Document of The World Bank FOR OFFICIAL USE ONLY ReportNo: 18708 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF KENYA THIRD NAIROBI WATER SUPPLY PROJECT (Cr. 2060-KE) December 17, 1998 Water and Urban Unit Eastern and Southern Africa Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Kenya Shillings (KSh) US$1.00 = 21.78 KSh Jan. 1990 US$1.00 = 24.35 KSh Jan. 1991 US$1.00 = 28.12 KSh Jan. 1992 US$1.00 = 36.13 KSh Jan. 1993 US$1.00 = 67.33 KSh Jan. 1994 US$1.00 = 44.48 KSh Jan. 1995 US$1.00 = 56.32 KSh Jan. 1996 US$1.00 = 54.78 KSh Jan. 1997 US$1.00 = 61.39 KSh Jan. 1998 US$1.00 = 60.75 KSh Jun. 1998 WEIGHTS AND MEASURES Metric System FISCAL YEAR OF BORROWER July 1 - June 30 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AfDF African Development Fund EIB European Investment Bank FY Fiscal Year IBRD International Bank for Reconstruction and Development (The Bank) IDA International Development Association MWD Ministry of Water Development NCC Nairobi City Commission NGO Non-Governmental Organization OECF Overseas Economic and Cooperation Fund of Japan PIU Project Implementation Unit ROK Republic of Kenya RWS Rural Water Supply UfW Unaccounted for Water UWS Urban Water Supply WD Water Department of the Ministry of Water Development WSD Water and Sewerage Department of the Nairobi City Commission Vice President Callisto E. Madavo Director Harold E. Wackman Sector Manager Jeffrey S. Racki Task Manager Alain R. Locussol FOR OFFICIAL USE ONLY KENYA THIRD NAIROBI WATER SUPPLY PROJECT [Credit 2060-KE] IMPLEMENTATION COMPLETION REPORT TABLE OF CONTENTS Page No. PREFACE ............................................................. i. EVALUATION SUMMARY ............................................................. ii PART I - PROJECT' REVIEW FROM BANK'S PERSPECTIVE ...................................I A. Project Identity ............................................................. I B. Background ............................................................. 1. C. Statement and Evaluation of Project Objectives ..............................................................2 D. Achievement of Project Objectives ..............................................................4 E. Implementation Record and Major Factors Affecting the Project .................................6 F. Project Sustainability ..............................................................7 G. IDA Performance ..............................................................8 H. Borrower Performance ..............................................................8 1. Assessment of Outcome ..............................................................8 J. Future Operations ............................................9 K. Key Lessons Learned ..........................................9 PART II. STATISTICAL ANNEXES ......................................... 1.1 Table 1 - Suimmary of Assessments ......................................... 1.1 Table 2 - Related Bank Loans/Credits ......................................... 12 Table 3 - Project Timetable ......................................... 12 Table 4 - Credit Disbursements ......................................... L3 Table 5 - Key Indicators for Project Implementation ......................................... 14 Table 6 - Key Indicators for Project Operations ......................................... 16 Table 7- Studies Included in Project ......................................... 17 Table 8A - Project Costs ......................................... 18 Table 8B - Review and Analysis of the 10 Largest Civil Works/Goods Contracts ............... J9 Table 8C - Project Financing ......................................... 20 Table 9 - Economic Rate of Return ......................................... 21 Table 10 - Status of Legal Covenants ......................................... 23 Table 11 - Compliance with Operational Manual Statements ......................................... 25 Table 12 - Estimated Bank Resources: Staff Inputs .....................................26 Table 13 - Bank Resources: Missions .27 ANNEXES A. Mission's aide-memoire B. Borrower's contribution to the ICR Map - IBRD No. 21208 This document has a restricted distribution and may be used by recipients oaly in the perfornance of their official duties. Its contents may not otherwise be disclosed without tWorld Bank authorization.-. i KENYA THIRD NAIROBI WATER SUPPLY PROJECT [Credit 2060-KE] IMPLEMENTATION COMPLETION REPORT PREFACE This is the Implementation Completion Report (ICR) for the Third Nairobi Water Supply Project, Republic of Kenya for which a Credit 2060-KE, in the amount of SDR 49.1 million (US$ million 64.8 equivalent) was approved on July 25, 1989, the Development Credit Agreement was signed on August 15, 1989, and the Credit was made effective on March 15, 1990. The Credit was closed on June 30, 1998 two years after the scheduled closing date of June 30, 1996. At the time this Implementation Completion Report was issued, it was not possible to formally close the Credit as there was still a balance in the Special Account that needed to be documented by the Borrower. Co-financing for the Project was provided by the African Development Bank (AfDB), the European Investment Bank (EIB) and the Overseas Economic and Cooperation Fund (OECF) of Japan. The ICR was prepared by Messrs. Alain R. Locussol, Principal Water and Sanitation Specialist AFTU 1, and Tejbir Singh Phool, Consultant; it was reviewed by Messrs. Jeffrey Racki, Manager AFTU I and Harold E. Wackman, Director AFCO5. Preparation of this ICR was begun in conjunction with IDA's final supervision/completion mission of June 1998. The Bonrower contributed to the preparation of the ICR by providing pertinent information and commenting on the draft ICR. The Borrower also prepared a separate evaluation of the Project's preparation and execution, that is attached to the ICR. ii KENYA THIRD NAIROBI WATER SUPPLY PROJECT [Credit 2060-KE] IMPLEMENTATION COMPLETION REPORT EVALUATION SUMMARY Introduction 1. In the late 1980's, Nairobi, the capital of the Republic of Kenya (ROK) housed approximately 1.3 million people and experienced a population growth rate of 7% per annum; about 30% of the city had no access to a satisfactory water service and about 40% to a sanitation service. In 1998, Nairobi's population was estimated at about 2.1 million. The water supply and sanitation system, owned and operated by the Nairobi City Commission (NCC), has always received high Government priority because Nairobi is an important center of activity and tourism. The Town Clerk, the NCC chief executive, supervises seven departments, including the Water and Sewerage Department (WSD); the latter is headed by a General Manager. The Bank has been involved in the urban water supply sector since the 1970's and has financed three water projects aimed at improving the service in Nairobi. The key lesson learned from these projects was the need for a strong autonomous organization, capable of making sound economic decisions. Also, in the late 1980's, ROK was again experiencing deteriorating fiscal and monetary conditions, that resulted in pressure on the national budget. Project Objectives and Components 2. Objectives. The Project's main objectives were to: augment Nairobi's water supply; improve basic needs provision and health conditions of the urban poor; assist in maintaining the city's sanitation standards, decrease pollution in the Nairobi river; and improve operational and financial efficiency of the WSD. In view of the impending shortcomings of the water supply and sanitation service, the main objectives were appropriate. In framing the institutional objectives, IDA and the Govemment initially agreed on the need to convert the WSD into an autonomous organization, but ultimately articulated a much weaker objective of strengthening only portions of the existing entity. They obviously missed a strategic opportunity to make significant institutional progress. 3. Components. The Project components included the construction of an impoundment dam and transmission mains, the extension of the water treatment capacity, the (limited) extension of the distribution system, the enhancement of the waste water treatment capacity, and the provision of technical assistance and training for selected departments of the WSD. The design of the physical components was adequate, and the dimensioning of the works consistent with the demand forecast made at appraisal. The water production and distribution programs were however somewhat unbalanced. There was also a discrepancy between the objective of improving the service to lower income groups and a design that included no secondary or tertiary water distribution pipes, sewers, connections or standposts in its original description. This was partly corrected after most components of the original Project description were completed, by the introduction of a limited pilot water distribution component in the slum area of Kibera, home to about half a million people. The institutional objective was supported only by a limited technical assistance and training program. ini Implementation Experience and Results 4. Achievement of Objectives. The Project has achieved its objective of increasing the water production capacity, but at closing about 50% of the population still had no direct access to piiped water despite a significant increase of the number of connections. The Project has only partially achieved its objective of increasing the waste water treatment capacity, since construction was not completed at closing. At closing, the full impact of the extension of the waste water treatment plant could not be realized because a significant portion of the sewage generated in the city did not reach it; effluent quality was however according to standards. The Project has only marginally achieved its objective of improving the water supply and sanitation service to low income communities, construction under the Kibera pilot scheme being completed only six months after closing. The Project has failed completely to improve the WSD operational and financial efficiency. 5. Project Cost. The final construction cost was US$213 million equivalent against the appraised US$217 million equivalent. The difference is accounted for partly by savings related to currency devaluation and partly because components costing approximately US$1.5 million were not yet completed. 6. Project Implementation. The closing date of the Project was extended twice to June 30, 1998 from June 30, 1996. Disbursement was suspended three times, because of constant disagreement on the balance between the "General Account" of the NCC and the "Water Account" maintained by the WSD; these accounts were in fact managed as only one account, in violation of Credit covenants. At closing, disbursement had been suspended for six months; the audited balance between the two accounts was made available five months after closing. Some savings were used to finance additional components to overcome shortcoming of the original design. 7. Factors Affecting the Project - Outside of Government Control. The performance of financing agencies, contractors and consultants with regards to implementation of construction activities of the original Project description was generally satisfactory. 8. Factors Affecting the Project - Subject to Government Control. The Project suffered constantly from the decision made not to address the major institutional shortcomings identified at appraisal. At closing, most WSD problems still had their roots, as already mentioned in the Staff Appraisal Report, in the difficulty to: access cash generated from operations; attract and/or retain competent staff by proposing a competitive compensation package; simplify a complex decision making process involving the Ministries of Local Authorities and of Water Resources and the NCC; and procure goods and services according to industry standards. The nominal water tariff was increased, but in 1998 the real tariff was below the 1989 level, and the "rate of return" covenant was not complied with. Counterpart funding was not a major issue, although it was currently unclear how WSD would fund the remaining construction activities. 9. Factors Affecting the Project - Subject to the Control of the ImplementingAgency. The Project Implementation Unit (PIU) of the WSD implemented the major physical components of the P'roject satisfactorily. The significant increase of the value of most major contracts, which ended up costing more than 170% their value at award, required a detailed review by IDA. This increase is difficult to explain taking into account that the Project was thoroughly prepared under an earlier Engineering Credit, and that about 16% of the construction costs were devoted to construction supervision, up from the 6% budgeted at appraisal. Also, while the Project was unable to overhaul the computerized billing system, the WSD shares the responsibility in the deterioration of its commercial operations. While Unaccounted for Water iv (UfW) improved from about 45% to 28% under the preceding project, it may have deteriorated again to about 50% in 1998. 