The World Bank Guinea Urban Water Project (P157782) REPORT NO.: RES53627 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF GUINEA URBAN WATER PROJECT APPROVED ON JUNE 27, 2017 TO MINISTRY OF ENERGY, HYDRAULICS AND HYDROCARBONS (MINISTÈRE DE L’ENERGIE, DE L’HYDRAULIQUE ET DES HYDROCARBURES) WATER WESTERN AND CENTRAL AFRICA Regional Vice President: Ousmane Diagana Country Director: Coralie Gevers Regional Director: Simeon Kacou Ehui Practice Manager/Manager: Yitbarek Tessema Task Team Leader(s): Dambudzo Josephine Muzenda, Karamoko Sanogo 17 February 2023 1 The World Bank Guinea Urban Water Project (P157782) ABBREVIATIONS AND ACRONYMS DATU Direction de l’Aménagement Territorial et de l’Urbanisme DNH Direction National de l’Hydraulique MEHH Ministère de l’Energie, de l’Hydraulique et des Hydrocarbures NRW Non-revenue water PACT Projet d’amélioration des critères technico-commerciaux PAPs Project affected persons PIU Projet implementing unit PDO Project development objective SEG Société des Eaux de Guinée 2 The World Bank Guinea Urban Water Project (P157782) BASIC DATA Product Information Project ID Financing Instrument P157782 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 27-Jun-2017 31-Dec-2023 Organizations Borrower Responsible Agency Ministry of Energy, Hydraulics and Hydrocarbons (Ministère de l’Energie, de l’Hydraulique et des Hyd Project Development Objective (PDO) Original PDO The objectives of the proposed project are to increase access to improved water services in the Greater Conakry area and improve the operational efficiency of the urban water utility. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-D2140 27-Jun-2017 26-Jul-2017 11-Jan-2018 31-Dec-2023 30.00 12.90 16.78 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No 3 The World Bank Guinea Urban Water Project (P157782) The World Bank Guinea Urban Water Project (P157782) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The Guinea Urban Water Project was approved in June 2017 and has been under implementation since February 2018. The project suffered from several design issues, including a water production component that could not be implemented after feasibility studies concluded that the required funding would be far higher than the existing budget envelope. The project was consequently restructured in 2020 to drop the original production component, add a new, smaller-scale, production component at the Kakoulima complex and extend the project by 18 months. However, while there was an expectation that the restructuring would help turn around the project, other challenges soon appeared. First, the COVID 19 pandemic slowed down implementation by preventing travel of contractors and other service providers and also restricting in-person missions for adequate World Bank supervision. Second, in September 2021, a coup d’etat led to the triggering of OP7.30 and the suspension of all World Bank operations. These measures remained in place for 6 months, during which time there were limited technical discussions but not much progress in procurement or project implementation. The impacts of the suspension were felt even after OP7.30 was lifted. 2. The resumption of operations in March 2022 helped to move forward crucial procurement activities as well as preparatory works for the distribution component of the project. The service order for civil works to begin was granted by the water utility, SEG, in November 2022 for lot 1 and that for lot 2 was issued in Janaury 2023. Works are now underway on this important distribution component. 3. Nevertheless, depite some good progress, the project is on the whole not performing well. With less than a year until project closure, civil works have only recently begun, very few of the indicators have been achieved (and only at intermediary level) and there continue to be indications of poor project management and coordination among key actors. Moreover, the compensation of persons affected by the project (PAPs) for the newly integrated production sub- component at Kakoulima has not yet begun. The experience of the compensation for the distribution component was very challenging, as the process entailed verification of PAPs by inspectors from the Ministry of Finance, which took some time, as well as weak reporting by the PIU. While the process was ultimately completed, the Task Team is not reassured that there are strong enough mitigation measures in place to avoid similar issues under the production sub- component. Moreover, the funds for compensating PAPs for Kakoulima were not transferred to the project as of December 2022, raising doubts about when compensation would be able to begin concretely. For these reasons, it has become clear that civil works for Kakoulima will not be completed before the project closing date and therefore it is preferable to drop the Kakoulima/ production sub-component. 4. Lastly, other planned activities – such as the construction of piezometers for groundwater monitoring and the construction of boreholes to service water standposts – have not advanced enough to give confidence that they could be completed in time. The need to cancel these activities therefore requires a restructuring of the project with the expectation that it will allow the remaining activities to be completed in time and with a solid development impact. 