Document of The World Bank FORoFFICAL USE ONLY /-AI .3 3316 Report No. P-5491-CH AMERANDUM Aft 'RNOOED=O PRESISIfTOPr THE 3RTEUNATIONL RAI FOR )RCONSTRUVION MRD ))VELOPI4U a - uncwxvz~O -AETOI PR0QfD~LOAM - Z~~N AN AONnElafTTUfIMLLON I 'Ism~~~~~~~~~< RMF1O3S DR O0MSrg SaTR SflARIAS D VflPZNS onlT, 1A~~~~~~~~~~~~~~~ 24 1,~~~~~ rAla40eweM 0 WITHkU 6WHWOoA-adTt Csy ¶f fPsLtCb OdFi IL ,114 41 cim- loa hE di,.*-" sEcoNDea VAPRaIS WAtE ot UPPLY be MlsdBWA#POE so~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7 CuwwrY Usaits Chlla 16Q {cb$) 1 US$ - 337-09 Vh$ D.c , 31. 1990) U3IG~~~~~~~~~~~~~~~~~~~~~'1S - ~~~~~~~~~~~~~~~~~ 1 Im. Vetri. .U (t- . . . . . . . . *.O S ceW ,ta&a~ 4 ..mo~ 3P4EC6 GoO .O , , i - * * * c . . . . .. . . . . w .. .fl . UI .. . . . .. . . \Z^~~oc ''.uq , a fl~d .'tt*i ..u . a%a- *C r j;\ _iC r < 'Eg _ ' ' ' ' ; ' ' ' ' ' " 9 ;' '0 ' ' ^' ' q ~~~~' . o.. 3''-< FOR OFFICIAL USE ONLY SNODVRLPARAISO VIATR SUPPLY AMDSNRA PAG0iROT Loan and Proisat Bumary B9rEoX3Z3 Bmpress de Obras Snitarias de Valparaiso S.A. (2IVAL) 3araantot The RepUblic of Chile Loan Amounts 9U$50 million equivalent TrmEs Repayment in 17 years# including 5 years of grace, at the Banks standard variable interest rate. Pinancina Plan; IBR US$50.0 million Total US$141.5 million Rate of Returns 14.6% Staff Araisal RaoDrts Report No. 9384-CH Has IBID 22903 This document has a restricted distdbution and may be used by recipients only In t;-e perfoi:ac. of their oficiai dutie Its contents may not othofwis be diclosd without World Uik auttr4Ation. MENORANDUM AND ECOIOMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR REONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$50 MILLION TO THE EMPRESA DE OBEAS SANITARIAS DE VALPARAISO S.A. (ESVAL), WITH TIM GUARANTEE OF Ti$ REPUBLIC OF CHILE FOR THE SECOND -ALPARAISO WATER SUPPLY AND SEWERAGE POJSET 1. The following memorandum and recoLmndation on a proposed loan to the Empresa de obras Sanitarias de Valparaiso S.A. (AVAL), with the guarantee of the Republic of Chile, for US$50 million equivalent is submitted for approval. Tho proposed loan would have a term of 17 year, with S years of grace, at the Bank's standard variable rate, and help finance a water supply and sewerage project. 2. Backgaround. Chile has made significant progress in the last two decades in expanding and improving its water supply and sewerage services. This is reflected in very high water and high sewerage coverage levels (the highest in Latin America), a low ratio of employees to water connections (among the lowest in Latin America), and the adoption of the firat steps towards a sound tariff policy based on long-run average cost. Nevertheless, there are still two major problems to be addressed in the water sectort (a) high rates of unaccounted-for water, which result in poor utilization of existing resoures as well as unreliable service; and (b) serious water pollution problem resulting from the discharge of large quantities of untreated sewage into natural water courses, particularly in the largest urban areas of the country. 3- In the Greater Valparaiso area, the country's third largest urban area, water and seer:2ge coverage is at present 9S% and 8S%, respectively. The water cupply system has insufficient production and treatmnmt capacity to satisfy the peak-day demand during the summer season, and the average-day demand in years of low flow in the Aconcagua River. The water distribution system suffers from serious deflciencies and high water losses caused bys inadequate layout, bottlenecks, insufficient storage capacity, and leakage and bursts from old plpes - some of which may have been adversely affected by the frequent earthquakes occurri! ln the area. Moreover, large quantitLes of untreated sewage are discharged Into streams and the Pacific ocean in an area that includes the sea resort city of Villa del Mar. This creates a public health haxard and reduces the area's