f N C B or International Shopping. Consultants. The total cost o f IDA-supported consultancies i s estimated at $8.72 million. All consulting services contracts costing more than US$lOO,OOO equivalent for f i r m s will be awarded according to the Quality and Cost Based Selection (QCBS) method. Consulting service contracts estimated to cost less than US$lOO,OOO equivalent to be awarded to consulting f i r m s may be awarded according to the Consultants’ Qualifications selection method. For contracts o f a routine nature estimated to cost less than US$lOO,OOO equivalent, such as design and supervision o f civil works for community sub-projects, the Least Cost Selection (LCS) method may also be used. Individual consultants will be selected in accordance with provisions of paragraphs 5.1 to 5.3 o f the Guidelines. In exceptional cases, Single-Source selection may be used in accordance with provisions o f paragraphs 3.8 to 3.1 1 o f the Guidelines. Shortlists for contracts costing less than US$lOO,OOO equivalent may consist o f national f i r m s only in accordance with provision o f paragraph 2.7 o f the Guidelines provided that at least three qualified f i r m s are available at competitive costs. However, if foreign f i r m s have expressed interest, they will not be excluded from consideration. Training. The total cost o f IDA-supported training activities i s estimated at $0.71 million. This will include services of consultants (whose services will be procured as mentioned above), participation in seminars, workshops, study tours, courses or attachment and fellowships. Expenses will be financed on the basis of supporting documentation. Respective annual training programs and budgets will be submitted by NWSB and NWSC for review by June 30 every year.
47
Table A: Project Costs by Procurement Arrangements (US$ million equivalent)
Procurement Method' Expenditure Category
NCB
1. Civil Works
2.53 (1.64) 0.30 (0.30)
2. Goods 3. Training
International Shopping
Local Shopping
3.70 (3.70)
0.19 (0.19)
3.70 (3.70)
0.67 (0.60) 0.86 (0.79)
4. Consultant Services
5. Operating Costs Total
2.83 (1.94)
Services
0.71 (0.71) 8.72 (7.86) 9.43 (8.57)
'Figures in parentheses are the amounts to be financed by the Grant. All costs include contingencies.
Total Cost
2.53 (1-64) 4.19 (4.19) 0.71 (0.71) 8.72 (7.86) 0.67 (0.60) 16.82 (15.00)
Bank Review Thresholds Table B gives the prior review thresholds. Each contract for the supply o f goods estimated to cost US$150,000 equivalent or more and the first two contracts estimated to cost below US$150,000 equivalent will be subject to prior review by IDA as per paragraph 2 and 3 o f Appendix 1 o f the Guidelines. Other contracts will be subject to post review in accordance with paragraph 4 o f Appendix 1 o f the Guidelines. 0 Each contract for works estimated to cost US$200,000 equivalent or more and the first two contracts o f value less than US$200,000 equivalent will be subject to prior review in accordance with the procedures o f paragraphs 2 and 3 o f Appendix Io f the Guidelines. 0 For Consultants services, all terms o f reference and single source contracts will, regardless o f the contract amount, be subject to prior review. Contracts estimated to cost US$lOO,OOO equivalent or more for firms will be subject to prior review in accordance with procedures set forth in paragraphs 2 and 3 o f Appendix Io f the Consultants Guidelines. With respect to each contract for employment o f individual consultants estimated to cost US$50,000 equivalent or more, the qualification, experience, terms o f reference, and terms o f employment o f the consultants will be submitted to IDA for prior review. Other procurement subject to IDA review will include: training as well as exceptional extensions to non-prior review contracts raising their values to levels equivalent or above the prior review thresholds. All consultancy services that are not subject to prior review will be subject to post review in accordance with procedures set forth in paragraph 4 o f Appendix 1 o f the Consultants Guidelines
48
Table B: Thresholds for Procurement Methods and Prior Review'
Expenditure Category
1. Works 2. Goods (Equipment & Vehicles) 3. Services (Firms) (Individuals)
Contract Value Threshold (US$ thousands) >500 500 and below >150 150 and below Vehicles
Procurement Method ICB NCB ICB NCB NCB QCBS CQ Comparisons o f 3 CVs
>loo
100 and below >50<100 50 and below
Contracts Subject to Prior Review (US$ thousands) >200 First two contracts >150 First two contracts
>loo
All TOR and single source All Individual consultants
'Thresholds generally differ by country and project. Consult OD 11.04 "Review o f Procurement Documentation" and contact the Regional Procurement Adviser for guidance.
Total value o f contracts subject to prior review: US$10.8 million Overall Procurement Risk Assessment: High Frequency o f procurement supervision missions proposed: One every six months (includes special procurement supervision for post-review/audits) Table C: Allocation o f Grant Proceeds
Expenditure Category
Works Goods Training Consultant Services ODeratinn Costs Unallocated Total Project Costs Interest during construction Front-end Fee Total
Amount in US$ million 1.48 4.19 0.7 1 7.85 0.60 0.17
Financing (Disbursement) Percentage 65% Local; 100% Foreign 90% Local; 100% Foreign 100% 90% 90%
15.00 15.00
U s e o f statements o f expenditures (SOEs): See Annex 7 - Disbursement Arrangements
Special Account: See Annex 7 - Disbursement Arrangements
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Annex 9: Economic and FinancialAnalysis KENYA: Nairobi Water and Sewerage Institutional RestructuringProject Background. Given the institutional restructuring nature o f this Project, the major components o f this Project involve technical assistance and the purchase o f goods and equipment not involving actual investments in the W SS production or network infrastructure for service delivery. The project will not support expansion o f the existing production or distribution systems. Only limited refurbishment and replacement o f deteriorated components o f the existing systems are expected, comprising less than 10% o f the project. Specific economic and financial investment analysis are not proposed for this Project. However, a detailed discussion o f the economic benefits o f the Project i s provided, including an elaboration o f the tangible benefits expected from the Project. A financial forecast o f the service delivery operations was also carried out to assess the viability o f the operations. Economic and Financial Analysis for Follow-on Project. The Project will support the preparation o f an envisaged future follow-on project that i s expected to include significant capital investment in WSS production and distribution infrastructure. These preparation activities to be carried out during the implementation of the Project will include economic and financial analysis o f any investments and the sustainability o f the management option envisaged. It i s expected that a traditional with and without project methodology will be used. Analysis o f the sustainability o f the operating management option will concentrate on the financial status and sustainability o f the NWSB and i t s service provider. This will include considerations o f demand forecasts, restructuring of the long-term WSS related loans, the impact o f various tariff regimes, sharing o f remuneration between the institutions, capital investment financing conditions, revenue improvements from the investments, cost reductions, etc. Economic Considerations Recent reviews o f the technical and financial performance o f the WSD o f the NCC have found a department that i s caught in a cycle o f declining investments and services, as well as lowering financial returns. The Household Survey, Water for the Urban Poor: Insights from Household Surveys in Kenya (World Bank 2001) carried out detailed work in an effort to provide an empirical basis for interventions in the urban water sector in Kenya. The Survey closely examined: (a) relative access to water supply and other services by poor and non-poor households, (b) per capita water use levels, (c) prices paid for water, (d) level o f service provided by the different systems and level of user satisfaction with each o f the systems, and (e) household preferences for improvement options and their ability and willingness to pay for such improvements. The Survey was based on a sample o f 674 households drawn from Nairobi (300), Mombasa (199) and Kakamega (175). Attachment 1 to this Annex provides a summary o f the Survey’s main findings. I t i s estimated that 72% of the current population in Nairobi have access to piped water supply
through private connections, yard taps and communal standpipes (kiosks), while 27% obtain water from independent providers, traditional and other sources. This access level seems high but due to a failing WSS utility and an institutional framework that i s not adapted to the task o f providing sustainable WSS service, the service i s quite dismal. It i s characterized by: 50
very l o w service levels o f the piped water supply as well as that o f alternative sources such as kiosks (the main source o f water for poor households); extremely high prices paid by users, averaging at about KSh260/m3, leading to a large water budget for households; remarkably l o w water use levels, averaging at 471cd2 due to cut-backs necessitated by highly curtailed hours o f service; high levels o f unaccounted for water, currently estimated at 50% o f production; high levels o f dissatisfaction among users.
