Document of The World Bank FOR OFFICIAL USEONLY ReportNo: 38457-MW PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OFSDR 18.4 MILLION (US$27.5MILLIONEQUIVALENT) AND A PROPOSEDGRANT INTHEAMOUNT OFSDR 15.O MILLION (US$22.5 MILLIONEQUIVALENT TO THE REPUBLIC OFMALAWI FORA SECONDNATIONALWATER DEVELOPMENTPROJECT April 27,2007 Water andUrbanUnit 1(AFTU1) Malawi CountryDepartment Africa Region This document has a restricted distributionand maybe usedbyrecipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective {Date}) Currency Unit = Malawi Kwacha US$1 = 140.2MWK 1SDR = 1.50US$ FISCAL YEAR July 1 - June30 ABBREVIATIONSAND ACRONYMS AfDB African Development Bank BWB BlantyreWater Board CIDA Canadian International Development Agency C M A Catchment Management Authority CRWB CentralRegional Water Board EA Environmental Assessment EAD Environmental Affairs Department o fMMNRE EIA Environmental Impact Assessment EIB European InvestmentBank EIRR Economic Internal Rate o fReturn ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan EUWF European Union Water Facility G O M Government o f Malawi GPOBA Global Partnershipfor OutputBased Aid ICR ImplementationCompletion Report IDA InternationalDevelopment Association IFR InterimFinancialReports JICA Japan International Cooperation Agency JPCC Joint Permanent Commission o f Cooperation LWB Lilongwe Water Board MCRPWSS Market Center andRural PipedWater Supplyand Sanitation M&E Monitoring andEvaluation MDG MillenniumDevelopment Goals MMNRE MinistryofMines, NationalResources, andEnvironment MEPD Ministryo fEconomic PlanningandDevelopment MGDS Malawi Growth and Development Strategy MIS ManagementInformation Systems MIWD MinistryofIrrigation andWater Development M O F MinistryofFinance MWERA Malawi Water and EnergyRegulatory Authority NGO Non Governmental Organizations NPV Net PresentValue FOROFFICIAL USE ONLY NRW NonRevenueWater NRWB Northern Regional Water Board NWDP NationalWater Development Program NWDP I FirstNational Water Development Project NWDPII m NationalWaterResourceAuthority SecondNationalWater Development Project O&M Operation andMaintenance OPEC Organization of PetroleumExportingCountries PC Privatization Commission PIU Program ImplementationUnit PMU Program ManagementUnit PPF Project PreparationFacility PPP Public Private Partnership RAP Resettlement Action Plan RPF ResettlementPolicyFramework RWB Regional Water Boards RWSS RuralWater Supply and Sanitation SADC SouthernAfrica Development Community SRWB SouthernRegionalWater Board SWAP Sector Wide Approach TOR Terms ofReference UNDP UnitedNations Development Program UNICEF uwss UnitedNations Children's Fund UrbanWater Supplyand Sanitation WRM wss Water ResourcesManagement Water Supply and Sanitation WUA Water User Association Vice President: Obiageli K.Ezekwesili Country Director: Michael Baxter Country Manager Timothy R. Gilbo SectorManager: Jaime M.Biderman Task Team Leader: RobertJ. Roche This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.1 MALAWI SecondNationalWater DevelopmentProject CONTENTS Page I STRATEGICCONTEXTANDRATIONALE . ................................................................. 1 A. Country and Sector Issues ................................................................................................... 1 B NationalWater DevelopmentProgram., . ............................................................................. 4 C. Rationale for Bank Involvement., ....................................................................................... 7 D. HigherLevelObjectives to which the Project Contributes ................................................ 7 I1. PROJECTDESCRIPTION ............................................................................................. 8 A. LendingInstrument............................................................................................................. 8 B. Project Development Objective and KeyIndicators........................................................... 8 C. Project Components ............................................................................................................ 8 D. Lessons LearnedandReflectedinthe ProjectDesign...................................................... 17 E. Alternatives Considered and Reasons for the Selected Instrument .................................. 19 I11 . IMPLEMENTATION .................................................................................................... 19 A. PartnershipArrangements................................................................................................. 19 B. Institutional and ImplementationArrangements .............................................................. 19 C. Monitoring andEvaluation of OutcomesResults ............................................................. 22 D Sustainability..................................................................................................................... . . . . 23 E. Grant Conditions andCovenants ...................................................................................... 25 IV. APPRAISAL SUMMARY ............................................................................................. 26 A. Economic and Financial Analysis.. ................................................................................... 26 B Technical........................................................................................................................... 30 . C. Fiduciary ........................................................................................................................... 31 D Social................................................................................................................................. . 32 E. Environment...................................................................................................................... 32 F. Safeguard Policies............................................................................................................. 33 G. Policy Exceptions and Readiness...................................................................................... 35 Annex 1: Country and Sector or ProgramBackground ......................................................... 36 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .................39 Annex 3: ResultsFrameworkandMonitoring ........................................................................ 40 Annex 4: DetailedProgramDescription ................................................................................... 46 Annex 5: ProjectCosts............................................................................................................... 72 Annex 6: ImplementationArrangements ................................................................................. 76 Annex 8: ProcurementArrangements ...................................................................................... 91 Annex 10: SafeguardPolicyIssues .......................................................................................... 109 Annex 11:ProjectPreparationandSupervision ................................................................... 111 Annex 12: Documentsinthe ProjectFile ............................................................................... 112 Annex 13: Statementof LoansandCredits ............................................................................ 113 Annex 14: Country at a Glance ............................................................................................... 114 Annex 15 MAPIBRD35457 .................................................................................................... 116 MALAWI SECOND NATIONAL WATER DEVELOPMENT PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTUl Date: April 27, 2007 Team Leader: Robert J. Roche Country Director: Michael Baxter Sectors: Water supply (85%); Sanitation Sector ManagerDirector: Jaime M.Bidennan (15%) Themes: Rural services and infrastructure (P);Water resource management (P);Access to urbanservices andhousing(P) Project ID: PO96336 Environmental screening category: Partial Assessment LendingInstrument: Specific InvestmentLoan [ ] Loan [XI Credit [XI Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 50.0 (IDA) Credit Total: 18.0 32.0 50.0 Borrower: Republic o fMalawi ResponsibleAgency: MinistryofIrrigationandWaterDevelopment ResponsibleEntities: Blantyre Water Board, Lilongwe Water Board, NorthernRegional Water Board, Central Regional Water Board, Southern Regional Water Board Estimateddisbursements(Bank FY/US$m) FY 08 09 10 11 12 4nnual 5.0 10.0 12.0 15.0 8.0 Cumulative1 5.0 I 15.0 I 27.0 I 42.0 I 50.0 I Project implementation period: Start October 31,2007 End: October 31,2012 Expectedeffectiveness date: October 31,2007 Expectedclosing date: October 31,2012 Does the project depart from the CAS incontent or other significant respects? Re$ PADA.3 [ ]Yes [XINO Does the project require any exceptions from Bankpolicies? Re$ PAD D.7 [ ]Yes [XINO Have these been approved by Bank management? [[ ]Yes [XINO ]Yes [ IN0 I s approval for any policy exception sought from the Board? Does the project include any critical risks rated"substantial" or "high"? Re$ PAD C.5 [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D.7 [XIYes [ ]No Project development objective Re$ PAD Para 27, Page 8 Increased access to sustainable water supply and sanitation services for people livingincities, towns, market centers, and villages and improvedwater resources management at the national level. Project description [one-sentence summary of each component] Re$ PAD, TechnicalAnnex 4 The project has four components. Component A: UrbanWater Supply and Sanitation for the cities o f Blantyre and Lilongwe will consist of: (i) priority investments for essential spare parts and materials to prevent water supply disruptions inBlantyre and urgentrehabilitationworks inboth cities: (ii) reaching the unserved areas, through piloting o fwater supply and sanitation services to low income areas inBlantyre, carrying out sanitation and hygienepromotion activities, expanding the water supply distribution network, and installing customer connections; and (iii) aqueduct planninginLilongwe. Component B: Town, Market Center, and Rural PipedWater Supply and Sanitation will consist of: (i) expansion o fwater supply facilities andimprovements inoperational efficiency insome o f their largest, fastest-growing towns including MZUZU, Kasungu, Mangochi, and Zomba, and other smaller towns; (ii) development o f community-managed water suppliesinmarket centers and rural piped systems; and (iii) training for the regional water boards, the staff o fprogram implementation unit, district assemblies, and local communities. Component C: Water Resources Management will consist o f (i) development and support for the promulgationo f enabling legislation for the National Water Policy o f 2005; (ii) development o f an integrated water resources investmentstrategy; (iii) design and independent environmental and social assessments for Lake Malawi level control; (iv) strengthening o f institutional capacity for water resource management including the establishment o fNational Water Resources Authority; and (v) feasibility studies, designs, and environmental and social assessments for the development o f future water sources. Component D: Sector Management and Urban Water Sector Reform will consist of: (i) support to MIWDinthe establishment o f a management system for the sector investmentprogram including investmentplanning, donor coordination, accounting, procurement, monitoring and evaluation, safeguard tracking, and informationtechnology and communications; (ii) development o f a strategic sanitation plan for Lilongwe and Blantyre; and (iii) and design implementation o f a sustainable reform plan for Blantyre and Lilongwe, including a regulatory framework, public awareness campaign, andinstitutional framework for a lease or similar contract with a private operator. Which safeguard policies are triggered, if any? Re$ PAD F.138, TechnicalAnnex 10 The project has triggers OP 4.01 Environmental Assessment, OP4.12 Involuntary Resettlement, andOP 7.50 Projects on InternationalWaterways. The ESMF andRPFhavebeendisclosed in the country and at the Bank's Infoshop. The safeguard screening category i s S2, and the environmental screening category i s B. Significant, non-standard conditions, if any, for: Re$ PAD C.7 Boardpresentation: None Loadcredit effectiveness: None Covenants applicable to project implementation: Outstanding water bills from the public institutions will be paid to the Water Boards and thereafter timely payment o f dues will be ensured. 0 The five water boards to at least cover their operations andmaintenance through revenues by fiscal year ending 2008/9, with continuous improvement to also cover depreciation anddebt service obligations by year ending2011/12. c I. STRATEGICCONTEXTANDRATIONALE A. Country and Sector Issues CountryBackground 1. Malawi i s one o f Sub-Saharan Africa's most densely populated countries with about 12,884,000 people (according to July 2005 estimate) spread over an area o f 118,484 km2.The recent Malawi Poverty and Vulnerability Assessment indicates that more than 52 percent o fthe population (6.4 million people) lives below the poverty line and 22 percent (2.7 million people) live inultra-poverty'. Beingone o fthe lowest GDPdcapita countries inthe world, Malawi faces formidable development challenges. 2. The Malawi Growth and Development Strategy (MGDS) recognizes that strong and sustainable economic growth i s key to reducing poverty. It emphasizes infrastructure development as one o fthe main areas o f focus, which international experience attests as a key ingredientfor economic growth. Domestic andinternationalinvestors are attracted to "livable" cities with appropriate basic urban services. However, water and sanitation services inMalawi's cities, towns, and market centers are now o f questionable sustainability. Water Resources 3. The availability o ftotal renewable water resource (TRWR) was calculated to be 17.3 km3/year,or 1,617 m3/capita/year.2While the availability o fwater resources inMalawiinthe aggregate i s considered satisfactory, per capita water availability i s declining at a rapidrate due to population growth, andMalawi may start experiencing water stress after 20253. Usingthe 2000 figures, Malawi had the 4thlowest per capita water availability o f the 14 Southern African Development Community (SADC) countries at 1,840 m3/cap/year (South Africa 1,136, Zimbabwe 1,483 and Mauritius 1,826). The SADC average i s 8,922 m3/cap/year. 4. Malawi has a large network o f surface water bodies covering 21% o fthe country's 120,000 km2 area. 94% o fthe landarea inMalawi i s part o fthe Zambezi River Basinwhich drains into the IndianOcean inMozambique. The remaining 6% falls within the Congo and Rovuma Basins or the small internal drainage basinof Lake Chilwa. The Zambezi River Basin is the second largest inthe SADC region; 8% o f the basin i s inMalawi. The most prominent water bodyi s Lake Malawi which is 567 kmlong and 28,900 km2 in area (of which 4,540 km2 is inMozambique) makingit the third largest lake inAfrica, and the 10th largest inthe world. More than ten rivers drain into Lake Malawi from two o fthe three riparian countries including Ruhuhu(Tanzania), Songwe (Tanzania andMalawi), N.Rukuru,N.Rumphi,S. Rukuru, Dwangwa, Bua, Linthipe, and Livulezi (Malawi). All o fthese rivers are unregulated, and thus subject to natural seasonal flows. However, most o fthe rivers maintain at least some base flow throughout the dry season. I Suchthat they cannot afford to meet even their recommended daily food needs. This figure is consistent with 5 studies between 1995 and 1998, as quoted inFA0 (2004) andGibb (2004). 3 Underthe Falkenmark definitions of water shortage and water scarcity, Malawiis currently water short (less than 1,700 m3/capita/year) and will become water scarce (less than 1,000 m3/capita/year) by 2025. 1 5. The Lake Malawi/ Shire River hydrological systemrepresent arguably the country's singlemost important naturalresource systemand supports significant economic activities. The Shire River systemperforms vital environmental and socio-economic functions. It supplies over 96% o fthe country's power generating capacity; supplies water to major urbancenters such as Blantyre and Limbe andthe rural water users along the length ofthe river as well as to economically important irrigation schemes. Water levels inLake Malawi are highlyvariable, andhave a direct effect onthe flow rate inthe Shire River (as the source o fthe Shire is the outflow o fthe Lake), which may lead at the one extreme to a no-flow situation inthe river, or, at the other extreme, to floods, causing damage to agricultural lands, infrastructure andloss o f life. 6. RainfallVariability: Despitethe noticeable surface water bodies, the availability and reliability o f surface water inMalawi is highlyvariable between the wet and dry seasons and from year to year. The national meanannual rainfall inMalawi is estimated at about 1100 mm/year, with the average annual rainfall varying from 650 mminthe Lower Shire Valley to 1,600 mminthe Northern Lakeshore Region. 70% o fthe country receives 800 to 1,200 mrnper year. While this i s relatively good rainfall (the second highestinthe SADC region), Malawi has an erratic rainfall pattern, which poses one ofthe biggest threats to sustained economic growth. 7. Groundwater: Groundwater resources are widespread throughout the country. The total potential groundwater yield i s estimated at 1.4 km3/year (44 m3/s), based on an average recharge rate o f 15mm/year; however, the groundwater potential has not beencomprehensively determined. The last significant hydro-geological mappingwas done in 1986, and even this was based on limitedborehole information. Groundwater abstraction i s generally unregulated and uncontrolled. It i s probable that, inthe absence o fregulation, unsustainable pumpingo f the groundwater i s occurring insome areas. Groundwater is presently exploited by 30,000 boreholes and 8,000 shallow wells equipped with handpumps. Nationally, groundwater quality i s generally acceptable for human consumption. However, rapid deteriorationo f the rivers' upper catchment areas due to deforestation and poor landuse practices is causing increased sediment transportation, and significantly affects the country's surface water resources and river hydraulic infrastructure. This, inturn, encourages excessive use o f groundwater resulting inthe resource's overexploitation and depletion. * 8. International Waters: Malawi shares a number o f important rivers and lake basins with the neighboring states o fMozambique and Tanzania. Lake Malawi is sharedwith Mozambique, and forms the boundary with Tanzania. The Shire River, which drains into the Zambezi in Mozambique, i s the most important water resource inMalawi for water supply, hydropower and irrigation. The Songwe River, which forms the international boundary between Malawi and Tanzania, i s usedlargely for fishing andagriculture. The river changes its course almost annually due to flooding. Lake Chilwa and Lake Chiuta are both shared with Mozambique. They are important fishing and ecological sites. The Ruo Riverborderswith Mozambique and has the potential for irrigation, water supplyandhydropower development. 9. The SADC Protocol on Shared Watercourse Systems was signed in 1995 by all SADC member states including Tanzania, Malawi and Mozambique, and was later revised and renamedSADC Protocol on Shared Watercourses in2000. It lays out the principles by which 2 common water resources inthe region shouldbe managed. Joint Permanent Commissions of Cooperation (JPCC) have beenestablished between Malawi and both countries. InMalawi, the most significant internationalrivers issue i s the management o fthe Lake Malawi/Shire River uppercatchment areas. Unsustainable landuse practices leadto devegetation andlanderosion, andsediment deposition inthe river andreservoirs downstream. 10. Water Quality: Although total water resources inMalawi are considered adequateto meet the needs o fthe growing population, these resources are becoming increasingly degraded through sedimentation, biological contamination and effluents. Silt loads insurface water runoff leadto significant problems inwater quality, including turbidity, increased suspended solids, water flow problems and water treatment costs, especially duringthe wet season. Highsediment loads have caused siltation o frivers andreservoirs, requiringcostly dredging to maintainwater and electricity production. The problem is aggravated by inadequate environmental watershed protectionresulting insoil erosion and decreasing microbiological water quality. Chemical contamination ofwater resources i s increasingdue to increased use o f fertilizer and pesticides in agriculture, improper discharge o fhazardous wastes from hospitals and disposal o f industrial waste. This has resultedinincreased concentrations o fnitrogen, phosphorus andheavymetals. ChallengeofMeetingthe MillenniumDevelopmentGoals andEnsuringSustainability 11. Today, about 65 percent o f the people o fMalawi have access to improvedwater supply and sanitation. To achieve the MDGby 2015, the number o fpeople served must double both in rural communities and intowns and cities. This means that an additional 3.5 millionrural and 2.5 million urban residents will needimprovedwater supply and sanitation services. Inthe next decade some 10,000 additional point sources (boreholes fitted with handpumps and small spring catchments) mustbe constructed and essentially, all piped systems must double insize. 12. Inurbancenters andtowns where water is suppliedbythe two citywater boards (Lilongwe and Blantyre) and three regional water boards (Northern, Central, and Southern), the average coverage level i s estimated to be 70-80%. However, there is a significant challenge in maintaining the aging water systems to ensure sustainability as the urbanpopulation, especially in the low income andperi-urbanareas, keeps growing. The market centers and small towns also require special attention to provide new and appropriate water infrastructureto exploit their economic growth potential. Currently, most ofthese centers are served by communal water points or traditional water sources that are inadequate and unsuitable for the concentrated population. Sanitation i s particularly problematic inall these centers. Therefore there i s a pressingneed to pay attentionto sanitation and improving hygienepractices. Operationaland FinancialChallengesfacedby the City andRegionalWater Boards 13. Blantyre faces a water crisis caused by highlevel o fnon-revenue water, intermittent supply, and sometimes complete interruptionofwater supply due to problems with electricity supply or pump failures. Lilongwe, Blantyre, and other major towns are expected to face increasing demand and water shortages inthe future unless the non-revenue water i s reduced and new sources are developed. Since the two city water boards are currently unable to even cover their operation andmaintenance (O&M) costs through user charges, and all five water boards are 3 unable to service their debts, there i s no internal cash generation available for reinvestment. Unless the water boards improve their financial performance andcan secure loans on the basis of their own credit worthiness, the government wouldneedto continue subsidizingthe sector for the foreseeable future. 14. Their poor operational and financial performance are due to several factors, including delayed tariff increases, inefficiencies inO&M, and an organizational culture that lacks proper performance incentives and governance. These inefficiencies are fostered by a corporate culture that does not rewardproductivity and commercial discipline. 15. CapacityConstraints: While the Bank's earlier engagements inthe sector through NWDP Iand other projects have contributedsignificantly to buildingthe capacity o fthe water boards, the capacity o fthe central and local government agencies i s still weak; whether in research, data collection and dissemination, sector monitoring, enforcement, planning, or private sector participation. B. NationalWater DevelopmentProgram 16. Sector Wide Approach: The Government andBankhave worked together to preparethe National Water Development Program. The Second National Water Development Project will be IDA'Scontributionto this Program. The NationalProgramhas catalyzed fundingandtechnical support from other donors, including the European Investment Bank (EIB), European Union (EU) and the OPEC Fundfor the urbanand town water supply; and the African Development Bank (AfDB), Canadian InternationalDevelopmentAgency (CIDA), UnitedNations Children's Fund (UNICEF), andJapan International CooperationAgency (JICA), among others, for rural water supply and sanitation. UNDP will assist MIWDto put aprogrammanagement systems inplace that can support a SWAP andbuildthe capacity o f the personnel to support the National Program. 17. Inlinewith the ParisDeclaration, MIWDhasagreedwith IDA andthe other donors mentioned above to (i) adopt common implementation strategies for village, rural piped, town, and city water supply; (ii) a common ProgramManagement Unit (PMU) withinthe utilize MIWD;(iii) harmonize sector planningand monitoring with annualjoint program reviews; and (iv) share the cost ofcapacitybuilding.For the most part parallel financing will be employed, but MIWDis establishing management systemsto supportjoint investments. While afull fledged SWAPis not inplace, the first phase o fthe NationalWater Development Programprovidesthe foundation to buildit over time. 18. The PMUwill provide central services for implementationo fthe National Water DevelopmentProgram. It will play a central role in(i) donor coordination, (ii) investment sector planning, (iii)contract management, (iv) project supervision, (v) monitoring and evaluation, (vi) safeguard tracking, (vii) communications, (viii) program accounting, and (ix) procurement. The P M Uwill contribute to MIWD'sWater Resources Management Department and Water Supply Department in(i) policy and planning and (ii) sector capacity building, and will rely on these Departments for technical and policy direction on all water resources and water supply initiatives. 4 19. Investment Program: The National Water Development Program is a five year, $260 millionmulti-donor effort to assist G O M to improve the management o f the Nation's water resources andto ensure the delivery o f efficient, reliable, and sustainable water supply and sanitation services to an increasingly large number ofpopulation inthe country. The overall goal for GOM i s to achieve universal coverage by 2025. The estimate for the existing coverage and the targets for year 2012 are giveninthe following table. Table 1: Existing Coverage 2007 Baseline Village MarketCenters RuralPiped Towns Urban Total Total Population 8,946,619 885,755 1,620,246 1,023,566 1,596,125 14,072,312 PopulationServed 5,815,303 575,741 1,053,160 665,318 1,117,288 9,226,809 PopulationServed(%) 65% 65% 65% 65% 70% 66% 2012 Tareet Population2012 I O , 122,279 1,026,833 1,833,160 1,215,676 1,895,696 16,093,643 Populationserved 7,968,791 801,287 1,443,160 940,497 1,506,492 12,660,226 PopulationServed(%) 79% 78% 79% 77% 79% 79% 20. The sector program will be parallel-financedby the GOM, donors, investment bankdfunds andNGOs.The expected investors by sub-sector are giveninthe following table. IDA will contribute $50 million to the ProgramthroughNWDPII. Table 2: Partners for NWDP DevelopmentPartner I Program gap (next five years) I 76 9 9 3 * US$6m may be reallocated to ruralpiped systems including market centers when OPECfitnds are available. ** US$2m isfor PPF and unallocated 5 NationalWater DevelopmentProgram Partiallyfinanced byIDA under the SecondNationalWater DevelopmentProject UrbanWater Supply and Sanitation - - Blantyre andLilongweWater Boards Arrange for an immediate service contract and establish an institutional framework for longer- - term private sector participation inBlantyre and Lilongwe. Improve operational efficiency including better financial management, improved cost efficiency, -- and reducednon-revenue water inboth cities. Rehabilitate existingplant and equipment, and expand water distribution inLilongwe. Replace equipment causing supply interruptions, improve water intake, increase ---- pumping/treatment capacity, and expand off-peak storage and water distribution inBlantyre. Improve water supply to low-income communities inboth cities. Develop future water sources for both cities. Prepare strategic plans to address solid waste, sewerage, and excreta disposal inboth cities. Carry out capacity buildingand technical assistance activities, including against HN/AIDS. Town, Market Center andRuralPipedWater Supply and Sanitation RegionalWater Boards - - Improve efficiency and expand water supply insome o f the largest, fastest-growing towns - including MZUZU, Zomba, Kasungu, Likuni,Mponela, Mzimba and Mangochi. Expandwater supply facilities in small towns based on business plans that address management -- arrangements, tariff structures, financial projections, and expansion plans. Develop water sources intowns where hydrogeologic conditions are difficult. Develop market center water supplies andrural piped systems as part o f integrated - infrastructure services. Establish a regulatory framework for financial resource allocation, monitoring operational - efficiency and water quality, and tariff setting and adjustment. Improve sanitation planning and services intowns including on-site systems, sewers, and - septage treatment/disposal facilities. Carry out capacity buildingand technical assistance activities, including against HIV/AIDS RuralWater Supply and Sanitation - Buildcapacity o f (i) assemblies to prepare and implementtheir ownrural water, district sanitation and hygiene promotionprograms and (ii) local service providers to assist villages to -- establish and maintain their own water supply facilities. Plan and construct community-managed village water supply systems. Plan and construct community-managed multi-village piped systems. Water ResourcesManagement -- Prepare enabling legislationfor the National Water Policy. Improve water resources management in selected sub-basins including water source --- development, water conservation, and erosion control. Strengthen MIWD and WRMB to improve planning, monitoring and assessment capability. Re-establish surface/groundwater monitoring system and MIS. Design and conduct safeguard studies/consultation for an improved level control structure at Liwonde, and construct ifincompliance with safeguard policies and procedures. Further study -- backup regional grid connection and low-flow pumping scheme. Prepare Water Resources Investment Strategy to address Malawi's water development needs. Design and carry out social/environmental impact assessments priorities identified inthe Water Resources Investment Strategy. ProgramManagement - Establish capacity inMIWDto manage sector wide program including planning, -- accounting procurement, M&E, and ICT systems. Design and implement a sustainable urbadtownregulatory framework Builda district-based hygieneand sanitation promotionprogram. 6 C. Rationalefor BankInvolvement 21. Buildingon Earlier Bank Support: The proposed project would be a follow on to NWDP Iwhich supported the implementation o fGovernment o fMalawi (G0M)'s water resources management policy by reforming and upgrading the management o fwater resources and the provision o fwater-related service. The Second National Water Development Project (NWDP 11)would provide continuing support to GOM's National Water Services Development Plan, which sets forth objectives, targets, actions, an investmentplan, and an implementation strategy for increasing water supply coverage and improving water resources management. 22. Contributionto Achievingthe Goals ofMalawiGrowth and DevelopmentStrategy (MGDS), Africa Action Plan, and MDGs: The project, which coordinates and leverages fundingfrom other donors through the sector wide approach, would support the MGDS and achievement o fthe MDGs which call for reducing by halfthe number o fpeople without sustainable access to improved water supply and sanitation by 2015. The project also contributes to the GOM's vision o f attaining universalwater coverage by 2025. At the regional kvel, the project will support economic and social objectives of the World Bank's Africa Action Plan which, inpart, focuses on closing the infrastructure gap, connectingpoor populations to markets, enhanced shared growth, developing anAfrican private sector, and strengthening partnerships at the country level. 23. HighLevel of GovernmentCommitmentto Reform:GOM's strategy for the water sector i s to transfer responsibility for water supply services to self sufficient water boardsand water associations, so that it can focus its attention on policy formulation and water resources management. G O M has shown commitment/ownership to this by establishing and shifting responsibility for town water supply services to three RegionalWater Boards (RWBs), developing and demonstrating a district-based strategy for rural water supply, and establishing a National Water Resources Authority (NWRA). 24. Supportfor GOM Policy:The project would serve as amajor vehicle for GOMto implement its new water sector policywhich was finalized inAugust 2005. The policybalances resource management with service provisionunder clear institutional arrangements and broad stakeholder participation. The policy is also inline with other government sectoral policies, such as the decentralization and environmentalmanagement policy. G O M i s also committed to ensuring effective cross-sectoral collaboration and intra-sectoraUgovemance collaboration. D. HigherLevel Objectivesto which the ProjectContributes 25. The project will contribute to GOM's goal o f establishing a platform for long-term management o fwater resources, increasing sustainable access to water supply and sanitation, creating an enabling environment for small/medium-scale private sector development, and contributingto school enrollment, employment, and improved health. 7 11. PROJECT DESCRIPTION A. LendingInstrument 26. The proposed instrument i s a five year JDA Specific Investment GrantKredit for a total o fUS$50million, which will contribute to GOM's nationalwater sector development program, as described previously under Section I, B. Donors have agreedwith Government to strong coordination, joint monitoring, collective policy dialogue, and common implementation arrangements. B. ProjectDevelopmentObjective and Key Indicators 27. GOM's NationalDevelopment Programwill bepartially financed by IDAunderNational Water Development Project 11.The Project's objectives and components are described below. 28. ProjectObjective: The development objective o fNWDP I1is to increase accessto sustainable water supply and sanitation services for people livingincities, towns, market centers, and villages and improve water resources management at the national level. The project would also contribute to buildingsector capacity through improved monitoring, regulation, incentive structures, public private partnerships, and coordination among the sector stakeholders. The development objective will be measured in terms o f the expected project outcomes (see Annex 3): e Improved water supply for 250,000 people andprovision o fnew water connections serving about 250,000 people incities, towns, market centers and rural communities. e Establishment o f a national sector investment program for city, town, market center, and rural water supply and sanitation. e Prevention o fwater supply disruptions inBlantyrethrough purchase o f essential spare parts and other priority investments. e Planningo fnew sources o fwater supplyfor Blantyre, Lilongwe, and four largetowns. e Improved operational and financial performance o fthe city and regional water boards. e Enhanced capacity o fthe Government o fMalawi to manage its water resources through development o f the water resources investment plan, preparation o f Lake Malawi level control, and establishment o f the National Water Resources Authority. 29. Indirect benefits would include improved health o f the beneficiary population, resulting from improved quality o f water and sanitation services, better hygiene practices, as well as time savings through improved access to water supply services. C. ProjectComponents 30. The proposed project would includethe followingproject components: (A) Urban Water Supply and Sanitation; (B) Town, Market Center and Rural Piped Water Supply and Sanitation; (C) Water Resources Management; and(D) Sector Management and Urban Water Sector Reform. GOM's broader sector program, however, would include a component that supports decentralized community managed Rural Water Supply and Sanitation which will be financed 8 by other donors and financiers. Implementationo fall project sub components will be undertaken inlinewiththe guidelines set out inthe Environmental andSocialManagement Framework (ESMF) as well as the ResettlementPolicy Framework (RPF). Table 3: IDA Financingfor NWDP A. UrbanWater Supply and Consultants, goods, 48 19% 7 14% Sanitation works, training B.Town, Market Center, and Consultants, goods, 106 41% 24 48% Rural PipedWater Supply and works, training, operating Sanitation costs, community sub- projects C. Water Resources Consultants, goods, 16 6% 12 24% Management training, operating costs D.SectorManagement and Consultants, goods, 10 4% 5 10% UrbanWater Sector Reform training, operating costs Unallocated 1 0% 0.21 0% PPF 1 0% 2 3% Total Program 258 100% 50 100% ComponentA. UrbanWater Supply andSanitation 31. Component A includes investments and consultancy studies that would be executed by Lilongwe and Blantyre Water Boards (LWB and BWB)4.Policy, institutional andregulatory reform activities for the urbanwater sector, under the responsibility o f GOM, are included in Component D: Sector Management and UrbanWater Sector Reform. 32. PriorityInvestments:Priority investmentswould include: (i) to mitigatewater actions supply disruptions inBlantyre; (ii) urgent leak andplantrepair inbothcities; and(iii) to actions serve customer backlog inBlantyre. (i) Actions to mitigate water supply disruptions in Blantyre: Blantyre has been experiencing significant problems related to frequent and prolonged disruptions in water supply to a large part o f its population. Procurement o f spare parts for pumps, motors, transformers and switch gears for raw andclear water at Walker's FerryandChilekapumpingstations will mitigatewater supply disruptionsin The urban water component of the overall sector program will also be supported by a consortium of the European Investment Bank (EIB) and the European Union Water Facility (EUWF) under the Malawi Peri-Urban Water and Sanitation Project. 9 Blantyre untilthese pumps andrelated electro-mechanical equipment are replaced under EU-EIBproject. (ii) Urgent leakage andplant repair in Blantyre and Lilongwe: There i s an urgent need to quickly repair leakages inBlantyre that are causing large water losses. This i s important becausethe cost o fproducing and distributingwater i s particularly expensive inBlantyre due to the highelectricity costs o fpumpingthe water up 800 meters. Procurement o f leakage repair materials and actual repair o f visible leakages within the distribution network will reduce water lossesbefore the service contractor is hiredunderthe EIB/EUfunded project. InLilongwe, urgent rehabilitationand maintenance o fplant and equipment will be carried out. This will involve the procurement o f essential equipment spareparts for repairs including on-site electrolyte chlorinationplant and damvalves to ensure continuous and reliable water supply. This will also involve the procurement o f pipesand fittings for repairs o f a 525 mrnasbestos cement (AC) pumpingmain from Northern Booster Station to Kanengo which i s experiencing highfailure rate. (iii) Actions to serve customer backlog in Blantyre: There are about 2,500 customers inBlantyrethat have already applied for water connections, but are yet to be connected due to lack o f meters. 5,000 meters will be purchased o fwhich halfwill be used for this purpose, andthe other halfwill be usedfor replacement o fnon- functioning meters to reduce wastage and leakage. Purchase o f 5,000 meters will benefitmore than 25,000 people. 