World Bank Documentdocuments.worldbank.org/curated/en/589341468147000208/... · 2016-07-10 · Document of The World Bank FOR OFFICIAL USE ONLY Report No: 59188-PE PROJECT APPRAISAL

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 59188-PE

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$54.5 MILLION

TO THE

REPUBLIC OF PERU

FOR THE

OPTIMIZATION OF LIMA WATER AND SEWERAGE SYSTEMS PROJECT

March 9, 2011

Sustainable Development Department

Bolivia, Chile, Ecuador, Peru and Venezuela Country Management Unit

Latin America and the Caribbean 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.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2010)

Currency Unit = Nuevos Soles US$1.00 = S./2.81 US$0.36 = S./1.00

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ANA

National Water Agency (Agencia Nacional

del Agua)

BOT Build Operate Transfer

BP Bank Procedures

CAF Andean Development Corporation

(Corporacion Andina de Fomento)

CO Country Office

CPS Country Partnership Strategy

CQS Consultant Qualifications Selection

DA Designated Account

DC Direct Contracting

EA Environmental Assessment

EGAm Environmental Management Team (Equipo

de Gestión Ambiental)

EMP Environmental Management Plan

EPS Sanitation Services Provider (Empresa

Prestadora de Servicios de Saneamiento)

FBS Fixed Budget Selection

FM Financial Management

FONAFE State Companies‟ National Fund (Fondo

Nacional Empresarial del Estado)

FY Fiscal Year

GDI Research and Development Management

(Gerencia de Desarrollo Institucional)

GDP Gross Domestic Product

GIS Geographical Information System

GoP Government of Peru

HQ Headquarters

HR Human Resources

IADB Inter-American Development Bank

IBRD International Bank for Reconstruction and

Development

ICB International Competitive Bidding

IDA International Development Association

IFR Interim Unaudited Financial Reports

INC National Institute of Culture (Instituto

Nacional de Cultura)

IPSAS International Public Sector Accounting

Standards

IRR Internal Rate of Return

JICA Japanese International Cooperation Agency

KfW German Cooperation (Kreditanstalt fur

Wiederaufbau)

LCS Least Cost Selection

MDG Millennium Development Goals

MEF Ministry of Finance (Ministerio de

Economía y Finanzas)

MINAM Ministry of Environment (Ministerio del

Ambiente)

MVCS Ministry of Housing, Construction and

Sanitation (Ministerio de Vivienda,

Construcción y Saneamiento)

NCB National Competitive Bidding

NGO Non Government Organization

NPS National Procurement System

NPV Net Present Value

NRW Non Revenue Water

O&M Operation and Maintenance

OM Operations Manual

OP Operational Policy

PAD Project Appraisal Document

PAPT Water for All Program (Programa Agua

para Todos)

PDO Project Development Objective

POA Annual Operational Program (Plan

Operativo Annual)

PP Procurement Plan

PPIAF Public Private Infrastructure Facility

PROMESAL Lima Marginal Areas Sanitation

Improvement Project (Proyecto

Mejoramiento Sanitario de las Áreas

Marginales de Lima)

PRONASAR National Rural Water Supply and Sanitation

Project (Proyecto Nacional de Saneamiento

Rural)

PVC Polyvinyl Chloride

QBS Quality Based Selection

QCBS Quality Cost Based Selection

SBD Standard Bidding Document

SCADA Supervisory Control and Data Acquisition

SEDAPAL Lima‟s Water and Sewerage Service

(Servicio de Agua Potable y Alcantarillado

de Lima)

SEIA System for Environmental Impact

Assessment

SEPA Procurement Plans Execution System

(Sistema de Ejecución de Planes de

Adquisiciones )

SIL Specific Investment Loan

SNTA Sub National Technical Assistance

SOE Statement of Expenses

SSS Sole Source Selection

SUNASS National Superintendence of Sanitation

Services (Superintendencia Nacional de

Servicios de Saneamiento)

TORs Terms of Reference

UFW Unaccounted for Water

UNSGAB United Nations Secretary General Advisory

Board on Water and Sanitation

WSP Water and Sanitation Program

WSS Water Supply and Sanitation

WWTP Wastewater Treatment Plant

Regional Vice President: Pamela Cox

Country Director: Laura Frigenti

Sector Director:

Sector Manager:

Laura Tuck

Guang Zhe Chen

Sector Leader:

Task Team Leader:

Ousmane Dione

Miguel Vargas-Ramirez

Table of Contents I. Strategic Context ...............................................................................................................1

A. Country Context ..........................................................................................................1

B. Sectoral and Institutional Context ................................................................................1

C. Higher Level Objectives to which the Project Contributes ............................................5

II. Project Development Objectives ........................................................................................6

A. PDO ...........................................................................................................................6

1. Project Beneficiaries................................................................................................6

2. PDO Level Results Indicators ..................................................................................6

III. Project Description .........................................................................................................6

A. Project components .....................................................................................................6

B. Project Financing ........................................................................................................8

1. Lending Instrument ..................................................................................................8

2. Project Cost and Financing .....................................................................................8

C. Lessons Learned and Reflected in the Project Design ...................................................8

IV. Implementation...............................................................................................................9

A. Institutional and Implementation Arrangements ...........................................................9

B. Results Monitoring and Evaluation ..............................................................................9

C. Sustainability ............................................................................................................ 10

V. Key Risks and Mitigation Measures ................................................................................. 10

VI. Appraisal Summary ...................................................................................................... 10

A. Economic and Financial Analysis .............................................................................. 10

B. Technical .................................................................................................................. 12

C. Financial Management .............................................................................................. 13

D. Procurement .............................................................................................................. 13

E. Social (including safeguards) ..................................................................................... 13

F. Environment (including safeguards) .............................................................................. 15

Annex 1: Results Framework and Monitoring .......................................................................... 17

Annex 2: Detailed Project Description .................................................................................... 19

Annex 3: Implementation Arrangements ................................................................................. 28

Annex 4 Operational Risk Assessment Framework (ORAF) ..................................................... 49

Annex 5: Implementation Support Plan ................................................................................... 52

Annex 6: Team Composition ................................................................................................... 55

Annex 7: Economic and Financial Analysis ............................................................................. 56

i

PAD DATA SHEET

Peru

Optimization of Water and Sewerage Systems Project

PROJECT APPRAISAL DOCUMENT

LATIN AMERICA AND CARIBBEAN

Urban, Water and Disaster Risk Management Unit (LCSUW)

Date: March 9, 2011

Country Director: Laura Frigenti

Sector Director: Laura Tuck

Sector Manager: Guang Zhe Chen

Sector Leader: Ousmane Dione

Team Leader: Miguel Vargas-Ramirez

Project ID: P117293

Lending Instrument: Specific

Investment Loan (SIL)

Sectors: Water supply (50%); Sewerage (50%)

Themes: Access to urban services and housing

(90%); Other public sector governance (10%)

EA Category: B – Partial Assessment

Project Financing Data:

Proposed terms: Variable spread loan with a final maturity of 18 years, including a grace

period of 17 years.

[X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

Source Total Amount (US$M)

Total Project Cost:

Cofinancing:

Borrower /SEDAPAL:

Total Bank Financing:

IBRD

IDA

New

Recommitted

64.9

10.4

54.5

Borrower: Republic of Peru

Responsible Agency: SEDAPAL

Contact Person: Jorge Barco

Telephone No.: +511 317 3000

Fax No.: +511 362 5148

Email: [email protected]

mailto:[email protected]

ii

Estimated Disbursements (Bank FY/US$ m)

FY 2012 2013 2014 2015 2016 2017

Annual 2.00 8.00 10.00 13.50 16.00 5.00

Cumulative 2.00 10.00 20.00 33.50 49.50 54.50

Project Implementation Period: July 4, 2011 – March 31, 2016

Expected effectiveness date: June 6, 2011

Expected closing date: October 31, 2016

Does the project depart from the CAS in content or other

significant respects?

○ Yes ● No

If yes, please explain:

Does the project require any exceptions from Bank policies?

Have these been approved/endorsed (as appropriate by Bank

management?

Is approval for any policy exception sought from the Board?

○ Yes ● No

○ Yes ○ No

○ Yes ● No

If yes, please explain:

Does the project meet the Regional criteria for readiness for

implementation?

● Yes ○ No

If no, please explain:

Project Development Objective

The Project Development Objective (PDO) is to improve efficiency, continuity and reliability

of water supply and sanitation services in the Northern Service Area of Lima.

iii

Project description

Component 1. Rehabilitation of water and sewerage networks in the First Northern Service

Area of-Lima. This component will finance the rehabilitation of the water and sewerage

networks in First Northern Service area of Lima, directly benefiting more than 158,380 low

income people. The exact proportion of replacement and renovation will be determined during

implementation based on a detailed hydraulic modeling of each subsector and an agreed

methodology.

Component 2. Improving SEDAPAL’s Efficiency. This component will finance studies and

consultant services to provide decision-making tools to SEDAPAL‟s management to improve

the company‟s efficiency. The activities will be focused on the following four areas: (a) support

for the implementation of the Geographic Information System (GIS); (b) SCADA information

technology standardization strategy and consolidation; (c) options for the development of a new

organizational model, and (d) preparation of a strategy to efficiently meet user demand for

water and sanitation services.

Component 3. SEDAPAL Project Management. This component will finance the additional staff

required for project management to establish a Monitoring and Evaluation System and

undertake the required financial audits as well as physical and procurement reviews.

Safeguard policies triggered?

Environmental Assessment (OP/BP 4.01)

Natural Habitats (OP/BP 4.04)

Forests (OP/BP 4.36)

Pest Management (OP 4.09)

Physical Cultural Resources (OP/BP 4.11)

Indigenous Peoples (OP/BP 4.10)

Involuntary Resettlement (OP/BP 4.12)

Safety of Dams (OP/BP 4.37)

Projects on International Waterways (OP/BP 7.50)

Projects in Disputed Areas (OP/BP 7.60)

● Yes ○ No

○ Yes ● No

○ Yes ● No

○ Yes ● No

● Yes ○ No

○ Yes ● No

● Yes ○ No

○ Yes ● No

○ Yes ● No

○ Yes ● No

Conditions and Legal Covenants:

Loan Agreement Reference Description of Condition/Covenant Date Due

Loan Agreement

Article V, 5.01 (a)

The Subsidiary Agreement has been executed on

behalf of the Borrower and the Project Implementing

Entity.

Before effectiveness

Loan Agreement

Article V, 5.01 (b)

The Operational Manual, in form and substance

satisfactory to the Bank, has been adopted by the

Project Implementing Entity through a managerial

resolution.

Before effectiveness

Loan Agreement

Schedule 2, Section I.A.1

The Borrower shall make the proceeds of the Loan

available to the Project Implementing Entity under a

Subsidiary Agreement

By effectiveness and

throughout Project

implementation

Loan Agreement

Schedule 2, Section I.C

The Borrower shall take any actions necessary to

assist the Project Implementing Entity in complying

with its obligations related to safeguard compliance

Throughout Project

implementation

iv

Project Agreement

Schedule, Section I.A

The Project Implementing Entity shall carry out the

Project through PROMESAL in coordination with

SEDAPAL‟s environmental and social units, and ,

for purposes of Part 2 of the Project, through

PROMESAL in coordination with GDI

Throughout Project

Implementation

Project Agreement

Schedule, Section I.A.2

The Project Implementing Entity shall maintain at all

times during Project implementation, competent staff

in adequate numbers and with terms of reference and

experience satisfactory to the Bank.

Throughout Project

implementation

Project Agreement

Schedule, Section I.C.1


Project in accordance with the provisions and

recommendations of the Environmental Management

Plan and the Involuntary Resettlement Framework.

Throughout Project

implementation

Project Agreement

Schedule, Section I.D.1


Project in accordance with the Operational Manual.

Throughout Project

implementation

Project Agreement

Schedule, Section II.B.2

The Project Implementing Entity shall contract the

auditors for purposes of Section 5.09(b) of the

General Conditions, under terms of reference

acceptable to the Bank.

No later than six

months after the

Effective Date

Project Agreement

Schedule, Section III.B

The Project Implementing Entity shall contract

annual independent procurement reviews for

previous year of Project implementation and furnish

to the Bank the report of such independent reviews.

Contract independent

review by October 15

of each year during

Project implementation;

furnish to the Bank the

report by July 31 of

each year; discuss with

the Bank by September

15 of each year during

Project implementation.

1

I. Strategic Context

A. Country Context

1. Peru's economy has seen a sharp recovery in 2010, returning to the high growth rates

recorded in the years before the global economic crisis. The Peruvian economy is expected to have

grown in 2010 by around 9 percent, up from a low of 0.9 percent in 2009 when the impact of the

global economic crisis affected the confidence of economic agents and resulted in sharply lower

private investments. Overall, the rate of economic growth achieved in 2010 and the main drivers of

the growth closely resemble those observed in the years 2006 to 2008 when the economy averaged

a rate of growth of 8.8 percent fueled by strong domestic demand and supported by positive terms

of trade shocks.

2. In light of the economic recovery the authorities have prudently started to gradually remove

the fiscal and monetary policy stimulus put in place in the midst of the crisis. The severity of the

global economic crisis in late 2008 and 2009 led the Peruvian authorities to launch a countercyclical

policy response designed to cushion the impact of the crisis in Peru. Thus, a two-year economic

stimulus plan of around US$4.8 billion, or about 3.5 percent of gross domestic product (GDP), was

launched. The fiscal stimulus plan combined with lower fiscal revenues caused a fiscal deficit of 1.9

percent of GDP in 2009. As the economy picked up in early 2010 the authorities have been

gradually removing this fiscal stimulus and, together with a sharp increase in fiscal revenues of

around 18 percent in real terms, are expected to have narrowed the fiscal deficit to around 0.9

percent of GDP in 2010. Despite the sharp economic recovery, inflation in 2010 remained low at

2.1 percent, well within the inflation targeting band of 1 to 3 percent. Still, interest rates were also

raised by the central bank throughout 2010 so as to gradually remove the monetary stimulus in

place since late 2008.

3. The increase in public spending on infrastructure, one of the hallmarks of the stimulus plan,

has been maintained. Sustained levels of public investment are key for both the competitiveness

agenda and to improve access to opportunities for all Peruvians. In fact public investment reached

5.3 percent of GDP in 2009, up from around 4.3 percent in 2008 and contrasting with 2006 and

2007 where public investment had bottomed out at around 2.8 percent of GDP. This stepped up

public investment was maintained in 2010 despite the fiscal consolidation efforts and public

investment reached around 6 percent of GDP in 2010. The authorities have been able to maintain

this higher level of public investment even after the stimulus plan concluded due to an overall

prudent fiscal stance. The government has been able to bring down its debt to 22.7 percent of GDP

in 2010, already below the pre-crisis level of 24 percent of GDP in 2008. Going forward, improving

infrastructure has been identified as one of the top priorities to contribute to the competitiveness of

the Peruvian economy as well as to provide opportunities for all Peruvians by improving access to

adequate basic services.

B. Sectoral and Institutional Context

4. Although the fast economic growth of recent years was accompanied by poverty reduction

and job creation,1 poverty incidence in Peru remains highly unequal in geographic terms, with some

1 Between 2005 and 2008 poverty fell from 48.7 percent to 36.2 percent, while extreme poverty was reduced from 17.4

percent to 12.6 percent. (Source: Instituto Nacional de Estadística e Informática –INEI).

2

regions posting poverty rates above 60 percent. This situation is also reflected in terms of access to

water supply and sanitation (WSS) services, where there are large disparities in coverage and

quality of services between urban and rural areas, socio-economic conditions and geographical

regions (Coastal, Andean and Jungle). Most of Peru‟s abundant water resources are concentrated in

the Amazon region, where less than 10 percent of the population lives and less than 10 percent of

the country‟s GDP is generated. Two thirds of the country‟s population (about 19.2 million people)

lives in the very dry Coastal area, receiving only about 1.8 percent of the national renewable fresh

water resources, and where the country‟s major cities, including Lima, are located.

5. Within the urban population, most of those without access to WSS services are located in

small urban centers or in peri-urban areas. At the national level, while 78 percent for the non-poor

have access to a water connection, only 45 percent of the poor do. This proportion drops to only 28

percent in rural areas (41 percent for the non-poor). This is in spite of an overall increase in water

supply coverage from 75 to 82 percent, and an increase in sanitation coverage from 54 to 68 percent

at the national level between 1990 and 2008.

6. The Lima-Callao metropolitan area (hereafter Lima) has been the main engine of Peru‟s

economic performance, accounting for 45 percent of the country‟s GDP in 2007. Rapid economic

growth has enabled reductions in poverty levels; however, these gains remain fragile and

infrastructure improvements are needed to sustain economic growth and further reduce poverty in

Peru in general and in Lima in particular. The provision of adequate WSS services in Lima remains

a challenge, given the explosive growth of the city (Lima‟s population has grown from 6.4 million

in 1993 to 8.4 million in 2009) and its scarce water resources. Lima water and sewerage coverage

rates are at around 91 percent, with the challenge to increase coverage for a population estimated to

reach 11.4 million in year 2030.

7. Lima is the world‟s second largest city located in a desert (after Cairo), with an annual

rainfall of 9 mm and an average total water flow of 20.5 m3/second, most of which (17.5 m

3/second)

is supplied by the Rimac River. During the dry season surface water flow in Lima drops by about 50

percent to 10 m3/second. Between 2004 and 2007 WSS coverage in the city has decreased by 3.5

percent for water and by 2.8 percent for sanitation services, mainly as a result of the city‟s high

population growth, including high rates of migration. Coverage of peri -urban areas represents a key

challenge in Lima, where about 40 percent of Peru‟s urban dwellers without access to piped water

(total 3.1 million) live.

8. Quality of WSS services is also a major issue in the sector. According to a 2005 survey

carried out in 1,628 municipalities, access to water services is not continuous in about half of them.

In 7.7 percent of the municipalities continuity of water services was less than 11 hours per day.

Large urban centers in Latin America have an average of 24 hours per day of water supply, while

Lima has only 21.

9. Poor urban areas suffer from low service standards, as lack of maintenance and sub-optimal

operation seriously affect the quality and sustainability of services. For instance, in the Northern

Service Area of Lima, non revenue water is estimated to be above 50 percent, with only 37 percent

of users receiving 24 hours of service and a very high frequency of pipe breaks and water leaks. The

sewerage network is in poor physical condition with frequent blockages and breaks, mainly due to

community self-construction using substandard building techniques and materials. In addition, some

3

of the older pipes have exceeded the lifetime use for which they were designed. Water quality is

also an issue, especially in rural areas and in smaller urban areas where services are provided

directly by the municipalities or by Water User Associations (Juntas Administradoras de Servicios

de Saneamiento).

10. These challenges stem mainly from policies adopted in the 1980s and early 1990s, when

Peru suffered from political and macroeconomic instability, which had long-term consequences for

the WSS sector. Lack of resources to adequately operate and maintain the existing WSS

infrastructure led to deterioration and need for considerable rehabilitation, while severe

underinvestment2 compromised service coverage and quality of service provision.

