The World Bank Water Security in the Dry Corridor of Honduras (P169901) REPORT NO.: RES60129 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF WATER SECURITY IN THE DRY CORRIDOR OF HONDURAS APPROVED ON JUNE 12, 2020 TO THE REPUBLIC OF HONDURAS WATER GLOBAL PRACTICE LATIN AMERICA AND CARIBBEAN Regional Vice President: Carlos Felipe Jaramillo Country Director: Michel Kerf Regional Director: Benoit Bosquet Practice Manager/Manager: David Michaud Task Team Leader(s): Andrea Mariel Juarez Lucas, Jose Antonio Silva Gomez The World Bank Water Security in the Dry Corridor of Honduras (P169901) ABBREVIATIONS AND ACRONYMS E&S Environmental and Social ESCP Environmental and Social Commitment Plan ESS Environmental and Social Standards FA Financing Agreement GoH Government of Honduras GRM Grievance Redress Mechanism IA Implementing Agency MTR Mid-Term Review O&M Operation and Maintenance PDO Project Development Objective PIU Project Implementation Unit RF Results Framework SAG Ministry of Agriculture and Livestock (Secretaría de Agricultura y Ganadería) SIAS Integrated Water Storage System (Sistema Integral de Agua Segura) TA Technical Assistance ToR Terms of Reference WTP Water Treatment Plant i The World Bank Water Security in the Dry Corridor of Honduras (P169901) BASIC DATA Product Information Project ID Financing Instrument P169901 Investment Project Financing Environmental and Social Risk Classification (ESRC) Substantial Approval Date Current Closing Date 12-Jun-2020 30-Dec-2025 Organizations Borrower Responsible Agency Republic of Honduras Project Development Objective (PDO) Original PDO To improve water service delivery and strengthen water governance in selected areas of the Dry Corridor of Honduras. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-66800 12-Jun-2020 08-Mar-2021 11-Aug-2021 30-Dec-2025 70.00 2.32 67.68 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No ii The World Bank Water Security in the Dry Corridor of Honduras (P169901) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. This Restructuring Paper seeks the approval of the Country Director on a proposed restructuring for the Water Security in the Dry Corridor of Honduras (P169901), to include the following proposed changes: (i) extend the closing date of the Project by 23 months; (ii) modify select component activities; (iii) cancel US$7 million of the project proceeds and modify the amount of the disbursement categories, (iv) revise the Results Framework (RF), accordingly; (v) update the component costs; (vi) update disbursement and implementation schedules; (vii) update the economic and financial analysis; and finally (viii) update Project risks. These changes will be reflected in the Project legal documents, the Financing Agreement (FA) and Environmental and Social Commitment Plan (ESCP) and are necessary due to delays in implementation and to ensure the achievement of the Project Development Objective (PDO). This second restructuring responds to the official requests from the Ministry of Finance (SEFIN) to extend the Project (letter number DGCP-FEMS- 348/2023 dated December 15, 2023) and to revise Project aspects (letter number DGCP-FEMS-238/2024 dated April 23, 2024). 2. An IDA credit in the amount of US$70 million (IDA 6680-HN) was approved by the Board of Executive Directors on June 12, 2020; the Project became effective on August 11, 2021, and is currently scheduled to close on December 30, 2025. The Project also leverages an additional US$15 million of counterpart funding. A first restructuring was approved on January 6, 2023, to reflect the change in the Project’s Implementing Agency (IA) from the original Honduras Strategic Investment Office (Inversion Estratégica de Honduras – INVEST-H) to the Ministry of Agriculture and Livestock (Secretaría de Agricultura y Ganadería - SAG), and revise institutional arrangements proposed by the Ministry of Finance in coordination with SAG. 3. The PDO is “to improve water service delivery and strengthen water governance in selected areas of the Dry Corridor of Honduras”. The Project comprises four components: (i) Component 1, Strengthening institutional capacity for water resources governance and management (IDA US$6.0 million), supports strengthening water resources information systems in the Nacaome Basin and activities to build local, basin and national capacity on water governance; (ii) Component 2, Scaling up resilient hydraulic infrastructure for water security in the Dry Corridor (US$55.0 million, of which US$40 million IDA and US$15 million counterpart funding), seeks to promote an integrated and multipurpose micro-watershed, community-based management approach in the Dry Corridor and finance activities to maximize the benefits of the multipurpose José Cecilio de Valle Dam (JCV Dam) in the Nacaome Basin, including the full feasibility, detailed design studies and dam safety plan, to supply and install the spillway gates in the Dam, a centralized potabilization plant and dedicated pipeline connecting with downstream municipalities; (iii) Component 3, Project management and capacity building (IDA US$9.0 million) supports, inter alia, overall Project implementation and oversight functions, national and local communication and outreach activities, citizen engagement and gender measures, and other strategic studies and prefeasibility assessments to contribute to the preparation of future interventions; and (iv) Component 4, Contingency Emergency Response (US$0.0 million), will provide for an immediate response to eligible emergencies. A. Project Status 4. The Project’s overall progress towards the achievement of the PDO has been continuously rated as Moderately Unsatisfactory since November 3, 2022. Signing of the FA was delayed for a year due to fiscal constraints associated with the need to divert central government funding to respond to the COVID-19 pandemic and Tropical Cyclones Iota and Eta emergency needs. Furthermore, the administration that took 1|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) office in January 2022 decided to end arrangements with the initial IA and transfer the Project to SAG, which further delayed implementation for an additional year, triggering the downgrading as it prevented activities from initiating. In this context, it has become clear that the remaining implementation lifespan (i.e., until the December 30, 2025) would not be sufficient to fully disburse credit proceeds and achieve the PDO. The Project team has provided close support to build SAG’s capacity for this implementation of Project activities and collaborated closely with the Client to devise an implementation plan aimed at expediting the pace of execution with clear turnaround actions. The Mid-Term Review (MTR) took place in December 2023 (see below). At present, none of the PDO indicators have made progress, as the required works and services underpinning results are still at formulation or procurement level. The original PDO can therefore no longer be achieved without a combination of downscaling and extension. 