33. Reachingthe Unserved Areas: This component would include the following sub- components: (i) connections to low income/peri-urban inBlantyre; (ii) new increased access to sanitation andhygiene promotion; (iii) procurement o fmeters and connection fittings; (iv) future expansion o f distribution and new connections. (i) Piloting of water supply and sanitation services in low income/peri-urban in Blantyre: This component will support new connections to low income areas based on a couple o f institutionalmodalities different from the approach being adopted by LWB with assistance from Water Aid. The three main options would include: (i) BWBmanagingwater supply services inlow income areasontheir own; (ii) outsourcing only the management o fwater kiosks to local service BWB providers; and (iii) BWB outsourcing themanagement o fthe distributionnetwork andall outlets (kiosks andhousehold connections) to local service providers. The choice o f technology and cost recovery plans for such services would be based on pilot studies. It i s envisaged that the outcome o f these pilots will feed into the service contract which will be implementedunderthe EU/EIB fundedproject. In addition to these pilots, a baseline surveywill be carried out to enumerate the basic coverage, service levels, and institutional arrangements o f service delivery inlow income/peri-urban areas inBlantyreandLilongwe. 10 (ii) Increased access to sanitation and hygienepromotion: This component would support BWB andLWBto implement a comprehensive sanitation program which will deliver both improvedaccessto sanitation as well as hygienepromotion through adoption o fthe "sanitation marketing" approach. (iii) Increased new connections: InLilongwe, 5,000 water meters will benefit about 25,000 people directly, and two to three times that number indirectly through shard yard tops, and also reduce the highlevel o f commercial losses caused by meter under-registration. (4 Expansion of distribution and new connections: An output-based-aid approach to the expansion o ftertiary distribution pipingand new customer connections may be employedunderthe Project. Underthis arrangement the Water Boards (or delegated water service operators) would pre-finance the investments required to connect new customers, and receive the pre-determinedcost per connection retroactively on the basis o fthe number o fnew customers that havebeen connected and served with water. Such a mechanismwould likely attract additional donor financing, including from the Global Partnership for Output Based Aid. The mechanism for out-put basedaid i s described inAnnex 4. Implementationo fthis approach requires the preparationo f an OBA agreement between MIWD and the Water Boards, approved by IDA, that conforms to Bank guidelines for output-based disbursements. 34. Aqueduct planning: Preliminary design, EIA and safeguardplans for aqueduct to treatment plantswill be carried out for Lilongwe. This sub-component i s aimed at mitigating the water pollution to the raw water inLilongwe River close to the treatment plant. ComponentB: Town, MarketCenter andRuralPipedWater Supply and Sanitation 35. Town Water Supply and Sanitation: Under this component the three Regional Water Boards (RWBs) will expand water supply facilities and improve operational efficiency insome o ftheir largest, fastest-growing towns including Mzuzu and Mzimba inthe NorthernRegion; Kasungu, Mponela and Likuniinthe Central Region; and Zomba and Mangochi inthe Southern Region; as well as other towns. To qualify for investments, business plans (for the target towns andconsolidated for eachRWB)that includemanagement arrangements with aperformance agreement betweenthe utility andthe town management, proposed tariffs, financial projections, andphased expansion plansas well as social/environmental safeguards will be required. Business plans and investment proposals will be appraised by the MIWDbased on a pre- determined criteria that includes the cost effectiveness o fthe proposed design, the long term financial viability o f the scheme, and ability to avoidmitigate negative sociaYenvironmenta1 impacts . 36. Grants may be provided to the RWBs for: (i) taps and public standpipes through an yard `output based aid' approach inwhich the RWBspre-finance connections and are reimbursedon a 11 cost per connection basis5; (ii) implementation o f sanitation plans that address the priority concerns o fthe town; and (iii) capacity building. Business plans will indicate the amount that would beprovided as grant andthe amount to be on-lent to the RWBs.Funds for town water supply will be maintainedby the MIWD,a portion o fwhich will be earmarked for each o f the three RWBs at the outset o fthe project and committed upon successful appraisal o f individual town business plans and investmentproposals. Additional fimds from IDA andother financiers can be committed to other towns on a performance basis, that i s submission o fbusiness plans and compliance withpre-determined appraisal criteria. 37. MarketCenter andRuralPipedWater Supplyand Sanitation: The project will finance the development o f community-managed water supplies inmarket centers andrural pipedwater schemes, often a combinationo fboth. The RWBsinconsultationwith MIWDand individual district assemblies will: (i) prepare pre-feasibility studies and introduce the project to short listedmarket centers and/or rural piped schemes; (ii) establish water user associations and contract local consultants to provide technical assistanceinparticipating communities; (iii) arrange and supervise works contracts to expand their water facilites; and (iv) assist the water user associations to hirethe local utility operator. The local consultants will: (i) provide capacity buildingand assist the water user associations to plan their water supply facilities; (ii) provide technical inputs to the water user associations whenhiringthe local utility operator and core operating staff, and learnto oversee operations; and (iii) local utility operators to train handle routine operations and maintenance. The water supply facilities and sanitation interventions will be financed on a grant basis, but communities are expected to pay all recurrent costs and part o f expansion costs. The project would fund a small part o fthe investment costs in the market centers towards meeting the technical assistanceprovidedby the RWBs. 38. CapacityBuilding: This sub-component will includetraining and development o fthe RWBpersonnel to improvetheirjob skills to effectively manage their water supplysystems. Operational support to the Program ImplementationUnit (PIU) for supervisiono f the activities will be funded on a declining basis. Support will beprovided to the RWBs incontinuing implementation o fthe HIV/AIDSprograms which include awarenessbuilding, promotion o f HIV/AIDStesting, andprevention. ComponentC: Water ResourcesManagement 39. This Component will be managed by MIWD, however, the five Water Boards will provide inputs to the sub-components related to carrying out the feasibility studies, preliminary design, and environmentalimpact assessments (EM) for new water sources. 40. EnablingLegislationfor NationalWater Policy: Duringproject preparation, a Project Preparation Facility (PPF) advance supported the development o f enabling legislation to implementthe National Water Policy o f2005, whichwill provide for the establishment o fthe required institutional framework for proper water resources development and management inthe country. Underthis sub-component support will be provided for the passage o f the legislation The water boardsplanto apply for additional funds from GlobalPartnershipfor OutputBasedAid (GPOBA) for this purpose. 12 through parliament usinginformation sessions, public awareness campaigns etc. and dissemination o f information explaining the content andimplications o fthe new legislation. 41. Water Resources Investment Strategy: An integrated water resources investment strategy i s urgentlyneeded inMalawi which identifies, through a multi-sector economic analysis, the water resources development and infrastructure needs o fthe country to provide the infrastructure platform required for growth inthe different water using sectors. Determiningan investment strategy to develop the country's water resources inthe context o f conflicting development and demand needs by different sectors and limitedwater resources requires prioritization on the basis o fnational development strategy, rather than an isolated sector-by- sector approach. The emphasis will be on the development ofmulti-purpose investments which will meet a range o fwater needs for productive purposes (agriculture, industrial/commercial, energy etc.) and water supply requirements. Selected priority multi-purpose investments will be identified for initial preparation including feasibility studies, basic design and impact assessments. 42. Lake Malawi LevelControl: The outflow from Lake Malawi has been known to cease due to natural lake level fluctuations as it didin 1915 andalmost again in 1996. The resulting social and environmental impacts would be catastrophic givenMalawi's reliance on electricity generated by hydropower dams on the Shire River, the importance o f the fish catch inLake Malombe for food, andthe dependence o fwildlife habitats within the national parks and reserves along the Shire to a base flow. To improve the management o f the Lake level and to avoid the potential o fthe Shire River ceasing to flow, a feasibility studywas undertaken in2003 to consider the utility o f a lake level control structure at Liwonde on the Shire River and a low-flow pumpingscheme at the moutho fthe Shire River. The conclusionwas that better level control can eliminate the risk o fthe river going dry inall but the most severe drought sequences (less thanonce inahundredyears), andthe regional gridconnector canensure electric power for the country provided Malawi can pay for and draw power from the regional connector when needed. 43. The project will finance the engineering design for the level control structure at Liwonde, and apreliminarydesign for a low-flow pumpingscheme at the moutho fthe Shire River. In parallel, an independentenvironmental assessment for both structures, including: (i) a resettlement action plan (as required) for the level control structure and (ii) a risk assessment for obtaining electricity from the regionalpower grid when required. Financing for the construction o fthe level control structure may be possible after the design, environmental assessment, resettlement actionplanand consultation processes are complete, uponthe request o f GOM, the advice o f an international panelo f experts, and the recommendationo fthe Bank's quality assurance group for the sub-component. This could be through additional financing for NWDP I1or through a separateproject. 44. WRM Institutional and Technical Support: The ongoing water resources sector reform process will be strengthened through the establishment of the institutional framework in terms o f the national water policy. Inparticular, this includes the establishment o f the National Water Resources Authority (NWRA) andsupport to the Ministry, enablingit to carry out its core functions inaccordance with the new water policy and legislation- includingpolicy formulation, regulation, strategic planning, and support to the water sector. 13 45. Establishment o f the NWRA will require an entire institutional formation process. This includes a clear determinationo f fbnctions and mandates, humanresource planning, business planning, physical establishment, staffing and transfers, equipping,training and capacity building, and all other activitiesrequiredto establish an autonomous organization, includingthe establishment o f a water resources fundingmechanism. The organizationwill include a national center and regional, catchment based offices, established inphases. Ultimately the process may extend to the establishment o f local water user associations. Studies will be requiredto determine the criteria necessary for sustainability o f the institution and effective functioning so that it will be able to fulfill its role o fmanaging, developing andprotectingthe nation's water resources. These will buildon the work already undertaken under NWDPI through a consultancy study carried out in2003, 46. Establishing `ring-fenced' revenue streams from water user charges andother sources i s essential to sustain the National Water Resources Authority. This will requirean efective licensing and administration system, based on an efficient nationalwater resources monitoring and informationmanagement system. A national campaign will be undertaken to assess the current use o fwater interms o f existing licenses, andunlicensed water use. The objective will be to increase collection rates on current licenses, promote the application and granting of new licenses for existing unlicensed usage and curtail unauthorized water usage. This will also require a complete re-establishment o f existing administration andinformationmanagement systems. 47. Developmentof FutureWater Sources in BlantyreandLilongwe:Fullfeasibility studies, preliminarydesign, EIA, and safeguard plans will be carried out for the works for developing new raw water sources for Blantyre and Lilongwe inthe mediumto longer term based on the future demandassessment. These documents are expected to be used for future projects funded by any source upon completion. These studies will be contracted byMIWDto ensure that a holistic view will be adopted inidentifyingnew water sources that would benefit broader users. BWB and LWB shall further carry out Hydrographic survey for their existing dams (Le. Kamuzu DamI& I1for LWB and MudiDam for BWB). 48. Water SourceDevelopmentfor Towns: Currently surface water sources are developed andmanaged on anindividual townbasis. However, the sector is inthe process o f adopting a holistic approach for developingnew water sources to cater for the towns as well as other users such as market centers and irrigation. 49. Undertheproject, thisholistic approachwill beusedfor selected towns that are inurgent need o fwater resources. MIWD incollaboration with the RWBswill commission andsupervise consultants to preparefeasibility studies, preliminarydesigns, and environmentalimpact assessmentsandresettlement actionplans. Preliminary designs would bebased on sufficient geophysical investigations to site the facilities and evaluate potentially negative impacts resulting from constructionandoperation o fthe facilities. 50. Inmost small towns andmarketcenters water supplyservices arelimitedbythe yield of existing boreholes. MIWDincollaborationwith the RWBswill launch a special initiative to 14 evaluate and test measures that can be taken to site, construct and maintainhigher-yielding boreholes. Component D. Sector Management and Urban Water Sector Reform 51. This component consists o fthree sub-components: (i) Management o f Sector Program; (ii)Strategic Sanitation Planningfor Blantyre and Lilongwe, which will be managed by MIWD; and (iii) Water Sector Reform, which will managedby the Privatization Commission Urban underthe guidance o fthe Program Steering Committee. 52. Management of Sector Program: Donors have agreed to adopt common implementation strategies for village, rural piped(including market center), town andurban water supply, and to work through a single Program Management Unit (PMU) within the MIWD.Forthemostpart donor financingwillbeparallel, butMIWDwill establishmanagement systems to support pooled investments.. 53. The village, rural piped, and town sub-components o fthe National Water Development Programhave been designed such that planningand implementation i s carried out ina stepped approach within each village, rural pipedsystem, and town. And project rules, including selection and appraisal criteria, are set out inthe respective implementationmanuals. Inthis way donors can invest ina tried and tested program without having to be involved inproject design. 54. This sub-component will provide capacity buildingandinstitutional support to MIWDin managing its sector program. PMUwill provide central services for NWDP implementation o f village, rural piped, town, and urbanwater supply and sanitation, andwater resources management. The PMUwill rely on technical experts within the Water Resources Management Department to guide studies, draw onthe Department o fWater Supply's zonal and district based personnel to supervise projects, and contribute to the Planning Department's sector policy and planningeffort. The PMUwill be involved in: (i) investment planning; (ii) sector donor coordination; (iii)sector policy andplanning; (iv) capacity building; (v) contract managemen;, (vi) project supervision; (vii) monitoring and evaluation; (viii) safeguard (ESMF andRPF) tracking; (ix) communications; (x) program accounting; and (xi) procurement. Part o fthe operational costs o fthe P M Uwill be financed by IDA and other investment partners. It's anticipated that each will contribute about four percent of their investmentcosts this purpose. UnderNWDPIIfunds for operational costs will includepayment for fixed-term contract staff, office equipment and operations, vehicle operations and maintenance, and program management workshops. 55. Strategic Sanitation Plan for Blantyre and Lilongwe: Blantyre and Lilongwe face significant challenges related to sewerage and excreta disposal, including the low income/peri- urban communities. This component would support MIWD to carry out a strategic sanitation planningfor the two cities plus several largetowns inreadiness for the operationalization o fthe National Sanitation Policy. The Policy to be adopted bythe Government aims at deliveringboth improved access to sanitation as well as hygiene promotionthrough adoption among others o f the "sanitation marketing" approach. 15 56. Urban Water Sector Reform: G O M is embarking on an urbanwater sector reform that starts with a Service Contract inBlantyre and Lilongwe, followed by a longer term plan involving a deeper form o fprivate sector participation as the environment i s ready. The reform preparatory phase has been initiated, and this would aim at creating the appropriate environment for a possible deeper form o f Public Private Partnership (PPP). The activities under the phase will include: (i) enteringinto a service contract (implemented under a separateproject funded by EIEVEU) that will address the current operational and customer service bottlenecks; (ii) will this be followed by a review o fthe service contract performance, sector environment, and the market conditions at midterm o f the contract scheduled after two years into the service contract. This service contract aims to achieve improved financial and commercial efficiencies, technical and operational efficiency, and increased access o fwater and sanitationto the people livinginperi- urbadlow income areas. It i s envisaged that the results achieved through the service contract will create an enabling environment for sustainable improvements, and contribute baseline information for a future private sector contract. 57. The project would support the overall reformprocess which includes; (i) developmento f an appropriate regulatory framework plus a regulatory institutionwhich clearly defines tariff setting and adjustment rules for water service provision, including that to the low income communities and the ability to encourage performance o fthe water boards; (ii) preparation and implementation o f a proper institutional framework andgovernance system, through a performance agreement between the water boards and the Government; (iii) preparation and implementation o f a longer term reform option that involves PPP transaction; and (iv) stakeholder consultation and consensusbuildingo fthe envisaged reform plan. 58. Regulatory framework: The regulatory framework to be developed will be for the water supply services and will cover all the existingwater boards. Regulationwill include financial resource allocation, operational efficiency, water quality, and tariff setting and adjustment. 59. Efforts have already been undertaken by GOM to establish Multi Sector Regulatory Authorities to regulate the infrastructure sectors namely, communication, transport and water and energy. For water, the regulatory authorityproposed, whichwill also overseethe energysector, Malawi Water andEnergy Regulatory Authority (MWERA). MWERA i s expected to be established and fully operational within the time o fthe service contract for the two urbanwater boards. Activities for implementation will include: (i) review and enactment ofthe proposed Act; (ii)development o fthe various regulations which would cover both the operational and financial areas and investment; and (iii) awareness. For effective implementation o fthis public regulatory authority, there i s needfor ajoint effort between the MIWD and the Department o f Energyinthe MinistryofMines, NaturalResources and Environment. 60. Institutional and Governance Framework: Preparation o f a proper institutional frhework and governance systemwill be carried out through a possible restructuringo f the water boards into forming an asset holding company and operating companies. The goal i s to establish a performance agreement between the water boards and the Government to ensure a proper accountability structure and governance system inplace for the Water Boards to perform their contractual obligations and for the Government to create an enablingenvironment for 16 efficient utility operation. A financial reform strategy will also be developed to ensure financial viability and sustainability o fthe water boards. 61. PPPTransaction:The possiblePPPis envisaged to transform the UrbanWater Boards into efficient operators through contracting out the provision o fwater services to a water operating company. Malawian investors andutility employees would be invited to join this partnership while the Government would retain the ownership o f the water infrastructure, continue to be responsible for approving and financing capital works, and ensure that the poor are not adversely affected. The Water Operating Company is expected to take over the staff and operations o f the Water Boards, andinthe not too distant future, the Water Operating Company could be sufficiently viable and credit worthy to list on the Malawi Stock Exchange. Investigationo fthe market appetite for such a transaction will also be camed out. 62. Preparation of such a transaction has already been initiated by MIWDthrough preparationo f developing the necessary legal and regulatory framework, financial framework, institutional and organizational framework and the requiredinfrastructuredevelopment plan. The actual implementation o f the deeper PPP option will be implemented,with the guidance o f an independent Transaction Advisor, under the direction ofthe Public Enterprises (Privatisation) Act 1996. 63. Sector ReformConsensusBuildingandPublicAwareness:The water sector is a politically sensitive area inthe country and mindfulo fthis fact, it is prudent to engage the various stakeholders inthe reform process. Government has initiated this important activity through holding the first urbanwater sector workshop and byplanning the following activities: (i) linesurveyoftheknowledgeandperceptionoftheconsumers,employees,thecivil base society andthe political wing; (ii) development o f a communication strategy including a media plan; (iii)stakeholder consultationon the proposed reform; and (iv) a study tour to two countries that have undertakensimilar reforms inthe water sector. 64. The project will finance the implementation o fthe communication strategy, including additional consultation workshops with policy makers, utility staff, and civil society andpublic dissemination o fthe key messages for the reform through electronic and print media. D. LessonsLearnedandReflectedinthe ProjectDesign 65. The following lessons have been learned from NWDP Iand thejoint sector review, and incorporated inthe proposed project design. 66. GovernmentCommitmentandOwnershipofthe Project:UnderNWDP I, much progress was made indeveloping a comprehensive sector program covering rural, town and urbanwater supply as well as water resources management. Under the project, three Regional Water Boards anda Water Resources Management Boardwere established; a district-based, community-managed approach to rural WSS was established; a capacity building strategy for MIWDwas developed; andanIntegrated Water ResourcesManagement Planfor LakeMalawi andthe Shire River was prepared. InrequestingNWDP 11,MIWDwas most interested in 17 maintaining the momentum established under NWDP Iand developing a sector program that many donors could support. 67. Inpreparingthe sector program, MIWDis systematically drawing on lessons learned from various donor fimdedprojects, througha consultative process and is consolidating existing implementation manuals into one that potential financiers can support. Inso doing, MIWDi s engaging keyrelevant government officials as well as other stakeholders, including districts, water boards, Non-Governmental Organizations (NGOs), the Privatization Commission(PC), and donors active inthe sector. 68. ManagementChanges: The ImplementationCompletion Report (ICR) o fNWDP I indicated that changes inthe key managers, particularly principal secretaries and ministers, shouldbe minimized to ensure continuity andconsistency inbuilding a sector program. 69. Sector Coordination:To ensurereadiness for implementation, it is important to prepare and agree on the comprehensive project implementationplan, detailingthe provision to buildthe requisite policy coordination, implementation capacity, to improve sector monitoring and evaluation (M&E), and to ensure consistency inprocedures for all donor and government funded projects under the envisaged program. Lessons from the current experience inthe sector also indicates that buildingfinancial management, procurement, and M&E systems integrated into the Government's systemreduces transaction costs for all parties involved. It i s envisaged that a SWAP involving the co-mingling o f hnds and common fiduciary and safeguard systems would beprepared duringthe project. 70. DemandDrivenModel: District-based, demand-responsive, and community-driven rural water supply and sanitation (RWSS) and catchment management has been identified as the most powerful factor inscaling up and ensuringsustainability. Managing services at the lowest appropriate level has contributed to proper stakeholder participation and accountability structure for effective service delivery. 71. CostRecovery andAffordability:Adherence to cost recoverypolicies incombination with transparent and targeted subsidies has also been demonstrated to be a keyingredient in financial sustainability. Inmeeting such goals, it i s crucial that appropriate technologies and standards are adopted to ensure cost effectiveness o finvestments. As for the sanitation sector, a shift from sewerageto on-site sanitation andhygienepromotionprograms where ever appropriate, has contributed to more affordable and sustainable use o f sanitation facilities. 72. Proper GovernanceandAccountabilityStructureEnsuresWell-Performing Utilities:International, regional, and local experience shows that sustainable infrastructure development needs an environment that fosters reform and takes advantage o f the local private sector inproviding the goods, works and services needed to plan, construct andmaintain rural and town water supply. Establishmento f efficient and commercially oriented urbanwater utilities requires proper incentive structures and autonomy. Inaddition, an effective regulatory and institutional framework needs to be established to carry out independent review and monitoring o fthe sector performance. 18 E. AlternativesConsideredandReasonsfor the SelectedInstrument 73. ProjectApproach: A simple, IDA-centered, follow-on project to NWDP Iwould have been the simplest alternative, but would not have made muchdifference giventhe limited investment that IDA can make inthe water sector inMalawi. Therefore, this traditional project approach was rejected and instead, a sector-wide approach (SWAp) was chosen to leverage other donor funds and to ensure harmonization and consistency inthe sector policy and guidelines. 74. PooledFundingSWAp: Inconsidering a SWAp, pooled fundingwas considered to reduce the multiplereporting and transactions and to ensure sector wide accountability with common implementation arrangements, fiduciary and environmental/social safeguard standards. However, the consensus amongst donors was that such an approach was prematureuntilthe sector had established the requisitemanagement systems and capacity. 75. Parallel-financing was chosen because at present the donors and Ministryprefer to focus on the development o f common implementation arrangements, andto buildthe capacity within MIWDandthe districts to manage a future SWAPwithpooledinvestments. Duringproject implementation, capacity will be built and a necessary management system will be established to enable implementation o f such a pooled SWAp. 111. IMPLEMENTATION A. PartnershipArrangements 76. As described above, the project contributes to GOM's National Water Sector Development Program I1which will beparallel financed by other donors and financiers. The mainprogrampartners include EWEU, CIDA, AfDB, NetherlandsLJNICEF, UnitedNations Development Program (UNDP), Organizationo f PetroleumExporting Countries (OPEC) Fund, JICA, Water Aid etc. The IDA funds for the project would follow the Bank's fiduciary and safeguards guidelines. However, the overall sector policy and operational procedures would be common for all activities under GOM's program. The Bank's project team will coordinate project implementation review activities, including the reporting, monitoring, and missions together with other financiers to ensure consistency and harmonizationinapproach. B. InstitutionalandImplementationArrangements 77. A comprehensive program implementationmanualhasbeen developed, detailing the roles and responsibilitieso f each implementingagency and sector stakeholders, as well as the guidelinesfor implementation for each sub-sector. The following groups will beresponsible for implementingNWDP 11: 78. The Ministryof Finance(MOF) will be responsible for: (i) securing and channeling resources for NWDP 11; (ii) allocating financial resources; (iii) approving public sector borrowing; and (iv) monitoring disbursements. 19 79. The Ministryof Economic PlanningandDevelopment(MEPD) will be responsible for economic validation o f the project activities and for ensuring that the project activities are inline with the national economic agenda. 80. The Ministryof EnergyMines,NaturalResources, andEnergy andits EnvironmentalAffairs Department(EAD)will beresponsible for formulating the environmental and social impact assessment. They will assist with the (i) preparation o f EnvironmentalAssessment (EA) terms o f reference; (ii) recruitment o f a consultancy to carry out anEA; (iii) arrangements for public consultations; and (iv) review and approval o fthe EA through the national EA approval process. 81. The NationalCouncilon the Environmentwill be responsible for: (i) the approval of EAreports; and (ii) forwarding its recommendations to the minister responsible for environmental affairs for endorsement. 82. The MIWDwill be responsible for: (i) development o fpolicies, laws, and strategies the for the water sector; and planning; (ii)coordinating, monitoring and evaluatingNWDP 11; (iii) buildingcapacity o fimplementinggroups (public andprivate); (iv) appraising town andmarket center investmentproposals; (v) refiningimplementationarrangements through experience; (vi) facilitating hygiene education and sanitation promotion; and (vii) overseeing the implementation o f the ESMF.MIWDRegional Water Development Offices liaise with districts and market centers and monitor technical assistanceprovided to them. 83. The MinistryofLands, Surveys andPhysicalPlanning,Officeof the Controllerof Lands,will beresponsible for: (i) overseeing the implementation o fthe RPF; (ii) reviewing and approving Resettlement Action Plans (RAPs) consistent with the RPF; and (iii) monitoring the implementation o fthe RAPS. 84. The PrivatizationCommission will be responsible for overseeing and guidingthe introduction o fprivate sector participationinurban water supply operations, creation o f an enabling environment for urbanwater sector reform, and establishment o f a regulatory authority for town and urbanwater supply. 85. The ProgramSteeringBoardwill act as a collective policy anddecision makingbody for the whole NWDP I1program, and will consist o fmembers from all concerned Ministries from the Government. This Board will ensure that there i s Government ownership and leadership o fthe program, and limit the impact o fpolicy level personnel changes inGOM. 86. The ProgramTask Force includes memberso fthe PKJs o f each component o fNWDP I1and is chaired bythe MIWD.The ChiefExecutives from District Assemblies, Ministryof Local Government, Ministryo f Justice, will be invited to participate as the needarises. The Task Force i s responsible for: (i) preparing and monitoring work plans and budgets; (ii) improving implementation arrangements; (iii) reviewingTerms o fReference (TOR) for studies andreview work ofthe consultants; and (iv) coordinating the implementation agencies. 20 87. The ProgramManagementUnitwhich is established within the MIWDwill have the core staffthat includes a program manager, a reform specialist, a procurement officer, an accountant, a water supply and sanitation engineer, a water resources management specialist, and a community participation specialist. Additional staffwill be recruited as they are required. The PMU's responsibility includes: (i) overseeing program planningand implementation; (ii) monitoring project progress and achievements through reports; (iii) coordinating andaccounting for utilization o fproject funds; (iv) coordinating review meetings; (v) establishing aproper and effective M&E system; (vi) ensuringthat implementation o f the project conforms to performance standards; and (vii) working with project steering committee andproject task force as the secretariat. 88. ProgramImplementationUnitswill be established ineacho fthe five implementing entities (Water Boards). They will be composed mainly o f designated staff already employedby the implementingentity (water board), and by fixed-term contract staff. Engineering, procurement and accounting personnel are already employedby the Water Boards. The PIUs will beresponsible for managingthe Water Board's part ofNWDP I1as set out inthe project description. 89. BlantyreandLilongweWater Boardsare responsible for providing water supply services intheir respective cities, and for managingthe implementationo fthe UrbanWater Supply and Sanitation component o fNWDP 11.Under NWDP 11,they will be responsible for carrying out urgent priority works, developing new water resources, increasingwater production, improving operational efficiency, and improving water supply and sanitation services inlow income communities with assistance from local private operators and working incollaboration with city assemblies. The water boards will also prepare necessary terms o freference andmake procurement arrangements for the studies for the new water source development (while MIWD will have the contractual authority with the consultants). 90. RegionalWater Boardsareresponsible for managingthe Town, Market Center, and Rural PipedWater and Sanitation component o fNWDP I1by: (i) providing efficient water supplyservices intowns; (ii) expanding water supply services intowns to meet demand; (iii) supportingdistricts and marketcenters to obtain andmaintain animprovedwater supply, including liaising with districts, carrying out pre-feasibility studies, and contractinghupervising consultants and contractors; (iii) providing ongoing technical support to market centers to sustain and expand facilities; (iv) preparing necessary terms o freference and make procurement arrangements for the studies for raw water and investigations for ground water development (while MIWD will have the contractual authority with the consultants); and (v) carrying out the environmental and social screening process for sub-projects through desk appraisals and site visits with the assistanceo fthe District Environment Officer (EDO). 91. DistrictAssemblies are responsible for: (i) managingtheir ownrural water supply and sanitation programs for point sources inindividual villages; (ii) facilitating and overseeing market center water supply activities which are delegated to the RWBs and Water User Associations; (iii) prioritizing market centers for improvedwater supplies and appraising investmentproposals, (iv) owning water supplyassets onbehalfo fvillages andmarketcenters; and(v) initiatingthe environmentaland social screeningprocess for sub-projects. 21 92. City/TownAssemblies will beresponsible for the review and approval of sub-projects based on the recommendations made by the RWBs. 93. Water User Associations are responsible for facilitating and overseeingwater supply services inmarket centers, groups o fvillages sharing rural piped systems and insome low income areas inthe urban areas especially inLilongwe. Their duties are to: (i) guidethe planningo ftheir water supply system; (ii) contract and supervise a local operator to handle routine operations andmaintenance; (iii) for long term technical assistance to assist local arrange utility operators to improve efficiency, resolve problems; and (iv) expand the system over time. 94. LocalUtilityOperatorsare accountable to Water User Associations (WUA) for (i) operating and maintaining water supply facilities inmarket centers and rural piped systms, ensuringa good quality water at all times; (ii)collecting water tariffs and managing accounts; (iii)providing regular, accurate monitoring reports on performance to W A S ;and(iv) expanding distribution and adding house connections. C. MonitoringandEvaluationof OutcomeslResults 95. A sector M&E systemwill be developedbyMIWD under the guidance ofMEPDto consolidate sector data and to monitor the progress o fthe performance indicatorswith regards to sector policy implementation and program outcomes. The key financial andoperational data would be collected from the city and regional water boards for the urbanandtown water components, as well as the district local governments for the rural water component. For Blantyre and Lilongwe, baseline survey will be carried out to collect the coverage and service levels to be used for monitoring the progress o f achieving the performance indicators. Water quality andissuance o fwater abstraction permits will be ensured. Core monitoring indicators requiredby the Bank to measure progress and success are listed inthe Results Framework. The key information required to be collectedby MIWD, districts, andwater utilities are defined in Annex 3. 96. Environmental and social monitoringwill be carried out at the community level by memberso fthe Village Development Committees andDistrict Executive Committees duringthe constructionand rehabilitationo f sub-projects; with support from the respective Area Executive Committees who will establish members o fMonitoring Committees for this purpose. 97. The MIWDcurrently has a rural water supply logging system. Nonetheless, targeted capacity buildingwill be requiredto establish a more comprehensive, computer-based Management Information System (MIS)for water supply and sanitation, and to train for sector agencies to undertake data collection, consolidation, and evaluation. The project will finance this effort. 98. The Bank will carry out implementationreview missions twice a year with other donors to monitor and evaluate the milestones and target indicators set for each sub-component o fthe program, as well as the overall program implementation. Two major reviews will be undertaken, one at mid-term, and one at the end o fthe project. At the mid-term review, it i s proposed that the Bankwillparticipateinthemid-termreview ofthe service contract, expectedto be hndedby 22 EIB/EUandprovide inputsto the reviewprocess and support GOMinimplementing its broader urbanwher sector reform. D. Sustainability 99. As described inthe previous sections, the keyingredientfor sustainability, GOM's commitment and ownership o f its sector program and related policies, has been demonstrated through the implementation ofNWDP Iand issuance o f its National Water Policy 2005. 100. Other factors that the project supports inensuringthe sustainability o f the water and sanitation investmentsinclude: (i) capacity buildingo fthe key sector and government institutions to carry out its program; (ii)proper monitoring and evaluationto assess the sector performance and lessons learned; and (iii) coordination with the donors active inthe sector and government departments to ensure implementationo f a consistent policy and guidelines. 