attractiveness for recreation, fishing and tourism, which constitute major sources of income for the population of the region. The GoCh is aware of the urgent problems facing the water supply and the sewerage system of Greater Valparaiso and has attached high priority t- solving thm. 4. The agency responsible for the planning, management, construction, operation, and sale of urban water and sewerage services ln Chile's Fifth Region is BSVAL. Until recently RIVAL operated as a public sector company controlled by the MOP. In June 1989, it was transformed into a stock corporation with all shares held by the Republic of Chile, either directly (35%) or indirectly (65%), through CORFO, a Government Bank. in 1986, the Bark granted a first loan to ESVAL of US$6 million for a US$12 million project, which included a major water treatment plant and other water supply facilities, as well as the preparation of feasibility studies and designs for the improvement and expansion of the Greater Valparaiso water supply and sewerage systems, in preparation of the proposed project. This project was successfully completed in 1990. ESVAL's institutional and financial capabilities are at present satisfactory, but will have to be considerably upgraded to carry out the project. This includes improving the operation and maintenance systems, administrative systems and management practices, and further increasing water and sewerage rates. 5. Rationale for Bank Involvement. The project is an integral part of the Bank's assistance strategy to Chile, which includess optimization of invsstments in infrastructure by improved maintenance and rehabilitation, increased efficiency in the delivery of public services, implementation of a financial policy of full cost recovery based on long-run marginal cost of least-cost solutions, and alleviation of environmental pollution problems that affect adversely public health and hinder economic development of the area. An adequate and efficient water and sewerage infrastructuro is neccseary to improv health conditions of the population and to provide access to services and employment to the low-income segments of the population. 6. Proiect Objectives. The main objectives of the project are: (a) to optimize the operation of the existing water supply system and improve water supply conditions in the Greater Valparaiso Area by reducing water losses, creating uniform service pressure, and improving the quality of the water supplied to the consumers; such optimization would also permit expanding the supply area and preclude the large capital investments that would otherwise be required; (b) to improve sanitary conditions of water streams, public beaches and the marine environment in the Greater ValparaSso Area, which are important recreational facilities for the population of the area, as woll as valuable economic resources of the region for tourism and fishing; and (0) to increase RsvAL's operational efficiency and capacity to implemont successftlly lts proposed investment and development program. 7. PrMoect Descrition. The Bank loan would finance the bulk of ESVZL's 1991-97 least-cost capital investment program, which includes: (a) improveseat of the Greater Valparaiso sewerage system, including an environmentally acceptable marine sewage disposal system (47%); (b) expansion, i prov emnt and optimization of the Greater Valpara8so water supply system (36%)i (c) institutional and operational improvinnts of ISVAL (9%) and (d) consulting services for supervising and monitoriAg the implementation of the project and for preparing studies and designs for future projects in the Fifth Region (9%). The construction of the main sewage collection and disposal system, the most sophisticated project component from a technological point of view, which incorporates works in which ESVAL in particular and Chile in general have no experience, will have to be supervised at least partly by foreign