5. Implementation Progress has also been Moderately Unsatisfactory since November 2022. To date, the Project has disbursed US$2.32 million (3.3 percent of the Project IDA amount) and commitments total US$ 1.44 million (62 percent). Implementation has slowly resumed in recent months, putting the Project on a positive trajectory despite limited implementation capacity, which is expected to further pick-up with the hiring of additional technical and procurement specialists by the Project Implementation Unit (PIU) in the short-term. a) Component 1: The Optimization Plan for hydrologic and meteorological services has been prepared and submission for final Bank review is expected by June 2024. The diagnostic to improve the hydrometeorological network is underway, with expected delivery by December 2024. The procurement for consultants for the first phase of the Technical Assistance (TA) to support local and municipal capacity development and prepare the designs for new/rehabilitated forest nurseries (estimated at US$0.05 million) is expected to be launched by July 2024. The PIU has hired a technical expert to speed up implementation of water governance activities at watershed and national level. b) Component 2: Procurement for the design studies of the four Integrated Systems for Water Security (sistemas integrales de agua segura, SIAS) was launched (estimated at US$ 0.6 million), with a delivery date expected by March 2025. The consultancy to update the Environmental and Social Risk and Impact Assessments, the Environmental and Social Management Plans, and develop the Watershed Management Plans of these SIAS (estimated at US$ 1 million) was launched in parallel. c) Component 3: The PIU is setup and operational with key positions filled, except for the social specialist. The contracting for this position is ongoing and expected to complete by June 2024. Terms of reference (ToRs) are underway for the TA that will undertake the initial beneficiaries survey, as part of the activities promoting citizen engagement. In line with the decision at MTR to downsize the package of activities initially planned for the JCV Dam (including dropping the installation of the spill gates, and the construction of the pipeline and a new treatment plant), the recruitment of a panel of experts on dam safety that was a requirement for such works is no longer needed and was put on hold. Instead, the approach will be reoriented around improving the dam safety (see “Description of changes”), for which ToRs for individual consultancies to deliver on the revised scope have been prepared and to be launched soon after the proposed restructuring becomes effective. 6. Implementation arrangements. Significant progress has been made on the covenants related to the hiring of additional PIU staff (i.e., a labor and occupational health specialist, a gender and social inclusion specialist, a legal specialist, and a resettlement specialist): ToRs for all these positions with Bank No Objection and bidding to fill these positions to launch in June 2024. As for covenants related to Inter-institutional 2|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) Agreements including SAG and other relevant stakeholder entities aim to ensure adequate delineation of roles and responsibilities: template Agreement between SAG, the Municipalities, and the pertinent Water and/or Irrigation Boards, received the Bank no-objection in December 2023. These Agreements will be signed once the newly appointed Water and/or Irrigation Board’s directorates are officially registered and before the design studies for the SIAS commence. 7. Fiduciary compliance and financial audit. The Borrower does not have any outstanding audit reports nor are there any audit reports deemed as unsatisfactory to the Bank. 8. Compliance with the Environmental and Social Standards (ESS). Issues with ESS2 have been resolved, allowing the performance rating to be upgraded to Moderately Satisfactory in April 2024. First, following an agreement with SAG, new contracts have been issued based on an acceptable duration and level of compensation and benefits, conducive to Project implementation progress as this minimizes the risk of losing key staff. Second, the Project Grievance Redress Mechanism (GRM) for stakeholders is in place as well as a temporary GRM for Project workers (e.g., covering PIU staff). A permanent GRM for Project workers is currently being developed under guidance from the Bank’s team. Aditionally, in line with the Project’s ESCP, the project’s environmental and social instruments (the Environmental and Social Management Framework, Labor Management Procedures, Indigenous Peoples Planning Framework, Resettlement Policy Framework, and Stakeholder Engagement Plan) have been updated to reflect the changes in implementation arrangements, and are in the process now of being further updated to reflect the proposed adjustments in Project activities. Finally, the PIU has prepared and delivered on the quaterly reporting per ESCP commitments. 