The World Bank Urban Water Supply and Sanitation Sector Project (P165872) REPORT NO.: RES40587 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF URBAN WATER SUPPLY AND SANITATION SECTOR PROJECT APPROVED ON MAY 16, 2019 TO SOLOMON ISLANDS WATER EAST ASIA AND PACIFIC Regional Vice President: Victoria Kwakwa Country Director: Michel Kerf Regional Director: Benoit Bosquet Practice Manager/Manager: Sudipto Sarkar Task Team Leader(s): Stephane Raphael Dahan The World Bank Urban Water Supply and Sanitation Sector Project (P165872) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank APA Alternative Procurement Arrangements EU European Union FFA Financing Framework Agreement IDA International Development Association IPF Infrastructure Facility for the Pacific PDO Project Development Objectives SIG Solomon Islands Government SW Solomon Water UWSSSP Urban Water Supply and Sanitation Sector Project The World Bank Urban Water Supply and Sanitation Sector Project (P165872) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P165872 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 16-May-2019 30-Jun-2027 Organizations Borrower Responsible Agency Solomon Islands through the Ministry of Finance and Solomon Islands Water Authority Treasury Project Development Objective (PDO) Original PDO To increase access and quality of water supply and quality of sanitation services in selected service areas of Solomon Water, and to improve the operational performance of Solomon Water. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-64070 16-May-2019 31-Oct-2019 30-Jun-2027 15.00 0 15.00 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Urban Water Supply and Sanitation Sector Project (P165872) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Background. 1. The Urban Water Supply and Sanitation Sector Project (UWSSSP), approved on 16 May 2019, aims to increase access and quality of water supply and quality of sanitation services in selected service areas of Solomon Water (SW), and to improve the operational performance of Solomon Water. The total project amount is US$82.33 million and is being jointly co-financed by the World Bank (US$15.00 million IDA credit), the Asian Development Bank (ADB) (US$28.00 million concessional loan and US$9.00 million grant) and the European Union (EU) through the Investment Facility for the Pacific (IPF) (Euro 18 million grant administered by the ADB). It also includes a counterpart financing contribution (US$9.00 million). ADB is the lead cofinancier and the World Bank uses the Alternative Procurement Arrangements (APA): ADB’s procedures are used to procure all project activities, and the Bank has delegated to ADB responsibility for the supervision of all procurement processes related to Part 1 and 2 of the Project. UWSSSP will meet its PDO by improving coverage, quality and efficiency of SW’s water supply systems in Honiara and several provincial capitals (Component 1), improving the quality of sewerage and sanitation systems in Honiara (Component 2), implementing a water conservation, sanitation and hygiene awareness program (Component 3) and supporting institutional strengthening and project management (Component 4). 2. Project Status. Project preparation is ongoing, with procurement processes expected to start imminently. It is anticipated that IDA financing commitments will reach 50% by the end of 2020. The Project Management Unit is in place and effective in managing the preparation of project activities. 3. The initial IDA Credit Effectiveness deadline was 29 January 2020. The deadline was extended to 27 June 2020 due to the following remaining effectiveness condition not being met: ‘the Co-financing Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of this Agreement) have been fulfilled’.. 4. The satisfaction of this condition may not be fulfilled for several months. While the agreements between Solomon Islands and ADB for the project, which amount to an aggregate of USD 57.347 million equivalent, have been executed by the parties, the agreement between Solomon Islands and ADB with respect to the grant from the European Union (EU) in the amount of USD 20.347 million equivalent (“Subsequent Co-financing Agreement”) cannot be declared effective. Declaration of effectiveness of the Subsequent Co-Financing Agreement is contingent on the signing of a Financing Framework Agreement (FFA) allowing the administration of EU funds by ADB, including under UWSSSP. Initiated about one year ago, FFA negotiations between ADB and EU are still ongoing, and there is no clear forecast regarding their completion. 