SCCD: N.G.

AFRICAN DEVELOPMENT FUND Language: English Original: English

ZAMBIA

CENTRAL PROVINCE EIGHT CENTRES WATER SUPPLY AND SANITATION PROJECT

APPRAISAL REPORT

INFRASTRUCTURE DEPARTMENT ONIN NORTH, EAST AND SOUTH REGIONS SEPTEMBER 2003

TABLE OF CONTENTS Page PROJECT INFORMATION SHEET, CURRENCY AND MEASURES, LIST OF TABLES, LIST OF ANNEXES, LIST OF ABBREVIATIONS, PROJECT MATRIX, EXECUTIVE SUMMARY (i-x) 1. ORIGIN AND HISTORY OF THE PROJECT 1 2. THE WATER SECTOR 2

2.1 Water Resources 2 2.2 Policy Framework 2 2.3 Legal and Institutional Framework 3 2.4 Sector Development 4 2.5 Donor Supported Programmes 5 2.6 Sector Constraints 5

3. THE URBAN WATER SUPPLY AND SANITATION SUB-SECTOR 6 4. THE PROJECT 8 4.1 Project Concept and Rationale 8 4.2 Project Area and Project Beneficiaries 10 4.3 Strategic Context 11 4.4 Project Objective 12 4.5 Project Description 12 4.6 Production, Market and Prices 13 4.7 Environmental Impact 15 4.8 Social Impacts 16 4.9 Project Costs 17 4.10 Sources of Finance 19 5. PROJECT IMPLEMENTATION 20 5.1 Executing Agency 20 5.2 Institutional Arrangements 20 5.3 Supervision and Implementation Schedule 21 5.4 Procurement Arrangements 21 5.5 Disbursement Arrangements 23 5.6 Monitoring and Evaluation 23 5.7 Financial Reporting and Auditing 24 5.8 Donor Coordination 24 6. PROJECT SUSTAINABILITY 24 6.1 Recurrent Costs 24 6.2 Project Sustainability 24 6.3 Critical Risks and Mitigating Measures 25

TABLE OF CONTENTS (cont’d) Page 7. PROJECT BENEFITS 25 7.1 Financial Analysis 25 7.2 Economic Benefits 26 7.3 Socio-economic Impact 26 7.4 Sensitivity Analysis 27 8. CONCLUSION AND RECOMMENDATIONS 27 8.1 Conclusion 27

8.2 Recommendations 28

______________________________________________________________________________ This Appraisal report was prepared by Messrs. P.E. Njuguna, Ag. Manager, ONIN.2 (Ext.2467), Lamin G. Barrow, Senior Financial Analyst (Ext.2592), Orison M. Amu, Senior Public Utilities Economist (Ext.2598), and Idrissa Samba, Senior Environmentalist (Ext.2657) following a mission to Zambia in September 2003. All enquiries should be addressed to the authors or Mr. K. Bedoumra, Director, ONIN (Ext. 2040).

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AFRICAN DEVELOPMENT FUND BP 323

1002 Tunis Belvedere Tel: (216) 71 333 511 Fax: (216) 71 351 933

PROJECT INFORMATION SHEET

(September 2003) The information given hereunder is intended to provide some guidance to prospective suppliers, contractors, consultants and all persons interested in the procurement of goods and services for projects approved by Boards of Directors of the Bank Group. More detailed information and guidance should be obtained from the Executing Agency of the Borrower. 1. COUNTRY : Zambia 2. NAME OF PROJECT : Central Province Eight Centres Water

Supply and Sanitation Project 3. LOCATION : Chibombo, Chisamba, Kabwe, Kapiri-

Mposhi, Mkushi, Mumbwa, Nampundwe and Serenje

4. BORROWER : Republic of Zambia 5. EXECUTING AGENCY : Ministry of Local Government and

Housing, Dept. of Infrastructure and Support Services (DISS) P.O. Box 50027, Lusaka, Zambia

Tel: 216 - 253192 Fax: 216 – 252680 6. PROJECT DESCRIPTION : The project entails improvement of water

supply and sanitation services in the 8 centres through (i) rehabilitation and extension of the infrastructure and (ii) the establishment of a Commercial Utility to manage these schemes. The project components include: A. Rehabilitation and extension of

water supply systems B. Sanitation Program: Rehabilitation and extension of sewerage infrastructure; the provision of on-site sanitation systems in peri-urban areas, and public hygiene education campaigns on water and health issues, Malaria and HIV/AIDS; and Solid Waste management.

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C. Building Works D. Institutional Support for the

establishment of a Commercial Utility to manage the water supply and sewerage schemes; and

E. Project Management

7. TOTAL COST : UA 24.62 million Foreign Exchange : UA 20.03 million Local Cost : UA 4.59 million 8. ADF LOAN : UA 16.25 million ADF GRANT : UA 5.78 million 9. OTHER SOURCES OF FINANCE Government of the Republic of Zambia : UA 2.59 million 10. DATE OF APPROVAL : December 2003 11. ESTIMATED STARTING DATE AND DURATION : June 2004, 4 years 12. PROCUREMENT : Procurement of goods and works and procurement of consultancy

services for this project will be in accordance with the Bank’s Rules of Procedure for Procurement of Goods and Works or Rules of Procedure for Use of Consultants, as appropriate, using the relevant Bank Standard Bidding Documents.

13. CONSULTANCY SERVICES REQUIRED : The Fund will finance services

required for construction supervision, institutional support, and project audit. All the services shall be procured through competition of shortlisted firms.

14. ENVIRONMENTAL CATEGORY : II

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EQUIVALENTS AND ABBREVIATIONS CURRENCY EQUIVALENTS

(September 2003) 1 UA = USD 1.37727 1 UA = ZMK 6,460.74 1 USD = ZMK 4,690.98

WEIGHTS AND MEASURES l/c/d = litres per capita per day m3 = cubic metre (1000 litres) m3/d = cubic metre per day Ml/d = million litres (thousand cubic metres) per day Mm3 = million cubic metres Km = kilometres

FISCAL YEAR

1st January- 31st December

ABBREVIATIONS ADB = African Development Bank ADF = African Development Fund CSP = Country Strategy Paper CU = Commercial Utility DANIDA = Danish International Development Agency DISS = Department of Infrastructure and Support Services DPC = Dynamic Prime Cost DWASHE = District Water, Sanitation and Health Education EA = Executing Agency ECZ = Environmental Council of Zambia EIA = Environmental Impact Assessment EIRR = Economic Internal Rate of Return EU = European Union F.C = Foreign Cost FIRR = Financial Internal Rate of Return GPN = General Procurement Notice GRZ = Government of the Republic of Zambia GTZ = Gesellschaft fur Technische Zusammenarbeit ICB = International Competitive Bidding JICA = Japan International Cooperation Agency JIT = Joint Implementation Team KfW = Kreditanstalt fur Wiederafbau L.C = Local Cost MCM = Million Cubic Metres MDGs = Millennium Development Goals MENR = Ministry of Environment and Natural Resources MEWD = Ministry of Energy and Water Development MIS = Management Information System MLGH = Ministry of Local Government and Housing MoFNP = Ministry of Finance and National Planning MoH = Ministry of Health NCB = National Competitive Bidding NORAD = Norwegian Agency for Development Cooperation NPV = Net Present Value NWASCO = National Water Supply and Sanitation Council O&M = Operation and Maintenance

iv PCR = Project Completion Report PIU = Project Implementation Unit PLAs = Participating Local Authorities PRSP = Poverty Reduction Strategy Paper PSC = Project Steering Committee RDC = Resident Development Committee ROA = Return on Assets RWSSU = Rural Water Supply and Sanitation Unit UA = Units of Account UFW = Unaccounted for Water UNDP = United Nations Development Programme UNICEF = United Nations Children’s Fund VIP = Ventilated Improved Pit (latrine) WASHE = Waster Supply, Sanitation and Hygiene Education WHO = World Health Organization WRAP = Water Resources Action Programme ZESCO = Zambia Electricity Supply Corporation ZMK = Zambian Kwacha

LIST OF TABLES

3.1 Water Supply and Sanitation Coverage by Type of Service in Project Area 3.2 Summary of CU’s Projected Financial Statements 4.1 Incidence of Water Related Diseases 4.2 Projections for Water Demand in Project Area 4.3(a) Schedule of Proposed Tariffs 4.3(b) Estimated Monthly Household Expenditure on Water 4.4 Summary of Project Costs by Component 4.5 Summary of Project Costs by Category of Expenditure 4.6 Financing Plan by Source 4.7 Financing Plan by Component 5.1 Expenditure Schedule by Component 5.2 Expenditure Schedule by Financing Source 5.3 Summary of Procurement Arrangements

LIST OF ANNEXES

1. Location Map 2. Bank Group Operations 3. Project Organisational Chart 4. Detailed Project Cost Estimates 5. Environmental and Social Management Plan Summary 6. Implementation Schedule 7. Computation of Financial and Economic Rates of Return 8. CU’s Projected Financial Statements

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Year Zambia AfricaDevelo-

ping Countries

Develo- ped

Countries

Basic IndicatorsArea ( '000 Km²) 753 30,061 80,976 54,658Total Population (millions) 2001 10.6 811.6 4,940.3 1,193.9Urban Population (% of Total) 2001 35.1 38.0 40.4 76.0Population Density (per Km²) 2001 14.1 27.0 61.0 21.9GNI per Capita (US $) 2001 320 671 1,250 25,890Labor Force Participation - Total (%) 2001 42.2 43.3 … …Labor Force Participation - Female (%) 2001 36.4 35.1 … …Gender -Related Development Index Value 1999 0.420 0.476 0.634 0.916Human Develop. Index (Rank among 174 countries) 2000 153 n.a. n.a. n.a.Popul. Living Below $ 1 a Day (% of Population) 1996 72.6 45.0 32.2 …

Demographic IndicatorsPopulation Growth Rate - Total (%) 2001 2.2 2.4 1.5 0.2Population Growth Rate - Urban (%) 2001 2.8 4.1 2.9 0.5Population < 15 years (%) 2001 46.6 42.4 32.4 18.0Population >= 65 years (%) 2001 3.0 3.3 5.1 14.3Dependency Ratio (%) 2001 98.0 85.5 61.1 48.3Sex Ratio (per 100 female) 2001 99.2 99.4 103.3 94.7Female Population 15-49 years (% of total population) 2001 21.9 23.6 26.9 25.4Life Expectancy at Birth - Total (years) 2001 41.9 52.5 64.5 75.7Life Expectancy at Birth - Female (years) 2001 41.4 53.5 66.3 79.3Crude Birth Rate (per 1,000) 2001 42.0 37.3 23.4 10.9Crude Death Rate (per 1,000) 2001 19.2 14.0 8.4 10.3Infant Mortality Rate (per 1,000) 2001 82.8 79.6 57.6 8.9Child Mortality Rate (per 1,000) 2001 147.9 116.3 79.8 10.2Maternal Mortality Rate (per 100,000) 1998 650 641 491 13Total Fertility Rate (per woman) 2001 5.2 5.1 2.8 1.6Women Using Contraception (%) 1996 25.9 … 56.0 70.0

Health & Nutrition IndicatorsPhysicians (per 100,000 people) 1999 7.2 36.7 78.0 287.0Nurses (per 100,000 people) 1988 21.8 105.8 98.0 782.0Births attended by Trained Health Personnel (%) 1996 47.0 38.0 58.0 99.0Access to Safe Water (% of Population) 2000 64.0 60.4 72.0 100.0Access to Health Services (% of Population) 1988 75.0 61.7 80.0 100.0Access to Sanitation (% of Population) 2000 78.0 60.5 44.0 100.0Percent. of Adults (aged 15-49) Living with HIV/AIDS 2001 21.1 5.7 … …Incidence of Tuberculosis (per 100,000) 2000 477.9 105.4 157.0 24.0Child Immunization Against Tuberculosis (%) 2000 100.0 63.5 82.0 93.0Child Immunization Against Measles (%) 1996 85.0 58.2 79.0 90.0Underweight Children (% of children under 5 years) 1997 23.5 25.9 31.0 …Daily Calorie Supply per Capita 2000 1,912 2,408 2,663 3,380Public Expenditure on Health (as % of GDP) 1998 2.3 3.3 1.8 6.3

Education Indicators Gross Enrolment Ratio (%) Primary School - Total 1996 87.8 80.7 100.7 102.3 Primary School - Female 1996 84.9 73.4 94.5 101.9 Secondary School - Total 1996 28.8 29.3 50.9 99.5 Secondary School - Female 1996 22.2 25.7 45.8 100.8Primary School Female Teaching Staff (% of Total) 1995 43.3 40.9 51.0 82.0Adult Illiteracy Rate - Total (%) 2001 21.1 37.7 26.6 1.2Adult Illiteracy Rate - Male (%) 2001 14.3 29.7 19.0 0.8Adult Illiteracy Rate - Female (%) 2001 27.4 46.8 34.2 1.6Percentage of GDP Spent on Education 1998 2.3 3.5 3.9 5.9

Environmental IndicatorsLand Use (Arable Land as % of Total Land Area) 1999 7.1 6.0 9.9 11.6Annual Rate of Deforestation (%) 1995 0.8 0.7 0.4 -0.2Annual Rate of Reforestation (%) 1990 6.0 4.0 … …Per Capita CO2 Emissions (metric tons) 1997 … 1.1 2.1 12.5

Source : Compiled by the Statistics Division from ADB databases; UNAIDS; World Bank Live Database and United Nations Population Division.Notes: n.a. Not Applicable ; … Data Not Available.

ZAMBIA: COMPARATIVE SOCIO-ECONOMIC INDICATORS

GNI per capita US $

0

200

400

600

800

1995

1996

1997

1998

1999

2000

2001

Zambia Africa

Population Growth Rate (%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1995

1996

1997

1998

1999

2000

2001

Zambia Africa

111213141516171

1995

1996

1997

1998

1999

2000

2001

Zambia Africa

Life Expectancy at Birth (Years)

Infant Mortality Rate ( Per 1000 )

0

20

40

60

80

100

120

1995

1996

1997

1998

1999

2000

2001

Zambia Africa

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ZAMBIA: CENTRAL PROVINCE EIGHT CENTRES WATER SUPPLY AND SANITATION PROJECT - MPDE MATRIX Narrative Summary (NS) Verifiable Indicators (OVI) Means of Verification

(MOV) Important Assumptions/Risks

Sector Goal: (Goal to Supergoal):

1 To improve the quality of life and productivity of all Zambians by ensuring an equitable provision of an adequate quantity and quality of water to all competing user groups, and improved sanitation services for all, at acceptable cost and on a sustainable basis

100% and 75% of the country’s total population provided with potable water and adequate sanitation respectively by 2015.

1.1 National statistical reports.

Project Objectives: (Project Object.to. Goal): 1. To improve the quality and delivery of water

supply and sanitation services in the eight centres in Central Province, through rehabilitation and extension of the existing infrastructure, and commercialisation of these services.

1.1 A total of 268,255 people in the project area have access to water supply meeting WHO standards and improved sanitation services available at affordable rates by 2007.