11. In order to address the issue of scarce resources and low service quality, as well as with the

goal to improve the efficiency of WSS service provision, over the past fifteen years the Government

of Peru (GoP) has implemented important reforms steps in the WSS sector, resulting in a well

established institutional framework, in which policy-setting, regulatory and service-provision

functions are differentiated. Policy-setting is assigned to the Ministry of Housing, Construction and

Sanitation (Ministerio de Vivienda, Construcción y Saneamiento – MVCS); regulatory functions to

the National Superintendence of Sanitation Services (Superintendencia Nacional de Servicios de

Saneamiento – SUNASS); and service-provision has been decentralized to Sanitation Service

Providers (Empresas Prestadoras de Servicios de Saneamiento – EPSs), municipalities, and/or

water user boards, with the exception of SEDAPAL (Servicio de Agua Potable y Alcantarillado de

Lima) the utility responsible for WSS service provision in Lima, which remains linked to the central

government.

12. The GoP has also undertaken a number of important reform steps on the water resource

management side to deal with water scarcity and pollution by approving a new Water Resources

Law (on March 31, 2009) and creating the National Water Authority (Agencia Nacional de Agua –

ANA) with a clear mandate for integrated, participative basin-scale management of water resources

with financial and administrative autonomy. The World Bank, through the Water Resources

Management Modernization Project, is supporting GoP in strengthening water resources

management institutional capacity to implement the new Water Resources Law, supporting the

creation, capacity building and operation of river organizations in three pilot basins and

strengthening ANA at the central level to support them.

13. The implementation of this institutional framework has enabled improved sector

management across different institutions, in particular sector service providers, who now work

under a clearer framework for tariff revisions. Nonetheless, there is much room for further

improvement and a need for deeper coordination among various sector entities at the central and

local government levels in the areas of investment planning, financing, as well as on the

implementation of mechanisms that further improves and brings accountability to the management

of EPSs.

2 During 1985-89 investments in water and sanitation infrastructure represented just 0.15 percent of GDP, one of the

lowest figures in Latin America. Latin American countries with better service had invested about 1 percent of their

GDP in water and sanitation infrastructure.

4

14. In 2007, the GoP launched the Water for All Program (Programa Agua para Todos – PAPT)

as a flagship initiative initially focused on providing sustainable access to WSS services for poor

neighborhoods in Lima. However, it soon became a national program focusing on complementing

existing initiatives and financing access to WSS for the poor, mostly located in peri-urban, small

towns and rural areas of the country and contributing to the achievement of the Millennium

Development Goals (MDGs) targets of reaching a national coverage rate of 82 percent for water

services and 77 percent for sanitation by 2015. Under the PAPT, the GoP plans to develop a

common platform and methodology to scale up investments in sustainable access to WSS, which

takes into account lessons learned from previous initiatives.

15. On the small towns and rural front, the MVCS is working with donors, including the World

Bank, the Water and Sanitation Program (WSP), the Inter-American Development Bank (IADB),

the Japanese International Cooperation Agency (JICA), as well as the German Cooperation

(Kreditanstalt fur Wiederaufbau – KfW), in reviewing the experience to date on providing access to

WSS and developing a common platform for intervention aimed at scaling up sustainable access to

WSS in these areas. The current World Bank-financed National Rural Water Supply and Sanitation

Program (Programa Nacional de Agua y Saneamiento Rural – PRONASAR) and its associated

Additional Finance are also part of this common platform. On the urban and peri-urban front, the

GoP is focusing on providing financing to EPSs and Municipalities to expand their service coverage

to poorer neighborhoods. In 2010, new rules to access financing from the PAPT, focused on

ensuring the sustainability of the systems built under the program, were adopted through a

Ministerial Resolution (No. 693-2008).

16. The PAPT has helped SEDAPAL‟s objective of expanding services. Indeed, under PAPT,

the utility has built 165,000 new water connections and 148,000 new sewerage connections in the

last 4 years, benefitting a population of around 732,000. This has meant doubling the expansion rate

in both water and sewerage, from a yearly rate of 20,220 for water and 19,220 for sewerage

connections between 2000 and 2005, to 43,750 and 38,450 new water and sewerage connections

during the past 4 years.

17. The following table presents some key performance indicators from SEDAPAL:

Figure 1. SEDAPAL’s Performance Indicators

Indicator Unit of

Measure

Actual Programmed

2005 2006 2007 2008 2009 2010 2011 2012 2013

New Water

Connections

x1000

connections 17 17,3 50,3 48,6 58,8 37,0 55,7 68,5 59,2

New Sewerage

Connections

x1000

connections 16,2 13,8 37,1 47,7 55,4 32,7 46,8 62,3 52,5

Continuity hours 21,5 21,1 21,2 21,5 21,6 21,5 21,6 21,8 21,9

Pressure meter of

water column 21,1 22,3 21,1 21,9 22,6 21,1 21,2 21,3 21,4

Metering % 60,4 68 70,1 70,3 68,8 78,9 85,9 87,4 87,4

Non revenue

water % 41,1 38,3 37 37 38,1 36,3 34,6 33,8 33,2

Working Ratio % 60,8 58 51,3 44,2 42,2 50,0 55,2 56,3 56,3

Volume of

Wastewater

Treatment

m3/s 1,6 1,57 2,43 2,53 2,77 2,70 2,77 17,84 17,86

5

18. Since the mid 1990s SEDAPAL embarked on an ambitious program for rehabilitation of

water and sewerage networks to avoid physical losses and delay investments on new sources. The

Bank supported a program for rehabilitation of networks on two of Lima‟s three regions: the

Southern and Central Areas (Lima Water Rehabilitation and Management Project, 3811-PE). The

investment program for the remaining Northern Service Area consists of interventions that include:

(i) supply-side management by increasing Rimac River‟s flow through a trans-boundary transfer, as

well as the expansion of water treatment and main distribution systems; (ii) demand-side

management by reducing physical and commercial losses and controlling demand through

installation of domestic meters, progressive tariff structures, and promotion of in-house water

saving devices; and (iii) increasing the wastewater treatment capacity through partnerships with the

private sector.

19. The first stage of this program consists of interventions aimed at (i) augmenting the flow of

the Rimac River by 2.8 m3/second by drawing water from the Huascacocha lagoon (the

Huascacocha Project, under implementation); (ii) increasing the drinking water treatment capacity

by constructing the Huachipa water treatment plant (a BOT with a private sector partner scheduled

for completion in mid 2011), as well as building/rehabilitating the distribution mains for the treated

water; (iii) rehabilitating the water supply and sewerage networks; and (iv) increasing wastewater

treatment capacity with the construction of the Taboada wastewater treatment plant (treatment

capacity of 14 m3/second) through a BOT with a private sector partner. The Huachipa and

Huascacocha projects, both under implementation, will increase the supply of drinking water in

Lima by 25 percent from 20.5 m3/second to about 25.5 m

3/second.

20. With the increase in water supply in the Northern Service Area of Lima, rehabilitation of the

water and sanitation network becomes particularly urgent. Given the poor physical condition of the

infrastructure it is expected that, without an adequate rehabilitation program, the increased water

pressure will take the already high frequency of pipe breaks and water leaks to unmanageable

levels. Within this context, SEDAPAL has developed a US$211 million program to rehabilitate and

optimize the WSS networks in the Northern Service Area of Lima, to be financed in parallel by the

World Bank through this proposed operation, JICA, KfW and SEDAPAL‟s own resources.

C. Higher Level Objectives to which the Project Contributes

21. The proposed operation would directly contribute to the Government‟s priority objective of

reducing inequality by ensuring that the poor get access to adequate basic services and improving

the quality of WSS services provided to low income urban dwellers. The proposed Project

contributes to the achievement of all three pillars of the current World Bank Group‟s Country

Partnership Strategy (CPS) for Peru3, as improving water services contributes to sustaining growth

and widening its base, as well as meeting basic needs in underserved areas, and promoting the

institutional and operational strengthening of SEDAPAL contributes to modernizing state

institutions.

3 The World Bank Group‟s Country Partnership Strategy 2007-2011 (Report #37913-PE) discussed by the Executive

Directors on December 19, 2006.

6

II. Project Development Objectives

A. PDO

22. The Project Development Objective (PDO) is to improve efficiency, continuity and

reliability of water supply and sanitation services in the Northern Service Area of Lima.

Project Beneficiaries

23. Project beneficiaries include the urban dwellers living in SEDAPAL‟s Northern Service

Area of Lima, which comprises 16 districts.4 It is envisaged that physical investments will largely

benefit the First Northern Area of Lima that means the following districts of the Borrower: Comas,

Independencia, San Martín de Porres y Los Olivos. The total beneficiary population is 158,380 in

an area of approximately 118 km2.

PDO Level Results Indicators

24. Achievement of PDO will be monitored by the following outcome indicators:

(a) Number of daily hours water services are provided in the project area5;

(b) Annual incidence of water pipe breakages per km of water supply network in the project area;

(c) Annual incidence of sewerage blockages per km of sewerage network in the project area;

(d) Volume of water saved in the project area; and

(e) Number of learning events on strategic planning and management

III. Project Description

A. Project components

25. In order to improve the efficiency, continuity and quality of the services, SEDAPAL will

follow a two-tier strategy. The first is to make more water available by reducing the physical losses

in the system, and the second is to improve the operational and commercial management of the

water and sanitation system by: (a) reducing commercial losses, and (b) optimizing the technical

operation of the systems (pressure management, sectorization and valve control, automatization for

the control systems and others). The proposed project will consist of three components, as follows:

26. Component 1. Rehabilitation of water and sewerage networks in Northern Service Area of

Lima (US$61.2 million, of which US$51.3 million will be financed by the Bank loan). This

component will finance the rehabilitation of the water and sewerage networks in First Northern

Service area of Lima, directly benefiting more than 158,380 low income people. The exact

proportion of replacement and renovation will be determined during implementation based on a

detailed hydraulic modeling of each subsector and an agreed methodology.

4 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los Olivos,

Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla. 5 Project area means the following SEDAPAL‟s hydraulic sub-sectors within the First Northern Service Area: 86, 334,

335, 336, 337 and 338.

7

27. To improve the appropriate management of the rehabilitated network and reduce losses the

component will also finance: (i) rehabilitation of water reservoirs (concrete storage tanks) to

increase storage capacity and pressure stabilization; (ii) replacement of household connections and

installation of new domestic water meters; and (iii) installation of bulk water meters and valves to

allow sectorization.

28. Social interventions will complement these physical investments to maximize the Project‟s

expected benefits by taking measures to facilitate the transition to a full pressure, continuous and

metered service. These will include gender-tailored initiatives such as the provision of guidance to

manage consumption in particular through the use of in-house water saving equipment.

29. Component 2. Improving SEDAPAL’s Efficiency (US$2.3 million, of which US$1.88

million will be financed by the Bank loan). This component will finance studies and consultant

services to provide decision-making tools to SEDAPAL‟s management to improve the company‟s

efficiency. The activities will be focused on the following four areas:

(a) Support for the implementation of the GIS: including an evaluation of the cadastre to determine

priority zones for updating and the identification of a process for regular updating, as well as

support to the training and institutional arrangements needed within SEDAPAL to maximize the

potential of the GIS;

(b) SCADA information technology standardization strategy and consolidation: including support

to SEDAPAL in the preparation of a SCADA Master and Investment Plan to ensure the

compatibility of current and future SCADA strategies;

(c) Preparation of a strategy to efficiently meet user demand for water and sanitation services :

including an evaluation of the exogenous and endogenous factors that affect demand for WSS

services, an estimation of future demand trends backed by adequate sensitivity analysis, and

identification of priority actions to meet such demand as efficiently as possible; and

(d) Options for the development of a new organizational model: including the preparation of a

strategic vision for SEDAPAL‟s management over the medium and long-term incorporating

new technologies, aligning human resources management with modern practices, exploring

options for sustainable financing of capital investments and rearranging institutional structure

along functional lines; and

30. Component 3. SEDAPAL Project Management (US$1.4 million, of which US$1.32 million

will be financed by the Bank loan). This component will finance the additional staff required for

project management to establish a Monitoring and Evaluation System and undertake the required

financial audits and physical and procurement reviews. Additionally, it will finance individual

consultants to strengthen the team on procurement, financial management and communication, as

well as the training for strategic planning, and selection of technical options to allow full

compliance with the Investment Plan 2009-2013 and subsequent plans. This component will also

support SEDAPAL‟s efforts to document the Project‟s process and results, and to mainstream

lessons learned and good practices.

8

B. Project Financing

1. Lending Instrument

31. The Project will be supported by a specific investment loan (SIL) in the amount of US$54.5

million.

2. Project Cost and Financing

Project Components* Project cost IBRD Financing

1. Rehabilitation of water and sewerage networks in Northern

Service Area of Lima

2. Improving SEDAPAL‟s efficiency

3. SEDAPAL Project management

Total Project Cost

61.2

2.3

1.4

64.9

51.3

1.88

1.32

54.5

*These amounts include physical and price contingencies.

C. Lessons Learned and Reflected in the Project Design

32. Using resource conservation techniques to liberate water resources for new clients. The

project design makes use of a comprehensive and synchronized application of demand and supply

management techniques, through non-revenue water investments as well as the social intervention

aimed at water conservation, in order to liberate scarce water resources to new users, with the

objective of increasing coverage and improving the quality of service provision. The project will

include conservation activities targeted to consumers, actively involving users in these efforts

through the promotion of water saving behaviors and equipment.

33. Verify the actual need for pipe rehabilitation or replacement through the use of hydraulic

modeling and field tests. Given the unknown state of the physical network, the most accurate

approach to determine the exact length of pipe to be replaced or rehabilitated is through hydraulic

modeling, paired with field tests, once the contractor is deployed rather than using these resources

on detailed designs that can only provide limited information. Thus, no network

rehabilitation/replacement will take place for a section of pipe that is not seen to be relevant based

on the results of the hydraulic modeling and field tests.

34. Implementation Arrangements. The proposed project has modeled its implementation

arrangements on the successful experience of the Lima Water Rehabilitation and Management

Project.6 SEDAPAL‟s project implementation division (PROMESAL) will be in charge of project

management and implementation reporting to SEDAPAL‟s management.

35. In addition, the Bank has learned important lessons from undertaking large complex

investment projects, such as not loading them with unrealistic policy reform measures or measures

which lack Government ownership. The proposed Project recognizes the need for further reforms in

the water sector in Peru, but proposes that: (i) the reforms and the pace at which they can be

implemented are Government owned; and (ii) the imposition of conditions or rigid covenants on the

proposed operation is not appropriate. This approach has already generated results, as the Bank is

involved in a number of parallel sector initiatives in partnership with: (i) SEDAPAL through a

6 Loans 3811-PE and 7180-PE

9

Public-Private Infrastructure Advisory Facility (PPIAF) proposal, under the Sub-National Technical

Assistance window that will evaluate the company‟s prospects for issuing debt instruments, (ii)

SUNASS and UNSGAB to provide technical assistance and support to EPSs in order to enable them

to access market financing, and (iii) the MVCS in developing a common platform for the scaling up

of sustainable investments in WSS in small towns and rural areas.

IV. Implementation

A. Institutional and Implementation Arrangements

36. PROMESAL will be the unit responsible for implementing the project , reporting directly to

SEDAPAL‟s General Manager (Gerencia General). Its responsibilities include: carrying out

bidding processes, selection of contractors, supervision, approval of contract amendments, and

general Project management. SEDAPAL‟s General Management (Gerencia General) will be

responsible for approving final designs, complementary studies, while Operations Management

(Gerencia de Operaciones) is in charge of the final reception of the works. PROMESAL is in

charge of most network rehabilitation and expansion projects in SEDAPAL, including recently

closed Bank-financed projects and parallel operations financed by JICA and KfW, and has proven

implementation capacity.

37. Through PROMESAL, SEDAPAL has been successfully implementing projects with

bilateral and multilateral institutions since 1995, including the US$170 million Lima Rehabilitation

and Management Project (3811-PE) and its associated Additional Finance Operation (7160-PE) for

the rehabilitation and expansion of water and sewerage services in the Southern and Center Service

Areas that closed in March 2009. Currently, PROMESAL is executing a US$410 million JICA loan

for the construction of the Huachipa Water Treatment Plant.

38. SEDAPAL strategy for intervening in rehabilitation of networks is a phased one, starting

with works on First Northern Area of Lima, continuing with the Second Northern Area of Lima,

following with interventions in San Juan de Lurigancho District and finalizing with network

rehabilitation in La Molina district. PROMESAL will be starting implementation of the first tranche

in First Northern Area of Lima in 2011, financed partially by JICA (US$67.1 million) and KfW

(US$50 million).

39. The Research and Development Unit (Gerencia de Desarrollo e Investigación- GDI) will be

in charge of overall coordination of Component 2, although contracting processes would be done

through PROMESAL. GDI has already designated teams to coordinate each consultancy of the

component, as well as the procedures and responsibilities for selection of consultants and approval

of products and payments. The IT Team at GDI will lead the support for the implementation of the

GIS and the SCADA information technology strategy and consolidation consultancies; the

Research, Standardization and Physical Planning Team will lead the preparation of a strategy to

meet user demand for water and sanitation services consultancy and the Operational Planning and

Financing Team will lead the options for the development of a new organizational model study.

B. Results Monitoring and Evaluation

40. The results framework and monitoring strategy are included in Annex 3. This framework

has been developed in close coordination with SEDAPAL. PROMESAL will consolidate the data at

10

the project level and produce semi-annual reports to monitor progress. An impact evaluation survey

– Encuesta de Evaluación de Impacto del Proyecto –will analyze the effect of the planned

investments on improving the quality of service delivery in the Project area.

41. Overall responsibility for monitoring and evaluation of the Project will lie with the

PROMESAL, which will provide timely information about the Project‟s implementation progress,

including qualitative information on the execution of selected activities, procurement and

contractual decisions, accounting and financial recording, and other operational and administrative

matters. The Project‟s Operations Manual will provide specific details regarding monitoring and

evaluation responsibilities, including data collection requirements, timing and use of information.

C. Sustainability

42. A financial analysis was undertaken to assess SEDAPAL‟s overall long-term financial

sustainability as well as its capacity to operate and maintain the investments supported under the

Project. The results of the analysis shows that SEDAPAL is in relatively good financial standing,

and its projected financial position is also relatively robust, provided that the company ensures the

availability and predictability of resources (about US$817 million) to implement the investments

under the PAPT. The projection results show that the company‟s working ratio will be maintained

below 0.89, and its debt service coverage is projected to reach 1.80 at the end of the projection

period.

43. Stakeholders’ engagement. The Project‟s beneficiaries will actively participate in all Project

stages through a robust social component, that has been designed using some specific gender

consultations, and which includes activities to be carried out by contractors as part of the

construction phase, civil society and interventions by SEDAPAL. Additionally, the Project

includes: (i) strengthening of the company‟s client relationship mechanisms (i.e. , claims

management, information disclosure, and others); and (ii) water savings equipment promotion using

social marketing tools to contribute both to resource conservation and lowering monthly payments

by families.

V. Key Risks and Mitigation Measures

44. Potential risks are summarized in the Operational Risk Assessment Framework (see Annex

4). The overall risk within this Project is rated as Medium, driven by likelihood. Risks identified are

manageable and mitigation measures are in place.

45. The two main risks identified are: (i) Institutional Risk: Lack of alignment in visions

regarding sector policy and investment priorities between sectoral actors (SEDAPAL, MVCS,

SUNASS, Municipality) could affect institutional priorities and impact tariff and subsidy decisions,

and (ii) Project implementation is delayed or discontinued due to competing priorities,

compromising the achievement of the PDO. Mitigation measures are an integral part of the Project‟s

design (for further details see Annex 4).