5. The proposed restructuring aims to correct some of the above mentioned weaknesses, as a proactive measure to ensure that the project performance improves and the completion will be smooth. The restructuring also paves the way for the pipeline Water and Sanitation Project (P179017), as the activities to be dropped will be integrated into the new operation while the underlying studies and bidding documents will ensure high readiness for the new operation. The World Bank Guinea Urban Water Project (P157782) II. DESCRIPTION OF PROPOSED CHANGES 6. The Level 2 restructuring will focus on the following changes: a. Cancellation of the Kakoulima production component under Component 1: This sub-component of Component 1 was included in the project during the first restructuring in 2020.1 However, the compensation of PAPs – a key step before civil works can begin – has not begun yet as the funds needed to kickstart the process have not yet been made available to the project. Moreover, the Resettlement Action Plan took a long time to prepare due to the lengthy process of compensating the PAPs for the distribution component. For this reason, the Kakoulima activity will be dropped from the original project scope and the funding allocated to it will be redirected to other activities, notably the non-revenue water reduction activity under Component 1. As the activities are under the same component, no reallocation of funds is needed. b. Cancellation of the water standposts and associated boreholes under Component 1: Initially, 25 standposts were supposed to be constructed along the main water distribution pipeline (DN 700mm), which would have led to an estimated 2,000 beneficiaries, providing treated water to these people for the first time.2 However, the initial design for the standposts proved to be technically unfeasible due to the lower-than-expected water pressure in the network, thereby limiting the amount of water that could reach the standposts. SEG proposed an alternative solution – namely drilling boreholes in order to supply the standposts with groundwater rather than treated surface water. The Bank requested studies to understand the potential impact of such construction on the water table and verify whether the water was of adequate quantity and quality. Following two technical missions undertaken by SEG, the conclusions were that the proposed borehole sites were too close to septic tanks (less than 20 meters away) and that there was a risk of groundwater contamination as a result. For this reason, it was agreed by both SEG and the Bank Team to drop this activity from the project and to revise the targeted number of beneficiaries accordingly.3 c. Cancellation of the piezometers: The project financed a groundwater study that included recommendations for constructing a network of piezometers in Greater Conakry that would enable the Direction National de l’Hydraulique (DNH) – the Hydrology Department of the Ministry of Energy, Hydraulics and Hydrocarbons (MEHH) to monitor better the use of groundwater in the region. However, the DNH was not able to make much progress in identifying sites, preparing technical specifications and other preliminary technical work for the development of the piezometers. With limited time left until project closure and given the limited capacity of DNH as the implementing agency, the activity will be cancelled as it is not likely to be implemented appropriately in the time remaining. 1 The 2020 restructuring was driven mainly by the need to cancel an initially proposed production activity i.e. the construction of a booster station at the existing Yessoulou water treatment station and associated infrastructure i.e. a new process line, water tank and pumping station. However, the feasibility study showed that the initial technical solution required more funding than the financing envelope of the PUEG allowed. For this reason, it was necessary to drop the original production component and replace it with the Kakoulima works component. 2 The standposts were meant to complement 1000 new household connections, with an estimated 24,000 beneficiaries, bringing the total number of people with access to water to 26,000. 3 The number of beneficiaries is consequently revised down from 26,000 to 24,000. The World Bank Guinea Urban Water Project (P157782) d. Modification of the results framework: Given the reduction in the scope of the project, the restructuring will also modify some indicators to reflect the new reality of the project. In particular, the PDO indicator related to the operational efficiency of SEG (working ratio) will be dropped and replaced by the more pertinent one related to the number of SEG sectors that will have benefitted from the non-revenue water program financed by the project. The reformulation of the PDO indicators better reflects the focus of the restructured project on distribution rehabilitation and improvements to water leakage detection and repairs – which are an essential part of improving SEG’s operational efficiency – as well as the new customer software system. However, the PDO itself remains unchanged. Several other indicators at intermediate level have been dropped or revised to align better with the new activities under the restructured project. 