1.2 Improved customer service through increased reliability and 24 hours availability of water supply by 2007.

1.3 Water rationing eliminated in the Project Area by 2007.

1.4 Incidence of water borne diseases halved by 2010.

1.5 Revenue collection improved from 61% in 2002 to 90% by 2007; Unaccounted-for-water reduced from 51% to 20% by 2007

1. PCR

2. NWASCO Reports

3. National/ Regional statistical reports.

4. Audit reports.

1. Government remains committed to increasing access to water supply and sanitation services at the national level.

2. Public and private investment in the sector is increased and sustained.

3. Donor support maintained

Outputs: (Output to Project Obj.):

1. Water supply and sanitation systems rehabilitated and augmented.

2. Water supply and sanitation services extended to low-income peri-urban areas;

3. Water supply and sanitation schemes in the project centers in Central Province operated on commercial basis;

4. Public education on environmental health and sanitation

1.1 25 production boreholes rehabilitated and/or installed; 2 existing water treatment plants rehabilitated and 1 new installed, 5 new water storage reservoirs constructed and 24 existing rehabilitated, 74 km of distribution pipes replaced and water distribution networks extended by 113 km, 148 public water kiosks installed, 80 km of house connection pipes replaced and 14,600 water meters provide and 8 workshops, tools and water treatment chemicals provided by 2007.

2.1 32 km of sewer reticulation rehabilitated and expanded, 65 km of sewer lines cleaned/flushed, 10 sewage treatment plants and associated pumping stations rehabilitated and 5 new constructed; 180 on-site sanitation facilities (improved latrines) provided by 2007.

1. Project quarterly and monthly progress reports.

2. Supervision Reports

3. National / Regional statistical reports.

4. Audit reports,

5. NWASCO Reports.

6. PCR

1. CU established on time 2. Suitably qualified staff recruited.

3. Effective management and adequate information systems are put in place on time to ensure proper O&M of the facilities.

4. Proposed tariff adjustments are implemented on time.

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Narrative Summary (NS) Verifiable Indicators (OVI) Means of Verification (MOV)

Important Assumptions/Risks

3.1 Commercial Utility established and operational by June 2004.

3.2 Metered connections, improved customer database, regular monthly billing by 2007;

4.1 Increased acceptance of new tariffs.

4.2 Enhanced awareness and knowledge of environmental health, malaria control and HIV/AIDS prevention,

Activities: Inputs (Activity to Output):

1. Procurement of goods, works and services

2. Setting up of the Commercial Utility (CU)

3. Construction works.

4. Works supervision.

5. Construction works.

6. Community mobilization and hygiene education.

7. Commissioning of works

8. Project Audit.

Total project cost: UA 24.62 million.

Resources:

ADF Loan UA 16.25 million

ADF Grant UA 5.78 million

GRZ UA 2.59 million

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Total: UA 24.62 million

1.1 Appraisal Estimates

1.2 Approved Government annual budgets

1.3 Audit Reports

1.4 Disbursement Records

1.5 Progress reports.

1.6 Supervision reports.

1. Timely implementation of the project 2. Adequate GRZ support to the project

including timely release of counter-part funds.

3. Active participation in the project by communities .

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ZAMBIA: CENTRAL PROVINCE EIGHT CENTRES WATER SUPPLY AND SANITATION PROJECT : MPDE MATRIX SPECIFIC FOR ADF GRANT COMPONENT

Narrative Summary (NS) Verifiable Indicators (OVI) Means of Verification (MOV) Important Assumptions/Risks

Sector Goal: (Goal to Supergoal):

1 To improve the quality of life and productivity of all Zambians by ensuring an equitable provision of an adequate quantity and quality of water to all competing user groups, and improved sanitation services for all, at acceptable cost and on a sustainable basis

100% and 75% of the country’s population provided with potable water and adequate sanitation respectively by 2015.

1. National statistical reports.

Project Objectives: (Project Object.to. Goal): To improve the quality and delivery of water supply and sanitation in the eight centres in Central Province, through rehabilitation and extension of existing facilities;

1.1 Adequate water supply extended to and benefiting a total of 188,500 people in the peri-urban areas of project centers by 2007;

1.2 A total of 268,225 people in the project area both in formal and peri-urban having improved sanitation by 2007; Incidence of water-borne diseases among the population in project area halved by 2010

1.3 Increased awareness of the affected population on environmental health, malaria and HIV.

1. PCR

2. NWASCO Reports

3. National/ Regional statistical reports.

4. District Health statistics

1. Government remains committed to increasing access to water and sanitation services at the national level.

2. Public and private investments in the sector are increased and sustained.

3. Donor support maintained

Outputs: (Output to Project Obj.):

1. Water supply services extended to high density, low-income peri-urban areas.

2. Sanitation systems rehabilitated and augmented

3. Improved personal hygiene and health.

1.1 Water distribution networks extended by 113 km, 148 public water kiosks installed by 2007,

1.2 Increased acceptance of new tariffs.

2.1 32 km of sewers rehabilitated and expanded, 65 km of sewer lines cleaned/ flushed, 10 sewage treatment ponds and associated pumping stations rehabilitated and 5 new constructed; 180 on-site sanitation facilities (improved latrines) provided by 2007.

3.1 Total project area covered by the Enhanced public awareness of environmental health campaigns as well as malaria control and HIV/AIDS prevention.

1. Project quarterly and monthly progress reports.

2. Supervision Reports

3. National / Regional statistical reports.

4. Audit reports,

5. NWASCO Reports.

6. PCR

1. Facilities well operated and maintained with full participation of beneficiaries;

2. Proposed Tariff adjustments are implemented on time;

3. Population adopts sound environmental health practices.

Activities: Inputs (Activity to Output):

1. Rehabilitation and extension of existing sanitation facilities;

2. Extension of water distribution networks to peri-urban areas.

3. Construction of improved public latrines and support for individual facilities;

4. Supply of Mosquito nets.

5. Community mobilization and public hygiene education.

Total costs: UA 6.11 million.

Resources:

ADF Grant UA 5.78 million

GRZ UA 0.33 million

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Total: UA6.11 million

1. Appraisal Estimates

2 Approved Government annual budgets

3. Audit Reports

4. Disbursement Records

5. Prog5ress reports.

6. Supervision reports.

1. GRZ provides counterpart funding; 2. Community participates in

public education activities.

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EXECUTIVE SUMMARY Project Background Since the mid-1990s, the Government of the Republic Zambia (GRZ) has made concerted

efforts to improve the delivery of water supply and sanitation services in the country. The National Water Policy was approved in 1994, and the Water Supply and Sanitation Act enacted in 1997. The main thrust of the policy is the devolution of authority for development and provision of water supply and sanitation services in urban areas to the local authorities. These policy and institutional developments have been followed by reorganization of Sector Ministries, and initiation of development programmes to improve the sector services, mainly to rehabilitate the existing water supply infrastructure in some of the major urban areas in the country. To ensure sustainability, the local authorities are encouraged to set up Commercial Utilities (CUs), autonomous entities that would be responsible for the development and management of the services in urban areas on a commercial basis. For the rural areas, the strategy is to create an enabling environment for the communities to provide the services themselves through the concept of Water Supply, Sanitation and Health Education (WASHE).

As part of the ongoing sector development efforts, the Bank financed in 1998, the Water Supply and Sanitation Study for Seven Centers in Central Province of Zambia. The objective of the study was to prepare both long term (20 year) strategic development programmes for water and sanitation in Chibombo, Chisamba, Kabwe, Kapiri-Mposhi, Mkushi, Mumbwa, and Serenje, conduct feasibility studies, and finally, prepare detailed designs and tender documents for the immediate project. Nampundwe was added later, bringing the total number of centres covered by the study to eight. The study has culminated in detailed designs and preparation of draft tender documents for the works required to restore water supply and sanitation services into a serviceable state. In conformity with the country’s sector strategy, the study also detailed the institutional arrangements required for sustained delivery of these services. GRZ has requested the Bank to finance the proposed Central Province Eight Centres Water Supply and Sanitation Project as detailed by the study. A Bank appraisal mission was fielded in September 2003, and this report is an outcome of the mission.

Purpose of the Loan The ADF loan of UA 16.25 million, and ADF grant of UA 5.78 million, which represent

89.5% of the total project cost, will finance 100% of the foreign costs and 43.5% of local costs.

Sector Goal and Project Objective The national water sector goal is to improve the quality of life and productivity of all the

people of Zambia, by ensuring an equitable provision of an adequate quantity and quality of water to all competing user groups and improved sanitation services for all at acceptable cost and on a sustainable basis. The project objective is to improve the quality and delivery of water supply and sanitation services in the eight project centres in Central Province, through rehabilitation and extension of the existing infrastructure, and commercialisation of these services.

Project Description and Outputs The project comprises mainly rehabilitation of the existing water supply and sanitation

facilities in the eight centres as well as institutional support for the formation of a CU to manage and operate the services. The envisaged outputs are: 1. water supply and sanitation systems in the eight centres rehabilitated and augmented; 2. water supply and sanitation services extended to high density, low-income peri-urban areas; 3. water supply and sanitation schemes in the project centers operated on commercial basis;

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4. public awareness of environmental health and sanitation issues, as well as malaria and HIV/AIDS.

Project Cost The total project cost is estimated at UA 24.62 million, of which the foreign and local

currency contributions are 81.4% and 18.6% respectively.

Sources of Finance The project will be financed by ADF loan and grant, and by GRZ. The ADF loan and grant

amounts are UA 16.25 million and UA 5.78 million respectively, which represent 89.5% of the total project cost. GRZ's contribution of UA 2.59 million represents 10.5% of the total project cost.

Project Implementation Project implementation is scheduled to last 4 years. The Executing Agency is the Ministry

of Local Government and Housing (MLGH) through the Department of Infrastructure and Support Services (DISS).

Conclusion and Recommendations The need to improve water supply and sanitation facilities in the eight centers in Central

Province has become critical, given the prevailing poor water supply and sanitation situation. As conceived, the project is in line with Government strategy, which seeks to promote access to water and sanitation services as a means of reducing poverty, and improve the quality of service delivery in the sector through commercialisation of these services.

The project is technically feasible, financially and economically viable with important

socio-economic benefits, as well as being environmentally sustainable. The project is accorded a high priority by the national and the provincial governments, which is reflected in the PRSP and in the Bank’s 2002-2004 CSP for Zambia. Moreover, it conforms to the Bank Group’s Integrated Water Resources Management Policy, which, among others, supports priority of rehabilitating existing infrastructure over new construction, and also encourages ultimate cost recovery while taking into account social equity and capacity to pay by the poor. When completed, this project, together with the ongoing Bank financed project covering the rural areas of Central Province, will ultimately provide adequate services to over 1.2 million people in Zambia, which would go a long way in contributing to the achievement of the water and sanitation MDGs.

It is recommended that an ADF loan not exceeding UA 16.25 million and an ADF grant not

exceeding UA 5.78 million be extended to Republic of Zambia for the purpose of implementing the project as described in this report, subject to the conditions specified in the loan and grant agreements.

1. ORIGIN AND HISTORY OF THE PROJECT 1.1.1 Since mid 1990s, the Government of Zambia (GRZ) has made concerted efforts to improve water supply and sanitation services. The reform measures included adoption of a National Water Policy in 1994, and enactment of the Water Supply and Sanitation Act of 1997. In line with the redefined policy framework, the sector institutions have been reorganized with emphasis being placed on the devolution of responsibility for service provision to the local authorities. For the development of water supply and sanitation services in the urban areas, the strategy is for local authorities to form Commercial Utilities (CUs) in the regions, to be responsible for the development and management of these services on a commercial basis. So far, 10 CUs have been formed in seven out of Zambia’s nine provinces, mainly with the support of the donors. Together with these reforms, investment programmes have been initiated to rehabilitate and extend the water supply infrastructure mainly in the larger urban areas. 1.1.2 These efforts to improve the performance of the water and sanitation sector in Zambia notwithstanding, many people still do not have access to improved services. While the policy reforms need further refinement and the institutional reorganization completed, the level of funding flows required to implement the reforms has been much lower than anticipated. As a result, the rehabilitation of water supply and sewerage infrastructure is yet to be fully carried out in most of the country’s urban areas. This situation has seriously curtailed the performance of most of the CUs. 1.1.3 In conformity with the sector development strategy, GRZ sought the Bank’s financing for the Water Supply and Sanitation Study for Seven Centers in Central Province of Zambia in 1998. The objective of the study was to prepare both long-term (20 year) strategic development programmes for water supply and sanitation in Chibombo, Chisamba, Kabwe, Kapiri-Mposhi, Mkushi, Mumbwa, and Serenje, and conduct feasibility studies, prepare detailed designs and tender documents for the immediate project. The study was also expected to propose the most suitable institutional arrangements for effective and sustainable management of these services. The town of Nampundwe was added later, bringing the total number of centres to eight. The study, which was largely completed in 2002, was conducted in close consultation with stakeholders, including the beneficiary communities. Workshops were held to discuss the outputs and recommendations at various stages of the study progress. 1.1.4 The main recommendation of the study is the urgent need to undertake rehabilitation works and necessary expansion of the existing water supply and sewerage systems in the study centres. The study has also identified the serious lack of services in the peri-urban areas, where the bulk of the population in these centres live. For institutional arrangements, the study recommended the formation of a single CU to manage the services in all the 8 centers. 1.1.5 Following the completion of the study, GRZ has requested the Bank to finance the implementation of its recommendations. The location map of the proposed project is presented in Annex 1. The Government’s request to finance the proposed Central Province Eight Centres Water Supply and Sanitation Project takes cognizance of the central role of water in economic development and contribution of adequate water supply and sanitation services to poverty reduction as articulated in the Country’s Poverty Reduction Strategy Paper (PSRP). The country’s pursuit of the Millennium Development Goal of halving the number of people without adequate water supply by 2015 further makes the need for this project all the more pressing. A Bank preparation mission was fielded in May 2003. Subsequently, a Bank mission returned to Zambia in September 2003 to appraise the project. This appraisal report is an outcome of the mission.