9. The MTR, carried out on December 8-15, 2023, confirmed the relevance of the Project, and provided recommendations to revisit its design and scope to speed up implementation and achieve expected results. The MTR confirmed that the objectives of the Project remain relevant and that the new implementation arrangements in place will require SAG leadership to ensure they function well to provide a conducive environment for the Project. However, based on the limited achievements to date, the MTR concluded that the PDO cannot be achieved within the current timeframe and recommended extending the closing date while significantly adjusting Project scope, focusing on most strategic activities feasible during a reasonably extended implementation period. This would entail: (i) adjusting capacity building and water resources governance strengthening to better reflect client needs and demand, including support for the National Master Plan for Irrigation and Drainage, (ii) including the preparation of design studies for additional SIAS, (iii) dropping the installation of spill gates in the JCV dam and the construction of the water treatment plant planned to supply downstream municipalities, (iv) canceling part of the funds allocated to the activities mentioned in (iii) for an amount of US$7 million and reorienting the other part of the allocation to finance rehabilitation investments for existing Water Treatment Plants (WTPs) in the Nacaome basin. The Results Framework and Financial Agreement would need to be revised accordingly. B. Rationale for Restructuring 10. The Project with its focus on water security remains strategic for the country. Honduras is extremely vulnerable to increasingly frequent droughts and other extreme weather events, and to the effects of climate change. The Dry Corridor is known for its variable precipitation patterns and increasingly unstable weather regime that further attenuate existing food and water security challenges. The phenomenon El Niño has affected the country in recent months and the GoH already prepares for the expected effects of La Niña. Improving water resources management and governance, both through investment and adequate tools, 3|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) capacities and policies is therefore critical for the country. This country context remains relevant and calls for an adjustment of the Project design to target achievable, tangible results to contribute to water security. 11. The initial delays have made it impossible to achieve the original PDO and its transformational vision by the current closing date. While some capacity building activities can be completed by the current closing date, none of the works planned under Component 2 could be delivered before December 2025, especially the large packages for the JCV dam, for which designs have not initiated. The water storage systems and improvement to JCV dam would require respectively an additional 23 months and 3.5 years to be fully operational. The TA targeting the water storage operators’ capacity for operation and maintenance would have to be aligned with works’ implementation schedules and therefore not produce tangible results in terms of sustainability by the current closing date. 12. A combination of a 23-month extension with a streamlined Project scope would allow the Project to substantially achieve the original PDO by November 30, 2027. Based on the current project status and limited implementation capacity, fully achieving activities as planned, including the JCV dam, would require a long-term extension in a very uncertain, hence risky context considering the complexity of such works (land tenure, dam safety requirements, and institutional arrangements, etc.). Yet dropping the construction of the dam but keeping the comprehensive dam safety assessment and instrumentation package, and instead reorienting part of the proceeds to reinforce other activities or include new ones (i.e., governance support, design studies for additional SIAS, and rehabilitation works for existing WTPs) would contribute to support the PDO achievement without changing the PDO itself. The revised scope would translate into revised end target values for the indicators and thus likely to ensure a satisfactory path for the project. A strategic shift in activities would therefore allow to demonstrate results and align with the strong demand of the counterpart, including beneficiary municipalities. No expenses have been incurred or financed with the proceeds of the Credit for the activities that are proposed for deletion. 13. Consequently, the restructuring also simplifies the project design and frees up IDA funds that can be reallocated to other priorities by the Government. Alternatives to the proposed scenario have been assessed. Given the high relevance of the Project for the country, an outright cancellation of the IDA financing was not deemed acceptable. On the opposite, extending by 3.5 years to allow for the JCV dam package to be implemented entailed too many risks for the scenario to be viable. As a middle ground scenario, the decision not to go with this package of activities and partial reorientation of proceeds to finance the rehabilitation of existing WTPs was the concerted way forward, which will lead to canceling US$7 million of the IDA funds. This amount will be available for other priority projects. Similarly, US$12.5 million of counterpart funding will also be dropped, which will allow the GoH to reallocate these resources towards other strategic activities. 14. Finally, the performance of the IA is considered satisfactory enough to carry out the proposed changes and achieve the Project objectives. As mentioned above, implementation has picked up recently, required institutional agreements are underway and the PIU is functional. Various mitigation measures have been taken or are being proposed as part of this restructuring (see Risk section) to further reduce capacity gaps and strengthen the IA fulfill its mandate. 4|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) II. DESCRIPTION OF PROPOSED CHANGES 15. Extension of the Project closing date. The Project closing date will be extended by 23 months from December 30, 2025, to November 30, 2027, to accommodate the delays accumulated since Approval. This would be the first extension of the closing date. 16. Revisions to the activities. The table below summarizes the changes as requested by the counterpart based on the recommendations from the MTR: Component 1 1.1 Information systems Drop: studies on groundwater and water quality monitoring system to support planning of water rights allocation Reduce scope: to focus on the rehabilitation of existing radar and improvements to the hydromet network and associated data systems 1.2 Water governance (i) Municipal/local level: Reorient scope of TA to help water/irrigation boards and water system operators define institutional arrangements and mechanisms to ensure the sustainability of the Project investments, including any capacity strengthening activities that may be required to meet this objective. (ii) National/Basin level: Reduce and reorient scope of TA from development of roadmap for the establishment of the national water agency to support the preparation of water resources management guidelines informing inter alia: sector policies and regulations + new activity: support for the preparation of the national Irrigation Master Plan, which falls under the exception to the notification under paragraph 7(b) of the Operational Policy (OP) 7.50 on Transboundary Waters. Component 2 2.1 SIAS Increased allocation to enable a scale-up in the number of additional SIAS to be designed and implemented. These works refer to small-scale structures that use a water harvesting and retention approach. These schemes are covered under the notification according to OP 7.50 carried out during Project preparation. 