Economic analyses to calculate specific EIRRENPV o f the investment intervention were not carried out because the project i s akin to a technical assistance one and will not support any expansion o f production and distribution infrastructure. However, this Project Appraisal Document includes detailed economic consideration for this project, predicated mainly on incremental consumption by existing customers (both domestic and non-domestic) made possible by the reduction of Unaccounted-for-Water (UfW) as the operations improve under the new incentives and autonomy afforded by the new service delivery framework. It i s expected that through the project, U f W will fall from the estimated 50% to 45% in 2005; 39% in 2006; 33% in 2007 and to 27% in 2008. If these targets are achieved, they will make available an additional 34.4 million m3/year for distribution. This additional water i s expected to translate to an additional 2 1 liters/connection/day (lcd) for the existing 164,172 domestic connections, leading to a water use level of 68 lcd over the current 47 lcd. This increased water use level i s s t i l l low relative to earlier estimates o f water use o f 105 lcd (made in 1967). Reduction in UfW i s also expected to result into an additional 700 lcd for the existing 18,123 non-domestic connections. Increased sales from this expected reduction in UfW will also be critical to the financial performance o f the operations. Increased consumption arising from reduction in UFW, coupled with overall efficiency improvement in billing and collection i s expected to result in more money going directly to the utility than i s currently the case. In the absence o f capital investments, users o f all categories will continue to survive on fairly l o w consumption levels and falling back on expensive alternatives to supplement utility supply. Further, those living in areas that do not yet have a network will remain unserved by the utility. This project therefore has an important role in ensuring a credible institutional framework and preparing the groundwork for future investments. The Household Survey Water for the Urban Poor: Insights from Household Surveys in Kenya, (World Bank 2001) has already demonstrated empirically that an overwhelming majority o f households: (a) rate water supply improvement as their top development priority and that there i s significant latent demand for such improvement; (b) perceive clear economic benefits from improvements in water supply, mainly through private piped connections and yard taps, and are thus more likely to be willing to pay for such improvements; and; (c) consider KSh.200/m33 to be generally “fair” and thus a proxy for acceptability or feasibility. Another important point to bear in mind for fbture interventions i s that Nairobi residents, including the poor, consistently rated kiosks as the worst option, with the highest level o f dissatisfaction; households use them simply because they have no choice. The
’
We use this per capita level estimated by Drawers o f Water I1to have consistency with the figures provided by NCC and used for the financial viability assessment, This level is almost 10 times the current average tariff of KShZl/m3.
51
supply side push for kiosks as the “appropriate” strategy for the reaching the poor will therefore need to be re-evaluated. All the above factors would indicate considerable potential for cost recovery and needs to be taken into account in designing the follow-on project. The Household Water Budget. Faced with severely curtailed hours o f supply, many households have been supplementing the inadequate utility service with vendor services, including tankers at high prices averaging at about Ksh4 per a 20 liter jerry can. Supply through kiosks i s expected to be more efficiently managed and water made available at more reasonable prices than currently where the average price of kiosk water i s 18 times the official tariff o f Ksh.1 l/m3. More regular supply o f water to households directly through the utility at a lower price than the average o f Ksh260/m3 i s likely to lead to a marginally reduced household water budget. Implications on Vendors. Due to the low water use levels even after this project has been implemented, it i s expected that residents will s t i l l need vendor services and other independent providers to supplement utility services and to serve areas that currently do not have a network. This project i s therefore not expected to impact negatively on this parallel market.. In the meantime, it will be useful during implementation o f this f i r s t project to get a good understanding o f the operations and volumes o f business o f private vendors, as they could be major losers under the follow on project, which will be expected to have significant capital investments covering expansion o f production and distribution facilities. Financial Forecasts Introduction. The financial viability o f NWSC and NWSB were analyzed over a 10-year horizon, focused on their ability to maintain positive cashflows and remain operationally viable. The implications o f the analysis in terms o f (i) the required terms and conditions o f financing the project, (ii) the treatment of outstanding WSS related long-term loans, and (iii) the financial structuring (e.g. lease fees, regulatory feedlevy) of the operational agreements between the new service delivery institutions; were taken into account in the financial structuring o f the project.
Current available financial and commercial data fiom the operations o f WSD are very limited. Their reliability i s also questionable given that these data have not been assessed by any independent audits. The last audited financial statements o f WSD were from i t s financial year 1996/97. The data used for the financial analysis were sourced primarily from: 0 The Nairobi City Council Water and Sewerage Department Abstract o f Accounts for the Year Ended June 30,2002; 0 The Nairobi City Council Water and Sewerage Department Estimates for the Year Ending June 30,2004 and Projections for 2004/2005 Financial Year; 0 A Study o f Options for Private Sector Participation in the Water and Sanitation Services o f Nairobi (June 2002); 0 The GOK’s Proposed Budget for the Operationalization o f the Nairobi Water Services Board. Where inconsistencies occur between the various sources o f data, the most conservative estimates have been used. The forecasted revenue collections were also compared against known actual revenue collections as a check against over-estimation o f revenue.
52
Methodology and Assumptions. Detailed financial projections in (current terms o f the Kenyan Shilling) over a 10-year period were prepared, reflecting the likely impact o f the project on the financial viability o f NWSC and NWSB. The base case financial projections only takes the project’s proposed investments into account. It i s assumed that the revenue collected w i l l be ring-fenced in NWSC and that service delivery improvements are achieved in a timely manner. Technical improvements are assumed to decrease unaccounted for water from 50% currently to 39% in 2006, while the introduction o f a comprehensive billing, collection and customer service system would result in full billing and increasing collection rates reaching 70 % by 2007. Detailed base case assumptions are attached in Attachment 2 to this Annex. Financial Projections and Results. A summary o f the pro-forma financial forecast i s attached in Attachment 2 to this Annex. The results o f the appraisal projections indicates that both NWSB and NWSC will remain financially viable if revenues are ring-fenced within the operations and the servicing o f existing WSS related loans to the government i s not taken into account (i.e., suspended). Their internal cash generating capacities are adequate to fund their respective portions o f project investments (counterpart funding). However, their ability to assume debt i s severely limited. Given that a large amount o f existing WSS related debt has to be suspended in any case, it i s not prudent for NWSC nor NWSB to assume long-term debt during the period o f institutional restructuring. Appropriate project covenants will be required to limit and control the indebtedness of these entities. Furthermore, the increasing costs due to inflation would continue to adversely affect the cash generating capacity o f the operations. While the operations could maintain positive cashflow throughout the projection period, it i s evident that the issue o f tariffs will have to be visited during the preparation for any follow-on project.
’
The forecast’s initial assumption reflects (i) the current actual collection o f revenue and (ii) adequate operational and maintenance expenses (expenses assumed from WSD budget rather than actual WSD expenses which are lower due to lack o f funds under the current situation). The operational viability forecast implies that current operations should be able to finance adequate maintenance o f i t s infrastructure if revenues are protected from unauthorized transfers. The funding o f normal maintenance activities from internally generated funds i s a pre-requisite o f a well running water utility. It i s critical that the design o f the Project should not discourage NWSC or NWSB from setting up the operational, financial and management systems to ensure that this occurs. The Project (as well as any other external financing envisaged) should limit financing o f any rehabilitation activities that are o f normal recurrent maintenance in nature. Owing to the relatively weak cashflow from operations especially in the three-year duration o f the project, the amounts of revenue collection that could be remunerated to the NWSB and possibly the WSRB would need to be kept small. This implies the need for NWSB to have a very lean staff structure - decreasing i t s operational costs to a minimum and maximizing i t s internal cash generating capacity. NWSC’s profitability would remain positive throughout. While NWSB’s operating profitability will remain positive throughout, i t s net profitability will be negative until the final years of the projection horizon owing to depreciation and grant amortization (the bulk o f the IDA grant i s to the account o f NWSB).
53
Key Factors Affecting the Financial Sustainability of the Project. The results o f the financial analysis are predicated on the achievement o f all the technical, financial and commercial improvements envisaged to be supported by the project. It i s critical that all project activities and funds from the IDA grant as well as internal sources are provided on time. In particular, project activities will impact the following factors: 0
0
0
-
Billing Eficiencies: Operational cashflow i s highly sensitive to billing efficiency cashflow deficit will occur within the first year if billing efficiency falls below 90%. NWSC i s assumed to continue the current billing system in the first instance but will ensure that billing i s done on time (currently it i s understood that NCC billing o f the majority o f customers are at least six months late). The comprehensive commercial and billing system will be installed during the first year o f the project, resulting in full billing by the end o f the first year and improving collection rates. Collection Eficiencies: The collection rate for revenue billed i s currently estimated to be about 65%. Collection i s assumed to improve significantly reaching 70% by project end and 90% by 2008. Assuming full billing i s achieved, without the corresponding improvement in collections, NWSC profitability i s projected under current tariff conditions to decline into losses by 2010 owing to increasing costs due to inflation. Unaccounted-for-Water ( U p ) : Given the demand for water services, it i s likely any leakages in the network that are fixed will result in increased sales / consumption at piped water. These increased sales are critical to the financial performance o f the operations. If no improvement in U f W i s achieved, the financial performance o f NWSC and NWSB will continually deteriorate. In particular, NWSC’s cash balances are projected to be exhausted by the end o f the 10-year horizon.