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2. THE WATER SECTOR 2.1 Water Resources 2.1.1 Zambia has abundant water, with an annual renewable resource of about 10,000 m3 per person, which is expected to decrease to about 6,000 m3 by 2025. The country is therefore not threatened by water stress or scarcity. However, there are significant spatial and strong seasonal variations across the country, resulting in water deficits in some areas. For example, rainfall ranges from 1400 mm in the north to 700 mm in the south, with most of the precipitation falling during November to March period. The country has a number of well-distributed perennial rivers, streams, lakes and swamps covering 6% of the total land area. There are 5 river basins, Zambezi, Kafue, Luangwa, Chambeshi/Luapula and Tanganyika. The Zambezi basin constitutes by far the largest water source in the country, and covers an area of 1.18 million m2 in several countries of the region. Approximately 50% (578,000 m2) of the total basin falls in Zambia, which accounts for 40.7% of the total flows in the Zambezi River. 2.1.2 The Kafue River, one of the major tributaries of the Zambezi and falling wholly within Zambia, is the most exploited water resource in the country. Most of the major industrial towns and centres in the country are located along its course, and depend on it for their water needs. However, the river suffers from severe pollution as it also serves as a sink for industrial, mining and sewage effluents from the same urban areas. The river has potential for irrigation, hydropower, fisheries, tourism and wetland development. The other major rivers include Luangwa River which is also a major tributary of the Zambezi, and then the Chambeshi and the Luapula both of which are part of the Congo basin, the latter forming the boundary with DRC for most of its length. In addition to the rivers, there are large natural lakes like Bangweulu, Mweruwa-Ntipa, Mweru and Tanganyika; the first two lying wholly within Zambia while the other two are transboundary lakes. 2.1.3 Zambia also has abundant groundwater resources with an estimated total of 1,740,380 MCM, and annual recharge rate of 160,080 MCM. Ground water is generally of good quality but has hardly been exploited. The development of ground water resources has hitherto been poorly controlled or monitored, a shortcoming that is going to be addressed through the proposed further refinement of the sector policy framework. 2.2 Policy Framework 2.2.1 Following wide consultations and participation by the stakeholders, GRZ adopted in the early nineties, the following principles as a guide to the sector reforms: (i) separation of the responsibilities of resource management from water supply and sanitation

provision; (ii) separation of the functions of regulation from service provision; (iii) devolution of authority to the local authorities and private enterprises; (iv) full cost recovery in the long term (with lifeline tariffs and cross subsidy); (v) human resources development resulting in more effective institutions; (vi) appropriate technology to local conditions; and (vii) increased government priority and budget to the sector. 2.2.2 The above principles were adopted through a consultative and collaborative process, and were followed with the adoption of the National Water Policy in 1994. The policy aims at promoting sustainable water resources development in order to facilitate adequate, equitable, and good quality water for all users at acceptable costs and ensuring security of supply under varying conditions. The policy framework has the following principles: -

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i) recognise the importance of the water sector in the overall socio-economic development of the country;

ii) place water resources under state control; iii) promote water resources development through an integrated management approach; iv) provide adequate, safe, and cost-effective water supply and sanitation services with due

regard to environmental protection; v) define clear institutional responsibilities for all stakeholders in the sector for effective

management and coordination; and vi) recognise water as both a social and economic good. 2.2.3 Strategies to implement the National Water Policy have been drawn up for the various sub-sectors including those of water supply and sanitation, for both urban and rural areas. For urban areas, the strategy is to devolve authority for service provision from central government to local authorities and private enterprises. In order to ensure cost recovery, most local authorities have commercialised the services by forming regional CUs. Each utility is responsible for the development and management of the services in the urban areas within a particular region on commercial basis. 2.2.4 Government has hitherto adopted the WASHE (Water, Sanitation, and Health Education) concept for the delivery of services in the rural areas. The strategy calls for full involvement of the beneficiary communities in the planning, development of the services, and in the maintenance of the facilities. At the district level, WASHE groups (D-WASHEs) are expected to work though community based WASHE committees in order to deliver the services. A national environmental sanitation strategy for peri-urban and rural areas has also been prepared and adopted by the Government. The strategy seeks to provide guidelines on how to improve the status of environmental sanitation in these areas. 2.3 Legal and Institutional Framework 2.3.1 In accordance with the Water Act of 1948, the management of water resources lies with the Ministry of Energy and Water Development (MEWD). The Act also established the Water Board as the organisational unit responsible for administering water rights in the country. The Board receives technical support from the Department of Water Affairs of MEWD. Other related Acts have been adopted over time, including that establishing the Zambezi River Authority. The National Water Supply and Sanitation Council (NWASCO) was established under the Water Supply and Sanitation Act of 1997 as an independent regulator for service providers in the urban areas. In accordance with the Act, NWASCO licenses service providers, approves tariffs, and is obliged to report annually to Parliament through MEWD. While it has moved relatively fast in setting quality standards for service delivery and developing its regulatory instruments, NWASCO’s ability to effectively monitor the service providers is constrained by lack of standardized reporting and non-adherence to common accounting standards. This problem will be resolved through the programmed GTZ technical assistance support, which would seek to harmonize the accounting practices for all urban service providers. NWASCO has also supported the creation of two Water Watch Groups, in Lusaka and the Copperbelt respectively, pursuant to its mandate to protect consumer interests in the urban water supply and sanitation sector. These Watch Groups provide a platform for NWASCO to receive regular feedback from the public regarding the quality of service delivery in Zambia’s urban areas. 2.3.2 The same Water Supply and Sanitation Act also assigned responsibility for delivery of water and sanitation services to the Ministry of Local Government and Housing (MLGH). The Ministry monitors and provides technical support to the local authorities, which are responsible for services provision in the areas under their jurisdiction, mainly through CUs. The Department of

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Infrastructure and Support Services (DISS) of MLGH provides technical support to the local authorities, including the established CUs. MLGH, through DISS, has similar responsibilities regarding the delivery of these services in the rural areas. A Rural Water Supply and Sanitation Unit (RWSSU) was recently created in DISS specifically to fulfil this mandate. 2.3.3 Other Government establishments involved in the sector include the Ministry of Health (MoH), which is responsible for water quality control and also for sanitation in the rural and peri-urban areas. Environment Council of Zambia (ECZ) is responsible for the protection of the environment and natural resources, including water. To conserve the natural resources and protect the environment, GRZ has also revised the relevant legislation and prepared national policies and action plans to improve the management of these resources. Some of the Government’s efforts to protect the environment include the ongoing donor funded Environmental Support Programme, which is being carried out within the context of the Government’s National Environmental Action Plan. Under the programme, communities are being mobilized through education and public awareness campaigns, to identify and integrate conservation of the environment into their daily activities. Conservation of water resources is part of the community-based environmental management initiatives. 2.4 Sector Development 2.4.1 In the context of GRZ’s continuous efforts to improve the sector’s policy framework, consultations are ongoing to update the now almost 10 years old National Water Policy (1994). At the same time, the possibility of preparing a separate Water Supply and Sanitation Policy is also being explored. Regarding the water resources management, the ongoing Water Resources Action Programme (WRAP) is at an advanced stage of completion. The objective of the programme is to establish, within the context of the National Water Policy, a comprehensive legal and institutional framework for the use, development and management of water resources in an integrated and sustainable manner. The programme, which is scheduled for completion by end of 2004, has its main expected outputs as definition of an enabling legal and institutional framework for integrated management of water resources and revision of existing Water Act. It is due for completion before end of 2004. In addition, both MEWD and MLGH are currently being restructured to improve their respective roles of management of the water resources and delivery of the services. 2.4.2 Despite the abundance of water resources in Zambia, not everybody has been able to benefit from the resource. On the basis of available data, access to water supply is 89% for urban and 57% for rural populations while access to sanitation is 73% and 35% for urban and rural areas respectively. However, due to non-functioning facilities the actual service coverage in both urban and rural areas is much lower. In peri-urban areas where 50-70% of the total urban poor population live, services are poor, inadequate and unreliable. As a result, the peri-urban population without access to improved water supply is 56% and 90% for sanitation. In its PRSP, the Government recognises that rural and urban households and communities with access to sustainable safe water supplies and adequate sanitation services have greater potential for engaging in economic activities to reduce poverty. GRZ therefore plans to increase urban water supply and sanitation coverage to 75% by 2005 and 100% by 2015, and for rural water supply to 50% by 2005 and 75% by 2015. 2.4.3 Some of the most significant sector physical development work in progress include the water supply and sanitation rehabilitation and expansion projects covering the urban centres in Southern, Northern and Northwest Provinces, and the Mine Townships Services Project in the Copperbelt. These programmes usually include the formation and support for CUs to manage the services. For the rural areas, the ongoing development work includes programmes in Central Province, Southern Province, Northern, Eastern and Northwest Provinces.

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2.5 Donor Supported Programmes 2.5.1 Most of the development work in the sector highlighted above is donor supported. The WRAP is being supported by NORAD, GTZ, IRELAND AID and the World Bank. GTZ/KfW have provided sustained support for the sector and are currently is supporting the rehabilitation of urban water and sanitation in Southern and North-West Provinces, technical assistance to NWASCO. The World Bank is supporting the Mines Townships Services Project, while Ireland Aid is supporting improvement of these services in Northern Province and is also supporting the establishment of RWSSU in DISS. JICA is supporting a ground water programme in the Southern Province as well as improvement of the services in a number of centres in the country. Most of the donors’ interventions in urban areas include the formation and support for CUs to manage these services. For improvement of the services in the rural areas, UNICEF is supporting rural water and sanitation programme in Southern and Eastern Provinces, KfW in North-Western Province and ADF in Central Province. Other agencies including World Vision, Water Aid and CARE are also supporting developments in the sector, mainly through community-based programmes. 2.5.2 The Bank Group has to date financed ten operations in the water supply and sanitation sector (7 projects and 3 studies), for a total amount of UA 71.18 million. Recently completed projects include the Lusaka and Kitwe Water Supply and Rehabilitation projects, each of which also included an institutional building component. For Lusaka, the total water production has been restored to 200,000 m3/d, enabling a total of over 1 million people to have continuous supply, while in Kitwe the designed production capacity of 76,0000 m3 has been restored with most of the City’s population of nearly 400,000 getting adequate water on continuous basis. Annex 2 shows the ongoing Bank financed projects in Zambia. The Central Province Rural Water Supply and Sanitation Project is the only ongoing Bank financed operation in the sector. 2.5.3 With all these donors involved in the development of this sector, GRZ has realised the need to ensure proper coordination of activities in order to avoid duplication of effort and inefficient use of resources. A Rural Water Supply and Sanitation Forum has recently been formed and brings together major stakeholders including the regulator, donors, government and service providers to review issues on the development of the sub-sector, including donor interventions. The forum meets once a month and is a vital source of feedback to the Government. Among other stakeholders, the Government also invites donors to workshops, whenever there are major issues being considered. 2.6 Sector Constraints 2.6.1 One of the main sector constraints is the delayed completion of the sector reforms. There is an urgent need to complete the reforms on the management aspects, which has lagged the reforms on service delivery. Completion of WRAP will address the problem, as it would facilitate the revision of the current Water Act in order to provide the necessary legal and institutional framework required for decentralised (to catchment or sub-catchment levels) integrated management of the country’s water resources, as well as proper management of ground water resources. 2.6.2 The process of commercialisation of the services through the formation of CUs needs to be completed for Luapula and Central Provinces, where these have yet to be formed. This should go hand in hand with the rehabilitation of the water supply and sanitation infrastructure in these areas. At the same time, it is important to address the constraints facing the existing CUs, including the usually heavy liabilities carried over from the Councils including excess staffing, poor cost recovery and the failure of government institutions to pay for the services. It has also taken long to set up the recently created RWSSU in MLGH. As a result, delivery of the services in rural areas has

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not progressed as fast as originally anticipated due to lack of necessary leadership required for the growth of this sub-sector. The increased flow of resources into the water sector, seen as a prerequisite to the success of the sector reforms, has also been slower than anticipated. 3. THE URBAN WATER SUPPLY AND SANITATION SUB-SECTOR 3.1.1 As indicated in section 2, overall responsibility for providing water supply and sanitation services in the country falls under MLGH while NWASCO handles regulatory functions. In line with the Water Supply and Sanitation Act, MLGH has encouraged the local authorities to establish CUs, which is vital for ensuring cost recovery and sustainability of these services. Currently, a total of ten CUs have been set up in seven out of Zambia’ nine Provinces. 3.1.2 The CU formation process starts with the setting up of a Joint Implementation Team (JIT), comprising members from the Participating Local Authorities (PLAs), with MLGH and NWASCO providing advisory services. Typically, the JITs have the responsibility of resolving transitional issues pursuant to the establishment of the CU, including company registration, preparation of skills and fixed assets inventories, ascertaining the current assets and liabilities for each of the individual schemes, and recruitment of the Managing Director. Share allocation among the PLAs is usually finalised when the CU is already established, and after completion of the fixed assets valuation. The functions of the JIT cease with the appointment of a CU’s Board of Directors, comprising representatives of shareholder local authorities. 3.1.3 While the formation of CUs has contributed to marked improvement of the quality of services, many people in urban areas still do not have access to improved services. Currently, the effective coverage of water services in Zambia’s urban areas is estimated at only 54%, while sanitation coverage is much lower. This low level of coverage is mainly due to the failure to accompany the establishment of CUs with sustained availability of resources to rehabilitate and extend the existing infrastructure. As a result, some of the CUs have inherited dysfunctional water supply and sewerage systems. In the urban areas, UFW persistently remains around 51% and metering is low, currently estimated at 21%. It is therefore not a coincidence that only Chipata Water Supply Company, with 100% metering, has posted an acceptable level of UFW, at 25%. Under these circumstances, most of the CUs are only able to recover their operation and maintenance costs. In some cases particularly for the services still under direct operation by the local authorities, GRZ is compelled to provide subsidies for urban water supply and sanitation services. 3.1.4 As indicated above and due to their weak financial position, some of the established CUs generally do not have the necessary resources to extend services to the peri-urban areas where over 60% of the urban population live. Therefore, the majority of people not served are the urban poor. To address this general lack of services in peri-urban areas, a Devolution Trust Fund (DTF) was established by GRZ in September 2001 to promote the extension of public water distribution systems and on-site sanitation to the peri-urban areas. DTF is administered as an autonomous fund under NWASCO, and is expected to be funded through the central government budget, supplemented with donor support for specific schemes. DTF’s main strategy for promoting access by the urban poor to these services is through water kiosks. 3.1.5 In the urban areas of Central Province, water supply and sanitation coverage is low (see Table 3.1). The water production and sewerage facilities are still owned and directly operated by the six councils, and by Konkola Copper Mining Company in Nampundwe. The latter has declared its intention to withdraw from the provision of water and sanitation services and is preparing to transfer the assets to the local Council. Due to the dilapidated state of the systems, losses are high (50% leakage in Kabwe for example) and there is a huge consumer demand that is unmet. Many

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households are supplied through unmetered house or yard connections, while the few households in the low cost and peri-urban areas with access to piped water are supplied through public standpipes. In the absence of meters, consumers are charged a fixed monthly fee determined by the type of property and connection. User charges currently average about ZMK 10,000 per month. Households drawing water from communal taps pay a monthly fee of ZMK 3000 (Kabwe).

Table 3.1: Water Supply and Sanitation Coverage by Type of Service

Water supply by source (%) Sanitation coverage by facility (%) Town

Piped Water

Hand Pump /Borehole

Open well

Other Unprotect

ed

Sewered Septic Tank

Pit Latrine

Bush

Chibombo 48.6 38.9 12.5 - - 81 6 13 Chisamba 58.9 - 41.1 - - 24 57 19 Kabwe 40.8 5.9 47.5 5 30 7 60 3 Kapiri-Mposhi 28.4 0.6 70.9 0.2 11 5 75 9 Mkushi 67.6 5.4 22.9 3.8 3 78 18 1 Mumbwa 62.3 27.7 9.7 - 4 16 70 10 Nampundwe 100 - - - 18 12 68 2 Serenje 19.1 57.1 20.3 - 27 1 72 -

Accounting and Financial Review 3.1.6 The financial and accounting policies for water supply and sewerage services in the project area are derived from the Financial Regulations for Local Authorities, which imply a cash accounting convention. However, the accounting for these services is not separated from other Council activities, which has prevented the councils from reporting independently on their water supply and sanitation operations. This situation has also contributed to the diversion of revenues away from water supply to other council activities. With the exception of Kabwe, where processing is automated, the Finance Departments of the other councils in the project area operate manual accounting systems. Budgetary control is weak, and restricted in most centers to simply monitoring available cash against current needs while the actual processes and systems supporting the revenue cycle do not effectively relate billing to actual consumption, because of the flat rate tariffs applied. 3.1.7 Based on data for 2000 provided by the Councils, collection efficiency of the water supply and sanitation schemes in the project centres vary from 14% in Chisamba to 74% in Mkushi while public sector debtors account for between 31% in Kapiri Mposhi and 100% in Chisamba. On receipts and payments basis, only two schemes (Kabwe and Serenje) appear to have achieved a cash surplus, and only Kabwe’s surplus appears high relative to the cash collection levels. Four of the centers (Chibombo, Kapiri Mposhi, Mkushi and Mumbwa) generated cash deficits while Chisamba attained break even. In Nampundwe, the water supply services are provided as a fringe benefit to the employees of Konkola Copper Mines, and to the communities in the outlying areas through public standpipes. Notwithstanding the fact that the true cost of running the business is understated, the financial performance of the water supply and sanitation schemes in the project centres has not been satisfactory. The block tariffs in use do not even cover O&M expenses, and liquidity has deteriorated to the extent that many of these schemes have not been able to pay for cash costs related to power supply and water treatment chemicals.