VI. Appraisal Summary

A. Economic and Financial Analysis

11

46. The proposed Project is economically feasible with returns of US$184 million and internal

rate of return of 20 percent. The evaluation shows positive economic results of US$181 million and

US$3 million for the water and sewerage components respectively and internal rate of returns of 20

percent and 13 percent. The financial evaluation shows that the project will be financial feasible

only with at least a ten percent tariff increase. A summary of the evaluation is presented in Annex 7,

and the full analysis is available in the project files.

47. The economic benefits were estimated as: (i) savings that SEDAPAL will get when water is

used more efficiently and water losses are reduced; (ii) savings that beneficiaries will obtain when

water intermittence is eliminated; and (iii) improving on living condition, which were assimilated as

appreciation of dwellings values. Given that a hedonic price study was not carried out, simulations

of property value increases were included.

48. The distributive analysis shows that the big winners will be the customers, whose economic

benefits will offset the higher bills to be paid to SEDAPAL once the service is improved. The

sensitivity and risk analyses shows very reassuring results for the economic evaluation, with a

probability of 100 percent of having positive returns for the water component and 69 percent for the

sewerage component.

Financial Assessment of SEDAPAL



project. The analysis is based on SEDAPAL‟s audited historical and pro-forma financial statements

for the 2007 to 2010 period and its projected financial performance for the next 10 years.

SEDAPAL is in relatively good financial standing. The company‟s audited accounts from 2007 to

2009 and estimates for 2010 results show that the company has been profitable. In 2007, the

company reported a net operating income of US$38 million. In 2008 this income was substantially

lower at US$1.3 million, mainly due to increased financial costs as a result of exchange rate

differences in its external debts. In 2009 the company had a net profit of US$74 million.

50. Projections to assess SEDAPAL‟s future financial position and performance were carried

out for the period of 2011 to 2021, with the following main assumptions in the base scenario: (a)

tariff adjustments for inflation, the real tariff increases already approved by SUNASS from 2010 to

2012 were incorporated; (b) a 6 percent real tariff increase was added in 2015 and 2016 as

additional planned investments expected to be approved by SUNASS are implemented, likely in

partnership with the private sector; (c) the investment plan excludes the investments related to the

PAPT and its associated benefits, given that the source and availability of funding are currently

under discussion; and (d) water losses are reduced to 32 percent company-wide by 2015 and 30

percent by 2021.

51. The implementation of the above assumptions ensures positive cash flow and a net profit for

SEDAPAL, enabling the company to meet its current operating expenses and debt obligations. The

company‟s working ratio will be maintained below 0.89 in all years and its debt service coverage is

projected to reach 1.80 at the end of the projection period. In 2015 the debt service coverage will

reach 1.15, highlighting the need for the company to carefully evaluate its debt position in an

ongoing basis. From 2015 onwards, SEDAPAL will also be able to finance a portion of its

12

investment needs (up to 50 percent depending on the overall levels of investment) from its own

resources.

B. Technical

52. SEDAPAL has carried out a detailed feasibility study on the status of the water and

sewerage pipes in the project area, and found that about 42 percent outlived their effective lifetime.

Also, the majority of pipes in the Northern Service Area were not laid by SEDAPAL and their

installation did not follow proper pipe installation standards, consequently they exhibit high water

losses of at least 50 percent. In addition, a large portion of these networks, especially the large

diameter pipes, are asbestos-cement pipes (89 percent of the water network is asbestos-cement and

10 percent PVC), which are not recommended for use considering their age and poor installation

practices. Under these conditions, the number of bursts and breaks in the networks is higher than

acceptable (about 3 bursts/km/year), leading to high frequency and cost of repair.

53. SEDAPAL, through its Northern Service Management Unit (Gerencia de Servicios Norte),

divides the system according to micro-watersheds grouping zones that share the same sewerage

outfall. The Northern Service Area corresponds to the Comas-Chillon primary outfall and is

considered priority as it is the closest to the Huachipa main branch bringing an additional water

flow of 5 m3/s. The Northern Service Area covers 12 operational sectors and 16 districts

7. Given the

nature of the intervention that encompasses not only the rehabilitation but also the creation of

hydraulically viable operational sectors, the four districts of Los Olivos, Independencia, San Martin

de Porres and Comas were prioritized.

54. Based on the hydraulic modeling, which provided information on pressure, length, network

layout and geographical distribution, it is expected that there will be 18 new operational sectors

replacing the current 12 ones. An operational sector is determined to be water-tight based on its

distribution lines so there is only one entry and exit point for interconnection with other sectors,

while a subsector is defined with valves mainly for operation and maintenance, which allows for the

carrying out of hydraulic balances to estimate physical losses.

55. The Project will finance works comprising the rehabilitation of 143km of PVC pipe with

diameters from 100 mm to 400 mm (about 130 km of 100 mm), 96 km of trenchless pipe

rehabilitation (cracking and/or relining), rehabilitation and/or replacement of about 26,000

household meters and provision, installation of 4 bulk meters and 700 water valves, and

rehabilitation of 4 reservoirs. Sewerage works will include the provision and installation of about

110 km of PVC pipe with diameter from 200 mm to 300 mm, as well as rehabilitation of about

14,000 sewerage connections and rebuilding/reconstruction of 1,300 manholes. More specific

information will be available once the detailed designs are completed, and these planned works are

also contingent to the availability of financing from other institutions.

56. SEDAPAL has divided the intervention zone in different independent areas, according to

available financing from the Bank, JICA and KfW. This will entail the independent contracting and

execution of each area, thus parallel financing of works is envisioned instead of co-financing. As a

7 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los Olivos,

Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla.

13

stand-alone project, the indicators developed for this Project and presented in Annex 1 refer

exclusively to the Bank‟s and SEDAPAL counterpart‟s investments.

57. The Taboada wastewater treatment plant, under construction, will collect and treat the

sewerage of the Northern Service Area, achieving a 70 percent increase in the wastewater volume

being treated. This plant is being implemented using a BOT contract that includes the design, 44-

month construction and operation and it is expected to start working in 2013.

C. Financial Management

58. A Financial Management (FM) assessment has been undertaken (see Annex 3) in

SEDAPAL, taking into account the entity‟s FM arrangements and performance during the

implementation of the previous Lima Water Rehabilitation project.

59. The Bank will consider retroactive financing for payments made up to one year before the

date of signature of the Loan Agreement and after February 16, 2011, provided that the works,

services and goods are procured in accordance with the Bank‟s guidelines and that the works are

executed in compliance with the Bank‟s safeguard policies. These expenditures would be paid in

advance by SEDAPAL and should not exceed US$10.9 million.

60. SEDAPAL through its Project Implementation Unit (PROMESAL) will implement the

proposed project. SEDAPAL previously implemented the Lima Water Rehabilitation project

financed through loan IBRD-3811-PE and additional financing IBRD-7160-PE. Hence, SEDAPAL

has developed experience in working with Bank funds and was consistently assessed during Bank

supervision and by external auditors showing satisfactory performance. On the basis of the FM

assessment performed, we can conclude on the adequacy of the FM arrangements for the project.

SEDAPAL will continue working on improving its financial information system with a module

capable to provide project financial reports and statement of expenditure (SOEs) from SEDAPAL‟s

current system. The Bank will follow up the progress made on this aspect during Project

implementation.

D. Procurement

61. An assessment of SEDAPAL‟s capacity to implement procurement actions for the Project

was conducted on November 2010 and a detailed action plan was prepared to address all risks

identified (see Annex 3). PROMESAL, SEDAPAL‟s project implementation unit, will be in charge

of project management and implementation, with guidance from a Managerial Investment

Committee that ensured ownership by SEDAPAL‟s management of the project activities under

implementation. PROMESAL has capacity for selecting consultants and procuring goods, works

and services and, as part of Project preparation, has updated the OM which provides detailed

procurement information for implementation. The proposed corrective mitigating measures are: (i)

establish a system to monitor and expedite contract modifications or change orders and (ii) publish

and manage the Procurement Plan through the Procurement Plans Execution System SEPA.

SEDAPAL has prepared an acceptable Procurement Plan.

E. Social (including safeguards)

14

62. SEDAPAL has prepared a social assessment covering the Project‟s area, including

consultation with female leaders, which provided information on the characteristics of the

population, a map of stakeholders, and social and economic issues affecting the Project‟s potential

beneficiaries. The report includes a directory of civil society organizations, NGOs and community

based groups for project implementation. The outcomes and findings of the social assessment were

disclosed in SEDAPAL‟s website.

63. The Project will benefit families of the districts of Comas, Independencia, Los Olivos and

San Martin de Porres, that includes 12 water service distribution sectors. About 28 percent of the

population are living under extreme poverty, located on the hills in the city‟s periphery, with the

risk of accidents due to rockslides; sub-stocked with drinking water 3 hours a day, and with a high

incidence of skin, respiratory and gastrointestinal diseases.

64. Women and men are mostly self-employed in commercial activities. The districts of San

Martin de Porres, Los Olivos and Independencia concentrate about 77.6 percent of the areas‟ small

enterprises in textiles, apparel, metalworking and wood furniture, having attracted the financial

services of 14 banks, microfinance institutions and village banking for credits focusing on women‟s

initiatives. A large union of micro and small business‟ network operates in the area.

65. SEDAPAL‟s policy is to guide the design and implementation of Involuntary Resettlement

Plans, establish policies and guidelines to mitigate and compensate the negative effects derived

from the involuntary taking of land to be used in the construction or rehabilitation of reservoirs,

wells, pumping stations, cisterns, tunnels, lagoons, networks, etc. aiming at reestablishing

equivalent and/or improved social and economic conditions to affected families. Even though the

preliminary designs in the known location for the works indicated that no resett lement will take

place, SEDAPAL has developed an Involuntary Resettlement Framework in accordance to OP 4.12,

in case some people could be potentially temporarily affected during construction. The Involuntary

Resettlement Framework will guide the preparation of Resettlement Plans, if necessary, during

Project implementation, and has been adopted and disclosed by SEDAPAL on February 16, 2011 as

corporate policy to guide all future investment operations.

66. The proposed Project also includes a social intervention to facilitate the transition to a full-

pressure, 24 hour metered service. The Project will select a marketing consultancy that will

strengthen SEDAPAL‟s efforts in promoting mechanisms to allow poor households to upgrade their

sanitary facilities with newer, water-saving equipment in order to minimize the impact of billing

according to actual rather than estimated consumption. This will be done through the creation and

expansion of current partnerships, development of new capacities at the utility and communication

management with the different stakeholders (employees, suppliers, private companies, clients,

users, community leaders and community-based associations). Given the traditional role of women

in water household consumption and use, special emphasis will be given to incorporate their

concerns and suggestions during the focus groups prior to intervention.

67. The Project‟s grievance mechanism will be disclosed as a part of the Project‟s general social

strategy. In other words users will interact personally with social professionals who will explain

their rights in terms of expressing complaints and grievances and the due redress process it will

follow. This mechanism is meant to cater especially to cases of involuntary taking of land. In

addition, SEDAPAL manages a claims system called AGUAFONO, which is considered best

15

practice in the public sector and is well-known by the population. This mechanism is another

channel where the company can receive feedback from civil society.

F. Environment (including safeguards)

68. The Project is expected to have very positive environmental impacts overall, by (i)

consolidating and improving water resources management in Lima; (ii) connecting people to

rehabilitated sewage collection systems in the Northern Service Area of Lima, thereby improving

human and environmental health conditions and protecting very scarce underground water sources,

and (iii) increasing the efficiency of the water supply services provided by SEDAPAL.

69. The Project will directly improve SEDAPAL‟s capacity of efficiently using water resources

by reducing water losses and the contamination of underground water sources. This reduction of

water losses is critical in a city like Lima, whose main water resources come from rapidly retreating

glaciers in the highlands due to climate change.

70. According to the Country Environmental Analysis, (World Bank, 2006), of all the impacts

of environmental degradation in Peru, those related to health are the most significant. The study of

the costs of degradation carried out as part of the Country Environmental Analysis estimated the

annual damages from environmentally related sources at S/. 8.2 billion (US$2.45 billion). Over 70

percent of that, around S/. 5.85 billion (US$1.75 billion) is attributable to environmental health,

arising from poor quality water supply, sanitation and inadequate hygiene. The project will directly

improve the environmental health conditions of the population to be served. Rehabilitation of

sewerage systems will decrease the rate of breaks in pipes that expose the population to water borne

diseases with significant human health impacts. Provision of full pressure, 24-hour service will also

eliminate the need for storage devices, change water use patterns and facilitate the adoption of

better hygiene practices. This behavioral change will in turn eliminate fertile ground for water borne

diseases, such as dengue and gastrointestinal cases associated with lack of hygiene. It is expected

that improved sewage collection systems will have a positive impact on the quality of aquifers in

Lima, as well as provide a healthier urban environment.

71. As the project is classified as Category B, an Environmental Assessment (EA) was

undertaken, in accordance with OP 4.01, including an Environmental Management Plan. The

detailed EA has identified potential direct and indirect environmental impacts associated with the

Project and other alternatives, and developed mechanisms and measures to avoid, minimize and/or

mitigate negative impacts. The Environmental Management Plan, contained in the EA study, has

specific activities, budget and responsibilities to ensure the implementation of these mitigating

measures. Detailed information on environmental impacts and mitigation measures is presented in

Annex 3. A copy of the full EA has been made available through the Bank‟s InfoShop on December

21, 2010. The EA report and its Addendum were also made available through SEDAPAL‟s website

on September 20, 2010.8

72. Physical Cultural Resources (OP 4.11). Peru has a well-developed legislative and normative

framework for management of physical cultural property, which is under the oversight of the

National Institute of Culture (Instituto Nacional de Cultura – INC). In accordance with local

8 http://www.sedapal.com.pe/estudio-impacto-ambiental

16

legislation and Bank requirements, SEDAPAL will include procedures for screening any known

cultural property in the Project area and incorporate „chance find‟ procedures in the event that

culturally significant resources are discovered during implementation. Procedures for the

identification and protection of physical cultural resources have been included in the EMP.

73. The EA report includes a list of archeological sites located in the project area and an

Archeological Monitoring Plan which specifies the following measures to be considered by project

contractor during the rehabilitation works: (i) preventive measures, (ii) immediate measures, (iii)

measures for the intervention of the monitoring Archeologist, (iv) prevention and mitigation

measures, and (v) a system for recording, analyzing, storing and delivering archeological materials

to Peru‟s INC.

17

Annex 1: Results Framework and Monitoring

PERU: Optimization of Lima Water and Sewerage Systems Results Framework

Project Development Objective (PDO): The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima

PDO Level Results Indicators* C

ore

Unit of Measure

Baseline Cumulative Target Values**

Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (indicator

definition etc.) YR 1 YR 2 YR3 YR 4 YR5

Indicator One: Number of daily hours water services are provided in the project area.

Hrs/day 16.09 -. - 16.09 23.00 24.00 Bi-annual

Northern Management Zone bi-annual report

SEDAPAL‟s Northern Management Office

Weighted average in average service hours for sectors 86, 334, 336,337 and 338.

Indicator Two: Annual incidence of water pipe breakages per km of water supply network in the project area.

Breaks/ km/yr

0.214 - - 0.214 - 0.107 Bi-annual

Leakage Reduction and Control, and Commercial Management Teams Annual Report

Leakage Reduction and Control, and Commercial Management Teams

Weighted average in kilometers rehabilitated times the average of water pipe breakages per district

Indicator Three: Annual incidence of sewerage blockages per km of sewerage network in the project area.

Blockage/

km/yr 8.75 - - 8.75 - 4.38 Bi-annual

Annual Report from the Network Operation and Maintenance Team.

Leakage Reduction and Control, and Commercial Management Teams

Weighted average in kilometers rehabilitated times the average of sewerage blockages per district

Indicator Four: Volume of water saved in the project area.

m3/yr 0 0 - 2,000 7,500 12,000 Annual

Northern Management Zone annual report

SEDAPAL‟s Northern Management Office

Cumulative of weighted average in kilometers rehabilitated times the average water loss per district

Indicator Five: Number of learning events on strategic planning and management

Events 0 2 4 6 8 10 Annual PROMESAL PROMESAL

INTERMEDIATE RESULTS

Intermediate Result (Component One): Rehabilitation of water and sewerage networks in Northern Service Area of Lima. This component will finance the rehabilitation of the water and sewerage networks in Northern Service Area of Lima, directly benefiting more than 158,380 low income people. The exact proportion of replacement and renovation will be determined during implementation based on a detailed hydraulic modeling of each subsector and an agreed methodology.

18

Intermediate Result indicator One: Km of water pipes rehabilitated. Km. 0 0 0 75 150 250

Quarterly, once construction started

Monthly supervision report from supervisor consultant

Supervisor consultant

Intermediate Result indicator Two: Km of sewerage pipes rehabilitated. Km. 0 0 0 25 80 100



Supervisor Consultant

Intermediate Result indicator Three: Pipe household water connections affected by rehabilitation works undertaken under the Project

Number of households

0 5,000 20,000 35,000



Supervisor Consultant

Intermediate Result indicator Five: Water utilities that the Project is supporting

Number of

utilities 1 1 1 1 1 1 N/A N/A N/A

Intermediate Result indicator Six: Number of stakeholders reached with information on how to invest on water saving equipment

Number of stakeholder

s 0 100 250 300 300 300 Bi-annual

Progress Report

PROMESAL

Intermediate Result (Component Two): Improving SEDAPAL’s Efficiency. This component will finance studies and consultant services to provide decision-making tools to SEDAPAL‟s management to improve the company‟s efficiency. The activities will be focused on the following four areas: (a) support for the implementation of the Geographic Information System (GIS); (b) SCADA information technology standardization strategy and consolidation; (c) preparation of a strategy to efficiently meet user demand for water and sanitation services, and (d) options for the development of a new organizational model.

Intermediate Result indicator One: Action plan completed for the integration of GIS and SCADA systems.

Yes/No None - - - Study

completed

- Annual Progress Report

None

Intermediate Result indicator Two: Evaluation of current and future demand for water and sanitation services completed together with identification of priority actions to meet such demand as efficiently as possible.


completed


None

Intermediate Result indicator Three: Study on options for the development of a new organizational model completed.


completed


None

.

19

Annex 2: Detailed Project Description

1. The Project Development Objective (PDO) is to improve efficiency, continuity and

reliability of water supply and sanitation services in the Northern Service Area of Lima. The

project beneficiaries include the urban dwellers living in SEDAPAL‟s Northern Service Area of

Lima, which comprises 16 districts.9 It is envisaged that physical investments will largely benefit

the First Northern Area of Lima that means the following District of the Borrower: Comas,

Independecia, San Martín de Porres and Los Olivos. The estimated beneficiaries reached are

distributed as follows: in the district of Los Olivos-San Martin de Porres (44,920 inhabitants),

Independencia (66,516 inhabitants) and Comas-Los Olivos (10,994 inhabitants), with a total

beneficiary population of 158,380 in an area of approximately 118 km2.

2. SEDAPAL‟s objectives are to prioritize the expansion, quality improvement and

sustainability of water, sewerage and wastewater treatment services. These utility‟s objectives,

included on the Optimized Master Plan and the Strategic Institutional Plan, aim at (i) increasing

access to WSS services, (ii) improve service quality, (iii) achieve financial viability, (iv) increase

service sustainability, and (v) modernize management. This project contributes to objectives (ii),

(iii), (iv) and (v) by increasing hours of service, increasing financial viability by recovering water

losses, augmenting water availability by reducing leaks supporting service sustainability and

modernizing management with the aim at introducing an unified SCADA and GIS.