2.2 JCV Dam and WTP Drop: JCV dam complex works (spill gates, new WTP and pipeline) Revise dam safety activities to include: a comprehensive dam safety assessment; repair and upgrade of the existing monitoring system; extraordinary maintenance of the hydromechanical equipment of the bottom outlet; other minor repairs, if deemed necessary; preparation and implementation of the Operation and Maintenance (O&M) plan and the Emergency Preparedness Plan; training and capacity building around dam operation and maintenance. Instead of a dam safety Panel of Experts, initially planned as the requirement for the original complex and significant modernization works of the dam, a dam specialist would be recruited to strengthen the PIU and as appropriate to oversee a firm dedicated to providing the revised package of dam safety interventions. Add: rehabilitation of the four existing WTPs of the municipalities downstream of the dam, in the Nacaome basin, which falls under the exception to the notification under paragraph 7(a) of the OP 7.50 on Transboundary Waters. 5|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) 17. The table below summarizes how changes in activities translate into amendments of the FA: Schedule 1 Part 1) (a) (iii), Delete as these activities will not be financed anymore (iv) Part 1) (b) 2. Adjust to reflect the reduced scope of the activity, focused on water boards and service providers and support for the definition of institutional arrangements and sustainability mechanism for the rehabilitated plants. Part 1) (b) 3. Delete existing paragraph and replace by a new one reflecting: dropping all activities to support ADA (change of priority of GoH) and including the preparation of the National Irrigation and Drainage Master Plan, and the preparation of water resources guidelines to inform sector policies and regulations. Part 2) (b) Delete introductory sentences “maximizing …” relating to JCV dam and (i) and (ii), which activities are dropped. Replace with new headline about dam safety. Include new Part 2) (c) for the rehabilitation of existing plants to replace the works of the proposed new plant. New Part 2) (c) Include new Part 2) (c) for the rehabilitation of existing WTPs to replace the works of the proposed new plant. Schedule 2 Section I. A.6. Add Water provider to reflect the expanded scope of SIAS activities. Section I. A.8. Delete the covenant to reflect the dropping of the construction of the dam (Part 2 (b)(i) and (ii)). Replace by new covenant related to the design of a sustainability mechanism for the rehabilitation of WTPs (new works under proposed Part 2)(c)(i). Section III.A. Modify the table of disbursement categories as shown in paragraph 19. Section III.B.1.(c) Modify the disbursement category initially intended for the works for the dam, reoriented towards works for the WTPs. Section IV. Modify the amount of counterpart funding. Schedule 3 Appendix Remove some definitions that are no longer relevant, include new definitions (Service Provider) and update some acronyms. 18. Partial cancellation and change in component costs. A specific disbursement category was created in the FA (Schedule 2, Section III.A) for the JCV dam works, in an amount of US$33 million (Schedule 1, Part 2 (b)(i) and (ii) of the FA). To reflect that installation of spill gates in the dam and construction of a new centralized water plant will not be executed, this allocation must be reduced and an amount of US$7 million will be canceled from disbursement Category (3), which corresponds to such works originally under Component 2.2. However, this category is also revised, subject to the change of activities as explained above, for the financing of the rehabilitation works of the existing WTPs (new Part 2 (c)(i)) for an amount of US$26 million. Reducing the scope of activities under Component 1, Component 2.2., and Component 3, will also result in decreasing the original allocated amount in Category (1) by US$ 9 million and its reallocation to Category (2) that is linked to all eligible expenditures associated to Component 2.1, to reflect the expanded scope of SIAS activities. 6|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) Category Amount of the Credit Allocated (US$) Current Revised (1) Goods, works, non-consulting services, consulting 22,000,000 13,000,000 services, Training and Operating Costs for the Project (except for Part 2 (a), and works for Part 2 (c)(i) of the Project) (2) Goods, works, non-consulting services, consulting 15,000,000 24,000,000 services, Training and Operating Costs for Part 2 (a) of the Project (3) Works for Part 2 (c)(i) of the Project 33,000,000 26,000,000 (4) Emergency Expenditures under Part 4 of the Project 0 0 Cancellation as of 23 April, 2024 7,000,000 TOTAL AMOUNT 70,000,000 70,000,000 19. Change of component costs. Following the proposed changes in Project’s scope and activities, corresponding changes in Project’s components costs is as follows: US$ million Original allocation Revised allocation IDA Counterpart IDA Counterpart Component 1 6.00 4.60 1.1 Information systems 3.00 1.00 1.2 Water governance 3.00 3.60 Component 2 55.00 50.40 2.1 SIAS 15.00 24.00 2.2 Dam and WTP 40.00 15.00 26.40 2.00 Component 3 9.00 8.00 0.50 Total Project 70.00 15.00 63.00 2.50 85.00 65.50 20. Revisions to the Restults Framework (RF). The RF will be updated to reflect revised and new targets based on the proposed changes in activities and revised closing date. The table below only shows indicators that are dropped, new ones or those significantly revised – including the outcome indicator reflecting the new scorecard indicator on access to water. Other changes, such as in intermediary and end targets, are reflected directly in the full RF Matrix in Annex. PDO indicators: Rationale for change PDO indicators: Beneficiaries with access to improved water Target revised from 166,450 to 105,000 