Financial Projections

3.1.8 Since none of the schemes in the project centres has audited financial statements for the past three years, and the historical financial data were either not available or unreliable, the focus of analysis is on the proposed CU, which shall manage and operate the schemes, including water supply and sewerage facilities developed under the project. The financial projections have been prepared with underlying assumptions stated in Annex 7, and incorporating the financial results of the water supply and sewerage operations in the individual project centres. The most important assumptions relate to i) demand for water supply and sanitation services is largely based on domestic households, with the current number of connections at 10,988; ii) average tariffs will be

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set at the O&M DPC in 2005, adjusted gradually towards reaching full cost recovery tariffs by 2010; iii) UFW is reduced dramatically as a result of the immediate infrastructure rehabilitation measures and the metering program supported under the project; iv) GRZ will pass through the rehabilitated infrastructure to the participating local authorities , which would represent part of their equity contribution in the CU; v) the CU’s staffing will be increased gradually to match operational requirements; and vi) sanitation revenue is embedded at 25% of water revenue, which is broadly consistent with experience in the sector. 3.1.9 As shown in Table 3.2 and annex 8, the financial performance of the CU will witness a turnaround from 2006, when operating income becomes positive. Operating income is projected to increase consistently, from US$ 0.387 million in 2006 to reach US$ 0.527 million by 2008. During the period of projection, the CU will also post strong cost recovery performance. For instance, the operating ratio improves from 1.62 in 2004 to 0.83 in 2008. Similarly, the working ratio, which measures total annual operating expenses (excluding depreciation and debt service) as a proportion of total annual pre-tax collections from billed services, improves from 1.07 in 2004 to 0.47 by 2008. This implies that the CU is able to generate adequate revenues to fully cover its operating costs plus some of its capital costs, which would ensure long run financial sustainability. Profitability, as measured by return on assets (ROA), is expected to move from negative territory to reach 1.33% by 2008, mainly attributable to the reduction of technical and commercial losses, improved collection performance.

Table 3.2: Summary of CU’s Projected Financial Statements (USD “000”)

2004 2005 2006 2007 2008 A: Income Statement Water Revenue 512.11 512.11 2381.95 2459.44 2538.71 Sanitation Revenue 0.00 0.00 595.49 614.86 634.69 Operating Costs 546.49 478.65 1502.96 1505.05 1506.42 Depreciation 283.01 764.00 1087.00 1139.68 1139.68 Operating Income (317.39) (730.55) 387.47 429.57 527.29 Net Interest Income/(Expense) 0.00 (21.53) (8.89) 40.79 96.93 Corporate Tax 0.00 0.00 0.00 0.00 0.00 Net Income/ (Loss) (318.85 (752.08) 378.58 470.37 624.21 B: Balance Sheet Fixed Assets (net) 19,056.99 30,663.54 38,415.46 39,679.74 39,679.74 Net Current Assets 9.14 (779.08) 908.20 2,747.64 4,748.77 Shareholders’ Funds 19,066.13 29,884.46 39,323.66 42,427.38 44,428.52 Ratios Operating Ratio 1.62 2.43 0.87 0.86 0.83 Working Ratio 1.07 0.93 0.50 0.49 0.47 Return on Assets (%) (1.67) (2.38) 1.01 1.08 1.33

Source: Feasibility Study Report and Mission Estimates 4. THE PROJECT 4.1 Project Concept and Rationale 4.1.1 The project is an integral part of the strategic development plan prepared for the individual centres covered under the Bank financed study. For each centre, the studies considered various alternatives, taking into account the available water resources, various technologies, investment and operation and maintenance costs, availability of spare parts, as well as staffing requirements. As far as possible, rehabilitation of existing facilities has been the preferred option over construction of new facilities. In addition, other factors considered for each scheme were affordability, social acceptability and environmental sustainability.

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4.1.2 The project is the outcome of extensive consultations carried out during the study stage, with various stakeholders, including communities to be served, local authorities, health, and Environmental Council of Zambia (ECZ) officials. Comprehensive survey was carried out of the beneficiary communities in order to determine effective demand, willingness and ability to pay for the selected level of services. Gender related issues like the role of women in providing water to their families and the time spent doing so were also explored. Besides the survey, a number of stakeholder workshops were conducted during the various stages of study implementation, in order to arrive at a project formulation which takes into account such factors as choice of technology, ability to pay, the institutional and management options, and also solicit communities support during implementation and in the operation and maintenance. 4.1.3 The least cost solutions employing simple and familiar technologies have been adopted in defining the proposed project. Wherever available, ground water sources have been selected, as these require minimum treatment compared to surface water sources. This applies to Kabwe town, which has abundant ground and surface sources including the Mulungushi Dam, which currently provides half of the water supply to the centre. Similarly, stabilisation ponds have been selected as means of sewage treatment due to simplicity of construction, and operation and maintenance of the facilities. 4.1.4 For the institutional arrangements, the selected option is the formation of a single CU to be responsible for the management of these services in all 8 project centres on commercial basis. A single CU will provide services at lower cost due to the economies of scale achieved through such grouping. The organisational structure and optimal staffing structure for the proposed CU has already been prepared as part of the study, and will be available in the Project Implementation Document. As a follow-up to the study, the process of setting up the CU is underway with all the 6 Participating Local Authorities (PLAs) having already passed resolutions agreeing to participate in the single utility. The JIT is currently being put in place to oversee the transformation. Drawing from the experience of the existing CUs, the proposed project will ensure institutional and financial sustainability of the proposed CU through provision of a fully rehabilitated infrastructure, adequate support for capacity building and the gradual introduction of full cost recovery tariffs. 4.1.5 In formulating the project, Bank’s experience with similar operations in the country has also been taken into account. Those projects financed by the Bank in the sector on the basis of feasibility studies experienced changes and modifications during implementation, which inevitably led to long implementation periods. This is in contrast to the projects financed on the basis of detailed designs, which were implemented both within budget and planned timeframe. In addition, operation and maintenance of projects financed under and operated directly by the local authorities suffered due to lack of adequate institutional arrangements, as compared with those being operated by CUs. The familiarity gained by the executing agency with Bank’s procedures, particularly the fulfilment of loan conditions, accounting and financial management requirements, procurement procedures and disbursements methods will also avoid some of the serious delays experienced with similar past Bank funded projects in the country. 4.1.6 At a national level, the project forms part of the ongoing rehabilitation and expansion programme being undertaken by GRZ with the support of donor agencies. As an integral part of the sector reforms, GRZ strategy is to have all the existing water supply and sanitation infrastructure rehabilitated and essential extensions carried out, in order to at least satisfy the current demand. Curtailing the high levels of UFW will save resources and also prepare the systems for further expansion to cope with increases in demand. The proposed project falls within this framework of sector development, which also conforms to the Bank Group’s integrated water resources management policy. The project is high among the priorities of both the national and provincial governments, as indicated by the priority given to the sector in the country’s PRSP and in the

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Bank’s 2002-2004 CSP for Zambia. The proposed anti-malaria component falls within the GRZ’s strategic plan of “Roll Back Malaria”, which is aimed at reducing the high morbidity and mortality rates caused by malaria, by 50%. Similarly, the project will support the Government’s national efforts to mainstream into national development programmes, the prevention and control of the spread of HIV/AIDS, which is estimated to affect nearly 25% of the population in the project areas.

4.2 Project Area and Project Beneficiaries 4.2.1 The project area covers eight centres in Central Province: Chibombo, Chisamba, Kabwe (the Provincial Capital), Kapiri-Mposhi, Mkushi, Mumbwa Nampundwe and Serenje. All the centres are located within 150 km radius from Kabwe. They have a combined population (2003) of 273,363 inhabitants, (Kabwe – 187,201 people, Kapiri-Mposhi – 30,700, Mumbwa -14,162, Mkushi - 14,660, Serenje - 14,470, Chisamba - 5,960, Nampundwe 5,700, and Chibombo – 510), which is projected to increase to about 402,200 by 2020, based on an average annual growth rate of 2.14%. With the exception of Nampundwe and Chibombo, these centres have large peri-urban settlements, mostly comprising low-income households. About 71% of the population in the project area lives in the peri-urban areas, called “compounds”, 19% in low-cost residential areas, and 12% in the medium and high cost areas. Kabwe is the provincial capital of Central Province, which until 1994, was a major mining center with significant trading and service activities. However, with the closure of the mines economic activities in Kabwe have reduced drastically. Kapiri-Mposhi is the fastest growing centre due to its strategic location at the junction of main routes to both the West and the North. The rest are mainly administrative centres. 4.2.2 The main occupations of the population in the project centres include public service, trading in light merchandise and agro products, and limited industrial activities in Kabwe, while subsistence agriculture is the dominant occupation in the more populous peri-urban settlements. Poverty is widespread, and destitution is quite visible particularly in the peri-urban areas, where housing units are mostly made of mud bricks and prone to destruction by storms. The most recent Living Condition Monitoring Survey (1998) classify 77% of the population in the project region as poor, with 63% classified as extremely poor. At the time, 50% of urban households in Central Province had monthly incomes less than ZMK 75,000 (approximately USD 33 per month at the time). 4.2.3 Water supply for the project centres comes from surface water and underground water sources. Currently Chisamba and Chibombo rely entirely on ground water whereas Serenje and Mkushi obtain water extracted directly from rivers. Kabwe and Mumbwa are supplied from both groundwater and dams while Kapiri-Mposhi relies on a dam. With the exception of Kapiri-Mposhi, which will depend of a dam, aquifers have been found to meet all or part of the water requirement for each of the other centers over the project horizon, 2020. 4.2.4 The water supply and sanitation services in the project area are highly inadequate due to deterioration of the infrastructure. For example, out of a total installed water production capacity of approximately 43,000 m3/d for all the centers, only about half of this is produced, and most of this is subsequently lost in the distribution system before reaching the consumers. All the metering system is broken down and both the level of production and consumption are only estimates. The existing sewage collection, treatment and disposal facilities are in an equally run-down state, with all pump stations having broken down and the stabilization ponds being out of service due to poor operation and lack of maintenance. Collection of solid waste is also accorded a low priority in the project area. Rapid and unplanned settlement in the peri-urban areas has not been matched by the provision of basic amenities like clean water, sanitation, electricity and even health facilities, resulting in deplorable living conditions. Currently only 4% of the people in these areas have access to clean water, while sanitation is generally lacking. In addition, lack of suitable solid waste

11

collection and disposal facilities make garbage collection irregular, and also result in poor management of disposal sites. On the whole, the country does not have a firm policy and strategies on solid waste management. This situation is bound to change soon following the completion of the ongoing DANIDA financed pilot solid waste disposal programme in Lusaka. It is expected that once completed, this will enable the formulation of a national strategy for solid waste management. 4.2.5 As a result of the poor sanitation condition and low access to clean water, there is high incidence of water-borne diseases like cholera, dysentery and diarrhoea in the project centres, which is more pronounced in the poorer communities. Table 4.1 shows the incidence of water related diseases and malaria in Kabwe, Kapiri-Mposhi and Mkushi, the largest project centres. The spread of diseases is attributed to the use of water from unprotected hand dug-wells, which are easily contaminated from broken down sanitation facilities or pit latrines in close proximity and low awareness of personal hygiene among the population. Due to the poor living conditions, the main problems facing the people in the project area include: poor health and morbidity, loss of productivity resulting from illness, and loss of school hours by children particularly girls, are all related to the poor quality and low coverage of water supply and sanitation services. Prevalence of HIV/AIDS in Zambia is high, affecting an estimated 25% of the population in the project area. The Government’s response to the very high incidences of both Malaria and HIV/AIDS is to mainstream the campaigns to combat these two scourges in its development programmes.

Table 4.1 - Incidence of Water related diseases (cases per 1000 people)

Kabwe Kapiri - Mposhi Mkushi

Disease

2001 2000 2001 2000 2001 2000

Dysentery 12.3 13.4 n/a* n/a 10.5 9.1 Diarrhoea 77.8 95.5 289.7 317.5 84.3 82.5 Cholera 5.3 n/a n/a n/a 0 0 Malaria 513.9 520.7 2519.8 1804.9 768 934.1

n/a - not available

4.3 Strategic Context 4.3.1 The project is in line with the national sector goal of improving the quality of life and productivity of all Zambians by ensuring an equitable provision of an adequate quantity and quality of water to all competing user groups and improved sanitation services for all at acceptable cost and on a sustainable basis. The proposed establishment of a CU to manage the services in the project centres, gradually moving towards full cost recovery, addresses many of the principles of the National Water Policy which requires autonomy in the delivery of the services and recognises water as an economic good. The project falls within the PRSP objectives for the water sector, which is to ensure that Zambia’s water resources are effectively developed to contribute to poverty reduction through increased access to safe water and sanitation and increased food security for low-income rural and urban people. Zambia also ascribes to the Millennium Development Goals (MDGs), which as these pertain to water supply and sanitation, is aimed at reducing by 50% the number of people without these services by 2015. The Bank’s CSP for 2002-2004 highlights the Government’s expressed priority for the water sector. When completed, this project, together with the ongoing Bank financed Central Province Rural Water Supply and Sanitation Project, will provide adequate services to over 1.2 million people, and would go a long way in contributing to achievement of the water and sanitation MDGs in Zambia. 4.3.2 The project is also in line with the Bank’s Integrated Water Resources Management Policy which, among others, supports priority of rehabilitation of existing infrastructure over new construction, and also encourages ultimate cost recovery while taking into account social equity and capacity to pay by the poor. The project support for the development of these basic services in

12

the peri-urban areas will empower this target population to be responsible for these services themselves. This approach is also in agreement with the Bank’s Strategic Plan for the sector, which recognises that in order to ensure sustainability, the poor have to be fully involved in the whole process of service delivery and maintenance.

4.4 Project Objective

4.4.1 The sector goal is to improve the quality of life and productivity of all Zambians by ensuring an equitable provision of an adequate quantity and quality of water to all competing user groups, and improved sanitation services for all, at acceptable cost and on a sustainable basis. The objective of the project is to improve the quality and delivery of water supply and sanitation services in the eight centres of Central Province, through rehabilitation and extension of the existing infrastructure, and the commercialisation of these services. 4.4.2 The benchmark indicator for achievement of the sector goal is 100% and 75% of the population provided with potable water and adequate sanitation respectively by 2015. The project objective will have been achieved when the following are attained by 2007: a total of 268,255 people have access to potable water supply meeting WHO standards and improved sanitation services available at affordable rates; improved customer service through increased reliability and 24 hours availability of water supply; water rationing in the project area eliminated; revenue collection improved from 61% to 90% of billed amounts; Unaccounted-for-water reduced from 51% to 20%; and the incidence of water borne diseases halved by 2010.