10. The Project is unlikely to be sustainable. The Government is still reluctant to address the fundamental issue of the managerial and financial autonomy of the WSD, although it has recently shown interest in "commercializing" municipal water companies. This will continue to constrain the internal resource generation capacity, and as a result, the WSD's capacity to fund maintenance activities; the WSD track record with funding maintenance is not encouraging. Major deficiencies in the commercial management, as evidenced by accounts receivable equivalent to 770 days of billing, still remain to be addressed, and further tariff increases are unlikely to be accepted by consumers unless there is a perception that the service is significantly improved. 11. Overall IDA pierformance was unsatisfactory, although it was satisfactory during identification, when several desirable steps to support the establishment of an autonomous WSD were taken. Performance during preparation and appraisal was unsatisfactory. Neither were objectives fully consistent with issues identified, nor were components fully consistent with the objectives articulated. While key issues were of institutional nature, corresponding components were of managerial nature only; further, even the design of the managerial components proved inadequate. Performance during supervision was also unsatisfactory, with strong emphasis placed on construction activities, and not enough on commercial and financial performance of the WSD. While suspension of disbursement resulted in partial compliance with covenants, it adversely affected Project implementation and did not provide proper answers to major institutional problems sidelined at appraisal. 12. Overall, the Borrower performance was unsatisfactory, although the performance of the PIU during implementation was satisfactory to the extent that all physical components of the original Project description were implemented according to standards, within budget and with few delays. The Government was never committed to addressing the major shortcoming of the institutional set-up, and the NCC defaulted on several covenants. At closing, Nairobi, after three Bank-supported projects, was still served by a WSD unable to produce reliable data on its operations, in an alanning financial situation, and unable to fund maintenance. 13. The Project outcome is unsatisfactory, although all physical components of the original description were implemented generally in a satisfactory manner. A strategic opportunity to make significant institutional gains was obviously lost. Further, consumers could not reap the full benefits of the Project because water production and waste water treatment capacities built were not balanced by corresponding water distribution and waste water collection capacities. Also, at closing, the Project had not been able to make a significant difference in the provision of the water supply service to lower income communities. The Project has failed to improve the WSD commercial and financial performance. A new computerized billing system is unlikely to be the answer to the problem if issues of autonomy of the WSD and the incentive framework it would operate in are not addressed. Summary of Findings, Future Operations and Lessons Learned 14. The Project demonstrated the importance of proper sequencing of institutional development and major investments. This requires the political will at the highest level of decision making to address fundamental issues. At: closing, several important challenges remain. These include: changing the institutional framework the WSD operates in; developing alternative service standards and management arrangements to provide a reliable and affordable service to lower income communities; improving collection of waste water; and ensuring that revenues generated from water supply and waste water v operations are exclusively used to finance the maintenance and development of facilities in addition to their operating costs. Main lessons are: * IDA should not finance projects unless the Borrower is committed to implementing policy and institutional reforms that would guarantee their sustainability; * IDA should insist on the creation of autonomous water utility companies prior to financing major development projects; * IDA should encourage Borrowers to seek private sector participation options, such as management, lease or concession contracts to improve overall technical, commercial and financial performance of the water supply and sanitation service; * IDA must carefully design financial covenants, watch performance indicators agreed upon during negotiations, and act decisively soon after evidence of violation appears; and * water supply and sanitation projects must be designed to achieve a balance between production and distribution capacities, and waste water treatment and collection capacities so that project benefits reach the intended beneficiaries. I KENYA THIRD NAIROBI WATER SUPPLY PROJECT [Credit 2060-KE] IMPLEMENTATION COMPLETION REPORT PART I - PROJECT REVIEW FROM BANK'S PERSPECTIVE A. Project Identity Name : Third Nairobi Water Supply Project Credit Number 2060-KE RVP Unit : AFRICA Region Country : Kenya Sector : Water Supply B. Background 1. The Republic of Kenya (ROK) stretches inland from the Indian Ocean to Lake Victoria and covers 583,000 km2 straddling the equator. In the late 1980's, the ROK had a population of 21 million growing at 3.8% annually, one of the fastest rate in the world. Nairobi, the capital city, housed approximately 1.3 million and experienced a higher annual growth rate of 7%; in 1998 Nairobi's population was estimated at 2.1 million. After receiving significant international aid that included an IMF-led readjustment package in the early 1980's, the ROK was again experiencing deteriorating fiscal and monetary condit:ions that resulted in pressure on the national budget and on government bodies. 2. In the late 1980's, about 70% of the city was served by house connections; about 60% had access to the public sewerage system and another 20% relied on septic tanks. But, a large proportion of the population received an unsatisfactory water and sanitation service, and each year, the rapid urban population growth rate added significantly to the large numbers of un-served individuals. Nairobi relies mostly on surface water from nearby perennial rivers, where adequate water quantities are available; ground water resources are very limited and contain high levels of fluoride. 3. The Water Suapply and Sewerage systems are owned and operated by the Nairobi City Commission (NCC), and receives high Government priority because the capital city is a major center of activity and tourism. The Town Clerk, the NCC chief executive, supervises seven departments including the Water and Sewerage Department (WSD). The WSD is headed by a General Manager. 4. The Bank Group has been involved in the urban water sector since 1970's, financing five water projects of which three were aimed at improving the service in Nairobi. The Nairobi Water Supply Project (Loan 714-KE implemented during 1972-76) represented the first phase of a long-range program to develop the local river system to meet Nairobi's water supply requirements. The Second Nairobi Water Supply Project (Loan 1520-KE implemented during 1978-84) provided extensions to meet water needs supply up to 1987-88. The Third Nairobi Water Supply Engineering Project (Credit 1566-KE implemented during 1988-1991) assisted in the preparation of the next extension phase (Credit 2060-KE). The key lesson learned from these projects was the need for a strong autonomous organization capable of making sound economic decisions within an established policy framework acceptable to the Govemment. 2 C. Statement and Evaluation of Project Objectives 5. Project Objectives. The Project's main objectives (SAR No 7500-KE) were to: * augment and secure the water supply to Nairobi through the expansion of source works to meet demand up to year 2003/2005; * improve basic needs provision and health conditions of the urban poor by expanding the coverage of the piped water supply to low income groups; * assist in maintaining sanitation standards in the city; * decrease pollution in the recipient river; and * improve operational and financial efficiency of the WSD. 6. Project Components. The following components would achieve these objectives: * extension of the water supply system * source works including the construction of: (a) a 63 m high dam on the Thika river with an impounding capacity of 70 million m3; (b) access roads; (c) raw water intakes; and (d) transmission tunnels; * extension of the water supply system: (a) extension of the capacity of the Ngethu water treatment plant from 180,000 m3/d to 460,000 m3/d; (b) 36 km of transmission main with a diameter of 1.3 and 1.4 m; (c) three treated water reservoirs with a total capacity of 46,000 m3; (d) two pumping stations; (e) 47 km of distribution pipes diameter of 0.2 to 1.0 m.; (f) instrumentation; and (g) offices and housing; * rehabilitation and extension of the sewage treatment plant to a total capacity of 90,000 m3/d dry weather flow and construction of staff housing, offices and amenities; * water supply and waste water disposal in low income residential areas; * engineering and construction supervision for the above works and for the preparation of a Sewerage and Sanitation Master Plan; and technical assistance and training for the WSD, including provision of management and staff support, implementation of training program, implementation of a self accounting system, and implementation of an environmental action plan. 7. Additional Components. During Project implementation and after most of the original components were completed, IDA agreed to allow cost savings of US$9.0 million to be used for additional components as follows: (a) water distribution in the low income communities of Kibera and Kasarani; (b) desludging of the Dandora waste stabilization ponds; (c) upgrading of the Kabete pumping station (d) additional upgrading of the Gigiri pumping station; (e) supply of sewer cleaning equipment; (f) computerization of the billing system; and (g) additional construction supervision. 8. Project Cost, Financing Plan, and Implementation Timetable. At appraisal, total Project cost was estimated at US$217.0 million equivalent, of which US$124.0 million represented foreign exchange requirements: (a) the African Development Bank/Fund (AfDB) approved US$35.0 million for the Thika dam; (b) the European Investment Bank (EIB), US$19.0 million for raw water intakes and tunnels; (c) the OECF of Japan, US$40.0 million for treated water transmission lines; (d) IDA, US$65.0 million for treatment plant, distribution, sewage treatment plant, engineering and construction supervision, and technical assistance to the WSD; (e) the NCC agreed to provide US$55.0 million for counterpart financing on all components; and (f) the Govermment of Kenya (GOK) agreed to provide US$3.0 million for land acquisition. The Project was to be implemented between 1990 and 1994, and its initial closing date was June 30, 1996. 3 9. Project Extension. IDA agreed to extend the closing date twice to June 30, 1998 and to finance the Additional Components discussed above. A third extension could not be not requested, because disbursement had been under suspension since late 1997. 10. Evaluation of Objectives. In view of the impending shortages of water and sanitation service in Nairobi, the physicad objectives were timely and appropriate. The Project's main objectives of increasing the water production and sewage treatment capacities were simple, well understood by, and important for the NCC and the WSD. 11. In framing the institutional objectives, IDA and the Borrower discussed the need to convert the WSD into an autonomous organization, took encouraging early steps, but ultimately articulated a much less ambitious objective of strengthening portions only of the existing entity. A strategic opportunity to make significant institutional progress was obviously missed. A letter from IDA to the NCC (5/6/86) indicated "... the Bank's prime concern in continuing to support Nairobi 's water supply and sewerage development has been to strengthen the WSD to operate efficiently and with financial independence. Past and current experience has revealed the serious shortcomings in both these areas ... ... Until these weaknesses are corrected, it is the Bank's view (which we have repeatedly emphasized both to the Kenya Government and the Commission) that further investments of the magnitude envisaged would only aggravate an already difficult situation." The Borrower, eager to signal its concerns, replaced the entire senior NCC management in early 1987 and agreed with IDA on the principle to create an autonomous regional water authority to manage the Nairobi water supply (memorandum of 3/6/87). Recognizing that it would take several years to create this regional authority, IDA suggested in a letter dated 5/18/87 that: "... consideration be given to the preparation of an interim project " ... whose purpose would be to: (a) provide modest expansion of Nairobi water supply at minimal cost in advance of construction of the next major investment project; (b) continue and strengthen the ongoing program of operational improvements; and (c) assist in the conversion of the Water and Sewerage Department into an autonomous organization. " 12. The SAR (para. 4.07) however concluded that: "...the transformation of the WSD into a separate entity, which would require tremendous additional effort in manyfields --political, legal, managerial, financial, etc. - would be premature and counterproductive during implementation of the proposed Project." IDA was obviously faced with the conflicting objectives of initiating a large construction program with a long implementation period, so that Nairobi has sufficient water in the medium term, and the need for supporting an in depth institutional reform, so that the WSD becomes financially sustainable as soon as possible. IDA finally concluded that sufficient improvement in the institutional set-up could be achieved if the autonomy of the Water Fund (para. 21) was maintained and computerized billing was instituted; an alternative strategy of waiting for more radical institutional changes was rejected by IDA given the importance of securing Nairobi's water supply. 