people due to the downscaling of the supply, disaggregated by gender activities. Revised as: People provided with water, disaggregated by gender. The change of wording aims to reflect the retrofitting exercise of the new corporate scorecard for access to improved water supply. Local organizations with enhanced capacity for using Water Resources Management Target revised from 12 to 8, reflecting the downsizing of several activities. principles for better monitoring/ decision making Intermediate indicators: Rationale for change 7|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) Water Resources Information System in Deleted: the activity will not be financed. Nacaome basin operational (Yes/No) New: “Number of hydro-climatic stations rehabilitated or new and rehabilitated radar reporting to data system”; target: 10. The GoH has prioritized this activity that is particularly relevant to support monitoring efforts to address recurring droughts. Area with watershed protection plans Revised as: “Number of action plans or watershed management plans (Hectare (Ha)) approved”; target: 4. This wording better reflects the types of instruments covered by the activities and makes the measure in superficies irrelevant. Roadmap for implementing the National Revised as: “Number of studies, instruments prepared to improve water Water Authority approved (Yes/No) governance”; target 2. GoH does not support the establishment of the National Waster Authority anymore. This measures other instruments that are relevant at national level. Number of local organizations strengthened Deleted: this is already captured by the related PDO indicator. Number of Rural Water Supply/ Irrigation Deleted: this is already captured by the related PDO indicator. Boards, Municipal Water and Sanitation Providers Number of Municipalities Deleted: this is already captured by the related PDO indicator. New: “Number of forest nurseries built and/or improved”; target: 4. This activity is part of the TA to the municipalities for the reforestation of the upstream part of the watersheds. Nacaome Water Basin Board strengthened Deleted: the activity will not be financed. (Yes/No) Water balance ready for Nacaome (Yes/No) Deleted: the activity will not be financed. Increased water storage due to the SIAS Target revised from 668,000 to 600,000 due to the downscaling of the activity. (Cubic Meter(m3)) Increased water storage in JCV dam (Cubic Deleted: the activity will not be financed. Meter(m3)) Increased load factor Deleted: the activity will not be financed. Improved water production capacity Revised as: “Improved water production capacity for beneficiaries of the WTP. (l/s)”, target revised from 310 to 250 l/s due to the downscaling of activities. New: “Personnel working in water treatment plants trained in operation and maintenance (Number)”; baseline: 0, target: 8. 21. Revision of disbursement and implementation schedules. The disbursement estimates and implementation schedule will be adjusted to reflect the changes proposed. 22. Operational Policy (OP) 7.50 on Transboundary Waters. The original Project was notified, and the process concluded on April 10, 2020. An exception to the notification requirement according to paragraphs 7 (a) and (b) was approved by the RVP on June 5th, 2024 for both (i) the rehabilitation of water treatment plants located in the Nacaome basin, which flows into the Gulf of Fonseca shared by Honduras, El Salvador and Nicaragua, and (ii) the preparation of the National Irrigation Master Plan, the terms of reference for which will include the requirement to assess any potential riparian issues. 23. Update of the environmental and social (E&S) instruments. Per the FA, the ESCP has been updated to reflect the changes in activities, the lowering of risk rating from high to substantial and the new Project end date. The E&S instruments are in the process of being updated to reflect the adjusted project scope, and will be completed as specified in the updated ESCP. 8|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) 24. Update the economic and financial analysis. The original economic analysis conducted at Appraisal was updated to account for changes to the Project design, including the updated budget. Based on this analysis, the Net Present Value (NPV) is estimated at US$13.1 million with a 19 percent Economic Rate of Return (ERR). Economic analysis estimates for the restructured Project are based on the following parameters, building on the analysis from the original Project:  Irrigation: Beneficiaries with access to water for irrigation will improve their productivity and increase their production.  Water supply: Project investments will support improved access to reliable potable water. The analysis includes estimates of the consumer surplus associated with this improved access to potable water based on “Willingness to pay” analysis.  Investment costs: Project disbursements have been estimated as part of the analysis.  O&M: Operations and maintenance costs are estimated at 5 percent of project investments. 25. Reassessment of the Project risks. It is proposed to revise the overall Project risk, currently rated as High, to Substantial. As a result of the extended period and revised implementation strategy including dropping of the construction of the dam, a significant simplification of the Project, in a sector context and under implementation arrangements that have changed significantly since appraisal, the overall risk is deemed to be lower at this stage. The table below provides a summary of the proposed changes in rating. Rating At approval Current Proposed Political and Governance Substantial Substantial Substantial Macroeconomic Substantial Substantial Substantial Sector Strategies and Policies Substantial Substantial Substantial Technical Design of Project or Program Moderate Substantial Moderate Institutional Capacity for Implementation and Substantial High Substantial Sustainability Fiduciary Substantial Substantial Substantial Environment and Social High High Substantial Stakeholders Substantial Substantial Substantial Other Substantial Substantial Substantial Overall Project risk High High Substantial 26. Technical Design of Project or Program: The risk is revised from Substantial to Moderate. While the scope of civil works envisioned under Component 2, especially for the JCV dam, justified a Substantial risk, with the dropping of the dam works (including the pipeline and the central WTP), the remaining works (SIAS) and newly included WTPs to rehabilitate remain relatively small-scale and do not entail a high level of technicality or technology. A dedicated firm specialized in dam safety will be hired under the Project and will ensure strict quality control on the activities linked to the JCV dam and TA to the municipalities will similarly mitigate technical risks. 