-
Fees to NWSB and NWSC. Given the weak operational cashflows, the payments remunerated from NWSC to NWSB, WSRB, etc., must be kept small especially in the institutional restructuring period. A combined total remuneration exceeding 10% o f collected revenue will cause NWSC to experience liquidity problems within the first year o f operations. Unauthorized transfers o f collected revenues from NWSC must not be allowed to occur. Working Capitalfunding of NWSC and NWSB: It i s critical that there i s adequate operational cash to fund the working capital of NWSC and NWSB. Given that remuneration from NWSC to NWSB can practically only be done on a periodic basis (assumed to be quarterly) it i s critical that NWSB will have adequate starting cash balances to fund its operations. An amount o f K s h l 2 million, equivalent to about six months o f operational expenses, will be required as startup cash balance. Given that NWSC will continually receive payments from customers, the requirement for a specific starting cash balance i s less critical.
54
Attachment 1 to Annex 9 Summary of the Study Water for the Urban Poor: Insights from Household Surveys in Kenya (2001)
Completed in 2002 as part o f the sector review, the objective o f the survey was to examine household water use and demand in urban Kenya with a particular focus on differences between poor and non-poor households, in order to provide a better empirical basis for interventions in Kenya’s urban water sector. The study was based on a detailed survey o f 674 households in Nairobi (300), Mombasa (199) and Kakamega (175) o f diverse socio-economic status and access to services, 46% o f which did not have private piped connections.
The study specifically examined: 0 0 0 0
0
relative access to water supply and other services by non-poor and poor4 households; per capita water use levels; unit prices paid for water; the level o f service provided by the different systems and levels o f user satisfaction with each; and preferences o f unconnected households for water supply improvements.
Households’ Access to Basic Services. The survey examined the proportion o f households with access to four basic services (a) private piped water supply; (b) a private toilet, i.e., not shared with another household; (c) organized public or private garbage collection; and (d) electricity. O f the 674 households, more than ?4do not have access to any o f the four basic services. In Nairobi, 54% o f the households have piped water while only 32% o f them have access to all the four basic services as well as social services such as education and health, households identified development o f a water supply by far as their top priority for both poor and non-poor households. Thirty-five percent o f all households rated water as their top priority while 15% rated electricity as second. Primary Water Sources. Households in Nairobi use a wide array o f primary water sources to meet their water needs with private in-house connections being the most important. 71% o f the households in Nairobi have access to piped water either through private in house connection or yard tap. The rest o f the households rely on kiosks and the remaining on independent providers (borehole owners, etc, traditional sources and others). The study found that although a significant proportion o f households have access to piped water, the service i s poor (all households receive water for only a few hours a day from their primary source and about 42% o f them rely on multiple sources - water storage i s ubiquitous). H a l f o f all households - piped and unpiped, poor and non-poor - are dissatisfied with current water supply situation and it i s no wonder therefore that improvement o f water supply was rated as the top development priority. Water Use. The study found that on average, water use averages about 40 lcd - for households with access to piped supply (private connection or yard tap) average water use i s 44 lcd and 34 For Nairobi, the survey defined “poor” in terms o f total monthly household income o f KSh.10,000 and less, while the rest are defined as non-poor.
55
lcd for unpiped households. Average water use for Nairobi was estimated at 37 lcd overall and 38 lcd and 35 lcd for piped and unpiped households respectively. Average water use between the poor and non-poor does not show as large differences as would be expected (it averages at 35 lcd and 44 lcd for poor and non-poor households respectively). This shows little difference in water use between piped and unpiped; this level o f water use i s also a drastic reduction from earlier consumption levels which was estimated at 105 lcd (in 1967) to 45 lcd (in 1997) and to about 40 lcd by the survey. This decline has occurred despite increased water use by unpiped households over the same period (1 1 lcd in 1967 to 28 lcd in 1997, and to 35 lcd in 2000) as estimated by the survey. This reduction i s attributable entirely to the sharp reduction in water use by piped households (1 17 lcd in 1967 to 47 lcd in 1997 and to 44 according to this 2000 survey) - piped households have been forced to cut back due to falling municipal supplies. The Price o f Water. Households are paying remarkably high prices for water. I t i s on average, KSh260/m3 (US$3.5/m3), with a median price o f KSh156/m3 (US$2.l/m3). It i s extremely high if compared with the average official tariff estimated at US$0.40 for all categories o f consumers (World Bank 2000). The main reason behind such high prices (including for many o f the households with piped private connections) i s that households are buying water from more kiosks and vendors - households in the sample were found to be paying, on average, KSh.4.1 per 20 liter j e r r y can (KSh207/m3 or US$2.7/m3) for water from kiosks and KSh12.60 per 20 liter jerry can (KSh630/m3 or US$8.4/m3) for water from vendors who deliver water to homes in tankers o f mostly 8m3 capacity. Average price o f water from kiosks i s remarkably high, despite the fact that NCC sells it at a bulk rate o f KSh.1l/m3 (US$O. 15/m3). At KSh4.1 per 20-litre jerry can, the kiosks are charging 18 times the price that they pay and therefore, the entire subsidy provided by the utility i s accruing to kiosk owners rather than to the poor for whom it i s intended.
The survey found that poor and non-poor households are on average, paying very similar prices for water and did not find any statistical difference (at 5% significance level) in average price paid for water by welfare level. This convergence o f prices paid by the poor and non-poor could be explained by: (a) the fact the failing municipal water supply does not provide adequate water to the connected non-poor households, forcing them to buy from vendors and tankers at prices that are significantly higher than the municipal tariff, thereby raising the average tariff that they pay for water; and; (b) the poor can and do use water from natural sources such as streams and rivers and do not incur monetary costs for it, which lowers the average price o f water that they Pay.
56
Overall Water Price Perception and Sensitivity. The survey found that households have some distinct price level that corresponds to what they perceive to be fair. Typically, a price o f about KSh.200/m3 i s perceived to be fair and this was found to be similar for poor and non-poor households. This estimate o f fair price can be considered as a “proxy” measure for acceptability. The prices that households are paying also provide an important insight into households’ ability to pay for future improvement options. To get insights into the price sensitivity o f households, the survey estimated households’ demand function, based on a multivariate linear demand model based on current water supply system. The model indicates that household demand for water i s quite inelastic in the KShlOO - 300/m3 range - this could be explained by the limited availability and access to water at the time (2000 drought), and the essential role o f water in every day life. The poor households were however more price sensitive than non-poor households. Collection Time. Households are on average, spending 30mins in a day collecting water; the poor an average o f 45mins and 18mins by the non-poor. Collection times o f course vary significantly by the primary source. Those with private connections spend only about 5 minutes on water collection daily, 15mins for yard connections and 55 minutes for kiosks. Those households that rely on other alternatives spend an average o f 37 minutes daily collecting water. Per Capita Water Expenditure. Households in the sample spend an average o f KSh9.06 (US$0.12) per capita per day; it i s an average o f KSh10.35 (US$0.14) for non-poor households and KSh7.63 (US$O.l 1) per capita per day for poor households. Though it i s lower in absolute terms for the poor households, it i s likely to represent a significantly higher proportion o f their income. Comparing the Levels o f Service from Different Systems. The study found low levels o f service from all sources - neither the gap between the private and yard connection nor that between the yard tap and alternative sources i s as large as one would expect. Thirty-six percent o f the households with private connections, 36% o f those relying on kiosks and 37% o f those relying on yard taps reported that water i s available for less than 8 hours a day. Only about 1/3 reported getting water for more than 16 hours a day and i s 115 and 1/10 for water supply from yard taps and kiosks respectively. Limited water availability, and the highly curtailed hours o f service partly explain why overall water use, by the poor and non-poor has fallen to such remarkably low level. In addition to cutting water use, households are coping by investing in storage.
Half o f the households are dissatisfied with their current water sources. Service availability (in addition to easy access) were important determinants o f satisfaction as was evident from the 56% satisfaction level for private piped connection in contrast to 100% satisfaction level for own sources. It i s therefore not surprising that both poor and non-poor households overwhelmingly rate improvement in water supply as their top development priority. The highest levels o f dissatisfaction are associated with kiosks and vendor services. People rely on them because they have no choice. This finding contrasts the supply side notion that kiosks provide a flexible and desirable service to the poor.