13. Evaluation of Components. The design of the physical components of the Project was adequate, and dimensioning of the works consistent with demand forecast made at appraisal. The production and distribution extension programs were however somewhat unbalanced. There was also a discrepancy between the objective of improving water supply and sanitation to lower income groups and a Project that put little emphasis on service to customers and further included no secondary or tertiary water distribution pipes, sewers, or connections in its original description. This was partly corrected, after most components of the original Project description were completed, by the introduction of a limited pilot water distribution component in particular in the slum area of Kibera, home to about half a million people. The Project's institutional objective was supported only by a limited technical assistance and training program. 4 D. Achievement of Project Objectives 14. Overall Assessment. The Project has achieved its objective of increasing the water production and only partially achieved the objective of increasing the waste water treatment capacity. The Project has only marginally achieved its objective of improving the water supply and sanitation service to low income communities. It is still difficult to judge if the Project has achieved its objective of improving ambient water quality in the Nairobi river. The Project has failed completely in its objective to improve the WSD operational and financial efficiency. Facilities built by the Project are well designed and quality of construction is good. 15. Water Supply Service. Construction of a new dam on the Thika River has added fresh water impoundment of 70 million m3. Available production capacity more than doubled from 214,000 m3/day in 1988/89 to 455,000 m3/day in 1995/96 (Table 6); this capacity is estimated to be adequate to meet demand through the year 2005. During the same period, actual production increased by 650%) from 214,000 m3/day to 347,000 m3/day. Total water connections increased from 101,000 to 158,000 and residential connections increased from 93,000 to 145,000; this corresponds to average annual growth rates of about 6.5%, comparable to that of the population. Population connected increased by about 50% from 630,000 to 980,000, but at the end of the Project, still an estimated 1,100,000 people, or more than 50% of the total population had no direct access to piped water. During the Project implementation period, Unaccounted for Water (UfW) may have increased from 28% to 51 %, while it had gone down from about 45% to 28% under the preceding project. These data indicate that the benefits of the water supply component have been limited by a restricted extension of the distribution system and increase in UfW. The increase in UfW could reflect a combination of several factors: (a) suspected un-metered off-takes on transmission lines; (b) steady deterioration of the WSD commercial operations; and (c) an increase in physical leaks due to higher pressure in the networks. The Kibera water distribution component was aimed at correcting shortcomings of the original Project description by supporting provision of service in lower income communities; it included a pilot community management system, with the WSD role limited to that of bulk supplier. Construction activities could be completed only six months after closing. 16. Waste Water Service. Waste water treatment capacity of the Dandora stabilization ponds has increased from 30,000 m3/day to 90,000 m3/day. However, at closing, construction was still not completed and is likely to be jeopardized by shortage of funds. During the Project implementation period, the increase in the number of sewer connections has been mostly attributable to private real estate developers; it is not known accurately. At closing, the available treatment capacity, after completion of the anaerobic ponds and desludging of the existing facultative ponds, was significantly above: the volume of waste water delivered by the main trunk sewer of about 50,000 m3/day, partly because untreated sewage was illegally diverted by small farmers for informal irrigation. Also, most of the center of the city still relies on an old combined sewer and storm water drainage system whose flow was not diverted to the ponds. While effluent quality was according to standards, there are no reliable data to assess the impact of the increase of waste water treatment capacity on the ambient water quality. 17. Low Income Communities. The Project has only marginally achieved its objective of improving the water supply and sanitation service to low income communities and a large percentage of the population is still not served, despite increased capacities. The population with no direct access to piped water may have increased from 700,000 to 1,100,000 between 1988/89 and 1995/96 (Table 6). The poorest segments of the population, notably those living in slums are the most under-served, and the Kibera pilot project was still in an early stage of implementation at closing. S 18. Institutional Development. The Project inappropriately aimed to address the institutional deficiencies by simply providing limited training and technical assistance (TA) to the commercial and financial management functions of the WSD. Training provided in Kenya and abroad failed to be translated into improved performance; several staff trained left the WSD for better paid positions in the private sector. The TA to commercial management failed partly because major delays hampered implementation of a new computerized billing system. At closing , the WSD still took more than a year to prepare financial statements of questionable accuracy, partly because most recording was manual. At closing, procedures were also still too bureaucratic; for examnple, payment by the WSD still required the signature of the NCC Treasurer and Town Clerk in addition to that of its General Manager for all expenses in excess of KShIO,000 (US$167). In 1996/97, the WSD was able to issue only five billings instead of the 12 planned. On the bright side, limited decentralization of collection to the neighborhoods was a move in the right direction. 19. The Project failed to improve the WSD operational efficiency. The WSD performance suffered constantly from the shortcomings of the institutional set-up identified at appraisal; this started with a six month delay of the Credit effectiveness. With collection of local taxes being a major problem, the NCC perceived the WSD as a main source of revenues. Therefore, the NCC had little incentive to grant financial autonomy to the WSD and for the large part persistently starved the latter of much needed cash. The NCC defaulted on most financial covenants and as a result, disbursement was suspended three times by IDA during the eight-year implementation period. At closing, the WSD was still unable to provide reliable data on its commercial and financial operations or to fund routine maintenance activities. At closing, disbursement had been suspended for more than six-months, and conditions for lifting suspension, had not been met (para. 21). In late 1990s, the WSD perfornance was still characterized by problems idenitified in the SAR prepared in the late 1980's (para 4.05) namely: ''institutional problems, e.g. inadequate salaty scales, cashflow problems, bureaucratic decision-making processes, poor financial control, low staff morale, inflexible puirchasing procedures and hence poor management." A bright note, however on the staffing ratio that decreased from 15 to 11.8 per thousand connections during the Project implementation period. 20. FinancialPerformance. At closing, the financial performance and position of the WSD were significantly worse than projected, and also worse than at appraisal. In 1995/96, operating revenues and cash generated from operations were significantly below forecast. In 1996/97, the average tariff, in constant terms, was blelow that of 1988/89. Also, the level of liquidity measured by the current ratio decreased (Table 6); the level of indebtedness measured by the long term debt to equity ratio increased; and the ability to service the long term debt from operating income measured by the debt service ratio declined. As of end 1996/97, accounts receivable represented about 770 days of billing. The under provisioning of non-collectible accounts overstated eamings, current and total assets and equity. 21. The WSD was constantly short of cash. Throughout Project implementation, the WSD maintained a "Water Account" separate from the NCC "General Account" where revenues from water sales were deposited. However, due to weak accounting and internal control systems, the two accounts were still managed as only one. Because the WSD experienced difficulties accessing cash generated from operations, it was unable to carry out regular maintenance activities. Constant disagreement on the balance between the two accounts and late reimbursement of amounts borrowed by the General Account from the Water Account, prompted IDA to suspend disbursement for a third time in December 1997. Independent auditors were hired to certify the balance; preparation of the report was hampered by poor accounting practices, co-mingled budgeting, and the multitude of inter account transfers. Their final report, showing a (tentative) balance of Ksh93 million (US$1.5 million) in favor of the General Account, was made available five months after closing. The auditors' report confirmed, as identified in the late 6 1980s, that financial autonomy of the WSD and the complete separation of the two accounts is a prerequisite for improved financial management. No action plan was submitted by WSD to offset the balance between the two accounts. 22. The NCC defaulted repeatedly on financial covenants, that were not all adapted to the situation of a utility company with poor collection and cash management records: (a) accounts and audits were always submitted with substantial delays; (b) calculation of the rate of return was affected by questionable valuation of the operating income and fixed assets in operation; (c) the debt coverage ratio remained below 1.5; (d) at the end of 1995/96, accounts receivable reached 770 days, i.e. more than eight times the 90 days targeted at appraisal, because customers often refused to pay bills they considered inaccurate; (e) medium term financial forecasts were never prepared; and (f) misuse of the Water Account was the main cause of suspension of disbursement. 23. Environmental Action Plan. Under Credit 1566-KE, the Govemment undertook in 1]988 an extensive study of the environmental impacts of the proposed Project. In particular, a full environmental impact of the Thika dam was assessed. The dam inundated 280 hectares of land displacing 3:35 families. An acceptable resettlement program was undertaken by the Government in 1990; by 1992 when impoundment began, all 335 farnilies had been compensated and resettled. In 1993, an environmental mid-term review was carried out by consultants financed by the Project. The review showed that, both in terms of physical environment and socio-economic environmental impacts, the mitigation measures implemented had a satisfactory impact. At closing, the same consultants were hired again by the WSD for a final review; their report is in under preparation. 24. Economic Rate of Return (ERR). The ERR of the Project was recalculated at 0.2% as compared with 12.6% at appraisal (Table 9). As in the SAR, the consumer surplus and extemalities, such as improved public health, have not been not captured, thus leading to undercounting of benefits. The much lower ERR achieved by the Project than that estimated at appraisal is explained by the devaluation of the local currency that changed its capital cost structure and the rapid inflation that increased operating costs, while tariffs were slow to rise. It also reflects the WSD's poor commercial performance, which leads to significant loss of revenues. E. Implementation Record and Major Factors Affecting the Project 25. Factors Outside of Government ControL The performance of financing agencies, contractors and consultants with regards to implementation of construction activities of the original Project description was generally satisfactory. The country experienced a decline in economic conditions and the Government was forced to devalue the Kenyan Shilling several times. Between 1989 and 1998 the Kenyan Shilling fell from approximately 22 to 61 against the US Dollar. 