Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 47028-PY

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$64 MILLION

TO THE

REPUBLIC OF PARAGUAY

FOR A

WATER AND SANITATION SECTOR MODERNIZATION PROJECT

MARCH 19, 2009

Sustainable Development Department Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective February 2, 2009)

Currency Unit = Paraguay Guarani (PYG) PYG $1 = US$0.0001951

US$1 = PYG 5,125

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AGPE Auditor General of the Executive Branch (Auditoria General del Poder Ejecutivo) AII Internal Audit Unit (Auditoria Interna Institucional) APC Alliance for Change (Alianza Para el Cambio) APL Adaptable Program Loan BCP Central Bank of Paraguay (Banco Central del Paraguay) BIRF IV Fourth Rural Water Supply and Sanitation Project CAB Basic Environmental Questionnaire (Cuestionario Ambiental Básico) CAS Country Assistance Strategy CBPY Central Bank of Paraguay CFAA Country Financial Accountability Assessment CORPOSANA National Water and Sanitation Utility (Corporación de Obras Sanitarias) CPAR Country Procurement Assessment Report CPGYCRH General Directorate of Water Resources Protection and Conservation DA Designated Accounts DAF Management and Finance Directorate (Dirección de Administración y Finanzas) DDI Declaration of Departmental Interest DGEEC General Directorate of Surveys, Statistics and Census (Dirección General de

Encuestas, Estadísticas y Censos) DIGESA General Directorate of Environmental Health (Dirección General de Salud

Ambiental) DPL Development Policy Loan EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return EPH Permanent Household Survey (Encuesta Permanente de Hogares) ERSSAN Sanitary Services Regulation Agency (Ente Regulador de Servicios Sanitarios) ESAR Environmental and Social Assessment Report ESFR Environmental and Social Follow-up Report ESMF Environmental and Social Management Framework ESSAP S.A. Sanitary Services Company of Paraguay (Empresa de Servicios Sanitarios del

Paraguay S.A.) FD Finance Department FESR Final Environmental and Social Report FM Financial Management FMA Financial Management Assessment

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FMIS Financial Management Information System FOCEM MERCOSUR’s Structural Convergence Funds (Fondos para la Convergencia

Estructural del MERCOSUR) FRR Financial Rate of Return GDP Gross Domestic Product GETSWS General Environmental Technical Specifications for the Water and Sanitation

Sector GOP Government of Paraguay HR Human Resources IA Internal Audit IAD Internal Audit Department (Departamento de Auditoría Interna) IAS International Accounting Standards IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICR Implementation Completion Report IADB Inter-American Development Bank IFA Integrated Fiduciary Assessment IFI International Financial Institutions IFR Interim Unaudited Financial Reports INCOOP National Institute of Cooperatives (Instituto Nacional de Cooperativas) INDI Paraguayan Agency for Indigenous People (Instituto Paraguayo del Indígena) INT Department of Institutional Integrity (of the World Bank) IP Indigenous Peoples IPMF Indigenous Peoples Management Framework IPP Indigenous Peoples Plan IRLAPF Involuntary Resettlement and Land Acquisition Policy Framework ISR Implementation Status Report IT Information Technology JBIC Japan Bank for International Cooperation LAC Latin America and the Caribbean LAP Land Acquisition Plan LCS Least-Cost Selection M&E Monitoring & Evaluation MDGs Millennium Development Goals MEF Monitoring and Evaluation Framework MH Ministry of Finance (Ministerio de Hacienda) MIS Management Information System MLC Municipal Localization Certificate MOF Ministry of Finance MOH Ministry of Health MOPC Ministry of Public Works and Communication (Ministerio de Obras Públicas y

Comunicaciones) MSPyBS Ministry of Public Health and Social Welfare (Ministerio de Salud Pública y

Bienestar Social) NCB National Competitive Bidding NGO Nongovernmental Organization NPV Net Present Value O&M Operation and Maintenance OBA Output-Based Aid

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OM Operational Manual PDO Project Development Objective PESAF Preliminary Environmental and Social Assessment Form QCBS Quality- and Cost-based Selection SBD Standard Bidding Document SEAM Environmental Secretariat (Secretaría del Ambiente) SENASA National Environmental Sanitation Service (Servicio Nacional de Saneamiento

Ambiental) SEPA Procurement Plan Evaluation System (Sistema de Evaluación de Planes de

Adquisiciones) SIAF Financial Management Information System SIAPS National Water Supply and Sanitation Information System SIAR Rural Water Supply Information System SICO Government Budget Execution System SICP Country Procurement Portal (Sistema de Información de Contrataciones Públicas) SIL Specific Investment Loan SOE State Owned Enterprises STR Request for Transfer TA Technical Assistance TORs Terms of Reference UAT Technical Support Unit (Unidad de Apoyo Técnico) UOC Procurement Operational Unit (Unidad Operativa de Contractaciones) UPGP Project Preparation and Coordination Unit (Unidad de Preparación y Gestión de

Proyectos) WB World Bank WSS Water Supply and Sanitation WSSMP Water and Sanitation Sector Modernization Project WSSU

Water and Sewerage Services Unit (within MOPC) (Unidad de los Servicios de Agua Potable y Alcantarillado Sanitario, USAPAS)

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Vice President: Pamela Cox Country Director: Pedro Alba

Sector Director: Laura Tuck Sector Manager: Guang Z. Chen

Task Team Leader: Maria Angelica Sotomayor

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PARAGUAY Water and Sanitation Sector Modernization Project

TABLE OF CONTENTS

I. STRATEGIC CONTEXT AND RATIONALE ......................................................................1

A. Country and sector issues.................................................................................................................1

B. Rationale for Bank involvement ......................................................................................................5

C. Higher-level objectives to which the project contributes.................................................................6

II. PROJECT DESCRIPTION .....................................................................................................6

A. Lending Instrument ..........................................................................................................................6

B. Project Development Objective and key indicators .........................................................................6

C. Project components ..........................................................................................................................7

D. Lessons learned and reflected in the project design.........................................................................8

E. Alternatives considered and reasons for rejection............................................................................9

III. IMPLEMENTATION............................................................................................................10

A. Partnership arrangements (if applicable)........................................................................................10

B. Institutional and implementation arrangements .............................................................................10

C. Monitoring and evaluation of outcomes/results .............................................................................11

D. Sustainability..................................................................................................................................12

E. Critical risks and possible controversial aspects ............................................................................13

F. Loan/credit conditions and covenants (in addition to standard FM covenants).............................15

IV. APPRAISAL SUMMARY....................................................................................................16

A. Economic and financial analyses ...................................................................................................16

B. Technical ........................................................................................................................................18

C. Fiduciary ........................................................................................................................................19

D. Governance ....................................................................................................................................20

E. Social..............................................................................................................................................21

F. Environment...................................................................................................................................23

G. Safeguard policies ..........................................................................................................................25

H. Policy exceptions and readiness.....................................................................................................27

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Annex 1: Country and Sector Background ...............................................................................28

Annex 2: Major Related Projects Financed by the Bank and/or Other Agencies.................39

Annex 3: Results Framework and Monitoring .........................................................................41

Annex 4: Detailed Project Description ......................................................................................52

Annex 5: Project Costs ................................................................................................................65

Annex 6: Implementation Arrangements ..................................................................................66

Annex 7: Financial Management and Disbursement Arrangements......................................72

Annex 8: Procurement ................................................................................................................86

Annex 9: Economic and Financial Analysis ..............................................................................96

Annex 10: Safeguard Policies ...................................................................................................107

Annex 11: Good Governance Strategy ....................................................................................122

Annex 12: Project Team/Costs .................................................................................................134

Annex 13: Documents in File ....................................................................................................135

Annex 14: Statement of Loans and Credits.............................................................................137

Annex 15: Country at a Glance ................................................................................................138

MAP (IBRD 36806 – IBRD 36807)...........................................................................................140

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PARAGUAY

PARAGUAY WATER & SANITATION SECTOR MODERNIZATION

PROJECT APPRAISAL DOCUMENT

LATIN AMERICA AND CARIBBEAN

LCSUW

Date: March 19, 2009 Team Leader: Maria Angelica Sotomayor Araujo

Country Director: Pedro Alba Sector Manager/Director: Guang Zhe Chen

Sectors: General water, sanitation, and flood protection sector (100%) Themes: Access to urban services and housing (P); Infrastructure services for private sector development (S); Rural services and infrastructure (S)

Project ID: P095235 Environmental screening category: Full Assessment

Lending Instrument: Specific Investment Loan Project Financing Data

[X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m): 64.00 Proposed terms: Commitment-linked, payable in 27 years, including 8 years of grace and level principal repayment; at six-month LIBOR plus fixed spread for a Fixed-Spread Loan of US$ 64 million.

Financing Plan (US$m) Source Local Foreign Total

Borrower 19.50 0.00 19.50 International Bank for Reconstruction and Development

0.00 64.00 64.00

Total: 19.50 64.00 83.50 Borrower: Republic of Paraguay Responsible Agency: Ministry of Public Works and Communications Oilva y Alberdi Asunción Paraguay Tel: (595) (21) 414 9000 www.mopc.gov.py

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SENASA Mcal. Estigarribiuia No. 796

Asunción, Paraguay Tel: (595-21) 494 399 www.senasa.gov.py

ESSAP ,SA Jose Berges # 516, casi San Jose Asunción, Paraguay Tel: 595-21-225001 /210330 Fax: 595-21-211381 www.essap.com.py

Estimated Disbursements (Bank FY/US$m) FY 10 11 12 13 14 15 Annual 8.00 8.00 12.00 16.00 14.00 6.00 Cumulative 8.00 16.00 28.00 44.00 58.00 64.00 Project implementation period: Start November 16, 2009 End: March 31, 2015 Expected effectiveness date: November 16, 2009 Expected closing date: March 31, 2015

Does the project depart from the CAS in content or other significant respects? Ref. PAD I.C.

[ ]Yes [X] No

Does the project require any exceptions from Bank policies? Ref. PAD IV.G. Have these been approved by Bank management?

[ ]Yes [X] No [ ]Yes [X] No

Is approval for any policy exception sought from the Board? [ ]Yes [X] No Does the project include any critical risks rated “substantial” or “high”? Ref. PAD III.E.

[X]Yes [ ] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD IV.G.

[X]Yes [ ] No

Project Development Objective Ref. PAD II.C., Technical Annex 3 The Project Development Objective (PDO) is to increase the efficiency, coverage, and sustainability of water supply and sanitation services in Paraguay by (a) improving the governance of the sector, (b) improving water services and increasing access to sewerage services in the Asunción metropolitan area, and (c) increasing access to sustainable water and sanitation services in rural areas.

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Project description Ref. PAD II.D., Technical Annex 4 Component 1: Support to the modernization of sector governance and institutional strengthening (US$4 million financed by the Bank loan): The component includes support for (a) the Ministry of Public Works and Communications (MOPC) to strengthen the recently created Water and Sewerage Services Unit; (b) strengthening the Regulatory Entity (ERSSAN) to effectively regulate the sector; and (c) the Environmental Secretariat (SEAM) by strengthening the Water Resources and the Environmental Licensing Directorates. Component 2: Urban water supply and sanitation—and institutional strengthening of the Sanitary Services Company of Paraguay (ESSAP) (US$65.5 million, of which US$50.5 million will be financed by the Bank loan): This component includes: (a) Institutional strengthening and corporate governance of ESSAP, and (b) Priority WSS infrastructure investments. Component 3: Rural water supply, sanitation, and hygiene education—and institutional strengthening of the National Environmental Sanitation Service (SENASA) (US$14 million, of which US$9.5 million will be financed by the Bank loan): This component includes: (a) strengthening the SENASA and its governance; (b) increasing coverage of water supply and sanitation (WSS) for indigenous communities; (c) increasing coverage of WSS, and hygiene education in rural communities; and (d) construction and/or expansion of services in rural communities using minimum subsidy schemes. Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 The project is categorized as environmental risk Category “A” due to the risk of concentrating sewerage in the Paraguay River. The project triggers the following safeguards policies: Environmental Assessment (OP 4.01), Natural Habitats (OP 4.04), Physical Cultural Resources (OP 4.11), Involuntary Resettlement (OP 4.12), Indigenous Peoples (OP 4.10), and Projects on International Waterways (OP 7.50). Significant, nonstandard conditions, if any, for: Ref. PAD III.F. Board presentation: None other than the standard for full Board presentation.