101, G O M instituted the key ingredients for sustainability for rural and town water supply underNWDP 1. For ruralwater supplykeyprinciplesinclude: (i) standardization o f a user friendly handpump;(ii) decentralized, demand-responsive, community-based management; and (iv) supplychains that provide for spareparts andrepairs. 102. For the town water, market center, andrural piped water supply and sanitation sector, the keyprinciples include: (i) that matchdemand; (ii) designs autonomous water boards; (iii) tariffs that cover recurrent and replacement o f short life assets; (iv) professional operators for routine technicaVfinancia1 operations; and (v) higher level technical assistanceto help towns fix problems, improve efficiency, andplan for expansion, Ingoing forward the Government intends to implement its sanitation policyby: (i) promoting hygiene and sanitation throughout the country and (ii) implementing environmental sanitation action plans prepared and enforced by individual communities. The investments fbndedunder the project would contribute to enhancing their revenue base through increased production and additional number o f customers. However, the financial and operational sustainability for the RWBs i s likely to be achieved only ifGOMcreates anenabling environment for them as spelledout inthe financial analysis section. 103. For the urbanwater sector, an official notification o f GOM's mediumterm reform path and the early initiation o fthe stakeholder consultation process would contribute to ensuringthe sustainability o fthe envisaged reformplan. The urbanwater reform planaddresses the Water Boards' deficient organization culture, inadequate work ethic, and lack o f commercial discipline, as well as the financial viability o fthe sector. The project supports GOM's plan to transform the Water Boards into efficient operators. 23 E. CriticalRisksandPossibleControversialAspects Urban and Town Water Sector Issues: GOM's mability, or delays inimplementing (i)Demonstrated and upfront commitment for High the institutional and regulatory reforms reformthrough an official notification o f the main elements o f reform. (ii) withaservicecontracttoquicklyimprove Start systemreliability and service, take time for consultation to introduce a well prepared, long term PPP contract ina suitable time frame. Delayed tariff increases that affect the water Establishment o f an independent regulator that High boards' financial sustainability approves the tariffs proposedby the water boards according to defined tariff setting guidelines. Delayedpayment o f water bills by (i) forpaymentofalloldarrearsagreedby Plan Moderate government institutions. project effectiveness. (ii)Retrofitting o fpublic institutions with water conservation devices and individual meters, before switching back to paymentby individual institutions. (iii) andtimelypaymentofwaterbillsby Full public institutions as a covenant. Perceivedrisks* and public resistance in Upfront and continuous consultation with the Substantial involving a private operator. public and sector stakeholders to communicate the right message regarding reform. Water Resource Issues: The proposed water resources legislation to Pilots could be continued while the legislation i s in Moderate implement the 2005 National Water Policy i s the process o fbeing passed and formalization could not approved by the cabinet intime to take place retroactively. establish the related institutions duringthe timeframe o f the project. Project Issues The proposedproject is complex involving As was done under the successful NWDP I, Moderate three different technical components. implementation will be delegated to the five Water Boards and Department o fWater Resources. In addition, Program Management Unitwill be established inMIWD for central support services. Malawi Context: Prevalence o f HIV/AIDS influences the HIV/AIDS programs, including awareness Moderate implementation capacity o f the project building, encouragement to do HIV/AIDS tests, and prevention o f disease spreading will be carried out under the project. Country risk o f corruption and governance Thorough capacity and procedure assessment Moderate affecting the project carried out by appraisal. Close monitoring and review to be carried out during implementation review missions. Overall RiskRating Moderate * Perceived risks could include big tariff increases or lack of incentivesfor theprivate operator to e2 x d services to the low income households. The communication strategy developed by the Privatization Commission will convey the right messages to thepublic that include: (i) adoption of afair tariff adjustmentformula and subsidized tariffs to thepoor; (ii) reduction in costs resultingfiom eflciency gains; and (iii) service obligation that would spec13 immediate expansion of access topoor areas. 24 E. GrantConditionsandCovenants EffectivenessConditions: SubsidiaryAgreements have been executed for each Project ImplementingEntity. The program implementation manual for all components o fthe project has been adopted. An annual work planand budgetfor the first year o fproject implementation hasbeen submitted to IDA. PMUhas beenestablished and the key staff o fthe PMUincluding a programmanager, a procurement officer, an accountant, a water supply and sanitation engineer, have been recruited. FinancialCovenantsinclude: 0 Auditedannual financial statements are completedwithin six months ofthe year end. 0 Project reports including "Interim UnauditedFinancial Reports" (IFRs) submittedwithin 45 days after each calendar quarter covering each calendar quarter. 0 Outstanding water bills from the public institutions paid to the Water Boards by December 31,2008 and thereafter timely payment o f dues ensured. The five water boards to at least cover their operations and maintenance through revenues by fiscal year ending 2008/9, with continuous improvementto also cover depreciation and debt service obligations by year ending2011/12. Other Covenantsinclude: 0 Submission o f annual work plans and implementationo f such work plans. 0 Regulatory framework for the delivery o f its urban and town water and sanitation services completedwithin 18 months o f the effectiveness date. 0 Mid-ternreview to include decision on the shift to a lease (or similar) contract. Conditionsof Suspension include: 0 Service contract for urbanwater supply signed and operational within 18 months o fthe effectiveness date. 0 Finalization o f co-financing agreements within six months o f effective date. SubsidiaryAgreements between GOM andthe ImplementingEntitiesinclude: 0 Outstandingwater bills from the public institutions paidto the Water Boards and thereafter timely payment o f dues ensured. Sub-loan and sub-grantterms and conditions. 0 Measures to ensure that revenues from the five water boards to at least cover their operations andmaintenance through revenues by fiscal year ending 2008/9, with continuous improvement to achieve full cost recoveryby year ending 2011/12. 25 IV. APPRAISAL SUMMARY A. EconomicandFinancialAnalysis EconomicAnalysis 104. Supply and Component B - Town,Market Center, and Rural Piped Water Supply and Sanitation Introduction:For purposes ofthe economic analysis, Component A - Urban Water are analyzed indetail. For Component A, IDA investments o f $7 million are complemented with $40 million o f EIB/EUinvestments for the cities o f Lilongwe and Blantyre. It i s important to note that for Component A, economic analysis is conducted for the physical investments o fthe project as a whole andnot for the IDA contribution only. This i s because the economic outcomes inthe form o fnew connections, expenditure andtime savings need to be valued for the urban water supply program as a whole and not as disaggregatedparts. The economic benefits are derived from new connections inunserved areas as well as from performance improving measures such as reduction o fnonrevenuewater (NRW) andrehabilitation and replacement o f treatment plants. There are other non-easily quantifiable benefits from this project which is typical o f a rehabilitationproject, such as higher hours o f service, increased reliability, improved customer service, and improved billing and collection systems. These have not been included in the analysis. 105. Methodology: A cost-benefit analysis usinga "with andwithout project" methodology has been usedto calculate the EIRR and NPV o fthe project to which the project directly contributes with physical investments.The goal o f the economic analysis i s to estimate the present value o fthe benefit streams to major stakeholders o fthe project -the households, over a 20 year period. The net economic benefits to arrive at the ERR and NPV are based on a 10% (the hurdlerate IDAuses inWSS projects) discount rate. 106. ComponentA: The measurable economic benefits o fthis component are: (i) higher expenditure from increased consumptioninthe previously unservedperi-urban and formal urban; and (ii) lower distance traveled and filling times at the new connections, leading to time savings. The rehabilitation o f existing networks undertaken duringproject implementation will result inincrementalwater o f 10,500 m3/day inLilongwe and 11,500 m3/day inBlantyre. In addition, the Non-Revenue Water (NRW) i s expected to reduce from 29% to 26% inLilongwe andfrom 48% to 34% inBlantyre duringthe course ofthe project. These investments will result inincrementalwater flows of 12,974 m3/day inLilongwe and 21,456 m3/day inBlantyre. The expenditure on water for the new consumers i s valued based on the average tariff for individual connections/yard taps which i s $0.43/m3 inLilongwe and $0.53/m3 inBlantyre. Incremental expenditure benefits from new connections are minimal since households are paying twice the formal domestic connection tariff at the kiosk to consume a minimal 20L bucket per capita. 107. Accessing water from yard-taps and private standpipes also means that households will incur time savings that can be quantified by valuing the time inthe form of wages lost due to the water collection activity. The economic benefits from the new connections primarily derive from these time savings, since an average householdspends approximately 4 hours a day collecting water. At the kiosk, the waiting, filling and carrying time for a 20L bucket is 26 approximately 50 minutes. Incomparison, the water collection time i s 10 minutes at the yard tap for a 20L bucket. 108. The economic analysis suggests that the Component A o f the project has a positive economic NPV o f $97 million and an EIRRo f 48%. This impliesthat the project will be beneficial to the citizens of Lilongwe and Blantyreinalleviating their water supply concerns. Table 1: EconomicRateof Return-UrbanWater Supply ComponentA: UrbanWater Supply I ~ NPV $97.109.448 ~ 109. ComponentB: Seventowns from service areas ofthe NorthernRegionalWater Board (NRWB), CentralRegionalWater Board(CRWB), and Southern RegionalWater Board (SRWB) are selected for new capital and rehabilitationinvestments to improvetheir water supply systems. The economic analysis is conducted for the type o fsystem -gravity and boreholes, installed inthese seven representative towns and benefits are valued per user. It i s assumedthat the tariffs charged to the users o fthese new gravity and borehole facilities will be $0.36/m3. The capital cost varies by type o f system, the typical capital cost o fbuildinga gravity system i s $40/capita and a borehole i s $50/capita. Given the fact that bulk o f the resources invested inthis component i s grant, investments will occur inthe following way - after the initial capital investment o f $40/capita (for gravity systems), 1.25% o f expansion cost for distribution will be spent inthe next 4 years and 10% o fexpansion cost for transmission, generation will be spent inthe 5thyear and this patternwill continue over the life o fthe project. Inaddition, An 0 &Mcost of$0.25/capita is spent eachyear. Similar willbethe investment schedule for borehole systems. 110. As aresult o fthis project, the beneficiaries o fthese new systems will be consuming more water - from 15 litredcapitdday to 50 litres/capitdday. The benefitsare valued for the additional water consumed by households at a higher price and time savings as a result o f lower time spent incollecting water. 111. The economic analysis suggests that the Component B ofthe project has a positive economic NPV o f $24.97/capita and an EIRRo f 20% for gravity systems and a NPV o f $11.8lcapita and ERR o f 14% for borehole users. Insummary, a quantitative valuation o f economic gains as a result o fNWDP I1for the project beneficiaries suggests that this project will have a positive impact on improvingthe productivity and overall welfare in addition to non- quantifiable health and environmentalbenefits. 27 Table 3: EIRRfor Gravity andBoreholeSystems I i NPV (Per capita) i Gravity System $24.97 I II i Boreholes iI FinancialAnalysis 112. Sector FinancialPerformance:The size of GOM's five year sector wide program is estimated to be about $258 million. It i s expected that the Government subsidies to the sector, especially for the urban and larger towns could be reduced over time ifthe tariffs increase along with the costs and contributeto the utilities' operating cash flows. Ifthe water boards can achieve financial autonomy and start tapping the capital markets on their own, public funds could be freed up to serve the poorer people inthe rural areas. Duringproject implementation, capacity strengthening activities will be carried out to enable the key financial staff o f GOM to create a strategy and make realistic projections for the medium to long term sector expenditure plans for achieving its sector objectives. 113. UtilityFinancialAnalysis: The financial analysis ofthe urbanandtownwater supply sectors have beencarried out usingthe audited financial statements o f the two city water boards and the three regionalwater boards. The analysis focuses on the water boards' ability to recover its operating costs, depreciation, and financial charges through its revenues. It also assesses the water boards' future cash flow situations based on the investments carried out under the whole program (not limited to the IDA fundedportion). 114. BWB andLWB: Bothcitywater boards havenot only beenunable to cover their operating costs through user tariffs, but also beenunable to service their loans or generate internal cash for reinvestment. Total debt owed to the Government has risen to about $10.5 million. The financial deficits are due to the slow tariff increases that have not kept pace with cost increases, non-payment o fwater bills bythe public institutions, and inefficiencies inO&M. 115. A financial modelhasbeen developed to assess the financial viability o fthe urbanwater sector andsimulate the different scenarios with regardto investment plan, operational efficiencies, service levels especially inthe low income communities, andtariff level. The analysis concludes that LWEIwould achieve full cost recovery by the end o fthe five year program ifthey makethe proposed capital investment and achieve the operating efficiency gains expected under the program. The situation for Blantyre i s more challenging, however, there i s a possibility o f BWB achievingfull cost recovery ifthe following assumptions are met: (i) a real annual tariff increase o f at least 5 percent; (ii) implementation o f a robust nonrevenue water reduction program; (iii) timelyproduction volume increase and connection to new customers; and (iv) debt-equityconversion ofthe existing loans on-lent to them by the GOM. 28 116. Three RegionalWater Boards(NRWB, CRWB, and SRWB): Annual reports and audited financial statements have been analyzed to assess the historical performance o fthe RWBs.Since eachwater boardcovers several districts andtowns, town level financial analysis has been carried out to evaluate the business plans and the related financial proposals prepared for each town. The historical financial performance indicates that the fastest growing towns are all able to cover their O&M costs through their revenues, contributing to the consolidated financial statements o f the RWBs.However, the highdepreciation and debt service obligations makeit difficult to sustainthemselves dueprimarilyto the highon-lending terms set byMOF for their loans. 117. Financialmodels have been developed for the three RWBs to assess the financial viability of their operations incorporating the proposed investments to be carried out under NWDP. The base case which assumes the status quo situation: (i) ad hoc tariff increase o f 5%; (ii) oftheplannedconnectionsrealized;(iii) increasealongwithinflation;(iv)average 70% cost historical debtor days o f 150; and (v) highportion o f the project funds assumed as loan and no change inon-lending terms from GOM, shows that none o f the three RWBswould be able to achieve full cost recovery inthe next ten years even ifit assumes that the existingdebt from GOM are converted fully into equityin2007. 118. Inorder to explore thepossibilityoftheRWBsachievingfullcost recoverywithinthe next 5-10 years, an improved scenario has been run, assuming: (i) annual tariff increase o f an 10%; (ii) realization o f 100% o fthe planned connections; (iii) increase matching inflation, O&M incorporating some efficiency gains; (iv) reduction inaverage debtor days from the historical average of 150to 60 days; and (v) 50% IDA grant, and 50% credit with the terms of inflation plus5%. The improved case shows that all three RWBswouldhavemuchbetter prospects of reaching full cost recovery inthe next 5-10 years with the improved assumptions (project cost recovery graph attached at Annex 9). 119. FutureFinancialSustainability of the FiveWater Boards: Inany o fthe cases, the situationbeyondthe project implementation period (2012) would beparticularly challenging for all five Water Boards as the grace period for the IDA credit expires. While the Water Boards are likely to continue covering their O&M expenses through their revenues, the debt service obligations for the IDA credit and other loans from other financiers that kick inwill give a significant impact on their overall financial health. 120. There are some performance improvement measuresthat the Water Boards can take on their own, such as increase inrevenue basethrough connecting to newcustomers, billcollection efficiency improvements, non-revenue water reduction, and other cost reductionmeasures. However, it would be highly crucial that an enabling environment i s created for the Water Boards to perform better. The FinancingAgreement o fthe Project and the Subsidiary Agreements between G O M and the water boards would address the following proposed covenants/agreements: (i) Outstandingwater billsby the publicinstitutionswill bepaidinfull and thereafterthe timely paymentwill be ensuredfor futurewater bills: As it is normally estimated that about 30%-70% o fthe billed amount are attributedto the 29 public institutions, full andtimely payment would significantly improve the bill collection rates o fthe Water Boards. This would result intimelypayment o ftheir obligations or generation o f cash for reinvestments innew networks and connections that lead to increased revenue base. A time-boundactionplanfor carryingout debt to equityconversionofthe debtfromthe Governmentinthe water boards'balancesheets will be prepared:Debtto equity conversion o fthe existing loans from GOMwould reduce the debt service obligations o fthe Water Boards significantly. For example, the existing long-term debt will be reduced from $7.4 million to $320,000 for BWB and from $16 million to $2.4 million for LWB. O&MCost Recoveryby 2008/09 and FullCost Recoveryby 2011/12for All FiveWater Boards:The five water boards will meet its O&M costs through their revenues by fiscal year 2008/09, and continue to improve thereafter to meet their depreciation and debt service obligations fully by fiscal year 2011/12. Regulatoryframeworkfor the deliveryof itsurbanandtownwater and sanitationservices completedwithin 18 months of the effectiveness date: This would include adoption o f a tariff setting mechanism that reflects the needfor the Water Boards to improve their cost recovery levels. Tariff indexation formula is proposed to enable automatic increase o f the tariffs along with inflation. Grant versus CreditElementsand Conditionsfor ProjectComponentsA and B: The elements that qualify for grants, as well as the on-lending terms and conditions o fthe loans to be passedon to the Water Boards will be specified to ensure the financial viability o f the Water Boards. B. Technical 121. UrbanWater Supply and Sanitation: Inthe next five years, Blantyrewill benefitmost from the actions taken to mitigate water supply disruptions, urgentrepairs o fvisible physical leakages, andconnecting new customers that have already applied for water connection but are yet to be connected due to lack o fmeters. Lilongwe will benefit from rehabilitationand maintenance o fplant and equipment, as well as connections to new customers through purchase o fmeters. Both cities will benefit from some funds that will bereserved for new connection in unserved areas. Through the EIB/EUfunded investments, Blantyre will benefitmost from the replacement o f old high lift and booster pumpswhose failure cause regular supply outages, and both Blantyre and Lilongwe will benefit from the reduction o fnon-revenue water and extending their distribution networks to unservedareas. Within ten years, bothBlantyreandLilongwe must produce more water to meet demand. The project, therefore, will finance the planningand design o fwater reservoirs and preparation o f environmental and resettlement action plans. 122. Town, MarketCenter, andRuralPipedWater Supply andSanitation: While the average growth rate intowns within a country may be high, growth rates and settlement patterns inindividualtowns is difficult to predict. A short planninghorizonwith amodularapproachto 30 design and staged construction are important. The systems should be designed so that they can be expanded as population grows and customers can afford ahigher level o fservice. The emphasis will be on keepingthe cost per capita low (maximum US$60); and designing for the longer term inphases. Systems will be designed such that the land, reservoirs, water intakes and transmission main diameters are designed to meet demand for ten years; boreholes, network diameters, pump stations and treatment plants, network lengthand storage tanks are designedfor five years. Sanitation improvementswill becarried out inconjunctionwith water supply improvements. (Over $5 per capita will be proved to implement sanitation improvements prioritized bythe community. A small peaking factor for diurnal variations inwater consumption can beprovided, but cost implications should be modeled andjustified. Seasonal variations would not be eligible for government financing. Capital investments o f $40 per capita can not be exceeded without cause. A grant o f $2 per capita to support the implementation o f community sanitation plans i s also provided under the project. C. Fiduciary 123. Financial Management Capacity: MIWDwill, through a dedicated PMU, coordinate, control, account and monitor the utilization o fproject funds by the component implementing agencies. The two city water boards will coordinate the Urban Water and Sanitation Component A; the three regionalwater boards will coordinate the Town, Market Center, andRuralPiped Water and Sanitation Component B; the MIWDwill coordinate the Water Resources Management Component C and Sector Management andUrbanWater Sector Reform Component D. 124. The MIWDPMUhas experience inmanagingprevious Bank-fundedprojects, the PPF has staff experienced with the Bank's fiduciary policies andprocedures. A dedicated Project Accountant inthe P M Uwill supportthe implementation and maintenance o f centralized financial management, internal controls, disbursements and financial reportingprocedures for the project as a whole. This arrangement i s further strengthened by separating and devolving implementationauthority and budgetsto the implementingagencies, with the additional control o ftheir existing financial management systems ensuringthat funds advanced to them are used only for the intendedpurposes inan efficient and economicalway, that reliable and timely financial information is made available to the P M U and that assets are safeguarded at the component level. Insummary, after the assessmentit i s concluded that MIWDP M Uhas the basic capability inplace to support the financial management o f the project. 125. Quality, Transparency, and Efficiency o fProcurement: MIWDwill, through the dedicated PMU, coordinate, monitor report on procurement implementation and ensure internal quality assurance systems for procurement inall the project component implementing agencies. Theproject component implementingagencies include the LWB andBWBincharge o fthe Urban Water Supplyand Sanitation Component A; the three regional water boards (SRWB, CRWB andNRWB)which will be responsible for coordinating and implementingthe Town, Market Center, and Rural PipedWater and Sanitation Component B; the MIWDwill coordinate the Water Resources Management Component C and Sector Management andUrbanWater Sector Reform Component D.Through NWDP I, MIWDgained experience inmanagingBank- funded projects through the dedicated PMU. This includes the PPF. The staff previously 31 employedby the P M Uhad experience with the Bank's fiduciary policies andprocedures including procurement, 126. The MIWDhas employed a project coordinator, accountant andprocurement specialist for project preparation. Nonetheless, all positions inthe PMUwill be advertised as longer, fixed- term positions to support NWDPII andNWDP. Some are likelyto have hadexperience in implementing other Bank supported projects, The staff o f the P M Uwill include a Procurement Specialist who will support the implementation and maintenance o f the overall procurement plan for the project. The Procurement Specialist o fthe P M Uwill provide support and oversight including quality assurance reviews. This h c t i o nwill be further supported and strengthened by the carrying out o fprocurement by each implementingagency. Each Implementing Entityhas a dedicated Procurement Specialist who works with technical specialists. The Procurement specialists inthe Implementing Entities will provide periodic progress reports andwill as appropriate makerequests to the Bank for review andclearances through the Procurement Specialist o fthe PMU. The Procurement Specialist o fthe PMUwill be supported by other qualified and experienced staff of the PMU. Systems for implementingthe project will be articulated inthe Project ImplementationManual which i s reviewedby the Bank to ensure acceptability inrespect of the Banks fiduciary responsibility. D. Social 127. To the extent that the project's rehabilitatiodconstruction activities require land, it i s possible that some people will experience a loss o f livelihoods, loss o f land, impact on assets, or loss o f access to economic assets. To addresspotential adverse social impacts due to land acquisition, impact on assets, or loss o f income or livelihood, the Borrower prepared a RPF.The RPFoutlines the policies andprocedures to be followed inthe event that future project activities involve land acquisition and/or the loss o f livelihoods and/or impact on assets requiring appropriate compensation. E. Environment 128. The ESMFidentifies potential adverse environmentaland social impacts o f the future investments at the various stages o fproject implementation. Thus, impacts are expected to result, for example, from: (i) works requiring additional land for storage/distribution tanks, civil booster stations, pipelines and for the constructiono f temporary structures; (ii) rehabilitation works requiring the demolition o f existing water supplyinfrastructure thereby generating wastes that would have to be disposed o fproperly; (iii) additional water abstraction resulting inchanges ingroundand surface water regimes, bothinsideandoutside theproject areas; (iv) additional water resources leadingto an increase inwaste water generation; and (v) the provision o f additional water supplies that may contribute to water stagnation and sanitation problems. 129. To ensure that the potential impacts on, for example, flora, fauna, soils, water resources, rural livelihoods or public health are addresses properly, the project implementers will apply the steps o fthe environmental and social screening process outlined inthe ESMF. These steps involve: (i) screening o f each sub-project as part o fthe desk appraisal and subsequentlyin the 32 the field; (ii) assignment ofthe appropriate environmental category to each sub-project; (iii) the carrying out the appropriate environmentalwork (either the application o fmitigation measures with guidance fromthe environmental checklist); (iv) review andapproval o fthe screening results andEA reports; and (v) implementation o fthe environmental management and monitoring plan; this plan i s to be adapted to the sub-projects as necessary. Inaddition, the ESMF includes Environmental Guidelinesfor Contractors to be attached to the bidding documents. 130. The ESMFproposes that environmentalmonitoring be carried out at the community level duringthe constructionandrehabilitation o fthe water supply and sanitation facilities, as well as duringtheir operation andmaintenance. Thus, duringthe rehabilitation o fthe existingwater supply structures, memberso fthe Village Development Committees and District Executive Committees will be responsible for the monitoring o f (i) constructiontechniques and inclusion o f environmentaldesign features as requiredinthe architectural plans; (ii) provisions for traffic safety, reduction innoise and dust levels; (iii) construction o f on-site waste management, proper storage o f constructionmaterials, sanitation, solid waste disposal, andwaste water disposal; and (iv) implementation o fplans for the restoration o fthe construction sites, once the constructionhehabilitationworks havebeen completed. Area Executive Committees will support the village level committees at all stages o f the work, including monitoring. To ensure proper operation andmaintenance o fthe water supply and sanitation facilities inan environmentally friendly manner, the Area Executive Committee withinthe proposed sites will appoint a monitoring committee. F. Safeguard Policies 131. The project has triggered OP 4.01 Environmental Assessment, OP 4.12 Involuntary Resettlement, and OP 7.50 Projects on InternationalWaterways due to potential adverse environmental and social impacts related to the constructionandrehabilitation o f investments under components A and B. The safeguard screening category i s S2, and the environmental screening category i s B. The notificationprocess designed to informMalawi's riparians (Angola, Botswana, Mozambique, Namibia, Tanzania, Zambia, and Zimbabwe) about this project has beencompleted accordingto the requirements ofthe Bank's OP 7.50. 132. Since the precise locations and potential localized adverse impacts could not be identified prior to appraisal, the borrower has prepared an Environmental and Social Management Framework (ESMF) and a Resettlement Policy Framework (RPF). These documents will guide project implementers inidentifying,assessing, mitigating and monitoring future potential adverse environmental and social impacts (potential soil and water pollution, loss o f vegetation, soil erosion, increased generation o fwaste water, increased incidences o fmalaria and other water-related diseases, noise and air pollution, loss o f assets or land).Both documents have been disclosed inMalawi on March 19,2007, and at the Bank's Infoshop on March23,2007. 133. The ESMF: (i) outlines the steps o fthe environmentaland social screening process to be applied by memberso f the District EnvironmentSub-committees and Area Executive Committees at the local level, and members o f the Regional Water Boards at the towdcity level at the time the infrastructureinvestments are planned; (ii) includes Environmental Guidelinesfor 33 Contractors to be attached to the biddingdocuments; (iii) includes a summary of the Bank's safeguard policies; and (iv) includes a generic Environmental Management andMonitoring Plan to be adapted to future sub-projects as necessary. 134. The ESMFwas prepared duringfield visits inconsultationwith officials from the Water Boards, Town and District Assemblies, members o f fishermen associations, villagers, lands officers, and potentially affected persons. Their concerns andsuggestions have been incorporated into the above generic EnvironmentalManagement andMonitoring Plan. The stakeholders largely viewed the project as very beneficial to their living standards. They suggested that the project carry out public awareness campaigns to sensitize the beneficiaries on general environmental and social management practices; put inplace effective environmental and social management plans, anduse existing local community structures inthe management and administration o f the ESMFinorder to promote ownership and sustainability o f the environmental management plans. 135. The RPFprovides guidance and standards for preparinga Resettlement Action Plan (RAP). The District Environmental Sub-committee will beresponsible for screening to determine ifland acquisition, impact on assets, andor loss o f income or livelihood will result from project activities. Once it i s determined that the resettlement policy has been triggered the project office will be responsible for implementingthe RPF and preparing a RAPwhich will need final clearance from the World Bank prior to commencing with compensation and civil works. 136. The borrower's capacity to implementsafeguard policy recommendations needs to be strengthened. Thus, to ensure effective implementation o fthe ESMF and RPF, the project will funda Training Program for the Trainingo fTrainers. This programwill train atotal o f30 personnel from District AssembliedTown Assemblies, City Assemblies, Regional Water Boards, Urban Water Boards, Ministryo f Irrigation and Water Development, and project personnel. Once these representatives have beentrained, it is recommended that they train (under the supervision o f a qualified facilitator) the other groups (members o fDistrict Development Committees, Area Executive Committees, Village Development Committees andLocal Leaders or their representatives) that will be directly involved inthe project implementation. Training topics include, for example, the screening process, the use o f checklists, preparation of terms of reference, Malawi's environmentalpolicies and laws as well as the World Bank's safeguard policies. 137. Consistent with OP 7.50, the Bank, on behalfof the Government o fMalawi, has notified the riparian states (Angola, Botswana, Mozambique, Namibia, Tanzania, Zambia, and Zimbabwe)between December 6-15,2006, except Tanzania which was notifiedinearly January 2007. N o unfavorableresponseswere received from any o f the riparians based on international waterways issues. Insupporting the proposed Project, Mozambiquerequestedthat the Project investigate practical measuresthat can be taken to improve the qualityo freturnflows andreduce resulting aquatic plant growth inthe Shire River. The Bank informed the Government of Mozambique that the issue would be investigated under the Project as part o f the environmental impact assessmentand stakeholder consultations to be undertakenunder Component C o fthe Project inrelationto the lake level control structure at Liwonde. Since no unfavorableresponse 34 was received from any o fthe riparians, andthe Project will cause no appreciableharmto any o f them, Managementhas approvedthe processingofthis Project. 138. The Bank staff have consideredthose aspects ofthe Project that might have an effect on the downstreamriparians andare satisfied that the Project will not cause appreciableharmto the other ripariansandwill not be appreciably harmedby the other riparians' possiblewater use. Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [XI [I Natural Habitats (OPBP 4.04) [ I [XI Pest Management (OP 4.09) [I [XI Physical Cultural Resources(OP/BP 4.11) [I [XI Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples(OPBP 4.10) [I [XI Forests(OPBP 4.36) [ I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OPBP 7.60)* [ I [XI Projects on International Waterways (OPBP 7.50) [XI [I G. Policy Exceptions andReadiness 139. There are no policy exceptions to be sought from management. 'Bysupportingtheproposedproject,theBankdoesnotintendtoprejudicethefinaldeterminationof theparties'claimsonthe disputedareas 35 Annex 1: Countryand Sectoror ProgramBackground MALAWI: SecondNationalWater DevelopmentProject 1. Water resources management: The availability o f total renewable water resource (TRWR) was calculated to be 17.3 km3/year, or 1,617 m3/capita/year. 6 While the availability o f water resources in Malawi inthe aggregate i s considered satisfactory, per capita water availability i s declining at a rapid rate due to population growth, and Malawi may start experiencing water stress after 20257. Usingthe 2000 figures, Malawi had the 4th lowest per capita water availability o f the 14 SADC countries at 1,840 m3/cap/year (South Africa 1,136, Zimbabwe 1,483 and Mauritius 1,826). The SADC average i s 8,922 m3/cap/year. 2. Malawi has a large network o f surface water bodies covering 21% o f the country's 120,000 km2 area. 94% o f the land area inMalawi- as well as parts o f many neighboring countries -i s part of the Zambezi River Basin which drains into the IndianOcean inMozambique. The remaining 6% falls within the Congo and Rovuma Basins or the small internal drainage basin of lake Chilwa. The Zambezi River Basin i s the second largest inthe SADC region (second to the Congo); 8% o f the basin i s inMalawi. The most prominent water body i s Lake Malawi. Lake Malawi i s 567 kmlong and 28,900 km2in area (of which 4,540 km2i s inMozambique) making it the thirdlargest lake inAfrica, and the 10* largest inthe world. Nine rivers drain into Lake Malawi from two o f the three riparian countries: Ruhuhu(Tanzania), Songwe (Tanzania and Malawi), N.Rukuru, N.Rumphi, S. Rukuru,Dwangwa, Bua, Lilongwe, and Bwanje (Malawi). All o f these rivers are unregulated, and thus subject to natural seasonal flows. However, most o f the rivers maintain at least some base flow throughout the dry season. The Lake Malawi / Shire River hydrological system represent arguably the country's single most important natural resource system and supports significant economic activities. The Shire River system performs vital environmental and socio-economic functions. It supplies over 96% o f the country's power generating capacity; supplies water to major urban centers such as Blantyre and Limbe and the rural water users along the length o f the river as well as to economically important irrigation schemes. Water levels in Lake Malawi are highlyvariable, and have a direct effect on the flow rate inthe Shire River (as the source o f the Shire i s the outflow o f the Lake), which may lead at the one extreme to a no-flow situation inthe river, or, at the other extreme, to floods, causing damage to agricultural lands, infrastructure and loss o f life. 3. Rainfall Variability: Despite the noticeable surface water bodies, the availability and reliability of surface water inMalawi i s highlyvariable between the wet and dry seasons and from year to year. The national mean annual rainfall inMalawi i s estimated at about 1100 d y e a r , with the average annual rainfall varying from 650 mminthe Lower Shire Valley to 1,600 mminthe Northern Lakeshore Region. 70% o f the country receives 800 to 1,200 mmper year. While this is relatively goodrainfall (the second highest inthe SADC region), Malawi has one o f the most erratic rainfall patterns inAfrica. This poses one o f the biggest threats to economic growth. 4. Groundwater: Groundwater resources are widespread throughout the country. The total potential groundwater yield i s estimated at 1.4 km3/year (44 m3/s), based on an average recharge rate o f 15mm/year; however, the groundwater potential has not been comprehensively determined -- the last significant hydro-geological mapping was done in 1986, and even this was based on limited borehole information at the time (NWRMP, 1986). Groundwater abstraction i s generally unregulatedand uncontrolled. It i s assumed that unsustainable pumpingo f the groundwater i s occurring in some areas This figure is consistent with 5 studies between 1995 and 1998,as quoted inFA0 (2004) and Gibb (2004). 7 Under the Falkenmark definitions of water shortage and water scarcity, Malawi is currently water short (less than 1,700 m3/capita/year) and will become water scarce (less than 1,000 m3/capita/year) by 2025. 