4.5 Project Description 4.5.1 The project main outputs include Water: functioning 27 boreholes, one river intake, 15 meter high dam, 28 reservoirs, 267 km of pipe work, 190 water kiosks and 14,860 meters; sanitation: functioning 97 km of sewer lines, 15 sewage treatment ponds, and improved pit latrines; and a functioning CU. The project components are:

A. Water Supply Rehabilitation and Extension B. Sanitation Program C. Building Works

D. Institutional Support; and E. Project Management.

A. Water Supply: This will entail rehabilitation of existing and development of new sources (groundwater and/or surface water) including 25 new boreholes and rehabilitation of 2 existing, and construction of Mushumbili Dam for Kapiri Mposhi. The dam, built only for drinking water supply, will be a 15 m high modified homogeneous earthfill structure, with a maximum water level of 12.2 m controlled by the spillway; and with adequate capacity to cater for the 2020 water demand for this centre. The height of the dam is explained by the topography of the site forming a V shaped valley. The surface covered by the impoundment is only 238 ha. Other works will include construction of one new water treatment plant and 5 new storage tanks, rehabilitation of 24 existing reservoirs, replacement and/or rehabilitation of a total of 187 km of pipework, installation of 190 water kiosks, 80 km of house connection pipes and installation of 14,860 water meters.

B. Sanitation Program: This will involve rehabilitation of existing sewerage schemes, rehabilitation and expansion of 32 km of sewer reticulation, cleaning/flushing 65 km of sewer lines, rehabilitation of 10 and construction of 5 new sewage treatment stabilisation ponds and associated pumping stations. On-site sanitation will involve the rehabilitation, cleaning and flushing of septic tanks, and support for the peri-urban population to provide their own improved pit latrines. Improved pit latrines will be promoted and assistance provided under the project for those families

13

prepared to contribute towards the cost of providing these facilities. The public health campaign will include dissemination of information against spread of HIV/AIDS, and also provide support for the National Roll Back Malaria campaigns by providing a revolving fund for subsidised sale of treated mosquito nets.

Under this component, each of the local authorities of the project centres will be provided with solid waste collection and disposal facilities comprising a trailer/tractor system, as well as tools (shovel, forks, etc.) for handling the waste by workers. Because of its size, Kabwe will be provided with three the tractor/trailer systems and proportionately more tools. This support for solid waste collection, will enable the councils to maintain project centres clean and also better manage the disposal sites, while waiting for the implementation of the recommendations of the short term study on Private Sector Participation in solid waste management, to be conducted under the institutional support described below. For the duration of project implementation public health and hygiene education campaigns will be conducted in order to generate the demand for improved household on-site sanitation, and also support GRZ’s efforts to mainstream HIV/AIDS and Malaria. Information against the spread of HIV/AIDS will be disseminated. The project will also support the National Roll Back Malaria campaigns by providing a revolving fund for subsidised sale of treated mosquito nets. C. Building Works: This component involves civil works for rehabilitation of offices, workshops and stores in each of the project centres. The works will include extension of these facilities where space is not adequate, and for construction of new facilities where they do not exist. The workshops will under separate contract, be equipped with plant and tools necessary for efficient operation and maintenance of the water supply and sanitation facilities developed under the project.

D. Institutional Support: This component consists of (i) support for the establishment of the Central Province CU, with headquarters in Kabwe and separate operational centres in the rest of the project centers in accordance with the organizational structure developed as part of the Study; (ii) capacity building within the CU to ensure effective management and operation of the water supply and sewerage facilities; and (iii) technical assistance to the CU once formed, in form of short-term consultancies to develop operational routines for general utility management based on best practices. These will include operations and maintenance, setting up a well interfaced financial management, accounting and billing systems, with the MIS and requisite staff training. Under this component, short-term studies will also be carried out to (i) determine the cost of services supply for purposes of tariffication and (ii) develop a strategy for private sector participation in solid waste management. NWASCO’s efforts to establish a Water Watch Group for Central Province will also be supported with a view to promote stakeholder participation in monitoring the service provider.

E. Project Management: This component will provide logistical and operational support for the PIU, comprising a Project Manager, Water and Sanitation Engineer and Accountant, seconded from both MLGH and the PLAs. It also includes provision for engineering services for supervision of the works, and annual audit of the project. 4.6 Production, Market and Prices

Water Demand 4.6.1 Projections of water demand over the project horizon are based on analysis of current consumption patterns in the project area, observed patterns in the other provinces where CUs are already in operation, as well as the expected coverage, and projected changes in demographic patterns. For design purposes domestic water demand is estimated at 190, 135, 100, and 30 litres per capita per day (l/c/d) for high, medium, low cost and peri-urban settlements. Institutional,

14

commercial and industrial consumption is projected to increase at a rate of 1.5% per annum. The project will bring down water losses from the current high level of over 50% to about 20% while at the same time the number of households with access to potable water is expected to increase from the current low level of 24% to 90% by 2010. The resulting projections for water demand are summarized in table 4.4 below.

Table 4.2 - Projections for Water Demand in Project Area

Total Demand (m3/day) Town 2005

2010 2015 2020

Chibombo 287 309 333 359 Chisamba 499 586 690 818 Kabwe 26980 28522 30161 31905 Kapiri-Mposhi 2757 3343 4104 5098 Mkushi 2032 2314 2653 3064 Mumbwa 1427 1554 1693 1850 Nampundwe 503 621 762 942 Serenje 2073 2305 2572 2878 TOTAL 36558 39554 42968 46914

Production

4.6.2 For Kabwe, the projected peak water demand of 36,193 m3/day by 2020 can safely be met from estimated sustainable yield of 50,000 m3/day from ground sources. Kapiri-Mposhi will be supplied from the new Mushumbili Dam to be constructed about 17 km from the town centre due to the heavy siltation of the present Lunchu dam, while for Chibombo, Chisamba and Nampundwe additional boreholes will be provided as well as rehabilitation of the existing boreholes, to meet the demand of each of the centres up to 2010. New boreholes will be added after that year to meet the demand as required. Mkushi will be supplied from both surface water and boreholes to meet the center’s demand.

Tariffs

4.6.3 The national water and sanitation policy recognizes the need for full cost recovery through user charges. However, the majority of consumers in the project area are currently charged flat rates, depending on the type of property and connection. The rates are not linked to volumes consumed and are lower than cost recovery tariffs. User charges currently average about ZMK 10,000 per month, with households drawing water from communal taps paying a monthly fee of ZMK 3000 (Kabwe). This has created an imbalance in cost allocation in favour of high-income consumers, to the disadvantage of low income-households. Based on consumption levels determined during the feasibility study, the current price of piped water for low-cost households is equivalent to ZMK833/m3 while the price for households in the high-cost areas only ZMK780/m3, even though the unit cost of supply to the two consumer categories are comparable. In comparison, the equivalent price for peri-urban households is about ZMK1670/m3. 4.6.4 The CU will introduce cost reflective tariff structure, incorporating a lifeline tariff. Tariffs will initially cover operation and maintenance costs (excluding depreciation charges), and will be adjusted gradually towards meeting full cost recovery tariffs by 2010. The tariffs will also incorporate charges for sanitation services, estimated at an average of 25% of water bills. On the basis of the proposed investment and the projected operational costs, the indicative tariffs by project commissioning are presented in Table 4.3(a) below.

15

Table 4.3 (a): Schedule of Proposed Tariffs Consumer Category Proposed (O&M))

Tariff (ZMK per m3) Sanitation as %

of water bill Water Kiosks 800 0% 0-10m3/month 800 20% 11-30m3/month 1,000 25% Above 30m3/month 1,500 25% Industrial/Commercial 1,500 50%

4.6.5 Experience from CUs operating in Zambia has shown that peri-urban household demand for piped water remains low (about 20l/c/d) soon after extension of supply to these areas. As such, household water expenditure in peri-urban areas, based on the proposed tariff, is estimated to be about ZMK2, 880 per month, representing about 4% of household income for the low-income group of the beneficiary population. At this level of expenditure, it is expected that poor households would be able to afford the consumption of at least a subsistence level of safe piped water. The indicative household water and sanitation expenditures for the various consumer categories, based on the proposed tariffs are shown in table 4.3 (b) below:

Table 4.3(b) – Estimated monthly household expenditure on water (ZMK)

Area At Current Rates

Based on Proposed Tariff

Av. Monthly Income1

Expenditure as % of Income

Peri-Urban 0 - 6,000 2,880 75,000 4% Low-Cost 4,200-15,000 16,800 350,000 4.8% Medium-Cost 8,400-25,000 22,700 400,000 5.7% High-Cost 15,120- 25,000 48,000 1,000,000 4.8%

4.7 Environmental Impact

4.7.1 The project has been classified in the ADB Environmental and Social Category 2 in accordance with the Bank’s Environmental and Social Guidelines. Environmental and Social Management Plan Summary is given in Annex 5. An Environmental Impact Assessment was carried out for the Kapiri-Mposhi dam, which showed that i) the impacts generated by the dam/reservoir could be easily mitigated; and ii) the households affected by the infrastructure do not reach the Bank threshold for carrying out a full relocation and compensation plan. In order to minimize silting at the Kapiri-Mposhi dam reservoir and contamination of boreholes, the project will implement environmental safeguards to protect the water sources and contribute to their sustainability. Among the actions planned include rehabilitation and erosion control to limit erosion in the Kapiri-Mposhi dam catchment and hence silting of the reservoir. In addition, the borehole sites will be fence protected and the 50 m radius (at least) protection area densely planted to mitigate risks of pollution of groundwater resources. 4.7.2 The water supply and sanitation components of the project do not involve any major construction works that could result in significant negative environmental impacts. Except a few boreholes drilling, most of the components are rehabilitation and improvement of the existing infrastructure. The project will have a marked positive impact in terms of delivery of improved water supply and sanitation services for the 8 centres. Positive impacts include availability of safe drinking water in sufficient quantity, which will subsequently alleviate water related diseases in the community, improve hygiene, assist in poverty alleviation efforts by availing the opportunity to develop small income generating activities (e.g. selling of ice and ice-cream, selling of water, fruit juice making, etc). Overall, people will enjoy an improved standard of living with the provision of improved water and sanitation services.

1 Average income in Peri-urban areas is taken as the lowest income recorded in the 1998 Census.

16

4.7.3 The major issue with regard to water supply is to ensure that the water production wells are properly sited to avoid ground water contamination from human activities. In the case of Kapiri-Mposhi, the key issue will be to maintain the quality of water in the new Mushimbili dam. This will be achieved through sound management of the catchments area, and particularly through the establishment and maintenance of an exclusion zone around the dam. This is particularly important since the soils in the area are mostly sandy, and prone to erosion. The construction of the reservoir will cause relocation and compensation of a total of 185 people in 30 households. A comprehensive census and an abridged relocation plan have been prepared and the cost of compensation included in the project budget. The local Chief, recognized by the government as the authority for the land of the area, has committed himself to provide land for compensation. A letter of commitment signed by this Chief will be attached to the relocation and compensation plan. As a condition of the loan and grant, the Borrower will be required to provide evidence of allocation of new land and payment of compensation for those, properties, crops and/or trees affected by the construction of Mushumbili Dam before commencement of construction, but in any case not later than 31st December 2004. Furthermore, the reservoir will flood a small old cemetery. Following consultations with the local population, it has been agreed to protect it by covering with a concrete slab. The mitigation measures to be implemented are detailed in the Environmental Management Plan and will be available in the Project Implementation Document. These include: rehabilitation and protection of the Mushimbili dam watershed to prevent erosion and silting of the reservoir; fence protection of the borehole sites on a 50 m minimum radius with dense re-vegetation; training and awareness building of population on conservation and rehabilitation as well as on environmental health issues. The effects of the dam on the downstream users will not be significant as there are other streams that will ensure continuity of flow even immediately beyond the dam area. In any case, the design of the dam allows continuous minimum flow downstream even during dry periods. 4.7.4 As for the sanitation, care will be taken to avoid contamination of water sources or the environment at large. The proposed introduction of improved latrines in the peri-urban areas will reduce risks of contamination of the water sources. The project will provide a vacuum tanker, to be used to empty septic tanks/interceptor chambers. The sludge will be transported to the nearest stabilisation ponds for further treatment, and the sewage effluent will constantly be monitored so that it is always within WHO standards and also acceptable to ECZ. It will also be important that all sanitation facilities including sewage treatment ponds, septic tanks and sewerage network, are maintained in good working condition, and the effluent and other wastes are properly managed, to avoid contamination of any water source or the environment at large. 4.7.5 Training on environmental review and monitoring will be conducted under the project for the key CU staff and a staff member of the Health Department from each of the Participating Local Authorities. At the same time, the beneficiary communities shall through awareness creation campaigns, also be trained on conservation and protection of the environment, as well as conducting health education with emphasis on the linkages between proper use of the services provided under the project and good health. 4.8 Social Impacts 4.8.1 The project will improve access to clean water supply and sanitation facilities for the affected population in the project area. The majority will be those living in peri-urban and low-income households. It is envisaged that with the completion of the project, piped water will be within reach of 90% of the population by 2010. The project will have significant impact on public health and general living condition of these people, who currently depend on unsafe and unreliable sources like shallow wells for their water supply.

17

4.8.2 The main social impact of the project involves the relocation of thirty (30) households (185 people) who are currently settled in the area to be flooded by the proposed dam in Kapiri-Mposhi. In addition to being relocated, there will be loss of about 238 hectares of land that is currently used for subsistence farming, as well as loss of property. As indicated above, land will be allocated to the affected population for housing and farming, and they will be fully compensated in accordance with the laws of Zambia. A number of schools and health facilities will be able to connect to the water supply network when the project is completed. Private businesses, especially hotels are also expected to benefit from reliable supply of clean water and improved environmental sanitation in the project centres. 4.8.3 The project is expected to produce mainly beneficial social impacts. Among the many benefits expected are alleviation of current water shortages, improvement of water quality, and expansion of access to water supply and sanitation services. These, in association with accompanying hygiene education programs, are anticipated to contribute to improved health conditions among urban and peri-urban population. The project will also set the conditions for development of income generating activities such as commercial water service providers. 4.8.4 The socio-economic study shows that in many peri-urban areas women have cash incomes and play a crucial role in the household, especially in Kabwe and in Kapiri Mposhi where a lot of men have lost their jobs as a result of the closure of factories and mines or as a result of retrenchment. The study concluded that women find it difficult to develop and engage in income generating activities. A reduction on time spent fetching water may have a positive impact upon the lives of women as they would have more time for social activities and to earn cash income. These poverty reduction benefits will have their greatest impact on women who suffer higher levels of poverty and endure lower levels of human resources development such as education and health. 4.9 Project Costs The total cost of the project is estimated at UA 24.62 million, net of taxes and duties, of which UA 20.03 million (81.4%) is in foreign currency and UA 4.59 million (18.6%) in local costs. Tables 4.4 and 4.5(a) give the summary of the project costs by component and category of expenditure respectively, while detailed cost estimates are set out in Annex 3. The project costs by category of expenditure for the ADF loan and grant financed components are provided in Tables 4.5(b) and (c) respectively. These US dollar based costs are derived from the detailed design report whose unit rates have been obtained from suppliers and contractors, as well as from experience with similar ongoing projects in the country. A physical contingency of 10% and a price contingency of 2.5% per annum have been built into these estimates.