26. Factors Subject to Government ControL Throughout implementation, the Project suffered from the decision made at appraisal not to address the major institutional shortcomings singled out during identification, with regards to its lack of autonomy of the WSD and the unclear incentive framework within which it operates. At closing, most problems the WSD was faced with still had their r'oots in the difficulty to: (a) access cash generatedfrom operations; (b) attract and/or retain competent staff by proposing a competitive compensation package; (c) simplify a complex decision making process involving the Ministries of Local Authorities and of Water Resources and the NCC; and (d) procure goods and services according to industry standards. Counterpart funding was initially not a major issue, but at closing, several contractors and consultants still claimed late payments and related interests on the portion 7 of the contracts financed by the WSD. It was also unclear how WSD would fund remaining construction valued at US$1.5 mjillion equivalent. 27. Factors Subject to the Control of the ImplementingAgency. The WSD Project Implementation Unit (PIU) implemented the physical components agreed at appraisal satisfactorily. The PIU confirmed that the participation of an expert panel to review the design and construction of the Thika dam was beneficial. The PIU was initially able to avoid extemal interventions on procurement decisions. Procurement records reveal that later, the NCC became more involved in procurement and adversely affected its process. Even if the main reason of the steady deterioration of the WSD commercial operations is its antiquated computerized billing system, the WSD has its share of responsibility in poor meter reading, meter maintenance, bill collection and implementation of coercive measures for non payment. As a result of limited maintenance means and regulation enforcement capacity, the WSD has allowed a situation where illegal water supply connections can be built, farmers can divert untreated sewage to irrigation, and structures can be erected on water mains and trunk sewers. 28. Project Cost. The final Project cost is summarized in Table 8A. It is estimated at US$213.0 million equivalent to be compared with the estimated US$217.0 million at appraisal. The difference is accounted for partly by savings related to currency devaluation and partly because components costing approximately US$1.5 million were not yet completed. However, while lowest bids for most major civil works contracts generally compared with appraisal estimates, their final cost ended up to be about 70% above the bid price, of which about 42% was for physical contingencies (Table 8B); the major cost overrun of the Thika Damn component forced the AfDB to increase its financing from US$35.2 million to about US$62.8 million equivalent. The large difference between the final cost of most contracts and their cost at award is difficult to explain taking into account that the Project had been thoroughly prepared under an Engineering Credit and that about 16% of the construction costs were spent on construction supervision, up from 6% estimated at appraisal. IDA had to conduct a detailed review of these large contract increases because documentation submitted to justify them was not always of acceptable quality. F. Project Sustainability 29. Several considerations indicate that the Project is unlikely to be sustainable, even if the water production and waste water treatment capacities are likely to be sufficient to meet demand until 2005. First, realizing the full benefit of the Project still requires that sizable investment be made to reinforce and extend the water distribution and sewer systems. Second, although some interest in "commercializing" municipal water companies has been demonstrated by the Government, there is still a high reluctance to address the fundamental issue of the financial and managerial autonomy of the WSD; this will continue to constrain its internal resource generation capacity. Third, the WSD's track record with regards to maintenance is not encouraging; while some of the works built by the Project were still under defect liability at closing, they may rapidly suffer from poor maintenance soon after demobilization of contractors. Fourth, major deficiencies in commercial management still remain to be addressed, and it is doubtful that a revamped computerized system could lead to major improvements in an institutional environment that provides little or no incentive to perform. Finally, tariff increases needed to service a large debt burden are uLnlikely to be accepted by consumers, unless they perceive a major change in the way business is conducted. 8 G. IDA Performance 30. Overall, IDA performance was unsatisfactory, although performance was satisfactory during Project identification, when IDA took several desirable steps to support the establishment of an autonomous WSD. Performance during preparation and appraisal was unsatisfactory: neither were Project objectives fully consistent with issues identified, nor were Project components fully consistent with objectives articulated. Specifically, while issues identified were mostly of institutional rather than of managerial origin, Project components designed to address them were of managerial nature only. Further, even managerial development components turned out to be inadequately designed. At appraisal and during negotiations, IDA should have: (a) insisted on the establishment of a strong autonomous organization as a condition for financing a large investment program and encouraged implementation of the in-depth reforms needed to address all institutional shortcomings; (b) recommended a better balance between water production with distribution and guided design of water supply components to serve low income communities; and (c) selected financial covenants better suited to a utility company whose main problems were, and still are, tariff collection and cash management. 31. IDA performance during supervision was also unsatisfactory, with too much emphasis placed on construction activities, and not enough on the WSD commercial and financial performance; rnonitoring of financial indicators and preparation of short term financial projections were somewhat deficient. A fornal mid-term review could have helped refocus the Project objectives and supervision activities. Despite the poor achievement described above, Development Objective was often rated "satisfactory" in supervision reports. Also, IDA may have contributed to delays in the procurement of the computerized billing system because agreement on the tender document could not be reached rapidly. Towards the end of the Project, supervision was also affected by changes of staff and poor record keeping; for exarnple, financial supervision reports have been lost during reorganizations and moves. While suspension of disbursement resulted in partial compliance with covenants, it also adversely affected Project implementation and did not provide answers to major institutional problems "sidelined" at appraisal. H. Borrower Performance 32. Overall, the Borrower performance was unsatisfactory. During the preparation and implementation stages, the NCC and the Ministry of Local Authorities demonstrated no willingness to address the many institutional issues to help the WSD improve its performance. However, the performance of the PIU during implementation was satisfactory to the extent that all physical components of the original Project description were implemented according to standards, within budget and with few delays. Relatively speaking, the WSD is staffed with competent engineers and accountants who were placed in an environment that provided neither means nor incentives to efficiently perform maintenance and commercial activities. Their frustration was exacerbated by the inability of the Project to overhaul commercial operations. The NCC/WSD defaulted on most covenants. At closing, and after three IDA supported projects during the last 25 years, the water supply and sewerage service in Nairobi was still provided by an agency unable to produce reliable data on its technical, commercial and financial operations and in an alarming financial situation. 1. Assessment of Outcome 33. The Project outcome is unsatisfactory. Although all physical components of the original description were implemented in a generally satisfactory manner, a strategic opportunity to achieve significant institutional and commercial gains was wasted. Further, full benefits were not realized because 9 water production and waste water treatment capacities built by the Project were not balanced by corresponding water distribution and waste water collection capacities, and consumers could not reap the full benefits of these investments. Also, at closing, the Project had not been able to make a significant difference in the provision of the water supply service to lower income communities and in the ambient water quality in the Nairobi river. The Project has failed completely to improve the WSD commercial and financial performance, and issues of autonomy of the WSD and of the incentive framework it would operate under have not been addressed. J. Future Operations 34. Future operations are likely to suffer because the political will to change the institutional framework and incentive structure influencing the NCC/WSD is weak. Several important challenges remain. Changing the institutional framework the WSD operates in would require the 'tremendous effort -- political, legal, managerial andfinancial "referred to in the SAR (para. 40). 35. With a growing population living in informal settlements and having no direct access to piped water, there is an obvious need to develop alternative service standards and management arrangements. At closing, the Kibera pilot water supply project was still in the early stages of implementation, and community management options were still being investigated. The Kibera project must be continued and closely monitored by the WSD so that it can be replicated in similar areas. But, with very little incremental revenue to be expected from extending the service in such neighborhoods, the WSD may have little incentive to pursue this effort if it is unable to generate revenues in formal settlements and if no external financial and technical assistance is provided. 36. Impact of the increased waste water treatment capacity on the ambient water quality is yet to be demonstrated. To achieve full benefit of the Project, it would be necessary to collect illegal waste water disposals in the Nairobi river, inject them in the trunk sewer and remove permanently the blockages created by farmers to irrigate. 37. Proper maintenance is a serious concern, because so far the WSD has been unable to finance it. This could lead to a rapid degradation of the facilities built and to the need for financing costly rehabilitation programs in the medium term. At closing, most facilities of the original Project description had been in service for about two years; the defect liability period or technical assistance contract, such as that for the Ngethu water treatment plant will end soon. While operation of the stabilization ponds require limited operating budget only, their benefits are directly linked to the WSD's capacity to increase the flow of waste water treated and thus to maintain and "police" existing trunk sewers. It is likely that weaknesses in the WSD's technical, commercial and financial operations can only be solved if a major decision is made to change the institutional set-up and involve the private sector in the provision of the water supply and sanitation service. As a first step in this direction, the WSD has recently requested proposals from several private firms for taking over its commercial operations; financing for this service contract is supposed to come from WSD's own revenues. K. Key Lessons Learned 38. Lessons learned from this Project are classified into three broad areas. 10 39. Institutional Development. The first main lesson is that IDA should not finance projects unless the Borrower is committed to implementing policy and institutional reforms that would guarantee their sustainability. A second main lesson is that IDA must insist on the creation of autonomous water utility companies prior to financing major development projects. A third main lesson is that IDA should encourage Borrowers to seek private sector participation options, such as management, lease or concession contracts, to improve overall technical, commercial and financial performance of the water supply and sanitation service. Components of these lessons are as follows: * project objectives must address institutional issues identified during preparation; it has obviously been counterproductive not to address them; it would have not been premature to address them in parallel to a large investment program; * project components should be designed to achieve project objectives; if major institutional issues are identified, managerial solutions are unlikely to address them; * the financial autonomy of the utility company is a prerequisite for protecting revenues generated from water supply and sanitation operations being diverted for other purposes; * improvement of technical, commercial and financial operations of a utility depends on the incentive framework it operates in; involving the private sector in the delivery of service is one way of implementing this incentive framework; and - suspension of disbursement for non compliance with covenants affects implementation of the Project and does not provide the proper answer to issues "sidelined" at appraisal. 