57
Household Preferences for Improvement in Current Water Supply System. Presented with three improvement options (piped private connection, yard tap connection, improved kiosk services, status quo - n o change), the survey found significant latent demand for some types o f improvement - only about '/4 preferred no change to the three alternative options. The study found that there were only three variables that were statistically significant in explaining households preferences among the three options: (i) number o f rooms in current residence, (ii) current unit price paid for water, and (iii) current per capita water use level. The survey found, for example, that a household is more likely to prefer the private piped connection option, the larger the number o f rooms it has in its current residence, the higher the price it pays for water and the higher i t s per capita water use level. Regarding the household decision o n whether or not to opt and pay for a change f i o m their current system, three variables were found to have a statistically significant influence: (i) time spent daily in collecting water, (ii) current unit price paid for water, and (ii) current per capita water use level. The survey found that a household i s more likely t o maintain i t s current water supply status, the lower the price it pays for water or the lower i t s per capita water use level or the longer time it spends daily o n collecting water. The results indicate that for a household not connected to the piped network, the decision o n whether or not to opt for a change depends not o n i t s economic status or i t s satisfaction with existing service, but o n whether it sees any economic benefit in such a switch. The survey indicates that an overwhelming majority o f Kenyan urban households perceive a clear economic benefit f i o m the proposed improvements and are thus willing t o pay for such improvements, which would also suggest high cost-recovery potential for future improvements.
58
Attachment 2 to Annex 9 Financial Analysis - Detailed Base Case Assumptions
Technical Assumptions a. Detailed evolution o f production, consumption and customer/connection assumptions are tabulated in the Assumptions Datasheet at the end o f this Annex. b. Unaccountedfor Water (U)’. The Assumptions Datasheet shows U f W from 50% to 39% by 2006, and further reduced to a stabilized percentage o f 27% from 2008 onwards; General Commercial Assumptions c. Inflation. Foreign inflation: 1.8% p.a. Local inflation: 10% p.a. (for current terms projections). d. Inflation will influence: (i)costs o f staff, electricity, insurance, chemicals, administration and general operations, and (ii)foreign exchange rates. e. Billing Eflciencies. NWSC immediately bills 100% o f domestic and non-domestic customers currently on i t s database. f. Collection Eflciencies. Yr 1 - 65.0%; Y r 2 - 65.0%; Yr 3 - 70.0%; Yr 4 - 80.0%; Yr 5 to 10 - 90.0%. Uncollected billing i s provisioned against bad debt. g. TariflAssumptions. Tariff i s assumed to remain unchanged and not indexed to inflation throughout the period: AVERAGE WATER TARIFF Domestic 12 Ksh/m3 Non-domestic 27 KsWm3 Communal 12 Ksh/m3 SEWER TARIFF Domestic 6.4 Ksh/m3 Non-domestic 10 KsWm3 N Communal Note: Sewerage volumes are estimated based on two-thirds o f water consumption. Financing Arrangements h. Project costs totaling $16.8 million, o f which $15.0 million will be funded by IDA Grant to GOK passed on to NWSB and NWSC as grants. The remaining $1.8 million will be funded through internal cash generation. i.Depreciation /Amortization. Tangible investments financed by the Grant (mostly goods and equipment) are written down over seven years. The associated capital grants from IDA are reflected as an equity amortized over seven years. j. Intangible support from the Grant (Le. consultancies and operational support) will be recorded as grant income and the associated expenses expensed in the same year in the income statements o f NWSB or NWSC. NWSC Financials k. NWSC’s starting base for expenses assumptions are The Nairobi City Council Water and Sewerage Department Estimates for the Year Ending June 30,2004 and Projections for 2004/2005 Financial Year 1. Regulatory levy i s assumed to be 0.5% o f collected revenue, increasing to 1% from 2007. This i s remuneratedto WSRB through NWSB. m. NWSC i s liable to 30% corporate tax on corporate profits. n. Trade debtor days - 3 months; stock levels - 3 months; trade creditor days - 3 months; payments to NWSB and WSRB - quarterly (every three months). 0 . N o dividend assumptions are made - although NWSC would be free to declare and pay dividends from net income (subject to project covenants). NWSB Financials p. NWSB’s starting base expenses assumptions are the GOK’s Proposed Budget for the Operationalization o f the Nairobi Water Services Board. q. NWSB and NCC are assumed to receive 5%, 7.5% and 10% each o f collected revenues o f NWSC in the first, second and third year o f the Project. r. Remittance from NWSC to NWSB and NCC - quarterly; trade creditor days - 3 months. s. NWSB assumed to obtain the use o f the existing WSS assets from NCC. These assets are not reflected in NWSB’s accounts. t. NWSB i s assumed to have 30% corporate tax obligations.
59
0
i4 2
I
5m
!
I
3 R
.n
'4 N m
9 P-
a
U Yr
I
a
U
E
k
?
a6
4
i
,
Annex 10: Safeguard Policy Issues KENYA: Nairobi Water and Sewerage Institutional RestructuringProject
The project has been categorized as C/S3, meaning that no safeguard policies are triggered and as such no environmental requirements need to be met. This i s meant to be a ‘short and quick’ institutional restructuring project (2-3 years) in preparation for larger future capital investment activities. Under the proposed institutional restructuring project, there will be no civil works, but only refurbishment o f office space and set-up o f equipment, replacement o f components on distribution systems, spare parts for electromechanical equipment, replacement and provision o f new laboratory equipment, transport vehicles and utility equipments. Thus, the project i s not likely to have any adverse environmental impact and none o f the safeguard policies will be triggered.
The project will basically focus on institutional restructuring aspects which will lead to a new and sustainable service delivery institutional framework. The refurbishment o f offices under the project will only be for existing facilities and sites. Improvement o f technical operations will be the procurement o f essential spare parts, laboratory equipment, electromechanical equipment, utility equipment, workshop equipment, sewer maintenance equipment, sampling and quality assurance equipment, and replacement o f meters and appurtenances on existing distribution systems and transmission mains. The aforementioned improvements are designed to reduce the high rate o f unaccounted-for-water - currently estimated at about 50% - before financing any investments.
At the end o f this project, a separate follow-on project i s envisaged which will involve large capital investment activities. The proposed institutional restructuring project will provide for the environmental and social impact studies associated with the follow-on project, to be conducted by environment and social specialists. Under the follow-on project, it i s expected that the majority o f the works will be carried out and supervised through private sector contracting arrangements. The executing/contracting agency will employ an environmental specialist to supervise and ensure compliance with environmental standards and safeguards.
67
Annex 11: Project Preparation and Supervision KENYA: Nairobi Water and Sewerage InstitutionalRestructuringProject
~
PCN review Initial PID to PIC Initial I S D S to PIC Appraisal Negotiations BoardRVP approval Planned date o f effectiveness Planned date o f mid-term review Planned closing date
Planned 10/29/2003 11/21/2003 11/21/2003 03/03/2004 03/23/2004 05/13/2004 07/15/2004 12/3 1/2005 06/3 0/2007
Actual 10/29/2003 11/21/2003 12/12/2003 03/08/2004 04/07/2004 06/17/2004
Key institutions responsible for preparation of the project: The project was prepared by an Inter-ministerial Technical Committee (IMTC) comprising members from the MWRMD, MLG, MOF, NWSB, NCC, set up by the GOK. The I M T C was provided with a Secretariat. Oversight was provided by an Inter-ministerial Steering Committee comprising ranking officials o f the ministries and agencies represented. Bank staff and consultants who worked on the project included: Name Title Fook Chuan Eng Task Team Leader Ato Brown Sr. Sanitary Engineer Wambui Gichuri Economist Devendra Bajgain Operations Analyst James Karuiru Engineer (Consultant) Perla San Juan Program Assistant Pascale Dubois Sr. Counsel Mohammad Nawaz Lawyer Catherine Moyer Junior Professional Associate Hyacinth Brown Sr. Finance Officer Dahir Warsame Procurement Specialist Moses Wasike Financial Mgmt. Specialist Cyril Wear Utility Management Specialist Cosma Gatere Communications Specialist Bank funds expended to date on project preparation: Bank resources: US$235,737 (FY02 - FY04) Trust funds: US$4,207 (FY02 - FY04) Total: US$239,944 (FY02 - FY04) Estimated Approval and Supervision costs: Remaining costs to approval: US$5 1,293 Estimated annual supervision cost: US$95,000
68
Unit
AFTUl AFTUl AFTU 1 AFTUl AFCO5 AFTUl LEGAF LEGAF LEGAF LOAG2 AFTPC AFTFM Consultant Consultant
Annex 12: Documents in the Project File
KENYA: Nairobi Water and Sewerage Institutional RestructuringProject A. Project Plans a a
Draft Project Implementation Plan A Communication Strategy for Nairobi Water and Sewerage Company
B. Bank Staff Assessments a a a
Project Preparation Back to Office Reports and Aide Memoires Project Information Document Integrated Safeguards Data Sheet
C. Other (Documents/Studies) a
a a a a
a a a a a
a a a a
a
Lease o f fixed assets, resolution of fixed liabilities and transfer o f customer contracts - tripartite agreement between NCC, NWSC and NWSB (2004) Service Provision Agreement between NWSB and NWSC (2004) Transfer o f operational assets, short-term liabilities and staff from NCC to NWSC (2004) Draft Customer Contract between NWSC and Customers License from WSRB to NWSB Draft Subsidiary Agreement (SA-NWSB) between M O F and NWSB; Draft Subsidiary Agreement (SA-NWSB) between M O F and NWSC; The Kenya Gazette Notice of March 21, 2003 for the gazetting the NWSB, WSRB and WSTF; Memorandum and Articles of Association o f Nairobi City Water and Sewerage Company dated December 2,2003; Draft Nairobi City Council Water and Sewerage Department Abstract o f Accounts for year ended June 30,2002 Nairobi City Council Water and Sewerage Department Estimates for year ending June 30,2004 and Projections for FY2004/05 Water Act (2002) Kenya - Review o f the Water Supply and Sanitation Sector (2001) - ESW carried out by the Bankjointly with other development partners A Study o f Options for Private Sector Participation in the Water and Sanitation Services o f Nairobi (June 2002) - Study carried out by GOK under funding from PPIAF The Household Survey, Water for the Urban Poor: Insights from Household Surveys in Kenya, (World Bank 2001)
69
Annex 13: Statement o f Loans and Credits KENYA: Nairobi Water and Sewerage Institutional RestructuringProject Difference between expected and actual disbursements
Original Amount in US$ Millions Project ID
FY
Cancel.