7. It should be noted that the restructuring will not entail a change of components and costs as the activities to be cancelled all fall within existing components. The funds originally allocated for the cancelled activities will be redirected to other activities within the same components. III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Safeguard Policies Triggered ✔ Legal Covenants ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ The World Bank Guinea Urban Water Project (P157782) Overall Risk Rating ✔ EA category ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPLIANCE_TABLE COMPLIANCE Safeguard Policies Safeguard Policies Triggered Current Proposed Environmental Assessment (OP) (BP 4.01) Yes Yes Performance Standards for Private Sector No No Activities OP/BP 4.03 Natural Habitats (OP) (BP 4.04) No No Forests (OP) (BP 4.36) No No Pest Management (OP 4.09) No No Physical Cultural Resources (OP) (BP 4.11) Yes Yes Indigenous Peoples (OP) (BP 4.10) No No Involuntary Resettlement (OP) (BP 4.12) Yes Yes Safety of Dams (OP) (BP 4.37) Yes No Projects on International Waterways (OP) (BP No No 7.50) Projects in Disputed Areas (OP) (BP 7.60) No No OPS_DETAILEDCHANGES_LEGCOV_TABLE LEGAL COVENANTS The World Bank Guinea Urban Water Project (P157782) Loan/Credit/TF Description Status Action Finance Agreement :Project Implementation Manual Schedule 2, Section I, B.1. | Description :The Recipient shall prepare and adopt, no later than (3) three months after the Effective Date, a Project Implementation Manual including governance and oversight After delay complied IDA-D2140 No Change arrangements, implementation arrangements, including with roles and responsibilities of all involved stakeholders, financial management and procurement procedures for the Project, satisfactory to the Association. | Due Date :15-Dec-2017 Finance Agreement :Recruitment of key PIU Staff Schedule 2, Section V, A.1. | Description :The Recipient shall, no later than three (3) months after the Effective Date, have recruited for the PIU key staff including Project coordinator, who shall be assisted by a core team comprised of, inter alia, a financial management After delay complied IDA-D2140 Revised specialist and accountant, a procurement specialist, an with environmental and social safeguards specialist, a communications specialist and a monitoring & evaluation specialist (Key Project Implementing Unit Staff) with qualifications, experience and TOR, satisfactory to the Association. | Due Date :15-Dec-2017 Without limitation to the provisions of paragraph (a) above, the PIU shall be headed by a Project coordinator, who shall be assisted by a core team comprised of, inter Proposed alia,, a financial management specialist and accountant, Expected soon a procurement specialist, an environmental and social safeguards specialist, and a monitoring & evaluation specialist ("Key PIU Staff". Due date: 31 March 2023 Finance Agreement :Recruitment of External Auditor Schedule 2, Section V, A.3. | Description :The Recipient shall, no later than six (6) months after the Effective After delay complied IDA-D2140 Date, have appointed an external auditor, whose No Change with qualifications and experience and terms of reference shall be acceptable to the Association. | Due Date :15- Mar-2018 The World Bank Guinea Urban Water Project (P157782) Finance Agreement :Computerized Accounting Software Schedule 2, Section V, A.2. | Description :The Recipient shall, no later than three (3) months after the Effective Date, have acquired and installed and made operational After delay complied IDA-D2140 No Change in the offices of the PIU computerized accounting with software capable of correctly recording and for automatic generating interim and annual financial statements. | Due Date :15-Dec-2017 Finance Agreement :Recruitment-a TA (Assistance à Maitrîse d'Ouvrage)-SEG. Schedule 2, Sec V, A.4. | Description :The Recipient shall, no later than six (6) months after the Effective Date, appoint a consultant, After delay complied IDA-D2140 No Change with qualifications, experience and terms of reference with satisfactory to the Association, to provide technical assistance (Assistance à Maitrise d'Ouvrage) to MEH . and SEG. | Due Date :15-Mar-2018 The World Bank Guinea Urban Water Project (P157782) . Results framework COUNTRY: Guinea Guinea Urban Water Project Project Development Objectives(s) The objectives of the proposed project are to increase access to improved water services in the Greater Conakry area and improve the operational efficiency of the urban water utility. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 Increase access to improved water services in the Greater Conakry area Number of people in urban areas provided with access to improved 0.00 0.00 0.00 20,000.00 24,000.00 water sources under the project (Number) Action: This indicator has been Revised Number of people in urban areas already connected and provided with access to "enhanced water 0.00 0.00 0.00 17,000.00 17,000.00 supply services " under the project. (Number) Action: This indicator has been Revised Percentage of female in urban areas provided with access to 0.00 0.00 0.00 0.00 51.70 improved water sources under the project. (Percentage) The World Bank Guinea Urban Water Project (P157782) RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 Improve the operational efficiency of the urban water utility Working ratio of water utility (ratio between O&M cost and revenue) 99.00 99.00 99.00 98.00 96.00 (Percentage) Action: This indicator has been Marked for Deletion Number of SEG sectors having completed a non revenue water 0.00 4.00 reduction program (Number) Action: This indicator is New PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 Component 1 - Urban Water Component 1 - Urban Water: New piped household water 0.00 0.00 0.00 0.00 1,000.00 connections that are resulting from Project interventions. (Number) Action: This indicator has been Revised Component 1 - Urban 0.00 0.00 1,000.00 4,000.00 5,000.00 Water: Piped household The World Bank Guinea Urban Water Project (P157782) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 water connections rehabilitated under the project (Number) Component 1 - Urban Water: Length of feeder 0.00 0.00 0.00 0.00 26.00 pipes constructed under the Project (Kilometers) Action: This indicator has been Revised Component 1 - Urban Water: Non-revenue water No No No Yes Yes baseline established (Yes/No) Rationale: Action: This indicator has The indicator is being deleted as there will not be enough time within the remaining implementation period to develop a proper NRW baseline as initially been Marked for Deletion planned. Component 1 - Urban Water: Beneficiaries that feel project investments 0.00 0.00 50.00 60.00 80.00 reflected their needs (Percentage) Component 1 - Urban Water: Registered grievances related to the 0.00 0.00 50.00 60.00 80.00 project activities are appropriately responded The World Bank Guinea Urban Water Project (P157782) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 within two weeks (Percentage) Additional water from Kakoulima water complex 0.00 0.00 0.00 0.00 2,000.00 supplied to SEG customers (Cubic Meter(m3)) Rationale: Action: This indicator has The activity is being dropped from the project scope as it can not be undertaken by project closure given the limited time remaining. been Marked for Deletion New stand posts constructed under the 0.00 0.00 10.00 15.00 20.00 project (Number) Rationale: Action: This indicator has This indicator is being deleted as it cannot be completed in the time remaining until project closure. been Marked for Deletion Number of new household 0.00 0.00 4,000.00 9,000.00 12,500.00 meters installed (Number) Number of handwashing facilities constructed under 0.00 200.00 400.00 500.00 500.00 the project (Number) Component 2 - Urban Sanitation Component 2- Urban Sanitation: Baseline study No No Yes Yes Yes Yes Yes completed and informs new sanitation strategy (Yes/No) Component 2- Urban No No Yes Yes Yes Yes Yes Sanitation: Sanitation The World Bank Guinea Urban Water Project (P157782) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 strategy and action plan adopted (Yes/No) Action: This indicator has been Revised Component 3 - Institutional Strengthening and Project Management Component 3 - Institutional Strengthening and Project Mgment: Tariff study for No No Yes Yes Yes Yes Yes urban water completed. (Yes/No) Component 3 - Institutional Strengthening and Project Mgment: Adoption of a new No No Yes Yes Yes Yes Yes Policy Letter for the urban water sector (Yes/No) Component 3 - Institutional Strengthening and Project Mgment: Database for No No Yes Yes Yes Yes Yes ground water resources established and operationalized (Yes/No) Rationale: Action: This indicator has The cancellation of the piezometers activity will make it difficult to have the data needed to constitute the database. For this reason, the indicator is being been Marked for Deletion dropped. Number of SEG staff having received training on 0.00 88.00 technical and commercial The World Bank Guinea Urban Water Project (P157782) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 aspects of water supply (Number) Action: This indicator is New of which women 0.00 20.00 (Number) Action: This indicator is New Installation of a new cartographic system for SEG No Yes capable of georeferencing customers (Yes/No) Action: This indicator is New Number of water sector officials having received capacity building on 0.00 25.00 groundwater resources (Number) Action: This indicator is New IO Table SPACE The World Bank Guinea Urban Water Project (P157782) Annex 2: Economic and Financial Analysis 1. The updated economic and financial analysis assesses the economic and financial benefits and costs associated with the new restructuring of Component 1 performed after the 2020 restructuring. The results of the economic and financial analysis show that from an economic perspective, the project remains sustainable, even though it involves the loss of net benefits valued at USD 3.5 million. The updated economic internal rate of return (EIRR) amounts to 9.17 percent associated with a net present value of USD 6.2 million, which is lower than the results under the 2020 restructuring, namely an EIRR of 10.7 percent with a net present value of USD 9.4 million. Although strengthening the operational capacity of Société des Eaux de Guinée (SEG, Guinea’s water utility) does not offset the cancellation of the Kakoulima investments, the level of economic and financial indicators still makes a case for the continuation of project activities to the end, as it has quite significant impacts on the national economy and drinking water sector, compared to the “without project” scenario. The relating analyses are detailed in this annex and supplemented by a sensitivity analysis. 