40. Financial Development. The main lesson learned is that IDA must carefully design financial covenants, watch performance indicators agreed upon at negotiations and act decisively soon after evidence of non compliance appears. Components of this lesson areas follows: * IDA must carry out, at least once a year, a full supervision of the financial performance of the utility company, in order to check accuracy of data, and update financial forecasts and action plans together with the Borrower; and * financial covenants should be tailored to issues to be addressed; financial covenants linked to cash generation are preferable for utility companies with poor collection and cash management; in order to be meaningful, a rate of return covenant must be based on maintenance expenses and valuation of fixed assets be in line with industry standards. 41. Plhysical Design and Implementation. The main lesson learned is that water supply and sanitation projects must be designed to achieve a balance between production and distribution capacities, and waste water treatment and waste water collection capacities so that project benefits reach the intended beneficiaries. Additional lessons are as follows: * good quality engineering preparation and participation of an expert panel to review the design and construction of dams, are elements that guarantee quality; * well prepared and monitored environmental and resettlement plans that involve timely stakeholder participation are essential and do not delay Project design and implementation; * management of large contracts requires special monitoring and attention from the Borrower and the Bank to avoid tlle need to assess large claims and cost increases; and * adding components to a Project that had already been suspended several times increases the risk of non completion, if the causes for suspension are not removed. 11 KENYA THIRD NAIROBI WATER SUPPLY PROJECT [Credit 2060-KE] IMPLEMENTATION COMPLETION REPORT PART II. STATISTICAL ANNEXES Table 1 - Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable (/) (/) (/~~~) ' () Macro policies V Sector policies _ Financial objectives Institutional development Physical objectives _ Poverty reduction Gender issues Other social objectives Environmental objectives = Public sector management Private sector development Other (capacity building) B. Project Sustainabil Likely Unlikely Uncertain (1) (V) (1) C. Bank performance Highly satisfactory Satisfactory Deficient (V) (V) (I) Identification = Preparation assistance Appraisal Supervision D. Borrower performance satisfactory Satisfactory Deficient (V) (V/) (I) Preparation = Implementation Covenant compliance Operation E. Assessment of Outcome HighlyHighly satisfactory Satisfactory Unsatisfactory unsatisfactory (D) E ) ([) L- LL [E 12 Table 2 - Related Bank Loans/Credits Preceding Operations Loan 714-KE, Nairobi Develop the Chania-Kamania- 1970? Outcome: l Water Supply Project Thika river system for the Satisfactory purpose of meeting Nairobi's water needs Loan 1520-KE, Second Provided extensions for 1978 Outcorne: Nairobi Water Supply Nairobi's water supply needs up Satisfactory Project to 1987-88 Credit 1566-KE Third Assisted in the Preparation of 1985 Outcome: Nairobi Water Supply the Third Nairobi Water Supply Satisfactory Engineering Project Project Table 3 - Project Timetable Identification (Initial Executive Project November 14, 1986 Summary) Identification (Executive Project Summary) October 4, 1987 Identification (Final Executive Project May 24, 1988 Summary) . l Preparation . 1986-1988 Appraisal June 1988 June 1988 Negotiations January 1989 March 1989 Board Presentation March 1989 July 25, 1989 Signing August 15, 1989 Effectiveness September 1989 March 15, 1990 (after two extensions) Project Completion June 30, 1995 Dec 31, 1998 estimated Loan Closing June 30, 1996 June 30, 1998 (after two extensions) 13 Table 4 - Credit Disbursements (SDR million) Appraisal estimate 3.08 10.5 13.51 11.56 7.29 2.89 0.27 0 0 0 Actual 3.82 6.3 5.41 2.71 6.32 3.91 7.31 5.01 2.47 0.4 Appraisal estimate 3.08 13.58 27.09 38.65 45.94 48.83 49.1 49.1 49.1 49.1 cumulative Actual cumulative 3.82 10.12 15.53 18.24 24.56 28.47 35.78 40.79 43.26 43.66 Actual as % of estimate 124% 75% 57% 47% 53% 58% 73% 83% 88% 89% cumulative _ 14 Table 5: Key Indicators for Project Implementation ........ :-~ Item Estimae Acivmn Part A: Water Supply I Source Works (i) New Dam on Thika River Impounding 70 million m3 of water Completed (ii) Access roads, raw water intakes, Thika-Kiama tunnel 1.1 Km. Long and, 2.5 Completed transmission tunnels and main m. dia Completed Kisma-Chania tunnel 3.6 km. Long and 2.5 Completed m dia. Completed Kimakia weir and shaft Mataara-Ngethu pipeline 10 km. 1 100 mm. Dia 2 Water Treatment, Delivery and Distribution System (i) Ngethu treatment plant Increase capacity from 180,000 to 460,000 Completed m3 /day (ii) Treated water transmission mains Ngethu to Kiambu & Gigiri 36 km. Long and Completed _____ ________________________________ 1300-1400 dia. (iii) Extension to distribution system Add. reservoirs 46,000 m3. Completed I Grgiri pumping station (iv) Instrumentation, control, automation __ Completed (v) Construction of staff housing and Completed offices l Part B: Sewage Treatment Plant Extension 1 Rehab and extension of Dandora Increase capacity to 90,000 m3./day dry Completed Sewage Treatmnent Plant weather 2 Construction of staff housing and Completed offices Part C: Improvement of Water Supply and Waste Disposal Facilities in Low Income Residential Areas 1| Vehicles, water meters and misc. _ Completed 2 In-filling mains, public water points, Completed kiosks, and improving sanitary facilities Part D: Engineering and Construction Supervision 1 Consulting services for design and Water treatment plant, pumping station, Completed construction supervision J sewerage works and dam and tunnel safety | panel 2 Consulting services for Master Plan | Sewage and Sanitation Completed Part E: Technical Assistance and Training for NCC/WSD 1 Management support to NCCIWSD Salaries and benefits Completed 2 Training programs Training consultancy services Completed Equipment and Materials Courses in Kenya and abroad Office technology equipment 3 Self Accounting System Asset valuation for WSD Completed 4 Environmental Action Plan Enhance area around Thika dam Final Phase near WSD/NCC Implement EAP completion WSD/NCC establish EAP team 15 Part F: Additional Components I Kibera and Kasarani Distribution Improved water supply distribution to nearly Construction Network 500.,000 residents of the Kibera informal completion settlement. estimated for December 1998 2 Desludging I)andora Ponds Improved wastewater treatment efficiency Construction and reduced pollution loading on Nairobi completion River estimated for November 1998 3 Upgrading Kabete Pumping Station Improved water supply distribution in Completed Nairobi 4 Computerization of Billing Svstem Improved financial performance Not Implemented due to procurement problems 5 Additional Project Supervision To improve quality of construction for Ongoing additional components 16 Table 6: Key Indicators for Project Operations .......~~~~~~~~~~~~~ ~~~~~~~~~~~~~~ .... "/ ...... .99 ............Fiscal 1988/89 Ficl1 91 9619 Unit SAR iActual~ ~SAR Actua SA Actual Physical Indicators _ Population 000 1,345 2,050 1,980 2,150 2,090 Population Connected 000 630 NA 930 NA 980 Connection Ratio % 47 NA 47 NA 47 Population Not Connected 000 715 NA 1,050 NA 1,110 Total Water Connections 000 101 NA 150 NA 158 Residential Connections 000 93 NA 138 NA 145 Production Capacity mil. 214 455 455 455 455 m3./d Production mil. 214 377 269 401 347 m3./d Sales mil. 149 283 194 301 170 m3./d _- Unaccounted for Water _ 28 25 28 25 51 Staff employed 1,520 _ 1,869 Staff /1.000 connections 15 11.8 Financial Indicators . Operating Revenues Shillings 30,326 27,751 89,911 63,595 Net Operating Expenses Shillings 6,302 6,252 14,587 34,519 _ Operating Income Shillings 24,025 18,247 75,325 23,429 Cash from Operations Shillings 9,939 11,804 35,613 18,416 Operating Ratio % 34 63 _ Return on Gross Fix Assets 9.9 19 12.5 15 _ Working Capital Shillings 23,667 (63,873) Net Book Val of Fix Assets Shillings 76,273 . 111,114 _ Long Term Debt Shillings 43,314 . 481,941 _ Current Ratio Ratio 2.35 0.69 Accounts Receivable Days of 240 417 90 769 Bill. Long Term Debt to Equity Ratio 0.58 2.4 _ Debt Service Coverage Ratio 1.4 1.5 1.2 Nominal Average Water Shillings 7 23 Tariff Real Average Water Tariff Shillings 7 5 _ 17 Table 7: Studies Included in Project Study DefinedPurpose Status Impactof Stdy Ci t u p s .S.... . .... .. . 1. Final Review Report Baseline Environmental Physical Environment Awaited Information 2 Social Environment Final Review Report Baseline Environmental Awaited Infornation 3 Leak Detection Technical Assistance 4 Physical Environment Mid Term Review Completed Baseline Environmental Information 5 Social Environment Mid Term Review Completed Baseline Environmental Information 6 Drainage and Sewerage Update Completed Future Drainage Plans Master Plan 7 Billing and Collection Computerization Pilot program 10,000 largest customers conducted computerized 18 Table 8A - Project Costs (US$ million) Cemp~~rnent% 7, Appraisal E't"mate ........... 1nd~~gA~itiona1'~~~ Local orein . ota..oc. ....n 1 Intakes, Tunnel, Access Roads 4.0 9.6 13.6 8.8 14.7 23. 5 2 Thika Darn 7.9 24.4 32.3 20.3 47.5 67.8 3 Ngethu Electrical and Mech. 2.0 7.3 9.3 1.0 2.2 3. 2 4 Ngethu Civil Works 6.8 3.1 10.0 2.9 4.5 7. 5 Raw and Treated Water Main 14.8 24.7 39.5 14.1 21.0 35.1 6 Reservoirs 3.8 1.6 5.4 3.3 0.4 3. 7 Distribution Network 4.0 8.9 12.9 5.0 9.2 14. 2 8 Gigiri Electrical and Mech. 0.1 0.9 1.0 1.2 1.3 2.5 9 Gigiri Civil Works 0.2 0.0 0.2 0.6 0.0 0.6 iO Instrument Control and 0.6 1.0 1.7 0.0 0.0 0.0 11 Housing and Offices 1.6 0.0 1.6 3.5 0.0 3.5 12 Dandora Civil Works 12.4 5.2 17.6 6.4 8.0 14. 13 Dandora Electrical and Mech. 0.5 2.9 3.5 0.8 2.2 3.0 14 Dandora Building 0.9 0.0 0.9 1.6 0.0 1.6 15 Engineering Services 4.5 4.6 9.1 4.9 20.4 25.3 16 Training and Management 1.3 1.8 3.0 0.1 1.1 1.2 17 Land Acquisition 3.4 0.0 3.4 5.9 0.0 5.9 Total Base Cost 68.9 96.1 165.0 Physical Contingencies 9.4 15.1 24.6 Price Contingencies 14.4 12.8 27.2 Total Project Cost 92.7 124.0 216.7 80.4 132.5 212.9 Costs estimated at appraisal are base costs as of end 1989; physical and price contingency are added in an aggregate manner to arrive at the Total Project Cost. Actual contract costs were derived from (items I to 14) from final payment certificates. For engineering services, training, and management support (items 15 and 16). the actual cost figures were obtained from IDA disbursement information. The cost of land acquisition was provided by NCC. 19 Table 8:B: Review and Analysis of the 10 Largest Civil Works/Goods Contracts (KSh million) .......... ~ ~ ~ ~ ~ ~ wetcL AwArded 1. Intakes. Tunnels, and EIB 231 359 45 69 133 606 Access Roads 2. Thika Dam AfDB/ 549 829 339 150 420 1,738 AtDF 3. Raw and Treated Water OECF 671 784 180 113 89 1,165 Pipelines 4. Ngethu Treatmenit Plant IDA 169 144 39 30 105 318 Civil Works 5. Ngethu Treatment Plawt IDA 158 134 11 26 7 177 Electro-Mechanical 6. Reservoirs IDA 92 120 18 0 26 164 7. Trunk Distribution IDA lIt) 140 53 31 30 254 Mains 8. Supply of Pipes and IDA 110 122 17 69 0 208 Fittings 9. Dandora Stabilization IDA 299 260 26 20 46 352 Ponds - Civil Works 10. Dandora Stabilization IDA 59 83 10 1 4 98 Ponds - E&MI Total 2,973 739 508 860 5,08 % 100.0 t i ;! 170.9 SAR Estimates 2,450 365 404 3,21 0/0 100.0 _41$ 131. The above table compares the base value of ten major construction contracts at appraisal, award, and completion. The total value of these contracts was about KSh 2,973 million at award, to be compared with an estimate of KSh 2.450 at appraisal. Their final value was KSh 5,061 million. Variation orders and acceptable claims by contractors represented 25% and 17% respectively, or a total of 42% of the cost of these contracts at award; this figure is to be compared with estimated physical contingencies of 15% at appraisal. Price adjustments represented about 29% of the cost of these contracts at award, to be compared with price contingencies of 16% at appraisal. It is difficult to explain the large difference between the contract cost at award and completion, i.e. about 42% without price adjustment, taking into account that: (a) the Project was implemented after an Engineering project that financed the preparation of detailed designs and tender documents; and (b) a total of about US$21.2 million (or about 16% of the Project construction costs) was spent on two major Consultant contracts for supervising construction activities. The value of one of these Consultant contracts doubled from US$9.6 to 18.5 million during the Project implementation period. 20 Table 8C: Project Financing (US$ million) IDA 18.0 46.8 64. 