18Table 4.4: Summary of Project Costs by Component

(‘000 USD) (‘000 UA) L.C F.C Total L.C F.C Total A. Water Supply Infrastructure A1. Rehabilitation of Networks A2. Networks Extension A3. Peri-Urban Water Supply A4. Equipment & Tools A5. Resettlement, Compensation & Environmental Mmgt. B. Sanitation Program B.1 Off-Site Sanitation B.2 On-Site Sanitation B.3 Solid Waste C. Building Works C.1 Rehabilitation/Construction of CU Offices, Workshops & Stores D. Institutional Support D.1 Establishment of CU D.2 Water Watch Group E. Project Management E.1 PIU E.2 Engineering Services E.3 Project Audit

1735.48 926.01 152.81

57.75 697.00

503.20 584.00

37.50

251.60

102.00 25.00

139.00 262.88

48.00

9907.08 5558.43 283.79 120.48

0.00

2851.48 1402.08 762.50

587.06

678.00 0.00

19.00 1489.65

0.00

11642.56

6484.44 436.60 178.23 697.00

3354.68 1986.08 800.00

838.66

780.00 25.00

158.00 1752.53

48.00

1260.09 672.35 110.95

41.93 506.07

365.36 424.02

27.23

182.68

74.06 18.15

100.92 190.87

34.85

7193.27 4035.83 206.05

97.48 0.00

2070.38 1018.01 553.63

426.25

492.28 0.00

13.80 1081.60

0.00

8453.36 4708.19 317.50 129.41 506.07

2435.75 1442.04 580.86

608.93

566.34 18.15

114.72 1272.47

34.85

Base Cost Physical Contingency Price Contingency Project Cost

5430.47 543.05 340.59

6314.11

23751.31 2375.13 1466.60

27593.04

29181.78 2918.18 1807.19

33907.15

3942.92 394.29 247.30

4584.51

17245.21 1724.52 1064.86

20034.59

21188.13 2118.81 1312.15

24619.10

Table 4.5 (a): Summary of Project Costs by Category of Expenditure for Overall Project (‘000 UA)

Category of Expenditure L.C F.C Total Works Services Goods Resettlement Operating Costs

2920.18 433.54

39.56 506.07

43.56

14367.01 1697.1114.

1181.10 0.00 0.00

17287.18 2130.65 1220.66 506.07

43.56 Base Cost Physical Contingency Price Contingency Total Cost

3942.92 394.29 247.30

4584.51

17245.21 1724.52 1064.86

20034.59

21188.13 2118.81 1312.15

24619.10

Table 4.5 (b): Summary of Project Costs by Category of Expenditure For ADF Loan Financed Components

(‘000 UA) Category of Expenditure L.C F.C Total Works Services Goods Resettlement

2115.12 142.01

2.53 506.07

11597.45 804.70 765.64

0.00

13712.58 946.71 768.17 506.07

Base Cost Physical Contingency Price Contingency Total Cost

2765.73 276.57 167.64

3209.95

13167.79 1316.78 813.77

15298.34

15933.52 1593.35 981.41

18508.29

Table 4.5 (c): Summary of Project Costs by Category of Expenditure for ADF Grant Financed Components

(‘000 UA) Category of Expenditure L.C F.C Total Works Services Goods Miscellaneous

805.06 216.75

0.73 61.71

2769.55 892.41 306.55

0.00

3574.61 1109.16 307.27

61.71 Base Cost Physical Contingency Price Contingency Total Cost

1084.25 108.43 181.88

1374.56

3968.51 396.85 370.89

4736.26

5052.76 505.28 552.78

6110.81

19

4.10 Sources of Finance 4.10.1 The project will be co-financed by ADF and GRZ in accordance with the Financing Plan detailed in Table 4.6(a) by Source for the Overall Project; (4.6(b) for the ADF Loan Financed Components and 4.6(c) for the ADF Grant Financed Components), and Table 4.7 (by Project Component) below. The proposed ADF loan of UA 16.25 million, which represents 66% of the total project cost, will cover 76.4% of the foreign exchange expenditures and 20.8% of local costs. The loan will support the rehabilitation and extension of the water supply infrastructure and associated engineering services, solid waste and the building works component of the project. The ADF grant, in the amount UA 5.78 million, will finance wholly the sanitation component, extension of the water supply infrastructure to the peri-urban areas, the institutional support component and the bulk of project management costs. It represents 23.5% of total project cost, and covers 23.6% of the foreign costs and almost 23% of local costs. Works financed by the ADF grant under the Sanitation Program entail rehabilitation of the sewerage system, construction of on-site sanitation facilities (VIP latrines) for the beneficiary population in the peri-urban areas, schools and health institutions in the project area. GRZ will finance the balance of UA 2.59 million; entirely in local currency, which represents 10.5% of the total project cost. 4.10.2 ADF support is justified by the project’s alignment to GRZ’s poverty reduction strategies and contribution towards achieving the water and sanitation MDGs for Zambia, which is underpinned by the fact that the majority of project beneficiaries are the poor people living in low-income and peri-urban settlements, where almost 70% of the population live.

Table 4.6(a): Financing Plan by Source (‘000 USD) (‘000 UA) Source

L.C F.C Total L.C F.C Total %

ADF Loan ADF Grant GRZ

1315.19

1433.39

3565.52

21069.94

6523.10

0.00

22385.13

7956.50

3565.52

954.93

1040.75

2588.83

15298.34

4736.26

0.00

16253.26

5777.01

2588.83

66.0

23.5

10.5 Total 6314.10 27593.04 33907.15 4584.51 20034.59 24619.10 100

Table 4.6(b): Financing Plan by Source (ADF Loan Financed Components) (‘000 USD) (‘000 UA) Source

L.C F.C Total L.C F.C Total %

ADF Loan GRZ

1315.19

3105.78

21069.94

0.00

22385.13

3105.78

954.93

2255.02

15298.34

0.00

16253.26

2255.02

88

12 Total 4420.97 21069.94 25490.91 3209.95 15298.34 18508.29 100

Table 4.6(c): Financing Plan by Source (Grant Financed Components) (‘000 USD) (‘000 UA) Source

L.C F.C Total L.C F.C Total %

ADF Grant GRZ

1433.39

459.74

6523.10

0.00

7956.50

459.74

1040.75

333.81

4736.26

0.00

5777.01

333.81

95

5 Total 1893.14 6523.10 8416.24 1374.56 4736.26 6110.81 100

20Table 4.7: Financing Plan by Project Component

(‘ 000 UA) Component ADF

Loan ADF

Grant GRZ

A. Water Supply Infrastructure A1. Rehabilitation of Networks A2. Network Extension A3. Peri-Urban Water Supply A4. Equipment & Tools A5. Resettlement, Compensation & Environmental Mmgt. B. Sanitation Program B.1 Off-Site Sanitation B.2 On-Site Sanitation B.3 Solid Waste . D. Building Works E. Institutional Support E.1 Establishment of CU E.2 Water Watch Group F. Services F.1 PIU F.2.1 Engineering Services Water Supply F.2.2 Engineering Service - Sanitation F.3 Project Audit

8934.99 4734.25 160.04 111.23

0.00

667.20

700.53

1056.25

206.05

2779.36 1607.37

641.81 20.98

92.21

394.38 34.85

855.64 890.66 110.95

2.65

506.07

53.63 69.72

0.00

0.00

24.22 0.00

42.15 31.91

0.00 0.00

Total 16253.26 5777.01 2588.83

5. PROJECT IMPLEMENTATION

5.1 Executing Agency 5.1.1 The Republic of Zambia shall be the borrower of the ADF loan and recipient of the ADF grant while MLGH/DISS will serve as Executing Agency (EA) for the project. Participating Local Authorities (PLAs), through their respective District Water Sanitation and Health Education (D-WASHE), will implement the low cost sanitation, Malaria and HIV/Aids campaign sub-components in the peri-urban areas. The overall coordination of the project and reporting obligations to the Bank will be the responsibility of MLGH/DISS. 5.1.2 The capacity of MLGH/DISS was reviewed extensively in the context of its current mandate and the tasks envisaged under the proposed project. While DISS was found to have adequate accounting, financial management and reporting systems, and has gained experience in implementing Bank financed projects, its core competence to carry out the responsibilities envisaged under the project is constrained by understaffing. Hence, it is necessary to establish a dedicated Project Implementing Unit (PIU) to deliver the project outputs within the timeframe proposed. The establishment of the PIU at DISS, and secondment of staff for the PIU; consisting of the Project Manager, Water and Sanitation Engineer and Accountant, all with suitable qualifications and experience acceptable to the Fund, will be a condition for the ADF loan and grant.

5.2 Institutional Arrangements 5.2.1 The Project Organisational Chart is provided in Annex 3. With the oversight of a Project Steering Committee (PSC) comprising key stakeholders, including MoFNP, MLGH, MEWD, Tourism, Environment and National Resources, Health, the Provincial Permanent Secretary and the Provincial Local Government Office, the PIU at DISS will coordinate the implementation of all the project components. One of the major tasks of the PSC is to oversee the CU’s establishment. The formation of the PSC will be a condition for the loan and grant. The PIU will coordinate and supervise the implementation of the project, maintain the project accounts and financial records,

21

process disbursement requests, and reports in accordance with the requirements of GRZ and ADF. While the PIU will initially operate under DISS, the Unit will eventually be transferred to the CU once the latter becomes operational, and be directly answerable to the Managing Director of the CU. Establishment of the CU not later than December 2004 will be a condition of the loan and grant. 5.2.2 The PIU shall also coordinate the work of PLAs through their respective DWASHEs, in implementing the public education campaigns on hygiene, promotion of household sanitation, as well as control and prevention of the spread of malaria and HIV/AIDS sub-components, using the existing institutional structures. The awareness creation campaigns will seek to mobilize the communities to support the project both during its implementation and also during operations and maintenance.

5.3 Supervision and Implementation Schedule 5.3.1 The project will be implemented over a period of 4 years in accordance with the implementation schedule given in Annex 6. The project will be supervised twice a year and a Mid-Term Review conducted not later than 24 months after loan and grant effectiveness. 5.3.2 A summary of the expenditure schedule by project component is given in Table 5.1 while the expenditure schedule by financing source is shown in Table 5.2 below.

Table 5.1: Expenditure Schedule by Component (UA ‘000) 2004 2005 2006 2007 Total A. Water Supply Infrastructure A1. Rehabilitation of Networks A2. Networks Extension A3. Peri-Urban Water Supply A2.4. Equipment & Tools A6. Resettlement & Compensation (incl. Environmental Mmgt.) B. Sanitation Program C. Building Works D. Institutional Support D.1 Establishment of CU D.2 Water Watch Group E. Project Management E.1 PIU E.2 Engineering Services E.3 Project Audit

1966.72 1089.17

63.40 29.18

126.52

1073.13

137.31

122.80 6.82

46.72 290.81

8.71

5007.10 2201.94 126.80

44.87 101.21

2284.29

422.24

125.87 6.99

47.05 588.86

8.71

2815.94 1710.64

95.10 60.30

126.52

1529.26

144.27

232.22 7.17

38.99 525.80

8.71

0.00 621.52

31.70 28.35

151.82

290.59

0.00

185.13 0.00

2.082.04 77.03

8.71

9789.77 5623.28 317.00 162.70 506.07

5177.27

703.82

666.02 20.98

134.84 1482.50

34.85 Total 4961.30 10965.93 7294.92 1396.95 24619.10

Table 5.2: Expenditure Schedule by Financing Source (UA ‘000)

2004 2005 2006 2007 Total ADF Loan ADF Grant GRZ

3291.11

1131.27

538.93

7813.73

2151.77

1000.43

4562.76

2008.92

723.25

585.67

485.07

326.22

16253.26

5777.01

2588.83

5.4 Procurement Arrangements 5.4.1 Procurement arrangements are summarized in Table 5.3 below. All procurement of goods, works and acquisition of consulting services financed by the Bank will be in accordance with the Bank’s Rules of Procedure for Procurement of Goods and Works or, as appropriate, Rules of Procedure for the Use of Consultants, using the relevant Bank Standard Bidding Documents.

22

Table 5.3: Summary of Procurement Arrangements UA ‘000

Categories ICB NCB Other* Short-List Non Bank

Funded

Total

1. Civil Works 1.1 Water Supply and Sanitation (Kabwe, Kapiri-, Mkushi) 1.2 Water Supply and Sanitation (Other Centres) 1.3 Building Works 1.4 On-site Sanitation

15,320 (13809)

3,100 (2,779)

(707) 955 (920)

15,320 (13809)

3,100 (2,779)

(707 ) 955 (920)

2. Goods 2.1 Plant, Equipment and Tools 2.2 Office/Laboratory Equipment 2.3 Chemicals 2.4 Mosquito Nets

(1,106) (82) (67)

(169)

(1,106) (82) (67)

(169)

3. Services 3.1 Engineering Supervision 3.2 Institutional Support 3.3 Public Education Campaigns & Community Mobilisation 3.4 Project Audit

1,483 (1,450)

(742) 98 (63)

(34)

1,483 (1,450) (742)

98 (63)

(34)

4. Miscellaneous 4.1 PIU 4.2 Resettlement & Compensation

168 (103)

588

168 (103)

GRAND TOTAL

15,320 (13809)

4762 (4406)

1,592(1,527)

2,357 (2,289)

588

24,619 (22,030)

* Other includes International Shopping and Direct Purchase. + Figures in brackets are amounts financed by ADF.

Civil Works

5.4.2 Procurement of Water Supply and Sanitation works for the larger centres (UA 15.32 million) will be carried out under International Competitive Bidding (ICB) procedures, and by pre-qualification of bidders. 5.4.3 Procurement of Water Supply and Sanitation works in Chibombo, Chisamba, Mumbwa, Nampundwe and Serenje (UA 3.10 million), (b) Building Works in the eight centres (UA 0.71 million) and (c) construction of on-site sanitation in the peri-urban settlements (UA 0.96 million) will be carried out under National Competitive Bidding (NCB) procedures. NCB is appropriate for these contracts because they are relatively small in value, uncomplicated in nature. There are enough sufficiently qualified local contractors in the country to ensure competition. Goods 5.4.4 Contracts for Plant and Equipment (UA 1.11 million), Office and Laboratory Equipment (UA 0.08 million), Chemicals (UA 0.07 million) and Mosquito Nets (UA 0.17 million) will each be procured through International Shopping (IS), as the goods are readily available off-the-shelf.

23

Services 5.4.5 Procurement consulting services will be undertaken in accordance with “Bank’s Rules of Procedure for Use of Consultants”. Engineering Supervision services (UA1.48 million) Institutional Support (UA 0.74 million), Public Education and Community Mobilisation (UA 0.098 million) and Audit Service (UA 0.03 million) will be through competition of Shortlisted Consulting Firms. Selection procedures will be based on technical quality with price consideration. General Procurement Notice 5.4.6 The text of the a General Procurement Notice (GPN) will be agreed on during the Loan Negotiations and will be issued for publication in the Development Business, upon approval of the proposed loan and grant by the Board of Directors. Review Procedures 5.4.7 The documents which will be subject to review and approval by the Bank before promulgation shall include Specific Procurement notices, Pre-qualification Invitation Documents, Tender Documents or Request for Proposal From Consultants, Tender Evaluation Reports or Reports on Evaluation of Consultant’s proposal including recommendations for award of contracts, and Draft contracts, if these have been amended from the drafts included in the tender invitation documents as well as negotiated draft contracts.