2. The cost-benefit analysis of the restructured Component 1 was conducted from an economic and financial perspective, following the same methodology used during the 2020 restructuring, consisting in calculating the net present value (NPV) of the cost and benefit flows at a discount rate of 6 percent, and determining the project’s economic internal rate of return/financial internal rate of return (EIRR/FIRR) over its estimated lifespan of 30 years. Table A1.1 provides an overview of the costs of the activities relating to the infrastructure restructured under Component 1. Table A1.1. Costs of project activities Projected cost Cost after the (2020 2023 Activity restructuring) restructuring Production (Kakoulima) 6,913,000 700,000 Distribution (Conakry) 11,197,000 12,000,000 PACT4 (Conakry) 4,990,000 9,800,000 COVID-19 response 1,000,000 1,500,000 Urban sanitation 1,000,000 1,000,000 Institutional support/PIU 4,900,000 5,000,000 Grand total 30,000,000 30,000,000 Methodology and assumptions 3. The economic and financial analysis assesses the economic impact of the investments made by the project as part of this new restructuring that affects all project components. 4 PACT: Projet d’amélioration des critères technico-commerciaux, i.e. project to improve technical and commercial criteria. 17 The World Bank Guinea Urban Water Project (P157782) 4. Cost-benefit analysis. The economic/financial feasibility analysis of the project compares its estimated economic/financial benefits with its economic/financial costs. The reorganization of funding allocations per project component inevitably calls for a reassessment of the benefits likely to result from the implementation of the project, established during the first restructuring in 2020. 5. Costs include the capital costs that will be incurred for the activities under Component 1 (see table above) over the project life. 6. The net benefit is calculated as the difference between the incremental benefits and incremental costs of two scenarios, namely the "without project" and "with project” scenarios. The “without project” scenario is based on the assumption that utility consumers will constantly encounter problems. It is assumed, for the purposes of the analysis, that if the project is not implemented (“without project” scenario), the quality, as well as efficiency of service delivery will not change and/or deteriorate. 7. The economic and financial analysis will also identify the cost linked to the cancellation of the investments planned in Kakoulima by comparing the results of the 2020 restructuring with those of the 2023 restructuring. The assumption here is that the Kakoulima investments could have been successfully implemented and that the option of maintaining the funding under Component 1 was more advantageous. Elements of the restructuring 8. Cancellation of the Kakoulima production component under Component 1. Valued at USD 6.9 million, this component was intended to rehabilitate the Kitema intake point, which is currently out of order and could produce an additional amount of 2,000m3 water per day to ensure continued water supply in the coverage area. 9. Cancellation of the standpipes and associated boreholes under Component 1. The initial plan was to construct 25 standpipes along the main water distribution pipeline (ND 700mm) which would have provided treated water to 26,000 people for the first time. This activity is now being dropped, the related indicators have been revised and the economic analysis has also been updated to reflect the change. 10. Reinforcement of the Conakry PACT. This subcomponent is the highlight of the restructuring, as its budget increases from USD 4.99 million to USD 9.8 million, with significant additional allocations made for the procurement of mapping (0.7 million of USD), customer management software (2.5 million USD), and the installation of 12,500 meters (1.7 million USD). Furthermore, the budget for PACT provides for a targeted extension of the distribution network of over 1,630 linear meters for an amount of USD 0.5 million. Economic analysis 11. Benefits. The 43,000 effective consumers that benefitted from the project in 2020 will benefit from improved water supply, thanks to the improvements made to the distribution network. Since the Kakoulima investments are cancelled, the number of project beneficiaries has been revised to 41,000 for Subcomponent 2, while the handwashing points are expected to serve 120,000 people in Greater Conakry. The project will also contribute to improving SEG's efficiency by supporting the efforts aimed at ensuring its financial and operational sustainability. The restructuring will amplify benefits in terms of efficiency by prioritizing distribution over production - the distribution system is quite dilapidated 18 The World Bank Guinea Urban Water Project (P157782) and it does not make sense to continue producing water that will be distributed through a network that is not fully functional. 