Loan/credit effectiveness: ESSAP Subsidiary Agreement has been executed on behalf of the Government of Paraguay and ESSAP, including issuance of pertinent legal opinions. Main covenants applicable to project implementation: a) For implementation of Component 1 (b), the ERSSAN Agreement has been signed between MOPC and ERSSAN including issuance of pertinent legal opinions. b) For implementation of rural subcomponents and indigenous subcomponents, and prior to the carrying out of any activity, SENASA must enter into an agreement with the pertinent individual rural community or indigenous community benefiting from said subcomponents. c) Prior to the initiation of any works under Component 2, the Borrower shall cause ESSAP to carry out an environmental/social screening and/or an environmental/social assessment for the pertinent works according to the Environmental and Social Management Framework. If resettlement and/or the presence of indigenous population is identified in the area in which the works will take place, the Borrower will cause ESSAP to, prior to the carrying out of any said

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works, prepare and furnish to the Bank a resettlement plan and/or an indigenous plan (in accordance with the provisions of the Involuntary Resettlement and Land Acquisition Policy Framework and/or the Indigenous Peoples Management Framework) as the case may be, and immediately thereafter carry out said plans in accordance with its terms. d) Prior to the initiation of any works under Component 3, the Borrower, through SENASA, shall carry out an environmental/social screening and/or an environmental/social assessment for the pertinent works according to the Environmental and Social Management Framework. If resettlement and/or the presence of indigenous population is identified in the area in which the works will take place, the Borrower, through SENASA will, prior to the carrying out of any said works, prepare and furnish to the Bank a resettlement plan and/or an indigenous plan (in accordance with the provisions of the Involuntary Resettlement and Land Acquisition Policy Framework and/or the Indigenous Peoples Management Framework) as the case may be, and immediately thereafter carry out said plans in accordance with its terms e) The Borrower, prior to the commencement of each calendar year during project implementation, shall create and maintain thereafter a separate budgetary line in the Ministry of Health and Ministry of Finance annual budgets to allow monitoring the budget allocation of funds during the project implementation period. Disbursement conditions: a) For payments made to finance Subcomponent 1(b): (a) a Subsidiary Agreement between the GOP through MOPC and ERSSAN has been signed; and (b) legal counsel, acceptable to the Bank, for the GOP and ERSSAN, have each issued a legal opinion, acceptable to the Bank, indicating that the ERSSAN Agreement has been duly authorized or ratified by the GOP and ERSSAN and that said agreement is legally binding; b) For payments made to finance any major sanitation works under Subcomponent 2, unless: (a) the Asunción Sewerage Master Plan has been updated on terms acceptable to the Bank; (b) the pertinent investment has been selected by the GOP in a manner acceptable to the Bank; (c) the corresponding feasibility study in respect of the pertinent investment has been carried out; and (d) ESSAP is in compliance with the provisions of the ESSAP Subsidiary Agreement; and c) For payments made to finance any Subproject under Component 3, unless the Environmental Unit has been established.�

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I. STRATEGIC CONTEXT AND RATIONALE �A. Country and sector issues

1.� After almost a decade of stagnation and recession, economic growth in Paraguay recovered between 2003 and 2007, supported by sound macroeconomic policies and favorable external factors, especially booming commodity prices. Despite this strong economic performance, Paraguay remains one of the poorest and most unequal countries in Latin America. Poverty and extreme poverty rates, which had increased significantly during the 2001-02 recession, improved somewhat in recent years, reaching 36 percent and 19.4 percent, respectively, in 2007 (compared to a high of 46 and 22 percent in 2002). As the fallout from the global economic crisis begins to affect Paraguay, the country's main challenge is to provide a sound and timely response to the crisis while at the same time reaching a path towards sustained and more equitable economic growth, one that can translate into improved living conditions and access to services for the poor. 2.� The new administration is committed to continuing the prudent macroeconomic policies of the preceding government, focusing on fiscal sustainability, improved competitiveness and equitable growth, as laid out in the government’s Strategic Economic and Social Plan for 2008-13. A key objective is to create fiscal space to dedicate more resources to priority spending programs, especially those aimed at reducing poverty. In order to achieve this, the government is committed to maintaining inflation within single digits, gradually increasing tax collections through better administration and the introduction of new taxes, and improving the efficiency of public spending. At the same time, the less favorable external environment presents an important challenge. As a small open economy with limited access to international financial markets, Paraguay will be affected by the ongoing financial crisis primarily on the real side. Falling commodities prices and a decline in global demand for Paraguay’s exports will especially affect the agriculture sector, which has been one of the drivers of growth in recent years and accounts for 20 percent of GDP. As a result, Paraguay’s current account fell into deficit in 2008 for the first time since 2001; and economic growth prospects for 2009-10 have been sharply revised downwards. The fall in international trade, coupled with a general slowdown in domestic economic activity, are expected to lead to a sharp reduction in customs and tax revenues, affecting the government's fiscal accounts. While the financial sector has not been directly affected by the crisis, the deterioration in the real sector means that credit risk remains an important threat.

3.� Paraguay has a population of 6 million and an average annual population growth rate of 2.2 percent, high compared to the regional average of 1.5 percent. The rapidly growing population presents a significant challenge for the provision of water supply and sanitation (WSS) services. While over 80 percent of the population in urban areas1 is served by a network water connection, only 49 percent have similar access in rural areas, and only 15 percent of urban residents have

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �1 Paraguay uses several definitions of “rural and urban”: The National Statistics Agency (Dirección Nacional de Encuestas Estadísticas y Censos) defines urban areas as those cities, heads of official districts, which have streets, electricity, public facilities, and so forth; and rural areas as those that are not urban. Regarding water service provision, urban centers in Paraguay are defined as those with a population of over 10,000. Rural areas include small towns with a population of fewer than 10,000. Fifty-eight percent of the population live in urban areas and 42 percent live in rural areas.

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access to a network sewerage connection.2 Low sewerage coverage is a critical problem in Asunción and its metropolitan area, where only 33 percent of the population3 is connected to the system. Adequate wastewater treatment is practically nonexistent,4 since untreated sewage infiltrates shallow aquifers, (which in turn are used as a source of water supply), or is directly discharged into the streets, creating serious public health and environmental pollution concerns. As in most countries, it is no surprise that the poor disproportionately lack access to WSS services. Thus, despite recent economic growth, Paraguay is unlikely to achieve most of the Millennium Development Goals (MDGs) by 2015, including the drinking water coverage target of 81 percent,5 without increasing investments in poor and marginal areas. 4.� Expanding access to sustainable WSS services for the rural poor and increasing sanitation coverage in urban centers are by far the biggest challenges for the sector. In terms of infrastructure investments, major improvements are needed to expand the coverage of the sewerage network and the adequate disposal of effluents (treatment or equivalent solution) in the Asunción metropolitan area. 5.� The achievement of sustained WSS service expansion in urban and rural areas can only be achieved through efficient and solid institutions. Improving sector governance is a basic requirement to address those challenges 6.� There are three types of providers of WSS services in Paraguay that together manage approximately 730,000 potable water connections serving around 3.6 million people. In urban settlements above 10,000 inhabitants, services are largely provided by the national WSS utility, (Sanitary Services Company of Paraguay, Empresa de Servicios Sanitarios del Paraguay S.A., ESSAP S.A.), and by small local private sector providers called aguateros, which partially fill unmet demand in peri-urban areas. In rural areas, the National Environmental Sanitation Service (Servicio National de Salud Ambiental, SENASA), a directorate under the Ministry of Health, facilitates the provision of WSS through water user committees, called Juntas de Saneamiento (juntas), to settlements with fewer than 10,000 inhabitants and to dispersed rural communities. 7.� ESSAP S.A. is the largest individual service provider, operating approximately 260,000 household connections, representing 35.8 percent of the market share (75.5 percent of which is in Asunción). The juntas collectively have the largest market share, supplying water to approximately 362,000 households (49.8 percent of the total). Private operators, aguateros, operate around 105,000 connections (representing 14.4 percent of total population served).

Key sector issues include the following:

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �2 Permanent Household Survey, 2007 (EPH-2007), Dirección General de Estadística, Encuestas y Censos. 3 The municipalities in the Asunción metropolitan area include (sewerage coverage in parenthesis): Asunción (67 percent), Lambare (16 percent), Fernando de la Mora (6 percent), San Lorenzo (9 percent), Luque (14 percent), Mariano Roque Alonso (12 percent), Limpio (14 percent), and Villa Elisa (0 percent). 4 There are 14 cities with sewerage services, with very low coverage. Of these, four have adequate wastewater treatment (Encarnación, San Pedro de Ycuamandyyú, Villeta, and Hohenau), and the rest have insufficient treatment and/or raw discharges. 5 The urban drinking water coverage target is set at 93 percent and the rural target at 59 percent.

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8.� Constraints of existing legal and institutional framework in sector management. Over the years, a series of institutional challenges have emerged in the management of the WSS sector: (a) compliance with the existing Sector Legal Framework (Law 1.614/00), which has not been fully implemented. The Regulatory Decree (18.880/02) of Law 1614/00 delegates to the Ministry of Public Works and Communications (Ministerio de Obras Públicas y Comunicaciones, MOPC) the lead role in WSS sector planning, policy development, and provision of technical assistance to service providers. However, no human or monetary resources have been assigned to the sector within the Ministry to carry out these tasks6; (b) there is a lack of an integrated and comprehensive WSS sector policy that would establish coverage goals, while quality and efficiency objectives have yet to be developed; (c) the lack of a concession agreement between the state and ESSAP S.A. impedes its effective regulation by the Sanitary Services Regulation Agency (Ente Regulador de Servicios Sanitarios, ERSSAN), but Law 3684/08 has mandated a deadline for the signing of said contract, which is expected to have ESSAP S.A. operating under it by June 30, 2009; (d) ERSSAN lacks both the capacity and resources to adequately regulate ESSAP S.A. and hundreds of small private local providers and over a thousand water user committees. Furthermore, the existence of only one large national monopoly poses significant regulatory challenges for ERSSAN; (e) SENASA has the responsibility of expanding access to WSS in rural areas, but lacks the resources to respond efficiently to demands for increasing coverage; and (f) strict and overambitious discharge standards constrain investments in sewerage, due to the lack of resources and capacity to comply with the associated levels of wastewater treatment.

9.� Poor sector performance caused by ESSAP’s operational and financial constraints. Although ESSAP was created with a “clean” balance sheet, without assets or liabilities, all of which remained with Treasury, in 2004, the Ministry of Finance imposed a canon payment (as a proxy for debt payments left over from the National Water and Sanitation Utility (Corporación de Obras Sanitarias, CORPOSANA7 debt) that represented 57 percent of ESSAP’s operating income and 144 percent of its operational margin. Tariffs have not been adjusted since 2002, even though inflation during 2002–07 was estimated at around 35 percent, thus ESSAP registered net losses. Despite all these financial restrictions, ESSAP has been able to control costs, to cover all operating costs, and to partially cover the cannon payment. ESSAP’s market is concentrated in the Asunción metropolitan area; however, at the national level it presents high levels of fragmentation. ESSAP operates in 20 municipalities outside the Asunción metropolitan area, serving less than 10 percent of the population in many of those areas, and little attention has been paid to the potential for market growth and financial sustainability in the interior of the country. In addition, there is no incentive structure to increase the operational efficiency of the company, except for the local interests demanding improved performance. 10.� In an attempt to reform the WSS sector, in 1999 the Government introduced a new regulatory framework and a plan to incorporate the private sector through a concession contract for CORPOSANA, for which a new “clean” utility, ESSAP S.A., was formed. However, the lack of political leadership and the parallel failure of the telecommunications sector reforms

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �6 On January 19, 2009, MOPC issued Resolution No. 37 creating the Water and Sewerage Services Unit; however, it is still not operational. 7 CORPOSANA was the National Water and Sanitation Utility of Paraguay until 2002, when its services were transferred to ESSAP S.A. and its assets and liabilities to the Government.