consultants, The water supply component of the project will be supervised by local consultants in joint venture with foreign consultants (to be used mostly for the water treatment component), as in the first project financed by the Bank. A comprehensive marine monitoring program is included in the project to ascertain whether the sewage disposal solution adopted will provide the expected environmental results and to determine if any additional measures ned to bo taken at a later stage. This monitoring program would be carried out by a joint venture of local specialized entities (including the three universities of the Region), local consulting firms, and foreign conSultants. 8. Total project cost is estimated at US$141.5 million equivalent (including local duties and taxes), with a foreign exchange cost of US$50 million representing 35% of the total cost or 45% of the project cost net of local duties and taxes. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in schedule S. A timetable of key project processing events and the status of Bank Group operations in Chile is given in Schedules C and D, respectlvely. A map is attached. The Staff Appraisal Report No. 9384-CH dated May 7, 1991 is also attached. 9. A maximum amount of US$3 million (6 of the total loan) will be used for retroactive financing of expenditures made after January 1, 1991 for the * construction of a water treatment plant needed urgently, and *ome sewage collectors and pumping stations that are in the critical path of the Greater Valparaeo sewage disposal system, whose early completion would alleviate serious environmental pollution problems. 10. The Government of Chile (GoCh) has recentlv requested the Government of Japan to consider the cofinancing of this project, as part of a package of several investmeni projects. If and when this operation materializes, an CXC? loan of about US$40 million may be granted to 3S'AL. In such an event, the Bank loan amount would remain the same, but the total external financing would increase from 45% to 80% of the project cost (net of dutles and taxes). OZCC board approval is contingent upon Bank approval of the loan. 11. Aared Actions. During negotiations, assurances were obtained as follows: From the GoCh that it would: (1) not make changes to the existing water supply or water tariff legislation that would materially and adversely affect DSVAL's ability to carry out the Project ; (2) enter into a Shareholders' Agreement with CRPOR, satisfactory to the Bank, allowing distribution of cash dividends to the shareholders only from the amounts available after eompliance with SVAL's self- financing and debt-equity ratio requirementsl (3) review yearly the system of direct income subsidies for water and adjust it as needed, in a manner satisfactory to the Dank; and (4) carry out not later than June 30, 1993, an environmental study to assess the impact of municipal and industrial sewage discharges into the Aconcagua River and the Pacific Ocean, and to propose industrial effluent discharge criteria. From ZYZC that it would: (1) continue to increase its water and sewerage tariffs to the maximum provided by the current tarlff legislation; (2) carry out a plan of action acceptable to the Bank to improve its operational and administrative efficiency, and a training program for its staff; (3) carry out tho planned changes in its organizational structure; (4) contract additional insurance to expand its current coverage, in terms and amounts acceptable to the Bank; (5) provide sufficient personnel, funds and other resources to ensure tho adequate functioning of the Project Coordinating Unit; (6) generate funds from internal sources equivalent to not less than 55% for fiscal years 1991 through 1994, and 70% for fiscal years 1995 though 1997, of its annual average capital expenditures for that fiscal year and the next, and maintain during the term of the loan a debt-equity ratio not greater