12. Reminder of the benefits in terms of water supply prior to the restructuring. Component 1 aims to improve the distribution network. The following benefits are expected from the proposed investments: (a) reduced water rationing; (b) additional sales of water made possible by the increased availability of water induced by the reduction of technical losses; (c) benefits for the consumer generated by the reduction of water costs; (d) public health benefits; and (e) additional savings on operations and maintenance. Once the infrastructure built under the project operates at full capacity, a total of about 43,000 people will benefit from it. In addition, investments made under Component 1 will benefit industries, businesses, and government agencies. 13. Benefits lost in terms of supply after the restructuring. a. Reduced water rationing. This advantage will be lost because of the cancellation of the increase in SEG's production capacity that was expected to supply 43,000 people an additional 21 liters per capita per day. This cancellation entails that the households that supplied themselves with kiosks and/or the sellers/tanks because of water rationing, will no longer be able to make savings from the significant difference between the price of water supplied by SEG and the price of water procured from the informal sector. This also applies to other users of SEG services who could have benefitted from the 2,000m3/day increase of the urban production. b. The removal of the 25 standpipes from the project cancels the benefits that a reduced water cost would have generated for consumers relative to water prices charged by informal service providers (private water kiosks and water trucks). Moreover, SEG loses the increase in revenue that could have been derived from the water consumption of around 2,000 people. Nevertheless, the 1,000 individual connections originally planned to complement the 25 standpipes will be maintained and thus benefits will be realized. 14. Additional benefits in terms of supply after the restructuring. a. Reinforcement of PACT activities. The main purpose of the restructuring is to reinforce PACT by providing it with an additional financing of USD 4.81 million that will generate multiple benefits. Indeed, this subcomponent will contribute to (i) improving the network's output and billing ratio, (ii) reducing the Non-Revenue Water rate, (iii) improving the collection rate, (iv) increasing SEG's turnover, (v) enhancing customer satisfaction at SEG by standardizing connections, (vi) improving the drinking water supply, and (vii) reducing the customer grievance rate. b. Reduction of the network's technical losses. The distribution network rehabilitation that will be implemented as part of the project will reduce physical losses, which, in turn, will increase the quantity of water billed and amount of revenue collected. At the time of the 2020 restructuring, the network had an average loss rate of 42 percent and the assumption retained for the analysis was that future losses would decrease by approximately 1 percent per year if no action was taken to reduce the volume of technical and commercial loss. At the time of the current (2023) restructuring, the available data indicates that the technical losses in 2019 were about 42.2%, and 34.5% in 2020 – a clear improvement of 7.7 points. 19 The World Bank Guinea Urban Water Project (P157782) c. Additional sales of water made possible by the increased availability of water induced by the reduction of technical losses. The amount of additional water sales is estimated using the following assumptions. Currently, only 29 percent of the total volume produced is billed on the basis of meter readings (36 percent for households and 29 percent for non-domestic customers). Restructuring activities include the installation of 12,500 water meters for domestic users and support to the improvement of the software systems that should improve the billing and collection rates. For the purpose of estimating this benefit, the assumption retained was that the combined billing and collection rates in 2020 would amount to 44 percent of the total amount of water produced. Additional sales of water are valued at the current average water tariff applicable to the relevant customer category. The analysis considers this benefit only in relation with the reduction of physical losses (estimated to amount to three quarters of all losses), as commercial loss reductions do not constitute economic benefits (but rather a transfer, which, thanks to the project, will be accounted for by SEG and will consequently have an impact on the financial analysis). d. Improved billing and revenue collection performance. In May 2022, the ASPA report indicated that the