3. PAPT has helped SEDAPAL‟s objective of expanding services. Indeed, the utility has

built 165,000 new water connections and 148,000 new sewerage connections in the last 4 years,

benefitting a population of around 732,000. This has meant doubling the expansion rate in both

water and sewerage, from a yearly rate of 20,220 for water and 19,220 for sewerage connections

between 2000 and 2005, to 43,750 and 38,450 new water and sewerage connections during the

past 4 years. Such an important increase in coverage has been possible with investments that

have shifted from an average of US$66 million per year in the period 2000-2005 to an average of

US$150 million per year, and an estimation to increase this to US$225 million annually.

4. These investments have been financed with 46 percent external debt and 54 percent own

resources for the period 2001-2005, while for the period 2006-2009 they were financed with 52

percent external debt, 36 percent own resources and 12 percent with funds from the Treasury.

For the period 2010-2014, it is estimated to finance investments with 47 percent external debt, 31

percent own resources, 12 percent from the Treasury and 10 percent with connection sales.

5. The Project supports SEDAPAL‟s request for structural and non-structural measures to

improve service delivery and sets the basis for the modernization of the utility. Structural

measures include the rehabilitation of water and sewerage networks in the Northern Service Area

of Lima, and the non-structural measures will encompass the utility as a whole – the complete

service area – to enhance the management capabilities by integrating automated systems, better

assessing current and future demand and identifying priority actions to meet such demand more

efficiently, and analyzing options to develop a new organizational model.

9 Ancón, Bellavista, Callao, Carabayllo, Carmen de la Legua, Comas, Independencia, La Perla, La Punta, Los

Olivos, Puente Piedra, Rimac, San Juan de Lurigancho, San Martín de Porres, Santa Rosa and Ventanilla.

20

6. The Project will support the implementation of SEDAPAL‟s development strategy

consisting of: (i) supply-side management by increasing Rimac River‟s flow through a trans-

boundary transfer, as well as the expansion of water treatment and main distribution systems; (ii)

demand-side management by reducing physical and commercial losses and controlling demand

through installation of domestic meters, progressive tariff structures, and promotion of in -house

water saving devices; and (iii) increasing the wastewater treatment capacity through partnerships

with the private sector.

7. Through the rehabilitation of the water and sewerage network, the Project will support

the proper distribution (and sewerage conveyance) of the increased flow from the Huachipa

water treatment plant as well as contribute to the reduction of physical losses by renovating

ageing infrastructure and correcting construction problems. The institutional strengthening

component, particularly the standardization of the SCADA and the identification of information

gaps for the GIS systems combined with better demand assessment, will support the reduction of

both commercial and physical losses.

8. Currently, SEDAPAL divides its operation into three main geographical areas: the

Northern, Central and Southern Service Areas. Rehabilitation activities will be undertaken on the

Northern Service Area for the following reasons: (i) under a previous Bank financed project

(Lima Water Rehabilitation and Management Project, Loan 3811-PE) efforts were directed to the

rehabilitation of the water supply networks in the Southern Service Area, which achieved success

in reducing physical water losses; and (ii) when the Huachipa water treatment plant project

begins operation, the pressure in the water supply system in the Northern Service Area will

increase, with consequent increases in water losses necessitating further water loss reduction

efforts.

9. SEDAPAL strategy for intervening in rehabilitation of networks is a phased one, starting

with works on First Northern Service Area of Lima, continuing with the Second Northern

Service Area of Lima, following with interventions in San Juan de Lurigancho District and

finalizing with network rehabilitation in La Molina district. PROMESAL will be starting

implementation of the first tranche in First Northern Service Area of Lima in 2011, financed

partially by JICA (US$67.1 million) and KfW (US$50 million).

10. For un-rehabilitated networks, a negative relation exists between Non Revenue Water

(NRW) and increase of hours of service. However, the quantity and continuity of service in the

area are unacceptable, and improving it is the higher objective, even though NRW may increase

in absolute terms. The Project will finance activities aimed at improving rational use of water,

contribute to lower consumption –in particular through the installation of water meters, but

overall use will increase with more water availability which is necessary since the current

consumption levels (of piped water) are sub-standard. Full metering, demand management and

optimal system operation are only achieved on a continuous full-pressure water network.

Component 1. Rehabilitation of water and sewerage networks in the First Northern Service

Area of Lima (US$61.2 million, of which US$51.3 million will be financed by the Bank loan)

11. This component will finance the rehabilitation of the water and sewerage networks in the

First Northern Service Area of Lima, directly benefiting more than 158,380 low income people

21

living in the area. The exact proportion of replacement and renovation will be determined during

implementation based on a detailed hydraulic modeling of each subsector and an agreed

methodology.

12. To improve the appropriate management of the rehabilitated network and reduce losses

the component will also finance: i) rehabilitation of water reservoirs (concrete storage tanks) to

increase storage capacity and pressure stabilization; ii) replacement of household connections

and installation of new domestic water meters; and iii) installation of bulk water meters and

valves to allow sectorization.

13. Social interventions will complement these physical investments to maximize the

Project‟s expected benefits by taking measures to facilitate the transition to a full pressure,

continuous and metered service. These will include the provision of guidance to manage

consumption in particular through the use of in-house water saving equipment.

Background

14. Based on a pre-feasibility design and preliminary allocation of the intervention zones

among the different sources of finance, Component 1 will finance works comprising the

rehabilitation of 143km of PVC pipe with diameters from 100 mm to 400 mm (about 130 km of

100 mm), 96 km of trenchless pipe rehabilitation (cracking and/or relining), rehabilitation and/or

replacement of about 26,000 household meters and provision, installation of 4 bulk meters and

700 water valves, and rehabilitation of 4 reservoirs. Sewerage works will include the provision

and installation of about 110 km of PVC pipe with diameter from 200 mm to 300 mm, as well as

rehabilitation of about 14,000 sewerage connections and rebuilding/reconstruction of 1,300

manholes. More specific information will be available once the detailed designs are completed,

and these planned works are also contingent to the availability of financing from other

institutions.

15. SEDAPAL through its Northern Service Management Unit (Gerencia de Servicios Norte)

divides the system according to micro-watersheds, grouping zones that share the same sewerage

outfall. The Northern Service Area (First and Second) corresponds to the Comas-Chillon primary

outfall and is considered priority as it is the closest to the Huachipa main branch bringing an

additional water flow of 5 m3/s. Virtually all sewerage discharge will go to the WWTP at

Taboada with a capacity of 14 m3/s, which is currently under construction and is scheduled to

start operating in 2013. The First Northern Service Area covers 12 operational sectors and 16

districts. It is envisaged that physical investments will largely benefit the districts of Los Olivos-

San Martin de Porres (44,920 inhabitants), Independencia (66,516 inhabitants) and Comas-Los

Olivos (10,994 inhabitants), with a total beneficiary population of 158,380 in an area of

approximately 118 km2. Given the nature of the intervention that encompasses not only the

rehabilitation but also the creation of hydraulically viable operational sectors, the aforementioned

four districts were prioritized. The Second Northern Service Area lies in the districts of San

Martin de Porres, Callao, Comas, Los Olivos, Carabayllo and Puente Piedra and its intervention

is scheduled for future undertakings,

16. An economic analysis carried out by SEDAPAL demonstrated that it is advisable to

rehabilitate all the water pipes installed for more than 10 years in the First Northern Service

22

Area, or about 90 percent of the water network in this zone. This relatively new (10 years)

network was not installed or supervised by SEDAPAL but by community dwellers that used

substandard construction procedures and materials. The infrastructure was later transferred to the

utility when it went from being a bulk water provider to a retail distributor of water services.

SEDAPAL estimates that 60 percent of the water pipes would have to be replaced and 40 percent

renovated, while about 50 percent of the sewerage pipes would have to be replaced and 50

percent renovated.

17. Experience has shown that replacement/rehabilitation of all or most of the pipes is not

always the most efficient alternative. Many pipes installed 25 years ago, and certainly 10 years

ago, still have a remaining useful life. In general, a large portion of the leaks and water losses

occurs in the household connection installations, which can be replaced fairly easily. The fact

that most of the large diameter network is made of asbestos-cement pipes points to an advantage

of rehabilitation rather than replacing as the disposal of old asbestos-cement pipes is a difficult

environmental problem due to the toxic nature of such waste material. Even if asbestos-cement

pipes are replaced, it would be advisable to leave the old pipes in place and install new pipes in

parallel. Several trenchless rehabilitation methods are currently in common use; however,

choosing between an open cut or trenchless rehabilitation should be based on local conditions,

with Peru‟s low labor costs making the former more economical. As to the sewerage collectors,

it would be more advisable to use rehabilitation methods rather than replacement of pipes. Such

an approach still takes advantage of the large diameter perforated conduits by re-lining them,

even if the pipes inside themselves are highly corroded.

The Intervention

18. This component primarily consists of rehabilitating the primary and secondary water and

sewerage network by replacing old pipes and rehabilitating existing ones through various open

cut and trenchless methods. Currently, the number of bursts and breaks in the pipe network in the

First Northern Service Area is high (about 3 bursts/km/year), with consequent high required

repair frequency and costs.

19. Prior to replacing each pipe section, tests and estimates will be made to establish the need

for replacement, rehabilitation or no action, the detailed methodology for carrying out these tests

will be improved and finalized during project implementation. The methodology will be based

on a detailed hydraulic modeling of the subsector to confirm the initial conceptual design (i.e.

new requirements for pipe diameters, network layout and location), followed by gathering data

on the material and age of the pipe section under consideration as well as information on the

frequency of breaks and leaks per pipe unit length in this section and comparing this with

performance standards , carrying out measurements for detecting leaks without uncovering the

pipe through leak detection instruments based on various commonly used methods (noise,

electromagnetic, specific methods for asbestos-cement and PVC pipes, closed circuit TV for

large diameter pipes), laboratory test and, if necessary, uncovering various strategic points in the

pipe section. The works contractor will carry out the tests for each pipe section and the tests will

be supervised and approved by a supervision firm.

20. Component 1 also includes the rehabilitation of water reservoirs (built concrete storage

tanks) for safeguarding storage capacity and for pressure stabilization. Damaged and

23

nonfunctioning domestic water meters will be replaced, and new meters will be installed for

unmetered connections. Bulk water meters and valves will be installed in the required points of

the primary water network to allow sectorization (pressure-control).

21. Based on the hydraulic modeling, which provided information on pressure, length,

network layout and geographical distribution, it is expected that there will be 18 new operational

sectors replacing the current 12 ones. An operational sector is determined to be water-tight based

on its distribution lines so there is only one entry and exit point for interconnection with other

sectors, while a subsector is defined with valves mainly for operation and maintenance, which

allows for the carrying out of hydraulic balances to estimate physical losses.

22. Social interventions will complement the physical investments to facilitate the household

transition to a full pressure, continuous service (elimination of in-house storage devices and

change of water use patterns), while providing guidance to users on reducing the new water bills

based on actual consumption, reducing consumption and using water saving devices which

SEDAPAL will be promoting as part of the Project.

23. The number of estimated beneficiaries for this component is 158,380 people, representing

approximately 19,000 households (water connections). First Northern Service Area includes 27

percent of the blocks in Metropolitan Lima, but has a lower proportion of Socio-Economic Level

A (higher income) and Level B, with 93.9 percent of the population in the C, D and E (lower)

socio-economic levels.

24. JICA and KfW are also financing part of required investments in parallel in the First

Northern Service Area (see table below). These investments are in different areas and under

different contracting arrangements, and their performance will not impact the deliverables of the

Bank financed works.

Table 1– Interventions in First Northern Service Area by Source of Financing (estimated from

preliminary designs)

Item unit JICA IBRD KfW Total

Water

Pipe supply and installation trenchless(Φ 100-500) PVC and ductile

iron m 201,795 142,914 21,116 365,825

Pipe supply and installation with trench(Φ 100-500) cracking and/or

relining m 110,798 96,791 0 207,588

Rehabilitation of water house connections un 35,443 26,700 1,602 63,745

Pressure-reduction chambers and valves (Φ 100-350) un 16 20 0 36

Provision and installation of stainless steel and ductile iron valves un 1,117 1,277 117 2,511

Reservoirs to be rehabilitated un 13 4 2 19

Macro-meters to be installed un 13 4 2 19

Water Sectors to be intervened un 8 8 1 17

Sewerage

PVC Pipe provision and installation (Φ 200-300) m 224,930 109,835 5,186 339,951

Rehabilitation of sewerage connections un 28,478 13,906 657 43,041

Rehabilitation of inspection chambers un 2,666 1,302 61 4,030

24

Component 2. Improving SEDAPAL’s Efficiency (US$2.3 million, of which US$1.88 million

will be financed by the Bank loan)

25. This component will finance studies and consultant services to provide decision-making

tools to SEDAPAL‟s management to improve the company‟s efficiency. The rehabilitation,

sectorization and micro-metering activities from Component 1 that will result on reduction of

non revenue water, will be complemented with the undertaking of additional actions that would

allow SEDAPAL to improve its management, in particular the governance and transparency of

its operational and commercial management. Terms of Reference for each consultancy, including

deliverables, key personnel, calendar and budget have been prepared. The following represent

the priorities studies at this stage for the complement of the investments in Component 1.

a) Support for the implementation of the GIS:

26. SEDAPAL is in the process of developing a corporate GIS that includes the

standardization and inter-operation, unified database, corporate access to the digital maps and

plans, and flexible geo-architecture among others. The main expected benefits are to reduce

time, effort and costs in the operational and commercial management, accelerating and making

more efficient the decision making process and the response to the clients.

27. However, to achieve those benefits, the GIS requires a good level of update and data

quality, which means improving the technical cadastre, users cadastre and the maps base. Thus,

the Project would support a study that identifies the information gaps that need to be bridged for

a proper GIS operation, designing a Plan for updating the system and to put in place

organizational procedures within SEDAPAL that allows the utility to keep updated information

in a systemic way.

28. The Project will support an evaluation of the cadastre to determine the priority zones for

cadastre updating and the continuous process to follow for updating. Based on the results of this

evaluation, the Project will finance selected updates of the cadastre. Additionally, the Project will

finance a study with recommendations to SEDAPAL on the structural changes needed to ensure

that the GIS unit is fully integrated to maximize the potential of this tool, including the training

of personnel and establishing formal linkages to other parts of the utility.

b) SCADA information technology standardization strategy and consolidation. Integration

of the Supervisory Control and Data Acquisition (SCADA) systems

29. Since 1995, the Bank has supported SEDAPAL on the automatization of operations with

SCADA, beginning with the study for the sectorization of the central supply in Lima (El

Agostino, Callao, Chorrillos). In 1997, a wastewater treatment SCADA control center was

financed, and in 2000 the metropolitan SCADA with 220 remote stations started operations. As a

result of this positive experience, SEDAPAL continues operating the metropolitan SCADA, and

is increasing the remote stations. It has also implemented an additional number of SCADAs for

water re-pumping and in the main wastewater treatment plant such as Carapongo and Huáscar

among others.

25

30. Currently, SEDAPAL has at least 7 SCADA systems in operation with 5 different

technologies, and 4 new systems in preparation or implementation stage with no relation to one

another. Existing SCADA systems are built on different technologies, are operated

independently by different areas and staff in the company and use different policies and criteria

which results in important inefficiencies. The following table shows the diverse platforms

currently used for SCADA in SEDAPAL:

Table 2 – Different SCADA systems being used in SEDAPAL

Item SCADA Software

1 SCADA Primary Network Aspen One 2006- Aspentech

2 SCADA Re-pumping Survalent

3 Atarjea Water Plant Oasys

4 Huachipa Water Plant (in construction) TBD

5 Miraflores Wastewater Treatment Plant Wizcon

6 Huascar Wastewater Treatment Plant Wizcon

7 San Bartolo Wastewater Treatment Plant Wizcon

8 Carapongo Wastewater Treatment Plant CIMPLICITY

9 Machay Wastewater Treatment Plant (in construction) TBD

10 Taboada Wastewater Treatment Plant (in construction) TBD

11 La Chira Wastewater Treatment Plant (in construction) TBD

31. The Project will finance the consolidation of these systems into one corporate SCADA

system, grouping all current and future systems using a unified design for the integration of

SCADAs to guide all future investments in this field. Integration of SCADA systems is a priority

for SEDAPAL and is part of their current efforts to consolidate their rapidly growing, extensive

and complex network management systems. The fact that the current SCADA systems are not

properly managed has had a direct negative effect on the decision making process and has made

technical operation more costly and cumbersome. Other issues related to the SCADA system are

the need for systematic maintenance of equipment, development of preventive maintenance

plans, update of equipment inventory and staff training.

32. Notwithstanding the importance of a unified SCADA, until now a strategy for its

standardization and determination of future requirements has not been developed. The Project

will finance the formulation of the SCADA Master and Investment Plan to guide the new

SCADA investments and produce a specific plan and budget for SCADA integration including

the identification of the hardware and software required to make the different SCADA systems

compatible.

c) Options for the development of a new organizational model

33. This activity will support SEDAPAL in building a strategic vision for the medium and

long term, including developing its planning system. It will help the utility in the establishment

26

of long-term financial planning according to its expected capital investments and rest ructuring of

liabilities as well as exploring HR policy restrictions.

34. Building on the information generated by the previous studies, it will ensure that the

proposed changes can be accompanied by the correspondent institutional adjustments. The new

organizational model will not be limited to the information technology for management but it

will also consider the evaluation of organizational improvements in the area of Production,

Primary Distribution, and Works and Projects as well as recommendations for enhancing the

commercial system. It will finance high-level consultants to advise SEDAPAL on strategic

priorities regarding resource mobilization, technical alternatives and HR policies that accompany

the implementation of their Strategic Plan 2009-2013 and beyond, as well as the training of

existing staff to front the new challenges to establish the new institutional structure.

35. Other priority areas identified during Project preparation are Planning, Financing and

Regulation. There is a need to centralize the information and personnel with dedicated expertise

on areas such as regulatory control and mechanisms, financial expertise to determine the optimal

mix of financing sources and planning in a changing economic and political environment , and

dealing with the long-term liabilities with the tax agency. Such critical mass of personnel and

resources may be able to help the utility towards a sustainable access to capital markets, devising

the ideal combination of resources (multilateral, public or private) on its investment plan. This

support builds on the recommendation of the recent UNSGAB report and on several initiatives

sponsored by PPIAF SNTA aimed at identifying the utility‟s weak areas and bottlenecks that

have prevented the access to local and international private markets.

d) Preparation of a strategy to efficiently meet user demand for water and sanitation

services

36. According to SEDAPAL‟s data, water consumption in Lima and Callao appears to have

followed a relatively erratic progression over the past decade, for instance, there has been a 57%

increase in the number of users but no increase in the volume of water produced. At the same

time, 7% of connections are currently inactive and 20 percent of water consumed is not paid for.

This is due to a mix of endogenous and exogenous factors which have not been systematically

identified and analyzed by SEDAPAL. As a result, SEDAPAL lacks the tools to predict future

demand accurately and take appropriate steps to manage and efficiently meet such demand.

37. The Project will support an evaluation of the various factors that affect demand for water

supply and sanitation services, as well as an estimation of future demand trends backed by

adequate sensitivity analysis. This diagnostic will then be used to design an action plan

identifying and prioritizing the steps that need to be taken in order to proactively manage and

respond to user demand.

38. The Project will also help identify the structural as well as the process-related measures

that SEDAPAL might need to implement in order to ensure that this demand analysis becomes

part of normal operations and is updated on a regular basis. Appropriate training for relevant

staff will also be designed as needed.