5.5 Disbursement Arrangements Payments will be made by direct disbursement to the suppliers of works for the ICB and NCB packages, and for consultancy services. Personnel and operating costs for the PIU will be by the Special Account method. The opening of two Special Accounts into which the ADF loan and grant proceeds will be deposited will be a condition for the loan and grant. Other Bank disbursement procedures could be used should it become necessary.

5.6 Monitoring and Evaluation 5.6.1 The Fund will monitor the project implementation through the monthly progress reports prepared by the consultants and the Quarterly Progress Reports to be submitted by the EA. These reports shall cover all aspects of project implementation, including the status of progress against agreed implementation and disbursement schedules, appropriateness and timeliness of the implementation of the environmental and social mitigation measures, key performance indicators highlighting issues and unforeseen problems, as well as proffer corrective actions to be taken. In addition, the supervision missions to be undertaken twice a year, and the review of annual audit reports will permit the Fund to monitor the project implementation progress. NWASCO, as sector regulator, will continue to monitor the CUs performance in terms of the indicators set for their licensing while the DWASHEs will monitor the relevant health indicators and report to the PIU and the health authorities. 5.6.2 The EA will assume primary responsibility for monitoring project implementation, and will perform its reporting obligations to the Fund through the PIU. The results of the Mid-Term Review will be utilized to make any necessary adjustments to the project design in order to ensure that the overall objectives of the project are achieved. The supervision and institutional support consultants will each be required to prepare and submit to the EA and the Fund a final report at the completion of their assignments, which shall serve as input into the Borrower’s PCR. The Fund, in turn, will use these reports as background material to prepare its own PCR in the established format.

24

5.7 Financial Reporting and Auditing 5.7.1 MLGH/DISS, as Executing Agency, will maintain separate accounts for the project that would permit identification of expenditures by component, category and financing source. The PIU will be responsible for the preparation and submission of withdrawal applications through MoFNP. An external auditing firm acceptable to the Fund will audit the project accounts annually, including the Special Accounts. Furthermore, once operational, the CU will collect detailed information on production volumes, operating costs, technical and commercial losses, billing and collection performance. These data will be included in the Quarterly Progress Reports to be submitted to the Bank.

5.7.2 Terms of reference for the annual audits will be submitted to the Fund for comments prior to issue. For each year of the project, certified copies of audited accounts will be submitted to the Fund by the EA within six months after the end of the fiscal year.

5.8 Donor Coordination The proposed project has been prepared in consultation with other development partners (including World Bank, GTZ, NORAD, EU and Ireland Aid) involved in the water and sanitation sector, through DISS, direct contacts with visiting Bank missions and through seminars to discuss specific issues and proposals. This close collaboration will be maintained through direct contacts by the supervision missions, and using the platform of emerging donor consultative forums on the sector. 6. PROJECT SUSTAINABILITY 6.1 Recurrent Costs 6.1.1 The proposed water supply infrastructure involve relatively simple and well-known technologies that require minimum inputs, in terms of both human and financial resources, for operation and maintenance. The maximum use of ground water sources wherever possible including Kabwe, will result in much lower recurrent costs because of the reduced O&M costs for the abstraction, storage and treatment of the water resource. Concerning sanitation, the use of stabilisation ponds for sewage treatment would rely mainly on natural processes. Hence, it would require minimum specialised skills or equipment to operate and maintain. 6.1.2 The project is not expected to lead to increased burden on the Government, as the tariffs will be adjusted gradually to reach full cost recovery tariffs by 2010. The increase in annual recurrent costs, estimated at US$ 0.378 million at full maturity would, as borne out by the financial analysis, be more than offset by the incremental revenues, at US$ 3.05 million, generated annually by the project. Consequently, there will not be any need for budgetary support, either directly or indirectly, from the Government.

6.2 Project Sustainability 6.2.1 The establishment of the CU, an autonomous entity that will take over the function of water supply and sewerage services provision from the councils, will enhance sustainability as it will (i) eliminate the diversion of water revenues to fund other council activities, and ensure their proper use for the sustained improvements in the quality of service delivery, and (ii) allow for the management of the facilities on a commercial basis. This concept is also supported by several donors, who have also supported the establishment of CUs in other centres. Institutional sustainability will be further enhanced in the present project by the transfer of the PIU to the CU

25

when the latter becomes operational, and ADF support to the PIU progressively phased out to permit the mainstreaming of recurrent costs initially borne by the project. 6.2.2 The long-term sustainability of sector institutions is a key objective of the on-going sector reforms, which seek to achieve, in the long term, full cost recovery in service provision through user charges. As such, a revision of the tariff regime is critical to ensure that the CU can meet its revenue requirements from user charges, taking into account both the needs of the poor and the CU’s financial sustainability. As a condition of the loan a cost reflective tariff, incorporating lifeline tariffs, will be introduced to cover the operation and maintenance costs by 2005, and adjusted gradually to cover operation, maintenance and depreciation costs by 2010, in line with the National Water Policy. In the short term, recovery of O&M costs will ensure that the CU generates adequate revenue for sustainable operations. Financial sustainability is expected to come from improved management and cost control measures, including loss reduction. 6.2.3 Affordability of service has been a key consideration in the design of the project and choice of technology such that the majority of households falling within the poor strata of the population are not overburdened by high user charges. In this regard, water-vending kiosks, each serving between 100 and 250 households, and simple Ventilated Improved Latrines (VIPs) are specified for the poor peri-urban settlements. These options are all demand driven and offer low cost solutions, bringing down operational costs within affordable levels for the peri-urban population. The involvement by the people in the selection of sites for the facilities, and households’ contributions towards the cost of improved sanitation creates a strong sense of ownership, which enhances sustainability. In addition, a social (lifeline) tariff will be put in place to allow for subsistence consumption up to 10 m3 per month, which is considered adequate for cooking and drinking needs of low-income households. As shown in table 4.4 above, the resulting water expenditure will range between 4–6% of household income, which is comparable to the recommended of 5%.

6.3 Critical Risks and Mitigating Measures 6.3.1 Timely establishment of the CU and its ability to recruit and retain qualified personnel are critical for the success of the project. Increased pay packages in the earlier established CUs helped in improving the retention of qualified staff. Similar remuneration packages are proposed for the new CU. 6.3.2 Delays in implementation of tariff adjustments are also likely to impact on the performance of the CU and the sustainability of the project. However the establishment of NWASCO has seen a marked improvement in the process of approval of tariff proposals. Further a loan condition requiring the increases to tariffs to the full cost recovery level is proposed. 6.3.3 The possibility of GRZ failing to meet local counterpart funding obligations is another risk. To mitigate the risk, the application of the General Condition requiring the Borrower to meet its obligation to contribute towards the project cost will be strictly applied during project implementation. 7. PROJECT BENEFITS 7.1 Financial Analysis 7.1.1 For the financial analysis, the project is defined as the provision and operation of all those assets required for meeting the projected demand for potable water and sewerage services in the eight centres over the project life span. Determination of the net benefits of the project is based on a comparison of two scenarios viz (i) benefits accruing from the project and (ii) incremental costs arising from the project implementation.

26

7.1.2 The computation of Financial Internal Rate of Return (FIRR) is based on the assumptions stated in Annex 7. The overall project, which combines the individual water supply and sewerage schemes in the eight centres, posts an NPV of US$ 8.77 million, excluding residual values, and FIRR of 5.53%. This rate of return is acceptable considering that the CU would, over time, be able to fully recover its costs while also contributing in expanding the population’s access to water and sanitation services at an affordable price, thereby contributing towards achievement of the water and sanitation MDGs in Zambia. 7.2 Economic Benefits The economic benefits of the project are evaluated by making an assessment of the quantifiable benefits that will accrue to the various sectors affected by project. In addition to the anticipated increase in revenue from water sales evaluated under the financial analysis, the economic analysis considered the impact of the project on the health sector as well as benefits accruing to households from time savings in water drawing, which could be used for productive engagements, and avoided health related costs. Assumptions underlying the evaluation are given in Annex 7. The Economic Internal Rate of Return (EIRR) is calculated as 21.39%. The value is higher than the opportunity cost of capital, estimated as 10%. As such, the project considered economically viable. 7.3 Socio-economic Impact 7.3.1 Inadequate water supply and sanitation services have adversely affected the quality of life and public health conditions of the people living in the project areas. The hardship experienced by the people, especially women and young girls in obtaining water severely constrains their ability to improve their living conditions. 7.3.2 During the dry months of the year, alternative sources of water supply such as shallow wells, ponds and small rivers often dry up, thereby increasing the hardship of poor households who rely on these sources for water supply. During the rainy seasons these sources are often contaminated from flooding thus increasing the risk of infection from water borne diseases. The poor households are particularly vulnerable because they lack resources and alternatives to protect themselves against these adverse impacts. 7.3.3 Availability of safe and convenient water supply to households will alleviate the hardship experienced by the people living in the project area, especially for women and children who are more vulnerable. In terms of household expenditure, benefits will accrue to the people from savings in health related expenditure, as well as from a reduction in loss of productive work due to illness and time spent obtaining water. These benefits will improve the living condition of the population. 7.3.4 Improved water supply will also help attract and sustain commercial, industrial activities, and tourism. This will in turn contribute to the provision of employment for the people. The project will also help to improve sanitation and waste disposal in all project areas through the creation of awareness and capacity building. This will improve the quality of life of the people.

Impact on Poverty 7.3.5 The 1998 Living Conditions Monitoring Survey has shown that 77% of the population living in the project areas can be classified as poor. Monthly average per capita expenditure in Central Province in 1998 was only 48,467 ZMK (approximately US$22). Lack of access to safe water and good sanitation is among the main causes of poverty in the area, as identified in Zambia’s PRSP. Only 4% of the poor population in the peri-urban settlements has access to safe water and sanitation. This group of the population is particularly vulnerable as they resort to unsafe

27

and unreliable sources for their water supplies, and their plight is expected to become even worse if nothing is done, as the existing infrastructure will continue to deteriorate. Due to their low-income status the poor peri-urban population lack the capacity to respond adequately to outbreak of diseases, and the cost of treatment can be a drain on their resources. 7.3.6 Access to safe water and sanitation has direct and indirect links to poverty reduction. First, households with access to clean water supply have greater potential for engaging in economic activities to reduce poverty, as time and energy savings from the drudgery of fetching water from unreliable sources can be channeled to productive activity. In peri-urban settlements of Kabwe for instance, where waiting time to fetch water is reported to be up to five hours, the project is expected to bring relief to the population, allowing children and women to spend more time on education and social activities. 7.3.7 Second, ill health imposes economic hardship and impoverishment particularly on poor households as a result of the reduced capacity of the sick and those who support them to engage effectively in productive work. Therefore, in addition to freeing time spent on water fetching, the project will also contribute indirectly to poverty reduction through the anticipated improvement in the health standards of the affected population. In addition to the anticipated improvement in productivity due to good health, health related expenditures are expected to reduce for household as a result of the project, particularly in the poor peri-urban settlements where water supply and sanitation conditions are currently in a deplorable state. 7.4 Sensitivity Analysis 7.4.1 Sensitivity analysis was conducted to assess the performance of the project as a result of likely changes in the key project variables, namely water supply revenues and operating costs. A 10% decrease in water operating revenues, with investment costs unchanged, reduces the FIRR to 4.62%. Alternatively, a 10% increase in O&M costs; given the anticipated increases to electricity tariffs in Zambia in view of ZESCO’s impending commercialization, with no changes to the project’s revenue streams, reduces the FIRR to 5.36%. While confirming that the project is robust, these results illustrate that it exhibits greater sensitivity to fluctuations in operating revenues than increases in O&M costs. This, therefore, points to the importance of regular tariff adjustment to ensure financial sustainability of the services.

7.4.2 Sensitivity analyses also indicate that the economic viability of component is robust. A 10% increase in project costs, with the estimated benefits streams unchanged, reduces the EIRR to 20.17% while the value drops to 20.04% when only the estimated benefits decrease by 10%. For a combined change of 10% in both project costs and the estimated benefits the EIRR value reduces to 18.9%. The value of the EIRR under all the conditions considered is higher than the cost of capital in Zambia, estimated at 10%, and therefore shows that the component is economically viable. 8. CONCLUSION AND RECOMMENDATIONS 8.1 Conclusion 8.1.1 The need to improve water supply and sanitation facilities in the eight centers in Central Province has become critical, given the poor water supply and sanitation situation. The project will improve the physical condition of the infrastructure, through rehabilitation and expansion of the existing facilities. The project will also support the formation of a Commercial Utility, an autonomous institution that will manage the water supply and sanitation services. Improved quality of services delivery will contribute towards improving the health and well being of the population, and boost economic activities in the project area.

28

8.1.2 The project, as conceived, is consistent with Government strategy, which seeks to promote access to water and sanitation services as a means of reducing poverty, and improve the quality of service delivery in the sector through commercialisation of these services. Moreover, it conforms to the Bank Group’s Integrated Water Resources Management Policy. The simplicity of design and operational procedures also correspond to the national strategy of adopting appropriate solutions in order to ensure affordability and sustainability of the services. 8.1.3 The project is technically feasible, financially and economically viable with important socio-economic benefits, as well as being environmentally sustainable. Moreover, the project is accorded a high priority by the national and the provincial governments as well as the population in the project area, as reflected in the PRSP and in the Bank’s 2002-2004 CSP for Zambia. When completed, this project, together with the ongoing Bank financed project covering the rural areas in Central Province, will provide adequate services to over 1.2 million people in Zambia, and will go a long way in contributing to achievement of the water and sanitation MDGs.

8.2 Recommendations

It is recommended that an ADF loan not exceeding UA 16.25 million and a grant not exceeding UA 5.78 million be granted to the Republic of Zambia for the purpose of implementing the Central Province Eight Centres Water Supply and Sanitation Project as described in this report, subject to the following conditions: A. Conditions Precedent to Entry into Force of the Loan Agreement and Protocol of Agreement: The Protocol of Agreement shall enter into force on its signature while the entry into force of the Loan Agreement shall be subject to fulfillment by Borrower of the conditions set forth in Section 5.01 of the General Conditions Applicable to Loan Agreements and Guarantee Agreements of the Fund. B. Conditions Precedent to First Disbursement of Loan and Grant The Borrower shall:

i) Give an undertaking to allocate land to people who shall be relocated, and to compensate those people whose lands; properties, crops and/or trees are affected by the construction of Mushumbili Dam before commencement of construction works but in any case not later than 31st December 2004. (para. 4.7.3);

ii) give an undertaking to cause the establishment of the CU for Central Province (para. 5.2.1);

iii) give an undertaking to cause the implementation of a programme of tariff adjustments for water supply and sanitation services in order to ensure that the CU attains full cost recovery in line with the National Water Policy (para. 6.2.1).

iv) provide evidence of having established a Project Steering Committee comprising a senior official from each of the Ministries of MoFNP; MLGH; MEWD; Tourism, Environment and National Resources; Health; the Provincial Permanent Secretary and the Provincial Local Government Office; (5.2.1);

v) provide evidence acceptable to the Fund of having established the PIU within DISS (5.1.2);

vi) provide evidence acceptable to the Fund that MLGH has staffed the PIU with a Project Manager, Water and Sanitation Engineer and Accountant, all with qualifications and experience acceptable to the Fund (para. 5.1.2); and

29

vii) provide evidence of having opened in a commercial bank acceptable to the Fund, two special foreign currency accounts into which the proceeds of the loan and grant shall be deposited (5.5).