27. Institutional Capacity for Implementation and Sustainability. The risk is revised from High to Substantial. The multisectoral nature of project activities will require strong leadership and technical capacity for planning and implementation. The change of IA from INVEST-H to SAG elevated the risk of delivering on this key aspect, as SAG did not have strong experience in managing WB-financed projects at that time. Clear progress has 9|Page The World Bank Water Security in the Dry Corridor of Honduras (P169901) been made in recent months to develop the inter-institutional coordination needed by the Project, through the preparation of the Inter-institutional Agreements between SAG and the main actors and beneficiaries, with clear delineation of roles and responsibilities. The Agreement planned with the Ministry of Environment (SERNA), is to ensure sustainability of the activities under SERNA responsibilities. A solid sustainability mechanism becomes increasingly relevant with the inclusion of activities to rehabilitate existing WTPs. However, the exact design and level of financial sustainability, that is likely to engage public finance, is beyond the strict control of the project, which represents a risk for this part of the Project’s investments. Risk mitigation measures include technical assistance to define the mechanism, close and continuous dialogue with GoH, inclusion of a covenant requiring defining the mechanism, and the existing commitment for counterpart financing for water plants (US$ 2 million out of the total of 2.5 million). Additionally, the Project will promote the establishment of citizen engagement mechanisms; provide technical assistance in areas where there is limited experience in Honduras; and ensure the sustainability of interventions through the provision of O&M training for beneficiary municipalities and water providers, among other measures. 28. Environment and Social: The environmental and social risks have been lowered from High to Substantial, as the JCV Dam improvement works have been removed from the project, which eliminates direct risks and impacts associated with the raising of the reservoir level, as well as the potential for significant downstream impacts to fish populations and associated livelihoods, changes to downstream land uses due to additional water available for irrigation, and related increased pressures on sensitive mangrove forests in the Chismuyo Bay. The main environmental risks and adverse impacts expected under the restructured Project include: (a) localized diverse construction stage impacts associated with SIAS developments and WTP improvements; (b) direct flooding of small areas for SIAS reservoirs; and (c) potential safety risks assocaited with the SIAS water harvesting structures. The main social risks and adverse impacts expected under the restructured Project include: (i) the potential to exacerbate existing social tensions and conflicts around access to and use of water resources; (ii) potential adverse impacts on Indigenous Peoples or other vulnerable groups, and their potential exclusion from project benefits and activities; and, (iii) impacts resulting from the permanent and temporary acquisition of land and restrictions on land use as a result of civil works. Existing Project instruments already contain appropriate measures to manage the majority of these risks, and will be updated to include potential risks and impacts associated with newly incorporated activities (e.g., the WTP improvements). III. DESCRIPTION OF PROPOSED CHANGES IV. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ 10 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) Disbursement Estimates ✔ Overall Risk Rating ✔ Legal Covenants ✔ Implementation Schedule ✔ Economic and Financial Analysis ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Disbursements Arrangements ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component 1: Strengthening Component 1: Strengthening institutional capacity for water institutional capacity for water 6.00 Revised 4.60 resources governance and resources governance and management management Component 2: Scaling up Component 2: Scaling up resilient hydraulic infrastructure resilient hydraulic 70.00 Revised 52.40 for water security in the Dry infrastructure for water Corridor security in the Dry Corridor 11 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) Component 3: Project Component 3: Project management and capacity 9.00 Revised management and capacity 8.50 building building Component 4: Contingency Component 4: Contingency 0.00 No Change Emergency Response 0.00 Emergency Response Component Component TOTAL 85.00 65.50 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IDA-66800 Effective 30-Dec-2025 30-Nov-2027 30-Mar-2028 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST IDA-66800- Disburs USD 70,000,000.00 7,000,000.00 23-Apr-2024 63,000,000.00 FOR 001 ing COUNTRY REASONS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IDA-66800-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: GO,CW,NCS,CS,TR,OP 22,000,000.00 903,480.06 13,000,000.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: GO,CW,NCS,CS,TR,OP Part 2(a) 12 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) 15,000,000.00 0.00 24,000,000.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: CW for Part 2(c)(i) 33,000,000.00 0.00 26,000,000.