Undisb.
PO78209
2004
Development Learning Centre LIL
Purpose
IBRD
0.00
0.00
0.00
0.00
0.00
2.86
0.00
PO78058
2003
Kenya Arid Lands I1
0.00
60.00
0.00
0.00
0.00
61.50
-0.24
0.00
PO82378
2003
Free Primary Educ. Support
0.00
0.00
0.00
0.00
0.00
22.83
-0.92
0.00
PO66490
2002
PUB.SEC.MGMT.TA
0.00
15.00
0.00
0.00
0.00
10.07
9.81
0.00
PO69501
2001
Kenya Economic & Public Sector Reform
0.00
150.00
0.00
0.00
0.00
107.88
97.62
52.99
PO66486
2001
Decentr. Reprod. Health & HIVIAIDS
0.00
50.00
0.00
0.00
0.00
39.61
19.38
-
IDA
SF
GEF
Orig.
Frm. Rev’d 0.00
0.71
,
PO70920
200 1
HIVIAIDS Disaster Resp. (Umbrella)
0.00
50.00
0.00
0.00
0.00
32.48
11.81
0.00
PO70718
2001
Regional Trade Fac. Proj. -Kenya
0.00
25.00
0.00
0.00
0.00
20.07
7.71
0.00
PO01354
1997
NARPII
0.00
39.70
0.00
0.00
0.00
0.84
-0.68
0.00
PO01344
1997
KE ENERGY SECTOR REFORM
0.00
125.00
0.00
0.00
0.00
36.71
45.52
0.00
PO34180
1997
Early Childhood Dev.
0.00
27.80
0.00
0.00
0.00
9.53
11.11
9.61
PO46871
1997
LAKE VICTORIA ENV.
0.00
9.80
0.00
9.80
0.00
6.24
6.65
0.00
PO35691
1996
NAIROBI MOMBASA ROAD
0.00
50.00
0.00
0.00
0.00
6.16
10.30
8.13
PO01319
1996
URBANTRANSPORT
0.00
115.00
0.00
0.00
0.00
24.45
35.28
0.00
0.00
717.30
0.00
9.80
0.00
381.23
253.35
71.44
Total:
KENYA STATEMENT OF IFC’s Held and DisbursedPortfolio In Millions o f US Dollars Committed
Disbursed
IFC FY Approval
Company
Loan
2000
Mabati
1970174177179181188189194196199
Panafiican
1972 0100
IFC
Equity
Quasi
Partic.
5.50
0.00
4.50
0.00
0.00
0.00
0.00
0.00
TPS (Kenya)
0.00
0.04
0.00
Tsavo Power
0.00
0.00
0.00
Equity
Quasi
Partic.
5.50
0.00
4.50
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.04
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Loan
1983191
LIK
0.00
0.03
0.00
0.00
0.00
0.03
0.00
0.00
2000
AEF AAA Growers
0.55
0.00
0.00
0.00
0.55
0.00
0.00
0.00
1998
AEF AAR Clinic
0.00
0.50
0.00
0.00
0.00
0.50
0.00
0.00
1997
AEF Ceres
0.93
0.00
0.00
0.00
0.93
0.00
0.00
0.00
1997
AEF Deras Ltd.
1.00
0.00
0.00
0.00
1.00
0.00
0.00
0.00
1996
AEF Equitea
0.28
0.12
0.00
0.00
0.28
0.12
0.00
0.00
1992
AEF Future Hotel
0.13
0.00
0.00
0.00
0.13
0.00
0.00
0.00
2000
AEF Lesiolo
2.50
0.00
0.00
0.00
2.50
0.00
0.00
0.00
1998
AEF Locland
0.37
0.00
0.00
0.00
0.37
0.00
0.00
0.00
70
2000
AEF Magana
1.27
0.00
0.00
0.00
1.27
0.00
0.00
0.00
1997
AEF Makini
0.25
0.00
0.00
0.00
0.25
0.00
0.00
0.00
1997
AEF Redhill Flrs
0.25
0.00
0.00
0.00
0.25
0.00
0.00
0.00
1999
AEF Transenergy
0.06
0.00
0.00
0.00
0.06
0.00
0.00
0.00
1999
ANSPAR
2.00
0.67
0.00
0.00
2.00
0.67
0.00
0.00
1980/83/98
DBK
3.00
0.00
0.00
0.00
3.00
0.00
0.00
0.00
1982
Diamond Trust
0.00
0.80
0.00
0.00
0.00
0.80
0.00
0.00
1998
GBHL
3.50
0.00
3 .OO
0.00
3.50
0.00
3.00
0.00
200 1
Gapco Kenya
15.00
0.00
0.00
0.00
10.00
0.00
0.00
0.00
IPS(K)-Allpack
0.00
0.31
0.00
0.00
0.00
0.31
0.00
0.00
0
IPS(K)-Frigoken
0.00
0.06
0.00
0.00
0.00
0.06
0.00
0.00
0
IPS(K)-Prem Food
0.00
0.11
0.00
0.00
0.00
0.11
0.00
0.00
1994
Intl Hotels-Ken
4.16
0.00
0.00
0.00
4.16
0.00
0.00
0.00
1996199
K-Rep Bank
0.00
0.43
0.00
0.00
0.00
0.12
0.00
0.00
2003
Kenair
15.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
3.07
7.50
0.00
35.75
2.76
7.50
0.00
0
Total portfilio:
55.75
Approvals Pending Commitment FY Approval
Company
Equity
Quasi
Partic.