C. Other Conditions The Borrower shall have:

i) provided evidence of allocation of new land and payment of compensation for those, properties, crops and/or trees affected by the physical components of the Project before commencement of construction, but in any case not later than 31st December 2004. (para. 4.7.3);

ii) caused the establishment of the CU for Central Province not later than December 2004 (para 5.2.1);

iii) caused the adjustment of water and sanitation services tariff, showing that a lifeline tariff is incorporated, in order to ensure that the CU’s average tariff fully covers the operation and maintenance (including depreciation) costs not later than December 2006 (para. 6.2.1).

Annex 1 ZAMBIA

CENTRAL PROVINCE EIGHT CENTERS WATER SUPPLY AND SANITATION PROJECT LOCATION MAP

.

This map is intended exclusively for the use of the readers of the report to which it is attached. The names used and the borders shown do not imply on the part of the Bank and its members any judgment concerning the legal status of a territory nor any approval or acceptance of these borders

#Y

#Y

#Y

#Y

#Y

#Y

#Y

#Y

Serenje

Mkushi

Kapiri Mposhi

Kabwe

Chibombo

ChisambaMumbwa

15°0

0'

15°00'

14°0

0'

14°00'

13°0

0'

13°00'

12°0

0'

12°00'

26°00'

26°00'

27°00'

27°00'

28°00'

28°00'

29°00'

29°00'

30°00'

30°00'

31°00'

31°00'

ZAMBIA

Central Province

N

ChibomboChisambaKabweKapiri MposhiMkushiMumbwaSerenjeNampundwe

510 6,206179,335 30,739 15,250 14,162 14,470 4,881

Approximate Population (2001)

Nampundwe

40 0 40 80 Kilometers

Annex 2

ZAMBIA: BANK GROUP OPERATIONS (On-going) UA 'millions

PROJECT APPR0VED SIGNED EFFECTIVE SOURCE AMOUNT DISBURSEDUNDISBURSED DISBURSEMENTDISBURSEMENT DEADLINE

Ratio(%)

AGRICULTURE SECTOR

Agricultural Sector Investment Program 17/12/1996 24/04/97 22/04/1998 ADF 15.000 2.297 12.700 15.31 31/12/2003 Village Based-Woodlands Management Project 14/11/2000 20/06/2001 12/11/2001 ADF 4.130 0.000 4.1300 0.00 31/12/2005 Village Based-Woodlands Management Project 14/11/2000 20/06/2001 12/11/2001 TAF 0.300 0.000 0.3000 0.00 31/12/2005 Small-Scale Irrigation Project 07/09/2000 06/02/2001 15/03/2002 ADF 5.290 0.126 5.164 2.38 31/12/2007 Small-Scale Irrigation Project 07/09/2000 06/02/2001 15/03/2002 TAF 0.760 0.000 0.7600 0.0 31/12/2007 Multi-Sector Support for Fiscal Transp & Accountability 28/06/2001 17/07/2001 2/10/2001 ADF 16.200 9.917 6.283 61.22 31/12/2004 Support for Fiscal Transp & Accountability 28/06/2001 17/07/2001 2/10/2001 TAF 0.530 0.074 0.456 13.96 31/12/2004 PUBLIC UTILITIES SECTOR Kitwe Water Supply Rehabilitation 14/05/1997 27/05/1997 03/05/1999 ADF 17.780 16.708 1.072 93.97 31/12/2002

Water Supply and Sanitation Study 26/11/1998 04/09/1999 22/06/99 TAF 1.870 1.483 0.387 79.3 31/12/2002 Victoria Falls Katima-Mulimo Project 01/12/1999 17/02/2000 01/12/1999 ADF 4.850 0.023 4.827 0.47 30/06/2005 Central Province Rural Water Supply 13/12/2000 20/06/2001 12/11/2001 ADF 12.410 0.900 11.510 7.25 31/12/2006

SOCIAL SECTOR Health II (Health Sector Support Project) 14/07/1999 01/10/1999/ 01 /02 /2001 ADF 8.920 0.533 8.387 5.98 31/07/2005

0 Education III 01/12/1999 17/02/2000 09/02/2001 ADF 8.500 0.874 7.626 10.28 31/12/2004 Support to HIV/AIDS Control Program 25/04/2001 20/06/2002 20/06/2002 TAF 1.000 0.349 0.651 34.90 31/12/2003

ANNEX 3

ZAMBIA: CENTRAL PROVINCE EIGHT CENTRES WATER SUPPLY & SANITATION PROJECT PROJECT ORGANISATIONAL CHART

GRZ

PROJECT STEERING

COMMITTEE

PIU

(DISS)

PLAs

DWASHEs

CU

JIT

ANNEX 5 ZAMBIA: CENTRAL PROVINCE EIGHT CENTRES WATER SUPPLY & SANITATION PROJECT - ENVIRONMENTAL AND SOCIAL MANAGEMENT PLAN SUMMARY a) Brief description of the project and key environmental and social components An ADF funded study has confirmed that the water supply, sanitation and solid waste management services in 8 centres (Chibombo, Chisamba, Kabwe, Kapiri-Mposhi, Mkushi, Mumbwa, Serenje and Nampundwe) of Zambia Central Province are unreliable, characterized by high proportion of unaccounted for water compounded by wastage, insufficient water supply to parts of the centres, particularly the peri-urban areas, outdated customer data base, low tariffs and unsatisfactory collection efficiency, frequent blockages of the sewer systems causing flooding onto streets in residential areas, insufficient funds for spare parts, repairs and replacements, low levels of qualified and motivated staff. The result is unhygienic conditions and increased health risks. The EIA summary is based on the environmental assessments done following the Zambia environmental procedure, review of which confirms its compliance with the ADB EIA procedures. It includes six Environmental Project Briefs and two full Environmental Impacts Assessments. The impact assessment reports obtained satisfy both ADB and the Environmental Council of Zambia (ECZ). This summary is a synthesis of all the assessments preformed in the eight centres covered by the project. It provides key environmental information related to the project in addition to the impact analysis, mitigation and monitoring measures, and stakeholder participation. The key objective of the project is to improve the quality and service delivery of water supply and sanitation services in the project centres. The following key project measures have been developed under this project, which will comprise the rehabilitation and extension of both the water supply and sanitation facilities. A. Water Supply: This will entail rehabilitation of existing ground and surface sources and transmission mains as well as development of new sources, including drilling of boreholes and construction of Mushumbili Dam for Kapiri-Mposhi. The dam, built only for drinking water supply, will be a 15 m high modified homogeneous earth fill structure, with a maximum water level of 12.2 m controlled by the spillway; and with adequate capacity to cater for the 2020 water demand for this centre. The height of the dam is explained by the topography of the site forming a V shaped valley. The surface covered by the impoundment is only 238 ha. It will also involve the rehabilitation and extension of water treatment and storage facilities, together with water distribution networks. B. Sanitation: This will involve rationalization of existing sewerage schemes, rehabilitation and expansion of sewer reticulation, sewage treatment plants and pumping stations. It will also involve provision of on-site sanitation facilities in the smaller centres and low income and peri-urban areas of larger centres as well as public information / education on water and health issues including HIV/AIDS. For solid waste management, this component includes, for the 8 centres: 1) a study to assess the best way to bring in the private sector to take over solid waste management, and in the interim; 2) provision of tractor, trailer and hand tools for each town to improve solid waste collection and dumpsite management. C. Building Works: This component will involve civil works for rehabilitation and extension of offices, workshops and stores in each of the project centres. The workshops will be equipped with plant and tools necessary for efficient operation and maintenance of the water supply and sanitation facilities. D. Institutional Support: The 6 Participating Local Authorities (PLAs) will establish a Commercial Utility to manage the water supply and sanitation operations in the eight project centres on a commercial basis. E. Project Management: A dedicated PIU will be established at DISS in MLGH to manage the project implementation activities. The PIU will comprise a Project Manager, Water and Sanitation Engineer and Accountant seconded from MLGH and the PLAs. It is envisaged that the PIU will be moved to the CU when the latter becomes operational. Project improvement measures have been designed towards a planning horizon 2020 for bulk components (transmission mains, reservoirs, pumping stations, treatment plan extensions, primary distribution mains, sewage networks and ponds). Project measures that can be developed over time have been designed in stages (extension of production wells to cater for water demand beyond 2010, extension of distribution networks for new development areas, pumping station equipment. Details on the physical measures for each centre are presented separately in the impact analysis.

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b) Major Environmental and Social Impacts Major adverse environmental impacts related to the project are: 1) Land take in Kapiri-Mposhi by the reservoir affecting 30 households; which prompted the preparation of an abridged resettlement and compensation plan. On the other hand, the new boreholes are drilled in dedicated land requiring no movement of population. 2) Possible increase in malaria with increased availability of water. 3) In turn, there is the potential for the environment to affect directly the project and its sustainability: erosion of the watershed and silting of the reservoir at Kapiri-Mposhi, and pollution of the borehole waters from the surface (in Nampundwe for example, e. coli contamination has been recorded as deep as 60 m). 3) Sanitation is unlikely to affect the environment, as improved latrines will be built and proper sludge disposal management. c) Enhancement and Mitigation program, Monitoring Program and Complementary Initiatives The resettlement and compensation issue will be resolved through implementation of the abridged Resettlement and Compensation Plan. For the land issue, the chief, who is recognized by the government for having full authority on the land, will allocate new land to those affected. A letter of commitment to be signed by the chief is attached to the Resettlement plan. Rehabilitation and regulation of the land use management in the watershed will minimize silting. Borehole planted protection areas will prevent contamination of the groundwater source at the borehole sites. The effects of the dam on the downstream users will not be significant as there are other streams that will ensure continuity of flow even immediately beyond the dam area. In any case, the design of the dam allows continuous minimum flow downstream even during dry periods. Currently, a government program for malaria control is in place and will be supported by the project. In addition, the project includes environmental health awareness activities. High level of participation by the local population in the project will enhance ownership, facilitate mitigation and ensure sustainability. Environmental and social monitoring are part of the overall implementation and supervision of the project. Results of environmental monitoring will feature in the reporting during project implementation. To control erosion and silting it is also necessary to prevent vegetation cover clearing in the immediate surrounding of the lake: avoid agriculture and charcoal burning at 2 km around the lake. Wood vegetation removal from inundation zone prior to flooding. The community should be allowed as soon as possible to remove any trees available in the inundation zone to generate income: charcoal, firewood, poles, etc. d) Institutional Arrangements and Capacity Building Requirements All institutional arrangements are defined in the Project Implementation Document and Environmental and Social Management Plan. e) Public Consultations and Disclosure Requirements Public consultations were regularly carried out during the feasibility studies and project design in all eight centres. Consultations were also extensively undertaken during environmental impact assessments. Local authorities have made plans for continuing with the public consultations and other stakeholder meetings during project implementation and thereafter during its operation and maintenance. f) Estimated Costs: Project Environmental Components The cost of environmental mitigation not inclusive of awareness building and training is US$697,000. g) Implementation Schedule and Reporting Implementation of the mitigation measures as well as that of the relocation and compensation is harmonized with the implementation schedule of the various components of the project. h) Conclusions The conclusions of the environmental and social assessments of the project, as well as the abridged Resettlement and Compensation Plan support Bank funding of the project.

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COMPUTATION OF FINANCIAL & ECONOMIC RATES OF RETURN

ASSUMPTIONS FOR FIRR The projections are based on September 2003 US dollar and Zambia Kwacha (ZMK) prices. Project Life: 25-year project life span is assumed. Investment Cost: Includes the base costs for the water supply (excluding peri-urban extensions) and off-site sanitation infrastructure rehabilitation and extension component, increased by physical contingency and also include replacements. Operations and Maintenance (O&M) Cost: Incremental O & M costs are estimated at 1.5% of capital costs. Depreciation: Fixed assets are depreciated using the straight-line method. Unaccounted For Water (UFW): Expected losses of water are factored to reduce drastically from their current average level of about 51% as a result of the immediate measures put in place to improve operations and maintenance procedures, as well as the impact of the rehabilitation and metering program in all project centres during the first year of project implementation. Losses are assumed at 25% by 2006 and to stabilize around 20% from 2007 onwards. Tariff: The tariff used are the levels expected to be put in place by the CU towards reaching O&M cost recovery tariffs (including depreciation charges) by the year 2010. Tariffs are assumed at US$ 0.129/m3 in 2005, adjusted gradually and maintained at US$ 0.364/m3 from 2010 in real terms. Incremental Water Revenue: Water production, sales and the relative consumption share of the high, medium and low cost consumers, as well as peri-urban, institutional and commercial consumer bands (litres per capita per day) are derived directly from the design report, with the opening number of water consumer connections assumed at 10,988. Incremental water sales attributed to the project are valued at the average DPC tariff, increased to the full cost recovery tariffs by 2010. The annual water demand growth rates used as per the design report are: 2.62% (2006-2011), 1.63% (2012-2015), and 1.46% from 2016. Incremental Sanitation Revenue: Embedded at 25% of water supply revenues. ASSUMPTIONS FOR EIRR The calculation of EIRR for the project is based on the cost and benefit streams used for the FIRR, with the following adjustments: Tariff: The tariff used for the economic analysis covers the full cost of supply; Project Costs: Opportunity cost of land that will be flooded by the new dam is including in project costs. The opportunity cost is estimated as the net value of maize yield from the land; Health Benefits: health related savings considered in the analysis, and the assumptions used to evaluate them are as follows: i) The potential increase in cases of water-borne diseases is projected with reference to the population without access to clean water. In the absence of the project, the incidence of water-borne disease is projected to increase by 1% per annum due to deterioration of service. Travel cost: per round trip to consult a doctor in the event of illness related to water borne diseases is 2000 ZMK. Payment is for one person, either an adult traveling alone or accompanying a child who travels free. Time for traveling to hospital and seeing a doctor is taken to be 3 hours and applies to an adult patient or a parent accompanying a sick child. Time is valued at the minimum wage; Cost of consultation: is determined as 2000 ZMK payable by all patients;

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Cost of treatment: 10000 ZMK payable once per disease event for medication. Public subsidy (for hospital equipment, supplies & staff costs): on health service provision is reported by the health authorities in Kabwe as approximately 20 million Kwacha per month for each hospital. This analysis allocates 5% of this amount to the treatment of water borne diseases. Savings in water collection time: saving on time spent collecting water is estimated as 30 minutes per trip. 5 trips per household are assumed. Time is valued at 50% of minimum wage given that both children and adults (women) are involved in this activity. ASSUMPTIONS FOR PROJECTION OF FINANCIAL STATEMENTS The financial projections are prepared using the water supply and sanitation operations and financial data for 2002 provided by the Councils. The financial model incorporates financial projections for the individual eight project Centres, in addition to the following: 1. Projections take into account the operations under the new project, the existing fixed water supply

and sanitation assets of the Councils, but exclude the current assets and liabilities of ongoing operations. An evaluation of the project Councils’ fixed assets will be undertaken under the project to ascertain the values to be included in the CU financial statements in the context of the CU establishment.

2. CU’s operating revenues include: water supply and sanitation services revenues. 3. Operations & Maintenance (O&M) cost: comprising chemicals, electricity and water

consumption, depreciation, administration and staff costs etc. are based on the historical costs, with projected increases in line with water production volumes.

4. Collection: The collection rate for water sales is assumed to increase progressively during the period of projection, from 70-80% in 2004 (depending on the centre) to reach 90% by 2007.

5. Shareholders’ Funds: Include CU capital fund and retained earnings. 6. Fixed Assets: Increased to reflect the capital investment program under the project.

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