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diminished momentum to complete reforms in the water sector, leaving the newly created ESSAP S.A. to operate in an unclear legal and regulatory environment.8 Consequently, over the last several years, little sector investment has taken place, resulting in a decline in coverage rates and a fragile financial situation in ESSAP that further prevents it from carrying out urgent investments needed to improve the quality of the services, expand access to unserved urban consumers, and adequately operate and maintain systems. In addition, the company did not generate sufficient resources to pay the canon that the Government imposed on ESSAP.9 The lack of modern management in the utility, especially regarding commercial systems and practices, further complicates the poor financial performance of the company.10 11.� Challenges in servicing rural areas persist. Water service in rural areas is provided by water user committees, juntas, which have been seen as a successful model in Paraguay. SENASA is responsible for planning, construction of systems, and creation of juntas. The regulatory framework sets the same regulations for juntas and for private operators serving peri-urban areas aguateros. This makes it nearly impossible and very expensive for the smaller juntas to comply with regulatory requirements, resulting in requests for technical assistance from SENASA to fulfill negligible valued-added bureaucratic procedures. This weak regulatory framework, together with the lack of resources and institutional capacity to comply with it, limits the potential for scaling-up successful experiences in the rural sector in Paraguay.11 Indeed, the general success of the juntas system in the country has created more demand for SENASA’s assistance (technical and financial) than SENASA is able to provide. In particular, those currently without service are the more remote and dispersed populations, making it even more difficult and costly to extend coverage. The challenge is to extend WSS coverage to dispersed populations (including the poor and highly vulnerable indigenous communities), to expand access to sanitation to rural and small towns, and to improve the sustainability of the existing WSS systems. Government strategy 12.� Government strategy for the water and sanitation sector. One of the objectives of the current administration, which took office in August, 2008 in Paraguay, is improving transparency and accountability in the management of state-owned enterprises and enhancing their efficiency. In the case of the water sector, the Government of Paraguay (GOP) is interested in implementing a modernization strategy for the sector and increasing service coverage in a sustainable manner. The main elements of this modernization process are expected to be (a) defining the market structure of ESSAP, favoring the creation of sustainable business units at the regional level; (b) strengthening sector finances through increased efficiency, and clear policies

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �8 This situation was regularizad by the recently enacted Law 3684/08, “Que autoriza la Reestructuración y Regularización del Estado Patrimonial de la Empresa de Servicios Sanitarios del Paraguay Sociedad Anónima (ESSAP S.A.).” 9 On December 31, 2008, Law 3684/08 was approved restructuring the payment of the canon. 10 This assessment is based on the results of the financial and performance audits of ESSAP, December 2005, which were financed by the Bank-Netherlands Water Partnership, a World-Bank-managed trust fund. 11 For additional information on the experiences with private sector participation in rural areas in Paraguay, see F. Drees-Gross, J. Schwartz, M. A. Sotomayor, and A. Bakalian, “Output-Based Aid in Water, Lessons in Implementation from a Pilot in Paraguay,” in OBApproaches, Note 07, May 2005, World Bank; and F. Drees-Gross, J. Schwartz, and A. Bakalian, “Output-Based Aid in Water, Lessons from a Pilot in Paraguay,” in Public Policy for the Private Sector, No. 270, April 2004, World Bank.

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for the use of public resources and subsidies; and (c) strengthening the regulatory, institutional, and legal frameworks while opening the possibility of introducing partnerships with the local private sector to increase operational and commercial efficiency. This process is expected to generate an appropriate environment for sustainable investment in the sector in order to significantly increase access to WSS services in Paraguay. Details of the modernization process for ESSAP are presented in Annex 1. The first step taken was to pass a law12 eliminating the burden of the canon, with Treasury assuming some of the liabilities of CORPOSANA, and thus allowing ESSAP to close its financial statements with positive results. In terms of corporate governance, a Board will be established separating the functions of the Board and of the General Manager. Furthermore, MOPC has issued a ministerial resolution creating a dedicated Water and Sewerage Services Unit (WSSU), and has an initial draft of the concession agreement to be signed between the GOP and ESSAP before June 30th, 2009 according to Law 3684/08. With respect to the rural WSS sector, the GOP is committed to supporting the modernization of SENASA, expanding coverage, and promoting sustainability of the systems. B. Rationale for Bank involvement

13.� The proposed project supports the following pillars of the current Country Assistance Strategy (CAS): (a) improving governance and transparency in public administration by reforming the public water utility (ESSAP), improving its accountability and efficiency, and establishing financial discipline, and by strengthening other sector actors like SENASA and ERSSAN; and (b) promoting social inclusion, and increasing the coverage and improving efficiency of basic social services to help Paraguay meet the MDGs through modernization of the sector, which would create the enabling environment for sustainable investments in water and sanitation in urban and rural areas in Paraguay. The project has also been identified as a priority by the current administration, for supporting its Poverty Reduction Strategy, and as so is expected to be a priority within the Bank’s engagement strategy with Paraguay. In addition, this proposed Project is included in the package the GOP is preparing as a response to the global financial crisis, which is expected to be presented in Congress in April 2009. 14.� The Bank is one of the few international institutions actively involved in the sector. The International Bank for Reconstruction and Development (IBRD) has financed dedicated rural WSS projects in Paraguay since the 1970s and is uniquely positioned to support the GOP’s program. First, the Bank is a natural partner, given the project’s linkages with the recently closed Fourth Rural Water Supply and Sanitation Project (BIRF IV), and the Bank’s support of independent audits of ESSAP and technical assistance provided for the development of a business plan for ESSAP. Second, the Bank is well positioned to respond quickly to the GOP’s request to support the implementation of the modernization process, providing technical advice and credibility to any potential private partners. Third, the Project is aligned with the forthcoming Development Policy Loan (DPL), which includes the modernization of the state, and improved management of state-owned enterprises. Fourth, the Bank enjoys the trust of the GOP and brings convening power, given its continuous and in-depth work with the sector and the flexibility of its current approach, as demonstrated by its high-level sector policy dialogue in

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �12 Law 3684/08, “Que autoriza la Reestructuración y Regularización del Estado Patrimonial de la Empresa de Servicios Sanitarios del Paraguay Sociedad Anónima (ESSAP S.A.).”

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the country. Finally, the new administration has requested this operation as soon as possible and has voiced its strong commitment to and appreciation of World Bank assistance in the sector. C. Higher-level objectives to which the project contributes

15.� The proposed project will contribute to the fulfillment of three of the GOP’s high-level objectives: poverty reduction, sustainable growth, and improved governance, by increasing access to sustainable WSS services. First, the project will help support sustainable growth. Second, the project will support the GOP’s poverty reduction strategy by improving the delivery of basic services to urban and rural areas, and indigenous communities. The project will also have positive effects on the health sector’s indicators with the reduction of waterborne diseases.

II. PROJECT DESCRIPTION A. Lending Instrument

16.� This US$64 million Specific Investment Loan (SIL) will partially finance the US$84 million initial phase of a modernization process of the WSS sector in Paraguay. This Project will allow the GOP to develop a phased approach to planning and investing in the sector, while at the same time strengthening policymaking, enhancing the regulatory framework, and modernizing sector institutions to improve governance. The project will also finance a series of investments to increase the coverage and reliability of urban and rural WSS services. It is envisioned that this project will: (a) help prioritize, strengthen, and consolidate the ongoing reform process; and (b) finance priority investments such as water and sewerage in Asunción and its metropolitan area and WSS in rural areas, whose initial results are expected to generate the social support to continue implementing the reform program. The Government plans to evaluate the results and continue the process with additional financing from its own resources, and with possible follow-up projects to incrementally deepen support for policy reforms and finance expansion and improvement of WSS services in a sustainable manner in urban and rural areas in the country. �B. Project Development Objective and key indicators

17.� The Project Development Objective (PDO) is to increase the efficiency, coverage, and sustainability13 of water supply and sanitation services in Paraguay by (a) improving the governance of the sector, (b) improving water services and increasing access to sewerage services in the Asunción metropolitan area, and (c) increasing access to sustainable water and sanitation services in rural areas. 18.� The success of the project will be measured using the following sets of indicators (see Annex 3 for the complete framework, results, and indicators):

•� Water and Sewerage Services Unit within the MOPC staffed and equipped, defining policies for the sector;

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �13 Urban systems are considered to be “sustainable” if (a) the systems are functioning as intended and deliver the service either continuously or regularly, depending on the service level selected; (b) tariffs are set at a level that guarantees operation and maintenance of the system, and are collected; (c) the systems are designed to ensure long-term supply (designed appropriately for yield of source). Rural systems are considered to be sustainable if the systems comply with (a), (b), and (c), and (d) the water committees meet on a regular basis.

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•� Timely availability of external auditing of financial and performance data published through an annual report in ESSAP’s website;

•� Number of additional beneficiaries using sanitation systems in year 5 of the project in the Asunción metropolitan area;

•� Number of additional beneficiaries using sustainable water systems14 in year 5 of the project in rural communities targeted in year 1 of the project; and

•� Number of additional beneficiaries using basic sanitation systems in year 5 of the project in rural communities that were targeted in year 1 of the project.

C. Project components

Component 1: Support to the modernization of the sector—governance and institutional strengthening (US$4 million financed by the Bank loan):

19.� This component is designed to institutionally consolidate the WSS sector through the following actions: (a) support the MOPC in the strengthening of the recently created15 Water and Sewerage Services Unit, which will perform the functions related to the Lead Sector Agency (Titular del Servicio) as per Law 1614/00, including elaboration and implementation of strategic sector planning, definition of a financial policy for the sector, regularization of service provision in the country, oversight and implementation of the Good Governance Strategy for the sector, and in the implementation of a sector information system; (b) strengthen ERSSAN to effectively regulate the sector; and (c) support the Environmental Secretariat (SEAM) by strengthening the Water Resources and Environmental Licensing Directorates, classifying the different basins by discharge standards, and improving the environmental licensing process for investments in the WSS sector. Component 2: Urban water supply and sanitation—and institutional strengthening of ESSAP (US$65.5 million, of which US$50.5 million will be financed by the Bank loan):

20.� This component focuses both on the modernization of ESSAP and the financing of urgently needed WSS investments through two subcomponents: (a) Institutional strengthening and corporate governance of ESSAP by: (i) implementing corporate governance activities related to ESSAP, such as the establishment of a Board of Directors, the implementation of the Good Governance Strategy related to ESSAP, including social accountability activities, and strengthening of, among other things, the internal control, auditing, and procurement units; (ii) restructuring ESSAP through the design and implementation of service units (Unidades de Servicio de ESSAP S.A.) and enhancing their operational and commercial performance; (iii) strengthening ESSAP’s environmental and social unit, ensuring adherence to safeguards and adequate implementation of the Environmental and Social Management Framework (ESMF); (iv) supporting the communication strategy of ESSAP, including activities foreseen in the Good Governance Strategy and the ESMF; and (b) Priority WSS infrastructure investments including: (i) urgent investments targeting the reduction of nonrevenue water and increasing efficiency; (ii) rehabilitation of existing water and sewerage infrastructure; (iii) prioritized expansion of water and sewerage systems in the Asunción metropolitan area and the interior; and (iv) expansion of

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �14 Rural systems are considered to be sustainable if the systems comply with (a), (b), and (c), and (d) the water committees meet on a regular basis. 15 Ministerial Resolution Nº 037/09, Ministry of Public Works and Communications (MOPC).