2002
Eberege Tea
0.00
0.00
0.00
0.00
2002
Itumbe Tea
0.00
0.00
0.00
0.00
2003
Kenair
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Loan
0.00
Total pending committment:
71
Annex 14: Country at a Glance KENYA: Nairobi Water and Sewerage InstitutionalRestructuringProject SubSaharan Kenya Africa
P O V E R T Y and S O C I A L 2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)
LowIncome
313 360 n3
688 450 306
2,495 430 1,072
2.3 2.9
2.4 2.5
19 2.3
35 46 60 22 57
33 48
a5
30 59 81
94 95 93
56 37 86 92 60
78 37 95 XI3 87
1992
2001
2002
Average annual growth, 1996-02 Population (%J Labor force I%) M o s t recent estimate (latest year available, 1998-02) Poverty (%of populafion belo wnational po vertyline) Urban population (%of totalpopulation) Life expectancyat birth (years) infant mortality(per lOOOlive biifhs) Child malnutrition (%ofchildren under5) Access to an improved water source (%ofpopulation) iiiiteracy(%ofpopulationage rSij Gross primaryenrollment Male Female
m
Development diamond. Life expectancy
I
T
ati;;
Gross enrollment primary
i~
Access to improvedwatersource
I
-Kenya Lowincome gmup
KEY E C O N O M I C R A T I O S and L O N G - T E R M T R E N D S 1982
GDP (US$ billions) Gross domestic investmentlGDP Exports of goods and serviceslGDP Gross domestic savingslGDP Gross national savingslGDP
6.4 82 25.0 14.5 11.8
6.0 0.7 26.9 13.7 9.7
114 P.8 26.0 4.2 9.6
Current account baiancelGDP Interest payments/GDP Total debtlGDP Total debt servicelexports Present value of debt/GDP Present value of debtlexports
-4.7 1.3 XI.0 14.5
-2.3 2.5 86.2 311
-2.8 0.7 49.5 t3.9 38.7 146.6
(average annualgro wth) GDP GDP percapita
1982-92 1992.02
S T R U C T U R E o f the E C O N O M Y
(%of GDP) Agriculture industry Manufacturing Services Private consumption General government consumption Imports of goods and services
(avenge ennualgmwth) Agriculture Industry Manufacturing Services Private consumption General government consumption Gross domestic investment imports of goods and services
4.4 10
2.1 -0.4
1982
2001 11 -10
1992
2002
lZ.1 14.8 25.5 8.7 t3.1
Indebtedness
18 -0.2
3.5 18
2001
2002
18.0 18.2 v.5 62.9
P.7 62.6
67.1 m.4 28.7
70.2 16.1 26.9
79.0 13.8 34.6
811 XI2 31.6
5.1 3.6 1.5 5.7
16 16 1.6 2.9 2.2 6.6 4.3 5.5
T
2002.08
26.6 18.9 It1 54.5
2J 4.3 5.1 4.9
Trade
0.5 511 9.8
33.4 s.9 P2 46.7
1982-92 1992-02
E c o n o m i c ratios'
2001
s.1
m.3
2002
-Kenya
-Lo
Growth o f investment and G D P (%) '5 T
-GDi
-GDP
Growth o f exports and imports (%)
12 0.7 0.6 13
1.0 1.4 3.5 36
20
-4.4 4.3 2.3 -12
0a 6.2 3.8 2.9
-10
72
winco me gro up
10 0
-20
Kenya P R I C E S and G O V E R N M E N T F I N A N C E D o m e s t i c prices (%change) Consumer prices Implicit GDP deflator Government finance (%of GDP, includes current grants) Current revenue Current budget balance Overall surplusldeficit TRADE
(US8 millions) Totalexports (fob) Fuel Coffee Manufactures Total imports (cif) Food Fuel and energy Capital goods Eqort price index(B95-WO) Import price index(895=00) Terms of trade (895=WO) BALANCE of PAYMENTS
1982
1992
2001
11.7
27.3 17.5
3.9 113
5.0 4.9
27.5 13 -3.3
22.5 15 -0.9
22.4 2.4 -0.9
1992
2001
2002
tot3
1,732 115 88 274 3,182 290 8xJ 756
1,742 01 97 310 3.t37 300 809 803
74
74 xJ4 71
25.1 1.5 ~
-a2 1982 894 223 227 107 1,415 83 523 250
69 a8 l44 1,666 156 4t? 411
77 it? 69
76 91 84
m 74
2002
I
1992
2001
1,7 15 2,030 -3 B
2,149 2,152 -3
2,966 3,939 -973
3,001 3,850 -646
Net income Net current transfers
-254 63
-355 68
-80 761
-70 576
Current account balance
-305
-mo
-38
Financing items (net) Changes in net reserves
t39 167
255 -75
509 -s91
256
Memo: Reserves including gold (US$ millions) Conversion rate (DEC, /oca!fUS$)
248 10.9
182 32.2
1,097 78.6
1,l74 76.7
1992
2001
2002
6,898 656 1411
5,644 24 2,263
6,207 t3 2,447
E X T E , R N A L D E B T and R E S O U R C E FLOWS 1982 (US$ mil/ions) 841 Total debt outstanding and disbursed IBRD 0 IDA 0
2002
258 1 0
670 159 16
417 26 51
299 t3 60
Composition of net resourcefiows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity
143 -15 -06 0 0
378 155 20 6 0
252 62 -103
-m
0 0 0
l76 92 a4
93 18 58
World Bank program Commitments Disbursements Principalrepayments
00
01
-CPI
3,000
2,000
1,000 0
90
97
98
89
00
01
02
OlmpOrtS
mEwports
:omposition o f 2 0 0 2 debt (US$ mill. G: 863
A: t3
1
0
73
9s
98
-GDPdeflator
Current account balance t o G D P (Oh)
Total debt service iBRD IDA
5
97
Export and import levels (US$ mill,)
1982
(US$ millions) Exports of goods and services Imports of goods and services Resource balance
I
Inflation (%)
D: 526
2 68 54
-
4 IBRD I-IDA :-IMF
D-Ot~mdtilateral
E - Bilateral F-Private
G-Short-ter
Annex 15: Summary o f Communication Strategy KENYA: Nairobi Water and Sewerage Institutional RestructuringProject Background The Government o f the Republic o f Kenya (GOK) through the Ministry o f Water Resources Management and Development (MWRMD) i s in the process o f implementing Water Sector Reform (WSR) based on the Water Act (2002). The reforms aim to improve service delivery o f water and sanitation services in the country.
Preparation and implementation o f this project i s a complex process that will involve the adaptation o f an entirely new way of doing business in the sector. The Water Act (2002) gives overall responsibility to MWRMD, to oversee the formation o f decentralized, autonomous institutions, which will be responsible for providing a harmonized and streamlined management o f water resources and water supply and sewerage services.
The new institutions created for the service delivery in Nairobi include the Water Services Regulatory Board (WSRB), the Nairobi Water Services Board (NWSB) and the Nairobi City Water and Sewerage Company (NWSC). Nairobi i s the first Water Sewerage and Sanitation (WSS) services utility in which the new institutional framework will be implemented and lessons emerging from the preparation and implementation process will need to be clearly communicated to inform program/project activities to be implemented in other urban WSS systems and WSB areas in the country. M W R M D through the Water Sector Reforms Secretariat has sought the services o f a communication consulting firm, Apex Communications Ltd. (ACL) to provide technical assistance in developing a communication strategy that will demystify WSR and clarify misconceptions surrounding the institutional reforms. A copy o f this strategy document i s available in the Project Files. The strategy development process i s being undertaken with the support o f GTZ and the Water and Sanitation Program (WSP), affiliated with the World Bank. This i s a summary of the proposed communication strategy for the Project. A more comprehensive strategy will be informed by the ongoing formative assessment on the Water Sector Reforms. Methodology The development o f the strategy has followed a consultative and participatory process since i t s inception. Below i s a summary of the on going process followed:
Several key documents were reviewed during the desk research to obtain background information on the pertinent issues that the communication strategy needs to address. The most helpful document that was reviewed was the World Bank aide-memoire for the pre-Appraisal mission o f November 2003. Other documents that provided insight for the strategy included literature review o f water sector reforms case studies from South Africa, Uganda, Ghana and Tanzania and other documents preparedby other key partners in the water sector.
74
A media content analysis was conducted with the aim o f establishing the coverage o f water issues by the local major newspapers for a period o f one year, from November 2002 to November 2003. From this the perceptions o f the media on water issues were identified and themes and messages for the communications strategy for Nairobi were created. A consultative meeting was held with key informants in the Nairobi City Council (NCC) to identify critical issues in the council in relation to the formation o f NWSC. This included a staff briefing on the on-going institutional reforms at a union meeting held between the council staff and their supervisors. The meeting was imperative in helping to capture the concerns o f the staff in relation to the reforms. Insights on the current situation, knowledge and practices related to water sector reforms in Nairobi will be further researched with the help o f research instruments; Focus Group guides, Indepth interview guides and a questionnaire, which are currently being developed. Problems Facing Water Sewice Provision 1. Up to 50% o f treated piped water in the city o f Nairobi i s unaccounted for due to leakage in the distribution system and illegal connections. 2. Approximately 40% o f water extracted and processed by the NCC i s unaccounted for in revenue and this i s attributed to (i) proliferation o f illegal connections; (ii) non-metered pipes; and (iii) old reticulation systems, some o f which are 60 - 70 years old and contribute to undetected leakage o f treated water before it reaches the destination. 3. L o w coverage with only 42% of households with water connections by NCC while third parties serve 58%. 4. An inefficient billing system resulting in late billing, unpaid bills and huge arrears. 5. Irregular and interrupted service delivery. 6. InComplete customer databases, 7. Faulty meters. Key Issues Communication related issues facing the institutional restructuring o f the WSS service provision in Nairobi in the short- to the medium-termare the needs to:
1. build “ informed opinion” among key decision makers in government, local authorities and other government related institutions. 2. reverse the lack of widespread understanding o f the consequences o f )restructuring (e.g. i s it privatization or commercialization?), how it works and how it benefits the consumers. 3. generate support among bodies that have influence among consumers such as resident associations. 4. “Quick-Start” the communication efforts by strengthening the capacity o f NWSB and NWSC. 5. build awareness and understanding o f the provisions o f the Water Act (2002) and the institutional framework governing the delivery o f WSS in Nairobi. 6. differentiate the NWSC as a separate entity managed outside the NCC established fiamework. 7. address staff issues and transitional plans in the new set up.