5. In order to allow for the project to reach effectiveness, the ADB team has received its Board approval to waive its effectiveness condition requiring the effectiveness of the Subsequent Co-Financing Agreement. Several changes, described in Section II, are required under the proposed restructuring to allow for the IDA Credit to become effective, and to adapt financing arrangements during the phase preceding the effectiveness of the EU Grant. 6. Also, SW is seeking the retroactive financing of two contracts related to: (i) the purchase of prepaid meters (SDB 3.93 million, US$0.86 million equivalent); and (ii) the purchase of vehicles for leakages research and repair (SBD 1.07 million, US$0.13 million equivalent). These contracts would be financed respectively under the new subcomponents 1(a), (e) and (f) as described in The World Bank Urban Water Supply and Sanitation Sector Project (P165872) Section II. They would be funded entirely using IDA credit and ADB grant and loan proceeds. The procurement processes have been reviewed by ADB and deemed consistent with ADB’s procurement procedures. These activities are aligned with the project Development Objectives, and relevant expenditures were incurred after October 31, 2018, i.e. within 12 months of the date of the Financing Agreement. Also, the retroactive financing amount does not exceed 20 percent of the credit, since only 33.3 percent of those contracts (i.e. 7 percent of the credit amount) would be funded by the IDA credit. II. DESCRIPTION OF PROPOSED CHANGES 7. The proposed changes include: 8. Change of effectiveness condition. With the delay on the execution of the Subsequent Co-Financing Agreement between Solomon Islands and ADB, it is proposed to exclude the execution of such an agreement from the effectiveness conditions. A new legal covenant will be added to require the Subsequent Co-financing Agreement to become effective within 12 months following credit effectiveness. 9. Change of disbursement arrangements. As the project is planned to become effective with a shortfall of US$20.347 million equivalent compared to the original funding, a list of higher priority activities (including those proposed for retroactive financing) fully fundable even without the EU Grant has been identified. This includes all activities foreseen under Component 1 except the construction of new service reservoirs in Honiara and the construction of a new water supply system in Munda. Component 1 description is reorganized as follows to desegregate higher level priority activities ([a], [d], [e] and [f]) from lower level ones ([b] and [c]): (a) Construction, rehabilitation, upgrade and expansion of water production and treatment systems in all urban areas except the Recipient’s town of Munda. (b) Construction, rehabilitation, upgrade and expansion of water production and treatment systems in the Recipient’s town of Munda. (c) Installation of additional water storage capacity within Solomon Water distribution network in the Recipient’s capital city of Honiara. (d) Installation of additional water storage capacity within Solomon Water distribution network outside of the Recipient’s capital city of Honiara. (e) Rehabilitation, upgrade and expansion of water supply transmission and distribution system. (f) Carrying out Non-Revenue Water reduction activities including leak detection and network repairs. 10. All activities under Component 2 are considered as lower priority. Overall, no activity from Component 1 is being dropped. Until the Subsequent Co-financing Agreement becomes effective, all payments for the higher priority activities (Expenditure Category 1 in Table 2) are to be fully covered by IDA and ADB funds, with 30.3 percent and 69.7 percent respective contributions. The Percentage of Expenditures to be Financed of the table of disbursement categories is amended accordingly. A disbursement condition is now included to prevent disbursements for lower priority activities (Expenditure Categories 2 and 4 in Table 2) until Subsequent Co-financing Agreement becomes effective. Once this milestone is reached, the table of disbursement categories will be changed again to reflect the contribution of the IPF grant to the funding of Part 1 (Expenditure Categories 1 and 4 in Table 2), since EU has expressed the preference to maintain some funding contribution to all project Parts. Table 