8 9.3 53.0 62.3 OECF 8.3 31.7 40.0 9.4 21.1 30.5 AfDB/AfDF 2.5 32.7 35.2 18.8 44.0 62.8 EIB 5.8 12.8 18.6 6.2 14.4 20.6 NCC/WSD 54.7 54.7 36.0 0 36.0 Government 3.4 3.4 0.7 0 0.7 Total 92.7 124.0 216.7 80.4 132.5 212.9 21 Table 9 - Economic Rate of Return Incremental Cost and Benefit Analysis (Millions of Kenyan Pounds) Operating Cost & Revenues Cost Estimates Cash Flow Cumul. Cash Flow Year Investmnent |Operation I Total IRevenuesiCurrent Prices Inflation 1989 Prices Costs Revenues 1 1990 15.8 0.00 15.8 0.0 -15.8 1.2 -13.7 7.7 31.5 2 1991 44.8 2.80 47.6 1.0 -46.6 1.4 -33.6 10.5 32.5 3 1992 63.7 4.78 68.5 -0.7 -69.2 1.8 -39.2 12.5 30.8 4 1993 78.6 5.37 84.0 5.0 -79.0 2.0 -38.7 13.1 36.5 5 1994 75.9 8.71 84.6 38.4 -46.2 3.0 -15.5 16.4 69.9 6 1995 26.4 15.69 42.1 31.6 -10.4 3.8 -2.7 23.4 63.1 7 1996 51.8 26.82 78.6 32.1 -46.5 3.9 -11.9 34.5 63.6 8 1997 108.1 33.30 141.4 32.5 -109.0 4.3 -25.6 41.0 63.9 9 1998 40.39 40.4 62.7 22.3 4.7 4.7 48.1 94.2 10 1999 48.81 48.8 71.6 22.8 5.1 4.4 56.5 103.0 11 2000 58.81 58.8 87.6 28.8 5.1 5.6 66.5 119.1 12 2001 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 1 3 2002 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 14 2003 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 15 2004 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 16 2005 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 17 2006 70.68 70.7 101.5 30.9 5.1 6.0 78,4 133.0 18 2007 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 19 2008 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 20 2009 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 21 2010 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 22 2011 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 23 2012 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 24 2013 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 25 2014 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 26 2015 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 27 2016 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 28 2017 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 29 2018 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 30 2019 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 31 2020 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 32 2021 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 33 2022 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 34 2023 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 35 2024 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 36 2025 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 37 2026 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 38 2027 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 39 2028 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 40 2029 70.68 70.7 101.5 30.9 5.1 6.0 78.4 133.0 Total 465 2295 2760 3306 546 8 2603 4566 Internal Rate of Return expressed in constant 1989 prices 0.2% Internal Rate of Return estimated at Appraisal 12.6% 22 Sources: * investment costs were provided by NCC; * incremental costs and revenues are consistent with those used by the AfDB in their reports (AfDB Aide-Memoire date 11/8/97); * selected operating income and costs were verified from audited financial statements (9/23/96) Note: the methodology adopted in this calculation is slightly different from that adopted in the SAR: the SAR estimates revenues and costs basing them on production, UFW, collection efficiency, and tariff estimates; * since estimates for these data are not all available, the PICR estimate is based on costs and revenues reported in financial statements; * in both approaches, the ERR is calculated from estimated cash streams associated with the project, and consumer surplus and externalities, such as improved public health, have not been captured, thus leading to undercounting of actual benefits; and * in the PICR, the cash streams reported in current terms have been adjusted to real 1989 terms to calculate the ERR. Results: the lower ERR than that calculated at appraisal can be explained by: * the devaluation of the local currency that changed the capital cost structure; * the rapid inflation that increased operating costs while tariffs were slow to rise; and * the poor overall commercial performance of the WSD which leads to significant loss of revenues. 23 Table 10 - Status of Legal Covenants CR 4.01 C 6/30/9 Borrower to reimburse NCC for cost of land Complied with I acquisition and compensation payments associated with Project CR 4.03 NC Borrower to agree with IDA and NCC on plan Mutual of action for resolving the qualification indebted-ness regarding non-payment of foreign and local requires loans on NCC's 1984 and subsequent audit clarification reports PR 2.06 C 1/1/90 NCC to implement environmental action plan Complied PR 4.01(a) CP NCC to maintain records and accounts adequate FY1995/96, to reflect its operations and financial condition, 96/97 and 7/1- including separate records, accounts, and 12/97 not financial statements for its water and sewerage audited activities prepared in a commercial accounting format as well as separate Project accounts PR 4.01(b)i CP NCC to have accounts audited by independent FYY1995/96, auditors 96/97 and 7/1- 12/97 not audited 4.01(b)i CP NCC to submit financial statements and interim FY1995/96, PR i audit reports within 9 months of fiscal year 96/97 and 7/1- 12/97 not audited PR 4.01(b)i CP NCC to submit certified copies of financial WSD complied, ii statements and final audit reports within 12 NCC did not months of fiscal year PR 4.02i 'NC WSD to ensure annual rate of return >7.5% after ROR <7.5% 1991.92 PR 4.03 NC Debt service coverage to be >1.5 every year Not complied PR 4.04 NC 6/30/9 NCC to employ consultants to revalue assets Valued once in 0 annually. 1990 PR 4.05 NCC to ensure that WSD would consult IDA Complied before undertaking any additional invest exceeding US$2 million PR 4.06 NC NCC to reduce accounts receivables arrears Arrears are at ______________ ___ progressively to 90 days 769 days 24 CR 4.01 C 6130/9 Borrower to reimburse NCC for cost of land Complied with 1 acquisition and compensation payments associated with Project PR 4.07(a) CP NCC to uses Water Fund only for water and Water fund sewage loaned large amounts to general fund PR 4. 07(a) NC NCC to progressively eliminate outstanding Water fund obligations to Water Fund loaned large amounts to general fund Status Codes: C-complied, CD-Compliance after delay, CP-Partial compliance 25 Table 11: Compliance with Operational Manual Statements Sitateent Number and .-Comments. OD 10.60 Weak intemal control within WSD led to the preparation of financial Accounting, Financial statements of dubious accuracy, always submitted with substantial delays. Reporting, and Auditing OD 13.10 Complied with, albeit with substantial delays. Last audit report of WSD Borrower Compliance financial statements received for 1995/96. Last audit report on Special with Audit Covenants Account included significant qualifications. OP 6.30 Complied with. The Borrower contributed about 19% of the actual project Local Cost Financing cost. and Cost Sharing OD 13.30 Complied with. IDA also granted a grace period of four months after the Extension of Closing closing date to allow for disbursements for services completed before the Dates Closing date. OD 13.55 Complied with. WSD prepared its own evaluation of the Project's ICR preparation achievements and participated actively in IDA completion mission and the review of IDA PICR. OD 4.01 Complied with. The final review of environmental effects and mitigation plan Environmental by independent consultants is still underway. Assessment OD 4.30 Complied with. The final review of resettlement and mitigation plan by Involuntary Resettlement independent consultants is still underway. 26 Table 12 - Estimated Bank Resources: Staff Inputs g ... 0~~~~~~~~~~~~~~~~.. ......I...... Through Appraisal 34.9 86.5 Appraisal-Board 45.118.l Board-Effectiveness 0 0 Supervision 188.2 546.2 Completion 16.5 34.0 5 ~~~Total 284.70 853.00 27 Table 13 - Bank Resources: Missions |Tdentification = |Praration 6/8 W 1 2 FA PrWaration 1/87- 1 12 FA _ | Prepration 6/87_ NA NA FA . Prenaration 12/87_ 2 NA F.N FV |Pre-Ap=jqnis 3/88 12 F.NI ,.-n Aggrmical 6/88 3 12 E.N, FC.t. F A Silpervision 9/89 1 7 FIN CC PP | .lpervision 7/90) _ 3 12 F.N, FA, LT .Gc,( |nptnervision l0/90 2 6 .EN FA 2 1 CC AF CnpDerYion 4/91_ 2 15 EN, FA 3 I CC AF pSnperision J 6/912 _ 3 15 FEN FA, SWervision 11/91 L 5 FNJ FA 3 1 CC AF PP |npervision 3/92 _ 2 FII EN FA 3 1 CC AF PP, FP Cnupervision 4/92 2- 5N F F 3 1 CC AF PP PP P. SWervnision 73924- 2 ~ 1. EN, FA S HSC PP PP PS |Sipervision 11/92 1 29L nC cc AFP PP FP, PS iserjinn 2L92i 2.. 25L EN.JFA IT I CC, AF PP PP PS |S£ervisian 5/93 - 2 15 F.N FA I 1 . CC AFP PP, PS -Silpervision 10/93 2 20 2 1 CC AF PP FP PS |Siervj-inn 3/94_ 2 15 F. N FA J S T-T t.CC PP FP PS Supervision 9/94 I RN FA, CM , R PP PS | Silpervi-don 7/95_- 2 20 FN.N F A TT R t tC, AF, PP, FP PS, | SiVpervision 1/96 _ 3 I S EN, FA, OP .R IR CC, AF, FP | Supervision 10/26 3 - 13 FN.N F A S 11; cc1, PP, FP |SiRlervision 1/97 2 13 FN F A S 1R c(, PPI FP - Silpervigion 7/97 _ 1 S FA I T R PP S ,Rlnerviisinn .L9& _ 3 I 1I FN.N I T IT CC, PP, FP La T.6stMission- 6/9X 3 1- FN.N A,F. IT EI CCPP PE 28 Staff Skills Performance Ratings Types of Problems AR - Architect 1 - Minor or No Problems AF: Availability of Funds CON - Consultant 2 - Moderate Problems CC: Compliance with Legal EC - Economist 3 - Major Problem Covenants EN Engineer S Satisfactory FP: Financial Performance EV - Environmentalist HS Highly Satisfactory PDO: Project Development FA - Financial Analyst U Unsatisfactory Objectives OA - Operation Assistant PMP: Project Management LG - Legal Expert Performance OP Operations Officer PP: Procurement Progress PO - Project Officer PS: Progress of Studies TTL - Task Team Leader TA: Technical Assistance DC -Division Chief Progress CM - Computerization Specialist ANNEX A Page 1 of 6 Third Nairobi Water Supply Project Credit 2060 KE Final Supervision and Completion Mission Aide Memoire Distribution Messrs./Mmes.: B. Chele, PS, Ministry of Local Authorities E. Mwongera, PS, Ministry of Water Resources M. Chemengich, PS, Ministry of Finance M. Wandera, Town Clerk, NCC J. Ongele, Depuity Town Clerk, NCC L. M. Musyoka, General Manager, WSD J. M. Macharia, Manager, PIU. World Bank Kenya Director's Office, Nairobi World Bank Kenya Country Team, Washington Regional Water and Sanitation Group, Nairobi African Development Bank European Investment Bank Overseas Economic and Cooperation Fund Nairobi July 3, 1998 ANNEX A Page 2 of 6 KENYA THIRD NAIROBI WATER SUPPLY PROJECT (Credit 2060-KE) Final Supervision Report 1. An IDA mission comprising Messrs. A. Locussol (Principal Water and Sanitation Specialist), L. Morrell (Senior Financial Analyst), J. Gadek (Sanitary Engineer, consultant), J. Karuiru and J. Sasia (Operations Officers, World Bank Nairobi) visited Nairobi between June 22 and July 3, 1998 to carry out a final supervision of the Third Nairobi Water Supply Project, for which IDA Credit 2060 KE was closed on June 30, 1998, and initiate the preparation of the Project Implementation Completion Report (PICR) that must be submitted to the Board before end 1998. The mission was also joined by Ms. M. Kariuki (RWSG/EA). The mission met with Messrs./Mmes. B. Chele, Permanent Secretary, Ministry of Local Authorities, M. Wande:ra, Town Clerk, Nairobi City Council (NCC), J. Ongele, Deputy Town Clerk NCC, L.M. Musyoka, General Manager of the NCC Water and Sewerage Department (NCC/WSD), J.M. Macharia, PIU Manager, the WSD senior staff and the Consultants who assisted the WSD implementing the Project. The mission wishes to thank the WSD for its active collaboration and the courtesies extended. 2. The present aide memoire reflects the findings and views of the mission. It was discussed with the WSD senior staff and reviewed during a wrap-up meeting chaired by the PS, Ministry of Local Authorities on July 2, 1998. IDA evaluation of the Project will be reflected in a draft PICR that will be submitted to the Government for review in October 1998. The Government's views on the Project must also be reflected in its own completion report, to be prepared according to Bank guidelines (a copy was provided), and sent to IDA by October 1998. An unedited version of the Government's report will be included in the final PICR submitted to the Board (if it contains less than 10 pages). 