non- revenue water (NRW) rate could be decreased to 20-25 percent without making any massive investment. Indeed, under the baseline in the Gbessia pilot area, the distribution efficiency was about 81.2 percent against an initial level of 49.9 percent. However, at the global level, the combined indicators of invoicing and bill collection remain at modest levels. In fact we see at the level of administration customers that the combined rate of invoicing and collection goes from 36% in 2019 to 40% in 2020 while for private customers the combined rate dropped from 41% in 2019 to 13% in 2020, which is problematic. In view of this situation, the strengthening of the PACT which would follow the new restructuring could offer real possibilities to improve the commercial performance of the SEG and bring the combined rate of invoicing and collection to more than 44% (hypothesis for 2020 ). Therefore, it is retained for the purposes of the analysis, an assumption of 50% for the combined rate of invoicing and bill recovery. 15. Reminder of the benefits linked to the implementation of the project's other components e. Public health benefits. The economic analysis looks into the impact of water and sanitation service improvement on waterborne disease-related morbidity and mortality. In addition to the expected reductions in diarrhea incidence, the literature documents ample evidence that the effects of improved water and sanitation services on infant and child mortality extend beyond their direct effect on diarrhea prevalence. By decreasing exposure to diseases transmitted by contact with stools, the access to improved water and sanitation systems not only reduces the incidence of diarrhea, but also significantly lowers the risk of malnutrition, as well as serious infection by other diseases (not transmitted through feces), increasing the protected children's chances of survival. To assess the public health benefits generated by this project, a study of its health-related socioeconomic benefits resulting from the improvement of sanitation5 services was used and allowed for finding an estimated annual benefit per capita of USD 12. f. COVID-19-related public health benefits. COVID-19 response activities aim to provide improved sanitation services to help limit the spread of the virus. Although it is too early to quantify the value of COVID-19-related interventions, the economic benefits of these activities are included to provide a conservative estimate of the interventions’ benefits. The benefits associated with the construction of 500 handwashing points in Greater Hutton, Guy, Haller, Laurence & World Health Organization. Water, Sanitation and Health Team. (2004). Evaluation of the costs and benefits of water and sanitation improvements at the global level / Guy Hutton and Laurence Haller. World Health Organization. 20 The World Bank Guinea Urban Water Project (P157782) Conakry are valued using an estimate of the benefits derived from the improvement of water and sanitation services6 in Guinea, i.e. USD 1.58 for every dollar spent on sanitation. The supply of essential equipment and chemicals such as chlorine is assessed based on the reduction of waterborne diseases, using the same method as the one described earlier. Although these estimates do not directly quantify benefits in terms of COVID-19 caseload reduction resulting from the intervention, they provide a conservative estimate that can be used to identify and assess the extent of the benefits. g. Additional savings on operations and maintenance (O&M). The updated economic and financial analysis takes into account the projected additional O&M savings, in comparison to the O&M costs calculated in the initial analysis, as the 2023 restructuring activities will contribute to reinforcing leak detection and repair equipment, as well as a system mapping to reduce maintenance labor cost requirements. 16. The estimated economic benefits of the water supply investments planned under the project are shown in Table A1.2 at a discount rate of 6 percent. These benefits are compared to the ones expected in 2020. Table A1.2. Net present value of the economic benefits 2020 restructuring 2023 restructuring Discount rate 6% 6% Reduced water rationing 8.67 0,00 Reduced water losses 6.26 11,19 Benefit for consumers 0.13 0,13 Public health benefits 11 10,49 Public health benefits - COVID-19 0.86 0,86 Additional savings on O&M 2.18 2,94 Total 29.1 25,60 Unit in million USD 17. Other benefits. Besides the avoidable direct economic losses, many other potential benefits are not considered in the present cost-benefit analysis. They are not addressed either because the lack of data makes them difficult to estimate, or their value is difficult to quantify because they are not necessarily financial or economic. An example would be the dignity gained from accessing better water supply. Some of the benefits that were not included in the economic analysis are discussed below. 