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potable water capacity. All works will follow the methodology detailed in the ESMF of the project. Major sewerage infrastructure works will be carried out after updating the Sewerage Master Plan for Asunción metropolitan area, which will fully integrate environmental and social baseline information and assessment criteria into the overall planning methodology. This study will provide an analysis of alternatives on which the Ministry of Finance, MOPC, and SEAM will prioritize investments in Asunción’s metropolitan area. This component will also finance the final designs and site-specific Environmental Impact Assessments of major works. Component 3: Rural water supply, sanitation, and hygiene education—and institutional strengthening of SENASA (US$14 million, of which US$9.5 million will be financed by the Bank loan):

21.� This component will build on the experience of previous rural WSS projects to increase and improve rural WSS, by: (a) strengthening of the National Environmental Sanitation Service (SENASA) and its governance by supporting its decentralization process, equipment, and strengthening of its environmental and social management units following the ESMF provisions. It will also include its communication strategy, social accountability mechanisms foreseen in the Good Governance Strategy, and activities under the ESMF; (b) increasing coverage of WSS for indigenous communities; (c) increasing coverage of WSS, and hygiene education in rural communities prioritized according to social indexes that will be used in the consultation process of the specific subprojects. The social intervention process will include training of juntas for operations and maintenance, supporting existing juntas, through strengthening Associations of Juntas; and (d) construction and/or expansion of services in rural communities using minimum subsidy schemes. 22.� Overall, as a guiding theme in all components, the project will seek to promote: (i) transparency, through planning and programming all interventions based on objective and quantifiable criteria; (ii) performance, through the identification of targets for each intervention to be monitored and whose attainment will be the indication of success; and (iii) accountability, through the participation in and publication and presentation of the programmed activities and results to the stakeholders. �D. Lessons learned and reflected in the project design

23.� This project builds on the lessons learned from a successful series of four Rural Water and Sanitation projects, from the Asunción Sewerage Project, and from the innovative governance approach used in the Road Maintenance Project in Paraguay. 24.� Build on prior experiences. The Fourth Rural Water Supply and Sanitation Project was built on the success of three previous Bank-financed projects, and it was successful in improving SENASA’s capacity as an effective promoter of WSS in rural areas. This project will build on these successes, which have an important role in improving the conditions of the poor. The juntas, with government support, have proven to be an effective mechanism for providing water supply services to the rural population. This was the experience from the Fourth Rural Water Supply and Sanitation Project, where the communities’ strength was its capability to contribute part of the capital requirements in cash and labor, community organization, and commitment to operate and maintain the infrastructure.

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25.� Need for a stepwise approach to sector reform. The Asunción Sewerage Project clearly showed that reforms in a complex environment have to be undertaken using a phased approach, allowing stakeholders to move at an incremental pace. While technical and political considerations should be taken into account, it is also important to initiate a reform process that has the ownership and commitment of the Government. In the case of ESSAP, the GOP has already selected a modernization option with the greatest viability in financial, technical, social, and political terms that should be implemented in a stepwise manner. This modernization process would begin with a public-public concession agreement between ESSAP and the GOP according to the recently enacted Law 3684/08. It will continue with the creation of decentralized service units for serving different geographic service zones that will be gradually formed. 26.� Need for an integrated approach to sector reform. When considering sector reform it is as important to consider the impacts on rural and peri-urban areas as well as on urban areas. The previous reform attempt focused only on the urban sector, creating unnecessary burdens for the smaller operators, juntas and aguateros, that were not included in the analysis. A comprehensive sector reform needs to include all sector institutions, regardless of the area they serve, in order to address the urgent issues in an integrated approach. 27.� Supply-driven sanitation services. Previous projects demonstrated that supply-driven approaches to the provision of sewerage services are likely to result in high fiscal costs, inefficient sector investments, poor service coverage, and poor targeting of subsidies. Under this project, sanitation subprojects will have substantial up-front work to determine the users’ demand for networked and non-networked sanitation services and, thus, avoid ineffective and inefficient interventions. Based on this analysis, the most suitable communities will be selected for the construction of the networked sanitation solution, and improved individual sanitation solutions will also be offered to communities. 28.� Strengthening sector governance. This project will build on the Governance Action Plan developed under the Road Maintenance Project with support from the Bank. A specific strategy is being developed for the sector, particularly to enhance the enforcement of current legal oversight functions of ERSSAN and the Ministries of Public Works and of Public Health (or any other agency that would accomplish their current functions) for each of the project-implementing agencies, ESSAP and SENASA. Moreover, government agencies (such as municipalities) and nongovernmental agencies (NGOs) will participate in oversight, which will be carried out for all the public sector agencies of the sector involved in the project. E. Alternatives considered and reasons for rejection

29.� The alternatives considered include the following: A. A Fifth Rural Water and Sanitation Project through a repeater project; B. A single Urban WSS Project implemented through a single-intervention Specific

Investment Loan (SIL); C. Multiple Operations:

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(a) A WSS Sector Modernization Program using an Adaptable Program Loan (APL). The first stage would be US$60 million to US$80 million for 4 to 6 years with a second or third stage.

(b) A WSS Sector Modernization Project using a SIL, with the possibility of follow-up interventions (additional SILs, repeater projects, and/or additional financing).

30.� Although option A presented low implementation risk and high cost-effectiveness relying on the previous Fourth Rural Water Supply and Sanitation Project, it was rejected because it failed to address the sector’s main institutional and urban subsector issues, and did not respond to the GOP’s needs.

31.� Option B, a single urban WSS project, was qualified with a high implementation risk, given the lack of recent experience in water-utility-implementing Bank-financed projects in Paraguay. Like Option A, this option also responds only partially to GOP needs.

32.� Options C (a) and (b) are the only alternatives that address the main sector issues, respond to GOP needs, and commit to long-term investment/reform needs. Initially, an APL was considered the preferred option; however, the GOP’s choice was a SIL, because it will provide more flexibility for the design of subsequent projects to support sector needs based on the results of this operation. It takes into account the increased flexibility introduced by the new instruments offered by the Bank, such as additional financing and repeater projects. See Table 1 for more details on these options and their evaluation.

Table 1. Alternatives’ Selection Criteria Matrix

Selection Criteria A. 5th Rural

B. Single Urban W&S Project

C. (a) Sector Modernization APL

C. (b) Sector Modernization (Multiple) SIL

Addresses main sector issues

No Partially Yes Yes with some uncertainty in the medium term

Responds to government needs

No Partially Yes requires more up-front knowledge

Yes provides flexibility on future design

Commits to long-term investment/reform needs

No No Yes Yes with moderate uncertainty

Implementation risk Low High Managed by triggers Medium

�III. IMPLEMENTATION

A. Partnership arrangements (if applicable)

33.� None.

B. Institutional and implementation arrangements

34.� The project aims to support the modernization of the water sector in Paraguay, providing institutional strengthening to sector agencies and improving overall sector governance. As such, the project will comprise every public entity currently involved in the sector, namely:

•� The Ministry of Public Works and Communications (MOPC), responsible for sector planning and policy development;

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•� The Sanitary Services Company of Paraguay (ESSAP S.A.), a public company, responsible for service provision in urban areas with population above 10,000;

•� The National Environmental Sanitation Service (SENASA), the General Directorate within the Ministry of Public Health and Social Welfare (MSPyBS) responsible for construction and promotion of WSS infrastructure for settlements with populations below 10,000;

•� The WSS sector regulatory agency (ERSSAN); and •� The Environmental Secretariat (SEAM), responsible for setting discharge standards and

issuing the environmental licensing for all sector investments. 35.� Given the large number of participating agencies, it was decided to work directly with the main agencies and to use, as much as possible, existing units within these agencies that have experience in the execution of World Bank-financed projects, thereby avoiding creating new temporary units. It was agreed with the different agencies that MOPC will be the overall project coordinator through the Water and Sewerage Services Unit, and will be the implementing agency for Component 1, in close coordination with ERSSAN and SEAM for the subcomponents related to those agencies. Component 2 will be executed by ESSAP and Component 3 by SENASA. 36.� For the implementation of the different components, the following subsidiary agreements will be required: (a) an agreement between the GOP and both ERSSAN, through the MOPC, and SEAM for the implementation of Subcomponents 1(b) and 1(c), respectively; (b) an agreement between the GOP and ESSAP, through the MOPC, for the implementation of Component 2; and (c) an agreement between the GOP and each eligible junta, when necessary, for Subcomponents 3(c), 3(d), 3(e), and 3(f). More details are presented in Annex 6. 37.� Each agency will be responsible for the financial management (FM) functions of the component under its responsibility, comprising budgeting, accounting, and reporting, including preparation of interim unaudited financial reports (IFR), internal control, flow of funds, and external auditing, and will produce a set of interim and annual financial statements. Thus, there will be three segregated sets of interim reports and annual financial statements to be audited separately. Financial reports will be prepared by MOPC, ESSAP, and SENASA for Components 1, 2, and 3, respectively. Additional information related to FM and procurement arrangements is provided in Annexes 7 and 8, respectively. 38.� Specific training in the use of the World Bank’s FM and procurement procedures and guidelines will be delivered to all implementing agencies, encouraging collaboration among its fiduciary staff. In addition, it has been coordinated with the Bank’s Department of Institutional Integrity to provide specific training in the areas of “ethics and integrity” to all sector agencies and to participate in a broader training open to construction and consulting companies, and other project stakeholders. In the case of the rural subcomponent, specific workshops will be targeted to include some of the juntas and Associations of Juntas. These activities are expected to take place in the period between Board approval and effectiveness. C. Monitoring and evaluation of outcomes/results

39.� In the absence of adequate sector information systems in Paraguay, the project, through Component 1, will establish monitoring and evaluation mechanisms at two distinct levels: At the

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project level: A Monitoring and Evaluation Framework (MEF) will include detailed information of the communities included in the project and, for a limited number of comparator rural communities not covered by the project under Component 3, and information on the intervention to be covered in Component 2; and at the national level: An Information System covering the entire WSS sector, whether benefiting from investments under the project or not.

40.� The project-level MEF will track progress in implementation, measure intermediate outcomes, and evaluate project impacts (in the case of Component 3). The framework outlines key performance indicators, data collection methods, a timetable for collection, and responsible agencies. The MEF will be used to supervise and monitor the implementation of the project. Three main tools will be used for monitoring and evaluation (M&E) of the project: (a) Progress Reports for all components; (b) Results-Based Monitoring and Evaluation for all the components; and (c) Impact Evaluation for Component 3. (For details on M&E see Annex 3).

41.� At the national level, the project will support the creation of a WSS information system that will allow for the tracking of key variables across various institutions. The information system will consist of a Rural Water Supply Information System (SIAR) for the internal use of SENASA, and a broader National Water Supply and Sanitation Information System (SIAPS) with data inputs by and for the use of various institutions, such as ESSAP, ERSSAN, and the General Directorate of Surveys, Statistics and Census (Dirección General de Encuestas, Estadísticas y Censos, DGEEC), among others.

D. Sustainability

42.� The project seeks a sustainable approach to WSS modernization with the partnership between the GOP and the World Bank. The GOP has shown its commitment to the sector modernization agenda, consistently supporting the project and its activities. Nevertheless, the sustainability of the program’s main sector-level objectives and benefits will remain critically dependent on the GOP’s sustained commitment to the reform agenda.

43.� ESSAP’s long-term institutional sustainability will depend on the success of the implementation of the institution’s governance reforms. With the concession agreement between the Titular del Servicio and ESSAP in place, the company will be able to develop and implement a strategy to achieve the required financial equilibrium between the costs to be covered (efficient levels of operation and maintenance, capital costs of future investments, and some of the debt of CORPOSANA), with the available sources (tariff increases, contributions and grants from GOP and/or other entities, and loans to be taken out by ESSAP). This will require a comprehensive effort to improve its financial situation with the support of Ministry of Finance, the commitment from the GOP, and the close oversight from its Board of Directors. 44.� To assure SENASA’s institutional sustainability, it is necessary to implement the reforms providing it with some administrative and financial stability. SENASA will also need to continue promoting the formation of associations of juntas to relieve its technical support functions, and should strengthen its capacity for recovery of loans granted to the juntas.

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45.� In terms of the sustainability of the financed interventions in rural areas, SENASA’s project cycle is considered sustainable given the results of the four previous World Bank-financed projects. This Project builds on that experience and will continue to include more emphasis on the social processes increasing the likelihood of sustainability. In terms of the investments in urban areas, the interventions are being designed emphasizing the achievement of social and environmental sustainability following the Bank’s safeguards. All the investments are being designed following state-of-the-art technical standards, doing all the required prefeasibility and alternative analysis including analysis of environmental and economic aspects and with a strong social component, all of which are expected to improve the sustainability of the investments. E. Critical risks and possible controversial aspects

46.� The overall risk rating for this project has been determined to be Substantial. Key project risks and their mitigation measures are provided in the following risk matrix:

Risk Factors Risk Mitigation Measuresa

Risk Rating with

Mitigation Technical/design: Technical staff at ESSAP might be resistant to using adequate, modern technologies, and/or lack of resources may prevent them from obtaining adequate designs. Population not willing to connect to the sewerage network.