3. The aide memoire includes in addition to this Final Supervision Report: * a first draft of main text of the PICR; * Annex 1: Final Project Cost, Implementation Issues; and * Annex 2: NCC/WSD Financial Performance. Implementation Issues 4. The Credit was definitively closed on June 30, 1998, after two extensions from the original closing date of June 30, 1996. At the Credit closing date, disbursement had been suspended since December 1997. Conditions for lifting suspension -- submission of an audited balance of the Water and General Funds, together with an action plan to settle amounts borrowed by the General Fund -- had not been met at the closing date; the auditors report is now expected for July, 1998. The mission requested that a copy be forwarded to IDA for information, together with the corresponding action plan, as soon as possible. A third extension of the closing date was neither requested by the Ministry of Finance, nor considered by IDA. ANNEX A Page 3 of 6 5. At the Credit closing date, several construction contracts, that were added in February 1997 to the original Project description, could not be not completed. Disbursement applications for works and services completed before June 30, 1998 can be processed until July 31, 1998. However, the mission will investigate the possibility of extending this date until October 30, 1998; it is likely that IDA would request that ineligible expenses paid from the Special Account be first reimbursed. Annex I shows that about US$1.45 million equivalent remained to be paid for activities to be carried out after the closing date. Annex 2 shows that it is unlikely that the WSD can generate sufficient revenues in 1997/98 and 1998/99 to finance these contracts. The Ministry of Local Authorities plans to seek agreement from the Ministry of Finance to finance these contract from funds available in other IDA supported projects. The mission suggested that IDA could accept a proposal to finance completion of the Kibera water distribution contract from Cr. 2333 KE (Second Mombasa Water Supply Project) which was recently extended until December 31, 1998. The mission asked that a copy of the agreement, if any, between the Ministry of Water Resources, NWCPC, and the WSD be forwarded for review as soon as possible. According to estimate carried out, the maximum amount to be financed should be: US$ Equivalent Completion of construction activities 180,000 Construction supervision 10,000 Technical assistance to communities N/A Contingencies 10,000 Total 200,000 NCC/WSD Financial Situation 6. Annex 2 reflects the WSD financial performance and position as of end 1995/96, the fiscal year for which financial statements were last prepared. The financial situation is significantly worse than what was forecast at appraisal and even worse than at appraisal. It can be summarized as shown in the table below. Since beginning of the Project, the WSD has constantly defaulted on Credit financial covenants. As explained in the Outline of the Project Implementation Completion Report, it is unlikely that the situation can be improved in the near future if the institutional set-up and incentive framework the WSD is placed in is not drastically changed. ANNEX A Page 4 of 6 NCC/WSD Summary Income Statements and Financial Positions (in Kenyan Pounds -- Kf1.0 = Ksh2O) 1988/89 1995/96 SAR Actual SAR Actual Volume of Water Sold (million m3) 50.24 95.53 Average Water tariff (KSh/m3) 9.00 13.96 Income Statement Operating Revenue 30,326 27,751 89,911 63,595 Net Operating Expenses 6,302 6,252 14,587 34,519 Operating Income 24,025 18,247 75,325 27,009 Cash Generated from Operations 9,939 11,804 35,613 21,966 Operating Ratio 34% 63% Rate of Return on Gross Fixed Assets 9.9% 19% 12.5% 15% Financial Position Working Capital 23,667 (63,873) Net Book Value of Fixed Assets 76,273 1.11,114 Long Term Debt 43,314 481,941 Current Ratio 2.35 0.69 Accounts Receivable (day of billing) 240 417 90 769 Long Term Debt to Equity 0.58 3.2 Debt Service Coverage 1.4 1.2 Summary of the Findings of the Completion Mission 7. The Project has achieved its objective of increasing the water production and sewage treatment capacities. Facilities built by the Project are well designed and quality of construction is good. The Project has only marginally achieved its objective of improving the water supply and sanitation service to low income communities, that now represent half of the population of Nairobi. The Project has failed to improve the WSD operational and financial efficiency. The WSD performance suffered constantly from the shortcomings of the institutional set-up identified during preparation. At appraisal, however, it was decided that it would be counterproductive and premature to address during Project implementation. 8. The Project is likely to be unsustainable: * the Government still appears somewhat reluctant to address the fundamental issue of the WSD financial and managerial autonomy, it has shown interest for "commercialization" of municipal water utility companies; * major deficiencies in the WSD commercial management remain to be addressed, and with limited external financing available, the timetable for improvement is uncertain; * NCC/WSD track record with proper budgeting of maintenance is not encouraging; works built by the Project could rapidly suffer from lack of maintenance; ANNEX A Page 5 of 6 * any tariff increase to generate additional revenues needed to service the WSD mounting long and short teim debt is unlikely to be accepted by consumers, unless they perceive that major changes in tde way business is conducted; * realizing the full benefit of the Project would require sizable investment to reinforce and extend water distribution and waste water collection; in the current economic situation, external financing is questionable. 9. To achieve Project sustainability, major changes in the institutional framework the WSD operates in would require the 'tremendous effort -- political, legal, managerial andfinancial " referred to in the Staff Appraisal Report. More precisely, this would require: (a) a strong political willingness at the highest level of decision making; (b) the participation of independent consultants with relevant experience in assisting governments reorganizing their water supply and sanitation sectors and selecting options for private sector participation adapted to local conditions; (c) study tours in countries, preferably in Africa, where successful reorganizations have been implemented; and (d) targeted public relation exercises to involve all stakeholders in the design of the solution. 10. With a growing population living in informal settlements and having no direct access to piped water, there is a need to develop alternative service standards and management arrangements. The Kibera pilot water supply project was only in early stages of implementation at the Credit closing date and community management options were still being investigated. This project must be continued and closely monitored by the WSD, so that it can be replicated in similar areas. But, with very little incremental revenue to be expected from service extension in these neighborhoods, the WSD may have little incentive to pursue this effort if it is not able to generate revenues in formal settlements and if no external financial and technical assistance is provided. Key Lessons Learned 11. Institutional Development * project objectives must address the major institutional issues identified during preparation; * it has been counterproductive not to address the major institutional issues identified during preparation; it was not been premature to address them in parallel to a large investment program; * project components should be designed to achieve project objectives; if major institutional issues are identified, they are unlikely to be addressed adequately by limited managerial solutions; * learning lessons from countries, preferably in Africa, that have successfully implemented major institutional reforms could have helped design solutions adapted to the local situation; * improvement of commercial operations depends as much upon quality of the billing system as on the incentive framework a utility company is placed in to reduce unaccounted for water (UfW) and improve collection; * suspension of disbursement for non compliance with covenants affects project implementation and does not provide the proper answer to issues "sidelined" at appraisal. ANNEX A Page 6 of 6 12. Financial Development * IDA must carry out, at least once a year, a full supervision of the financial performance of the utility company it lends to, in order to review accuracy of data, prepare short-tern financial forecast and action plans with the company; * financial covenants should be tailored to the financial issues to be addressed; financial covenants linked to cash generation are preferable for utility companies with poor collection and cash management; * if audit reports are not in line with industry standards, IDA should request the Borrower to employ the service of acceptable auditors. 13. Physical Implementation * good quality preparation, continuity of the engineering consultant throughout the prcject cycle, participation of an expert panel to review the design and construction of darns, are elements that guarantee quality; * well prepared and monitored environmental and resettlement plans do not delay proj ect design and implementation; * management of large contracts requires special attention to avoid assessing large claims and cost increases; * adding components to a project that had already been suspended several times increases the risk of non completion, if causes for suspension are not removed. ANNEX B Third Nairobi Water Supply Project Credit 2060 KE Borrower's Contribution to the ICR ]]DA CREDIT 2060 KE THIRD NAIROBI WATER SUPPLY PROJECT IMPLEMENTATION COMPLETION REPORT A (i). EVALUATION OF OBJECTIVES The objective of the project was to; * Expand Nairobi's Water Supply System to cater for increased demrand up to the year 2003 - 5. Improve the basic needs provision and health conditions of the poor Assist in maintaining the sanitation standards in the city. Preventing pollution in the recipient rivers. * Improving the efficiency of NCC's Water and Sewerage Department (WSD) with the aim of supporting its transition, at a later date into an autonomous body. (ii) Project Components. To achieve these objectives, the project included the following major components; - Extension of the water supply system Expansion of source works and raw water transmission capacity. Extension of treatment capacity at Ngethu waterworks from 180,()00m3/day to 440,000m3/day. Extension of the treated water transmission and storage capacity. Construction of a new pumping station at Gigiri and Improvement of the reliability of the pumping facility at Kabete. Extension of the distribution system. Construction of offices, staff housing and social amenities. Rehabilitation and extension of the sewerage treatment plant to total capacity of 80,000m3/day Water supply and waste-water disposal in low income residential areas. Engineering and construction supervision for the above works and the preparation of a sewerage and sanitation master plan. Page 1 of 9 * Technical Assistance and training for WSD. B (i) ACHIIEVEMENT OF OBJECTIVES (i) Physical The major objective of the project, that is to expand Nairobi's water supply system; was substantially achieved. However the improvement of basic needs provision and health conditions could not be accomplished by implementation of the above project components on their own. It required parallel complementary programmes from other sectors e.g; health, housing and environment. There is also need to continue the expansion of the distribution system if benefits of the expanded source works and treatment capacity are to be fully realised. The trunk sewers are in very sorry state partly due to wilful blocking of the same by farmners, theft of manhole covers, deterioration due to age, surface overburden etc. Construction of houses along the sewer wayleave has made it difficult for WSD to carry out maintenance operations. These are matters which need to be attended to in the near future otherwise discharge of raw sewage into water courses and pollution of the rivers will continue for quite some time. (ii) Macroeconomic Policies This has no direct relevance. (iii) Sector policies The project is yet another step forward in realisation of the water and sanitation sector development policies. (iv) Financial Objective: The project has failed to improve the WSD operation and financial efficiency. In fact WSD is worse off financially than it was before the project. The reasons for this is that the development of the Institutional capacity of WSD and NCC has failed to keep pace with development of WSD's Physical Infrastructure. The billing system and procedures are woefully inadequate for a city the size of Nairobi. The current WSD/NCC Institutional arrangement requires restructuring if the water supply and sanitation services are to be financially sustainable. Page 2 of 9 (v) Institutional Developments The Institutional problems afflicting WSD were identified during the preparation of the staff appraisal report. However the SAR concluded that the transformation of WSD into a separate entity " would be premature and counter-productive during implementation of the project. Consequently, only marginal institutional developments have occurred in the recent past. The major problems identified by the SAR, namely inadequate salary scales, cash flow problems, bureaucratic decision making processes and hence poor management continue to plague W&SD C. MAJOR FACTORS AFFECTING THE PROJECT (i) Factors not generallv subject to Government Control The project was affected by factors outside of Government Control. The outbreak of the Gulf War resulted in changes in oil and energy costs and led to increases in freight costs for offshore source goods. The wind of political change in Africa that brought with it high internal inflation rate. (ii) Factors Generally Subject to Government Control The Project suffered from the decision made at appraisal not to address the major shortcomings of the institutional set up while the SAR identified autonomy of the WSD as a prerequisite for performance. Thus WSD is still unable to access cash generated from its operations, unable to offer competitive compensation package in order to attract and retain quallified staff, and faced with a