36 leadingto groundwater mining. Groundwater i s presently exploited by 30,000 boreholes and 8,000 shallow wells equipped with handpumps. Nationally, groundwater quality i s generally acceptable for human consumption. However, rapid deterioration o f the rivers' upper catchment areas due to deforestation and poor landuse practices i s causing increased sediment transportation, and significantly affects the country's surface water resources and river hydraulic infrastructure. This, inturn, encourages excessive use o f groundwater resultinginthe resource's overexploitationand depletion. 5. International Waters: Malawi shares a number o f importantrivers and lake basins with the neighboring states o fMozambique and Tanzania. Lake Malawi i s shared with Mozambique, and forms the boundarywith Tanzania. The Shire River, which drains into the Zambezi inMozambique, i s the most important water resource inMalawi for water supply, hydropower and irrigation. The Songwe River which forms the international boundary between Malawi and Tanzania, i s usedlargely for fishing and agriculture. The river changes its course almost annually due to flooding. Lake Chilwa and Lake Chiuta are both shared with Mozambique. They are important fishing and ecological sites. The Ruo River borders with Mozambique and has the potential for irrigation, water supply and hydropower development. 6. The SADC Protocol on Shared Watercourses was signed in 1995 by Tanzania, Malawi and Mozambique, and later revised in2000. It lays out the principlesby which common water resources in the region should be managed. Joint Permanent Commissions (JPC) have been establishedbetween Malawi and both countries. InMalawi, the most significant international rivers issue i s the management o f the Lake Malawi/Shire River upper catchment areas. Unsustainable land use practices led to the devegetation and land erosion, and sediment deposition inthe river and reservoirs downstream. 7. Water Quality: Although total water resources inMalawi are considered adequate to meet the needs o f the growing population, these resources are becoming increasingly degraded through sedimentation, biological contamination and effluents. Silt loads in surface water runoff leads to significant problems inwater quality, including turbidity, increased suspended solids, water flow problems and water treatment costs, especially duringthe wet season. Highsediment loads have caused siltation o frivers and reservoirs, requiringcostly dredging to maintain water and electricity production. The problem i s aggravatedby inadequate environmental watershed protectionresultingin soil erosion and decreasingmicrobiological water quality. Chemical contamination o f water resources i s increasing due to improper application o f fertilizer and pesticides inagriculture, improper discharge o fhazardous wastes from hospitals and improper disposal o f industrial waste. This has resulted inincreasedconcentrations o f nitrogen, phosphorus and heavy metals. 8. Water Resources Policy and Legislative Context: The Water Resources Act (1969) and the Waterworks Act (1995) define a main legal and regulatory framework for water resources management in Malawi. It outlines institutional and organizational arrangements under which the water sector operates, the pricing and tariff principlesand the water supply and sanitation service delivery norms and rules. The abstraction o f water i s regulatedby the system o f licensing and water permits stipulated inWater resources Act o f 1969. The Waterworks Act (1995) has established the three regional water boards and reconstituted the Blantyre and Lilongwe Water Boards. Other laws and policies guidingthe functioning o f the water sector are the Environmental Management Act (1996); Fisheries Conservation and Management Act (1997); Forestry Act (1998); Local Government Act (1998); LandPolicy (2002); National Irrigation Policy and Development Strategy (2000); and Malawi Vision 2020. 9. The recent National Water Policy adoptedby the Government in2005 promotes an integrated approach to water resources management and defines the primary policy objectives as the sustainability of both the resource and o f service delivery. The policy declares objectives andprinciples, which are consistent with the DublinPrinciples, and, specifically, emphasizes the need inan integrated approach to water resources management with "equitable" access to water; promotes the availability o f safe potable 37 water for all users; the needinpreparedness and contingency plans for droughts and floods; and outlines principles o f water utilization for the main water usingsectors (irrigation, WSS, hydropower, fisheries, tourism, forestry). 10. The National Water Policy i s complemented by the National Irrigation Policy and Development Strategy (NIPDS) o f 2000. It focuses on such key issues as promoting public-private partnership in irrigation development, full participation o f the beneficiary farmers inirrigation management, and introduction o f cost recovery principles. The NIPDS was further elaborated inthe Irrigation Act (2001). 11. The MIWDrecently finalized a new 2005 National Water Policy by further reviewing and amending the 2000 Draft Water Policy following recommendations from a consultant who carried out a study for the Strengthening o f the Water Resources Boardunder the National Water DevelopmentProject (NWDP). The new Policy has now been approved by Government. The Government o f Malawi intends to translate the Water Policy into a new legal framework. 12. The recently approved MDGS recognizes the importance o f improved water resources management and development and outlines such key strategies on water resources development in Malawi. This includes, inter alia, empowering national authorities to manage water resources using integrated water resource management approaches; establishing good hydrologicalmonitoring systems; improving the quality o f surface and ground water and developing a system for pollution control; and . improving the reliability o f access to water by main water services (WSS and irrigation). 13. Water ResourcesInstitutions: The mainnationalinstitutions for water resources management include the Ministryo f Water Development and Irrigation, which, inturn, i s divided into four departments, namely, Surface Water, Ground Water, Hydrogeology, and Departmento f Irrigation; various Ministries responsible for naturalresources (Forestry, Fisheries, Lands, Environment), Water Resources Board (WRB), and five RegionalWater Boards responsible for implementationof water and sanitation services, including Blantyre Water Board, Lilongwe Water Board, Southern, Central and Northern RegionalWater Boards. The NWDP I1will provide support to strengthening the proposed National Water Resources Authority and the MIWDto ensure that water resources development i s environmentally sustainable, and re-establish a surface water, groundwater and water quality monitoring system, and a management information system. 14. Water ResourcesInformationSystems: Reliable hydrological data are necessary for effective water resources management and informed decision making on the use and development o f water resources. The hydrographic network established inMalawi prior to Independence i s almost completely out o f action and the current challenge for the Ministryfor Water Resources Development i s to restore the system o f hydrological data collection and archiving. Some improvements inhydrologicaland water quality monitoring systems have been introduced under the NWDPI. However there i s still a significant need for better hydrological data monitoring, collection and processing systems. 15. The most comprehensive analysis o f the water resources situation was undertaken under the National Water Resources Management Plan completed in 1986. Since then, regular monitoring o f the hydrological system (meteorological stations, rain gauges, river flows etc.) was steadily on decline and there was no updatedanalysis o f the water resources situation inthe country. 38 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies MALAWI: SecondNationalWater DevelopmentProject Table 3: Major RelatedProjects includingrural piped svstems I Ruralwater supply and IntegratedRuralWater Supply and S S sanitation SanitationProject(AfDB) Ruralwater supply, RuralWater Supply and Sanitation S S sanitationandhygiene (UNICEF) promotion. RWSS, focus on MangochiEast Groundwater S S groundwater development Project(GTZ) 39 Annex 3: ResultsFramework and Monitoring MALAWI: SecondNationalWater DevelopmentProject Table 4: ResultsFramework PDO ProjectOutcomeIndicators Use of ProjectOutcomeInformation Increased access to Number o f people with improved water T o determines if access to water supply sustainable water supply supply and sanitation. and sanitation has increased as planned. and sanitation services for people living incities, Enhancedcapacity o f the Government o f To determine ifwater resources towns, market centers, and Malawi to manage its water resources management has improved as planned. villages and improved water resources management at the national level. IntermediateOutcomes IntermediateOutcomeIndicators Use of IntermediateOutcome Monitoring A. UrbanWSS Increasedconnections Number o f new connections. To determine ifkey inputs will serve Number o f rehabilitated connections. the targeted number o fbeneficiaries. More reliable supply Hours per day o f supply. Improved cash flow Ratio o f operating revenues/expenses. T o assess financial viability o f utilities. B. Town, Market Center, and Rural PiDed WSS Number o f new connections. T o determine ifkey inputs will serve Increasedconnections Number o f rehabilitated connections. the targeted number o fbeneficiaries. Hours per day o f supply. More reliable supply Ratio o f operating revenueslexpenses T o assess financial viability o f utilities. Improved cash flow Autonomous water boards To assess progress inintroducing key Institutional reform Performance-based operator contracts institutional r e f o m c. wRh4 Improved WR regulation National Water Resources Authority Tojudge progress inimproved water established resources management Improved WR investment To determine ifwater resource planning Water resources investment strategy development canbe financed. Improved Lake level control prepared T o assess progress inplanning level Level control design and E I N R A P control. completed. D. Sector Management and UrbanWater Sector Reform Sector management system inplace in T o assess the capability o fMIWD to Improved sector MIWD. manage the sector program. management Short term service contract signed. T o assess progress inintroducing key Institutional framework Regulatory and institutional framework for institutional reforms. urban water supply. urban water sector reform established. To assessprogress inimproving Hygiene and sanitation Sanitationplans for towns and market hygiene and sanitation. improved. centers prepared and implemented . Strategic sanitationplans prepared and HSP strategies implemented incities. T o assess implementation o f social and Improved safeguard ESMF and RPF implemented satisfactorily environmental safeguard policy. practices 40 Arrangementsfor ResultsMonitoring 1. Institutional Issues: A monitoring and evaluation (M&E) system will be created to serve as a tool for implementers, to enable them to assess project implementationand undertake modifications on a timely basis so that the project development objective and intermediate results can be achieved. 2. Table 6 (Arrangementsfor ResultsMonitoring): identifies institutionalresponsibilities for data collection and reporting. The project's M&Emanual (an annex o f the project implementationmanual) will elaborate onthe institutionalarrangements for M&E. Monitoring for rural water supply and sanitation will be at the districthornunity level and monitoring for town and urban water supply will be at the utilitylevel. The SWAP Management Unitwithinthe MIWD and the RegionalWater Boards will appoint staff who will be responsible for the coordinationo f M&E activities for towns and cities. These staff will receive initial training inM&E, with follow-up, on-the-job training organized as needed. 3. Data collection: Responsibility for data collection is indicated inthe Arrangements for Results Monitoring table. Detailedrules for the collection, processing and organization o fM&E information are part o f the M&Emanual. The project includes a budget for M&E activities including staffing, training, mid-term and final evaluations, data collection, and technical reviews. Data collection will take place through normal operations reports and financial accounting, plus annual audits. 4. Capacityfor implementing the M&E system: Meetings, workshops and training events will take place as required duringproject implementationto further develop, implement and fine tune the M&E system and to buildlocal capacity to manage it. An M&E capacity plan i s incorporated inthe project's capacity buildingactivities. 41 I 0 0 2 9 i I- - I- - T -L 0 0 0 0 2 2 Z 0 DATA COLLECTION Cfor calculatingutilityperformance) - 1. Population o fcity ---- 2. Average number o fpersons per household Terminoloav 3. Average number o f persons per standpipe production = volume into supply 4a. Number o f residential (house & yard tap) connections consumption = volume billed (sold) --- 4b. Number o f public standpipe connections revenue = cash collected 4c. Number o f institutional, industrial and commercial connections income = billing 5. Average number o f households sharing residential connections operating expenses = 6. Number o f connections with operating meters salariedwageshenefits, energy, consumables, spareparts, taxes, ---- 7. Production capacity (&/day) (see 24for actual) plus administative costs, but not 8. Transmission capacity (m3/day) depreciation and interest expenses 9. Water storage volume (m3) LC = local currency 10. Lengtho fwater distribution network (m) --- 11. Hourddaythat borehole and intake pumps operate., 13. Water pressure at 6am, noon, 6pm and midnightinservice areas A, B, C, ... (bar) 12. Duration o f supply inservice areas A, B,C, . (average hourdday) --- 14. Number o fpipe breaks repaired indistribution system 15. Number o f leaks repaired on service connections 16. Number o fnew connections Number o f violations o f Malawi National water quality standards ------- 17. Tariff structure (LC/m3 for first 6 &/month, 6-15 m3/month, >15 m3/month) 18. Tariff at standpipe (LC/m3) 19. Connection charge (LC/connection) 20. Does the utility allow customers to repay the cost o f connection over time? (Y/N) 21. Does utilitycharge a flat tariff for households with yard taps shared by neighbors? (YN) 22. Date o f complaint and date o f response 23. Date o f request and date connection i s made -- 24. Volume o f water into supply (m3) ----- 25a.Billings to (income from) residential customers (LC) 25b.Billings to (income from) institutional, industrial and commercial customers (LC) 26a.Volume o f water paidby institutions (m3) 26b.Volume o f water paidby industriallcommercial customers (m3) 27a. Cash collected (revenue) from residential customers, excluding connection charges (LC) 27b.Cash collected (revenue) from institutionalhndustiaVcommercia1 customers, - excluding connection charges (LC) 28. Cash collected (revenue) for new connections (LC) - 29. Number o f staff 30. Operating expenses (excluding depreciation charges) --- -- 31. Salaries and wages (LC) 32. Energy expenses (LC) + KWH and liters o f fuel 33. Total debt service (LCiyear) 34. Endo f year accounts receivable (LC) Replacement and expansiontargets J Productionandtreatment replacementlexpansion(physical works andinvestment) J Distributionandstoragereplacementlexpansion (physical works andinvestment) J Newconnections (numberandinvestment) 44 PERFORMANCE INDICATORS Impact on consumers J Water coverage (percent o fpeople served by utility) ([2]*[4a]*[5] + [31*[4bl)/ [ll J Water production(liters/capita/day) [24] 1[1] Percent o f people with access to house connections [2]*[4a]*[5] / [ I ] = [A] Percent o fpeople with access to standpipes [3]*[4b] I [I] [B] = J Percent o f households without access to piped supply 1- [A] - [B] J Average time betweencomplaint andresponse (days) [22] J Average time betweenrequest for andinstallationo fconnection (days) [23] J Durationo fsupply (average hours/day) [12] Revenue per person served (LC/persodyear) [27a] {[l]*([A] + [B])} J Annual cost ofwater for ahouseholdconsuming 3m3o fwater per month froma yardtap. [17] 12 J Annual cost o fwater for ahouseholdconsuming 3m3o fwater per month froma standpipe. [I81 3 ** ** 3 12 J Average time to collect 20 liters ofwater [ii][iii]20 I * Financial Performance J Amount billedper m3 into supply ([25a]+[25b]) I [24] J Cashcollectedper m3 into supply ([27a]+[2%]) [241 J Amount billed (income) / operating expenses ([25a]+[25b]) / [30] J NRW(volume billedas percent ofvolume into supply) ([26a]+[26b]) / [24] J Value ofNRW as % ofthe operatingexpenses {([25a]+[25b]) - ([27a]+[27b])}/ [30] J Debt service ratio (debt service / revenue) [33] / ([27a]+[27b]+[28]) J Collectionratio (cash collected / amount billed) ([25a]+[25b]) J Collectionperiod(days) {[34] / ([27a]+[27b])} *([27a]+[27b])}/ 365 J Operating cost coverage (operatingrevenue / operating expenses) ([27a]+[27b]) / [30 + depreciation (re~lacement)] OperationalPerformance J Operating expenses per m3 into supply [30] / [241 J Energy expenditureper m3 into supply [32] / [24] J Labor costs (percent o ftotaloperatingexpenses) [31] / [30] J Staffing level (number per 1000connections) {[29] / ([4a]+[4b]+[4c])} * 1000 J Average operatingpressure (meters) [average of 13 a,b,c, ...] J Meteringlevel (percent ofconnections withfunctional meter) [6] / ([4a]+[4b]+[4c]) J Production capacity (volume into supply (m3iday) / productioncapacity (&/day)) [24] / [7] J Transmission capacity (flow capacity (m3/hour) / productioncapacity (m3/hour)) [8] / [7] / 24 J Storage capacity (storage (m3) / productioncapacity (m3/day)) [91/ [71 45 Annex 4: DetailedProgramDescription MALAWI: SecondNationalWater DevelopmentProject 1. The proposedNWDP I1project will be part o f GOM's National Water DevelopmentProgram which consists o fUrban Water Supply and Sanitation, Town, Market Center, and Rural PipedWater Supply and Sanitation; Water Resources Management; Rural Water Supply and Sanitation; and Sector Management and Urban Water Sector Reform. 2. This Annex summarizes all the activities proposedto be financed under GOM's program, including the IDA project NWDP I1as well as the projects financed by other donors. ComponentA: UrbanWater Supply and Sanitation 3. Component A includes investments and consultancy studies that would be executed by Lilongwe and Blantyre Water Boards (LWBand BWB).Policy implementation, institutional and regulatory reform activities for the urban water sector reforms categorized to be under the responsibility o f G O M are included inComponent D : Sector Management and Urban Water Sector Reform. 4. EIBEUFundedProject:The urbanwater component o fthe overall sector programwill also be financed by a consortium o f European Investment Bank (Em)and European Union Water Facility (EUWF) under the MalawiPeri-UrbanWater and SanitationProject. The EIB/EUWFproject would be about Euro 32 million in size and it i s expected to fund a service contract and related investments and capacity buildingactivities that the service contractor i s mandated to carry out inBlantyre and Lilongwe. The key areas o f focus would be; (i) improvements inproduction capacity; (ii) reduction of nonrevenue water; (iii)efficiency improvement o f the two water boards; (iv) financial sustainability o f the two water boards; and (v) serving the low income communities. Water Aid o f Malawii s a key partner in serving the low income communities. 5. The main objectives o f the above project are to: (i) performance capacity to LWB and raise BWB; (ii) restructuringheformingo fthe Water Boards (not only training); and (iii) actual implementation o f an investment program (improve production, reduce NRW, extend service to low-income areas). The key performance indicators for the project include reduction innon-revenue water, improvements in commercial efficiency, increasedproductionvolume, and population with improved access to water supply withparticular focus on the low incomeand unservedareas. 6. IDA FundedProject: The activities funded under the IDA financed project include: (Al) priority investments; and (A2)reaching the un-served areas, describedbelow. 7. PriorityInvestments:Priority investments would include: (i) to mitigate water supply actions disruptions inBlantyre; (ii) leak and plant repair inboth cities; and (iii) to serve customer urgent actions backlog inBlantyre. 8. Actions to mitigate water supply disruptions in Blantyre: Blantyre has been experiencing significant problems related to frequent and long disruptions inwater supply to a large part o f its population. Procurement o f spare parts for pumps, motors, and switch gears for raw and clear water at Walker's Ferry and Chileka pumpingstations will mitigate water supply disruptions inBlantyre until these pumpsand the entire electro-mechanical equipment are replaced under EU-EIB'project. 9. Urgent leakage andplant repair: There i s an urgent need to repair major physical leakages in Blantyre that are causing large water losses because the cost o fproducing and distributingwater i s 46 particularly expensive inBlantyre due to the highelectricity costs o f pumpingthe water up 800 meters. Procurement o f leakage repair materials and actual repair o f visible leakages within the distribution network will reduce such apparent water losses before the service contractor i s inplace. InLilongwe, urgent rehabilitationand maintenance o fplant and equipment will be carried out. This will involve the procurement of essential equipment spare parts for repairs including On-Site Electrolyte Chlorination plant, Damvalves to ensure continuous andreliable water supply. This will also involve the procurement o f pipes and fittings for repairs o f a 525 mmasbestos cement (AC) pumpingmain from Northern Booster Station to Kanengo which i s experiencing highfailure rate. 10. Actions to serve customer backlog in Blantyre: There are about 2,500 customers inBlantyre that have already applied for water connection but are yet to be connected due to lack o f meters. 5,000 meters will be purchasedo fwhich halfwill be used for thispurpose, and the other halfwill be used for replacement o f the old meters that are not functioning to reduce wastage and leakage. Purchase o f 5,000 meters will benefit more than 25,000 people. 11. Reachingthe unservedareas: This component would include the following sub-components: (i) piloting o f institutional arrangements to serve the low income/peri-urban areas with focus on Blantyre; (ii) increased access to sanitation and hygiene promotion; (iii) procurement o f meters and connection fittings; and (iv) future expansion o fdistribution andnew connections. 12. Piloting of water supply and sanitation services in low income/peri-urban in Blantyre: In addition to the approach being adoptedby LWBwith assistance from Water Aid, a couple o f different institutionalmodalities for serving the low income areas will be piloted. The three main options would include BWB: (i) managingwater supply services inlow income areas on their own; (ii) outsourcing only the management o f water kiosks to local service providers; and (iii) outsourcing the management o f the distributionnetwork and all outlets (kiosks and household connections) to local service providers. The / choice o f technology and cost recovery plans for such services would be based on the studies carried out duringprojectpreparation. It is envisagedthat the outcome o fthese pilots will feed into the service contract which will be implementedunder a separate project funded by EU/EIB.Inaddition to these pilots, a baseline survey will be carried out to enumerate the basic coverage, service levels, and institutional arrangements of service delivery inlow income/peri-urban areas inBlantyre and Lilongwe. 13, Increased access to sanitation and hygienepromotion: This component would support BWB and LWBto implementa comprehensive sanitationprogramwhich will deliverbothimprovedaccessto sanitation as well as hygiene promotionthrough adoption o f the "sanitation marketing" approach. 14. Increased new connections: InLilongwe, 5,000 water meters will benefit about 25,000 people and also reduce the highlevel o f commercial losses caused by meter under-registration. 15. Funds reservedfor future expansion of distribution and new connections: Fundswill be reserved for use on an output-based form for future expansion o f distribution and connection o fnew customers. It i s expected that the Water Boards (or any water service operators) will pre-finance the investments required for connecting the new customers, andreceive the pre-defined cost per connection retroactively on the basis o fthe number o fnew customers they have connected. It i s envisaged that a mechanismwill be put inplace under the project to attract other donors and financiers, including the Global Partnership for OutputBased Aid, to finance the extensions o f water supply to low-income households intowns and cities. 16. Mechanismfor Output-BasedApproach: The Water Boards, inconsultation with city and town assemblies will select the areas on the basis o f their existing water supply coverage, with unserved and low income areas given preference. The output basedapproach will be adopted to shift focus from 47 subsidizing the expenditure requiredto buildinfrastructure to subsidizing the delivery o f an agreed output. The agreed output would be the number o fnew connections that will be made to targeted households via the use o f tertiary distribution pipes, pipe connections to the yard tap and yard or other forms o f tap. 17. The Water Boards (or any water service operators) will pre-finance the construction o f the tertiary distribution pipingand connections within the selected area, and would be repaidperiodically when portions o f the work have been completed and independently verified. Although the majority o f subsidy payment i s made after verification that outputs have been delivered, an advancedpayment may be made to help with start-upcosts. Consumers are expected to pay for the connection fees according to the tariff policy set inthe sector's regulatory framework. Such tariffpolicy will reflect the affordability o f the low income households and allow connection subsidies for such target population. 18. The conditions that the water service provider would need to fill to receive the funds will include: (a) consultation and facilitation with the water users inthe communities; (b) compliance with ESMF and RPF; (c) World Bankprocurementrequirements for the works; (d)meetingrequiredspecifications for the connections, service delivery to the connectedhouseholds at a satisfactory level for a specified number o f months; and (e) independent verification for the compliance o f the above conditions. 19. Aqueduct Planning: Furthermore, preliminary design, EIA and safeguard plans for aqueduct to treatment plants will be carried out for Lilongwe. This component i s aimed at mitigating the water pollution to the raw water inLilongwe River close to the treatment plant. ComponentB: Town, Market Center andRuralPipedWater Supply and Sanitation Background 20. The three RegionalWater Boards are mandatedby law to provide water supply services in 53 towns inMalawi. Inaddition there are about 80 market centers with a total population o f about 650,000 people. ComponentB1: TownWater Supply and Sanitation Objectives 21. This component is designed to improveefficiency inthe largest and fast growing towns by implementinginfrastructure development and capacity buildinginitiatives. The Proposed component objective i s to improve water resources management and achieve increasedaccess to sustainable water supply and sanitation services for people living intowns. 22. The component will support development o fTown Water Supply and Sanitation (TWSS) by providing the following key inputs: 0 Expansion o f water supply facilities intowns based on appraisal o f business plans that includes management arrangements that include performance agreement between the utility and the town management, tariff analysis, financial projections and expansion plans as well as social/environmental safeguards. Establishment o f a regulatory framework for operational efficiency, water quality, and tariff setting (implemented under component D). 0 Improved sanitation planning services intowns including on site systems, sewers, and septic treatmentldisposal facilities. 48 0 Technical assistance to Regional Water Boards to establish systems for routine O&M, financial management, customer management inorder to lower operating costs, reduce unaccounted for water and expand systemto meet increasing demand. 0 Assistance with planning for expansion and development o f existing water supply and sanitation systems. Key outputs will include: Business plans and sound management systems for the towns to ensure quality service, efficiency, viability and sustainability. 0 RWBswith improvedmanagement systems, operational and financial capacity. Improved cost recovery. 0 Improved water supply and sanitation facilities. 0 Increasednumber o f people accessing water supply and sanitation services. ProgramManagement for TownWSS 23. The primary responsibility for implementation o f town water supply and sanitation improvements will rest withRegionalWater Boards, who will contract and supervise consultants to assist with planning, feasibility studies, design, capacity building, procurement and construction supervision, as well as works contractors and suppliers. 24. The towns whose investment will be funded by IDA and other donors shall have business plans that show how tariffs will be phased to full cost recovery; that customers are willing and able to pay the tariffs required and how debt service obligations will be met. Inaddition, sound systems for financial and operations management, performance reporting and annual audits o f financial statements must be inplace along with the required capacity. 25. The proposedprojects themselves mustbe feasible -technically, environmentally, socially, financially and economically. These projects and business plans must have been developed in consultation with stakeholders and be endorsed by the MIWD.Grants and loans for the project sub components are to be channeled through the RWBs from MIWDand MoF. On-lending arrangements will be on terms normally provided for utilityfinancing. DesignCriteria 26. To avoid financing over-designed water supply systems that customers cannot afford, the focus in the project will be on affordable design. The systems should be designed so that they can be expanded as population grows and customers can afford a higher level o f service. The emphasis will be on keeping the cost per capita low (maximum US$60), designing for the longer term inphases. Systems will be designed such that the land, reservoirs, water intakes, and transmission main diameters are designed to meet demand for ten years; boreholes, network diameters, pump stations and treatment plants, network length and storage tanks are designed for five years. Inso doing it i s assumed that the system expansion will be staged with production, treatment, and storage added at least every five years, and network distribution and house connections added on a continuing basis. The estimated cost o f the preliminary system design will be checked against affordability and willingness o f customers to pay for improved service as well as the per capita ceiling on what can be grant financed under the project, and adjusted as necessary. Water works designedunder this program shall be sound, simple to operate, manage and maintain. Sanitation improvements will be carried out inconjunctionwith water supply improvements. A $5 per capita will be provided to implement sanitation improvements prioritized by the community. 49 Selection Criteria 27. The RegionalWater Boards, by law, are responsible for the provision o fwater supply services in selected towns, generally the larger and faster growing ones. Since the RWBswere established in 1996, water supply services have improved considerably, with water available 24 hours 7 days a week. The populationinthese towns i s doubling every 15-20years, so continuedinvestment i s requiredto keep up with demand. Itis expected that these towns cannow self finance recurrent, replacement andpart o f expansion costs. It i s also expected that day-to-day management o f these systems i s decentralizedto the scheme level, with revenues ring fenced, with only about 40 percent o frevenues transferred to the head office o f the RWBs inreturn for higher level technical support. Scheme managers are fully responsible for managingtheir facilities. RWB towns are all eligible for financing, but individually must meet certain criteria, before the Government will finance further expansion. AppraisalCiteria 28. Before tendering and construction MIWDwill carry out an appraisal to check that the following criteria have been met: Cash flow coveringrecurrent costs. Effective financial management, accounting, billinghollection, and monitoring/evaluation systems inplace. Approved town business plan. Cost-effective, staged design for water supply facilities. Financial projection shows that revenue covers operations and maintenance, renewal and replacement o f short life assets, and part o f expansion costs. Biddocuments prepared. Day-to-day management decentralized and financing ring fenced at the scheme level, with performance incentives available to operators. 0 Environmental and social assessmentshave been made. Component B2: Market Centre andRuralPipedWater Supply and Sanitation Objectives 29. The overall objective o fMarket Centre and RuralPipedWater Supply and Sanitation (MCRPWSS) sub-component i s to support decentralized provision o fwater supply and sanitation services inmarketcenters. The specific objectives are: 0 to establish well functioning water supply and sanitation systems inthe Market Centers and rural piped systems o f participating communities, to increase the capacity o fparticipatingdistrict assemblies and communities to effectively operate and manage their Market Center and rural piped water supply and sanitation facilities. 30. The component will support the development o f MCRPWSS by providing the following key inputs: Technical assistance to: - District Assemblies to buildcapacity to plan and oversee the operation and management - o f MCRPWSS Programs; Communities to buildcapacity to plan and manage their own water and sanitation facilities, and local utility operators to efficiently operate and maintainthe water supply facilities; 50 - Local consultants to buildcapability to assist communities to plan, construct and maintain their own facilities, 0 Goods, services and works for implementationo f MCRPWSS Program. 0 Financial assistance to RWBs to provide technical assistance to t o d u r b a n market centers and to DAsto provide technical assistance to rural MCs. Key outputs will include: 0 Market Centre and Rural PipedWater Supply and Sanitation Schemes established. 0 District Assembly staff (District CoordinatingTeams and extension workers) adequately trained and equipped to support market centre water supply and sanitation programs. 0 Market Centre Water Associations established and able to manage and maintain systems. 0 Local utilityoperators contracted to operate and maintain the water supply facilities. 0 Local consultants capable o f supporting MCRPWSS at the community level. 0 Improved water supply and sanitation facilities at the community Market Centers and rural pipedsystems. 0 Improved sanitation and hygiene practices inparticipatingMarket Centers and rural piped systems. ComponentManagement 31. The implementation arrangements reflect the policy objectives o f decentralization to lowest possible level, involvement o f all stakeholders inthe process, integrationo f sanitation with improvements to water supply and recognizingwater as an economic, as well as social good. 32. A demandresponsive, performance basedapproachwill be followed so that communities receive assistance to put inplace institutions and develop capacity for implementation. Communities will be able to access more resources for development o f their market center and rural piped water supply and sanitation systems as they demonstrate their growing capacity. A stepped approach has been designed for market centre and rural piped water supply and sanitation to allow each community to move at its own pace and receive further assistance when ready. RWBs, inconsultation with the district assembly and MIWDwill assistthese communities to plan, develop, andoperate their water supply and sanitation systems. 33. Essentially the same implementationarrangements will be employed for both rural piped systems and market centers. This is because bothtypes o f systems require the same type o f management arrangements, that i s an oversight body (Water Association, Cooperative or Trust), a full time utility operator plus core technical and financial staff, and part time maintenance and revenue collection personnel from within the communities. The major difference i s that for rural piped systems special arrangements mustbe made for the participationo f a number o f communities inthe planning and management. Stakeholder Consultation 34. Under the new mandate MIWD and RWBs will, inpartnership with the district assemblies, become the supporters and facilitators o f community basedmanagement, with people incommunities taking key decisions from planning and design through to execution and implementationo f facilities including monitoring and evaluation. Increasedparticipation o f users in scheme design and management i s a key way to improve the chances o f new facilities being looked after properly and used effectively hence wider stakeholder consultations shall be a prerequisite at all stages. 35. This approachwill be important for the success, sustainability and to ensure a sense o fownership o f the MCRPWSS. Eachtime a task or decision that affects their subprojects i s made on their behalf, the communities shall be consulted or involved. A special effort will be made to involve women inthe 51 planning process at the very beginning o f the consultation process, and linkingwater supply and sanitation to other women's group activities inthe community. Inorder to realize maximumbenefits from consultation process, all subprojects shall include technical assistance and community development ,activities to ensure adequate capacity amongst the communities inmaking informed decisions when preparingtheir Community Water Supply and Sanitation (WSS) Plans. CapacityBuilding 36. Communities are responsible for planning and managing their water supply and sanitation facilities and improving health and hygiene practices. The areas inwhich communities will have to be trained include: 0 Participatory water supply planning. 0 Community management including finance management. 0 Operations and maintenance o f water and sanitation facilities. 0 Mainstreamingo f Gender, HIV/AIDS and other social issues. 0 Health, hygiene and sanitation promotion. 0 Problem solving and leadership skills. 0 Environmentaland catchment protectionand management 0 Monitoring and evaluation skills DesignCriteria 37. While the average growth rate intowns within a country may be high, growth rates and settlement patterns inindividual towns i s difficult to predict. A short planning horizon with a modular approach to design and staged construction are important. Accordingly, piped systems for market centers will be designed suchthat the land, reservoirs, water intakes, andtransmission main diameters are designed to meet demand for ten years; boreholes, network diameters, pump stations and treatment plants, and network lengthand storage tanks are designed for fives years. For sanitation and hygiene promotion, component would encourage households to improve their hygiene and sanitation practices. Households will be expected to pay for their ownlow cost on-site sanitation, relying largely on locally available materials and technologies. The component will support training o f local artisans to construct sanitation facilities. Selection Criteria 38. The RWB will engage a consultant who in consultation with MIWD,District Assemblies, and individual communities will identify viable market centers. At this stage the RWBs consult with District Assemblies to confirm the institutional and financial arrangements. Recognizingthat most are or could be served by handpumps, the selection criteria will be oriented toward economic development potential: 0 socio-economic potential o f a center 0 priority inthe district infrastructure plan 0 commitment o f center to meet conditions for participation 0 population inand around the center 0 existing level o f service and condition o f the water supply facilities 0 availability o f electric grid connection. 