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: Emergency Expenditures under Part 4 0.00 0.00 0.00 100.00 100.00 Total 70,000,000.00 903,480.06 63,000,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2020 0.00 0.00 2021 0.00 0.00 2022 1,482,989.59 1,482,989.59 2023 1,000,000.00 832,639.48 2024 22,500,000.00 0.00 2025 30,600,000.00 8,500,000.00 2026 14,420,000.00 13,500,000.00 2027 0.00 25,500,000.00 2028 0.00 13,180,000.00 OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  Substantial  Substantial Macroeconomic  Substantial  Substantial Sector Strategies and Policies  Substantial  Substantial 13 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) Technical Design of Project or Program  Moderate  Moderate Institutional Capacity for Implementation and  Substantial  Substantial Sustainability Fiduciary  Substantial  Substantial Environment and Social  High  High Stakeholders  Substantial  Substantial Other  Substantial  Substantial Overall  High  Substantial OPS_DETAILEDCHANGES_LEGCOV_TABLE LEGAL COVENANTS Loan/Credit/TF Description Status Action Schedule 2. Section I. A. 1C. Implementation Arrangement. For purposes of implementation of Parts 1, 2 and 3 of the Project, the Recipient shall without limitation of the provisions of (b) above, no later than Partially complied IDA-66800 No Change sixty (60) days after signing the Amendment, hire the with following additional staff for the PMU: (i) one procurement specialist and a procurement officer, (ii) a labor and occupational health Schedule 2. Section I. A. 2. Implementation Arrangement. To facilitate implementation of Part 1 (a) of the Project, the Recipient, through SAG, shall no later than sixty (60) days after signing this Amendment, enter Marked for IDA-66800 Expected soon into a tripartite agreement (the Inter-institutional Deletion Agreement) with SERNA and COPECO; all under terms and conditions acceptable to the Association, including the provisions Schedule 2. Section I. A. 3. Implementation Arrangement. Without limitations to the provisions of paragraph 2 above, the Recipient, through SAG, shall IDA-66800 Not yet due No Change ensure that no works shall be carried out under Part 1 (a) of the Project unless the agreement referred to in said paragraph has been signed. 14 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) Schedule 2. Section I. A. 4. Implementation Arrangement. To facilitate implementation of Part 1. (b) 1. of the Project, the Recipient, through SAG, shall no later than sixty (60) days after signing this Amendment, IDA-66800 Expected soon No Change enter into an agreement (the Inter-institutional Agreement) with ICF; under terms and conditions acceptable to the Association, including the provisions set forth in Section I.C. o Schedule 2. Section I. A. 5. Implementation Arrangement. To facilitate implementation of Parts 1. (b) 2., 1. (b) 3., and 2. (b) of the Project, the Recipient, through SAG, shall no later than sixty (60) days after Marked for IDA-66800 Expected soon signing this Amendment, enter into an agreement (the Deletion Inter-institutional Agreement) with SERNA, under terms and conditions acceptable to the Association, including the provisi Schedule 2. Section I. A. 6. Implementation Arrangement. To facilitate implementation of Part 2. (a) of the Project with respect to each selected SIAS, the Recipient, through SAG, shall no later than sixty (60) IDA-66800 Expected soon Revised days after signing this Amendment enter into an agreement (the Inter-institutional Agreement) with the corresponding Selected Municipality (which has territorial jurisdiction over said Schedule 2. Section I. A. 6. Implementation Arrangement. To facilitate the implementation of Part 2 (a) of the Project with respect to each selected SIAS, the Recipient, through SAG, shall no later than sixty (60) days after the Effective Date of this Amendment Letter, enter into an agreement (the Inter-institutional Proposed Agreement) with the corresponding Selected Not yet due Municipality (which has territorial jurisdiction over said selected SIAS) and the pertinent Water Board and/or Irrigation Board and/or Water Provider (as the case may be); all under terms and conditions acceptable to the Association including the provisions set forth in Section I.C. of this Schedule 2. IDA-66800 Schedule 2. Section I. A. 7. Implementation Not yet due No Change Arrangement. Without limitations to the provisions of paragraph 6 above, the Recipient, through SAG, shall 15 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) ensure that no works shall be carried out under Part 2 (a) of the Project unless the agreement referred to in said paragraph has been signed. Schedule 2. Section I. A. 8. Implementation Arrangement. Without limitations to the provisions of paragraph 5 above, the Recipient shall ensure that: (i) no works shall be carried out under Part 2 (b) of the Project unless the comprehensive dam safety assessment of the JCV Dam referred to in Part 2 (b) (iv) (1) of the Project has been completed in a manner acceptable to the Association, and the Marked for IDA-66800 Not yet due recommendations set forth therein have been Deletion implemented in accordance with the pertinent provisions set forth in Section I.C of this Schedule and in a manner acceptable to the Association, and the agreement referred to in paragraph 5 above has been signed; and (ii) no goods shall be procured, unless the agreement referred to in paragraph 5 above has been . signed. 16 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) . Results framework COUNTRY: Honduras Water Security in the Dry Corridor of Honduras Project Development Objectives(s) To improve water service delivery and strengthen water governance in selected areas of the Dry Corridor of Honduras. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 To improve water service delivery People provided with water, disaggregated by 0.00 0.00 0.00 0.00 4,000.00 105,000.00 105,000.00 105,000.00 gender (Number) Rationale: Due to the extension, activities are planned to be completed in the years 6 and 7 of the project. The change of wording aims to reflect the retrofitting exercise of Action: This indicator has the new corporate scorecard for access to improved water supply. The target has been diminished due to downscaling of activities, especially regarding the JCV been Revised dam works, that are eliminated. Beneficiaries with access to new/improved irrigation, disaggregated 0.00 0.00 0.00 0.00 480.00 650.00 650.00 650.00 by gender (number) (Number) Action: This indicator has Rationale: been Revised Due to the extension, activities are planned to be completed in the years 6 and 7 of the project. 