1: Original table of expenditure categories The World Bank Urban Water Supply and Sanitation Sector Project (P165872) Category IDA Percentage of Expenditures (expressed in US$) to be Financed (exclusive of Taxes) (1) Goods, works, consultancy services, non-consulting services, 11,000,000 25.54 percent training, incremental operating costs under Part 1 (2) Goods, works, consultancy services, non-consulting services, 2,310,000 14.09 percent training, incremental operating costs under Part 2 (3) Unallocated 1,690,000 TOTAL AMOUNT 15,000,000 The World Bank Urban Water Supply and Sanitation Sector Project (P165872) Table 2: Proposed table of expenditure categories Category IDA Percentage of Expenditures (expressed in US$) to be Financed (exclusive of Taxes) (1) Goods, works, consultancy services, non-consulting services, 9,300,000 30.3 percent training, incremental operating costs under Part 1(a), (d), (e) and (f) (2) Goods, works, consultancy services, non-consulting services, 2,310,000 14.09 percent training, incremental operating costs under Part 21 (3) Unallocated 1,690,000 (4) Goods, works, consultancy services, non-consulting services, 1,700,000 30.3 percent training, incremental operating costs under Part 1(b) and (c)1 TOTAL AMOUNT 15,000,000 1No withdrawal shall be made under Categories (2) and (4) unless and until the Recipient has provided evidence satisfactory to the Association that all conditions precedent to the effectiveness of the Subsequent Co-financing Agreement or to the right of the Recipient to make withdrawals under the Subsequent Co-financing Agreement (other than the effectiveness of this Agreement) have been fulfilled. 11. Retroactive financing. The Financing Agreement is amended to allow for retroactive financing in an amount of US$0.62 million equivalent for payments made on or after October 31, 2018 against eligible expenditures under the new disbursement category (1). The retroactive financing date of October 31, 2018, falls within 12 months of the date of the Financing Agreement. 12. Change in risk rating. The rating of “Other risk”, described in the PAD as the risk that co-financing contributions do not materialize as planned, is changed from Low to High. While the outcome of current FFA negotiation between ADB and EU are uncertain, the impact of its failure on the achievability of PDO would be very significant. If this issue is not resolved and the funding gap continues beyond 12 months after effectiveness, the Bank will work with the government and ADB to explore other sources of financing. Should no possible alternative to the IPF grant be identified, a project restructuring will be carried out to decrease the project scope and size, and adjust its development objectives accordingly. This change to the “Other risk” rating does not impact the Overall Risk Rating, which was already defined as High.1 13. Revision of the co-financing amount. The total ADB’s co-financing amount for the project is revised from US$58.23 million to US$57.347 million. This is due to a reduction of ADB grant contribution by US$1 million between IDA credit negotiation (April 9, 2019) and ADB financing negotiation (August 27, 2019) and to changes in the Euro to USD exchange rate during that period. The reduction of the financing amount is covered by various minor adjustments to Component 2 project activities that do not affect the achievability of project objectives. 1Introduction of the change to “Other risk” in the Datasheet leads to Overall Risk Rating being shown as Changed in III. Summary of Changes, although no change to overall risk rating is proposed as part of this restructuring. The World Bank Urban Water Supply and Sanitation Sector Project (P165872) III. SUMMARY OF CHANGES Changed Not Changed Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Legal Covenants ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Disbursement Estimates ✔ Safeguard Policies Triggered ✔ EA category ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES The World Bank Urban Water Supply and Sanitation Sector Project (P165872) Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IDA-64070-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: GD,WK,CS,NCS,TNG,IOC,EXL-Tax:Part 1 (a), (d), (e) 11,000,000.00 0.00 9,300,000.00 25.54 30.3 iLap Category Sequence No: 2 Current Expenditure Category: GD,WK,CS,NCS,TNG,IOC,EXL-Tax:Part 2 2,310,000.00 0.00 2,310,000.00 14.09 14.09 iLap Category Sequence No: 3 Current Expenditure Category: UNALLOCATED 1,690,000.00 0.00 1,690,000.00 iLap Category Sequence No: 4 Current Expenditure Category: GD,WK,CS,NCS,TNG,IOC,EXL-Tax:Part 1 (b), (c) 0.00 0.00 1,700,000.00 30.3 Total 15,000,000.00 0.00 15,000,000.00 OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  Substantial  Substantial Macroeconomic  Moderate  Moderate Sector Strategies and Policies  Moderate  Moderate Technical Design of Project or Program  Substantial  Substantial Institutional Capacity for Implementation and  High  High Sustainability Fiduciary  Substantial  Substantial Environment and Social  Substantial  Substantial Stakeholders  Moderate  Moderate The World Bank Urban Water Supply and Sanitation Sector Project (P165872) Other  Low  High Overall  High  High OPS_DETAILEDCHANGES_LEGCOV_TABLE LEGAL COVENANTS Loan/Credit/TF Description Status Action Financing Agreement, Schedule 2, Section I.A., para 1. To ensure proper oversight of the Project, the Recipient shall maintain throughout the Project implementation IDA-64070 Complied with No Change period, a Steering Committee, with a mandate, composition and resources satisfactory to the Association. Financing Agreement, Schedule 2, Section I.A., para 2. The Recipient shall cause the Project Implementing Entity to maintain, throughout the Project IDA-64070 Complied with No Change implementation period, staff and/or personnel in adequate numbers for the implementation of Project activities. Financing Agreement, Schedule 2, Section I.A., para 3. The Recipient shall cause the Project Implementing Entity to maintain throughout the Project IDA-64070 Complied with No Change implementation period, Project Management Unit with a mandate, composition and resources satisfactory to the Association. Financing Agreement, Schedule 2, Section I.C, para. 1(b). No later than one (1) month after Effective Date, the Recipient shall adopt a Project Operations Manual, IDA-64070 Not yet due No Change in form and substance satisfactory to the Association, for the purpose of ensuring proper implementation of the Project. Financing Agreement, Schedule 2, Section I.E., para 1. The Recipient shall cause the Project Implementing IDA-64070 Not yet due No Change Entity to prepare and furnish to the Association, not later than November 30 of each year during the The World Bank Urban Water Supply and Sanitation Sector Project (P165872) implementation of the Project (or such later interval or date as the Association may agree), an Annual Work Plan and Budget containing all eligible Project activities and expenditures proposed to be included in the Project for the following fiscal year of the Recipient. Financing Agreement, Schedule 2, Section II, para 1. The Recipient shall cause the Project Implementing Entity to IDA-64070 furnish to the Association each Project Report not later Not yet due No Change than one month after the end of each calendar quarter, covering the calendar quarter. Financing Agreement, Schedule 2, Section II, para 2. The Recipient shall carry out, jointly with the Association, not later than June 30, 2023, or such other period as may be agreed with the Association, a mid-term review IDA-64070 of the Project (the “Mid-Term Review”) to assess the Not yet due No Change status of Project implementation, as measured against the Project indicators acceptable to the Association, and compliance with the legal covenants included or referred to in this Agreement. Financing Agreement, Schedule 2, Section IV.A. The Recipient shall ensure that - throughout the duration of the Project - Solomon Water remains financially sustainable as indicated by the ability of Solomon Water IDA-64070 Complied with No Change to recover its costs (operations and maintenance costs as well as depreciation costs of plants and equipment it operates) through user fees and/or government subsidies. Project Agreement, Schedule, Section IV, para 2. The Project Implementing Entity shall undertake a study – under the terms of reference acceptable to the IDA-64070 Association – to review water tariffs of Solomon Water Not yet due No Change (including a focus on affordability aspects) and furnish the completed study to the Association no later than December 31, 2020. The World Bank Urban Water Supply and Sanitation Sector Project (P165872) Financing Agreement, Article IV, para 4.01. The Co- financing Deadline for the effectiveness of the IDA-64070 Not yet due New Subsequent Co-financing Agreement is the date twelve . (12) months after the Effective Date.