0 geographic balance 39. The RegionalWater Boards will then facilitate the development o f water supply and sanitation facilities taking into account preferences o f the communities. This will be achieved byprocuringand managing contracts, both for consultancy services and construction. A stepped approach to planning and implementation, as describedbelow, will be followed. 52 SteppedApproach to Implementation 40. Not all communities canbenefit from the program due to limited budget. A stepped approach at community level shall therefore be adoptedto ensure that only those communities that are willing to fulfilltheir responsibilities will benefitfrom the program. The stepped approachthusrequires communitiesto develop their water supply facilities instages, moving ahead as they buildtheir management capacity, and conform to program guidelines. Inthis way Government better ensures that scarce financial resources are used efficiently and are sustainable. An Appraisal Committee consisting o f MIWD,RWBs,andthe district assembly will review and determine eligibility to go from one stepto the next. STEP 0 - Regional Water BoardAssistance to Market Centers 0 Pre-feasibility studies. 0 Selection o f shortlisted communities. Agreement on project conditions for participation. 0 Establishment o fWater User Association. 0 Hiringo flocalutilityoperator and core operating staff. 0 Selection o f consultant. Main Criteria to Oualifi-for Step I -- - Establishment o f Water Association. Hiringo flocalutilityoperator and core operating staff. Submission o f application (business and investment plan) to participate inproject. STEP I - Initial Planning and CapacioBuilding 0 Conduct a baseline survey and assessment. 0 Consult with stakeholders on conditions for participation. 0 Prepare a preliminary design. 0 Identify immediate service improvements. Main Criteria to Oualifv for Step 2a - - Application filed with baseline survey and assessment. Stakeholder consultations heldregardingprogramrequirements: management arrangements, tariffs, and design - particularlylayout o f the distribution system and the location o f -- individual connections and community standpipes. Preliminary design completed and approved. Proposed immediate service improvements within per capita ceiling and according to positive list. STEP 2A - BusinessPlanning and Desian 0 Prepare a business plan. 0 Prepare water supply facilities design and tender documents. 0 Prepare operator performance agreement. 0 Prepare sanitation investmentplan. 0 Implement immediate improvement plan for existing facilities. 0 Buildthe capacity o fthe Water Association and localutilityoperator, introducingimproved financial management, billinghollection, operational and monitoring procedures inexisting systems. 53 Main Criteria to Ouali@.for Step 2b (Tendering and Construction1 Before going into Step 2b the following should have been achieved: --- Approved business plan. Water Association meeting on schedule and trained to manage its water supply facilities. Localutility operator trained to manage the water supply facilities with operational, accounting, financial management, billing and collection, and monitoring and evaluation -- systems inplace. Cost-effective, staged designs for water supply facilities. --- Financial projection shows that operating cash revenue covers cash expenses. Agreement for provision for long term external technical assistance signed. Stakeholder consultations completed. Immediate service improvements completed. STEP 3 - Tenderingand Construction Prepare biddocuments for works. Evaluate the bids. Rehabilitate and expand facilities. Supervise construction. Buildthe capacity o fthe utilityoperator. Arrange for long term professional support. Continue capacity buildingo f the Water Associations and utility operator. Main Criteria to Oualift for Steu 4 (Exuansion) -- Business plan current. Operations, financial management, billing and revenue collection & M&E systems in place - and efficient, as confirmedby independent audit. Cost recovery tariffs in place for existing system for recurrent, replacement, and part of - expansion costs. Utility operating efficiently with adequately trained technical and financial staff, operator - performance contracts signed, and external, higher-level technical assistance secured. Water user Associations' Board meeting as scheduled and effectively carrying out its oversight functions. STEP 4 - Exuansion (following hWDPII1 Combination o f grants, commercial loans and internally generated funds for staged expansion. 54 Figure 1:Market Centre Water Supply and Sanitation Program STEP 0 RWBAssistance to Market Centers STEP 4 Pre-feasibility studies, selection o f Expansion Year-by-year utility participating communities, agreement extends distribution on project rules, establishment o fWater system, and connects Associations, and hiring of system new customers. Every manager and core oDeratina staff. STEP 26 Rehabilitation and five years utility expansion, continued expands production, capacity building treatment, storage, RWB tenders rehabilitation primarydistributionto keep up with growth. STEP2a and expansion works. Expansion financed Design and immediate Design consultants advise through utility revenues service improvements on bid evaluation and and cost sharing with Phase 1: supervise construction, and continue on-the-job MIWD. STEP I Assist water association and training o fwater utilityoperator to prepare a Baseline, Immediate association and utility business plan. Implement ServiceImprovements, immediate improvement plan operator. andpreliminary Design to repairheplace essential Technical Assistance to equipment; install monitoring market centers to form meters; and improve unit Water Associations, hire operations, billing and systemmanager and core collection, accounting, and staff, consult with monitoring. Prepare stakeholders, carry out rehab/expansion design, and Main Criteriato Oualifi foi baseline assessment, bid document. Introduce identifyimmediate service contract for operators with Stev 3 improvements, prepare performance incentives. Operations, financial preliminary design and management, billing and financial analysis, and revenue collection, and M&E prepare application for systems inplace and efficient (a Step 2a. confirmed by independent audit: M a i n Criteria to Oualifi for Operating cash revenue covers Stev 2b cash expenses. Utilityoperator under Main Criteria to Oualifi Stetl2, Phase 2: performance contract, and for Stev 2a Businessplan acceptable. higher level external technical Application filed with Rehabilitatiodexpansiondesign assistance secured from RWB 01 baseline information, acceptable. qualified consultants. preliminary design, and Operator performance-based Board meeting as scheduled and financialhariff analysis. contract signed. effectively overseeing system. Stakeholder consultation on Executive Board active, meeting 01 System expansion planand tariffs and distribution systerr schedule. business plan acceptable. layout competed. Stakeholder consultations completc Cost sharing plan acceptable. Immediate service Immediate service improvements improvement plan submitted. completed Utility operator trained in unit operations, billing and collection, accounting, and monitoring. Yard tap connection applications and connection fees received. 55 Component B3: Capacity Building 41. Capacity buildingwill be implemented at all levels and among all stakeholders - from the Regional Water Boards through to participatingcommunity members. Regional Water Boards 42. A special initiative is neededto develop the capacity o fthe RegionalWater Boards to implement the TWSS Projects effectively. The approach to capacity buildingwill be through onjob training during project implementationand specialized training, local and off-shore (short and long term). Onthejob training will be achieved by attaching some members o f staff to work with consultants. 43. Key members o fPIUs and InternalProcurement Committees (IPCs) will be trained on World Bank procurement procedures and guidelines, financial management and reporting, project management, project monitoring and evaluation, public-privatepartnership, among others. 44. Longterm training will lead from Diplomato Masters level inspecialized fields inwater and sanitation, inproject managementmonitoring and evaluation, policy, etc. Details will be provided inthe training plan to be prepared. 45. Operational support to the PIU for supervision o fthe activities will be funded on a declining basis. Support will be providedto the RWBs incontinuing implementationo fthe HN/AIDS programs which include awareness building,promotion o f H N / A I D S testing, and prevention. Component on RuralWater Supply and Sanitation(notfinanced under NWDP11) Objectives 46. The Rural Water Supply and Sanitation (RWSS) component o f NWDPIIi s designed to support decentralization ofrural water supply and sanitation service provision by helping to buildcapacity for planning and management o f systems at the lowest possible level. Funding would be provided (i) to increase the capacity o f participatingdistricts to effectively manage their rural water supply and sanitation programs, (ii) to increase the capacity o fparticipatingcommunities to effectively manage their water supply and sanitation facilities, and (iii) ensure that well functioning water supply schemes are inplace to inparticipatingcommunities. 47. The Rural Water Supply and Sanitation Component i s divided into two sub components one for district-based, point source water supply and sanitation, and the other i s rural piped systems. The districts own the assets and are responsible for bothtypes o f systems, butthe districts are directly responsible for managing the implementationo fpoint sources inindividual villages, whereas the districts delegate the management o frural piped systems to the MIWD, which inturnmay draw on the expertise and capacity o f the RWBs.The implementation arrangements for rural piped systems are identicalto those for market centers (see the town component o fNWDP 11)excepting the MIWDi s responsible for the activities assigned to the RWBs. 48. The principal target groups for this Component will be staff o f district assemblies, (constituted as a District CoordinationTeam), Community Facilitation Teams and local Technical Service Providers, and rural communities. The DCT will be responsible for planning and managing the Programthat will be implementedat the community-level The Districts will ensure that communities get the support they needto plan and undertake their activities and maintaintheir facilities. 49. The Component will support District RWSS by providing the following key inputs: 0 Consulting services to district administrations to buildcapability to plan and manage 56 their RWSS Programs. Technical assistance and training for Community FacilitationTeams who specialize community development to promote hygiene and sanitation andbuildcommunity capability to plan, construct and maintaintheir own water supply schemes and sanitation facilities. Technical assistance to local Technical Service Providers (artisans) who specialize inthe construction o f spring catchments, borehole aprons, and latrines; and inthe installation, repair and spare parts supply for handpumps. Goods, services and works for implementationo f District RWSS Programs. Capacity buildingat the district and zonal levels to support program implementation (financial management, procurement, contract management) and to put inplace improved systems for monitoring and evaluation. Key outputs will include: District Water Supply and Sanitation Programs. 0 District staff adequately trained and equippedto support rural water supply and sanitation at the community level. 0 Community facilitators capable o f supporting RWSS at the community level. Artisans/technical service capable on constructing springcatchments, handpump aprons and latrines; and installing, repairing and providing spare parts for handpumps. Community water and sanitation committees established and able to promote hygiene and sanitation and to manage and maintain their water supply facilities. Improvedwater supply and sanitation facilities at the community level. 50. ProgramManagement: The primaryresponsibilityfor implementationo fruralwater supply and sanitation improvements will rest with districts and communities. The MIWDwill be responsible for assisting districts to obtain consulting services, technical assistance, appraising District RWSS Programs, providing technical support for program implementation, monitoring and evaluation, and helpingto expedite construction. A stepped approach would be followed that will allow districts and communities to receive support based on their performance as determined by meeting set criteria. 5 1. MIWDwill contract specialists to assist districts to develop their ownRWSSPrograms andto buildcapacity for implementation. A District CoordinatingTeam, with membership drawn from different departments will plan and manage implementationo f the District RWSS Program. They will prepare a Strategic Plan and regularly update the annual RWSS Action Plans recommending to the district assembly the communities to participate inthe program each year, arranging for community facilitators to help communities to plan and learn to manage their facilities, assisting communities supervise the work o f community facilitators, appraise Community Water and Sanitation Plans, and commissionnew water facilities. 52. Districts will contract local community facilitators to assist communities to prepare their facilities and managementplans, train them to manage their water supply facilities, promote hygiene and sanitation, andprovide advice duringconstruction. Districts will also contract local artisans to help construct water points and latrines. The District RWSS team will supervise community facilitators and artisans, monitor progress at the community level, and also help expedite implementation. CapacityBuilding District Capacity Building Consultants will be contractedby MIWDand supervisedby MIWD - RegionalWSS Specialists to assist districts to develop their RWSS Programs and to buildcapacity for implementation. District staff will learn about program development, management and 57 monitoring and evaluation through workshops and on-the-job training.. The MIWDRegionalWSS Specialists will monitor progress at the district level and also provide technical assistance. Some o f the specific areas inwhich district staff will be trained include: ---- Preparing District WSS plans Establishing District WSS teams Procurement procedures Training o f District WSS teams Community Capacity Building - Community facilitators will be contractedby districts to assist communities to plan and manage their water supply facilities and to promote sanitation and hygiene. The Water and Sanitation Committee and caretakers will learn necessary skills primarily through on- the-job training. The District RWSS teams will monitor progress at the community level, and, inthe process, provide technical assistance. RWSS SteppedApproach District Level Step 1- Districts receive assistance to prepare their RWSS Programs. Step 2 - Upon approval o f the District RWSS Programby MIWD,districts receive further assistance for implementation. Community Level 0 Step 1- Communities receive assistance to form WATSAN committees and prepare facilities and management plans. Step 2 - Upon approval o ftheir facilities and management plans by the district, communities receive further assistance to buildmanagement capacity and to construct their facilities. RWSSSelection and AppraisalCriteria District Selection; All districts within Malawi are eligible to benefit from the project. However, the MIWDinconsultationwith individualdonors will determine how to phase districtparticipationsince not all can be assisted simultaneously. Selection criteria include: (i) water supply coverage, (ii) geographic balance, and (iii) proximity to one another to shorten travel distances. District Step 2Appraisal; To qualify for step 2, districts must: (i) appoint qualified technical staff to manage their RWSS Program; (ii) finance the operation (time, travel and equipment) o ftheir District Coordinating Team; and (iii) prepare a rolling district RWSS Plan including, acceptable subproject proposals and procurement plans. 0 Community Selection: The Programi s demandresponsive. Communities must apply for assistance and are then selected on the basis o fneed and readiness -the criteria including poverty, water supply coverage, and proximity to one another. Community Step 2 Appraisal: To qualify for step 2 communities must: (i) establish a trained WATSAN committee, at least half o fwhom are women; (ii) prepare an acceptable Community WSS Plan and budget; and (iii) collect and deposit o f into a bank account a cash budget contribution equal, at least, to 5% o fthe projected capital cost o f the Plan (on an exceptional basis, the district could contribute up to half of the requiredcash contribution from the District Development Fund). Communities will also be requiredto commit themselves to an in-kindcontribution that, together with the 5% or more cash contribution, would have a value equal to 10%ofthe estimatedcapital costs. 58 53. FinancialPolicy:The community contribution for rural water supply systems wouldbe ten percent, at least half of which mustbe incash. The cash contribution would be placedina community- managedbank account as an indicator of readiness prior to construction. The contributionwould be transferred to the district after the borehole has been successfully pump tested. Incommunities requesting a piped system, half the community cash contribution will be paid to the district as an indicator o f readiness before the detailed design work begins. The other half o f the cash contributionwill be paid before the works contract i s signed. The in-kindcontribution will be made inthe construction phase. The Project would establish a per capita subsidy ceiling, initially set at $3O/capita for all rural systems. On a case-by-case basis the ceiling may be exceeded ifsource and transmission costs are exceptionally high. Technical assistance and training for communities would be fully financed by the project. It i s not envisioned that subsidies will be provided for household latrines. Cost sharing and construction caps will be periodically reviewed and adjusted. 54. Technical DesignCriteria: Forboreholes fitted withhandpumps, the programwill finance a basic level o f service o f at least 15 litersper capita per day with one water point serving a maximumo f 300 persons usually within 250m but not more than 500m. Hand dugwells should provide at least 15 liters per capita per day with one well serving a maximum o f 200 people. Small piped systems (springs and boreholes fitted with mechanized pumps) should provide at least 20 liters per capita per day to the existing service population. The design should allow for future expansion. For sanitation and hygiene promotion, the emphasis will be training WATSAN Committees and village volunteers to educate households about hygiene and to promote sanitation. Households will be expected to pay for their own low cost on-site sanitation, relying largely on locally available materials. The project will support artisans to get into the business o fmarketing and constructing pit latrines. 55. ConsultationProcess:All subprojects shall include technical assistance and community development activities to ensure adequate assistance to the community inmaking informed decisions when preparingtheir Community WSS Plan, and intraining the WSS Committees to manage their facilities including preventive maintenance and financial management. 56. Gender EqualityIssues: A special effort will be made to involve women from the very beginning o f the planningprocess and to ensure they have a significant role inongoing decision-making and program management. Community Facilitation Teams will raise for discussion incommittee and community meetings issues around the role o f menand women inthe safe supply and use o f water and the improvement o f sanitation facilities and hygienic practices. 57. HIV/AIDS: The reality o fHIV/AIDS as a major healthriskandimpedimentto community-based WSS management will be addressed inthe committee and community meetings with a view to reinforcing preventive messages and taking measures to negative impacts. 58. LinkagebetweenCommunitiesandDistrict: Communities shall be involved inall stages o f the project cycle. Eachtime a task or decision that affects their subprojects are made on their behalfby the district, the community shall be consulted or involved. Communities shall sign-off on all official documentation pertainingto subproject implementation(i.e. contract award, payment certificates, completion certificates). 59 Figure2: SteppedApproach to Rural Water Supply and Sanitation District Planning and Implementation STEP2 Capacity building to implement Woreda STEP 1 RWSSPrograms Technical Assistance to establish District RWSSPrograms Consultants assist District RWSS Teams to: 0 Continue buildingdistrict capacity in Consultants assist Districts to: management, accounting, procurement and Prepare RWSS Plans contract management. Improve their management. accounting, 0 Continue training o f local service providers procurement and contract management to help communities to plan, construct, and skills. manage their water and sanitation facilities. 0 Select and train local service providers incommunity development, handpump installationhepair and latrine construction. District RWSS Team equipped and trained. District RWSS ProgramPlanprepared and approved. Promotion and 0Local service providers selected for training district selection Community Planning and Construction STEP 2 Construction & Capacity Building STEP1 0 W A T S A N committee plans Planning & Capacity its water supply and Building promotes improved hygiene Technical Assistance to and sanitation practices. establish W A T S A N 0 Households practice Committee, select improved hygiene, and technology, prepare construct latrines with WATSAN Plan and collect assistance o f latrine artisans. contribution Promotion and Main Criteriato Oualifi for Stev 2 community selection WATSAN committee established & trained Facilities and managementplanprepared Community contribution to the capital costs secured. 60 ComponentC: Water ResourcesManagement 59. The water resources component o f the National Water Development Project (NWLlP) Phase I1 project follow on from the successful completion o f NWDP IinDecember, 2003. The NWDP Ihad several components, one o f which was water resources studies. The findings and recommendations o f these studies have formed the basis o f the preparation o f the water resources management component under the National Water Development Project Phase II. C1. EnablingLegislationfor NationalWater Policy 60. The project supported the development o f an enabling legislation to implement the National Water Policy o f 2005. The legislation will provide for the establishment o f the required institutional framework for proper water resources development and management inthe country. This support was provided out o fPPFduringthe preparationo f the project. Underthis sub- component support will be provided for the passage o f the legislation through parliament using information sessions, public awarenesscampaigns etc. and disseminationo f information explaining the content and implications of the new legislation. C2. Water ResourcesInvestmentStrategy 61. An integratedwater resources investment strategy i s urgently neededinMalawi which identifies, through a multi-sector economic analysis, the water resources development and infrastructure needs o fthe country to provide the infrastructure platform required for growth inthe different water usingsectors. 62. Malawi faces significant water resources management challenges relating to climatic variability, frequent droughts and floods, competing demands for water use and chronic under-investment inwater infrastructure. Water resources-related problems have a significant impact on the country's economy, the attainment o f its development goals and poverty reduction. Through the proposed sub-component o f the NWDP I1on development o fthe water resources investment strategy, the Government o fMalawi will be able to determine the constraints which under-development o fwater infrastructure will place on the present and future national growth and poverty reduction strategies, and where strategic investments are requiredto make most effective use o f limited development finance. 63. The overall objective o f the proposed sub-component i s to identify and prioritize investments in the water resources sector inview o f the national development goals o f economic growth and poverty reduction, sectoral development strategies and the constraining impact o f underdevelopment o f water resources on the country's economic performance. The specific objectives o f this sub-component are: 0 To analyze the economic development objectives o f the country and how water resources affect the country's achievements ineconomic growth and poverty reduction; To identify key water-related challenges for the country's economic development in the mediumand long-term; 0 To set-up priorities for the water sector interventions intime and geographically; 0 To identify priority water resources sector investments. 64. Methodology: To determine interventions inthe water sector which should receive priority support, it i s necessary to take into account the relevance and consistency o f selected interventions with the country's development objectives and povertyreduction targets identifiedinthe national development plans and strategies, and, specifically, inMGDS andthe recently completed Poverty Reduction Strategy 61 Paper (PRSP). It i s also neededto focus on systemic and urgent challenges inthe country's water resources development and management and the relevance o f selected interventions to these priorities. The proposed interventions should be realistic about the nature o f the challenge they are addressing and the timeframe and resources necessary to implement them. 65. The focus indefining responses to water-related challenges under the proposedWater Sector Investment Strategy shouldbe primarily on water resources development and management issues. However, it should also analyze the connections between resource use and service management because the culture and principles o f water use by major water usingsectors have an important influence on water resources management and the water security situation at the local and national scales. At the same time, inadequate water resources infrastructure and weak water resources management imposes a riskon the reliability o f water services and sustainability o f investments inthe water service sectors. 66. Additionally, the methodology for the development o fthe water resources investment strategy should take into account: regional perspectives and plans for economic development to address regional disparities in poverty and well-being that vary considerably among the districts, and between rural and urban areas; 0 inter-sectoral perspectives in terms o f economic value o f water used in different economic sectors; 0 the need to weight broader economic development targets against more immediate poverty reduction objectives; and the need to coordinate and sequence investments in water infrastructure and water management. 67. Approach and Scope: The development of the Water Sector Investment Strategy inthe Malawi context faces such challenges as: (i) outdated information on the status o fthe country's water resources; (ii)lackoftheNationalWaterResourcesMasterPlan' orStrategy,oranyotherpreliminaryanalysis a undertakenby the government to screen the priority issues and identify the necessary investment interventions; (iii) the need to place the water resources development issues ina broader naturalresources management context incorporatingland use improvements and conservation measures into the investment strategy choices; and (iv) the needto take into account international dimensions o f the water resources and upper catchments managementproblems. 68. To meet its objectives, the implementationo f the sub-component will need to consist o f two distinct phases. InPhase 1, an assessment o f the water resources situation will fill the knowledge gap on the current status o f water resources inthe country, including water availability and water demands inthe main river basins, surface and groundwater quality, the status o f the existing infrastructure, etc. The study will buildupon the analysis undertaken under the National Water Resources Master Plano f 1986 and the information and data available with different relevant central and provincial agencies. Phase I1of the implementationwill focus on defining the development scenarios, identification o f priority water resources interventions and related investment options, and will result inthe prioritizedwater resources investment strategy. 69. Initial Proiect Preparation: Selected priority multi-purpose investments will be identified for initial preparation including feasibility studies, basic design and impact assessments. The emphasis will be on the development o fmulti-purpose investments which will meet a range o f water needs for productive purposes (agriculture, industrial/commercial, energy etc.) and water supply requirements. * The latest National Water Master Plan i s dated 1986. 62 This is inorder to undertake preparatory work on priority investments so as to enable such investments to proceed to detailed design and construction as quickly as possible (although the design and construction phases are not included inNWDPII). C3. Lake MalawiLevel Control 70. In1996Lake Malawinearlydroppedbelow the levelneededto maintainflow inthe Shire River sufficient to protect downstream economic and environmental benefits. Infact, people feared that the Shire River would cease to flow as it did in 1915. The resulting social and environmental impacts would have been catastrophic given that fact that 85% o f Malawi's electricity i s generated by hydropower installations on the Shire River, fish catches inLake Malombe are an important source o f food to many people, and wildlife within the national parks and reserves along the river are dependent on a base river flow. The crisis was dissipated with the onset o f heavy rains. 71, Under NWDP1, which became effective inApril 1996, there was time to prepare a more thorough feasibility study and environmental assessment o f the low-flow pumpingscheme, as well as improved level control at Liwonde. It turned out that better level control, combined with the regional grid connector, could eliminate the riskthe river going dry in all but the most severe drought sequences (on the order o f once ina hundredyears), and ensure electric power for the country, provided Malawi can pay for and draw power from the regional connector when needed. 72. Given the positive findings o f the previous feasibility study, and the fact that the risk o f the lake dropping below the level needed to protect downstream benefits remains high,as a priority MIWDwill contract consultants to carry out the design, independent environmental assessment, resettlement plan (if required) and consultation with national and international stakeholders inthe first two years o fthe project. Given the riskthat Malawimay not be able to pay for, or draw on, electricity from the regional grid duringprolongedregional droughts, NWDPIIwill also finance a preliminary design, independent environmental assessmento f the low-flow pumpingscheme, and assessment o f the risks associated with relying on the regionalpower grid during extended drought periods. A request for additional financing to construct the level control structure couldbe made to the Bank's Board o f Directors after the design, environmental assessment, resettlement actionplan, consultation and riparian notification are completed and have been reviewedby an international panel o f experts and the Bank's quality assurance group. This could also includethe detailed design the low-flow pumping scheme. The objectives o f this sub-component are: To-design and carry out safeguard studies and consultation to convert the existingbarrage at Liwonde to a permanent structure and installmodem gates to better regulate Lake Malawi levels and Shire River flows. To provide for more reliable electricity supply from the Shire River power plants, with lower risksoflow flows curtailing power productionindrought periods, as a resulto fimproved flow regulation at the Kamuzu Barrage inLiwonde. To protect the aquatic ecology inLake Malawi and Shire River System including fish catches, and consequently the livelihoods o f communities that depend on it, throughthe provision o f environmental flow releases, restoring inpart the natural conditions o fhigher flows at the end o f each wet season. To improve lake transportation between many lakeshore towns inMalawias well as in Mozambique and Tanzania as a resulto f more stable lake levels. To further analyze the need for a low flow pumpingbarrage at the mouth o f the Shire River to be constructed according to a pre-defined action sequence based on projected lake levels duringprolongeddrought sequences. 63 To establish and maintain an IntegratedWater Resources Management System for Lake Malawi and the Shire River, as a strategic framework within which the water resources planning, development, management and operation o f the Lake and River systemwill be undertaken, and to provide basic tools such as hydrological modeling systems to enable fully informed planning and management to be undertaken within this framework. This subcomponent will achieve these objectives by: Designing and completing safeguard studies and consultation necessary to upgrade the existing Barrage at Liwonde. Improving the institutional arrangements for its operation and maintenance. Providing operating rules which will reduce the risk o f lowhigh Shire River flows and o f lowhigh Lake levels, and which will enhance aquatic and streamside environments through environmental flow releases. The steps to be undertaken under this subcomponent include: I.DesignandupgradingoftheKamuzuBarrageatLiwonde. Design and preparation o f contract documents for the construction o f the upgraded Kamuzu Barrage including: -- Review and refinement of the operating rules o fthe proposedbarrage. Agreed institutional arrangements for the ownership, oversight and operation o f the - upgraded level control structure. Preparation o f a hydrological and environmental monitoring plan for Lake Malawi and - the Shire River. To refine the hydraulic model (Integrated System Simulation Model - IWSSM), and - measure and assess barrage operations. Incorporation o f relevant recommendations o f the Environmental Impact Assessment into the design o f the dam and monitoring system. Initial operation o f the systemunder the new operating arrangements, release rules and other environmental operating criteria. 11.Preliminarydesignofa pumpingbarrageat Samama/Mponda. Prepare a preliminary design for the low flow pumpingstructure following on the feasibility study carriedout under NWDP1. Prepare an independent environmental assessmentrefining the work done under NWDP1. Detailed design could be financed with additional funding after EL4i s completed. Evaluate the proposedpower sharing arrangements for the regional gridconnector interms o f the risks to Malawi indrawing power duringextendedregional droughts. Identify trigger points to construct the pumping scheme inthe event o f extended drought sequences. 111.EnvironmentalImpactAssessment Independent EnvironmentalImpact Assessment o f the level control structure at Liwonde and the low flow pumpingscheme. IV. Stakeholder Consultations Consultation with the other riparians (particularly closely with Tanzania and Mozambique) from the earliest stages inregard to all aspects o f the proposals which may affect them, including the notificationsrequiredunder the policies o f GOM, under the Z A M C O M and SADC Agreements, and under relevant World Bank safeguard policies. Consultation will include national 64 stakeholders, particularly the lakeshore communities, as well as international stakeholders. A panel o f experts will review the design and environmental assessment. C4. WRM Institutionaland Technical Support: (purtiullyfinanced by IDA) 73. The ongoing water resources sector reform process will be strengthened through the establishment o f the institutional framework interms o f national water policy. Inparticular this includes the establishment o fthe National Water Resources Authority (NWRA)and support to the Ministry, enabling it to carry out its core functions inaccordance with the new water policy and legislation- including policy formulation, regulation, strategic planning, and support to the water sector. 74. Establishment o f the NWRAwill require an entire institutional formation process. This includes a clear determination o f functions and mandates, humanresource planning, business planning, physical establishment, staffing and transfers, equipping, training and capacity building, and all other activities required to establish an autonomous organization, including the establishment o f the Water Resources Fund. The organization will include a nationalcenter andregional, catchment basedoffices, established inphases. Ultimatelythe process will extendto the establishment oflocal water user associations. Studies will be requiredto determine the criteria necessary for sustainability o fthe institutionand effective functioning so that it will be able to fulfill its role o f managing, developing and protectingthe nation's water resources. These will build on the work already undertaken under NWDPIthrough the Mott MacDonald Report (2003). 75. Establishing the institution will therefore require at least the following activities: 0 Enactingo f enabling framework legislation 0 Establishment o f the Water Resources Fund 0 Determinationo f functions and mandates 0 Human resourceplanning 0 Businessplanning 0 Physicalestablishment, equipping 0 Staffing and transfers 0 Training and capacity building Public awareness 0 Licensingsystemreform 0 Water Monitoring system re-establishment 76. Establishing `ring-fenced' revenue streams from water user charges and other sources i s essential to sustain the National Water Resources Authority. This will require an effective licensing and administration system, based on an efficient national water resources monitoring and information management system. An assessmento f potential income [undertaken as part o f the Mott MacDonald $500,0001 could be realized - the estimated annual cost o frunningthe Authority i s inthe region o f Study] shows that (as long as charge rates are increased four times) up to MK 66 million [approximately $400,000. However, it would be unrealistic to expect: (1) the NWRA to achieve 100%income generation given current income collection i s between 10% and 20% o fpotential income; and (2) that all persons who should have a water righddischarge consent have one (ie. some revenue sources will not be known about). A nationalcampaign will be undertaken to assess the current use o fwater interms o f existing licenses, and unlicensed water use. The objective will be to increase collectionrates on current licenses, promote the application and granting o f new licenses for existing unlicensed usage and curtail unauthorized water usage. This will also require a complete re-establishment o f existing administration and informationmanagement systems. 