17 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 To strengthen water governance Local organizations with enhanced capacity for using WRM principles for 0.00 0.00 0.00 2.00 4.00 8.00 8.00 8.00 better monitoring/decisionmaki ng (number) (Number) Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the years 5, 6 and 7 of the project. The target is revised from 12 to 8, reflecting the downsizing of been Revised several activities. PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Component 1: Strengthening institutional capacity for water resources governance and management Water Resources Information System in No No No No No Yes Yes Nacaome basin operational (Yes/No) Action: This indicator has been Marked for Deletion 18 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Number of action plans or watershed 0.00 0.00 0.00 0.00 0.00 4.00 4.00 4.00 management plans approved (Number) Rationale: Action: This indicator has This wording better reflects the types of instruments covered by the activities and makes the measure in superficies irrelevant, therefore the indicator now is been Revised accounted as number. Number of studies, instruments prepared to 0.00 0.00 0.00 0.00 0.00 2.00 2.00 2.00 improve water governance (Number) Rationale: Action: This indicator has The Government of Honduras does not support the establishment of the National Water Authority anymore in the activities of this project. This measures other been Revised instruments that are relevant at national level. Number of local organizations 0.00 0.00 0.00 0.00 6.00 7.00 13.00 strengthened (Number) Action: This indicator has been Marked for Deletion Number of Rural Water Supply/ 0.00 0.00 0.00 0.00 2.00 3.00 5.00 Irrigation Boards, Municipal Water and 19 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Sanitation Providers (Number) Action: This indicator has been Marked for Deletion Number of Municipalities 0.00 0.00 0.00 0.00 4.00 4.00 8.00 (Number) Action: This indicator has been Marked for Deletion Nacaome Water Basin Board strengthened No No No No Yes Yes Yes (Yes/No) Action: This indicator has been Marked for Deletion Water balance ready for No No No No No Yes Yes Nacaome (Yes/No) Action: This indicator has been Marked for Deletion Number of hydro-climatic stations rehabilitated or new and rehabilitated 0.00 0.00 0.00 5.00 10.00 radar reporting data system (Number) 20 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Rationale: Action: This indicator is Government of Honduras has prioritized this activity that is particularly relevant to support monitoring efforts to address recurring droughts. New Number of forest nurseries built and/or 0.00 0.00 0.00 0.00 4.00 improved (Number) Rationale: Action: This indicator is This activity is part of the TA to the municipalities for the reforestation of the upstream part of the watersheds. New Component 2: Scaling up resilient hydraulic infrastructure for water security in the Dry Corridor Increased water storage due to the SIAS (Cubic 0.00 0.00 0.00 0.00 0.00 0.00 283,000.00 600,000.00 Meter(m3)) Rationale: Action: This indicator has Revised from 668,000 to 600,000 due to the downscaling of the activity been Revised Increased water storage in JCV dam (Cubic 29,000,000.00 0.00 0.00 0.00 0.00 43,000,000.00 43,000,000.00 Meter(m3)) Action: This indicator has been Marked for Deletion The average load Increased load factor factor is 16% per TBD TBD TBD TBD TBD TBD (Text) year; 73% in winter (Jun-Nov) 21 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 and 7% in summer (Dec-May). Action: This indicator has been Marked for Deletion Improved water production capacity for 117 l/s 117 l/s 117 l/s 117 l/s 117 l/s 117 l/s 250 l/s 250 l/s beneficiaries of the water treatment plants (Text) Rationale: Due to the extension, activities are planned to be completed in the years 6 and 7 of the project. The change in the redaction is to reflect that the beneficiaries will Action: This indicator has be those who will get drinking water from the rehabilitation of the water treatment plants. The target revised from 310 to 250 l/s due to the downscaling of been Revised activities. JCV dam with dam safety assessments completed and monitoring No No No No No No No Yes instruments installed (Yes/No) Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the year 7 of the project. been Revised Number of people with access to improved 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4,000.00 sanitation services (Number) 22 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the year 7 of the project. The target revised from 7,000 to 4,000 due to the downscaling of been Revised activities. Personnel working in water treatment plants 0.00 0.00 0.00 0.00 8.00 trained in operation and maintenance (Number) Rationale: Action: This indicator is This new indicator is proposed to foster the sustainable operation and maintenance of the rehabilitated water treatment plants under activities of this New Component. Component 3: Project management and capacity building Number of staff trained 0.00 0.00 0.00 0.00 0.00 6.00 12.00 18.00 in the PMU (Number) Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the years 5, 6 and 7 of the project. been Revised Citizen engagement % Beneficiaries satisfied with the participatory process to prepare and implement the Project 0.00 0.00 0.00 0.00 0.00 80.00 80.00 80.00 (disaggregated by vulnerable groups) (Percentage) 23 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the years 5, 6 and 7[FAL1] of the project. been Revised % Beneficiaries that feels the Project reflected 0.00 0.00 0.00 0.00 0.00 80.00 80.00 80.00 their needs (Percentage) Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the years 5, 6 and 7 of the project. been Revised Grievances and claims registered and addressed No No No No No Yes Yes Yes (GRM) (Yes/No) Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the years 5, 6 and 7 of the project. been Revised Gender % females members in community-based decisionmaking and 20.00 20.00 20.00 25.00 30.00 35.00 35.00 35.00 management structures (Percentage) Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the years 5, 6 and 7 of the project. been Revised 24 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 of which % in leadership roles 0.00 0.00 0.00 0.00 0.00 10.00 10.00 (Percentage) Rationale: Action: This indicator Due to the extension, activities are planned to be completed in the years 5, 6 and 7 of the project. has been Revised % female participants in irrigation related activities who have 0.00 0.00 0.00 0.00 0.00 65.00 65.00 65.00 improved sources of income (Percentage) Rationale: Action: This indicator has Due to the extension, activities are planned to be completed in the year 7 of the project. Besides the name of the indicator was changed without reflecting the been Revised difference with the male beneficiaries. IO Table SPACE 25 | P a g e The World Bank Water Security in the Dry Corridor of Honduras (P169901)