than 60:401 (7) take necessary measures to met a series of operational and financial targets each year; (8) carry out an in-depth m 4 - mid-term review of the project by September 30, 1994; and (9) carry out a comprehensive environmental monitoring program satisfactory to the Bank before, during and aittr the construction of the Project' sewage disposal system. It was also agreed that, in the event that funds (other than the Bank loan) are made available for the financing of the Project, EVIL would finance with internal funds at least 20% of the Project costs net of duties and taxes, and any funds from net internal sources that are not needed for self-financing would be used to either pay dividends to the shareholders or make investments acceptable to the Bank in addition to those included in the Project. Condition of Effectiveness. The signing of the Shareholders' Agreement between the GoCh, in its capacity as both Guarantor and shareholder of the Borrower, and CORFO (the other shareholder), is a condition of loan effectivenss. 12. Ben2fits. The project would yield econoaric, environmental and social benefits. Economic benefits include increased revenues from water *ales resulting mostly from increased water and sewerage rates as well as additional connections, and decreased operational costs resulting from the optimisation of the system and the reductlon of losses. Environmental benefits will be achloved by alleviating the pollutlon of the area's stream and the ocean. Xt is expected that- the presently contaminated beaches in the resort area of VLfia del Mar would become clean and safe for public use. Social beneflts include ensuring uniform quality of the water servlce, which wll directly beneflt the urban poor (who suffer most from the present deflciencles), public health lmprovements, and the provision of local employment during ecnstruction. 13. RLsku and Sfeauards. Two types of risks can be foreseen. The flrst L related to the limLted capacLty and expeLorien of ZSVAL to carry out a project of this magnitude adequately and in a timely manner, so that delays and cost overruns could occur. To minimLse thls rLsk, agreeemet was reached during negotiations that USVAL would carry out a orles of institutional improvements its planned reorganization, and a comprhensive training program for lts staff. The second risk pertains to the limited availability of funds generated by BSVaL, if present legislation on water and sewerage tarlffs is altered or lnadequately implemented, and/or lf the soclal subeLdy for low-income water users is not successful. To eliminate thli risk, agreement was reached during negotiations that current tarlff policLes would be fully applied by ESVAL and maintained by the GoCh, and that the present system of subsldles to the urban poor would be adjusted, lf needed, to make lt more effectlve. 14. Recmmendation I am satisfLed that the proposed loan complLes wlth the Artliles of Agreement of the Bank, and recommend that the Sxecutlve Dlrectors approve it. Barber B. Conable President Attachments WashLngton, D.C. Aprll 26, 1991 -5- SchadulI A amA 1oo. V!PARID VATM ANDll n" tsN I m 3S¶fN&YU PrOJEcT COSTS lED P!ACIIOLAN (La us$ million) Prot as flimatem A. Sewerage and Pollution Control 18.3 19.6 37.9 S. Water supply 13.3 15.4 28.7 C. situtitutl mp 8ovmt 2.6 4.3 6.9 D. CosultLng Sevice 4.2 2.4 6.6 Me COST (at December 1990 prices) ALA Physical Contingtenis (10%) 3.8 4.2 8.0 Price Contingencies 19.4 4.1 23.5 TOTAL PCCT COST (not of duties & taxes) Ali 100JL import Duties and VAT 30.0 - 30.0 TOTAL PROJEC CO 1.T05 (including duties a taxes) inanino ln %of % of P r j e c t C o a t Duties Total Project Total Sour clForsin Total and Zm a cost cost World Bank --na 50.0 50.0 - 50.0 45 35 EsvAL 61.5 - 61.5 30.0 91.5 55 65 Total 5 0AL. 0 .5 MA .S5 sam (in EJS million) Method Total -XJA .a ;a Othe Cok Civil Works 17.7 19.7 2.0 39.3 (5.3) (5.9) (0.6) (11.8) Zquipment 28.6 32.1 