27

Component 3. SEDAPAL Project Management (US$1.4 million, of which US$1.32 million will

be financed by the Bank loan)

39. Currently, PROMESAL has 20 full time staff to undertake its responsibilities; however

this unit will be in charge of implementing 4 new loans and will continue the support for the

supervision of the construction of the large wastewater treatment plant at Taboada.

40. Therefore, PROMESAL will need to be strengthened with hiring of additional personnel,

as well as the training of existing ones on engineering, contract administration, accounting and

financing services to ensure the proper and timely execution of the Project. This component will

finance the additional staff required for project management to establish a Monitoring and

Evaluation System and undertake the required financial audits as well as physical and

procurement reviews. Additionally, it will finance individual consultants to strengthen the team

on procurement, financial management and communication, as well as the training for strategic

planning, and selection of technical options to allow full compliance with the Investment Plan

2009-2013 and subsequent plans. This component will also support SEDAPAL‟s efforts to

document the Project‟s process and results, and to mainstream lessons learned and good

practices.

28

Annex 3: Implementation Arrangements

1. Project Administration Mechanisms

1.1 Project implementation institutional arrangements

1. The Republic of Peru will be the Borrower. The implementation agency will be

SEDAPAL. The Project will be managed by PROMESAL (Lima‟s Marginal Areas Sanitary

Improvement Project), a unit depending directly from SEDAPAL‟s General Manager (Gerencia

General). The unit will be responsible for overall management of the Project, and will ensure

consistency in the application of Bank guidelines and compliance with the Loan Agreement, the

Project Agreement, the Subsidiary Agreement, and the Operational Manual. The proceeds of the

loan will be passed on to SEDAPAL as a loan.

SEDAPAL

2. SEDAPAL (Servicio de Agua Potable y Alcantarillado de Lima) is a State owned

enterprise, constituted as a Sociedad Anónima, under the Ministry of Housing, Construction and

Sanitation. It has technical, administrative, economic and financial autonomy. It was created

through a Legislative Decree Nº150, dated June 12, 1981. It is ruled by its Estatuto and the

General Law of Societies (Law Nº26887), the norms that rule water and sanitation providers, and

the related laws in Peru. In March, 2006 Law Nº28696 modified the area under SEDAPAL‟s

responsibility, indicating that it includes the Province of Lima, the Constitutional Province of

Callao and those other provinces, districts or areas from the Province of Lima attached to the

service area through a ministerial resolution of the Housing Sector, as long as the territory is

adjacent and coverage can be provided directly.

3. SEDAPAL has been successfully implementing projects with bilateral and multilateral

institutions for several years, including the recently closed Lima Rehabilitation and Management

Project (3811-PE) and the associated Additional Finance Operation (7160-PE) for the

rehabilitation and expansion of water and sewerage services in the Southern and Center Service

Areas. Currently SEDAPAL is executing a US$65 million IFC bridge loan for the construction

of the Huachipa Water Treatment Plant, as well as parallel operations financed by JICA and

KfW for the rehabilitation of water and sewerage networks in the First Lima Norte Service Area.

Project Management Unit – PROMESAL

74. The implementation phase of the Project will be under the responsibility of PROMESAL

(Lima‟s Marginal Areas Sanitary Improvement Project), a unit depending directly from

SEDAPAL‟s General Manager (Gerencia General). Its responsibilities include: carrying out

bidding processes, selection of contractors, supervision, approval of contract amendments, and

general Project management. SEDAPAL‟s General Management (Gerencia General) will be

responsible for approving final designs, complementary studies, while Operations Management

(Gerencia de Operaciones) is in charge of the final reception of the works. PROMESAL is in

charge of most network rehabilitation and expansion projects in SEDAPAL, including recently

29

closed Bank-financed projects and parallel operations financed by JICA and KfW, and has

proven implementation capacity.

4. Following the successful implementation arrangements of the previously Bank financed

Project, the Managerial Investment Committee, comprising the full quorum of the company‟s

managers and headed by the General Manager of SEDAPAL, will provide a high level interface

with the rest of SEDAPAL. This committee will be responsible for approving all of the key

procurement and implementation decisions prior to the Bank‟s no objection, and it will ensure

coordination between PROMESAL and other areas of the company.

5. The operation and maintenance of the infrastructure will be in charge of SEDAPAL‟s

Norte Management (Gerencia Norte), as part of its overall responsibility of service provision in

the area. The following SEDAPAL organization chart shows the relation between the different

Management Units (Gerencias).

1.2 Measures to address capacity constraint

6. The administrative structure of PROMESAL will be strengthened in order to meet the

incremental needs associated with the administration and execution of the Project. Measures

include hiring individual consultants, training, and the use of firms for the supervision of large

contracts.

SEDAPAL

ORGANIZATIONAL CHART

LOGISTICS

MANAGEMENT &

SERVICES

PRIMARY PRODUCTION & DISTRIBUTION MANAGEMENT

COLLECTION,

TREATMENT &

DISPOSAL

MANAGEMENT

COMMERCIAL

MANAGEMENT

CENTRAL SERVICE

MANAGEMENT

SOUTHERN

SERVICE

MANAGEMENT

NORTHERN SERVICE

MANAGEMENT

HUMAN

RESOURCES

MANAGEMENT

FINANCIAL MANAGEMENT

RESEARCH &

DEVELOPMENT

MANAGEMENT

PROMESAL -PROJECTS &

WORKS MANAGEMENT

GENERAL

MANAGEMENT

BOARD OF DIRECTORS

INTERNAL

AUDIT

MANAGER

30

2. Financial Management, Disbursement and Procurement

2.1 Financial Management

Executive Summary of Financial Management Assessment

7. As part of the preparation process of the proposed project, the FM team has performed a

financial management capacity assessment to determine the adequacy of the entity “Servicio de

Agua Potable y Alcantarillado de Lima” SEDAPAL‟s financial management arrangements to

support project implementation. The assessment was performed in accordance with OP/BP 10.02

and the “Financial Management Manual” dated March 1, 2010.

8. SEDAPAL is a continuing entity with experience in working with Bank funds and was

consistently assessed through supervision of Bank‟s previous projects and external auditors

showing satisfactory performance. The FM arrangements will be similar to the previous project

implemented by SEDAPAL. As of the date of this document, SEDAPAL has the required

fiduciary staff to support beginning of project activities; and an additional Financial Management

Specialist will be selected and hired once implementation starts. Therefore, proposed project

implementation will rely widely on existing arrangements, strengthening them in specific areas

identified and agreed during the assessment in view of the expected increase in SEDAPAL‟s

operations and towards facilitating the preparation of financial reports. On such basis,

SEDAPAL is working on the following actions: recruiting the additional financial management

specialist whose terms of reference have been agreed with the Bank, and improving the financial

information system with a module to produce financial reports of the project and the Statement

of Expenditures (SOEs).

9. At present, the project‟s inherent risk and control risk are rated modest, mainly taking

into account SEDAPAL‟s experience with Bank-financed projects, and the existence of overall

acceptable FM arrangements, which are being strengthened in terms of staffing, information

system, and update of the Operational Manual. Thus, the overall FM risk rating is defined as

modest.

10. Based on the assessment performed, in general proposed FM arrangements are

considered acceptable subject to the successful implementation of agreed strengthening

measures, aimed at enhancing SEDAPAL‟s capacity for project implementation.

Programming and budget

11. PROMESAL will coordinate with SEDAPAL‟s technical area the activities to be

executed during the year to prepare the Annual Program (POA) and the budget of the project .

The Board of Director‟s of SEDAPAL has the responsibility to approve the budget of the project

which is submitted for approval to the Fondo Nacional Empresarial del Estado (FONAFE).

Thereafter, the Minister of Finance (MEF) will also include this budget under the national budget

and will approve the disbursements for loan resources to be used for project implementation. As

in the previous operation, the budget is operated under the Sistema de Administración Financiera

(SAP). The PROMESAL will be responsible for preparing and monitoring the overall project

31

budget, including all sources of financing –BIRF and SEDAPAL contributions– following the

functional classification in terms of components, sub-components and activities of the project.

The Financial Department of SEDAPAL will record the budget of the project in its information

system. The budgetary control will consist of: (i) timely preparation and approval of annual

programs, budget and procurement plans, establishing a clear relation among them; (ii) proper

recording of the approved budget in the financial management system; and (iii) timely recording

of commitments and payments as required, to allow an adequate budget monitoring, and (iv) also

provide accurate information on project commitments for programming purposes.

Accounting – Information System

12. Accounting records of SEDAPAL follows private sector regulations including the use of

the General Chart of Accounts established for the private sector entities. SEDAPAL accounting

follows the accrual basis of accounting; however, for the preparation of the financial statements

of the project, the PROMESAL will follow the cash basis of accounting. With this object, the

General Chart of Accounts will need to be complemented with a more functional classification,

including project components/sub-components/activities. Currently, SEDAPAL uses the SAP

financial information system for budget and accounting records. SEDAPAL will add a module to

its SAP system to prepare the project financial reports to guarantee the timely and reliable

preparation of financial information reports, SOEs, and to monitor the project execution to

control budget variances. The main FM regulatory framework for the project will consist of: (i)

Peru‟s laws governing financial management for the private sector and the entity‟s operating

manuals and norms. Project-specific FM arrangements that are not contemplated in the above

mentioned documents have been complemented in a concise FM section of the project‟s

operational manual. Among others, specific reference will be made to: (i) the appropriate internal

controls for the project; (ii) the formats of project financial reports; and (iii) auditing.

Procedures and Internal Controls

13. PROMESAL has submitted to the Bank for review the version of the Operational

Manual (OM) of the Financial Management chapter. The OM reflects processes, procedures, and

internal control mechanisms for the new project, including, chart of accounts according to the

functional classification of the project, the IFRs, terms of reference of the additional financial

management specialist, the flow charts that describe the procedures, roles and responsibilities,

and specific internal controls –ex-ante and ex-post- to be followed for the implementation of the

project. Therefore, this chapter of the OM is satisfactory to the Bank.

Financial Reports

14. On a semester basis, PROMESAL will prepare unaudited interim financial reports (IFR)

containing at least: (i) a statement of both sources and uses of funds for each calendar quarter

and cumulative uses (with expenditures classified by component/subcomponent, use of funds by

component and beginning and ending cash balances; along with a reconciliation of the

Designated Account accompanied by the copy of the bank statement; (ii) a statement of budget

execution per component/subcomponent (with expenditures classified by the major budgetary

accounts) and all sources of financing and including variances between budget and actual

32

expenses with the respective explanatory notes of main variances. PROMESAL will be

responsible for submitting the IFRs to the Bank not later than 45 days after the end of each

semester. The reports should be prepared in local currency and in US Dollars. On an annual

basis, PROMESAL will prepare the project financial statements including cumulative figures for

the year and as of the end of that year. The financial statements will also include explanatory

notes in accordance with the Cash Basis International Public Sector Accounting Standard

(IPSAS), and the entity‟s assertion that loan funds were used in accordance with the intended

purposes as specified in the Loan Agreement. As described above, IFRs will be prepared using

the information provided by SAP. Any working paper generated for the preparation of IFRs and

annual financial statements will be maintained by PROMESAL as supporting documents.

Auditing arrangements

15. Internal Audit. SEDAPAL has an Internal Audit Department, which depends on the

Board of Directors. The audit department may include under their annual program an ex-post

review of the project activities and proposed recommendations if needed. If such audits occur,

PROMESAL will provide the Bank with copies of internal audit reports covering project

activities and financial transactions.

16. External Audit. SEDAPAL through PROMESAL will prepare the annual project

financial statements, which will be audited following International Standards on Auditing (ISA),

by an independent firm and in accordance with terms of reference (TORs), both acceptable to the

Bank. The audit opinion covering project financial statements will contain a reference to the

eligibility of expenditures. An audit firm will be hired by SEDAPAL, through the General

Comptroller Office of Peru, which will perform the audit of the project and provide the audit

report. The audit report will be required to include a section on the state of the internal control of

the implementing entity. PROMESAL will submit the audit report to the Bank no later than 6

months after the end of each fiscal year. In addition to the audit report of the project, SEDAPAL

will submit its entity annual audited financial reports to the Bank. The audit work for the project

described above can be financed with loan proceeds. PROMESAL will ensure that the first

external audit is contracted within six months after Loan Effectiveness.

Flow of funds and Disbursement Arrangements

17. SEDAPAL will be the sole responsible entity for managing loan proceeds SEDAPAL

will co-finance the project and those funds will become available for the project implementation,

as counter-part funds, upon budget approval by SEDAPAL‟s Board of Directors.

Disbursement Methods

18. On a preliminary basis and following the general practice of the current portfolio, the

following disbursement methods may be used to withdraw funds from the credit: (a)

reimbursement, (b) advance, and (c) direct payment. Under the advance method and to facilitate

project implementation, a Designated Account in US Dollars would be opened and maintained

by SEDAPAL in the commercial financial institution. The ceiling of the Designated Account

will be of US$1 million for outstanding advances for the first six months after effectiveness and

US$2 million thereafter. Funds deposited into the Designated Account as advances, would

33

follow Bank‟s disbursement policies and procedures, to be described in the Legal Agreement and

Disbursement Letter.

Payment mechanism

19. To process payments, the entity will be able to withdraw the required amount to a local

currency bank account from where payments to consultants and suppliers would be made. The

procedures and internal mechanism are reflected in the Operational Manual and are being

updated to reflect particularities for this new operation.

Disbursement Deadline Date

20. Four months after the closing date specified in the Loan Agreement. Loan proceeds will

be disbursed against the following expenditure categories:

Table of Loan Proceeds Category Amount of the Loan

Allocated (expressed in USD)

Percentage of Expenditures to be

financed (exclusive of taxes)

10

(1) Goods, works, consultants‟

services, Non-Consultant Services and

Training for Part 1 of the Project

51,300,000 100%

(2) Goods, consultants‟ services, Non-

Consultant Services and Training for

Part 2 of the Project

1,880,000 100%

(3) Goods, consultants‟ services, Non-

Consultant Services and Training for

Part 3 of the Project

1,320,000 100%

TOTAL AMOUNT 54,500,000

2.3 Procurement Plan and Procurement Arrangements.

A. General

21. Procurement for the proposed project would be carried out in accordance with the World

Bank‟s "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 revised

October 2006 and May 2010; and "Guidelines: Selection and Employment of Consultants by

World Bank Borrowers" dated May 2004 revised October 2006 and May 2010, and the

provisions stipulated in the Loan Agreement. For each contract to be financed by the Loan, the

different procurement methods or consultant and non-consultant selection methods, the need for

pre-qualification, estimated costs, prior review requirements, and time frame are agreed between

the Borrower and the Bank in the Procurement Plan. The Borrower has prepared a Preliminary

Procurement Plan for the entire scope of the Project and a detailed and comprehensive

procurement plan, that includes all contracts for which bid invitations and invitations for

proposals are to be issued in the first 18 months of project implementation. The Procurement

10

It will be important to ensure that the invoices sent to the Bank clearly indicate amounts net of taxes for Bank

financing which is exclusive of taxes.

http://go.worldbank.org/XH679K5M60

http://go.worldbank.org/1M27MNVLZ0

http://go.worldbank.org/1M27MNVLZ0

34

Plan will be available at the Procurement Plans Execution System (SEPA). Goods and works

shall be procured under contracts awarded on the basis of International Competitive Bidding,

National Competitive Bidding, Shopping or Direct Contracting. Consultants‟ services shall be

procured under contracts awarded on the basis of Quality and Cost-based Selection, Quality-

Based Selection, Selection under a Fixed Budget, Least Cost Selection, Selection Based on the

Consultants‟ Qualifications, Single Source Selection and, Procedures set forth in Section V of

the Consultant Guidelines for the Selection of Individual Consultants, including Sole Source

Selection for Individual Consultants.

B. Assessment of the agency’s capacity to implement procurement

22. Country. The national procurement system of Peru has made significant progress in the

last few years, particularly with regard to access to information and adoption of standard bidding

documents. However, it still suffers from serious setbacks that affect both the efficiency and

transparency of government purchasing. Of most concern, is the distortion of competition

generated by the use of the referential price and the permanent concern for literal compliance

with the requirements set forth in the national regulatory framework, as well as the lack of

procurement capacity in some sectors, particularly at the local level.

23. Agency. Following the implementation arrangements, PROMESAL will be responsible

for the administration of the Project, including procurement, disbursement and financial

management matters of this operation. PROMESAL is adequately staffed and will maintain its

capacity to conduct Procurement under this new operation. As part of Project‟s preparation,

PROMESAL has updated the Operational Manual which provides detailed procurement

information for project‟s implementation.

24. An assessment of the implementation agency‟s capacity to implement procurement

actions for the project was finished on November 2010. The capacity assessment looked into PU:

(a) organizational structure, (b) facilities and support capacity, (c) qualifications and experience

of the staff that will work in procurement, (d) record-keeping and filing systems, (e) procurement

planning and monitoring/control systems used, and (f) capacity to meet the Bank‟s procurement

contract reporting requirements. It also reviewed the procurement arrangements proposed in the

Procurement Plan.

25. The overall project risk for procurement is Moderate

26. The corrective mitigating measures proposed are:

MITIGATING MEASURES STAGE

An external procurement review must be contracted To be carried out during/throughout

project implementation

The Procurement Plan must be included and managed through

SEPA

Procurement Special Provisions.

35

27. In addition and without limitation or restriction to any other provisions set forth in this

Section or the Procurement Guidelines, the following provisions shall govern the procurement of

goods, non-consultant services and works with National Competitive Bidding procedures:

(a) Foreign bidders shall not be required to be locally registered as a condition of

participation in the selection process.

(b) No reference value shall be required for publication in the bidding documents or used for

the purpose of evaluation.

(c) Award of contracts shall be based exclusively on price and, whenever appropriate, shall

take into account factors that can be quantified objectively, and the procedure for such

quantification shall be disclosed in the invitation to bid.

(d) Foreign bidders shall be allowed to participate in National Competitive Bidding without

restriction and shall not be subject to any unjustified requirement which will affect their

ability to bid such as, but not limited to, the requirement to authenticate their bidding

documents or any documentation related to such bidding documents with either Peruvian

Consulates, the Ministry of Foreign Affairs, or any Peruvian authorities as a prerequisite

of bidding.

(e) The Borrower shall use standard bidding documents and standard evaluation formats, all

satisfactory to the Bank.

28. In addition and without limitation or restriction to any other provisions set forth in this

Section or the Consultant Guidelines, the following provisions shall govern all employment of

consultants:

(a) Foreign consultants shall not be required to be locally registered as a condition of

participation in the selection process.

(b) Foreign consultants shall not be required to authenticate any documentation related to

their participation in the selection process with either Peruvian Consulates, the Ministry

of Foreign Affairs, or any Peruvian authorities as a condition of participation in said

selection process.

(c) The Borrower shall use standard requests for proposals and standard evaluation formats;

all satisfactory to the Bank.

(d) Foreign consultants, either individuals or firms, shall not be required to pay fees to the

Peruvian Consultants‟ Association that are different from those required for Peruvian

consultants.

(e) No consultant hired for the Project, at the time he or she is carrying out his or her

contractual obligations as consultant, may hold civil service office or any other position

in any agency of the Borrower, nor shall such consultant have any right to re-entry into

any such office or position upon the conclusion of his or her consulting services.