65 77. Support i s required for the re-establishment o f surface water, groundwater and water quality monitoring systems, and the establishment o f a Management Information System (MIS) to enable the management and development o f water resources inthe country. The estimated costs o fthe initial establishment costs o f the NWRA are as follows: Licensingreform campaign $ l . l m Water use revenue MIS $0.2m Water Resources FundEstablishment $0.2m NWRAestablishment $0.35m Ware resources management MIS $0.43m Equippingthe NWRA $0.62m Water Monitoring system $3.3m TOTAL $6.2m The IDA fundingallocations for this sub-component will cover the following items: Licensingreform campaign $ l . l m Water use revenue MIS $0.2m Water Resources FundEstablishment $0.2m NWRAestablishment $0.35m TOTAL $1.85m Partners to provide funds for the other aspects are to be determined. C5:Surface and GroundWater SourceDevelopment 78. FutureWater Sourcesfor LilongweandBlantyre: Fullfeasibility studies, preliminary design, EIA, and safeguard plans will be carried out for the works for developing newraw water sources for Blantyre and Lilongwe inthe medium to longer term based on the future demand assessment. These documents are expected to be used for future projects funded by any source upon completion. These studies will be contracted by MIWDto ensure that a holistic view will be adopted inidentifying new water sources that would benefit broader users. BWBand LWB shall further carryout ydrographic survey for their existing dams (i.e. KamuzuDam I& I1for LWB and MudiDam for BWB). 79. FutureWater Source for Towns: Currently surface water sources are developed and managed on an individual town basis, however, the sector i s inthe process o f adopting a holistic approach will be adopted indeveloping new water sources which will cater for the towns as well as the needs o fthe other users such as market centers and irrigation. 80. Under the project, this holistic approach will be used for selected towns that are inurgent need o f water resources. MIWD incollaborationwith the RWBs will commission and supervise consultants to prepare feasibility studies, preliminary designs, and environmental impacts assessmentsand resettlement action plans. Preliminary designs would be based on sufficient geophysical investigations to site the facilities and evaluate potentialnegative impacts resulting from construction and operation o f the facilities. 81. Inmostsmalltowns andmarketcenters water supplyservices arelimitedbytheyieldofexisting boreholes. MIWDincollaboration with the RWBs will launcha special initiative to evaluate and test measures that can be taken to site, construct and maintain higher-yieldingboreholes. 66 C6. PilotCatchmentManagementand Development:(notjhanced by IDA) 82. Catchments throughout Malawi are degrading due to poor land use practices and population pressure. This results inerosion, the loss o f fertile soils, decrease ingroundwater recharge, flash flooding, highsediment loads instreams and rivers, and deteriorating water quality. Instrategic catchments such as the Shire river, this results inhighwater treatment costs and damage to hydro-power generation equipment. A pilot Catchment Management Authority (or Authorities) will be established under the authority and guidance o fthe National Water Resources Authority ina selected sub-catchment, and support will be provided to small scale investments inlivelihoods based catchment management activities through the preparation and implementation o f catchment management plans aimed at reversing the degradation o f the river's catchment area. 83. Inline withinternationallyacceptedprinciples(as expressed for example inthe Dublin Principles, and inthe Revised Protocol on Shared Watercourses inthe Southern African Development Community), the National Water Policy o f 2005 envisages the management o f water resources at the lowest appropriate level, linking land and water uses across whole catchment areas or groundwater aquifers, with full public consultation and involvement o f users. Itprovides for the establishment o f Catchment Management Authorities (CMAs) as the institutional mechanisms for implementingwater resources management at catchment level, under the authority and guidance o f the National Water Resources Authority. The Policy envisages these bodies as being: 0 implementedinresponse to water resources management and development problems and opportunities within the catchment or aquifer system, or arising downstream due to water quality or quantity problems caused by human activities withinthe catchment. 0 strongly participative inboth ingovernance and operation. 0 containing or having access to sufficient technical, scientific, social and other relevant skills to deal adequately with the issues being faced. 0 financially self sufficient. 0 implementedprogressively, with the objective of dealing first with problems o f highest national and localpriority, without seeking to cover the entire country with such bodies. 84. The subcomponent aims to support the establishment ofthe first one or two CMAs, and its first three years o f operation. This pilot CMA would have as its objective to ensure protection, development and management o f a selected catchment that i s strategically important to the future development o f Malawi, particularly for: 0 the enhancement o f livelihoods inthe catchment; 0 the development, protectionand management o f the water resources o f the catchment; for uses within the catchment and downstream; and 0 the preservation and enhancement o f key environmental systems. 85. The following activities will be undertaken by or under the supervision o f the CMA: 0 Establishment o f Pilot CMA. GOMestablishes the Pilot CMA, empowered as necessary, and appoints its Board; 0 Establisha Stakeholder Forum to solicit responses to proposals and initiate the concept o f a Pilot CMA; Note: These activities depend upon the establishment o fthe National Water Resources Authority which will require a considerable lead time and will therefore not be possible to implement under the NWDPII. Under sub- component C4 the framework for the establishment of Catchment Management Authorities will be set up. 67 Support the establishment and functioning o f Water Users Associations made up directly o f individual farmers and other users o f water or their representatives; Identify and prepare designs and costing o ftypical works to be undertaken inthe pilot catchment area (PCA) under the project; Develop a Catchment Management Plan (CMP). The CMP will specify the activities to be undertaken including the construction o f small dams, reclamationo f degraded micro- catchments, erosion control, improved land and water management, reafforestation, etc. The plan will indicate the role o f key players including the Stakeholder Forum, the Water Users Association, land users, district authorities, the MIWD, Ministry o f Agriculture, Environmental Affairs Department, Department o f Forestry and other stakeholders. Steps requiredto prepare the CMP will include: - Review o f information: Data required for the design o f a catchment management plan will be collected, both from data already available and from the field. This will include settlement patterns, population densities, landuses, farming methodologies, forest encroachment, steep slope and hill-side cultivation, river bank encroachment, - erosion types and extent, river training, sediment loads, etc; Analysis o f land use and impacts: Examine land use patterns and economic activities inthe catchment andrecommend appropriaterehabilitationandreclamation methodologies, consistent with agricultural and environmental requirements and - minimization o f flood damages; Identification o f Target Areas: Identify the target areas o f intervention for the project. This will be basedon an options analysis o f different areas taking into account the levels o f existing degradation, the potentialimprovements to the livelihoods o f the communities within the target areas, and the potential strategic down-stream impacts related for example to water supply, hydro-power generation - and environment; Technical guidelines: Technical guidelines, standard designs, construction guidelines, and unit costing will be worked out for typical project activities such as small dams, erosion control, improved landwater management, reafforestation etc. Standard contract formats will be prepared for small contractor engagement inthe construction o f small dams, erosion protectionetc. and professional TA requirements - for design and construction supervision will be assessed; Impact Assessments: Social, environmental and economic impact assessmentswill be undertaken o fthe major actions o fthe CMA. 0 Implementationof CMP. The CMA will prepare a comprehensive Catchment Investment Plan (CIP) including institutional arrangements, fund flow mechanisms and implementation approaches (Community DrivenDevelopment, involvement o f local government etc.) The CMP will be implemented under the supervision o fthe CMA, and with involvement o f stakeholders including the Stakeholder Forum; 0 Business Plan. C M A prepares a business plan covering the first five years o f operation. ComponentD.Sector ManagementandUrbanWater Sector Reform 86. This component would be managedbyMIWDand consists oftwo sub-components; (Dl) Management o f Sector Program; and (D2) Urban Water Sector Refom. 87. Managementof Sector Program: Donors have agreedto adopt common implementation strategies for village, rural piped(including market center), town and urban water supply, and to work through a single Program Management Unit (PMU) within the MIWD.For the most part donor financing will be parallel, butMIWDwill establishmanagement systems to support a pooledinvestments. 68 88. The village, rural piped, and town sub-components o f the National Water Development Program have been designed such that planning and implementation i s carried out ina stepped approach within each village, rural piped system, and town. And project rules, including selection and appraisal criteria, are set out inthe respective implementationmanuals. Inthis way donors can invest ina tried and tested programwithout having to be involved inproject design. 89. This sub-component will provide capacitybuildingand institutional support to MIWDin managingits sector program. PMUwill provide central services for NWDP implementationo f village, rural piped, town, and urban water supply and sanitation, and water resources management, The P M U will rely on technical experts withinthe Water Resources Management Departmentto guide studies, draw on the Department o f Water Supply's zonal and district based personnel to supervise projects, and contribute to the PlanningDepartment's sector policy and planning effort. The PMUwill be involved in: (i) investmentplanning;(ii) coordination;(iii) policyandplanning;(iv)capacity sector donor sector building;(v) contract management; (vi) project supervision; (vii) monitoring and evaluation; (viii) safeguard tracking; (ix) communications; (x) program accounting; and (xi) procurement. 90. Strategic Sanitation Plan for Blantyre and Lilongwe: Blantyre and Lilongwe face significant challenges related to sewerage and excreta disposal, including the low income/peri-urban communities. This component would support MIWDto carry out a comprehensive strategic sanitation planning inthe two cities inreadiness for the operationalization o f the National Sanitation Policy. The Policy to be adopted by the Government aims at deliveringboth improvedaccess to sanitation as well as hygiene promotion through the adoption of, among others, the "sanitation marketing" approach. 91. UrbanWater Sector Reform: GOM i s embarking on an urban water sector reform that starts with a service contract inBlantyre and Lilongwe, followedby a longerterm plan involving a deeper form o f private sector participation as the environment i s ready. The reform preparatory phase has been initiated, and this would aim at creating the appropriate environment for a possible deeper form o f PPP. The activities under the phase will include: (i) entering into a service contract (implemented under a separate project funded by EIBEU) that will address the current operational and customer service bottlenecks; (ii) this will be followed by areview o fthe service contract performance, sector environment, and the market conditions at midterm o f the contract scheduled after two years into the service contract. This service contract aims to achieve improved financial and commercial efficiencies, technical and operational efficiency, and increasedaccess o f water and sanitation to the people livingin peri-urbadlow income areas. It i s envisagedthat the results achieved through the service contract will create an enabling environment for sustainable improvements, and contribute baseline informationfor a future private sector contract. 92. The project would support the overall reform process which include: (i) development o f an appropriate regulatory framework plus a regulatory institution which clearly defines tariff setting and adjustment rules for water service provision, including that to the low income communities and the ability to encourage performance o fthe water boards; (ii) preparation and implementationo f a proper institutionalframework and governance system, through a performance agreement between the water boards and the Government; (iii) preparation and implementation o f a longer term reform option that involves PPP transaction; and (iv) stakeholder consultation and consensus buildingo f the envisaged reform plan. Regulatory Framework 93. The Water Boards, as primary serviceproviders to customers, were established to perform against the terms o f Corporate Charters contracted between the Board o f Directors o f each Water Board and MIWD.These Charters includeda tariffsettingmethodology, service standards, and government requirements, however, these Charters have not been implemented infull due partly to lack o f capacity in 69 the Water Boards and partly to the political influence caused by the Government. Inthe absence o f a working structure, the Water Boards continue to set their own service targets, tariffs are reviewed on an ad hoc basis, and the performance o f the Water Boards are deteriorating. There i s therefore an urgent need to establish a regulatory framework for the urban and town water sector inMalawi. 94. The regulatory framework to be developed will be for the water supply services and will cover all the existingwater boards. Regulationwill include financial resource allocation, operational efficiency, water quality, and tariff setting and adjustment. 95. Efforts have already been undertaken by GOMto establish Multi Sector Regulatory Authorities to regulate the infrastructure sectors namely, communication, transport and water and energy. For water, the regulatory authority proposed will also oversee the energy sector and will be called Malawi Water and Energy Regulatory Authority (MWERA).MWERA i s expected be established and be fully operational by the time service contractor for the two urban water boards i s inplace. Activities for implementationwill include; (i) and enactment o f the proposedAct; (ii) review development o f the various regulations which would cover both the operational and financial areas and investment; and public awareness. For effective implementation o f this regulatory authority, there i s need for ajoint effort between the MWD and the Department o f Energy inthe Ministry o f Mine, Natural Resources and Environment. 96. The water related functions o f MWERAwould be to ensure both economic and service regulation o f the Water Boards. While the specific obligations on the service providers may be detailed inthe Corporate Charters, both GOM and the Water Boards will be parties to these contracts. To ensure adherence to the contract terms, there will also be a function for external oversight. 97. Institutionaland GovernanceFramework: Preparation o faproper institutionalframework and governance system will be carried out through a possible restructuring o fthe water boards into forming an asset holding company and operating companies. The goal i s to establish a performance agreement between the water boards and the Government to ensure a proper accountability structure and governance system inplace for the Water Boards to perform their contractual obligations and for the Government to create an enabling environment for efficient utility operation. A financialreform strategy will also be developed to ensure financialviability and sustainability o fthe water boards. 98. PPPTransaction: The possible PPP is envisagedto transformthe UrbanWater Boards into efficient operators through contracting out the provision o f water services to a water operating company. Malawian investors and utility employees would be invited to join this partnership while the Government will retainthe ownership o fthe water infrastructure, continue to be responsible for approving and financing capital works, and ensure that the poor are not adversely affected. The Water Operating Company i s expected to take over the staff and operations o f the Water Boards, and innot too distance future, the Water Operating Company could be sufficiently viable and credit worth to list on the Malawi Stock Exchange. Investigation o f the market appetite for such a transaction will also be carried out. 99. Indetermining the design and scope ofPPPs, it is crucialto carefully allocate the responsibilities, risks, rewards, and incentives. Preparation o f such a transaction has already been initiatedthrough MIWD through development o f the necessary legal and regulatory framework, financial framework, institutional and organizational framework and the requiredinfrastructure development plan. The actual implementationo f the deeper PPP option will be implemented, with the guidance o f an independent Transaction Advisor, under the directiono fthe Public Enterprises (Privatisation) Act 1996. 100. Sector ReformConsensusBuilding(Public Awareness): The water sector is a politically sensitive area inthe country and mindfulo f this fact, it was prudent to engage the various stakeholders in the reformprocess. Government has initiated this important activity throughholding the first urban water 70 sector workshop and by planningthe following activities: (i) line survey o f the knowledge and base perception o f the consumers, employees, civil societies and the political wing; (ii) development o f a communication strategy including a media plan; (iii) stakeholder consultation on the proposedreform; and (iv) a study tour to two countries that have undertaken similar reforms inthe water sector. 101, The project will finance the implementation o f the communication strategy, including additional consultation workshops with policy makers, utilitystaff, and civil society and public dissemination o f the key messages for the reform through electronic and print media. 71 Annex 5: ProjectCosts MALAWI: SecondNationalWater DevelopmentProject Table 6: Project Cost for NWDP by Component Bank Bank Component Category Elnancing US$m Financing A. UrbanWater Supply and Sanitation Consultants, works, 7.1 14% goods, training B. TownandMarket Center Water Consultants, works, 24.1 48% Supply and Sanitation goods, training, operating costs, community sub-projects C. Water resourcesManagement consultants, goods, 12.0 24% training, operating cost D. Sector Management consultants, goods, 5.1 10% training, operating costs E. PPFRefund 0.9 2% F. Unallocated 0.8 2% Total 50.0 100% 72 Table 7: Proportion of NWDPII Financedby IDA A. UrbanWater Supply and Consultants, goods, 48 19% 7 14% Sanitation works, training B.Town, MarketCenter, and Consultants, goods, 106 41% 24 48% Rural PipedWater Supply and works, training, operating Sanitation costs C. Water Resources Consultants, goods, 16 6% 12 24% Management training, operating costs Consultants, goods, D.SectorManagement and training, operating costs 10 4% 5 10% UrbanWater Sector Reform Unallocated 1 0% 0.8 1% PPF 1 0% 0.9 3% Gap ( next 5 years) 76 30% 50 100% Total Program 258 100% 50 100% 73 Table 8: Project Cost Sharingfor NWDPII SecondNational Water DevelopmentProject Project Cost Sharing IDA Financing Component US$ 4. UrbanWater Supplyand Sanitation 7,065,000 A1. Priority Investment 3,750,000 A2. Reaching the unserved areas 3,315,000 B. Town, Market Center and Rural WSS 24,110,000 B1. Town water supply 20,040,000 B2. Market center andrural piped systems 3,040,000 B3. Training 1,030,000 C. Water resourcesManagement 11,990,000 C1. EnablingLegislation 100,000 C2. Water Resource Investment Planning 2,500,000 C3. Lake Malawi Level control Studies 2,500,000 C4. WRM Institutional Strengthening and Technical support 1,850,000 C5. Surface and Groundwater source development 1,600,000 C6. Raw Water Source Development 3,440,000 D. Sector Management 5,126,000 D1-Sector Management 3,000,000 D2. UrbanWater Sector Reform 1,826,000 D3. Strategic sanitation planningfor Blantyre and Lilongwe 300,000 E. PPFRefund 900,000 F.Unallocated 809,000 Total 50,000,000 74 Table 10: ProjectCost NWDPI1Cost Breakdown costs Total Costs A. UrbanWater Supply Component 7,065,000 1. PriorityInvestments 7,065,000 3,750,000 la- Action to mitigatewater supply distribution in Blantyreand Lilongwe 1,214,000 1b. Urgent leak and Plant repairs 1,597,000 1c. Urgentactionsto serve customer backlog 689,000 Id. Preliminarydesign, EIA, and safeguardplansfor Aqueduct (LWB) 250,000 2. Reaching the unservedareas 3,315,000 2a. New connectionto low incomeareas in lantyre 500,000 2b. Sanitationand Hygiene promotion 200,000 2c. Urgent lmpovementin connections 615,000 2d. Funds reservedfor future connections 2,000,000 B. Town, Market,and Rural PipedWater SupplyComponent 24,110,000 24,110,000 1.Town water supply 20,040,000 20,040,000 la. Town water supply for the fastest growingtowns Mzuzu 4,720,000 Mzimba 2,400,000 Kasungu 2,600,000 Mponela 1,200,000 Likuni 1,800,000 Zomba 4,280,000 Mangochi 2,740,000 1b. Sanitationplanning 300,000 IC. institutions Public 0 2. Market center and rural piped systems 3,040,000 4,070,000 3. Training 1,030,000 C. Water Resources ManagementComponent 11,990,000 11,990,000 1. Enabling Legislation 100,000 100,000 2. WR InvestmentPlanning 2,500,000 2,500,000 3. Lake MalawiLevel control Studies 2,500,000 2,500,000 4. WRM InstitutionalStrengthening 1,850,000 1,850,000 5. Surface and Groundwater source development 1,600,000 1,600,000 6. Raw water source development 3,440,000 3,440,000 6a. Feasibilitystudies, preliminarydesign, EIAfor newwater sources, including hydrographicsurvey of Mudi dam (BWB) 1,920,000 1,920,000 6b. Feasibilitystudies, preliminarydesign, EIAfor newwater sources, including hydrographicsurvey of existing dam (BWB) 1,520,000 1,520,000 D.ProgramManagementand UrbanWater SectorReform 5,126,000 5,126,000 1. Sector Management 3,300,000 1a. SWAPmanagement 1,000,000 1b. Implementationsupport 1,000,000 1c. Strategic Sanitation Planningfor Blantyreand Liliongwe 300,000 Id. M&E 1,000,000 2. Urbanwater sector reform 1,826,000 1,826,000 2a. Regulatoryframework 486,000 2b. Institutionaland GovernanceFramework 50,000 2c. PPP transaction 700,000 2d. Sector reformconsensus buildingand public awareness 590,000 E. Project preparationfacility 900,000 900,000 F. Unallocated 809,000 809,000 Total 50,000,000 50,000,000 75 Annex 6: ImplementationArrangements MALAWI: SecondNationalWater DevelopmentProject The National Water DevelopmentProgram i s divided into five components, each o f which i s managedby a separate group. Overall Program Management i s the responsibility o f the MIWD for all sector specific issues, with the approval o f the Ministryo f Finance when it comes to the allocationo f financial resources. Urban Water Sector Reform is the responsibility o fthe PC. Urban Water Suuulv and Sanitation i s the responsibilityo fthe Blantyre Water Board and Lilongwe Water Board. Town.Market Center. and Rural Piped Water Suuulv and Sanitation i s the responsibilityo f the three RegionalWater Boards. Rural Water Supplv and Sanitation i s the responsibility o f the District Assemblies withthe support o f the Water Supply Department inthe MIWD. WaterResources Management at the national level i s the responsibilityo f the Water Resources Department inthe MIWD.Various other entities also have key roles. The main actors and their core responsibilities are listed below. An overall schematic o f the program structure i s given inFigure 3. Roles and Responsibilitiesof Institutions Ministryof Finance ---- securing and channeling resources for NWDP; allocatingfinancial resources; approvingpublic sector borrowing; and monitoring disbursements. Ministryof EconomicPlanningandDevelopment -- economic validation o f project activities; ensuring that project activities are inline with the national economic agenda. MinistryofMines, NaturalResources,andEnvironmentandEnvironmentalAffairs Dept. ---- assisting with the preparation o f EAterms o freference; recruitment o fa consultant to carry out an EA; arrangements for public consultations; review and approval o f the EA through the national EA approval process. The NationalCouncilon the Environment -- approval o f EAreports; forwarding o f the recommendations to the ministerresponsible for environmental affairs for endorsement. MinistryofIrrigationandWater Development ------ developing o f policies, laws, strategies for the water sector; planning; coordinating, monitoring and evaluating NWDP; buildingcapacity of implementinggroups public andprivate; appraising town and market center investment proposals; refining implementation arrangements through experience; and facilitating hygiene education and sanitation promotion. MIWDRegionalWater development - Offices liaise with districts and market centers and monitor technical assistance provided to them; contract consultancy studies for raw water source development and ground water investigations - and development; overseeing implementation o f ESMF. 76 The Ministryof Lands,SurveysandPhysicalPlanning,Officeof the Controller of Lands -- overseeing the implementation o f the Resettlement Policy Framework (RPF); review and approval o f Resettlement Action Plans (RAPS)consistent with the; Resettlement - Policy Framework (RPF); monitoring the implementation o f the RAPs. PrivatizationCommission - Overseeing and guidingthe introduction o f private sector participation inurbanwater supply - operations; Establishment o f a regulatory authority for town and urban water supply. ProgramSteeringBoard This Boardwill act as a collective policy and decision makingbody for the whole NWDPprogram, and consist o fmembers from all concerned Ministries from the Government. This Board will ensure that there i s Government ownership and leadership o fthe program, and limit the impact o fpolicy level personnel changes inGOM. ProgramTaskForce The ProgramTask Force consists o f members o fthe PIUs o f each component o fNWDP and i s chaired by the MIWD.The Chief Executives from District Assemblies and Ministry o f Justice will be invited to participate as the need arises. Their main tasks include: ---- preparing and monitoring work plans and budgets; improving implementation arrangements; reviewing TOR for studies and review work o f the consultants; and coordinating the implementationagencies. ProgramManagementUnit ProgramManagement Unitwhich i s established within the MIWDwill have the core staff that includes a programmanager, procurement officer, accountant, water supply and sanitation engineer, a water resources management specialist, and a community participation specialist. Additional staff will be recruitedas they are required. The PMu's responsibilityinclude: ------- overseeingprogramplanning and implementation; monitoring project progress and achievements through reports; coordinating and accounting for utilization o fproject funds; coordinating review meetings; establishing a proper and effective M&E system; ensuring that implementation o f the project conforms to performance standards; working with project steering committee and project task force as secretariat. ProgramImplementationUnits Each implementing entity that are responsible for the project components will have Program Implementing Units(PIUs) that will carry out the activities specified inthe project description section. The PIUs will implement the sub-components inaccordance with the implementationmanuals developed for each component. Blantyre andLilongweWater Boards --- providing water supply services intheir respective cities; managing the implementationo fthe U W S S component o fNWDP 11; -- carrying out priority works; developing new water resources; increasing water production; 77 -- improving operational efficiency; and improving water supply and sanitation services inlow income communities. RegionalWater Boards Managing the Town, Market Center, and ruralpipedWSS component o f NWDP by: --- providing efficient water supply and sanitation services intowns; expanding water supply services intowns to meet demand; supporting market centers to obtain and maintainan improved water supply and sanitation, including liaising with districts, carrying out pre-feasibility studies, and contracting/supervising -- consultants and contractors; providing ongoing technical support to market centers to sustain and expand facilities; and preparing terms o f reference, make arrangements for procurement o f consultants for surface raw water source development and ground water investigations and development. District Assemblies - managing their own rural water supply and sanitation programs for point sources inindividual - villages; facilitating and overseeing market center and rural piped water supply and sanitation activities -- which they delegatedto the RWBs and Water User Associations; prioritizing market centers and appraising investment proposals, and owning water supply assets on behalf o f villages and market centers. City/Town Assemblies - Review and approval o f sub-projects based on the recommendations made by the RWBs. Water User Associations - facilitating and overseeing water supply services inmarket centers and groups o f villages sharing --- rural piped systems; guidingplanningo f their water supply system; contracting and supervising a local utility operator to handle routine operations and maintenance; arranging for long term technical assistance to assist local utility operators to improve efficiency, - resolve problems; and expanding the system over time. Local Utility Operators - operating and maintaining water supply facilities inmarket centers, ensuring a good quality water - at all times; collectingwater tariffs and managing accounts; - - providingregular, accurate monitoring reports on performance to W A S ;and expanding distribution and addinghouse connections. 78 Figure 3: Diagramof Institutional Interactions I H I I 1 I 1 i MEP&D M°F MIWD Board ProgramTask Force I I I Program I I Management I unit I I Y I I I I _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Commission Under OPC Dept. I I I Blantyre Regional District Regional & Lilongwe NWRMB Offices Assembly Water Boards Board -Water Boards District WSS Team Villages MarketCenters (pointsources) & RuralPiped Cities Catchments Systems 79 Annex 7: FinancialManagementandDisbursementArrangements MALAWI: SecondNationalWater DevelopmentProject FINANCIAL MANAGEMENT ARRANGEMENTS Introduction 1. The financial management assessment was done inline with the Financial Management Practice Manual (November 2005) o f the FMBoard. The objective o f the assessment i s to determine whether the project implementing entity has acceptable financial management arrangements, which will ensure: (i) that funds are used only for the intended purposes inan efficient and economical way; (ii) preparation the o f accurate, reliable and timely periodic financial reports; and (iii) safeguarding the entities' assets. CountryPFMSystemIssues 2. The Malawi Growth and Development Strategy (MGDS) recognizes that strong and sustainable economic growth i s key to reducingpoverty." The MGDS recognizes that, amongst other critical preconditions, macroeconomic stability underpinned by sound fiscal control and budget management i s o f key importance. 3. There are several ongoing initiatives" contributing to the improvement o f the PFMsystem: International Monetary Fund (IMF)StaffMonitored Program (SMP) and the WorldBank Structural Adjustment Credit (SAC): Both o fthese have performance criteriatied to fiscal discipline. They bothrefer to the need for an effective public expenditure management system, including through adoption o f the MTEF. FIMTAP (Financial Management, Transparency and Accountability Project): This i s a World Bank funded project aimed at strengthening financial accountability and reporting. A key component i s support for the development o f IFMIS (Integrated Financial Management information System). Public Finance and Economic Management (PFEM): This i s designed to be an umbrella framework for addressing fundamental weaknesses inthe budget management and accounting system. Some key legislation under the PFEMhas already been enacted inthe r e f o m o f the Public Finance Management, the Public Audit and the Public Procurement Acts. ThePEG (Project on Economic Governance): This i s a CIDA supported initiative aimed at buildingthe capacity o fexternal stakeholders to engage ineconomic issues and the budget process. MTEF Phase11Program: Designed to improve budget credibility and make better linkages between the Malawi Poverty Reduction Strategy and the budget. The programmei s financed by DFIDand other donors. Macro-economic Advisory ServicesProject: A GTZ supportedproject, to strengthen macroeconomic planning and budgeting. Tikambirane-Support for Voice,Accountability and Rights:A DFIDfunded project, to enhance the voice and influence o f Malawi citizens within accountable and responsive systems o f governance. Institutional Cooperation with the Swedish National Audit ofJice (SNAO): A project supportedby Norway and Sweden to produce highquality audits and increase the efficiency o f the National Audit Office (NAO). lo buildingprogrammeforeconomicmanagementandpolicycoordination:technicalreportno.32,governmentofMalawiand Capacity European Union, February 2005 80 Support to theAnti Corruption Bureau: Supported by the DFID,to enable the ACB strengthen its competence andcredibility as an effective anti corruption agency. 4. Clear commitment and action by the Government i s visible. The restoration o f fiscal control i s the cornerstone o f its economic r e f o m program and good progress has been made with the implementation o f the principles o f transparency and accountability enshned inthe new Public Finance Management Act (PFMA). The implementationo fthe new IFMIS has shown commendable progress since August 2006. 5, However, the problem" identifiedi s that these individual components are yet to be sufficiently integrated into a functioning whole. The systems are therefore still somewhat dysfunctionaland operating sub-optimally because o f missing or weak linkages between the component parts. Stakeholders have assessedthis to have serious negative consequences for the Government's ability to implement its plans. 6. For the project, the implication at this time i s that full utilization o f the Malawi PFMsystemi s not yet possible. Components that will be relied upon are the following: (i) activities will be Project subject to internal audit will be overseen by the Central Internal Audit unit o fthe Government o f Malawi; and (ii) The National Audit Office will provide or oversee the external audit service as explained inmore detail below. RiskAssessmentandMitigation 7. The Ministryo f Irrigation and Water Development (MIWD)will, through a dedicated Project Management Unit (PMU), coordinate, control, account and monitor the utilization o fproject funds by the component implementing agencies. The two city water boards will coordinate the Urban Water Supply and Sanitation Component A; the three regional water boards will coordinate the Town, Market Center, and Rural PipedWater and Sanitation Component B; the MIWDwill coordinate the Water Resources Management Component C and ProgramManagement Component D. 8. The PMUhas experience inmanaging previous Bank-funded projects, the project preparation facility and has staff experienced with the Bank's fiduciary policies and procedures. A dedicated Project Accountant inthe PMUwill support the implementation and maintenance o f centralized financial management, internal controls, disbursements and financial reportingprocedures for the project as a whole. This arrangement i s further strengthened by separating and devolving implementationauthority and budgets to the implementing agencies, withthe additional control o f their existing financial management systems ensuring that funds advanced to them are used only for the intended purposes inan efficient and economical way, that reliable and timely financial infomation i s made available to the P M U and that assets are safeguarded at the component level. Insummary, after assessmentitisconcludedthatMIWDPMUhasthebasiccapabilityinplaceto support the financial management o f the project. I'CapacityBuildingProgrammeForEconomicManagementAndPolicyCoordination:TechnicalReportNO.32,GovernmentofMalawiand Europeanunion, February2005 81 The FMriskassessmentis summarizedinthe table below: Risk Risk Risk MitigatingMeasures Rating Incorporatedinto ProjectDesign herent Risks Country S Key FMoversight elements o f the project are entrusted to the Government - Internal Level Audit and External Audit. Capacity for external audit is enhancedbythe use o f private sector audit fm. EntityLevel M ExistingPublic Sector Agencies will implement the components, and implementation will further come under scrutiny o fthe responsibleWater Boards. Also, successfully implementedN W D P1without problem. Project Level M FMfunctions are to be centralized inthe MIWD Project Management Unit(PMU), who has the basic capability to provide the required FM.This arrangement i s further strengthened by separating and devolving implementation authority and budgets to the implementing agencies, with the additional control o ftheir existing financial management systems at the component level. ontrol Risks Budgeting M The P M U will determine the overall framework and system for budget development inaFMProcedures Manual. Annual budgets willbe submitted to the ProgramTask Force for approval and monitoring and evaluation. Accounting M Accounting will be centrally done for the project as a whole, by staff experiencedin WB fiduciary requirements andprevious WB funded projects. An accounting system similar that used for NWDP Iwill be deployed and supported by a FMProcedures Manual. Internal M Internal control is strengthened byproper segregation o f functions, use o f trained Control staff, proper FMprocedure manuals, processes and systems and also by deployment o f independent internal audit services (at the project and component levels) to test the effectiveness o f the control system. FundsFlow M Project fbnding will be disbursed through one US$ Designated Account inthe Reserve Bank o f Malawi. Inaddition, project expenditures will be paid through a limited number o f local currency accounts, but all transactions on all bank accounts willbe centrally accounted for inthe project financial statements. Quarterly monitoring o f this arrangement will be done via IFRs. Financial M Monthly, quarterly and annual financial statements reports will be prepared to support Reporting monitoring o f project implementation. In-year and annual reports will be submitted to Project Task Force, with annual reports also submitted to the Accountant-general and Auditor-general. Auditing M The Central InternalAudit unit o f the Government o f Malawi has the mandate to perform audits on all projects, and will be supported inthis project by the Internal Audit Unitsat eacho fthe implementingentities to performinternal audits at the component levels. An external auditor will be engaged by the Auditor-general to carry out an annual independent audit o f the project financial statements. Overall FM M The overall FMrisk i s considered moderate; inherent risks are offset by: (a) RiskRating centralizing key aspects o f the FMsystem using experienced existing and contract FMstaffo fthe MIWD;(b) an internal control system, which allows for segregation o f functions and other basic internal control elements; independent internal and external audit; (c) sound financial procedures and systems; and (d) preparation o f quarterly consolidatedFMReports. H-High S-Substar .a1 M-Moderate L-Low 82 Strengths 9. The provision o f project FMmanagement and control functions by qualified FMstaff that has worked on Bank projects before i s a significant FM strength inthe project. Furthermore, the independent nature o f internal and external audit arrangements strengthens the management of fiduciary risks. a. Bank accounts for IDA funding opened and signatories confirmed and authorized by MIWD / MOF Government b. The programFMimplementation manualhas beencompleted. Actionsto besupportedbythe project c. External auditors arrangements confirmed with Government and auditors appointed MIWD d. Development o f SWAP arrangements for program-establisha mechanismto support PMU/MWID/MOF individual donor financed project and to enable pooled financing and use common FM guidelines for multiple donors and government funds. Standard financial covenantsincludedinthe FinancingAgreement are the following 0 Submission of audited financial statements within six months after the year end Submission o f un-audited interim financial statements within 45 days after each calendar quarter, to cover such calendar quarter 0 Submission o f any other information as requiredby IDA ImplementationArrangements 11. Annex 6 deals with the implementationarrangement indetail. Financial management and control will be centralized inthe PMUandthe FMsystemestablishedas discussed later. The overall FM framework i s depicted on the next page. 83 V E P 2 g B BE 3 2 x rg a PlanningandBudgeting 12. Cash budget preparation will be detailed inthe FPM.At a minimuman annual cash budget for the life of the project at each level o f implementationwill be prepared, by the responsible implementing agency. The annual cash budget will be broken down quarterly and monthly, insupport o fproject activities as reflected inthe approved work plan and procurement plan. InternalControlandInternalAuditing 13. Internal control comprises the whole systems o f control, financial or otherwise, established by the PMUandimplementing agencies inorder to: (i) out the project activities inan orderly and efficient carry manner; (ii) ensure adherence to policies and procedures; (iii) safeguardthe assets o f the project; and to (iv) secure as far as possible the completeness and accuracy o fthe financial and other records. 