ESSAP’s technical staff has visited sewerage works in Bolivia and Peru that use condominial sewerage technologies, and innovative wastewater discharges to rivers in Argentina. It is keen to use adequate modern technologies, not currently used in Paraguay. Given the financial situation of the utility, it has been agreed with the GOP that Loan proceeds will be used to update the Asunción Sanitation Master Plan to ensure an adequate analysis of alternatives, and to prepare technical designs following Bank safeguard procedures for Category A projects, especially those related to sewerage network and wastewater treatment plants for the Asunción metropolitan area. Financing options will be given for the connection fee and/or the intradomiciliary connections, so families can defer the costs in the water bill. Arrangements with contractors and municipalities will be made for construction and financing of intradomiciliary facilities.

L

L

Implementation capacity: Implementation agencies lack adequate capacity to execute the project. ESSAP has no recent experience implementing WB projects.

In the case of MOPC and SENASA, there is a low implementation risk since they are implementing or have recently satisfactorily executed similar Bank projects. All sector institutions, especially ESSAP, will receive procurement and FM training to prepare them for project implementation, and to make sure they are familiar with Bank policies and guidelines. Sector institutions will be strengthened during project implementation.

L

S

Sustainability of urban investments: ESSAP has a poor record of O&M and the utility’s legal

The institutional arrangements and the corporate governance measures to be implemented (including the signing of the concession agreement) should adequately mitigate most of the legal risks faced by ESSAP. The signing of the concession agreement and the enactment of Law 3684/08 regularizing the financial situation of

M

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and financial situation is being regularized.

ESSAP and the Government’s commitment to the process, and the implementation of the fiduciary enhancement plan adequately mitigate this risk.

Financial management: Some implementation agencies lack capacity to undertake FM activities as required by Bank rules.

Special FM arrangements and additional mitigating measures that have been identified, will contribute to an enhanced fiduciary framework for the project, which meets minimum Bank requirements. The enhanced fiduciary framework is intended to adequately deal with and mitigate project-identified FM risks. Control risk after implementation of the mitigation measures is rated moderate. However, overall FM residual risk is rated high, given the high risk associated with Paraguay, which is beyond project mitigation scope (see Annex 7).

H

Procurement: Country procurement environment. ESSAP lack of capacity to undertake procurement activities as required by Bank rules and guidelines.

The following are the main procurement risk mitigation measures agreed with the GOP: (a) all implementing agencies will employ the Country Procurement Portal (SICP) and the Procurement Plan Evaluation System (SEPA) for project procurement; (b) inclusion in the Loan Agreement of the Special Procurement Provisions listed in Annex 8, Section F and of the Covenants listed in Annex 8, Section G; (c) ESSAP will hire an experienced engineer to support the procurement process, consultants to support the supervision of the works, and a concurrent financial-technical audit; and (d) project staff will attend procurement training delivered by the Bank and an “Ethics and Integrity” course to be delivered by the Bank’s Department of Institutional Integrity (see Annex 8).

Hb

Social safeguards: Inequity of access, potential involuntary resettlement, and inappropriate interventions in indigenous communities.

The beneficiary communities of the project will be selected using an Equity Index, which was elaborated in accordance with the inequity of access to services analysis, including opportunities of livelihood, welfare, and voice; and poverty, social, and degree-of-vulnerability criteria. It also establishes principles of transparency, accountability, anticorruption, viability of participation activities, and management of expectations. As part of the ESMF, specific instruments were prepared by sector agencies to manage involuntary resettlement issues if they arise, and an Indigenous Peoples Framework was prepared with clear guidelines for intervention in indigenous communities, and detailed consultation and disclosure procedures.

M

Environmental safeguards: The project is a Category A, involving sewerage systems, and wastewater treatment and disposal.

Given the institutional capacity constraints, and aiming at minimizing the potential negative environmental impacts, an ESMF was developed, and all of the main sewerage and wastewater treatment and disposal infrastructure will be carried out based on the evaluation of alternatives resulting from an Environmental Impact Assessment that will be done during project implementation to ensure its adequate funding and compliance with Bank guidelines. Moreover, the proposed investments will represent a significant improvement over the current environmental situation.

M

Sensitive political and governance situation of the country: Including likely adverse position to the

Resistance to change in ESSAP: Internal and external communication activities have been and will continue to be undertaken to ensure staff is accurately informed about the Project’s objectives and progress, and participate in its design/implementation. Legislative: Maintaining an open, flexible, and transparent approach to the modernization process, encouraging joint work among the

S

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proposed modernization process.

executive branch and Congress. Engage Congress in policy dialogue to maintain legislative support. Ensure political timing is appropriate with project preparation schedule. Expose key decision-makers to experiences with public utilities reform and private sector participation in the water sector; ensure they differentiate this process from “privatization” or the previous “reform” process. Civil Society: Developing a communications strategy during project preparation to create a constituency of support among users and among the local private sector, academic and professional groups, and organized civil society for improvements in service quality and coverage. Maintaining transparency and public disclosure. Involving the population to gain support linking the Bank’s Small Grants Program with the sector’s issues to raise awareness.

Lack of a working majority in Congress generates a risk on project approval.

There is wide consensus among representatives from all political parties on the importance of the project. Recently, a law was approved to solve the financial situation of ESSAP and the need for further investments and a serious institutional strengthening process was supported by all major parties. In addition, sector institutions have presented the project to municipalities in the Asunción metropolitan area, to construction company associations, to consultant associations, and civil society, all of which expressed their support for the project.

S

IV. Overall Risk (including Reputational Risks) S

a. Rating of risks on a four-point scale—High, Substantial, Moderate, Low—according to the likelihood of occurrence and magnitude of potential adverse impact. b. Risk rating might be upgraded to “Substantial” during project implementation depending on actual implementation of mitigation measures and their impact, which will be assessed during Procurement Post-Review Exercises.

F. Loan/credit conditions and covenants (in addition to standard FM covenants)

47.� Effectiveness conditions: The ESSAP Subsidiary Agreement has been executed on behalf of the GOP and ESSAP, including issuance of pertinent legal opinions. 48.� Main covenants applicable to project implementation:

a) For implementation of Component 1(b), the ERSSAN Agreement has been signed between MOPC and ERSSAN including issuance of pertinent legal opinions.

b) For implementation of rural subcomponents and indigenous subcomponents, and prior to the carrying out of any activity, SENASA must enter into an agreement with the pertinent individual rural community or indigenous community benefiting from said subcomponents.

c) Prior to the initiation of any works under Component 2, the Borrower shall cause ESSAP to carry out an environmental/social screening and/or an environmental/social assessment for the pertinent works according to the Environmental and Social Management Framework. If resettlement and/or the presence of indigenous population is identified in the area in which the works will take place, the Borrower will cause ESSAP to, prior to the carrying out of any said works, prepare and furnish to the Bank a resettlement plan and/or an indigenous plan (in accordance with the provisions of the Involuntary

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Resettlement and Land Acquisition Policy Framework and/or the Indigenous Peoples Management Framework) as the case may be, and immediately thereafter carry out said plans in accordance with its terms.

d) Prior to the initiation of any works under Component 3, the Borrower, through SENASA shall carry out an environmental/social screening and/or an environmental/social assessment for the pertinent works according to the Environmental and Social Management Framework. If resettlement and/or the presence of indigenous population is identified in the area in which the works will take place, the Borrower, through SENASA, will, prior to the carrying out of any said works, prepare and furnish to the Bank a resettlement plan and/or an indigenous plan (in accordance with the provisions of the Involuntary Resettlement and Land Acquisition Policy Framework and/or the Indigenous Peoples Management Framework) as the case may be, and immediately thereafter carry out said plans in accordance with its terms.

e) The Borrower, prior to the commencement of each calendar year during project implementation, shall create and maintain thereafter a separate budgetary line in the Ministry of Health and Ministry of Finance annual budgets to allow monitoring the budget allocation of funds during the project implementation period.

49.� Disbursement conditions:

a) For payments made to finance Subcomponent 1(b): (a) a Subsidiary Agreement between the GOP through MOPC and ERSSAN has been signed; and (b) legal counsel, acceptable to the Bank, for the GOP and ERSSAN, have each issued a legal opinion, acceptable to the Bank, indicating that the ERSSAN Agreement has been duly authorized or ratified by the GOP and ERSSAN and that said agreement is legally binding.

b) For payments made to finance any major sanitation works under Subcomponent 2, unless: (a) the Asunción Sewerage Master Plan has been updated on terms acceptable to the Bank, (b) the pertinent investment has been selected by the GOP in a manner acceptable to the Bank, (c) the corresponding feasibility study in respect of the pertinent investment has been carried out, and (d) ESSAP is in compliance with the provisions of the ESSAP Subsidiary Agreement.

c) For payments made to finance any Subproject under Component 3, unless the Environmental Unit has been established.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

50.� The economic evaluation of the Project was based on (a) the analysis of the Itay basin sewerage project, which is the largest subproject likely to be financed in the Asunción metropolitan area; and (b) the economic analysis of a sample of rural subprojects analyzed for the Implementation Completion Report (ICR) of the Fourth Rural Water and Sanitation Project, which represent the type of projects to be financed under this operation for rural communities. Detailed financial and economic analyses were conducted including sensitivity and risk assessments. A description of the methodology used and the complete results of the analyses are presented in Annex 9.

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Economic Analysis 51.� The project is expected to generate a broad set of benefits, including increasing the efficiency of WSS services, increasing access to the sewerage and disposal systems in Asunción’s metropolitan area and other urban centers, and increasing access to rural WSS services, all of which are expected to improve health conditions and quality of life in the country. 52.� Specific infrastructure works financed under Component 2 will only be defined after the Sewerage Master Plan for Asunción’s metropolitan area is updated, making it challenging to estimate and quantify the project’s detailed costs and benefits. As such, the economic evaluation for the project was based on the following: (a) an analysis of the Itay basin sewerage project, which is deemed representative of the type of investments to be financed in the metropolitan area, is likely to be considered a priority investment once the Sewerage Master Plan is updated, and will probably be the most expensive urban intervention given its large size; and (b) the economic analysis of a sample of rural subprojects analyzed for the ICR of the Fourth Rural Water Supply and Sanitation Project, which represent the type of projects to be financed under this operation for rural communities. 53.� Urban Investments. The economic analysis was based on preliminary cost estimates for the construction and operation and maintenance of the Itay basin sewerage works over a period of 25 years. The results indicate that costs for the development of sewerage and disposal systems in the Itay basin have a present value of US$34 million and are expected to generate benefits of US$95.9 million, resulting in a net present value (NPV) of US$62 million, with an economic internal rate of return (EIRR) of 43 percent. This relatively high rate of return is due to the fact that 10 years ago, the GOP, with Bank’s financing, built a tunnel, which will be operational under this project. The cost of the tunnel was not incorporated into the analysis, because it is considered a sunk cost. If these costs were to be considered, the EIRR for the project would fall to 23 percent, which could be a better estimate of the EIRR of the other sewerage investments in the area. 54.� Rural Investments. A sample of subprojects was analyzed to perform the economic evaluation of the rural component. The main benefits of this sample were improved water services to approximately 90,425 beneficiaries in 18 rural communities in 5 departments. The 18 subprojects evaluated had an EIRR ranging from zero to 73 percent, an average return of 34 percent, and an average NPV of US$73,950. Only three out of the 18 subprojects were economically infeasible. The overall result of this ex-post analysis is substantially positive based on the sample analyzed. While the average rate of return per subproject and the overall economic NPV were higher than expected at appraisal, the results of the ex-post assessment led the project team to revise the economic assessment methodology in the Operational Manual for the new project to simplify its application and allow for easier screening of economically infeasible subprojects. Financial Analysis 55.� The project is expected to generate financial benefits to ESSAP S.A. in the form of revenues stemming from increased sales due to an increase in the number of subscribers with access to sewerage services, higher efficiency in the provision of water services, and the sale of new sewerage connections. The analysis has been conducted in current terms based on net cash