75
8. increase understandingo f water sector reforms among media organizations. 9. mainstream the role o f communication in the new service delivery framework to plan and coordinate communication activities. 10. build confidence among consumers and demonstrate resolve to address problems such as inefficient billing system. Overall Goal T o build wide stakeholder support and consensus on restructuring o f the WSS service provision in Nairobi. Communication Strategv Rationale Over the years WSS service provision in Nairobi have been delivered through the Water and Sewerage Department (WSD) o f the NCC. The framework around which the department provides the service leads to a service that i s inadequate, wasteful, inefficient, and unable to meet the needs o f the consumer. There is enough evidence that WSS service provision premised on commercial principles improves the quality and efficiency o f service. The communication strategy i s therefore driven by the need to instill a paradigm shift that positions service delivery underpinned by commercial principles as an efficient way to manage WSS services. Communication Objectives 1. Increase the media’s knowledge and capacity to report accurately o n the restructuring process. 2. Create a supportive environment for restructuring within the City Government 3. Increase the capacity o f the N W S C and NWSB to plan and manage communication as a strategic function. 4. Set up a two-way feedback mechanism for receiving and providing information to customers and stakeholders for tracking issues related to restructuring and service provision. 5. Increase the staff members’ understanding o f the changes by maintaining open channels o f communication. 6. Increase understanding and support o f the restructuring process among decision makers in government. 7. Forge alliances with stakeholder groups to build a supportive environment for partnership. 8. Design and produce corporate identity materials for the N W S C and NWSB. Audiences Segments Based o n issues at hand and the overall goal o f the communication effort, below i s what constitutes the most important audiences over the short- and medium-term: 1. Decision makers in Government. The views and opinions o f key government leaders will have an impact o n the success o f the institutional restructuring. 2. Nairobi City Council (NCC). N C C will have a lot o f responsibility in operationalizing the new set-up. Key focus will be o n building a supportive environment for the new set-up among key organs within the NCC. 3. Current Staff o f WSD. Current staff members will be critical to the success o f the new setup. During the transition, employees will require open and honest communication o n j o b security, as well as regular and timely information o n broad implications o f the reform process. They are also the best advocates o n the new set-up to the rest o f the City residents.
76
.
4. NWSB and NWSC Board Members and Senior Management. Key members o f these two bodies will need to effectively communicate the vision and mission o f their organizations to diverse audience groups and also serve as champions o f the restructuring process. 5. Parliamentarians. Educating and establishing dialogue on the restructuring process with parliamentarians and specifically those MPs representing Nairobi Constituencies will be crucial to the reform process. 6. The Media. Capturing the interest, educating and effectively engaging the media will significantly leverage outreach and cost-effectively reinforce messages on the new set-up. The media will be an important partner in disseminating information on the new set-up, helping build a supportive environment. 7. Nairobi Resident Associations. Resident associations will have strong influence on the residents whom they serve. Partnering with them from the outset to help them understand the restructuring process will make them a key ally for the reform. 8. Large Industrial and Institutional Consumers. Besides being a major source o f revenue to the NWSC, large industrial water consumers such as Kenya Breweries Ltd need to appreciate the benefits o f the new process. 9. Domestic and Other Consumers. General consumers are the most important audience segment since their appreciation o f the reforms process and ultimate acceptance o f the new structure will be crucial to i t s success. Through their numbers, they also have the power to organize politically and can be a formidable force. 10. Donor Organizations. During the initial phase, the reform will require donor support to succeed. I t will be important to keep them updated on progress and challenges faced. 11, Leadership of NGOs and Civil Society Dealing with Water Issues. T h i s includes the leadership o f NGOs and community groups operating in Nairobi. Partnerships with these groups will help leverage outreach, particularly if they are persuaded to add key elements o f the new set up to their agenda. 12. Professional Associations and Special Interest Groups. Associations representing groups such as hoteliers, the Nairobi Central Business District, the Kenya Association o f Manufacturers form an influential audience group. Cultivating them as partners will appeal to their self-interest and will make them influential champions for reforms. Message Theme Framework Creatively designed messages delivered within relevant contexts are critical for focusing the communication effort, mobilization support and maintaining consistency across audiences developed around the following theme:
“NWSUNWSB promises to deliver improved water services under the new service delivery
structure”
Communication Channels A combination o f mass media, group and interpersonal channels will be used to reach audiences with key messages and to promote discussion and feedback on the reform process. Tactical decisions will be made on which media to use depending on the issue to be communicated and ‘for which audiences. Initially, small media in the form o f targeted publications, group and interpersonal channels will be used to build understanding among audience groups critical to the reform process. This will be followed by mass media to reach the entire population o f Nairobi.
77
Below are the recommended tactical approaches with different media within the overall message framework. 1. Radio: Spot news, talk shows, special programs in the many FM stations in Nairobi 2. Newspapers: News, feature articles, opinion pages and special columns. 3. Television: News, talk shows, special features 4. Group media: Structured presentations at stakeholders meetings and piggy backing presentations at meetings o f other relevant stakeholders. 5. Small media: brochures, fact sheets, Frequently Asked Questions (FAQs), and posters targeted at different audiences. 6. Strategic issue Advertising: Limited advertising to communicate information in a controlled medium and as a means o f reinforcing other means o f communication. Implementation Strategies and Activities for Key Audience Segments Decision Makers in Government and Parliamentarians Educate and inform key government officials to build their support on the new set up. Build and proactively engage allies and supporters among key opinion leaders and influential at critical government institutions and other related bodies. Illustrative activities 1. Build a Database o f key government officials and parliamentarians who must be kept informed and proactively engaged on the roles and work o f the new structures. 2. Establish an Opinion Leader Publication in the form o f a regular newsletter (say monthly) on the NWSBNWSC addressing issues o f concern to decision makers in government. 3. Develop and produce a fact sheet on the institutional restructuring addressing key issues for dissemination to the above group. Nairobi City Council Inform and educate key decision makers at City Hall on the benefits o f the restructuring process to the City and residents o f Nairobi. Emphasize win-win outcomes that will arise. Illustrative Activities 1. Prepare briefing notes for presentation to key officials and councilors. 2. Identify credible officials supportive of the restructuring process within NCC and support them as internal champions. 3. Organize a meeting for councilors and chief officers to discuss the entire process and to address their fears and concerns. NWSB Board Members and Senior Management of the NWSC and W S B Educate members o f the above groups so that they completely understand the restructuring process and can effectively articulate the goals and mission o f the two organizations. Illustrative Activities 1. Plan and organize an induction program appropriate for the two groups. This program can cover training on effective presentation and handling the media.
78
2. Prepare speaking points for key members o f the two groups. 3. Develop a speaker’s bureau with members o f the two groups as resource persons and arrange for speaking placement within professional, resident association and other groups. The Media The media focus will be driven by the need to increase knowledge on the new structures and challenges facing the process to key journalists and media gatekeepers. Radio, TV and newspapers will be prime vehicles for informing the public on all aspects o f the new set-up. Illustrative Activities 1. Develop tools and materials to increase knowledge among key media representatives and gatekeepers on the restructuring process. This will be in the form o f background on the NWSB/NWSC and their work, tip-sheets for journalists on the new set-up, news features on different aspects o f the new set up and the organizations involved. 2. Plan and hold media seminars to keep the media up-to-date on water reforms 3. Provide technical assistance to the NWSB/NWSC in establishing the capacity to proactively deal with the media. 4. Explore partnering with one o f the leading media houses such as the Daily Nation to run a regular column on the restructuring process. 5. Maintain engagement at a high level (editors, publishers, producers) on specific aspects of the overall challenges facing the new set up through regular editorial briefings. 6. Proactively plan to creatively set the media agenda on key issues on the new structures by participating in talk shows and other call in programs. Nairobi Resident Associations Cultivate the support o f leaders o f the Nairobi Resident Associations by establishing dialogue on elements o f the reform with leaders o f the main resident associations. Illustrative Activities 1. Plan and hold a briefing seminar for leaders o f key resident organizations. 2, Provide key leaders o f these organizations with speaking points for presentation during their association meetings. Large Industrial and Institutional Consumers Educate t h i s group on the new changes and the promise and also reach them through organizations such as the Kenya Association o f Manufacturers, Nairobi Central Business District Association among others. Illustrative Activities 1. Briefing o f key contacts by area NWSC key personnel. 2. Prepare and disseminate briefing notes addressing concerns o f this group. Donor Organizations Regularly update the Water Sector Technology Group donors on the progress o f the institutional reform.