29. Annual Procurement External Reviews. The Project Implementing Entity shall: not

later than October 15 of each year during Project implementation or such other date agreed with

the Bank and set forth in the Operational Manual, contract annual procurement reviews for each

year of Project implementation, with independent reviewers of experience and qualifications

satisfactory to the Bank operating under terms of reference satisfactory to the Bank, and have all

the procurement records and documentation for each fiscal year of the Project reviewed, in

accordance with appropriate procurement review principles; ii) not later than July 31 of each

year during Project implementation or such other date agreed with the Bank and set forth in the

36

Operational Manual, furnish to the Bank the procurement review (covering the previous calendar

year), of such scope and in such detail as the Bank shall have reasonably requested; iii) furnish to

the Bank or to said reviewers such other information concerning said procurement records and

documentation as the Bank shall from time to time reasonably request; and iv) not later than

September 15 of each year during Project implementation or such other date agreed with the

Bank and set forth in the Operational Manual, discuss the results of such review with the Bank

and take into account the Bank‟s comments thereon

C. Procurement Plan

I. General

Bank’s approval Date of the procurement Plan – March 3, 2011

Expected Date of General Procurement Notice: April 2011

Period covered by this procurement plan: 4 years

II. Goods, Works and non-consulting services.

30. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as

stated in Appendix 1 to the Guidelines for Procurement:

Thresholds for procurement methods and prior review (thousands of USD)

Expenditure

Category

Contract Value (Thresholds) US

$ thousands Procurement Method

Contracts Subject

to Prior Review

1. Works >3.000 ICB All

250 – 3,000 NCB First

<250 Shopping First

Regardless of value DC All

2. Goods >250 ICB >350

50 - 250 NCB First

<50 Shopping First

Regardless of value DC All

Note: ICB = International Competitive Bidding

NCB = National Competitive Bidding

DC = Direct Contracting

Reference to Project Operational/Procurement Manual:

31. The Borrower, as part of Project‟s preparation, has updated the Operational Manual

which provides detailed procurement information for project‟s implementation.

37

III. Summary of the Procurement Packages

1 2 3 4 5 6 7

Ref.

No.

Description Estimated

Cost US$

million

Packages Domestic

Preference

(yes/no)

Review by

Bank

(Prior/Post)

Comments

CIVIL WORKS

1 Rehabilitation of

water and

sewerage

networks in

Northern Lima

50

(excluding

taxes)

2(Packages

3 and 4)

No Prior

IV. Selection of Consultants

32. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated

in Appendix 1 to the Guidelines Selection and Employment of Consultants:

Thresholds for methods and prior review (thousands of USD)

Consulting Services Contract Value (Thresholds) US

$ thousands Procurement Method

Contracts Subject to

Prior Review

3.a Firms >100 QCBS, QBS, FBS, LCS

>200;

<200 Terms of Reference

<100

QCBS, QBS, FBS, LCS,

CQS Terms of Reference

Regardless of value SSS All

3.b Individuals

Comparison of 3 CVs in

accordance with Chapter

V of the Guidelines

>100;

<100 Terms of Reference

Note: QCBS = Quality- and Cost-Based Selection

QBS = Quality-Based Selection

FBS = Fixed Budget Selection

LCS = Least-Cost Selection

CQS = Selection Based on Consultants' Qualifications

SSS: Single Source Selection

33. Short list comprising entirely of national consultants: Short list of consultants for

services, estimated to cost less than US$350,000 equivalent per contract, may comprise entirely

of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant

Guidelines.

38

Consultancy Assignments with Selection Methods and Time Schedule

1 2 3 4 5

Ref. No. Description of Assignment Estimated Cost

US$ Processes

Review by Bank

(Prior/Post)

Firms

1.1 Communication Strategy for Social

Intervention

150,000

(excluding taxes)

QCBS Prior

1.2 Social Marketing for Water Saving Devices 1,250,000

(excluding taxes)

QCBS Prior

2.1 Support for the implementation of the GIS 432,000

(excluding taxes)

QCBS Prior

2.2 SCADA information technology

standardization strategy and consolidation

648,000

(excluding taxes)

QCBS Prior

2.3 Preparation of a strategy to efficiently meet

user demand for water and sanitation

services

300,000

(excluding taxes)

QCBS Prior

2.4 Options for the development of a new

organizational model

500,000

(excluding taxes)

QCBS Prior

Individuals

1 Contract Management Engineer $54,000 (per year) 3 CVs Prior

2 Works Supervisor Engineer $42,000(per year) 3CVs Prior

3 Procurement Specialist $42,000 (per year) 3CVs Prior

4 Financial Specialist 1 $42,000 (per year) 3CVs Prior

5 Financial Specialist 2 $36,000 (per year) 3CVs Prior

6 Procurement external review $10,000 (per year) 3CVs Prior

34. In addition to the prior review supervision to be carried out from Bank offices, the

capacity assessment of the Implementing Agency has recommended annual supervision missions

to visit the field to carry out post review of procurement actions. The size of the sample for post-

review will be not less than 1 in 10 contracts.

3. Environmental and Social (including safeguards)

35. The proposed development objective of this project is to improve the water and sewerage

services in the Northern Service Area of Lima. This will be achieved by the rehabilitation of the

infrastructure network and by the strengthening of SEDAPAL‟s operational capacity.

36. In order to improve the continuity and quality of the services, SEDAPAL will follow a

two-tier strategy. The first is to make more water available by reducing the physical losses in the

system, and the second is to improve the operational and commercial management of the water

and sanitation system by: (a) reducing commercial losses, (b) optimizing the technical operation

of the systems (pressure management, sectorization and valve control, automatization for the

control systems and others). Given the new water source that will become available in the

Northern Service Area in mid-2011 by the construction of Huachipa Water Treatment Plant, it is

important to count on a working water and sewerage system that is able to withstand the new

pressures and volumes.

39

37. The proposed project will consist of three components: (i) rehabilitation and

improvement of water and sewerage networks in the First Northern Service Area of Lima, which

include social interventions aimed at enabling households to maximize water benefit s, such as

promoting the use of water saving equipment; (ii) improving management for better transparency

and governance, which will provide technical assistance for the institutional strengthening of

SEDAPAL; and (iii) Project management.

38. This section provides information as to the World Bank Safeguard Policies triggered by

the project, safeguards-related risks and/or impacts identified through field visits to the project

area and discussions with SEDAPAL staff, the measures to be taken to address those safeguards

related risks as stated in the terms of reference for the EA undertaken according to the national

environmental regulations, and procedures for ensuring those measures are implemented during

project execution. The project has been designed to comply fully with the World Bank

Environmental and Social Safeguards Policies.

Compliance with the World Bank Safeguards and the Peruvian Environmental Legislation

39. Following the World Bank safeguards principles, the project was classified as an

Environmental Category B and the following safeguards were triggered: OP 4.01 Environmental

Assessment; OP 4.12 Involuntary Resettlement; OP 4.11 Physical and Cultural Resources.

40. According to the sectoral environmental legislation for water and sanitation projects,

enforced by the Ministry of Housing, Construction and Sanitation (MVCS), SEDAPAL has to

conduct a detailed Environmental Assessment (EA). Terms of reference for this detailed EA

were prepared by SEDAPAL in close coordination with the World Bank in 2009 to fully comply

with the letter and spirit of relevant World Bank Safeguard Policies. The preparation of the EA

has been completed.

Environmental Assessment (OP 4.01)

41. As the project is classified as Category B, an Environmental Assessment (EA) is in

required, in accordance with OP 4.01, including an Environmental Management Plan. The

detailed EA has identified potential direct and indirect environmental impacts associated with the

project and other alternatives, and developed mechanisms and measures to avoid, minimize

and/or mitigate negative impacts. The Environmental Management Plan, contained in the EA

study, has specified activities, budgets and responsibilities to ensure the implementation of these

mitigating measures.

42. Since the detailed EA has been reviewed by the World Bank, an Addendum to the

original EA report was prepared by the consulting firm. The full EA report (including the

Addendum) was disclosed at SEDAPAL‟s Webpage in September 20, 2010. A copy also has

been disclosed at the Bank‟s InfoShop on December 21, 2010.

40

Positive Environmental Impacts

43. The project is expected to have a very positive environmental impact overall, by (i )

consolidating and improving water resources management in Lima; (ii) connecting people to

rehabilitated sewage collection systems in the First Northern Service Area of Lima, thereby

improving human and environmental health conditions and protecting very scarce underground

water sources, and (iii) increasing the efficiency of the water supply services provided by

SEDAPAL.

44. Efficient water supply services. The project will directly improve SEDAPAL‟s capacity

of efficiently using water resources by reducing water losses and the contamination of

underground water sources. This reduction of water losses (estimated at 12,000 m3/yr after

project completion) is critical in a city like Lima, the second largest city in the world located in a

desert area after Cairo and a city whose main water resources come from rapid retreating glaciers

in the highlands due to climate change. This support will consist of the rehabilitation of the

primary and secondary water networks as well as the construction of several water reservoirs for

storage and pressure stabilization, the installation of water sectors for consumption and water

meter and pressure management, and the replacement of water and sewerage connections.

45. This component will include a social intervention to facili tate the households

transitioning to a full-pressure, 24 hour-service, while minimizing the impact of the new water

billed based on actual consumption rather than estimated by replacing the current sanitary

installation with water-savings devices. This support will also include support to SEDAPAL

aimed at maximizing the benefits gained by the infrastructure interventions under Components 1

(listed above), and also includes: (a) automatization and operational control systems, (b)

enhancing the micro-credit mechanisms to allow poor households to upgrade their sanitary

facilities with newer, water-saving devices, and (c) Project Management to include also studies,

audits, as well as monitoring and evaluation.

46. Improvements in environmental and human health conditions. According to the Country

Environmental Analysis, (World Bank, 2006), of all the impacts of environmental degradation in

Peru, those related to health are the most significant. The study of the costs of degradation

carried out as part of the Country Environmental Analysis estimated the annual damages from

environmentally related sources at S/. 8.2 billion (US$2.45 billion). Over 70 percent of that,

around S/. 5.85 billion (US$1.75 billion), is attributable to environmental health, arising from

poor quality water supply, sanitation and inadequate hygiene. The project will directly improve

environmental health conditions of population to be served. Rehabilitation of sewerage systems

will decrease the rate of breaks in pipelines what exposes population to water borne diseases and

odors with significant human health impacts. This full pressure, 24-hour service will also

eliminate storage devices, change water use patterns and modify hygiene practices. This

behavioral change will in turn eliminate fertile ground for water borne diseases such as dengue

and gastrointestinal cases associated with lack of hygiene. It is expected that improved sewage

collection systems will generate positive environmental benefits to the quality of aquifers in

Lima, as well as provide a healthier urban environment due to improved sanitation and water

services to the urban population to be served by this project.

41

Potential Negative Impacts

47. During construction: The environmental and social impacts associated with these works

are considered low and no significant and irreversible environmental damage is expected.

Potential temporal minor negative environmental impacts, mostly nuisances (e.g., disposal of

waste from works and replaced pipelines, occasional spills from liquid waste in machinery

camps, odors, dust and noise, traffic congestion, access-related restrictions on neighbors,

temporary effects on socioeconomic activities and small businesses, street vendors proliferation,

etc.) might happen, associated with the construction works. To avoid these potential negative

impacts, appropriate measures will be incorporated in the project‟s design. These measures have

been addressed in detail in the EA report and its constituent Environmental Management Plan

(EMP). Table 1 presents the major negative environmental impacts identified during the EA

process.

Table 1 Negative Environmental Impacts during construction

Generation of particulate matter and dust during transportation of materials and due to

manipulation of asbestos-cement pipelines

Accumulation of pipelines waste materials due to excavations

Temporal interruption of water and sewage services

Increase in congestion due to restricted access to vehicles and pedestrians

Unpleasant odors due to wastewaters

Noise produced by machinery and trucks and by demolition of existing infrastructure

Removal of trees and bushes due to rehabilitation of reservoirs located in parks

Soil contamination generated by accumulation of concrete waste in the area of works, solid

waste generated by workers and spillover of fuels, painting material and oils

Human health and security risks during excavations and construction works in reservoirs Source: EA report (Nippon Koei, 2010)

Environmental Management Plan (EMP)

48. The Environmental Management Plan (EMP) includes a series of very detailed and

adequate mitigation and enhancement measures designed to ensure the project minimizes any

negative impacts, and improve the positive ones. Costs of these measures have been estimated.

The EMP is organized into several programs to be implemented during the

construction/rehabilitation and operation phases. The EMP includes the following measures and

programs:

Environmental impacts control and mitigation measures

Water management program

Soil management program

Solid waste management and final disposal program (includes disposal of wastes from

asbestos-cement pipelines)

Vegetation conservation, restoration and compensation program

Environmental compensation measures program

Construction materials management program

Social management program

42

49. The EA report also includes other plans and programs such as: (i) Environmental

monitoring plan, (ii) Environmental training and education plan, (iii) Surveillance program, (iv)

Investment program, (v) Occupational health and safety plan, (vi) Closing program, and (vii)

Contingency plan.

50. Table 2 summarizes the main negative environmental impacts and the corresponding

mitigation measures:

Impacts Mitigation Measures

Air pollution due to combustion

gases, dust from works in pipelines

and others

Preventive inspection and maintenance of engines and vehicles

(trucks, machinery, etc.)

Optimization of transport time

Preventive maintenance of unpaved access roads, considering

wetting down those roads

Permanent wetting down of streets to avoid dust

Carefully selecting the places to store construction materials and

excavation wastes and materials

Provide health protection equipments to workers

Wetting down of land to be removed

Speed limits to tipper trucks and cover the tipper to avoid dust

Use of protection equipment by workers exposed to particulate

matter from polyethylene and asbestos-cement pipelines

Compliance with safety measures to replace asbestos-cement

pipelines

Transport of asbestos-cement wastes in the minimum possible time

to an identified landfill for hazardous materials (located in Chilca,

south of Lima)

Soil alteration due to operation of

heavy duty equipments Prevent dumping of materials from excavations in adjacent land

plots and properties

Heavy load machinery will limit their movement to the project area

and access ways

Minimize the area to be excavated

Nuisances due to noise generated by

transit of heavy duty vehicles Frequent maintenance of equipments engines

Use of protection equipments against noise by workers

Landscape alteration due to heavy

duty machineries and equipments Proper management of wastes

Move equipments and machinery immediately after completion of

works

Clearing and leveling only the minimum area required by

construction activities

Soil contamination due to solid and

liquid wastes, wastewaters, fuels

and spillovers, etc.

Distribution of containers for collection of wastes in the project

areas

Collection of wastes in specific containers, avoiding to mix them,

according to the procedures established

Proper disposal of solid wastes in designated sanitary landfills

Containers for fuels and oils must be hermetic and in perfect

conditions

Hire of portable chemical toilets and hygiene facilities for workers

Disposal in appropriate landfills and recycling of industrial wastes

(e.g. bottles, cans, used filters, cement residuals, etc.)

Store fuels and lubricants in appropriate containers in a designated

area within the camp site

43

Impacts Mitigation Measures

Generation of waste materials Segregate and accumulate solid wastes in hermetic containers for

disposal in authorized landfills

Impacts on health due to workplace

accidents Hire experienced and trained personnel for operation of machinery

and equipments

Permanent use of personal protection equipment by personnel

Training on safety measures

Training on hygiene habits and cleaning up of facilities

Impacts on green areas Restore trees and gardens in areas affected by civil works Source: EA report (Nippon Koei, 2010)

51. Project Environmental Management: The environmental management of this project will

be undertaken by SEDAPAL‟s Environmental Management Team (EGAm) in close coordination

with the Ministry of Housing, Sanitation and Construction‟s Office for Environment.

SEDAPAL‟s EGAm and SEDAPAL‟s Social Unit will be responsible for coordinating the

project‟s environmental and social actions respectively, while the Ministry of Housing,

Sanitation and Construction‟s Office for Environment will be in charge of providing inspection,

follow-up and guidance to the execution of mitigation measures required according to what was

established in the EA report, that has to be approved by the Ministry of Housing, Construction

and Sanitation‟s National Directorate for Sanitation, as well as environmental oversight of the

works. The Ministry of the Environment (MINAM) will be permanently informed since it is the

ruling authority o the National System for Environmental Impact Assessment (SEIA) and is

allowed o randomly review this project‟s EA according to the regulation of the law that created

the SEIA.

Borrower’s institutional capacity for environmental and social safeguard policies and

institutional strengthening needs.

52. The Borrower‟s institutional capacity for safeguard policies is good. SEDAPAL‟s

Environmental Management Team (EGAm) is ascribed to the Management Unit for Logistics

and Services. EGAm‟s main functions are: (i) prepare SEDAPAL‟s Environmental Management

Plan and assuring its implementation and updating11

; (ii) develop planning, implementation,

enforcement and evaluation actions in investment projects for maintenance and expansion of

green areas, reforestation and landscape development in SEDAPAL‟s Operations Center located

in La Atarjea and the Rimac River Landscape Reserve; (iii) undertake inter-institutional

coordination for the proper management of the Rimac, Chillon and Lurin River watersheds,

including their environmental restoration; and (iv) establish linkages with national and

international entities on environmental management issues.

53. In order to fulfill these tasks, EGAm‟s structure currently includes a 13-person

environmental management team in charge of environmental aspects of water and sanitation

11

This in turn will require: (i) coordinate with project, services and activities affecting SEDAPAL‟s environmental

management, (ii) propose to and coordinate with SEDAPAL‟s different teams the preparation of procedures to

ensure that SEDAPAL personnel‟s behavior conducts to improvements in the environmental performance of their

activities, products and services, (iii) coordinate with projects and teams the inclusion of EAs into sewerage projects,

and (iv) develop environmental awareness programs targeted to workers, suppliers and clients.

44

projects. At present, out of these, 5 people are specialists in environmental impact assessments

and environmental management.

54. A Plan for the Organizational Strengthening of SEDAPAL‟s Environmental Management

has been recently prepared. Under this Plan, EGAm will be transferred from the Logistics and

Services Management Unit to the Research and Development Management Unit. Also, tasks

such as maintenance of La Atarjea Operations Center‟s green areas, operation of the irrigation

system and management of forested areas in the Rimac River Ecological Reserve will be

transferred from EGAm to SEDAPAL‟s Administration and Conservation Team. In practice this

internal reforms in SEDAPAL‟s organizational structure will imply a reduction in personnel

allocated to EGAm, which will be reduced to a team of 6 professionals. Out of these, only 3

people will be in charge of environmental management issues, including EAs review and

monitoring of measures contained in the corresponding EMPs on the basis of information

reported by an independent supervision company.

55. Implementing the aforementioned Plan for the Organizational Strengthening of

SEDAPAL‟s Environmental Management will also include the following actions: (i) preparation

of EGAm‟s Organization and General Responsibilities Manual, (ii) preparation and

implementation of SEDAPAL‟s 2011-2015 environmental management plan,12

(iii) approval of

EGAm‟s Personnel Allocation Chart (EGAm will be reduce from a 13 person team to a 6 person

team), and (vi) allocation of human resources to EGAm to strengthen its environmental

management capacity.

56. Main responsibility for oversight implementation of the EMP will lay on SEDAPAL‟s

Lima Marginal Areas Sanitation Improvement Project (PROMESAL) and SEDAPAL‟s

Environmental Management Team (EGAm). PROMESAL will count on the technical support to

be provided by a consulting firm responsible of supervising contractor‟s compliance with the

World Bank‟s social and environmental safeguards. This supervision company will send its

supervision reports to PROMESAL which in turn will send them to EGAm and the World Bank.