14. The key elements to ensure a sound internal control system will include: 0 Segregation o f functions to authorize, execute and record 0 Physicalcontrol over fixed assets 0 Clear delegations and channels o f command 0 Monthly reconciliation and clearance o f advances for expenditures 0 Integrity and performance o f staff at all levels 0 Supervision 15. The Central Internal Audit unit o f the Government o f Malawi has the mandate to perform audits on all projects, and will be supported inthis projectby the InternalAudit Units at each o fthe implementing entities to perform internal audits at the component levels. Project activities will also be periodically audited by the Central Internal Audit unit o f the Government o f Malawi. The internal auditor managers inthis unit are qualified, an audit approachhas been established and they will prepare at least an annual audit report to the National Audit Office and the MIWD.The scope o finternal audit will include at least periodic reviews o fproject activities, assets, systems, records and accounts; ensure effectiveness o f financial and accounting policies and procedures, as well as compliance with internal control mechanisms; review SOEs; verify materialprocurements and contract management; and carry out other functions as stated intheir approved mandate. At the component level the project activities will also come under the scope o f the internalaudit units o f the implementing entities, under the normal governance arrangements applicable to each implementing entity. Accounting 16. Project accounts will be maintainedon a cash basis, augmentedwith appropriate records and procedures to track commitments and to safeguard assets. Accounting records will be maintained in Kwacha. The opening and closingbalances o fthe US$DesignatedAccount ("DA"), and o f any other bank accounts relatingto the project that are held in a currency different from the books o f account, should be translated at the rate ruling on the opening and closing dates, respectively. Expenditures made out o f the DA (and other bank accounts as mentioned above) should be stated at the rate ruling on the transaction dates. The actual exchange rates used should be disclosed ina note to the financial reports. 17. The Chart o f Accounts will facilitatethe preparation o frelevant monthly, quarterly and annual financial statements, including information on the following: 0 Total project expenditures 0 Total financial contribution from each financier Total expenditure on each project component/activity 0 Analysis of that total expenditure into the disbursement categories o f the project, which would include goods, works, consultants' services and operating costs 86 All accounting andcontrolprocedureswill be documented ina FPMandregularly updatedbythe Project Accountant. FinancialReporting 18. Minimumrequirements for InterimFinancialReports(quarterly) and AnnualFinancial Statementsare outlinedbelow: Statementof Sources and Uses of Funds, showing by fundingsource for the period and cumulatively (project life or year to date) inflows and outflows by project component and disbursement category, as well as opening and closing cash balances o f the project; Bank Reconciliation Statement for each bank account, including copies o f the respective bank statements; Statement of Expenditure, an itemizedstatement summarizing eligible expenditures incurred duringa statedperiodbased on individual transactions. The expenditures are normally grouped by project components and disbursement categories, comparing actual and budgeted expenditures. The report will also include a cash flow forecast for the following two quarters; Payments made during the reportingperiod against contracts subject to the Bank's prior review, summarizing contract payments; Designated Account Reconciliation, showing deposits and replenishments received, payments supported by withdrawal applications, interest earned on the account and the balance at the end o f the reporting period; Procurement Reports, which provide information on the procurement o f goods, works, and consultants and on compliance with agreed procurement methods. The reports will compare procurement performance against the plan agreed at negotiations or subsequently updated, and highlightkey procurement issues such as staffing and buildingborrower capacity; Physical Progress Reports, which includenarrative information and output indicators (agreed duringproject preparation), linkingfinancial informationwithphysicalprogress and highlightingissues that require attention. 19. Indicative formats for the reports are available ina Bank guideline General formats o f FMRs are contained in: "Financial Monitoring Reports for World Bank Financedprojects: Guidelines for Borrowers"'2. Inaddition AnnualFinancialStatementswould need to comply with relevant International Public Sector Accounting Standards (IPSAS). 20. Quarterly and annual reports are to be submitted respectively to: (i) the Accountant-General; (ii) the Auditor-General; (iii) (for the purpose o f monitoring project implementation); and (iv) the IDA Project Task Force inorder to ensure transparency inproject activities and implementationto all stakeholders. ExternalAuditing 21. The IDA FinancingAgreement will require the submission o f audited Annual Financial Statements for the project, within six months after year-end. 22. Qualified, experienced and independent external auditors will be appointed by the Auditor- General, based on TORSacceptable to IDA. l2http://siteresources.worldbank.org/INTRANETFINANCIALMGMT/Resources/TOPICSIFMRs/FMR-BoiTowers- English-Nov-2002.~df 87 23. Besides expressing an opinion on the Annual Financial Statementsin compliance with International Standards on Auditing(ISAs), the auditors will be required to form an opinion on the degree o f compliance with IDA procedures for the DesignatedAccount and the balance therein at the year-end. 24. Inadditionto the audit report, the external auditors willbe expectedto prepare aManagement Letter givingobservations and comments, and providingrecommendations for improvements in accounting records, systems, controls and compliance with financial covenants inthe IDA agreement. FMSupervisionPlan 25. The first FMreview will be carriedout after 6 months o f project implementation. This detailed review will cover all aspects o f FM, internal control systems, reviewing the overall fiduciary control environment and tracing transactions from the biddingprocess to disbursements as well as SOE review. Thereafter, given that the FMriskrating for the project i s moderate, subsequent reviews will be as follows: review o f quarterly FMRs; annual SOEreview as part o fthe TOR o f the external auditors; review o f audited Annual Financial Statements and management letter as well as timely follow up o f issues arising; participationinproject supervision missions as appropriate; and updatingthe financial management rating inthe Implementation Status report (ISR). The FMstaff at the Pretoria Country Office will play a key role inmonitoringthe timely implementationo f any actionplans. FUNDFLOWSAND DISBURSEMENTARRANGEMENTS BankAccounts 26. Due to the lapsed loans/grants inthe Malawi portfolio, no new projects, including NWDP I1can make use of the DesignatedAccount (DA) untilthe balances inthe lapsed loadgrant accounts are refundedto IDA. Once this issue has been solved, the GOM will open the following bank accounts: 0 The GOM will open one US$ DA at a commercialbank inMalawi under terms and conditions acceptable to IDA, into which IDA will advance project funds interms o f its normal disbursement guideline^'^. Any interest on DA balances will be transferred to a separate bank account maintainedby GOM. Four bank account signatories, two o fwhom needto authorize any transaction, will be designated - (either the P M or the PS MIWD and either the Accountant-General or ST MOF). Depending on the outcome o f the current evaluation o f the Reserve Bank o f Malawi, the DA may be shiftedto the Reserve Bank o f Malawi at a later date. 0 One "NWDP I1IDA General Operating Bank Account" inKwacha, opened at any commercialbank at the choice o f the GOM, under terms and conditions acceptable to IDA into which draw-downs from the DA will be credited to fundlocal currency eligible expenditures except those paid via the accounts mentioned below. This account will be funded from the USD DA. Draw-downs into this account will be as and when requiredto avoid loss inforeign exchange. Three bank account signatories, two o f whom need to authorize any payment, will be designated - (the PMand one o f either the Director PSD, or the PS ofMIWD). 27. The following additional local currency bank accounts are requiredto: (a) facilitate the payment o f large batches o f expenditures inthe local currency; (b) allow more control over the timing o f payments by sub-components that are not located inLilongwe; and (c) avoidimplementation bottlenecks causedby cumbersome proceduresbetween the sub-component and the P M U who manages the DA. These accounts will be funded from the PMUlocal currency operating account, retainingbalances as close to zero as possible after payments. All transactions on these accounts will be reported monthly and `3http://web.worldbank.or~/WBSITE/EXTERNAL/PROJECTS/O,.contentMDK:20 120763-rnenuPK:276 159-pageP K:41367-piPK:5 1533-theSitePK:40941,00.html 88 substantiated with source documents to the Project Accountant, who will see to the accounting and reconciliation o f these accounts before advancing any further amounts to these accounts: One "NWDP I1OperatingBank Account" inKwacha for each o f the Water Boards, opened at any commercial bank at the choice o f the GOM. Payments from this account will be authorized by the designated component managers and one additional person inthat entity. The DA will be operatedby MIWDand the local currency accounts will be operated by the project implementing entities, including BWB, LWB,NRWB, CRWB, and SRWB. 28. The Project Accountant will reconcile all bank accounts and advances on a monthly basis and submit suchreconciliations to the P Mfor reviewand approval. Detailedbanking arrangements, including control procedures over all bank transactions (e.g., payment signatories, transfers, etc.), will be documented inthe Financial ProceduresManual (FPM). If,inthe opinionofthe PM, there is aneedfor additional localcurrency bankaccounts, IDA approval for the opening o f such bank accounts will be obtained. Petty CashSystems 29. As needed, implementing agencies will be given petty cashadvances for cashpayment o f small administrative expenses and such petty cash records will be centrally recorded, controlled and reconciled by the PMU. WorldBankDisbursement Methods 30. By effectiveness, the Project will use the transaction-baseddisbursementprocedures,i.e., direct payment, reimbursement, and special commitments as described inthe World Bank Disbursement Handbook. As project implementationproceeds, the quarterly Interim Financial Reports (IFRs) produced by the Project will be reviewed. Where the reports are adequate and produced on a timely basis, and the borrower requests conversionto report-baseddisbursements,a review will be undertaken by the Bank Task Team to determine ifthe Project i s eligible for report-based disbursement. The adoption o freport- baseddisbursements by the Projectwill enable it to move away from time-consumingvoucher-by- voucher (transaction-based) disbursement methods to quarterly advances to the Project's Designated Account based on IFRs. Detailed disbursement procedures will be documented inthe FPM which will be part o f the PIM. Reportingon Use of CreditProceeds 31. IDAwould require withdrawals fromthe grant accounts to be made on the basis o f Statements o f Expenditure for: (a) services o f individual consultants costing less than US$50,000 equivalent per contract; (b) services o f consulting firms costing less than US$lOO,OOO per contract; (c) all training; and (d) works costing less than US$500,000; and (e) goods costing les than US$250,000, (e) training and workshops; (0 operating costs; and (g) subprojects. 32. Allrequests for withdrawal of expendituresunder contracts subject to IDA'Spriorreview would be fully documented. 33. All supporting documentation willberetainedbythe PMUandmustbemade available for review by periodic World Bankreview missions, internaland external auditors. Withdrawalof GrantKreditProceeds 34. Withdrawal o f grant and credit proceeds to the DA will be inaccordance with the World Bank Disbursement Guidelines and the disbursement letter that the Bank may issue from time-to-time. There 89 will be one DA for both grant and credit. The grant portion will be utilized first before the credit portion i s withdrawn. Taxes 35. The project will pay for all reasonable taxes interms o f GOM legislation. Equally, the project will deduct onbehalfo fthe GOM "Withholding Taxes" from payments to foreign consultants, but provision will be made duringthe procurement process to notify consultants o f this arrangement. RetroactiveFinancing 36. Component A1 (priority works) are intended to respond immediately, before project effectiveness, to the water crisis inBlantyre by financing: (i)essential spare parts for pumping equipment; (ii) leak and plant repair inboth cities; (iii) to serve customer backlog in urgent actions Blantyre. Expenditure category 1 for goods and works applies. DisbursementsCategories 37. The table below sets out the expenditure categories and percentages to be financed out o f the grant proceeds. Table 9: Disbursement Categories Amount of the Amount of the CreditAllocated Grant Allocated (Expressedin (Expressedin Category US$) US$) (1) Works andGoods 12,899,000 11,670,000 (a) Part A UrbanWater Supply and Sanitation 2,780,000 3,735,000 (b) Part B1TownWater Supply and Sanitation 9,356,000 7,320,000 (c) Part C Water Resources Management 389,000 3 15,000 (d) Part D Sector Management andUrban Sector Reform 374,000 300,000 (2) Consultant Services 10,970,000 7,020,000 (a) Part A UrbanWater Supply and Sanitation 3 14,000 255,000 (b) Part B1Town Water Supply and Sanitation 1,838,000 1,500,000 (c) Part C Water Resources Management 7,174,000 4,095,000 (d) Part D Sector Management andUrban Sector Reform 1,644,000 1,170,000 (3) Subprojects under Part B2 Market Center and Rural Piped Water Supply and Sanitation 1,674,000 1,380,000 (4) Training 762,000 615,000 (a) Part B Town, Market Center and Rural PipedWater Supply and Sanitation 568,000 465,000 (b) Part D Sector Management andUrban Sector Reform 194,000 150,000 (5) OperatingCosts 732,000 600,000 Refundof ProjectPreparationAdvance 0 900,000 Unallocated 463,000 315,000 TOTAL 27,500,000 22,500,000 90 Annex 8: ProcurementArrangements MALAWI: SecondNationalWater DevelopmentProject A. General 1. Procurement will be carried out inaccordance with the World Bank's "Guidelines: Procurement under IBRDLoans and IDA Credits" dated M a y 2004 and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated inthe Legal Agreement. Procurement for non-ICB procurement and selection o f consultants that does not involve international consultants will be carried out inaccordance with the Malawi Public Procurement Act (No. 8 o f 2003) and its accompanying regulations and desk instructions. The various items under different expenditure categories are described ingeneral below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and timeframe are agreed between the Recipient and the Bank inthe Procurement Plan. The Procurement Planwill be updatedat least annually or as requiredto reflect the actual project implementation needs and improvements ininstitutional capacity. 2. Procurementof CivilWorks: The total cost ofworks under the NWDPIIis estimated at US$14,866,000 million. Works procuredunder this project would include: water and sanitation infrastructure. The procurement will be done usingthe Bank's StandardBiddingDocuments (SBD) for all ICB andNational SBD, which have beenreviewedand found satisfactory to the Bank. Contracts for works costing US$500,000 equivalent or more per contract will be awarded through the International Competitive Bidding(ICB). Works estimated to cost more than the equivalent o fUS$ 50,000 but less than the equivalent o f US$500,000 will be procuredon the basis o fNational Competitive Bidding(NCB) procedures. Contracts o fworks estimated to cost US$50,000 equivalent or less per contract may be procuredunder Shopping procedures, as described inthe Procurement Guidelines. 3. Procurementof Goods: The total cost o fgoods under the NWDPIIis estimated at US$4,602,635. Goods procured under this project would include pipes, fittings, meters, pumps, water quality testingAaboratory equipment, equipment and tools for measuringriver flows and lake levels and other goods related water supply. The procurement will be done usingthe Bank's SBD for all ICB and National SBD satisfactory to the Bank. Under the project, Goods estimated to cost US$250,000 or more per contract will be procured under ICB procurement method. Goods estimated to cost less than US$250,000 will be procured on the basis o fNational Competitive Bidding(NCB). Goods estimated at US$330,000 will be procured on the basis o f LimitedInternational Bidding(LIB)inaccordance with the provisions o f paragraph 3.2 o f the Guidelines. The Government has identifiedthat there are at least 5 suppliers for motor spare parts and that these parts are neededurgently. Where practical, the goods to be purchased will be grouped and be procured under ICB contracts. Goods that are estimated to cost less than US$50,000 equivalent per contract may be procuredthrough Shopping procedures inaccordance withthe procedures set forth inthe Bank Guidelines and as may be further reflected inthe Procurement manuals o f the respective implementing agencies. 4. ProcurementofNon-ConsultingServices: Non-consultingservices under thisprojectwill include: workshops, transport, and training. As appropriate, the procurement o f non consulting services Training - The total cost o f training under the NWDPII i s estimated at US$1,840,000 million. will be done usingNational SBDs acceptable to the Bank. Consultants' services for training estimated to cost more than US$50,000 equivalent per contract, but less than US$200,000 will be procured through the Selection Based on Consultants' Qualifications (CQS) method whenever this i s feasible. When appropriate, training may also be procured on the basis o f Single Source Selection subject to review and approval by the Bank. The NWDPIIwill based on component approved annual work plans and budget prepared and submittedto the Bank, for its prior review and 91 approval, an annual training program, as part o f the project annual work plan. The training will, inter alia, identify: (i) the training envisaged; (ii)thejustification for the training, how it will leadto effective performance and implementationo f the project and or sector; (iii) the personnel to be trained; (iv) the selection methods o f institutions or individuals conducting such training; (v) the institutions which will conduct training, ifalready selected; (vi) the duration o f proposed training; and (vii) the cost estimate o f the training. Reportby the trainee upon completion o f training would be mandatory. 5. Selectionof Consultants: The total cost o fconsultant's assignments under the NWDPIIis estimated at US$15,646,900 million. Consulting services under the project include: engineering, feasibility, environmental, social, design and other studies required for planning water supply infrastructure; assignments for construction supervision o f the works; and supply and installation contracts. Other consulting contracts include development o f Information Management Systems (MIS), technical, financial andprocurement audit contracts. Except as detailed below, consulting services will be selected through competition among qualified short-listed firms based on Quality and Cost-Based Selection (QCBS). Consultants for financial audits and other repetitive services estimated to cost less than US$50,000 equivalent per contract will be selected through Least Cost Selection (LCS) method. As appropriate, other selection methods such as selection based on a fixed budget (FBS), Selection based on Consultants Qualifications (CQS) and Quality Based Selection (QBS) may be used for selection o f consultants. 6. Inexceptionalcases, andunder circumstances describedunder Paragraphs 3.9 through3.13 ofthe Consultants Guidelines, the Borrower may, upon prior clearance with the Bank, hire consultants through the single-source selection method. Consultants for services meeting the requirements o f Section V o f the Consultant Guidelines will be selected under the provisions for the Selection o f Individual Consultants (IC) method. Support to implementationo f certain specialized interventions, such as water quality testing, may be contracted by identifying specialized in-country research and training institutions and Universities subject to clearance by the IDA inthe procurement plan. The procurement o f consultants will be done usingthe Bank's SRFP and Standard BidEvaluationand Recommendation for Award forms agreed with (or satisfactory to) the Bank. 7. Short-List of Consultants: Short-list o fconsultants for services estimatedto cost less than US$lOO,OOO equivalent per contract, may be comprised entirely o f national consultants inaccordance withthe provisions o fparagraph 2.7 o fthe Consultant Guidelines. 8. PriorReview of Consultants: All consultant assignments for contracts withindividuals estimated to cost US$50,000 and above and all consultants assignments for contracts with firms estimated to cost US$lOO,OOO and above and all single source selection o f consultants for individual consultants and firms will be subject to prior review by the Bank. All consultant assignments for contracts with firms estimated to cost US$50,000 and above and all single source selection o f consultant firms will be subject to prior review by the Bank. 9. Operating Costs: Operating costs will beprocured usingthe Government o fMalawi's administrative procedures and or the administrative procedures o f the component implementing agency's administrative procedures, which were reviewed and found acceptable to the Bank. 10. Force Account: The NWDPIImay use the Force Account procedures under the conditions specified inParagraph 3.8 o f the Bank Guidelines. This will be inthe particular case o f the 3 Regional Water Boards, the Blantyre and the Lilongwe Water Boards to cover emergencyrepairs. Effort will be made to enter into LongTerm Maintenance Contracts with the contractors who could at short notice using pre -established unitrates established on the basis o f a prior competitive process, be engaged to carry out such work 92 11. Direct Contracting (Single Source): Direct contracting for goods and works without competition may be allowed, upon prior clearance o fthe bank under the conditions specified in paragraphs 3.6 and 3.7 o f the guidelines. Goods estimated at US$632,000 will be procured on the basis o f Single Source Procurement. The Government indicates that there i s only supplier for the spare parts for pumpswhich are o faproprietarynature. B. Assessment of the Agency's Capacity to Implement Procurement 12. A formal procurement capacity assessmenthas been undertaken o fthe NWDPIIimplementing agencies. The procurement capacity assessment was finalized on 24" February 2006 by Wedex Ilunga, Procurement Specialist. The capacity assessment noted that procurement activities will be carried out by several implementingagencies: (i) Southern RegionWater Board (SRWB); (ii) Central Region The The Water Board (CRWB); (iii) The Northern RegionWater Board (CRWB) (iv) Blantyre Water Board (BWB); (v) Lilongwe Water Board(LWB);and (vi) the SWAP PMUwithinthe MIWD. The PMUwill comprise a project coordinator, engineers, water resources specialists, accountants, procurement specialists, and monitoring and evaluation specialists have been responsible for the management o f the PPF for the project. The Ministry o f Irrigation andWater Development (MIWD)will, through the National Water DevelopmentProject Unit (NWDP Unit) which i s a dedicated Project Management Unit (PMU) coordinate, monitor report on procurement implementationand ensure internalquality assurance systems for procurement inall the project component implementing agencies. The project component implementingagencies include the LWB and BWB incharge o f the Urban Water Component A; the three regional water boards (SRWB, CRWB and NRWB) which will be responsible for coordinating and implementing the Town and Market Center Water Component B; the MIWDwill coordinate the Water Resources Management Component D and ProgramManagement Component E.The NWDP together with the MIWDhas inthe past throughthe dedicatedPMUgained experience inmanaging Bank-funded projects. This includes the US$2,3million project preparation facility and the NWDPI(1999 - 2003). Many o f the staff inthe P M U and the implementing agencies hadprior experience with the banks procedures including procurement. The staff o f the P M Uwill include a Procurement Specialist who will support the implementationand maintenance o f the overall procurement plan for the project. The Procurement Specialist o f the PMUwill provide support and oversight including quality assurance reviews and monitor implementationprogress o f all the components. This function will be further supported and strengthened by the existence and carrying o f procurement by each implementing agency. Each ImplementingAgency has a dedicatedProcurement Specialist who works withtechnical specialists. The Procurement Specialists inthe implementingagencies will provide periodic progress reports and will as appropriate make requests to the Bank for review and clearances through the Procurement Specialist o f the PMU. The procurement Specialist o fthe PMUwill be supported by other qualified and experienced staff o f the PMUand systems for implementingthe project which will be articulated inthe Project ImplementationManuals which will be reviewedby the Bank to ensure acceptance inrespect o f the Banks fiduciary. 13. The procurement management under the various components though having some differences in institutional management i s deemed to have an average risk. Some minor deficiencies and areas needing attention are shown inthe table on the next page, including the suggested remedial actions: 93 5 IWeak contract management. intensive and continuoustraining ofkeyprocurementstaffin Bankprocurementpoliciesandprocedures,particularlyfor the PMUwhich will be staffedby newpeopleandmaynot benefit from the experiencegainedinimplementingtheNWDPI Project. 6 IInadequateprocurement monitoring (i) Establishmentandmaintenanceof a contractor/vendor/consultant performancemonitoringandrating system; (ii) updatingof procurementplans basedon "actual" production of performancereports; and (iii) establishindicatorsfor Procurementmonitoringwithin the W E framework. 7 Weak internalqualityassurance of procurement Institutean internalquality control/ assurance system to review quality of documentsand reportsbefore internal and external approvals are sought. 8 Needto update knowledgeon the applicable (i) Hold a procurement for all procurement staff and Consultantsand ProcurementGuidelines revised (ii)updatetheprocurementimplementationmanualstoinclude October 2006. the changes. 14. Not withstanding the areas for improvement noted above, the overall project risk for procurement i s Average. C. ProcurementPlan 15. The Recipient at appraisal developed a procurement plan for project implementation, which provides the basis for the procurement and selection methods. This plan was agreed between the Recipient and the Bank at negotiations and i s available at the office o f the PMU, National Water DevelopmentProgram, MIWD,Manobec House, Lilongwe. Itwill also be available inthe project's database and inthe Bank's external website. The Procurement Plan will be updated in agreement with the Bank annually or as requiredto reflect the actual project implementation needs and improvements in institutional capacity. D. Frequencyof ProcurementSupervision 16. Inadditionto the prior review supervision to be carried out fromBankoffices, the capacity assessment o f the ImplementingAgencies has recommended supervisionmissions to visit the field every six months inthe first year and thereafter once a year to carry out post review o fprocurement actions. 17. Annual Procurement Post Reviews and or independent procurement audits may also be carried out and would aim to: verify that the procurement and contracting procedures and processes followed for the projects were inaccordance with the FinancingAgreement (FA); 0 verify technical compliance, physical completion and price competitiveness o f each contract inthe selected representative sample; 94 review and comment on contract administration and management issues as dealt with by participatingagencies; review capacity o f participatingagencies inhandlingprocurement efficiently; and Identify improvements inthe procurement process inthe light o f any identifieddeficiencies. E. Contract AwardDisclosureRequirements 18. Contract awards donethroughICB: procurement method shallbe consistent with Paragraph 2.60 o f the Guidelines: Procurement under IBRD Loans and IDA Credits,May. Withintwo weeks o f receiving the World Bank's "no objection" (acting on behalf o f the cooperating partners) to the recommendation o f contract award, the Borrower shall publishin W D B online and indgMarket the results identifying the bid and lot numbers and the following information: name o f each bidder who submitted a bid; bidprices as readout at bidopening; name and evaluated prices o f eachbidthat was evaluated; name o f bidders whose bids were rejected and the reasons for their rejection; and name o f the winningbidder, and the price it offered, as well as the duration and summary scope o f the contract awarded. 19. ContractAwards donethrough DirectContracting: procurement method shallbe consistent will Paragraph3.7 o fthe Guidelines: Procurement under IBRD Loans andIDA Credits. After the contract signature, the Borrower shall publishin W D B online and indgMarket the: 0 name o f the contractor; price; duration; and summary scope o f the contract. This publicationmay be done quarterly and inthe format of a summarized table coveringthe previous period. 20. ContractAwards for Consultancies: shallbe consistent with Paragraph2.28 o fthe Guidelines: Selection and Employment of Consultants by WorldBank Borrowers, May 2004. After the award o f contract, the borrower shall publishin W D B online and indgMarket the following information: names o f all consultants who submitted proposals; technical points assigned to each consultant; 0 evaluated prices o f each consultant; final point ranking o f the consultants; and name o f the winning consultant and the price, duration, and summary scope o f the contract. The same information shall be sent to all consultants who have submitted proposals. 21. ContractAwards for SelectionBasedonthe Consultants' Qualifications (CQS) shall be consistent with Paragraph 3.8 o f the Guidelines: Selection and Employment of Consultants by WorldBank Borrowers, May 2004. The Borrower shall publishin W D B online and indgMarket the: name o f the consultant to which the contract was awarded; the price; duration; and scope o f the contract. This publication maybe done quarterly and inthe format of a summarizedtable coveringthe previous period. 95 Details of Procurement that are Subiect to BankPrior Review a) Goods Description* 1) UrbanWater Supplyand Sanitation(UWSS)Component a) BlantyreWater Board Supply of essentialequipmentspare parts for electro-mechanical L Lumpsum Proc. Estimated Prioror Bid Date Description* Pkg Mobilizatio Dateof No. orBillof Meth Amountin Post Invitation Contract Quantities od U S % Revlew Date Award Completion I1)Town and Market Center Water Supply I Constructionofpriority rehabilitation, NRWBN/Ol Lumpsum ICB 4,000,000 Prior 20 March08 15 Aug 08 01 Oct 08 30 Sept 09 upgradingand extensionworks for Mzuzu Constructionofrehabilitation and extension Lumpsum ICB 2,000,000 Prior 15Nov 08 15 April 01 Jun09 30 Nov 10 works for water supply facilities and NRWBNIO2 09 catchmentsprotectionandrehabilitation works for Mzimba b) CentralRegionWater Board Constructionof priority works for Kasungu CRWBNIOl Lump sum ICB 2,064,000 Prior 09 Jun 08 03 Oct 08 04 Nov 08 30 Jan 09 Water Supply Scheme Constructionof priority works for Mponela CRWBNIOZ Lump sum ICB 806, 000 Prior 09 Jun 08 03 Oct 08 04 Nov 08 30 Jan 09 Water Supply Scheme I I I I I I I I I I c) Soutbern RegionWater Board Constructionofpriority works for Zomba SRWBNiOl I ILump I ICB I3,700,000 IPrior I21 April08 I25 Ju108 I 11AugO8 IFeb 2010 sum Constructionofpriority works for SRWBNi02 Lump ICB 2,305,000 Prior 05 May 08 25 JulO8 11Aug 08 Feb 2010 Mangochi Sum 96 Thresholds for ProcurementMethodsandPriorReview Works and Goods I I >=50,00 < 250,000 I NCB I None Lm All Contracts <50,000 Shopping None All value Direct Contracting/Single All Contracts Source 1. Works >=500,000 ICB All Contracts >=50,000 <500,000 - NCB None <50,000 Shopping None All values Direct Contracting All contracts ICB InternationalCompetitiveBidding QCBS DC Direct Contracting NCB NationalCompetitiveBidding S Shopping c) Consultant Services Cost Prior/ Expected RefNo. Descriptionof the Assignment Estimate Selection Post inUS spfs;; Method Compietlon Dollars ndate Date BWB 01 Feasibility Studies for new water source 2,000,000 QCBS Prior 21/04/08 01/09/09 BWB 11 Strategic Sanitation Planning 300,000 QCBS Prior 12/05/08 06/01/09 LWBll I Preliminary Design, EIA, safeguardplans for raw water source and I 1,600,000 I QcBs Prior 29110107 04/09/008 Hydrographic Survey for the existing dams LWB/Z Preliminary Design, EIA, safeguardplans for aqueduct 250,000 QcBs Prior 26111/07 02/10/008 LWBI3 Strategic Sanitation Planning I 300,000 I QcBs Prior 14/04/08 05/03/009 2) Town and Market Center Water Supply a)Northern RegionWater Board NRWB/C/OI I Preliminary and detailed design of priority rehabilitation, upmadingI 345,000 I QCBS IPrior I04/12/07 100/03/08 97 Expected Expected RefNo. Cost Description of the Asslgnment Estimate Seleceon Prior/ Post S"b&lrion P r o p ~ d C::?? Method ~~i~~ date Dollan Inus CRWBICIO5 Pre-feasibilitystudies for allMarket Centresand Detailed 00/09//08 00103/09 feasibility studies and preparationofbusinessplans for viable Market Centres 300,000 QCBS Pnor CRWBICI07 Feasibility studies for groundwater source developmentfor Ntcheu, Dedza, Mponela, Madisi andNtcheu 350,000 QCBS Pnor 11/12/07 00112/08 CRWBICIOI Sanitationplanningstudy in all CRWB town centres 00101108 00107108 Detaileddesign andconstructionsupervisionofrehabilitation and Prior SRWB1C102 extensionworks for Zomba water supply 370,000 QCBS 00/03/08 00/12/09 sRWB1cIo3 Detaileddesignand constructionsupervision of Augmentation for Mangochiwater supply 230,500 QCBS Prior 00103108 001/12/09 SRWB/C/O6 Feasibiltystudies for groundwatersource developmentfor Namwera,Balaka,Muloza, Chikwawa, Nchalo, NgabuandNsanje. 350,000 QCBS Prior 00103108 0010808 SRWBICIO7 Sanitationplanningstudy inall SRWB town centres 150,000 QCBS Prior 01/03/08 00109108 IVariousconsultancies inMWERA Iamended' WRSO4 IPublic awarenessabout MWERA 150,000 CQS Prior 14112107 03/04/09 PMU-5(i) IAssistantAccountant24 months I 50,400IIC 98 ImulementinpAgencv CauacitvBuildingActivitieswith Time Schedule I No. I Expectedoutcome/ EstimatedCost EstimatedDuration StartDate ActivityDescription Comments NRWB/T/Ol Capacitybuildingin various fields including 350,000 April 07 to June 07 Imanagementandoperation. CentralRedonWater Board ICRWB/T/Ol I Cauacitvbuildinginvarious fields includine 1 . . I 330.000 A~rilO7to June 07 I procurement,Financialmanagement,projec; I ' 1IDkc 12/ 08 II I I SRWB/T/Ol Capacitybuildinginvarious fields including 350,000 April 07 to June 07 procurement,Financialmanagement,project Dec 12/ 08 managementandoperation. Capacity Buildingand Trainingfor the ImplementingAgencies I No. ExpectedoutcomeI EstimatedCost Estimated Duration Start Date Comments ActivityDescription NorthernRegionWater Board NRWB/T/Ol Capacitybuildingin various fields including 350,000 April 07 to June 07 procurement,Financialmanagement,project Dec 12/ 08 managementandoperation. CentralRegionWater Board CRWB/T/Ol Capacitybuildinginvarious fields including 330,000 April 07 to June 07 procurement,Financialmanagement,project Dec 12/ 08 managementandoperation. SRWBITI01 Capacitybuildinginvarious fields including 350,000 April 07 to June 07 procurement,Financialmanagement,project Dec 12/ 08 ., Thresholds for Consultants SelectionMethodsandPrior Review <100,000 CQS, LCS, QBS, FBS Firstcontract =50,000 I C All contracts SSS Single Source Selection QCBS Qualifications & Cost Based Selection I C Individual Consultant CQS Selection Based on Consultants Qualifications UN Procurement by a UNAgency LCS Least Cost Selection SFB Selection under Fixed Budget Totalvalue of contractssubject to prior review: Goods:US$4,249,000; Works: US$14,831,000; ConsultingAssignments: US$15,259,900 Totalall contractsfor PriorReview:US%34,339,900 OverallProcurementRiskAssessment:{Average} 99 Annex 9: EconomicandFinancialAnalysis MALAWI: SecondNationalWater DevelopmentProject EconomicAnalysis 1. Introduction: Malawi, a primarily agrarian economy with 13million people, is located inthe southern cone o f the African continent. More than halfo f its population remains below poverty line and poverty has remained almost unchanged inthe last decade (Country Economic Memorandum, 2005)14. Poor also have a disproportionately lower access to basic infrastructure services. Inwater supply, Urban and rural householdsprimarily access drinkingwater from communal standpipe and communal handpumps respectively. Only 2% o fMalawians have access to piped water inside dwelling, 70% of these households are located inthe urban areas. A significant proportiono fpopulation, particularly inthe rural areas, i s dependent on unimproved sources o f drinkingwater, with adverse effects on health, environment, and productivity. 1 Main Sourceof DrinkingWater Urban Rural Total I I 1 I Piped into dwelling 11.83 0.75 2.16 Piped outside dwelling 18.3 1.16 3.34 j Communal standpipe 11 45.37 12.03 16.28 Personalhandpump 1.25 0.22 0.35 IIII I1 Protected Communal handtmmn 9.46 49.92 44.77 1 spring 0.28 0.7 0.65 11 11 River. sming Personal open, unprotectedwell 2.71 2.48 2.51 Communal open, unprotected well 9.39 23.98 22.12 i 0.35 8.29 7.27 i L....-;.;;...-......- Source: Malawi M S , 2004 2. Only about 6% o f the householdshave pipedwater, either inside or outside the dwelling, and 93% of those with piped water inside dwelling are inthe top two quintiles. Inboththe richest andpoorest quintiles, well/boreholes/handpumps are the most prevalent sources o f drinkingwater. l4World Bank, 2004. Malawi Country Economic Memorandum: Policies for accelerating growth, Report Number 25393 MA1 100 Figure 1: Sources ofDrinkingwater, by Quintile Sources of Drlnklnp Water, By Quintile Source --eQuintile 1---tQuintile 5 Source: Malawi M S 2003 3. Intherecent Malawi Poverty ReductionStrategy, GOMarticulated its strategy to increase access to potable water by: a) construction and rehabilitationo f water facilities; b) water resources management; c) raising capacity to meet industrialand domestic demand; and 4) reducing water-borne diseases (World Bank, 2005)15. NWDP I1i s part o f an integrated effort by the Government o f Malawi (GOM) to pool resources o f the donors to meet its goals o f increasing sustainable access, ensuring efficient service delivery, and contributing to robust institutional structure. 