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flows generated by the project over a 25-year period, and it shows that the combined financial rate of return (FRR) of the investment and efficiency interventions is 11 percent. The project’s cash flow is discounted at 12 percent, and the resulting NPV deficit of about US$1.7 million indicates that the project is able to generate enough cash to cover 97 percent of the costs, and that the remaining 3 percent should be covered by subsidies from the Government. 56.� Past and Current Performance of ESSAP S.A. ESSAP S.A.’s revenues stem from the provision of WSS services to the Asunción metropolitan area. Based on the review of financial statements from 2004 to 2007, ESSAP S.A. had a negative net income, mainly due to the canon payment obligation, without which the company would have been profitable. In spite of these limitations, the company has been able cover all operating costs, and to keep costs relatively under control with operating expenses increasing by 21 percent between 2004 and 2007, when the inflation over this period reached 35 percent. Most of ESSAP S.A.’s liabilities were related to the canon payment, limiting the company’s capacity to plan and implement needed investments that could improve the quality of service, enhance efficiency, and increase coverage. 57.� Future Performance of ESSAP S.A. The projections for ESSAP S.A.’s future financial performance for 2008–20 were based on the following key assumptions, among others: (a) an annual increase in the water tariff to the annual projected inflation for that year; (b) a gradual increase in the sewerage tariff from 50 percent of the water bill to 100 percent of the water bill over a period of 7 years (2009–15); and (c) an increase in sewerage coverage in the Asunción metropolitan area from 20.7 percent in 2009 to 48.9 percent in 2015, and to 60.4 percent in 2020. The implementation of these measures ensures a net profit for ESSAP S.A. and enables the company to continue to meet its current operating expenditures. It is also expected, given that the provisions of recently approved Law No. 3.684 (on the restructuring and regularization of the company’s assets and equity), which have not been fully implemented, that the company will be able to meet its debt obligations and in the longer term have a positive cash flow. B. Technical

Urban Component 58.� As mentioned, investment in sanitation infrastructure in ESSAP has been practically nonexistent in recent years. The following paragraphs explain what has initially been assessed as the main investment needs. However, the precise technology, timing, sequence, and scope of these investments will be guided by the updating of the sewerage system’s Master Plan for Asunción’s metropolitan area,16 based on which ESSAP will have an analysis of alternatives on which to base its investment decisions. These studies will include the Environmental Impact Assessment (EIA) and final designs of the infrastructure to be financed. The financial modeling will ensure the sustainability of the water utility to carry out and recover the investment. 59.� Rehabilitation of the sewerage system of Asunción was included in the 1985 Master Plan as a priority. Given the limited investment capacity in ESSAP, these urgent investments have been postponed. Under the proposed project, the prioritization and replacement of sewage collectors is expected to be addressed in order to convey the existing flows.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �16 ESSAP’s Master Plan for Asunción’s Sewerage System was developed by William Halcrow and Partners in 1985.

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60.� The completion of the Itay basin’s sewerage networks, treatment installation, and effluent disposal system is of the highest priority, and these works would be analyzed under the Master Plan and will probably be constructed under the project. A tunnel of 1.6 meters in diameter and 3.5 kilometers in length has already been constructed with financing from the previous Asunción Sewerage project to convey the Itay wastewater to the Paraguay River, the natural receiving body. Before discharging into the river, the wastewater should be treated. However, the required treatment level could only be established with the results of the modeling of the water quality of the Paraguay River, which will also be financed under the project. 61.� The improvement of the 11 existing raw wastewater discharges of Asunción to the Paraguay River has also been identified as an urgently needed investment. In addition, the sewerage systems of the cities of Luque, San Lorenzo, Mariano Roque Alonso, and Lambaré will also be part of the updating of the Master Plan. The alternative solutions will be subject to detailed analysis of alternatives, technical designs, and an EIA to be financed by the project. The project would also likely finance some other minor water and sewerage investments in urban areas, mainly aimed at increasing drinking water production and rehabilitating infrastructure. Rural Component 62.� The construction and expansion of water supply systems will focus on works to improve access to sustainable water supply services to rural communities. In rural areas, approximately 70 new systems will be constructed. Five water supply systems using private participation will be implemented. Where possible, lined wells will be constructed and a simple disinfection procedure with chlorine implemented. Depending on the system’s size, fiberglass or concrete tanks will be installed. The drinking water systems will provide house connections to the beneficiaries. The project will also include the construction of about 30 water systems for indigenous communities consisting of earthen reservoirs to collect rainwater, with windmills to pump it to a tank with a small distribution network, including coal filters. 63.� The sanitation works of this component will focus on the construction of on-site sanitary solutions. There are three options for the on-site solutions: a basic solution that is an improved ventilated pit latrine and two types of flush latrines for communities with access to water connections: a basic flush solution consisting of a toilet with an optional shower and a hand-washing basin, from which the effluents drain into a septic chamber connected to a sand filter; and an improved solution, consisting of the basic flush solution with a kitchen and/or laundry basin (lavadero). For the indigenous communities, ventilated pit latrines will be constructed. C. Fiduciary

Financial Management 64.� The financial management (FM) assessment conclusion is that the FM arrangements in place, along with the additional mitigating measures that contribute to an enhanced fiduciary framework for the project, meet minimum Bank requirements. The enhanced fiduciary framework and the Good Governance Strategy (Annex 11) are intended to adequately deal with and mitigate project-identified FM risks. Control risk after the implementation of the proposed mitigation measures is considered moderate. The new Government of Paraguay, which took office in August 2008, has designed a program aimed to increase transparency, improve governance, and reduce corruption. However, the lack of law enforcement, absence of

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transparency, and weak attitude toward control, as identified in the Country Financial Accountability Assessment (CFAA), are still relevant in the country’s context and materially affect the overall project risk. Therefore, residual FM risk remains high. The evaluation of the impact of implementation and effectiveness of the enhanced fiduciary measures will be carried out during FM supervision and project FM risk will be reassessed accordingly. (See Annex 7 for details.) Procurement 65.� An in-depth assessment of the procurement capacity of the three implementing agencies was carried out by the team, and a detailed action plan was prepared to address all risks identified, including a Good Governance Strategy (Annex 11). The overall project risk for procurement is high, which is the result of: (a) the risky country procurement environment, mainly due to the weaknesses of control institutions, lack of uniform ethics standards and established procedures to address wrongdoing, and lack of competitiveness of the market; and (b) the modest degree of experience of ESSAP staff in the implementation of operations financed by International Financial Institutions (IFIs). The corrective measures that have been agreed are: (a) all three implementing agencies will employ the Country Procurement Portal (Sistema de Información de Contrataciones Públicas, SICP) and the Country Acquisition Plan Execution Portal (Sistema de Ejecución de Planes de Adquisiciones, SEPA) for all project procurement; (b) inclusion in the Loan Agreement of the Special Procurement Provisions listed in Annex 8, Section F and of the Covenants listed in Annex 8, Section G; (c) ESSAP will hire an experienced engineer to support the procurement process, consultants to support the supervision of the works, and a concurrent financial-technical audit; (d) project staff will attend procurement training delivered by the Bank either in Paraguay or abroad; and (e) project staff will attend an Ethics and Integrity course to be delivered by the Bank’s Department of Institutional Integrity staff in Asunción. Additional details are available in Annex 8. D. Governance

66.� Preliminary assessments showed that if the project was to increase its chances of attaining its development objective, its design should strengthen both the supply and demand sides of governance at the sectoral and agency level. As a result, the overall approach of the project from the outset of its design has been to promote as a guiding theme in all components: (a) transparency, (b) participation, and (c) accountability.17 In addition, a Good Governance Strategy has been built with the aim of helping the agencies gradually reform toward improved corporate,18 regulatory, institutional, and sectoral governance environment and practices.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �17 Transparency: flow of timely and reliable information on the progress of activities and results obtained made accessible to all relevant stakeholders; Participation: mechanisms designed to facilitate stakeholders having the opportunity to influence and share control over the decisionmaking about the initiatives that affect them; and Accountability: planning and programming all interventions based on objective and quantifiable criteria that can be presented for public scrutiny. 18 Corporate Governance refers to the internal system encompassing policies, processes, and people, which serve the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture that safeguards policies and processes (G. O’Donovan).

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67.� The Good Governance Strategy for the sector comprises institutional-based and social accountability activities that are thought to: (a) provide a comprehensive sectoral framework, which clarifies the roles and responsibilities of the different WSS sector agencies, and proposes measures to better coordinate interventions; (b) strengthen the corporate governance of ESSAP; (c) improve regulatory governance of ERSSAN; (d) improve the institutional governance of SENASA and SEAM; and (e) increase cross-sectoral and sectoral governance. An action plan with a monitoring framework, including specific activities to address risk areas, was prepared by the involved agencies. Mitigation measures and possible remedies and sanctions for the risks are grouped into two areas: (a) effective management of the involved agencies, and (b) improved relationship of these agencies among them and with key stakeholders. Control of corruption19 is included in both areas. The detailed Strategy is presented in Annex 11. E. Social

68.� The project social analysis, based on the social assessment carried out by the GOP, sought to identify social opportunities, constraints, impacts, and risks of the project that arise from the country’s socioeconomic, cultural, and political context. The main social opportunities of the project are to: (a) overall favor social inclusion and improvement of health and quality of life, and particularly potentiate social capital and the role of women in WSS; (b) contribute to the preservation of the environment; and (c) contribute to the creation of employment opportunities.

69.� By expanding coverage of WSS and improving service quality, the project would have a direct positive impact on approximately 17 percent of the country’s population. It will favor social inclusion by contributing to the enhancement of multiple excluded groups, who have scarce access to WSS, and to the improvement of the country’s poor health indicators.

70.� It is estimated that approximately 1,000,000 people that live in the Asunción metropolitan area will benefit from the increase in sewerage coverage and disposal, improvements in water service quality, reduction of physical losses, and sewerage leakages, improving the overall environmental quality of the area. In rural areas, the project will construct 70 rural water systems to benefit approximately 24,500 people, an additional 30 systems in indigenous communities to benefit 6,300 indigenous people,20 and approximately 5,700 sanitation solutions to benefit an equal number of rural families including those in the 30 indigenous communities. Paraguay is a relatively homogenous country in terms of its ethnic and religious makeup, but the exclusion of people living in rural areas is evident; for example, speaking jopará (a combination of Spanish and Guaraní), which is a criterion attached to a social class, although not a source of conflict, lifts barriers to the access to basic services and social mobility.

71.� Only 2.5 percent of the indigenous population (IP) has access to drinking water and only 1.1 percent to sanitation services, which is particularly important because water is part of the indigenous culture, taking open access to it for granted. IP represents only 1.7 percent of the total population of Paraguay (about 87,100), and are the most excluded social group, experiencing extreme poverty. They show a higher population growth rate (3.9 percent) than the average for

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �19 Corruption is generally defined as “the abuse of public office for private gain.” 20 Of 412 indigenous communities, 125 have been assisted by SENASA, benefiting around 27,600 people with water systems, contributing to the coverage of approximately 24 percent of the total indigenous people in the country. In addition, 50 communities of the 125 have been benefited with sanitation solutions, reaching 9 percent coverage.

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the national population (2.7 percent).21 Thirty systems would be built for indigenous communities, to benefit about 7 percent of the total IP in Paraguay. An Indigenous Peoples Management Framework (IPMF) has been prepared to ensure that: (a) works are culturally appropriate, (b) works and services provided do not inadvertently induce inequality by limiting project benefits for the stronger elements of the community, and (c) the project engages with communities through a consultation process appropriate to the local cultural context and local decision-making processes.

72.� There are two particular social assets in the sector over which the project will capitalize. One is the existance of strong social capital as a result from the approximately 3,000 juntas formed over the last 30 years, that have been examplary in addressing the lack of WSS services22 through community organization, enabling the participation of people with very scarce economic assets in decisions that otherwise would not be possible. The other asset is constituted by women. To a great extent, relieving women of the chore of carrying water contributed to greater equity, with women taking on more important roles within the community. At least two women are on the Board of 45 percent of juntas, and in some cases leadership is completely in the hands of women; they accomplish great efficacy in the management of the organizations.

73.� Improvement in health indicators, especially in rural areas, will be supported by hygiene education activities, such as hand-washing promotion, which has been proven to increase the impact of WSS interventions, contributing to the reduction of diarrhea and acute respiratory infections in children under 5 years of age, the leading cause of infant morbidity in Paraguay according to the latest MDG report.23 With regard to the second social opportunity of the Project, the Project would enable improvement in human and environmental health by reduction of exposure to contaminants caused by the very low sewerage coverage, as described previously. The Project’s third social opportunity is to contribute to the creation of temporary employment opportunities requiring unskilled labor at the local level, contributing to local economic development.