79
Illustrative Activities 1. Build a donor database with names o f contact persons responsible for water and related issues. 2. Proactively engage representatives o f WSTG donors as partners in the restructuring process. Professional Associations and Special Interest Group Cultivate the support o f professional associations and special interest groups as proponent o f professional management o f the water services. Illustrative Activities 1. Inform, educate and establish a dialogue with leaders o f professional organizations about the benefits o f the restructuring process. 2. Develop a calendar o f professional meetings and seek speaking opportunities. Leadership of NGOs and Civil Society working in Water Related Issues Encourage and support the participation o f NGOs and civil society by building their understanding on the operations o f the new structure, how it i s being implemented, how it works, how they can participate and how it benefits water consumers. Illustrative Activities 1. Create a comprehensive l i s t o f NGOs and their leaders active in the water sector and related areas operating in Nairobi. 2. Organize consultative meetings with NGOs and civil society leaders on the new set up. 3. Encourage the establishment o f a coalition o f NGOs supportive to the new structure. NWSC Employees Communication with employees moving from the WSD in N C C will focus on securing their commitment towards achieving the NWSC corporate objectives and on operating on new commercially driven principles. Illustrative activities 1. Prepare staff briefing notes to guide the agenda at on-going staff meetings and to ensure that messages are communicated consistently across different employee groups. 2. Produce a one-page periodic bulletin to update employees on developments at NWSC. 3. Organize structured briefing sessions between employees and management to share information, motivate them and encourage dialogue. Domestic and Other Consumers within Nairobi. Put in place a plan to regularly inform domestic consumers on operations o f the new structures for water service provision as well as their expectations, concerns and complaints. Prepare them for new approaches in water service provision such as prompt bill payment, strict disconnection policies for overdue payments, improved billing system etc. Illustrative Activities 1. Establish a customer help desk managed effectively. 2. Prepare a one-page lettedfact sheet mailed with monthly bill on new structures.
80
3. Prepare posters on new set up for placement in high people traffic areas within Nairobi. 4. Plan and publicize call-in radio/TV talk show programs to address key concerns in Nairobi. 5. Prepare and issue advertising to reach residents o f Nairobi with information that requires to be communicated through a controlled medium. 6. Prepare radio and commercial spots to communicate thematic and tactical messages (e.g., reminders to pay water bills) to residents o f Nairobi. OperationalPartners 1. Ministry o f Water Resources Management and Development
2. Ministry o f Local Government 3. Ministry o f Information and Tourism 4. Ministry o f Health 5. Non-governmental organizations such as M a j i na Ufanisi 6. Network for Water and Sanitation (NETWAS) 7. United Nations Human Settlement Program (UN HABITAT) 8. African Medical Research Foundation (AMREF) 9. Nairobi Central Business District Association (NCBDA) 10. Vendors providing communication services
81
Performance Indicators Against Communication Objectives Simple process and outcome indicators will be used to track desired changes that will contribute to the overall goal during the short term. 1.
Communication Objectives Increase the media’s knowledge and capacity to report accurately on the re-structuring process.
2.
To create a supportive environment for restructuring within the City Government.
3.
Increase the capacity o f the NWSC to plan and manage communication as a strategic function.
m
Set up a two-way feedback mechanisms for receiving and providing information to customers and stakeholders for tracking issues related to restructuring and service provision. Increase the staff members understanding o f 5. the changes by maintaining open channels o f communication.
4.
6.
Increase understanding and support o f the restructuring process among decision makers in government.
7.
Forge alliances with stakeholder groups to build a supportive environment for partnership.
~
8.
Process/outcomeIndicators Number o f media articles/programs on reforms Proportion o f media articles reporting accurately on reforms Number o f media workshops held on reforms Number o f consultations held to explain reforms Supportive actions and policies from NCC and chief officers on reforms Proportion o f councilors who can articulate the benefits o f reforms Defined role o f communication as a management function Hire o f communication professional or retention o f services Clear scope o f work for communication services contracted from vendors Operational customer care system Number o f complaints being received from customers
Number o f briefing meetings held with staff members Number o f communication materials addressing staff issues ProDortion o f staff members understand Number o f decision makers receiving regular briefings from NWSC Proportion o f decision makers publicly supporting reforms Number o f meetings and presentations made to stakeholder groups Number o f stakeholder groups publicly supporting reforms. Number o f requests from stakeholder groups on presentations on reforms Number o f materials produced with key messages on reforms Number o f requests for information on reforms
Design and produce corporate identity materials for the NWSC.
82
Implementation Plan
--
Indicative Budget An actual budget will be developed in consultation with NWSB and NWSC
Personnel
consensus building
Communications
Description
Short-term consultant
Stakeholder group meetings, media workshops and briefings, special public events, e.g. road shows Mailing, telephone, fax and Internet
Strategic issues advertising development and management Development and production
Corporate ID material, brochures, posters, pamphlets, etc
Unit cost
Cost in (US$)
(US$) 5,000~12 60,000 months
3000x15
45,000
2000x12
24,000
2,000x10
20,000
€ 200,000
Total
334,000
83
Justification
A communications specialist hired for a period o f one year will provide technical assistance to the Board and the Company, and build capacity for the implementation o f the strategy These activities w i l l help build awareness, increase understanding and engage a crosssection o f target audiences in order to mobilize support and forge alliances for the restructuring process These will enable the Board and the Company to provide and receive information from customers and other stakeholders Certain key issues and emerging concerns w i l l best be communicated through a controlled medium, such as advertising This will serve as a one-stop shop with information about the restructuring process, answers to frequently asked questions, and a directory o f who i s who in the new set-up These materials and publications will be disseminated widely to customers and other stakeholders
Annex 16: Training and Development
KENYA: Nairobi Water and Sewerage Institutional Restructuring Project Background I t has been recognized that staff to be appointed to the Nairobi Water Services Board (NWSB)
and Nairobi Water and Sewerage Company (NWSC) will require significant training and development if they are to grow into employees that will establish a new culture o f performance in their respective organizations. This particularly applies to the majority o f staff expected to transfer from the Water and Sewerage Department o f the Nairobi City Council. A Service Provision Agreement will prevail between NWSB and NWSC so that NWSB will have responsibility for the assets and resultant standards o f service to the community. NWSC, on behalf o f NWSB, will have responsibility for managing, operating and maintaining the assets and for provision of services to the customers. In effect, NWSB will be supervising the contract with a service provider. As a result, training and development o f officers o f each organization will be different. A culture o f performance delivery cannot be obtained merely by training through the attendance at courses and conferences or by staff visiting best practice organizations to see how things should be done. The key i s development of the people o f which training i s but a part. Employees need to establish confidence in their ability, pride in their achievements, incentive to strive further and patience to undertake the priority tasks. To achieve these things a work environment needs to be established where these qualities can be developed. Capacity Building
NWSB i s expected to let a Capacity Building Contract that will provide specialist consultant services and implement a management information system. Similarly, NWSC will let two contracts to provide specialist consultant services and the implementation o f a management information system that will contain a billing and revenue collection module. The outcomes from these contracts will form the basis upon which to build management capability. Specialist consultant support will be provided in the following areas: NWSB: 0 Utility management; 0 Financial management; 0 Infkastructure Planning and Procurement; and Environmental Management. NWSC: 0 Utility management; 0 Financial management; 0 Commercial management; and 0 Environmental management.
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These Specialists will work under the general direction o f NWSB’s and NWSC’s respective Chief Executive Officers (CEOs) and will work side by side with their appointed NWSB and NWSC counterparts, teaching and transferring their knowledge and benefit o f their experience and providing general management counseling and advice. Development and training by partnering will be supplemented by the following training: 0 Attendance at professional conferences and seminars; 0 Attendance at courses such as the procurement courses conducted by the World Bank; 0 Study tours to organizations that have a reputation for performance; 0 Invitations extended to managers from high performing organizations to visit Nairobi and offer advice; 0 In-house courses where relatively large numbers o f people can be trained; 0 Hiring in experts to advise on specific issues; 0 Subscribing to selected professional magazines; and 0 Use o f the internet. Work Plans prepared by the Capacity Building Contractors will l i s t training they will provide to NWSB and NWSC staff. They w i l l report quarterly to the CEO’s on the training and development they have provided to senior management and others, as well as report on the adherence to the detailed annual Training and Development Plans to be prepared by NWSB and NWSC. These Training and Development Plans must be prepared annually by NWSB and NWSC and reflect training to staff at all levels and across all areas o f the organization, not just the senior members. For optimum development o f people, specific programs should be prepared to meet their personal needs. It will be the responsibility o f the CEO’s to structure and implement personal development programs for their senior managers and for these managers to pass that learning on to their subordinate staff. Initially, training should be prioritized to concentrate on areas where major improvements in performance are required. I t i s expected that some senior members o f the management team will make regional or international visits to organizations o f high performance to assess reasons for their success. These visits should be within Africa and only undertaken to relevant and exceptional
organizations.
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MAP SECTION