4. The IDA funds o f $50 million would be allocated to all sub-components o f the GOMprogram that include: (i) water supply; (ii) market and rural water supply; (iii) resources urban town, water management; and (iv) programmanagement and urbanwater supply reform. For purposes of economic analysis, the components: A) urbanwater supply and B) town and market center water supply will be analyzed indetail. The project resources allocated to these two components form three-fourths o f the project, so economic benefits will only be higher ifthe other components are included. For component A, IDA investments o f $11.3 million are complemented with $40 million o f EIB/EUinvestments for the cities o f Lilongwe and Blantyre. It i s importantto note that for component A, economic analysis is conducted for the physical investments o f the project as a whole and not for IDA contribution only. This i s because the economic outcomes inthe form o f new connections, expenditure and time savings need to be valued for the urban water supply program as a whole and not as disaggregated parts. The economic benefits are derived from new connections inunserved areas as well as from performance improving measures such as reductiono fNRW and rehabilitationand replacement o f treatment plants. There are other non-easily quantifiable benefits from this project which i s typical o f a rehabilitationproject, such as higher hours o f service, increasedreliability, improved customer service, and improvedbilling and collection systems. These have not been includedinthe analysis. 5. Methodology: A cost-benefit analysis usinga "with andwithout project" methodology has been usedto calculate the ERR and NPV o f the project to which the project directly contributes with physical investments. The economic analysis supplements the financial analysis that calculates the incremental financial flows to the water boards from the project. The goal o fthe economic analysis i s to estimate the present value o f the benefit streams to major stakeholders o f the project -the households, over a 20 year period. The net economic benefits to arrive at the ERR and NPV are based on a 10% (the hurdle rate IDA uses inWSS projects) discount rate. 6. ComponentA: The two towns where new urbanwater supply connections are installed and existingnetworks rehabilitated are Lilongwe and Blantyre. Currently, about 28% o f LWB's (190,000 15 WorldBank, 2005. MalawiJoint IDA-IMFAdvisoryNote onthe PovertyReductionStrategySecondAnnual Progress Report, ReportNumber 32645-MW 101 people) and 30% o f BWB's service area (246,000 people) are unserved by the water boards inthe service area. This number rises dramatically ifthe unplanned settlements are considered. Recent evidence suggests that only 17% o f Lilongwe's population i s covered by water from LWB (Chinva and Junge, 2007). The water scarcity situation i s severely aggravated inBlantyre where the population i s growing at 6% per year and cost o f water provision i s costly due to its higher geographical location and distance from the main source o f water -the Shire River. This component aims to bringthe unserved population into the service area o f Lilongwe and Blantyre water boards and provide the new consumers with improved water supply. A total o f 51.3 million IDA and EIBEUresources will be invested innew connections for peri-urban and formal urban areas. 7. The measurable economic benefits o f this component are: (i) Higher expenditure from increased consumptioninthe previously unserved peri-urban and formal urban and (ii) lower distance traveled and filling times at the new connections, leadingto time savings. These new consumers are currently dependent on hosks. There are nine different kioskmanagement models ranging from Water Boards, City Assembly, Water User Associations, Committees, and Private businessmen. Among these, WB and Community/WUA kiosks are most prevalent. As evident from the recent Poverty and Social Impact Analysis (Chiwra and Junge, 200716), the prices at the kiosks vary between 1.5 - 3.5 MK inBlantyre and between 2-4MK for a 20L bucket respectively. Therefore, for the purpose o f this analysis, price at the kiosk i s $0.87/m3 inBlantyre and $ l.O5/m3 inLilongwe. Table 2: PricesandPriceTrends inPublicKiosks (MW20litrebucket) Source: Chinva and Junge, 2007 8. The rehabilitationo f existing networks undertakenduringproject implementationwill result inincrementalwater o f 10,500 m3/day inLilongwe and 11,500 m3/day inBlantyre. In addition, the NRW is expected to reduce from 29% to 26% inLilongwe and from 48% to 34% in Blantyre duringthe course o fthe project. These investments will result inincrementalwater flows o f 12,974 m3/day inLilongwe and 21,456 m3/day inBlantyre. One o fthe goals o fthese kindso finterventionsis to help Malawireach the millenniumdevelopment goals andfocus on per-urban and informal settlements where access is laggingbehind and population i s growing. It i s assumed, therefore, in the economic analysis that 75% o f this incrementalwater generated in Lilongwe and Blantyrewill be channeled to the peri-urban areas and the rest to formal urban areas. The new connections will be inthe form o f yard-taps and private standpipes andit i s assumed that 24 - 28 persons (4 households) can share the benefit from each o f these connections. 16 Chirwa, E. andN.Junge. 2007. Poverty and Social Impact Analysis: Private Sector Participation in the Distributionand Management o fWater Services inthe Low Income Areas inthe cities o f Lilongwe and Blantyre 102 Table 3: Number of New Connections 9. The expenditure on water for the new consumers i s valued based on the average tariff for individual connections/yard taps which i s $0.43/m3 inLilongwe and $0.53/m3 inBlantyre. Incremental expenditure benefits from new connections are minimal since households are paying twice the formal domestic connection tariff at the kiosk to consume a minimal 20L bucket per capita. 10. Accessing water from yard-taps and private standpipes also means that households will incur time savings that can be quantifiedby valuing the time inthe form o f wages lost due to the water collection activity. The economic benefits from the new connections primarily derive from these time savings, since an average household spends approximately 4 hours a day collecting water. At the hosk, the waiting, filling and carryingtime for a 20L bucket is approximately 50 minutes.Incomparison, the water collection time i s 10minutes at the yard tap for a 20L bucket. Provision o f improved water source also has significant gender implications, as notedby Chinva and Junge (2007), since women and children primarily bear the burden o f carrying water. Ifthese women and children spend significantly less time fetching water, they can devote the time inother productive activities. This also means that girl children can have a higher possibility o f staying in school. 11. The economic analysis suggests that the Component A o f the project has a positive economic NPVo f$97 million and an EIRRo f48%. This implies that the projectwill be beneficialto the citizens o f Lilongwe and Blantyre inalleviating their water supply concerns. Table 4: EconomicRateofReturn UrbanWater Supply - iI Component A: UrbanWater Supply NPV $97,109,448 I 12. ComponentB: Sevenmarket towns from service areas o fNorthernRegionalWater Board (NRWB), Central RegionalWater Board (CRWB), and SouthernRegionalWater Board (SRWB) are selected for new capital and rehabilitation investments to improve its water supply systems. The economic analysis i s conducted for the type o f system - gravity and boreholes, installedinthese seven 103 representative towns and benefits are valuedper user. It i s assumed that the tariffs charged to the users o f these new gravity and borehole facilities will be $0.36/m3. The capital cost varies by type o f system, the typical capital cost o fbuildinga gravity system i s $40/capita and a borehole i s $50/capita. Given the fact that bulko f the resources invested inthis component i s grant, investments will occur inthe following way -aftertheinitialcapitalinvestmentof$40/capita(forgravitysystems), 1.25%ofexpansioncostfor distribution will be spent inthe next 4 years and 10%o f expansion cost for transmission, generation will be spent inthe 5" year and this pattern will continue over the life of the project. Inaddition, An 0 & M cost o f $0.25/capita i s spent each year. Similar will be the investment schedule for borehole systems. 13. As a result o fthisproject, the beneficiaries o fthese new systems will be consuming more water - from 15 litres/capita/day to 50 litres/capita/day. The benefits are valued for the additionalwater consumed by households at a higher price andtime savings as a result o flower time spent incollectingwater. Table 5: Cost by Type of Water Facility Source: NRWB, SRWB, CRWB 14. The economic analysis suggests that the Component B o f the project has a positive economic NPV o f $27.83/capita and an EIRRo f 20% for gravity systems and a NPVo f $16.66/capita and ERR o f 15% for borehole users. Table 6: EIRR for Gravity and Borehole Systems 15. Insummary, a quantitative valuation of economic gains as aresult ofNWDPI1for the project beneficiaries suggests that this project will have a positive impact on improving the productivity and overall welfare in addition to non-quantifiable health and environmental benefits. FinancialAnalysis 16. One o fthe key aspects that determine the sustainability o f the water supply provision, which forms the central part o f GOM's policy objective, i s financial sustainability o f the sector and the financial viability of the main service providers. Attaining this long term goal has been challenging, partly because o f the difficulty for the service providers to recover the full cost o f service, and partly because Government and external fhding are often inadequate and unreliable. Through technical assistance, the project envisages supporting GOM inapproaching its financial goal through forming and implementing a strategy for MIWDto improve its sector financial performance, and for the main service providers such as the three regional water boards and the two city water boards to become more financially autonomous and commercially oriented to reduce dependence on government subsidies. 104 17. Sector FinancialPerformance: As elaborated inthe previous sections, the projectwould be part o f a larger sector wide programmanaged by GOM. The size o f the five year program i s expected to be about $258 million. It i s expected that the Government subsidies to the sector, especially for the urban and larger towns could be reduced over time ifthe user charges and tariffs increase along with the costs and contribute to the utilities' operating cash flows. Ifthe water boards can achieve financial autonomy and start tapping the capital markets on their own, public funds could be freed up to serve the poorer people inthe rural areas. Duringproject implementation, capacity strengthening activities will be carried out to enable the key financial staff o f GOM to create a strategy and make realistic projections for the medium to long term sector expenditure plans for achieving its sector objectives. 18. UtilityFinancialAnalysis: The financial analysis ofthe urbanandtown water supply sectors have been carried out usingthe audited financial statements o f the two city water boards and the three regional water boards. The analysis focuses on the water boards' ability to recover its operating costs, depreciation, and financial charges through its revenues. It also assesses the water boards' future cash flow situations based on the investments carried out under the program. 19. BlantyreWater Board(BWB): BWBhas producednet losses ineachyear since FY02, largely as a result o f poor operating efficiency, e.g. with increasednon revenue water from 34% inFY02to 49% inFY05.BWB'sproductionefficiency has also deterioratedto the extent that inFY05 it soldless water (by volume) than it didinFY02,while also producing more water than it didinthat year. The highlevel o fNRW is particularly costly since BWB has to pump all the water which it produces approximately 800 meters up from the Shire River. InFY06the electricity costs were equivalent to 50% o f the company's revenues from water sales. BWB also suffers from non-payment o f water bills from a large number of government institutions, totaling $10 million. BWB's poor operating efficiency i s combined with tariffs that are below its actual costs or what i s considered as reasonable or efficient costs and that have not kept pace with inflation. Inefficienciesfrom operation have affected BWB's cash flow to be very low or negative ineachyear between FY02and 06. BWB has been unable to service its debt, and unpaid debt has rapidly accrued on its balance sheet. The current portion o f BWB's long-term borrowings has more than tripled in size between FY02 and 06. BWB's inability to generate sufficient cash from operations and to service its existing debt has resulted ina lack o f financing available for investments infixed assets. Since FY03, BWB's annual capital expenditures have been well below its annual depreciation charges. As a result, BWB's balance sheet indicates that its fixed assets are heavily depreciated. Insummary, BWBcurrently: Does not generate sufficient operating revenues to cover its operating costs; I s not able to meet its current debt service requirements; and Does not have cash or the access to financing required to make investments to improve operating efficiency, extend service, and better the quality o f service it provides. An improvement inBWB's financial situation will require: Increasing operating efficiency; Establishing tariffs that recover its operating and capital costs; and Obtaining financing for investments inits fixed assets. 20. LilongweWater Board(LWB): LWBhasproducednet losses ineachyear since FY03.While LWB's operating income was positive ineachyear fromFY02to FY06, highinterest expenses and exchange rate losses resulted ina net loss on the income statement. Insummary, LWBcurrently: Produces net losses once interest expenses and exchange rate losses are accounted for; I s not able to meet its current debt service requirements; and 105 0 I s only able to finance its required capital investments by relying on government capital contributions. The key areas for LWBto improve its operational performance are: 0 NRW-LWB's level o f NRW increased from about 27% in FY02 to 38% in FY04 and then fell to around 35% in FY06. LWB's proposed capital expenditure program aims to substantially reduce the company's NRW levels. 0 Collections-according to information provided by LWB, the company's collection rate in FY06 wasjust below 95%. 0 Staff productivity and staff costs-staff productivity, measured as the number o f employee per 1000 water connections, improved from 19.4% in FY02 to about 16.8 in FY05. Despite this improvement, the level i s still well above the level for efficient utilities in developing countries. While LWB has demonstrated improvement interms o f staff productivity, average annual staff compensationrose by nearly 90% between FY02 and FY06. InFY06, staff costs representedover 40% o f total operating costs. 21. A financial model has been developed to assess the financial viability o fthe urbanwater sector and simulate the different scenarios with regard to investment plan, operational efficiencies, service levels especially inthe low income and peri-urban communities, and tariff level and structure. The analysis concludes that LWBwould achieve full cost recovery by the end o f the five year program, ifthey make the proposed capital investment and achieve the operating efficiency gains expected under the program. The situation for Blantyre i s more challenging, however, there i s a possibility o f BWB achieving full cost recovery ifthe following assumptions can be met: (i) a real annual tariff increase o f at least 5 percent will be implemented; (ii)robust nonrevenue water reductionprogram i s implemented; (iii) a timely production volume increase and connection to new customers are carried out; and (iv) subsidies (including write-offs o f loans on-lent to them by the GOM) are received from GOM. 22. Three RegionalWater Boards(NRWB,CRWB, and SRWB): Annual reports and audited financial statements have been analyzed to assess the historical performance o f the RWBs. Since each water board covers several districts and towns, town level financial analysis has been carried out to evaluate the business plans and the related financial proposals prepared for eachtown. NRWBcovers 6 districts and 9 towns varying in size between 145,000 inMmzuto small market centers o f 10,000 to 50,000 inpopulation. CRWB covers 9 districts and 19towns rangingfrom population size o f 30,000 to 300 (rural hospital). SRWB covers 12 districts, 13 towns, and 10 centers/institutions, ranging from 250,000 inZomba, to centers as small as 10,000 to 40,000. The fastest growing towns, including Zomba, Mangochi, Kasungu, Likuni,Mponela, Mzum,and Mzimba will receive the initial investments. 23. The historical financial performance indicates that the fastest growing towns are all able to cover their O&M costs through their revenues, contributingto the consolidated financial statements o f the RWBs.However, the highdepreciation and debt service obligations make it difficult to sustain themselves. As an example, inthe case o fNRWBtheir total debt service obligation amounts to $3.7 million, corresponding to 170%(almost twice the size) o f the total revenues in 2006. This i s due to the highon-lending terms from MOFto the RWBs. 106 NetIncome (395,147) (543,607) (217,916) (264,745) (784,040) (673,406) % Full CostRecovery 38% 35% 55% 55% 30% 40% Longterm Debt to Eqity Ratio 561% 725% 320% 360% 700% 809% Financecosts as % ofRevenue -155% -170% -82% -83% -218% -151% CashBalance 1,512 (2,906) 12,149 1,944 7,843 (8,761) 24. Financial models have been developed for the three RWBs to assess the financial viability o f their operations incorporating the proposed investments to be carried out under NWDP. The base case scenario assumes: (i) (less thaninflation) annual tariff increase; (ii) 5% 70% o fthe planned connections are realized; (iii) increase inO&M costs along with inflation; (iv) average debtor days o f 150 from the past continue; and(v) 100% o fthe IDA credit will be onlent to the RWBsby MOFwith the terms o f inflation plus 5%. The base case shows that none o f the three RWBswould be able to achieve full cost recovery inthe foreseeable future (next 5-10 years) even ifit assumes that the existingdebt from GOM are written off from their books in2007. 25. Sensitivity analysis hasbeencarried out to assess the time it takes for the RWBsto achieve full cost recovery inthe foreseeable future. The improved scenario assumes the following: (i) tariffincrease of 10%; (ii) o f the plannedconnections are realized; annual 100% (iii) efficiencygainsrealizedinO&Movertime;(iv)averagedebtordaysof150fromthe some past i s reduced to 60 days; and (v) 50% o fthe IDA credit will be grant, and 50% will be a credit with the terms ofinflation plus 5%. The improved case shows that all three RWBswould have much better prospects o f reaching full cost recovery inthe next 5-10 years with the revised assumptions, as shown inthe graph below. ! 6 YOCost Recovery Projectionsfor RWBs > 150% Y " g 100% 2 50% - \o 0% +NRWB Base +CRWBBase SRWB Base xX SRWB Improved I NRWB Improved -0- CRWB Improved 107 Futurefinancial sustainabilityofthe five Water Boards 26. The situation beyond the project implementationperiod, for the years beyond 2012 would be particularly challenging for all five Water Boards as the grace period for the IDA credit expires. While the Water Boards are likely to be able to continue covering their O&M expenses through their revenues, the debt service obligations for the IDA credit that kick inwill give a significant impact on their overall financial health. 27. There are some performance improvement measures that the Water Boards can take on their own, such as increase inrevenue base through connecting to new customers, bill collection efficiency improvements, non-revenue water reduction, and other cost reductionmeasures. However, it would be highly crucial that they also receive support from GOM. 28. The key actions that GOMhas agreed to take to create an enabling environment for the Water Boards to perform better are spelled out as covenants inthe Financing Agreement o f the Project: (i) Outstandingwater billsbythe publicinstitutionswill bepaidinfull andthereafter the timely paymentwill be ensuredfor the future water bills: As it isnormally estimatedthat about 30%-70% o f the billedamount are attributed to the public institutions, full and timely paymentwould significantly improve the bill collectionrates o fthe Water Boards. This would result intimely payment o f their obligations or generation o f cash for reinvestments innew networks and connections that leadto increased revenue base. (ii) Atime-boundactionplanforcarryingoutdebttoequityconversionofthedebt fromthe Governmentinthewater boards' balancesheets will beprepared: Debt to equity conversion o f the existing loans from GOM would reduce the debt service obligations o f the Water Boards significantly. For example, the existinglong-term debt will be reduced from $7.4 million to $320,000 for BWB and from $16 million to $2.4 million for LWB. (iii) O&M Cost Recoveryby 2008/09 andFullCost Recoveryby2011/12 for All Five Water Boards:The five water boards will meet its O&M costs through their revenues by fiscal year 2008/09, and continue to improve thereafter to meet their depreciation and debt service obligations fully by fiscal year 2011/12. (iv) Regulatoryframework for the delivery of itsurbanandtownwater and sanitation services completedwithin 18monthsofthe effectivenessdate: This would include adoption o f a tariff setting mechanism that reflects the need for the Water Boards to improve their cost recovery levels. Tariff indexationformula i s proposed to enable automatic increase o fthe tariffs along with inflation. (v) Grantversus CreditElementsand Conditionsfor Project ComponentA andB:The elements that qualify for grants, as well as the on-lending terms and conditions o f the loans to be passed on to the Water Boards will be specified to ensure the financial viability o f the Water Boards. 108 Annex 10: SafeguardPolicyIssues MALAWI: SecondNationalWater DevelopmentProject 1. OP 4.01 EnvironmentalAssessment: This policy hasbeen triggereddue to potentialadverse environmental and social impacts related to the construction and rehabilitation o f investments under components A and B. Since the precise locations and potential localized adverse impacts could not be identifiedprior to appraisal, the borrower has prepared an Environmental and Social Management Framework (ESMF) which will guide project implementers inidentifying, assessing, mitigating and monitoring future potential adverse environmental and social impacts. 2. The ESMF identifies potentialadverse environmental and social impacts o fthe future investments at the various stages o fproject implementation. Thus, impacts are expected to result, for example, from: (i) civil works requiringadditional landfor storage/distribution tanks, booster stations, pipelines and for the construction o f temporary structures; (ii) rehabilitation works requiringthe demolition o f existing water supply infrastructure thereby generating wastes that would have to be disposed o f properly; (iii) additionalwater abstractionresulting inchanges inground and surface water regimes, bothinside and outside the project areas; (iv) additional water resources leadingto an increase in waste water generation; and (v) the provision o f additional water supplies that may contribute to water stagnation and sanitation problems. 3. To ensure that the potentialimpacts on, for example, flora, fauna, soils, water resources, rural livelihoods or public health are addresses properly, the project implementers will apply the steps o f the environmental and social screening process outlined inthe ESMF. These steps involve: (i) the screening of each sub-project as part of the desk appraisal and subsequently inthe field; (ii) assignment o fthe the appropriate environmental category to each sub-project; (iii) carrying out the appropriate environmental work (either the applicationo f mitigation measures with guidance from the environmental checklist); (iv) review and approval o f the screeningresults and EA reports; and (v) implementationo f the environmental management and monitoring plan; this plan i s to be adapted to the sub-projects as necessary. Inaddition, the ESMF includes Environmental Guidelines for Contractors to be attached to the biddingdocuments o f future sub-projects as well as a summary of the Bank's safeguardpolicies to ensure that hture sub- projects are implementedinan environmentally and socially sustainable manner. 4. The ESMFproposes that environmental monitoring be carried out at the community level during the construction and rehabilitation o f the water supply and sanitation facilities, as well as duringtheir operation and maintenance. Thus, duringthe rehabilitationo fthe existing water supply structures, members o f the Village Development Committees and District Executive Committees will be responsible for the monitoring of: (i) construction techniques and inclusion o f environmental design features as requiredinthe architectural plans; (ii) provisions for traffic safety, reduction innoise and dust levels; (iii) construction o f on-site waste management, proper storage o f construction materials, sanitation, solid waste disposal, and waste water disposal; and (iv) implementationo f plans for the restoration o f the construction sites, once the constructionhehabilitation works have been completed. Area Executive Committees will support the village level committees at all stages o f the work, including monitoring. To ensure proper operation and maintenance o f the water supply and sanitation facilities inan environmentally friendly manner, the Area Executive Committee within the proposed sites will appoint a monitoring committee. 5. The ESMFwas prepared during field visits inconsultation with officials from the Water Boards, Town and District Assemblies, members o f fishermen associations, villagers, lands officers, and potentially affected persons. Their concerns and suggestions have been incorporated into the above generic EnvironmentalManagement and Monitoring Plan. The stakeholders largely viewed the project as very beneficial to their living standards. They suggested that the project carry out public awareness 109 campaigns to sensitize the beneficiaries on general environmental and social managementpractices; put inplace effectiveenvironmental and social managementplans, anduse existinglocal community structures inthe management and administration o f the ESMF inorder to promote ownership and sustainability o f the environmental management plans. 6. The borrower's capacity to implement safeguardpolicy recommendations needs to be strengthened. Thus, to ensure effective implementationo f the ESMF and RPF, the project will fund a Training Program for the Training o f Trainers. This program will train a total o f 30 personnel from District Assemblies/Town Assemblies, City Assemblies, Regional Water Boards, Urban Water Boards, MinistryofIrrigation andWater Development, andprojectpersonnel. Oncetheserepresentatives have been trained, it i s recommendedthat they train (under the supervision o f a qualified facilitator) the other groups (members o fDistrict DevelopmentCommittees, Area Executive Committees, Village Development Committees and Local Leaders or their representatives) that will be directly involved inthe project implementation. Training topics include, for example, the screening process, the use o f checklists, preparation o f terms o freference, Malawi's environmental policies and laws as well as the World Bank's safeguardpolicies. 7. OP 4.12 InvoluntaryResettlement:This policy has been triggered due to the planned rehabilitatiodconstction activities described under components 1-3, To the extent that these activities require land, it i s possible that some people will experience a loss o f livelihoods, impact on assets, loss o f land, or loss o f access to economic assets. To address potential adverse social impacts due to land acquisition, the Borrower has prepared a Resettlement Policy Framework (RPF). The RPF outlines the policies and procedures to be followed inthe event that future project activities involve land acquisition, impact on assets, and/or the loss o f livelihoods which would require appropriate compensation. 8. OP 7.50 ProjectsonInternationalWaterways: Consistent with thispolicy, the Bank, on behalf o f the Government o f Malawi, has notified the riparian states (Angola, Botswana, Mozambique, Namibia, Tanzania, Zambia, and Zimbabwe) inDecember 2006. N o unfavorable responses were received from any o f the riparians based on international waterways issues. 9. The Bank staff have consideredthose aspects o f the Project that mighthave an effect on the downstream riparians and are satisfied that the Project will not cause appreciable harmto the other riparians and will not be appreciably harmedby the other riparians' possible water use. 110 Annex 11: ProjectPreparationand Supervision MALAWI: SecondNationalWater Development Project ~~ Planned Acutal ~~ PCNreview June 27,2005 June 27,2005 InitialPID to PIC October 18,2005 October 18,2005 InitialISDS to PIC November 17,2006 November 17,2006 Appraisal March 19, 2007 March 23,2007 Negotiations March26, 2007 March 27, 2007 Board/RVP approval May 24,2007 Planned date of effectiveness October 31,2007 Planned date of mid-termreview April 31,2010 Plannedclosing date October 31,20 12 1. Key institutionsresponsible for preparation of the project: Ministry of Irrigationand Water Development Privatization Commission MinistryofFinance e MinistryofEconomic PlanningandDevelopment Two City Water Boards and Three RegionalWater Boards 2. Bank staff and consultants who worked on the project included: Name Title Unit RobertRoche LeadWater and Sanitation Specialist AFTU1 Midori Makino Senior Financial Analyst AFTU1 LeonardJohn Abrams Senior Water ResourcesManagement Specialist AFTU1 Jan Janssens LeadTechnical Specialist WBIEN Edeltraut Gilgan-Hunt Environmental Specialist AFTS2 Kristine Schwebach Social Safeguards Specialist AFTS1 Gert van den Linde Senior Financial Management Specialist AFTFM Wedex Ilunga Procurement Specialist AFTPC MuthoniKaniaru Senior Counsel LEGAF Modupe Adebowale Senior Finance Officer LOAG2 Barbara Mwila Water and Sanitation Specialist ETWAF Kazimbaya-Senkwe Yitbarek Tessema Senior Water and Sanitation Specialist AFTU1 Sudeshna Banerjee Economist AFTP1 Esther Lozo Program Assistant AFMMW BelindaAsaam Program Assistant AFTU1 Bank funds expendedto date on project preparation: 1. Bank resources: US$355,921.38 2. Trust funds: 3. Total: US$355,921.38 Estimated Approval and Supervision costs: 1. Remainingcosts to approval: US$75,000 2. Estimated annual supervision cost: us$100,000 111 Annex 12: Documents in the Project File MALAWI: Second National Water Development Project 1. Government ofMalawiPolicyDocuments National water policy Draft national sanitation policy 2. Preparation Study Reports Sector reform consultancy reports Institutional/financial/technical study for low income andperi-urbancomponent Feasibility studies for physical investments 3. Bank Staff Assessments Project concept note, quality enhancement review, and decision meeting minutes Mission aide memoires 4. Project ImplementationDocuments Programimplementationmanual Implementationmanual for urban water and sanitation component Implementation manuals for town, market center, and rural pipedwater and sanitation component Implementationmanual for rural water supply and sanitation component Environmental and social management framework Resettlement Policy Framework 112 Annex 13: Statement of Loansand Credits MALAWI: SecondNationalWater DevelopmentProject Differencebetween expected and actual Original Amount in US$ Millions disbursements ProjectID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO84148 2006 MW-Irrig, RuralLvlihds & Agr SIL 0.00 0.00 0.00 0.00 0.00 38.26 5.48 0.00 (FY06) PO57761 2006 MW-Infrastr Srvcs S I M 0.00 0.00 0.00 0.00 0.00 40.49 0.00 0.00 PO83401 2005 MW-Health Sec Supt SIM (FY05) 0.00 0.00 0.00 0.00 0.00 10.27 1.60 0.00 PO70823 2005 MW-Edu Sec Supt SIL 1(FY05) 0.00 0.00 0.00 0.00 0.00 27.22 -3.96 0.00 PO75247 2004 MW-ComBasedRural Land Dev (FY04) 0.00 0.00 0.00 0.00 0.00 17.11 2.85 0.00 PO73821 2004 MW-Multi-sectoralAIDS MAP (FY04) - 0.00 0.00 0.00 0.00 0.00 13.59 -10.70 0.00 PO78408 2003 MW-Fin Mgmt, Transpar & Account 0.00 23.70 0.00 0.00 0.00 15.47 9.50 0.00 (FY03) PO75911 2003 MW-MASAF APL 3 (FY03) 0.00 32.80 0.00 0.00 0.00 2.96 -1.88 0.00 PO70235 2001 RegionalTrade Fac. Proj. Malawi - 0.00 15.00 0.00 0.00 0.00 12.60 11.08 0.00 PO63095 2000 MW-Priv & Utility Reform (FYOO) 0.00 28.90 0.00 0.00 0.00 9.07 6.44 2.62 Total: 0.00 100.40 0.00 0.00 0.00 187.04 20.41 2.62 MALAWI STATEMENT OF IFC's Held and DisbursedPortfolio InMillions ofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2000 NICO 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.00 Total portfolio: 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.00 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. Total pendingcommitment: 0.00 0.00 0.00 0.00 113 Annex 14: Country at a Glance MALAWI: Second National Water DevelopmentProject Sub- POVERTY and SOCIAL Saharan LOW- Maiawl Afrlca Income >eveIopment dlamond. 2005 Population, mid-year(millions) P.9 741 2,353 GNi percapita (Atlasmethod, US$) 6 0 745 580 Life expectancy GNi(Atlas method,US$ billions) 2.1 552 1364 - Average annual growth, 1999-05 Population(%) 2.3 2.3 19 Laborforce (%) 2.0 2.3 2 3 Gross capita l+enroiimeni "1 primar) M os1 recent ertlmate (latest year available, W99-05) Poverty(% of population belownatbnalpovertyline) Urbanpopulation (%oftotalpopulationj n 35 30 Lifeexpectancyat birth(ears) 40 46 59 infantrnortaiity(per lOOOllvebirfhs) m 00 80 Childmalnutrition(%ofchiidrenunder5) 22 29 39 Access to improvedwatersource Access to an improvedwatersource (%ofpopulation) 73 58 75 Literacy(%ofpopulation age a+) 64 62 Gross primaryenroilment (%ofschool%gepopulation) P5 93 0 4 -Malaw Male P 3 99 10 Lowrncome omuD Female 126 87 99 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1985 1995 2004 2005 Economlc ratlos' GDP (US%biiiions) 11 14 19 2 1 Gross capitalformation1GDP 6.5 7.4 '6.3 145 Exports of goods andSewicesIGDP 24.2 30.4 26.8 26 8 Trade Gross domestic savingsiGDP P,9 -0.3 -9.1 -n6 Gross nationalsavingslGDP .. -4.0 -5.3 -74 Current account balance1GDP -8.5 -P2 -8.1 -82 interest papentslGDP 2.7 2.8 12 Domestic Capital Total debt1GDP 90.2 6 0 2 79.6 savings formation Total debt serviceleuports 39.0 26.5 9,3 Presentvalueof debtlGDP 57.1 Presentvalueof debtlexports 69.8 indebtedness 1985-95 m95-05 zoo4 2005 2005-09 (averageannualgroMh) GDP 2.4 2.7 7.1 2.6 6.8 -Malaw GDP percapita -0.9 0.1 4.8 0.4 6.2 Lowrncome group Exportsof goods andsewices 1.7 19 -3.0 202 3.0 STRUCTURE of the ECONOMY 1985 7995 2004 2005 (%ofGDPj Growth of capltal and GDP (%I Agriculture 429 304 38.9 347 40T industry 219 8 6 17.2 8 4 Manufacturing 145 '68 114 P5 Services 352 500 44.0 45 9 Householdfinalconsumptionexpenditure 694 794 92.2 948 Generagov't flnaiconsumptlonexpenditure T77 210 8.9 6 7 Importsof goodsandservices 299 461 512 530 1985.95 1995.05 2004 2005 I (averageannualgrovclh) Growth of exports and imports (%) Agriculture 19 40 2.7 -9 1 40T Industry 3 4 11 u.2 154 Manufacturing 31 -07 6.9 11s 20 Services 24 13 5.3 5 2 Householdfinalconsumptionelpenditure 48 32 2.1 27 11: Generalgov't finalconsumptionemnditure 16 37 P.1 15 Grosscapitalformation -14 -12 332 03 Imparts of goodsandservices 28 23 -0.7 110 Note 2005dataarepreliminawestimates This tabiewasproducedfromthe Development EconomicsLDB database *Thediamonds showfourkeyindicatominthecountry(in bo1d)comparedmthits income-groupaverageIfdataare missing.thediamondhill be incomDiete 114 PRICES andGOVERNMENT FINANCE 1985 1995 2004 2005 Domestlc prlces (%change) Consumer prices 0.5 83.3 114 6.4 Implicit GDP deflator 8.9 77.2 P5 15.5 Government flnance (%of GDP, includes current grants) Current revenue 22.7 8.7 23 2 25.6 00 01 02 03 M 05 Current budgetbalance -0.8 -8.2 -8 1 -02 Overall surplus/deficit -9.7 -a.o -207 -20 9 TRADE 1985 1996 2004 2005 (US$ millions) Export and Import levels (US$ mlll.) Totalexports (fob) 300 404 470 514 Tobacco la 256 230 282 Tea I 54 27 47 51 Manufactures 50 49 ,a5 It? Total imports (cif) 287 474 866 984 Food 2 0 1 85 2 0 Fuel and energy 34 45 83 94 I Capital goods 77 157 287 326 Eqort priceindex(20OO=fJO) im 0 8 0 1 99 00 01 02 03 Importpriceindex(2000=00) 96 98 97 Exports Inports Terms of trade (2000-fJ0) P2 10 0 4 BALANCE of PAYMENTS 1985 1995 2004 2006 (US$ millions) Current account balance to GDP (`4 Exportsof goods and Services 276 429 511 578 0 Imports of goods and services 331 548 947 1066 Resource balance -54 -118 -436 -488 5 Net income -53 -47 -45 -41 .10 Net current transfers -4 1% a 1 .15 Current account balance -97 -77 1 -363 -398 Financing items (net) 54 258 379 445 -20 Changes innet reserves 42 -87 -8 -47 Memo: Reserves includinggold (US$ millionsl 49 115 t34 8 5 Conversion rate (DEC,local/US$) 17 6.3 $38.9 18.4 EXTERNAL DEBT and RESOURCE FLOWS 1985 1995 2004 2005 (US$ millions) :omposition of 2004 debt (US$ mill.; Total debt outstanding and disbursed 1021 2,239 3,418 iBRD 69 55 0 0 F:8 a 2 8 IDA 322 1251 2,075 1940 Total debt service 10 18 60 iBRD 7 8 1 0 IDA 3 8 25 50 Composition of net resource flows Officialgrants 38 262 348 Officialcreditors 52 773 62 Private creditors -29 -23 -2 Foreign direct investment (net inflows) 1 6 8 Portfolio equity(net inflows) 0 0 0 World Bank program Commitments a 5 00 54 Disbursements 34 73 62 45 b . E-Ellateril E IDA .IBRD D. Other mltilEitrd F- Private Principal repayments 2 18 a 35 G-Start-ten Net flows 32 55 50 0 Interest payments 8 8 14 `8 Net transfers 24 39 37 -5 Note:This table was producedfrom the Development Economics LDB database. 8/t3/08 115 IBRD 35457 32°E 34°E 36°E To To Songwe Mbeya TANZANIANZANIA Tunduma ChitipaChitipa MALAWI Karonga 10°S ChisengaChisenga 10°S KARONGA KARONGA To CHITIPA CHITIP Muyombe Nykia Nykia (2,606 m) (2,606 m) Chilumba ChelindaChelinda Mkondowe To Muyombe Livingstonia KatumbeKatumbe RUMPHIRUMPHI Rumphi Rumphi Ruarwe MZIMBA MZIMBA KafukuleKafukule tns. Mzuzu Mzuzu EuthiniEuthini M Nkhata Z A M B I A NORTHERNNORTHERN NKHATA NKHA BA BAY Mzimba Mzimba ChintecheChinteche (MALAWI) 12°S Viphya Bay 12°S LuwawaLuwawa Lake M To Lundazi NkhungaNkhunga KalulumaKaluluma alawi K A S U N G U Nkhotakota Kasungu Kasungu NKHOTAKOT NKHOTAKOTA M O Z A M B I Q U E NTCHISI NTCHISI Ntchisi Ntchisi 0 20 40 60 80 100 Kilometers C E N T R A L MCHINJI MCHINJI DOW DOWA Dowa SALIMA Dowa SALIMA Makanjila To Mchinji Mchinji Bua Chipata 0 20 40 60 Miles SalimaSalima LILONGWELILONGWE 14°S 14°S NamiteteNamitete Monkey LILONGWE LILONGWE Bay To To DEDZADEDZA Cuamba Furancungo DedzaDedza M A N G O C H I Mangochi Mangochi To Ulongwe NTCHEUNTCHEU S O U T H E R N M O Z A M B I Q U E To Cuamba 32°E NtcheuNtcheu BalakaMACHINGAMACHINGA Balaka LiwondeLiwonde MALAWI Shire Machinga Machinga Lake SECOND NATIONAL WATER ZOMBA ZOMBA Chilwa MWANZAMWANZA Zomba Zomba DEVELOPMENTPROJECT To LirangweLirangwe Tete MwanzaBLANTYRE Chiradzulu MwanzaBLANTYRE ChiradzuluPHALOMBEPHALOMBE PARTICIPATING CITIES Blantyre Blantyre CHIRADZULU CHIRADZULU Phalombe Phalombe PARTICIPATING TOWNS MULANJE MULANJEMULANJE 16°S Chikwawa Chikwawa Mulanje Mulanje SapitwaSapitwa 16°S LAKE LEVEL CONTROL STRUCTURE THYOLO THYOLO (3,002 m) (3,002 m) Thyolo Thyolo SELECTED CITIES AND TOWNS CHIKWAWACHIKWAWA To Liciro DISTRICT CAPITALS N'gabuN'gabu REGION CAPITALS To Morire NATIONAL CAPITAL NSANJENSANJE RIVERS MAIN ROADS Nsanje Nsanje RAILROADS This map was produced by the Map Design Unit of The World Bank. DISTRICT BOUNDARIES The boundaries, colors, denominations and any other information To shown on this map do not imply, on the part of The World Bank REGION BOUNDARIES Vila de Sena Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. INTERNATIONAL BOUNDARIES 36°E APRIL 2007