EGAm and PROMESAL‟s Social Team will be responsible for verifying proper implementation

of the project‟s environmental and social actions respectively. Also, PROMESAL, in permanent

coordination with EGAm, will be in charge of providing inspection, follow-up and guidance to

the technical execution of civil works and implementation of mitigation measures required

according to what was established in the EA report and its EMP as well as environmental

oversight of the works.

57. Social Management Program: As part of the detailed EA, a social management plan will

be developed for this project. This plan will ensure a permanent and timely communication

among social and institutional stakeholders and allow mitigation of social and economic impacts

that might occur during the project construction and operation phases.

58. Disclosure, Consultation and Communication program : A public consultation on social

and environmental issues was held in October 2010 with sector stakeholders and civil society to

12

This Environmental Management Plan includes: (ii) SEDAPAL‟s Solid Waste Management and Minimization

Plans, (iii) Implementation and operation of the Integrated Management System (ISO 14001), and (iii) Coordination

with national and international institutions working on environmental management.

45

discuss the findings of social assessments, and present the EA report and mitigation measures

contained in the EMP. The EMP includes strategies on disclosure, consultation and

communication to inform the affected groups on management of environmental impacts. Specific

procedures to permanently inform the local groups on the scope of works and the EMP proposed

have also been prepared. Mechanisms to ensure consultations with these groups during the

project implementation have been designed aimed at addressing environmental issues that might

affect them.

59. In addition, SEDAPAL manages a grievance mechanism called AGUAFONO, which is

considered best practice in the public sector and is well-known by the population. This

mechanism is another channel where the company can receive feedback from civil society.

During preparation the Project team discussed the integration of system data acquired by

AGUAFONO and the technical department, with regards to pipe breakages and network issues,

in order to have a comprehensive picture on the performance of its networks. The undertaking of

this activity will be further considered during project implementation.

Physical Cultural Resources (OP 4.11)

60. Peru has a well-developed legislative and normative framework for management of

physical cultural property, which is under the oversight of the National Institute of Culture

(Instituto Nacional de Cultura – INC). In accordance to local legislation and Bank requirements,

SEDAPAL will include procedures for screening any known cultural property in the Project area

and incorporate „chance find‟ procedures in the event that culturally significant resources are

discovered during implementation. Procedures for the identification and protection of physical

cultural resources have been included in the EMP.

61. The EA report has included a list of archeological sites located in the project area and an

Archeological Monitoring Plan which specifies the following measures to be considered by

project contractor during the rehabilitation works: (i) preventive measures, (ii) immediate

measures, (iii) measures for the intervention of the monitoring Archeologist, (iv) prevention and

mitigation measures, and (v) a system for recording, analyzing, storing and delivering

archeological materials to Peru‟s National Institute for Culture (INC). The contractor will hire

two archeologists to support its personnel to take into account the aforementioned measures.

Implementation of the Archeological Monitoring Plan will be supervised by the National

Institute for Culture (INC).

Involuntary Resettlement (OP 4.12)

62. SEDAPAL has developed an Involuntary Resettlement Framework to be applied on all its

future interventions, regardless of source of financing. The Involuntary Resettlement

Framework (Norma Técnica de Reasentamiento) was developed in accordance to OP 4.12, and

will guide the preparation of Resettlement Plans, if necessary, during Project implementation,

and has been adopted and disclosed by SEDAPAL on February 16, 2011 as corporate policy to

guide all future investment operations.

46

63. SEDAPAL‟s policy is to guide the design and implementation of Involuntary

Resettlement Plans, establish policies and guidelines to mitigate and compensate the negative

effects derived from the involuntary taking of land to be used in the construction or rehabilitation

of reservoirs, wells, pumping stations, cisterns, tunnels, lagoons, networks, etc. Aiming to

reestablish equivalent and/or improved social and economic conditions to the ones families

enjoyed previous to the institution‟s intervention.

64. Specific objectives include: (i) Acknowledgment of involuntary displacement; (ii) fair

and assisted compensation for physical, economic and social losses; (iii) reestablishing previous

social and economic living conditions; (iv) assisting resettled families in their transition and

adaptation to their new surrounding until they have started to rebuild social networks; (v) Inform,

consult and engage affected people in the objectives of the project; (vi) assistance in the

productive use of compensation payments; (vi) minimizing the social and economic impacts that

derive from land acquisition, lots, housing or limitations in their use; (vii) Reestablish and

improve, if possible, affected people‟s living; ( viii) In the case that the affected person prefers to

receive economic compensation for their house, ensure that the affected people, families and

communities participate in the decision.

65. Grievance Mechanism: The project‟s grievance mechanism will be disclosed as a part of

the project‟s general social strategy. In other words users w ill interact personally with social

professionals who will explain their rights in terms of expressing complaints and grievances and

the due redress process it will follow. This mechanism is meant to cater especially to cases of

involuntary taking of land. In addition, SEDAPAL manages a grievance mechanism called

AGUAFONO, which is considered best practice in the public sector and is well -known by the

population. This mechanism is another channel where the company can receive feedback from

civil society. During preparation the Project team discussed the integration of system data

acquired by AGUAFONO and the technical department, with regards to pipe breakages and

network issues, in order to have a comprehensive picture on the performance of its networks.

The undertaking of this activity will be further considered during project implementation.

Social Assessment

66. Beyond the safeguards that were triggered: OP 4.01 Environmental Assessment; OP 4.12

Involuntary Resettlement; OP 4.11 Physical and Cultural Resources, SEDAPAL has prepared a

social assessment for the area of the Northern Service Area, focusing on the four prioritized

districts (Los Olivos, Independencia, San Martin de Porres and Comas), which provided

information on the characteristics of the population, map of stakeholders, social and economic

issues of the beneficiaries and developed a consultation with female leaders. The report includes

a directory of civil society organizations, NGOs and community based groups, for project

implementation. The outcomes and findings of social assessment will be disseminated via

SEDAPAL‟s web site including a video of a social consultation with women.

67. The social report has identified the following social risks and mitigation measures.

68. The social assessment evidences opportunities and risks in the project, among the

relevant opportunities there is the improvement of the capacities of the water management of the

47

population, participation in the decisions, control of works and surveillance of the system for its

sustainability, and access to temporary employment in the works (estimate a hiring capability of

2600 people). It identified as potential risks, potential social conflicts during the installation of

meters of water consumption, for the excessive extension of the duration of the works, and/or for

the increasing of the costs of the works beyond the expected ranges.

69. People‟s participation and social consultations can be a mechanism for good government,

and therefore requires resources for its appropriate implementation. There are four aspects for to

follow, (i) commitment of the local actors for preventive group actions to avoid unwanted

outcomes, (ii) public investment (SEDAPAL, Municipalities) to strengthen the mechanisms of

social participation and water management; (iii) management planning by results; and (iv)

transparency and social accountability.

3.1 Institutional Arrangements for Management of Environmental and Social issues

70. In order to fulfill these tasks, the EGAm‟s structure includes an 11-person environmental

management team in charge of environmental aspects of water and sanitation projects. Out of

these, 5 people are specialists in environmental impact assessments. EGAm‟s team with count on

the support of the technical experts from the company in charge of rehabilitation supervision to

be hired by SEDAPAL. This rehabilitation supervision company will have a team in charge of

environmental oversight of the works.

4. Monitoring & Evaluation

71. The results framework and monitoring strategy are included in Annex 3. This framework

has been developed in close coordination with SEDAPAL. PROMESAL will consolidate the

data at the project level and produce semi-annual reports to monitor progress. An impact

evaluation study – Encuesta de Evaluación de Impacto del Proyecto – that will analyze the effect

of the planned investments on improving the quality of service delivery in the Project area is

currently being designed.

72. Overall responsibility for monitoring and evaluation of the Project will lie with

PROMESAL, which will provide timely information about the progress and execution of the

project, including qualitative information on the execution of selected activities, procurement

and contractual decisions, accounting and financial recording, and other operational and

administrative matter. The Project Operations Manual provides specific details regarding

monitoring and evaluation responsibilities, including data collection requirements, timing and

use of information.

5. Role of Partners

73. The proposed project is part of SEDAPAL‟s program to rehabilitate the water supply and

sewerage networks in the Northern Service Area of Lima. This program will be financed in

parallel by the World Bank through this proposed operation, JICA, KfW and SEDAPAL‟s own

resources.

48

74. SEDAPAL has already secured resources from JICA and KfW, and the corresponding

specific designs are being prepared. The social interventions financed by the proposed project

will encompass the entire program (including the areas financed by JICA and KfW),

complementing the physical investments to facilitate the household transition to a full pressure

continuous service, improve hygiene practices, and provide guidance to manage consumption

including the use of in-house water saving equipment. During implementation bi-annual/annual

meetings will be scheduled with all financiers in order to review overall progress of the program

and resolve any identified issues.

75. The Bank implementation team has signed an Aide Memoire with JICA and KfW

representatives expressing the intention to share information and knowledge about the

implementation of the Program, as well as standardization of technical project reporting and

social intervention with the beneficiaries‟ communities. This Aide Memoire is in Project files.

49

Annex 4 Operational Risk Assessment Framework (ORAF)

Project Development Objective(s)

The Project Development Objective (PDO) is to improve efficiency, continuity and reliability of water supply and sanitation services in the Northern Service Area of Lima

PDO Level Results Indicators:

1. Number of daily hours water services are provided in the project area

2. Annual incidence of water pipe breakages per km of water supply network in the project area

3. Annual incidence of sewerage blockages per km of sewerage network in the project area

4. Volume of water saved in the project area

5. Number of learning events on strategic planning and management

Risk Category Risk

Rating Risk Description

Proposed Mitigation Measure

Timing for Mitigation Prep/Imp.

Project Stakeholder Risks

Stakeholder L

Borrower relation: Project implementation is delayed or discontinued due to competing priorities. Donor relation: A potential conflict or tension of objectives amongst the three donors active in the area (JICA, KfW, WB) could cause delays and undermine PDO achievement. Direct Stakeholder view: Envisaged consultation and information sharing activities fail to gain stakeholder support, delaying or obstructing Project implementation.

This project is part of a larger investment program in the Northern Service Area of Lima, one of the poorest and more marginalized areas of the city, considered a priority by SEDAPAL. Bank, JICA and KfW teams have kept fluid communications since the identification phase of the Project to ensure good levels of cooperation, coordination and complementarity. All contract packages are independent which limits inter-dependency and the implementing unit is the same, which prevents overlapping. Disclosure and consultation have begun during Project preparation and will continue throughout its implementation. SEDAPAL has an experienced team working on social outreach and appropriate communications channels (including grievance and redress mechanisms) are in place.

X X

50

Implementing Agency Risks (including FM & PR Risks)

Sector Policies and Institutions

M-L

The lack of reliable and updated information on the situation of the water and sanitation services makes the formulation of far reaching programs very difficult.

The Bank team will keep involved in its current dialogue with the government as well as the multilateral and bilateral –participation in the AGUA forum, and joint missions- to ensure that projects adhere to single sector policies. The Bank will increase its support to the standardization and collection of information though the PRONASAR project. SUNASS has already agreed to this investment Project, and given the strong justification for the investments, strong support from all actors is to be expected.

X X

Project Risks

Design

M-I

The Project will be negatively affected if the drinking water treatment plant (Huachipa) or the wastewater treatment plant (Taboada) are not fully operational by their scheduled completion time. There is also the risk of inefficiency in the investment by replacing more parts of the system than what would be technically and economically feasible.

The team will maintain close coordination with the technical staff at SEDAPAL to monitor the progress of the complementary works and to be able to adapt the proposed investments accordingly. The construction of the Huachipa water treatment plan has a 94 percent completion rate as of January 31, 2011. A methodology was developed to guide the infrastructure investment with an aim at cost containment and ensuring that expected benefits are fully realized. This methodology will be adapted and incorporated into the design of the bidding packages.

X X

Social & Environmental M-I

It is possible that the population’s shelter, assets, and/or income may be temporarily or permanently affected once the exact interventions are identified. The inappropriate handling and disposal of asbestos residuals could have significant health and environmental impacts. The full benefits of the Project will not be achieved if the beneficiaries (i.e. SEDAPAL’s customers) don’t adjust their behavior to the new levels of service being provided.

SEDAPAL prepared and adopted an Involuntary Resettlement Framework following Bank’s policy. Once the exact intervention is defined, SEDAPAL may need to prepare an Involuntary Resettlement Action Plan. Additionally, the population will be adapting to new infrastructure and thus it may take some time to adjust their use and behavior. In order to support this process, the project will include awareness-raising activities to help them adapt to the new volumes and regularity of water. The Environmental Management Plan will include specific actions to mitigate the health and environmental risks from asbestos pipelines residuals. The social intervention, which is an integral part of the Project, will be focused on preparing beneficiaries for the new levels of service. The Bank will continue working with SUNASS to point out any tariff affordability issues.

X X

51

Program & Donor L

Given the Project is part of a wider investment program in the area financed by multiple donors, lack of success in other programs or mere capacity constrains could negatively affect the impact of the Project.

The objectives of the Project are shared by the other donors. Bank and other donor’s teams will continue to keep fluid communications to ensure good levels of cooperation, coordination and complementarity.

X X

Delivery Quality L

Given the beneficiaries’ low levels of income; there is a risk that the nonpayment of water bills affects the proper maintenance and sustainability of investments.

Direct mitigation measures to be undertaken are included in the institutional development component. Component 2 of the Project will support a series of measures aimed at improving SEDAPAL’s capacity to efficiently provide water and sanitation services. The sustainability equation for SEDAPAL is computed as a whole, thus there is an intrinsic cross-subsidy to this population.

X X

Overall Risk Rating at Preparation

Overall Risk Rating During Implementation

Comments

M-L M-L

52

Annex 5: Implementation Support Plan

Strategy and Approach for the Implementation Support

1. The Implementation Support Strategy has been designed based on the following

considerations:

The Project is part of a larger investment Program for water and sanitation in the

Northern Service Area of Lima, which includes financing by JICA and KfW.

The Project‟s implementation will be managed by PROMESAL, a unit with experience in

managing large projects with international finance institutions.

All investments in the area (even those financed by other institutions and SEDAPAL‟s

own funds) will need to comply with Bank‟s safeguards.

The Project will be supervised by a mix of HQ and CO based staff. In addition to sector

specialists and safeguard and fiduciary staff, the Bank‟s team will also be supported by

local and international consultants.

Frequency of supervision missions will likely be higher at the beginning (4 per year) to

decrease to 2-3 per year after project implementation regularizes.

Fiduciary and safeguards training will be offered as necessary to PROMESAL.

2. The Implementation Plan will be revised regularly during implementation on the basis of

project progress and continuous risk assessment.

Implementation Support Plan

3. Technical Support. SEDAPAL counts with a large body of engineers with many years of

experience in the management of their complex network of water and sewerage. However, the

rehabilitation in such a scale for water supply systems will require hiring high level engineers to

assist in the reviewing technical studies.

For Component 1, world-class engineers advising the local firms on the methodology to assess

block by block whether the pipe may be replaced, rehabilitated, removed or left on site

abandoned. This involve specialized knowledge on Leak Detection Processes and Technology,

Water Loss Management in Developing Countries, Assessment of pipe infrastructure and

materials to further refine the methodology for pipe replacement or rehabilitation. Additionally,

technical advisors alternative construction technologies, and construction site management for

large works among others may be desirable.

4. Fiduciary support. As stated in Annex 3, SEDAPAL has experience implementing several

programs financed by multilateral banks. Additional measures will be taken during

implementation to strengthen SEDAPAL to support its implementation of the Program with

different financiers at the same time. Specifically:

Procurement: Implementation support will include: (i) providing training to members of

SEDAPAL; (ii) reviewing procurement documents and providing timely feedback to the

procurement units/specialists; (iii) providing detailed guidance on the Bank‟s

53

Procurement Guidelines; and in the SEPA system (iv) monitoring procurement progress

against the detailed Procurement Plan.

Financial Management. Supervision will review the Project‟s financial management

system, including but not limited to, accounting, reporting and internal controls.

Supervision will also cover sub- projects on a random sample basis.

5. Safeguards support. Given the scale of investment undertaken by SEDAPAL, particular in

the last years has created the capacity in the institution to implement large works according to

environmental and social considerations. However, the nature of the interventions as well as the

innovations introduced in the additional social activities envisaged in the Component 1, requires

advise of specialized social and marketing consultants.

6. Thematic support. The Bank has a large portfolio in Peru, including water resources and

water supply systems, and has kept engaged in policy dialogue with the Ministry of Housing,

Construction and Sanitation, the Water Regulator and Service Providers. This projects would

allow further engagement on utility management, for which SEDAPAL, the largest utility sets up

the example and innovative approaches countrywide, The team expects that most of this dialogue

will be led by the Project‟s sector specialists, particularly in the areas of financial planning,

project implementation on low-income areas and efficiency improvement. together with

representatives from the Country team and the Water and Sanitation Project. Specific support

from other sector specialists or specialists from other fields might be needed at certain times of

project implementation, particularly in the discussions about the products of the studies financed

under Component 2.

7. Implementation main focus. The following table summarizes the main focus of

implementation during the life of the project:

Time Focus Resource Estimate Partner Role

First 12 months Project launch,

establishing of Project‟s

procedures, review of

bidding documents

(including technical

designs) and monitoring

selection of consultants for

Component 2.

150 % supervision budget Joint missions, when

possible.

12-24 months Ensuring quality of works

and monitoring of

safeguards, review and

dissemination of

Component 2 products.

150 %Normal supervision

budget

Joint missions, when

possible.

24-36 Ensuring quality of works

and monitoring of

safeguards

Normal supervision budget Joint missions, when

possible.

36-60 Ensuring quality of works

and monitoring of

safeguards

Normal supervision budget Joint missions, when

possible.

Closing Collect final technical and

financial information.

50% of Normal

supervision budget

NA

54

Skills Mix Required

8. The following table summarizes the proposed skill mix and number of staff weeks in the

initial phase of project implementation. It is expected that demand will change with time.

Skills Needed Number of Staff

Weeks

Number of Trips Comments

HQ based Sector Specialists 20 4-5 Based in HQ

Environmental Specialist 3 1-2 Based in Country Office

Social Specialist 3 4 Based in Country Office

Procurement Specialist 3 1 Based in Country Office

Financial Management Specialist 1 1 Based in Country Office

Disbursement Specialist 1 0 Based in Country Office

Consultant(s) on Institutional and

Technical Issues

6 2-4 International Consultants

Other specific consultants 6 4-6 International and Local

Consultants

Partners

Name Institution/Country Role

JICA Japan Parallel Financer

KfW Germany Parallel Financer

55

Annex 6: Team Composition

World Bank staff and consultants who worked on the project:

Name Title Unit

Miguel Vargas-Ramírez Task Team Leader, Senior Water and

Sanitation Specialist

LCSUW

Lizmara Kirchner Water and Sanitation Specialist LCSUW

Michel Kerf Sector Leader LCSSD

Iris Marmanillo Senior Water and Sanitation Specialist TWILC

Raúl Tolmos Environmental Specialist LCSEN

Maria Elizabeth Dasso Senior Social Development Specialist LCSSO

Gabriela Arcos Environmental Specialist LCSEN

Kimberly Vilar Social Development Specialist LCSSO

Francisco Rodríguez Procurement Specialist LCSPT

Ana Lucia Jimenez Financial Management Analyst LCSFM

Silvia Delgado Program Assistant LCSUW

Mara Elena La Rosa Team Assistant LCC6C

Elizabeth Huaman Team Assistant LCC6C

Pilar Gonzalez Senior Counsel LEGLA

Maria Del Rocío Florez de

Cilloniz

Water and Sanitation Specialists,

Handwashing

TWILC

Patricia de la Fuente Hoyes Senior Finance Officer CTRFC

Nelly Ikeda Financial Management Analyst LCSFM

Menahem Libhaber Consultant, Lead Sanitary Engineer LCSUW

Luz Maria Gonzalez Consultant, Economist LCSUW

Augusta Dianderas Consultant, Water utility expert

Fabio Garzón Consultant, Networks Rehabilitation LCSUW

James Thomson Consultant, Pipe Materials and

construction techniques

LCSUW

Guillermo Hernandez Consultant, Automatization Specialist LCSUW

Malva Rosa Bascovich Consultant, Sanitation Markets TWILC

Ana Lucia Barragan Team Assistant LCSUW

Ignacio Urrutia Junior Professional Associate LCSUW

56

Annex 7: Economic and Financial Analysis

Cost-Benefit Analysis

Overview

1. The project will improve water supply reliability and water and sewerage service

provision in the Northern Service Area of Lima, through: (i) rehabilitation of current water and

sewerage network; and (ii) installation or replacement of equipment to induce water use

efficiency, such as: meters, and sanitary tools. On this basis, a cost-benefit analysis was

undertaken to evaluate the economic and financial viability of the project, its distributive impact,

and risk analysis.