0.9 61.6 (15.6) (17.5) (0.5) (33-6) ConsultLag 8ervices 10.6 10.5 and Related Items (4.6) (4.6) TOTAL 46.3 51.7 13.5 111.S (20.9) (23.4) (5.7) (S0.0) notes Figures in brackets are the amounts fianced by the Dank. Allocation of Loan Proe _s The proposed disbursement categories, the allocation of loan funds, and the disbursement percentages are as follows Amount of % Expenditures M2teoory Jm Q to be Financed Civil Worke 27.000,000 45% Xquipment & Materials 18,000,000 45% of local - aependitures and 65% of foreign eiaenditureu Consultants, training, supervision S,OOO,OO0 50% of worko technioal assistance TOTAL 50.000.000 UaSU eJd Bank DioLs mm nts (in US$ million)s Bank I 22 22 PA 21 2i 97 21 Annual 7.6 7.6 9.0 9.8 8.2 5.5 2.3 Cumulative 7.6 15.2 24.2 34.0 42.2 47.7 50.0 -7- 8ECOND VALPARAISO WATER SUPPLY aND AMUAGE PROJECT Timetable of Rey Proioot Processung Events (a) Time taken to prepares 1.5 years (b) Prepared bys ESUAL (c) First Bank missions November 1989 (d) Appraisal mission departures November 1990 ({) Negotiations: April 8-12, 1991 (f) Planned date of effectiveness: September 1991 (g) List of relevant PCRs and PPAR:s PCR Loan 1832-CR (September 14, 1990) Page 1 of 2 WHE STATUS OF EANK GROUP OPERATIONS IN CH*l" A. sTATEmENT OF sAN LOANS AND IDA cRes (gs at Dembe 31. 199) Loanor US$n Credt fiscal Nuber ,Ye P 4 34 loam and one crdi fully disburud 1,532I 9 22 / Q.0 2481 19S5 Chile Agrl ServCrdt Sao0 - 8.0 2504 1965 Chfle T.echnlc Asstance 6s - 0.3 2606 1986 Chle Id Fin. estPuc. 100.0 - 1.2 2613 1966 CORFO Small & Med. d 4Q0 6.7 2651 1986 EMOS Santiago Wat Sup. 60.0 - 50.0 2662 1986 ESVAL VaeparsisoWat Sup. 6.0 - CA 2832 1987 CORFFO Hydroelectric W0.5 - 33.3 2833 1987 ENDESA PowerTmramIsion 21.53 - 6. 302 199 Chile Urban Srs & Malt 75.0 - 57.1 3030 1989 Chble 4ouung n 200.0 - T1S 3053 1989 Chile Id. Fance 11 7. - 17.2 3120 1990 Chle Road Sector - 224.0 172.S 3143 1990 Che Fancil Market 130.0 Total A5. .4 22* whh has ben dpad 49560 88 Tota now oubtand g24 14.1 Amountsold .7.2 ... of which has be repad 7.2 ToW now held by San* and IDA Z0761 14.1 Total undibursed t093 11 IndhAes n rke aduments. The original amount of the crdt was US$10.0 m -9- Schedul,e Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS (as at December 31, 1990) I/ Fqscal Type of Amount In US$ MUion Year Obiqgor Business Lo -uy-ra; 1958. 1959, Empresw Minera de Copper mining 31.85 7.50 39.35 1966,1984 Mantos Blancos 1959 and Fideos y Alimentos Food products 1.50 0.15 1.65 965i Carozi SA 1960, 1961 Cemento Blo-Bio S.A Cement 1.20 0.10 1.30 and 1965 1963 Cia. Manufacturera Pulp and Paper 3.00 . - 3.00 de Papeles Cartones Cartones 1970 Miniera Sagasa SA Copper Mining 10.45 0.45 10.90 1982 Inverchile Money and capital - 0.20 0.20 markets 1986 Ssignal Methanol Chemicals & petro- 93.37 6.63 100.0 chemicals 1986 Compania de Carbones Mining 16.50 2.20 18.70 de hile (COCAR) 1987, 1988 Aruco Pulp and paper 130.50 - 130.50 and 1989 1988 Chile Fund Money and capital - 4.65 4.65 markets 1988 IMCO Money and capital - .06 .06 markets 1989 IICC Money and capital - 3.75 3.75 markets 1989 Escondida Mining 70.00 15.00 85.00 1990 Fie Arrows Money and capital - 4.85 4.85 markets 1990 Celpac Pulp and paper 73.00 10.00 83.00 1990 Andino Money and capital 10.00 - 10.00 markets 1990 CTC UtIilty 80.00 .19.09 89.09 Tota1 gross commitments 521.37 74.63 596.00 less cancelations, terminations, repayments and sales 201.34 29, 2.7 Total Commitnents now held by IFC 320.03 44. 364.93 Total Undisbursed 83.37 5.37 88.74 1/ In addition, $55 million In loan and quasi-equity was approved In March 1989 -for a pulp and paper project _ _ ______ ~~~~~~~~~~~~~~~~~~~~~~~~IBRD 22903 SEA OUTFALL ConconR L-800r.i Higuerillas-CnonS< ,\ , . /> ~~~~~~~~~~~~~~~~~~~~KILOMETER PACIFIC OCfEAN N \0 - Renac \ - ; Renaca RE, ) _4tOSEAROMOS may I M CHILE~~~~~~~~~~~~~~~~~~~~~Bt RZL2 ti i PROJEC&EXISTING- A -v,X. ZntAunnretmntPlnt C H I L E~~~~~~~~~~~~~~~~~~~~~~~~ARH19