74.� The main social constraints identified are addressed as follows: a.� The sensitive governance situation of the country, including political constraints and a likely

adverse position from the unionized workers of ESSAP (around 1,200 individuals) that could eventually undermine the effectiveness of the project is being addressed with a Good Governance Strategy for the Sector. This strategy includes concrete mechanisms to favor participation, ensure transparency, and promote accountability of the agencies of the sector throughout the project cycle with activities such as a social communication strategy, and a local government participation strategy.

b.� Different needs, levels of capacity, and likely subsequent lack of coordination among the five implementing agencies are expected to be managed by supporting the strengthening of the WSSU within MOPC, which will perform the functions of the ruling entity.

c.� Inequity of access to the services for the most vulnerable groups. Since urban, rural, and indigenous populations will benefit from the project at the same time, and since resources are scarce and sectoral policies nonexistent, rigorous methodologies for beneficiary selection,

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �21 Indigenous Peoples Census (2002). 22 Ex Post Assessment of the Fourth Rural WSS project. 23 Ministry of Public Health, Basic Health Indicators, Asunción, Paraguay, 2005.

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including a social index, were prepared. Moreover, a detailed participation plan was formulated based on a stakeholders analysis and will be used throughout the project cycle.

d.� Absence of a transparent subsidy policy in the sector, which could create uncertainty for vulnerable groups, would be addressed by the formulation of the financial policy for the sector, to be carried out by the WSSU within MOPC, and supported by the project. Moreover, communication measures to keep the population informed will be developed.

e.� With respect to entitlements, the only identified situation is the private service providers’ (aguateros’s) legal right to operate in selected areas until 2012. Even though most of the aguateros’s service is reported to be of lower quality and higher price, the project will support the development of an adequate framework for their participation in the new market structure, and the possibility of developing compensation mechanisms for those that would not be able to continue providing services is being evaluated.

f.� Adequacy of delivery mechanisms is ensured in the design of specific components, including incorporation of specific measures to address lessons of the Fourth Rural Water Supply and Sanitation Project.

g. � Social risks associated with the Bank’s safeguards policies and the procedures to address them are described in the agreed Environmental and Social Management Framework (ESMF). Complementary social assessments will be carried out for the specific works once their locations are known during project implementation. Individual Negative Social Impact Mitigation Plans will be developed if necessary.

75.� Monitoring of the main social impacts of the project, through indicators such as level of coverage, improvement of quality, and health and environmental enhancement, will be carried out through two evaluations, at the midterm and at the end of the project. Both measurements will be based on a baseline, which is being elaborated and will be concluded before project effectiveness. Moreover, the social strategy of the project will include progress indicators, which will be reviewed through annual reports and during supervision. F. Environment

Key Environmental Issues of Importance to the Project 76.� The project works that can potentially cause negative environmental impacts are related to the expansion and rehabilitation of the WSS systems, the construction of wastewater treatment plants including a possible river sewage outfall in Asunción, and construction of small water systems for the rural areas. Implementation of most of the works planned with the Project’s resources is not expected to lead to significant environmental impacts. However, larger civil works such as the urban sewerage works in Asunción and the construction of new wastewater treatment plants and associated river outfall can jeopardize the natural and social environment where the works will be executed. Thus, in accordance with the Bank’s Environmental Assessment Policy (OP 4.01), the Project has been rated as “Category A.”

77.� Environmental Impact Assessment (EIA) Process. Since the project is programmatic in nature, specific investments are not known in advance. Conventional, site-specific EIAs can therefore not be developed prior to project approval, but will be developed once works and investments have been determined. Even though there is a “long list” of required investments that has been prepared, the exact sequencing, scope, and preferred technological alternatives of the final list of investments are still unknown. Environmental and social issues based on more

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detailed studies and public consultations will be addressed in developing designs for specific works under the project, based on the ESMF. This will guide the implementation of the project. It provides an analysis of the project setting and baseline conditions and a set of technical guidelines describing procedures and institutional responsibilities for assessing and managing the potential environmental and social risks and impacts that could be faced throughout the project cycle.

78.� Alternative analysis is built into the screening, selection, and design process for the various subprojects, and will be incorporated at various stages of project implementation. First, it will occur during the revision to the Asunción sewerage master plan when various alternatives, strategies, and design options will be finalized. Second, since the project is essentially demand- driven and participatory in nature, specific alternatives will be discussed in the context of community planning and identification of subproject proposals. The planning methodologies proposed for the project are highly participatory in nature, and will provide numerous opportunities for beneficiaries, affected groups, and other stakeholders to have input into the decision process. Third, for subprojects requiring a site-specific EIA, such as large infrastructure works associated with sewerage, wastewater treatment, and river outfall construction, alternatives will be addressed at two levels: through the master planning level and through the specific project technical design. TORs for the EIA include specific requirements for alternatives analysis. In addition, the project will support overall system planning including evaluation of strategic options.

79.� The ESMF supports three essential goals of the project: (a) to ensure the social and environmental sustainability of the subprojects, (b) to comply with national environmental legislation, and (c) to comply with the Bank’s Environmental and Social Safeguards Policies. It comprises model EIA TORs for proposed large-scale civil works to be identified during project implementation, a methodology for subproject screening, an Involuntary Resettlement and Land Acquisition Policy Framework (IRLAPF), an Indigenous Peoples Management Framework (IPMF), and specific guidance on public consultation and disclosure procedures. The ESMF is intended for use and application by the agencies charged with the execution of the investment subprojects under each component, ESSAP and SENASA.

80.� The ESMF includes a review of the institutional and legal context of the WSS sector in the country from an environmental and social perspective, the existing national requirements for the EIAs, and identified environmental and social issues related to the proposed investments that would be financed by the Project. Specific procedures included in the ESMF include (a) environmental and social screening of activities, and the construction manuals; (b) public consultation and design concerns; (c) mitigation measures required during and after works implementation; and (d) project monitoring. The ESMF was developed in a participatory manner by promoting ample intersectoral participation in which the SEAM was an active partner.

81.� Measures incorporated into the Project to address key issues. A detailed environmental assessment methodology has been developed and documented within the ESMF for the assessment of subprojects. Both ESSAP and SENASA have an inventory of prioritized works to be financed through the loan. Rural works considered in this project include construction or expansion of water systems and on-site individual sanitation solutions. The environmental and

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social impacts associated with these works are considered low since no significant or irreversible environmental damage is expected.

82.� For these construction works, minor environmental impacts, mostly nuisances (disposal of construction waste, dust and noise, erosion control, protection of spring catchments in rural areas, and so forth) will be addressed by appropriate guidelines that will be incorporated into the technical specifications of construction contracts. Appropriate environmental and social screening criteria (previously agreed for WSS subprojects for the Fourth Rural Water Supply and Sanitation Project and applied since 1997) have been updated for this proposed project in the ESMF and will be fully incorporated into the project Operational Manual.

83.� While environmental and social impacts of sewerage works have the potential to have significant adverse impacts if not carefully planned and managed, project support for the urban areas is expected to have a positive environmental impact overall. This will be achieved by (a) consolidating and improving water resources management in the country; (b) connecting people to sewage collection and treatment systems in Asunción’s metropolitan area and other urban centers, thereby protecting water sources; and (c) increasing the efficiency of the WSS services.

84.� Institutional Capacity Building. The institutional capacity-building plan proposes specific actions of management, training, and equipment. A specific budget has been allocated and will be executed during Project implementation. There is full agreement with the Borrower on the actions required to strengthen institutional capacity, and staff with expertise in these areas have already been hired prior to project approval, indicating commitment on the part of the Borrower to address these issues in an integrated manner. This is also reflected in the organizational structure, where environmental and social management is integrated with planning units rather than working in isolation.

G. Safeguard policies

85.� The project is categorized as environmental risk Category A due to the risk of concentrating sewage in the Paraguay River. In addition to the Environmental Assessment Policy (OP 4.01), the project triggers several other safeguards policies as indicated below. (See Annex 10 for details.)

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [X] [ ] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP/BP 4.10) [X] [ ] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60)* [ ] [X] Projects on International Waterways (OP/BP 7.50) [X] [ ]

*By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas.

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86.� Environmental Assessment (OP 4.01): Based on the project’s potentially significant environmental and social impacts resulting from the construction and operation of urban sewage collection, wastewater treatment, and disposal into the Paraguay River, the project is considered an environmental risk Category A. Since the project is programmatic in nature, specific impacts are not yet known. An Environmental and Social Management Framework (ESMF) has been prepared by the Borrower and approved by the Bank. This ESMF describes specific procedures for evaluating and addressing any impacts caused by individual subprojects and cumulatively for the project. Alternatives analysis will be carried out during the detailed planning phase of the project, to ensure that potential environmental and social impacts are integrated into decision-making processes and in developing the project’s strategies and plans. This is reflected in the Terms of Reference for subproject Environmental and Social Impact Assessments, which include specific provisions for analysis of alternatives. (See Annex 10 for more details.) 87.� Natural Habitats (OP 4.04): Since the precise location and operational details of planned civil works are not known at this point, it is not possible to rule out potential impacts on natural habitats. The planning criteria for the Master Plan study, subproject screening mechanisms, and the site-specific EIA for subprojects will all include specific assessment of potential impacts on natural habitats, with particular emphasis on critical natural habitats as defined under the Bank policy. (See Annex 10 for more details.) 88.� Physical Cultural Resources (OP 4.11): The project is not expected to impact known physical cultural resources. However, both the EIA for the main urban works and the ESMF include criteria for evaluating possible impacts. Construction contracts for all works will include clauses describing chance finds procedures in the event that such resources are found during construction. (See Annex 10 for more details.) 89.� Involuntary Resettlement (OP 4.12): Physical relocation of people or acquisition of land and assets is expected to be minor under the project. A Resettlement and Land Acquisition Policy Framework has been prepared to guide the project-implementing teams in the event that resettlement or land acquisition is required. This Framework envisions the development of measures that bridge the gaps of national legislation due to, among other factors, the nonexistence of a national law of expropriation and compensation that is equivalent to the principles of the OP 4.12. (See Annex 10 for more details.) 90.� Indigenous Peoples (OP 4.10): Indigenous Peoples are known to live within the project area and will be direct beneficiaries of some of the rural works planned. A planning process that is culturally appropriate and takes into account local desires and aspirations has been developed, and an Indigenous Peoples Management Framework (IPMF) has been developed for the project in consultation with representatives of indigenous groups. (See Annex 10 for more details.) 91.� Projects on International Waterways (OP 7.50): This policy is triggered since major sewerage infrastructure in the Asuncion metropolitan area is expected to be financed following the results of the updated sanitation master plan for said area. The Project aims at the improvement of the current raw discharges to the Paraguay River and the overall environmental and sanitary conditions of Asuncion’s metropolitan area. The Paraguay River is an international waterway as defined under OP 7.50. Riparian countries of the Paraguay River Basin are

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Argentina, Bolivia, Brazil, and Uruguay. These countries were notified by the Bank, on behalf of the Borrower, under OP 7.50, and were requested to provide a response by March 19, 2009. The nature of the works envisaged under the proposed Project are not expected to adversely affect the quality or quantity of water flows to the other riparians, nor are they expected to be adversely affected by other riparians’ water use, but on the contrary, should contribute to improve the quality of the river, and have a positive impact on the environment. 92.� By March 19, 2009, the Bank received a positive response from the Government of Uruguay, but did not receive any response from any of the other three riparian countries. Subsequently, Management approved further processing the proposed operation, including the presentation of the proposed operation to the Bank’s Board of Executive Directors, for approval thereof. (See also Annex 10) 93.� Public Consultation and Disclosure in Designing the ESMF: The development of the final ESMF has been based on a consultative process that sought feedback from key stakeholders. Disclosure and consultation of the ESMF, including IRLAPF, and the IPMF, have been completed and are being carried out as follows: (i) Project preparation: Multiple stakeholder groups were involved in defining the overall framework as defined in the ESMF. Disclosure and consultation of the ESMF started with a presentation of the document on April 10, 2008. It was published on the websites of ESSAP, SENASA, ERSSAN, and SEAM on April 14, 2008, and via the Bank’s Infoshop on May 7, 2008. The ESMF was later updated incorporating the comments received and a new version was published on the institution’s sites and Infoshop on June 2, 2008. An updated ESMF comprising the extensive IPMF and the IRPLAPF was presented in local workshops, followed by disclosure on the sites of ESSAP and SENASA on December 26, 2008. The last consultation workshops of the ESMF, the IPMF and the IRLAPF took place on January 30, 2009, after which, these documents were sent to the Infoshop on the same date. (ii) Project Implementation: The ESMF’s disclosure on the websites of the counterpart institutions will continue during project implementation. The ESMF’s instruments disclosure and consultation will be carried out following the procedures foreseen in their disclosure and consultation plans, which are consistent with the general principles and procedures of the ESMF disclosure and consultation plan. H. Policy exceptions and readiness

94.� The Project does not warrant any exceptions to Bank policies and is deemed to be ready for implementation.