2. The cost-benefit evaluation was made from financial and economic perspectives. From a

financial perspective, each component was evaluated appraising its costs and benefits at market

price, in the same way that SEDAPAL will be paying or getting from each component. From an

economic perspective, each component was evaluated converting financial cash flows into

economic cash flows through: (i) the use of conversion factors for the costs; and (ii) the

estimation of savings and other benefits that beneficiaries and SEDAPAL will have when the

project is implemented.

3. The proposed Project is economically feasible with returns of US$184 million and

internal rate of return of 20 percent. The evaluation shows positive economic results of US$181

million and US$3 million for the water and sewerage components respectively and internal rates

of return of 22 percent and 13 percent. The financial evaluation shows positive results only when

the tariff is raised by at least 10 percent additional to the increase already approved by the

regulator (SUNASS). The detailed cost-benefit analysis carried out for the project is available in

the project files, along with the distributive, sensitivity and risk analyses.

Summary of Methodology

4. All project components were appraised measuring their flow of costs and benefits for the

project lifetime, estimated as 30 years. Costs and benefits were expressed in constant prices of

June 2009.13

The discount rate corresponds to the opportunity cost of capital for Peru estimated

as 10 percent.

5. The benefit of the project was estimated as the incremental benefit of two scenarios: with

and without project situations. The with project situation includes the proposed investment

program and its associated targets. The without project situation considers the service would be

provided under the same conditions as it is today, and current operational indicators remain the

same or worsen along the years.

6. The with and without project scenarios were built taking into consideration that

SEDAPAL is constructing a new water treatment plant, Huachipa, and the North main water

pipe, which will bring in the first phase, an additional 5 m3/second to the water distribution

13

The exchange rate used was S/. 3.00: US$1

57

system. The Huachipa plant will treat water from the Rimac River up in the North and will

improve the water supply system through a better use of water resources. Specific considerations

were made in both the with and the without project scenarios using SEDAPAL‟s historical data

to ensure that the impact of the entry of Huachipa is properly taken into account.

7. Cost. The analysis includes investment and operating costs, and encompasses the totality

of the short-term/priority rehabilitation investments planned in the Northern Service Area of

Lima regardless of source of financing. Financial investment cost include: (i) project cost with

physical contingencies, supervision and taxes; and (ii) operation and maintenance cost (i.e.,

production cost of each of the water sources, distribution and energy costs, as well as network

maintenance). The volume of water produced is calculated based on the production capacity and

projected losses under each scenario (with and without project). Water capacity remains the same

in both scenarios; however, water losses vary in each scenario. In the with project scenario, water

losses improve from current level of 50.3 percent to 30 percent; while in the without project an

increases of one percent per year was assumed due to the high water pressure that the increase of

water supplied by Huachipa will bring. Financial prices were converted into economic prices

through the use of conversion factors.

Table 1. Investment Cost (million)

Investments S/. US$

1. Water rehabilitation, coverage expansion, and

reduction of water losses 427.3 142.4

2. Sewerage rehabilitation and coverage expansion 180.5 60.2

Total 607.8 202.6

8. Benefits. The benefits were measured in market prices and economic prices. The

financial prices correspond to the prices SEDAPAL pays for each input and the price that it

receives for each component, while the economic price corresponds to the real cost to the society

when market distortions are eliminated. Service levels in the project area are lower than

company averages, due to the shortage of water. Intermittence is high, with about 59 percent of

users receiving less than 9 hours of service per day. Non revenue water is estimated at 50.3

percent in the project area (compared with 37 percent in SEDAPAL), 80 percent of which

corresponds to physical water losses, and the remaining 20 percent to commercial losses; 33

percent of connections are metered.

9. The proposed Project is expected to improve service reliability in such a way that

rationing will be eliminated; water losses reduced to 30 percent: 25 percent of physical water

losses, and 5 percent of commercial losses; micro metering extended to 100 percent of

customers. Another benefit that comes along with an efficient water usage is the release of some

water that can be used to serve population in other areas in Lima with similar levels of water

intermittence.

10. Project benefits were measured in financing terms as follows: (a) increase of revenues,

measured as volume of water billed, times the average tariff per cubic meter for each category of

users, (b) reduction of operating costs, measured as savings on operating costs when reduction of

water losses is attained, and operation improvement is achieved, and (c) water release that comes

along with measures for an efficient water usage is included as a financial benefit when sold to

58

vicinity areas (the social tariff was used to calculate this benefit, which was also partially offset

for the operating cost required to distribute this water).

11. The Project‟s economic benefits were estimated as follows: (a) elimination of

intermittence in the water supply, (b) savings on operating costs, as a result of network

rehabilitation and reduction of water losses, and (c) savings on operating costs associated with a

reduction in the number of sewer pipes plugged. In addition, households that currently are

connected to the sewerage are subjected to bad odors, overflow of wastewater on the streets and

sometimes inside their houses. When the project is implemented none of these problems will

persist, which will bring along improvement in the quality of life and health benefits. To identify

the economic benefits, surveys were done during preparation, with results showing that the most

important impact could be measured through increase in property value of the households.

Given that no hedonic price study was carried out, different value increases on the properties

were tested for this evaluation. Finally, health benefits are likely occur when environmental

conditions improve; however they were not quantified in this evaluation.

Results

12. Economic Results. The economic evaluation shows positive results for both components

with overall returns of US$184 million and internal rate of return of 20 percent. The water

component alone shows profits of US$181 million and 21.8 percent of rate of return, while the

sewerage component‟s profit is US$2.6 million and 12 percent return. For sewerage component

the evaluation was done assuming an increase in property values of US$1,000 per dwelling

already connected to the service, which corresponds to a 5 percent increase on property value.

Additional benefits are expected from the sewerage component, which were not included in the

evaluation such as health and environmental benefits.

Table 2. Summary of Economic Results

NPV of flows („000 US$)

IRR Benefits Costs Net benefit

Water 258,532 77,447 181,085 21.8%

Sewerage 19,630 16,981 2,649 12.8%

Water and sewerage 278,162 94,428 183,734 20.2%

13. Financial Results. As Table 3 shows, neither water nor sewerage component are

financially viable showing losses of US$14 million and 9.1 percent internal rate of return. If

tariffs were increased an additional 10 percent, the internal rate of return would increase to 10

percent and the profit to US$25 million. This increase would be additional to the already

approved in June 2010 by sector regulator (SUNASS); the higher the tariff, the bigger the

financial benefits will be.

Table 3. Summary of Financial Results

NPV of flows („000 US$)

IRR Benefits Costs Net benefit

Water 79,860 89,417 (9,557) 9.1%

Sewerage 15,745 20,325 (4,580) 8.9%

Water and sewerage 95,605 109,742 (14,137) 9.1%

14. Distributive Analysis. The difference between economic and financial flows represents

rents or monetary flows that accrue to someone else than SEDAPAL. Winners and losers were

59

identified when decomposing inputs of all economic and financial costs. The big winners are the

customers who reap US$182 million benefits, which are explained mainly in the savings they

will have when service is provided continuously. The increase in bills they will have to pay to

SEDAPAL is paid off with the averted costs when rationing is eliminated. The same with the

sewerage project, customers will have higher economic benefits that compensate bills payments.

The fiscal impact for the government is positive as well increasing the taxes by US$17.5 million.

On the other hand, suppliers will have a loss of US$2 million. Society as a whole will have a net

gain of US$197 million.

15. Sensitivity Analysis. The sensitivity analysis measures the impact on the results when

variations occur on the assumptions. The outcome is measured changing one variable while all

others remain constant. The variables selected as those believed of carrying major risks were: (i)

investment cost overrun; (ii) operating cost overrun; (iii) project delays; (iv) reduction on

rationing cost; and (vi) increase of property values.

16. Results from the sensitivity analysis show that the project would have positive economic

results even when investment increases by 117 percent and when operating cost are doubled. The

rationing cost could decrease by 74 percent and the project would still be profitable. Regarding

the changes in property value, the results are highly sensitive; a one percent increase would mean

additional profit of about US$3 million.

Table 4. Results of the Sensitivity analysis. Break-even Point of Benefits

Economic results

Investment costs overrun 117%

O&M costs overrun 250%

Project Investment delays (# years) 4

Rationing costs decreases 74%

17. Risk Analysis. To enhance the accuracy of the financial and economic analysis, the

uncertainties of the real world are approximated using Monte Carlo simulation with the Crystal

Ball software. Based on a simulation of 1,000 trials the model recalculates the results of t he

financial and economic analyses by simultaneously changing each of the selected risk variables

according to their assigned probability distributions. As seen in Table 5 below, the result of the

risk analysis confirms the robustness of the economic results. The probability of having positive

economic returns is 100 percent for the water component and 69 percent for the sewerage

component.

Table 5: Risk Variables and their impact on economic results

Economic Results

Probability of positive NPV Mean expected NPV („000 US$)

Water 100% 159,914

Sewerage 69% 19,333

Total project 100% 179,142

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Financial Assessment of SEDAPAL



project. The analysis is based on SEDAPAL‟s audited historical and pro-forma financial

statements for the 2007 to 2010 period and its projected financial performance for the next 10

years.

Summary of Institutional Framework

19. Since 1990, the responsibility for water and sanitation service provision has been

decentralized to subnational governments (district or provincial municipalities).14

Local

municipalities received the ownership of the water supply and sanitation infrastructure and were

mandated15

to create urban water utilities as autonomous ring-fenced corporations under private

company law. The only exception is the service provision in Lima, which remains under the

responsibility of the central government, who retained the ownership of the infrastructure and

created SEDAPAL as a public utility operating under private law.16

SEDAPAL is the biggest

utility in the country serving more than one million connections, and its service area includes the

Lima Metropolitan Region and Callao.

20. The Ministry of Housing construction and Sanitation (MVCS) is the ruling entity for the

water and sanitation sector. Within the Ministry, the Vice Ministry of Construction and

Sanitation (Viceministerio de Construcción y Saneamiento, VMCS) is in charge of formulating,

approving, executing and supervising the country‟s water and sanitation policies.

21. The Ministry of Economy and Finance (Ministerio de Economia y Finanzas, MEF) plays

an important role in the sector, related to the terms of investment, sector planning, and

regulation. The General Directorate of Multiannual Planning for the Public Sector assesses the

multiannual strategic plans for each sector and the viability of selected infrastructure projects

through the National Public Investment System (Sistema Nacional de Inversion Pública, SNIP).

The General Directorate of Public Budget plans and assigns budget resources to each sector,

while the General Directorate of Public Credit is responsible for approving and for issuing the

national guarantee for any external debt or international cooperation for the sector. The

Directorates of Public Budget and Public Debt, determine to some extent the financing policies

of water utilities. They do so by setting limits on their indebtedness and by guaranteeing their

debts before local and international lenders.

22. The National Agency of Sanitation Services (Superintendencia Nacional de Servicios de

Saneamiento, SUNASS) was created in 1992 through the Law Decree No. 25965, and is the

sector regulator. SUNASS reports directly to the Presidency of the Council of Ministers. In

particular, the SUNASS is in charge of regulating the activity of the 50 Peruvian water and

14

Decree 574-1990 and Decree 601-1990, transfers the responsibilities for service provision to local governments.

The Constitution of 1993 and the Organic Law of Municipalities (23853) confirms that local responsibility. 15

Law No. 26338 of July 22, 1994 known as the General Water and Sanitation Law (Ley General de Servicios de

Saneamiento). 16

Decree-Law No. 25491 (May 7, 1992), which merges the Ministry of Housing and Construction with the Ministry

of Transport, with the exception of SEDAPAL that is transferred to the Ministry of Presidency.

61

sanitation utilities, including SEDAPAL. The agency publishes regularly reports on the

performance of the service operators and proposes management frameworks such as tariffs

models.

23. The main planning tool for public water and sanitation utilities in Peru is the optimized

master plan, which defines the needs in terms of investments and resources for a period of

around 30 years. Every optimized master plan has to propose an investment program meeting the

five following priorities: (a) improvement of water quality; (b) increased efficiency in the use of

water resources; (c) increased access to water supply and sanitation services; (d) increase in the

level of wastewater treatment; (e) and other required investment projects. In addition to

investment planning this plan is required to determine the tariff structure and level (calculated

according with a specific methodology developed by SUNASS) and the performance indicators

to be achieved by the each utility. In the absence of an approved optimized master plan,

SUNASS does not allow a water and sanitation utility to revise their tariffs. However,

adjustments to reflect the country‟s inflation index are automatic.

Past and Current Performance of SEDAPAL

24. SEDAPAL‟s main source of revenue is the provision of water supply and sanitation

services to the population in Lima. Until August 2010, the company charged a volumetric water

tariff, with no separate tariff structure for the provision of sanitation services. Thereafter, the

tariff was disaggregated between water and sanitation charges (70 and 30 percent respectively);

the sanitation tariff represents 43 percent of the water tariff. Audited accounts from 2007 to 2009

and estimates for 2010 results show that the company has been profitable. In 2007, the company

reported a net operating income of US$38 million. In 2008 this income was substantially lower

at US$1.3 million, mainly due to increased financial costs as a result of exchange rate differences

in its external debts. In 2009 the company had a net profit of US$74 mill ion. As shown in the

table below, SEDAPAL is in relatively good financial standing.

Table 6: SEDAPAL Historical Indicators

25. In the first half of 2010, SEDAPAL submitted to the regulator (SUNASS) a new

optimized master plan containing an ambitious 5-year investment program valued at US$1.5

INDICATORS 2,007 2,008 2,009 2,010

Liquidity Indicators

Current Ratio 0.9 1.0 1.0 1.4

Profitability Indicators

Operating ratio 0.8 0.8 0.8 0.77

Working ratio 0.6 0.5 0.6 0.58

EBITDA Operating margin 20% 24% 23% 23%

EBIT Operating margin 20% 4% 27% 12%

Leverage/coverage

Total Debt/Equity 0.5 0.5 0.6 0.67

Total Debt /Revenues 1.9 1.8 2.2 2.08

EBIT/Interest expense 3.6 1.1 5.1 2.04

EBITDA/Interest expense 8.1 11.6 8.2 7.05

62

billion and proposed associated tariff increases.17

After evaluating the company‟s proposal

SUNASS approved a lower tariff increase than that requested from SEDAPAL, given that 54

percent the investments proposed (about US$817 million) were to be implemented under the

National Water for All Program for which SEDAPAL is supposed to receive investment

subsidies from the national government. SEDAPAL, SUNASS and the government are currently

discussing this issue, given that the investment subsidies from the national government are not

materializing as predictable as originally envisaged – e.g., the company invested about US$100

million under the program in 2009 and has not received the full equivalent subsidy from the

government. Given the large nature of these investments and their potential impact on the

company‟s long-term financial sustainability, SEDAPAL needs to ensure the availability and

predictability of resources (either via subsidies or tariff increases) before these planned

investments are undertaken.

Future Performance of SEDAPAL

26. Projections to assess SEDAPAL‟s future financial position and performance were carried

out for the period of 2011 to 2021. The main assumptions and a summary of the main projected

indicators are presented below, while the detailed analysis is in the project files.

27. In the base scenario, projections were based on the following key assumptions:

a. In addition to adjustments for inflation (including the 3 percent increase approved in

January 2011), the real tariff increases already approved by SUNASS for 2010 (3.2

percent) was incorporated. A 6 percent real tariff increase was added in 2015 and 2016

as additional planned investments are implemented, likely in partnership with the private

sector. These are expected to be approved by SUNASS in due time.

b. The investment plan excluded the investments and associated benefits related to the

National Water for All Program, given that the source and availability of funding are

currently under discussion.

c. Water losses are reduced to 32 percent companywide by 2015 and 30 percent by 2021.

28. The implementation of the above assumptions ensures positive cash flow and a net profit

for SEDAPAL, enabling the company to meet its current operating expenses and debt

obligations. The company‟s working ratio will be maintained below 0.89 in all years and its debt

service coverage is projected to reach 1.80 at the end of the projection period. In 2015 the debt

service coverage will reach 1.15, highlighting the need for the company to carefully evaluate its

debt position in an ongoing basis. From 2015 onwards, SEDAPAL will also be able to finance a

portion of its investment needs (up to 50 percent depending on the overall levels of investment)

from its own resources. Table 7 below provides an overview of the company‟s main indicators

based on the projected financial results.

17

The proposed project represents 3.5 percent of SEDAPAL‟s proposed investment program .

63

Table 7: SEDAPAL Projected Indicators

INDICATORS 2,011 2,012 2,013 2,014 2,015 2,016 2,017 2,018 2,019 2,020 2,021

Liquidity Indicators

Current Ratio 2.4 2.3 2.4 3.7 4.7 5.8 6.6 7.2 6.9 6.8 7.0

Profitability Indicators

Operating ratio 0.81 0.85 0.89 0.83 0.88 0.83 0.82 0.80 0.81 0.77 0.76

Working ratio 0.62 0.66 0.71 0.66 0.72 0.67 0.67 0.66 0.66 0.63 0.62

EBITDA Operating margin 19% 15% 11% 17% 12% 17% 18% 20% 19% 23% 24%

EBIT Operating margin 19% 15% 11% 17% 12% 17% 18% 20% 19% 23% 24%

Leverage/coverage

Total Debt/Equity 0.70 0.71 0.72 0.74 0.77 0.76 0.72 0.68 0.59 0.48 0.39

Total Debt /Revenues 2.27 2.23 2.14 2.07 2.07 1.96 1.90 1.81 1.59 1.31 1.11

EBIT/Interest expense 3.17 2.62 1.72 2.68 2.01 2.85 2.87 3.05 3.05 4.44 5.81

EBITDA/Interest expense 6.45 5.86 4.61 5.39 4.84 5.35 5.21 5.36 5.39 7.12 9.14

Debt service coverage 2.75 2.33 1.68 1.32 1.15 1.28 1.27 1.22 1.19 1.57 1.80

Documents

World Bank Documentdocuments.worldbank.org/curated/en/589341468147000208/... · 2016-07-10 · Document of The World Bank FOR OFFICIAL USE ONLY Report No: 59188-PE PROJECT APPRAISAL