complex decision making process involving the ministries of local authorities, water resources and Nairobi City Council etc. The disbursements of IDA funds for the project was suspended on three different occasions due to non compliance with credit conditionalities by the Government not only for the project credit but other credits as well. (iii) Factors subject to the control of the Implementing Agency: The Project Implementation Unit under the Project Manager implemented the physical components of the project satisfactorily. However over the years certain components of the project eg sewer master plan, computerisation of WSD, Training of WSD Staff etc. were silently removed from the direct control of the Project Manager. As a result, implementationi of these components did not benefit from the exposure and experience of the P.I.U staff. Page 3 of 9 Institutional structure constraints continued to affect the implementation of the project particularly the lengthy decision making process often compromised by politics. Thus contracts could not be awarded in time; compensation to land owners could not be effected in time etc. The effect has been the obvious delay in completion of the project especially the added components financed through savings from initial project cost. The overhaul of the commercial operations of WSD is a case in point where institutional and managerial has resulted in a situation where metering, billing and collection of revenue has all but stalled. Indecisiveness in procurement of water meters for instance led to a situation where between 1995 and 1997, new connections were hampered by lack of meters and metering of consumption was abandoned in certain housing estates. There were significant cost overruns in local currency terms. However in US dollar terms there were savings. This is due to the fact that project components were priced in Kenya Shilling which between 1990 and 1995 devalued from 18 to 70 shilling to the dollar, resulting in more than proportionate increase in cost of inputs on the local market. There were minor delays in the implementation of the project. The SAR anticipated the implementation to be complete by 1994/95. However at the Credit closing date implementation of some components was still under-way; though these were additional elements. The main cause of the delays were:- (i) Length decision making process both within the NCC and other key players and delays in selection of Contractors. (ii) Delay in land acquisition (iii) Delays in payment to the contractors by both the Bank and NCC leading to Contractors suspending work or going slow. (iv) Suspension of disbursement by the bank due to non compliance by NCC and GOK with Development Credit Agreement conditions. (v) The change in the project horizon necessitated redesign of some components of the project eg. the Treatment Plant, resulting in delay in calling of tenders. There were no natural disasters which directly affected the Project. Marginal interruption were recorded as a result of the collapse of the Nairobi-Mombasa railway line and lastly the onset of El Nino phenomenon affected the additional components. Page 4 of 9 D. PROJECT SUSTAINABIL1TY The achievement made by the project in relation to its objectives are unlikely to be sustained due to the following:- i) The Government has yet to decide on WSD autonomy. ii) The physical infrastructure installed under the project are likely to fall into a state of disrepair due to allocation of inadequate maintenance funds and skilled staff. The pumping stations and the expanded water and sewage treatment plants are likely to suffer most. iii) The commercial operations of the department have been virtually untouched by the project and there has been a steady deterioration in the efficiency of the department commercially. This decline is expected to continue with knock on effect on the entire operation of the department. Failure to implement the billing and software component of the project is likely to accelerate the decline of the billing system. iv) WSD does not have power to review tariff for cost recovery. The procedure involve the Ministry of Local Authority and Water Resources etc. v) The water distribution system and sewer collection systems need to be expanded if the full benefit of the project are to be realised. Not much activity is expected on these twin direction due to financial constraints. Thus the water may be available at the terminal of the transmission points but actually selling it and generating the much needed revenue will continue to be a problem. The matter of follow up projects needs to be addressed urgently. E. BANK PERFORMANCE i) Project Identification and preparation The project was consistent with the Governments and Banks development strategy. However, components of the water supply to the urban poor and collection of waste water should have been given more weight. The assistance of the bank in the project preparation was satisfactory. The major aspect of preparation namely technical, financial, economic, environmental and sociological were adequately covered. There were shortfalls in the commercial and institutional aspects arising mainly out of inadequate involvement of the bank in the development and implementation of these aspects. Perhaps the bank failed to appreciate the potential negative impact of institutional shortfalls in the implementation of the project. Page 5 of 9 ii) Bank's Performance in Project Appraisal During the project appraisal, the above aspects were looked into in details. Experience was also drawn from the implementation of the Nairobi water supply phase II under credit 1520KE. Thus at the time of appraisal, the necessary measures necessary to ensure proper implementation and sustainability of the project were identified. Despite identification of these problems, the project suffered heavily from the risks identified at appraisal namely; inadequate improvement in WSDs institutional capacity and heavy borrowing by NCC general fund from the water capital fund. The financing package was adequate for the project. The bank's relationship and coordination with other financing agencies was cordial. iii) Bank's Performance in Project Supervision The performance of the bank during the project implementation can be judged as of mixed quality. Until the later stages of the project implementation, all issues were reviewed and resolved in Washington. Follow-up was always a major problem. The bank placed emphasis on physical aspect of the project implementation though curiously enough, the credit was suspended on three (3) occasions on non-engineering matters. Perhaps if the bank had placed more emphasis on management and fmancial issues in the project supervision, the suspensions could have been avoided. In any event, the suspension of disbursements caused more problems than the solutions they provided. There was a high turnover of bank staff resulting in serious difficulties in follow-up. The delegation of certain responsibilities to the local office in the later stages of the project did ease the problems somewhat. F. BORROWER PERFORMANCE i) Performance of WSD The performance of WSD in the project identification, preparation and implementation can also be judged of mixed quality. The P.I.U. which was responsible for the physical implementation performed satisfactorily in a less than conducilve environment. The selection of contractors and consultants was conducted in a transparent and professional manner. The commercial section of the WSD performed less satisfactorily perhaps due to inadequate emphasis placed on commercial aspects by all parties. Page 6 of 9 ii) Performance of NCC By NCC is meant other arms of the City Council which WSD had to liaise with in the project implementation including the Council. The support of NCC was less than satisfactory. Approval of contract awards delayed due to trivialities. Payments to contractors and landowners was always delayed. Perhaps the greatest impact on the project was use of water capital fund by the general fund causing the project to be suspended twice. iii) Performance of the GOK The performance of GOK was also less than satisfactory. The budgetary allocation for the project was not always adequate. The Government abdicated its responsibility on land acquisition leaving NCC to shoulder the burden of compensating land owner affected by the project. The decision making in the Government is bureaucratic and lengthy. Failure by GOK to comply with conditionalities on other IDA funded projects led to suspension of the credit once. The accounting system and disbursement procedures were lengthy making payments to contractors and consultants delayed leading to payment of interest on late payments, suspension by contractors and delay in project implementation. G. ASSESSMENT OF OUTCOME The project outcome is satisfactory. However, although all physical component of the original description were implemented according to specifications. Implementation of additional components are still under-way and their future hangs in balance due to financing uncertainties. WSD is still unable to get water to a substantial proportion of Nairobi Residents due to constraints in the distribution system. Similarly, inadequacy in the waste water collection system means that the expanded sewage treatment works operates below capacity as most of the raw sewage discharged into natural water courses. The project has failed to improve the WSD commercial and financial performance. The new billing system has not been installed although it would not have been expected to make much impact if issue of WSD autonomy and incentive framework are not addressed. The training component can also be described to have been of mixed success, some of the beneficiaries of training programme have left the organisation in search of better working conditions while others who have remained continue to work in less than conducive environment. On a more positive note, WSD now has a fully developed source works and water and waste water capacity to sustain the demands of a fast growing city up to the year 2010. Page 7 of 9 H. FUT1JRE OPERATION Unless the commercialisation of the urban water supply sector is implemented speedily, the future prospects of the operation of the project do not look very promising. WSD's maintenance has been run in a fire fighting basis with inadequate budget and funds. There is real danger of rapid degradation leading to financing costly rehabilitation programmes in the medium term. The commercial operations of the department cannot be sustained at the current state; there is an urgent need to change the way business is conducted. Involvement of the private sector in new connections, metering and billing may be the way into the future. 1. KEY LESSONS LEARNED (i) Institutional Development * Project objectives must address institutional issues identified during preparation; it has obviously been counterproductive not to address them; it would have not been premature to address them in parallel to a large investment program; * Project components should be designed to achieve project objectives; if major institutional issues are identified, managerial solutions are unlikely to address them; Learning from countries, preferably in Africa, that have successfully implemented major institutional reforms could have helped design institutional options adapted to the local situation; Improvement of commercial operations depend as much on the quality of the billing system as on the incentive framework the utility company is placed in to reduce UfW and improve collection; Suspension of disbursement for non compliance with covenants affects implementation of the project and does not provide the proper answer to issues "sidelined" 'at appraisal. (ii) Financial Development There should be as much emphasis on financial performance as technical performance. Audit reports should be prepared by a different institution to the one that prepares the accounts to enable cross-checking. Financial records should be readily accessible and possibly computerised. Page 8 of 9 * Proper records of WSD/NCC mutual indebtedness should be maintained in line with normal accounting standards. WSD should be free to source for services rendered by NCC from the open market to enable it get the best services at better rates eg Computer and legal services. (iii) Physical Implementation Thorough definition and appraisal, continuity of engineering consultant throughout the project cycle and participation of an expert panel to review the design and construction of dams are elements that guarantee quality though continuity of consultant may deny the borrower the opportunity to obtain competitive rates and may also lead to complacency on the part of the consultant. Well prepared and monitored environmental and resettlement plans do not delay project design and implementation. Management of large contracts requires special attention to avoid the need to assess large claims and cost increases. Awarding contracts to the lowest bidder does not guarantee least cost of implementation and maybe a recipe for complications on qcality control. Inspite of the institutional shortcomings, it is still possible Lo implement a complicated water supply project though this may be too demanding on the project management team. 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