18. Impact on women and girls. As one of the project’s main effects, households would spend less time collecting water from standpipes and tankers (where water is not directly delivered at home). Since fetching water is generally the responsibility of women and young girls, the project will free up part of their time, allowing them to engage in productive or educational activities that will help them generate substantial additional income, and increasing the likelihood that girls will receive formal education. The project will also provide women with opportunities to sit on water committees and other community organizations, thereby contributing to gender balance in the management of water services. 6 Idem. 21 The World Bank Guinea Urban Water Project (P157782) 19. It follows that the estimated benefits derived from the project, as described in this analysis, can be deemed conservative, and it is reasonable to presume that actual benefits will exceed the ones estimated in this economic analysis. 20. Project costs. Costs include the capital costs that will be incurred over the project term in relation with the projects under Component 1 (see table above). Operations and maintenance costs are not considered as costs because of the additional savings expected from the restructuring of project activities. The present value of the costs associated with the economic benefits estimated under this analysis is presented in Table A1.3. Table A1.3. Present value of the costs associated with the estimated economic benefits 2020 restructuring 2023 restructuring Discount rate 6% 6% Kakoulima rehabilitation 5.7 0.6 Distribution network 9.1 10.0 PACT 4.1 8.1 COVID-19 response 0.7 0.7 Total 19.7 19.4 21. Consolidated results of the economic analysis. The opportunity cost of the restructuring option is not very high as the difference between the benefits associated with the two restructurings amounts to USD 3.5 million. Nevertheless, the recommended option - i.e. increasing funding for PACT - allows for saving the project and bringing it to a successful conclusion by keeping its NPV at a significant level amounting to more than USD 25.6 million, and its EIRR at 9.17 percent, just above the discount rate, and is a 1.53 point drop relative to the 2020 restructuring. Considering that some potential project benefits have not been taken into account because they would be difficult to quantify and evaluate, the project retains its economic sustainability, justifying its implementation to the end. Table A1.4 summarizes the present value of benefits and costs, as well as the project's NPV, at a discount rate of 6 percent, for the two restructuring periods. Table A1.4. Summary of economic analysis results 2020 restructuring 2023 restructuring Discount rate 6% 6% Present value of benefits 29.1 (USD million) 25,6 Present value of costs (USD 19.7 million) 19,4 Net present value (USD 9.4 million) 6,2 IRR 10.70% 9,17% Financial analysis 22 The World Bank Guinea Urban Water Project (P157782) 22. The results of the financial analysis show that the project is not sustainable on a purely financial basis. Because of the decision to cancel the activities aimed at increasing the production capacity by 2,000 m3/day, the strong increase in water production whose sale would have generated a financial benefit will no longer happen. The combined financial benefits derived from the sale of water and reductions in operations and maintenance costs are not sufficient to offset the project's cost. On the other hand, it should be noted (Table A1.5) that the restructuring improves SEG's financial sustainability, increasing its EIRR from 0.3 percent to 3.58 percent. The updated FIRR of the activities reviewed as part of the financial analysis is shown in the table below. Table A1.5. Summary of the financial analysis results 2020 restructuring 2023 restructuring Discount rate 6% 6% Present value of benefits 9.5 (USD million) 14,1 Present value of costs (USD 19.7 million) 18,5 Net present value (USD -10.2 million) (4,4) IRR 0.30% 3,58% 23. Compared to the analysis conducted in 2020, the current results of the economic analysis are very sensitive to two indicators, which are the overall performance of the network and the combined billing and collection rate. To do this, a variation in network losses of -5 points was tested separately from a variation in the combined rate of collection and invoicing of +/- 5 points, then a simultaneous variation in the rate of return was tested. of the network and the combined billing and collection rate of + 5 points. The results of the different tests are presented in Table A1.6. Table A1.6 Results of Sensitivity Analysis Total network losses 5 point negative variation 5 point positive variation EIRR NPV (M USD) EIRR NPV (Musd) Combined Stable 12.37% 11.9 3.13% -6 rate of billing 5 point and collection positive 13.27% 13.5 3.14% -6.1 variation 24. The results indicate that the reduction of technical water losses is a major challenge for SEG. Indeed, when the losses are significant, they most often cancel the commercial efforts made at the level of invoicing and collection, while a 5 point reduction in water losses significantly improve the profitability indicators of the project to place the internal ERR at 12.37% and when this is accompanied by a growth of 5 points in the combined billing and collection rate the profitability of the project becomes very satisfactory with an ERR is 13.27%. 23