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Annex 1: Country and Sector Background

PARAGUAY: Water and Sanitation Sector Modernization Project

A. Country Background

1.� Political. The victory of Fernando Lugo, a former Catholic bishop, in the presidential election held on April 20, 2008, ended 61 years of Colorado Party dominance. Winning by a margin of 10 percentage points over the Colorado candidate, the victory gave President Lugo and his movement strong legitimacy. 2.� President Lugo heads a center-left coalition, the Alianza Para el Cambio (APC), which includes approximately two dozen political parties that span a wide range of ideologies. Despite the range of political views, the coalition shares key priorities that include a deep commitment to improve governance and reduce corruption; to improve the livelihoods and opportunities of the poor in a sustainable fashion, in particular through a more equitable distribution of land and more and better jobs; to strengthen the management of the country’s vast hydroelectric resources; and to consolidate democratic government. The APC has also adopted a pragmatic economic policy approach based on maintaining sound macroeconomic management and a balanced view of the role of the State. 3.� Economic. Over the past four years, Paraguay experienced its biggest economic expansion since the 1970s. Paraguay went through a period of economic stagnation in the late 1990s and early 2000s, as a result of terms of trade shocks, a domestic banking crisis and the negative fallout from the economic turbulence in the Southern Cone. Between 2003 and 2005, the macroeconomic situation turned around, with growth averaging 3.6 percent during this period. GDP grew by 4.3 percent in 2006 and by an exuberant 6.8 percent in 2007 (Figure A1.1), and was set to continue at a comparable pace in both 2008 and 2009. 4.� The resurgence of growth was driven by agriculture and the recovery in domestic demand. Between 2003 and 2007 agricultural production grew 7 percent per year on average. Related sectors, such as beef processing (accounted for under manufacturing) were also very dynamic, advancing 6 percent on average during the same period. While these sectors were driven mainly by the upsurge in commodity prices, productivity gains also played a role—even in the livestock sector which has traditionally been based on extensive practices. Also dynamic were assembling industries and communications, which grew on average more than 8 percent each during the period. And with free private sector entry into ports and shipments, logistics also started to catch up, although large opportunities remain for further efficiency gains. On the expenditure side, consumption growth accounted for 82 percent of total GDP growth between 2003 and 2007, with investment accounting for the rest. Investment was particularly dynamic in the latter years of the period when it expanded very sharply. On the external front, import growth fully offset export growth during this period.

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Table A1.1. Paraguay Key Economic Indicators, 2000-2007 2000 2001 2002 2003 2004 2005 2006 2007

Real GDP growth (%) -3.3 2.1 0.0 3.8 4.1 2.9 4.3 6.8CPI inflation (eop, % change) 8.6 8.4 14.6 9.3 2.8 9.9 12.5 6.0Central government fiscal balance (% of GDP) -4.6 -1.2 -3.2 -0.4 1.6 0.8 0.5 1.0Current account (% of GDP) -2.3 -4.1 1.8 2.3 2.1 0.2 0.8 0.2External debt (% of GDP) 44.1 46.0 62.9 60.8 47.9 40.9 32.6 25.3

Source: Ministry of Finance and Central Bank of Paraguay. See Annex Table B6.

5.� Prudent fiscal management from 2003 through 2007 contributed to the recovery. The restoration of macroeconomic stability, which re-established confidence and pushed up consumption, was anchored in a tight fiscal stance. But fiscal policy also contributed to recovery in an indirect manner: tax policy reforms, coupled with improvements in tax and customs administrations, brought about an important first wave of economic formalization.24 These reforms supported a stabilization of revenues around 18 percent of GDP. Since the level of primary spending was maintained at about 16-17 percent of GDP, it was possible to achieve an average primary surplus of 2 percent of GDP. Most state-owned enterprises (SOEs) were also kept under a strict budget constraint (Figure A1.2), although that was achieved primarily through cuts in investment spending rather than by increasing productivity.25 The resulting overall fiscal surplus for the consolidated government was about 1 percent of GDP for the 2004-07 period. 6.� Public debt levels are low. The primary surplus, lower interest rates, higher growth, and the strengthened guaraní all contributed to a fall in public debt. The public debt to GDP ratio, including domestic debt by both the government and the Central Bank of Paraguay (BCP), decreased rapidly from over 60 percent of GDP in 2002 to around 30 percent in 2007.26

Figure A1.1. Real GDP growth (annual % change)

Figure A1.2. Overall fiscal balance (% of GDP)

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Source: Central Bank of Paraguay. Source: Ministerio de Hacienda. 7.� Paraguay’s external position strengthened. The current account went from a deficit of 4.1 percent in 2001 to a peak surplus of 2.3 percent in 2003, mainly on the account of greater

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �24 This is the case for instance of commerce in informatics, a key activity in Ciudad del Este (the country’s second largest city and a well known center for intermediating goods from abroad mainly to the more protected market of Brazil under a legal tourist regime). 25 An exception to this is PETROPAR, the state-owned petroleum company, which has run up a significant stock of debt due to subsidization of diesel fuel consumption. 26 While the government’s debt has been falling rapidly in recent years, the Central Bank accumulated debt through the issuance of significant amounts of sterilization bills.

� 30

stronger export performance.27 Between 2003 and 2007, the surplus remained between roughly 1 and 2 percent of GDP. Paraguay did not run large current account surpluses when commodity prices increased in 2006 and 2007 because imports started to boom due to strong domestic demand and high oil prices.28 The strong rise in international commodities prices that began in 2007 resulted in a surge in foreign exchange inflows, supported also by higher levels of worker’s remittances, and royalties from the two hydroelectric plants. These put pressure on the guaraní to appreciate from Gs.5,300/US$ at the end of 2006 to below Gs.4,000/US$ in mid-2008. Between June 2007 and June 2008, the Central Bank accumulated US$1 billion in international reserves in an effort to contain the appreciation of the guaraní. 8.� Despite progress in recent years, poverty and inequality remain high relative to other Latin American countries. Incidence of moderate poverty peaked at 46 percent in 2002, and has since then fallen to 35.6 percent. Extreme poverty has fallen from 21.7 to 19.4 percent during the same period (Figure A1.3).29 This fall suggests that the recent economic growth has been to some extent pro-poor. Despite this positive trend, poverty levels are now only back at the levels observed in the late 1990s, suggesting that poverty remains a structural problem. At the same time, the nature of poverty appears to have changed: while moderate poverty used to be a primarily rural phenomenon, it has become more prevalent in urban areas in recent years. � � At 0.55, Paraguay’s Gini coefficient of income distribution is the fourth highest in Latin America (Figure A1.4). The richest 10 percent of the population accounts for between 42 and 47 percent of total income. Similarly, inequality in land distribution is among the highest in the world. Reducing poverty and inequality in a sustained manner thus remains an important challenge, particularly with regards to access to productive assets, possibilities to accumulate human capital, and labor market opportunities.

Figure A1.3. Poverty Incidence Figure A1.4. Inequality and extreme poverty

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� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �27 The BCP does not have a system to register re-exports through Ciudad del Este, and the country’s two large hydropower (co-owned with Brazil and Argentina, respectively) are treated as foreign companies. These make the BOP (and national accounts) statistics very unreliable in Paraguay. 28 The economy is completely dependent on imports for oil, but has abundant hydroelectric production capacity. 29 Extreme poverty increased slightly between 2006 and 2007, due to rising food prices. 30 This trend will need to be confirmed once the revised methodology for calculating poverty is in place. The World Bank is providing technical assistance to the National Statistics Institute for a revision of this methodology.

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9.� The new administration is committed to continuing the prudent macroeconomic policies of the preceding government, focusing on fiscal sustainability, improved competitiveness and equitable growth, as laid out in the government’s Strategic Economic and Social Plan for 2008-13 published in September 2008. A key objective is to create fiscal space to dedicate more resources to priority spending programs, especially those aimed at reducing poverty. In order to achieve this, the government is committed to maintaining inflation within single digits, gradually increasing tax collections through better administration and the introduction of new taxes, and improving the efficiency of public spending. 10.� At the same time, the less favorable external environment presents an important challenge. As a small open economy with limited access to international financial markets, Paraguay will be affected by the ongoing financial crisis primarily on the real side. Falling commodities prices and a decline in global demand for Paraguay’s exports will especially affect the agriculture sector, which has been one of the drivers of growth in recent years and accounts for 20 percent of GDP. Prices for soy beans, one of Paraguay’s main exports, have already fallen 42 percent since their peak in July 2008, and there are indications that demand for meat in some of Paraguay’s main export markets has begun to decline. As a result, Paraguay’s current account fell into deficit (estimated around 2.2 percent of GDP) in 2008 for the first time since 2001. 11.� The effects of the crisis on Paraguay’s currency have already become apparent. Mirroring the devaluation of the Brazilian real as investors fled to safety, the guaraní depreciated sharply in recent months. In October the Central Bank had to reverse its course and sell international reserves in order to contain the slide in the guaraní. While this intervention led to a loss of US$460 million in international reserves, at US$2.8 billion (or 3.7 months of imports) the Central Bank’s foreign exchange cushion remains comfortable and well above historical levels. 12.� The deterioration in the real sector presents a significant risk for the financial sector. Since the last banking crisis in the early 2000s, the level of financial intermediation has improved, and the banking sector is generally considered to be sound, with an average capital adequacy ratio well above the regulatory floor of 10 percent.� � � Dollarization remains high but is on a declining trend: 39 percent of bank credits to the private sector are now denominated in US dollars, down from 47 percent in 2005. But credit grew fast between mid-2007 and end-2008, raising some concerns over the quality of banks’ credit portfolio. As a result, credit risk is the primary threat to the banking system. The expected economic slowdown will be more acute in agriculture (which accounts for 26 percent of outstanding bank credit) and the services sector. This may lead to an increase in non-performing loans, which currently account for 1 percent of banks’ loan portfolio. Based on simulations, the banking system would be able to absorb loan losses resulting from a moderately severe crisis. To deal with higher credit risk, commercial banks are already reducing and becoming more cautious in their lending, which may restrict liquidity and affect the financing of private sector investments. 13.� The non-banking financial sector may be even more vulnerable than banks. Cooperatives account for 30 percent of total loans in the system and for 16 percent of total deposits, and they

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� 32

are strongly interlinked with the banking system through loans and deposits. Unlike banks, financial cooperatives fall under the supervision of the National Institute of Cooperatives (INCOOP), whose supervision capacity is still weak. In addition, the regulations applied to cooperatives are significantly laxer than those applied to the banking sector. Information about the sector is scarce, outdated and of uncertain reliability, making it difficult to adequately assess potential risks.

B. Sector Background 14.� Paraguay has a population of 6 million and an average annual population growth rate of 2.2 percent, high compared to the regional average of 1.5 percent. The rapidly growing population presents a significant challenge to the provision of water supply and sanitation (WSS) services. While over 80 percent of the population in urban areas32 is served by a network water connection, only 49 percent has similar access in rural areas, and only 15 percent of urban residents has access to a network sewerage connection.33 Low sewerage coverage is a critical problem in Asunción and its metropolitan area, where only 33 percent of the population34 is connected to the system. Adequate wastewater treatment is practically nonexistent,35 as untreated sewerage infiltrates shallow aquifers (which in turn are used as a source of water supply) or is directly discharged into the streets, creating serious public health and environmental pollution concerns. As in most countries, it is no surprise that the poor disproportionately lack access to WSS services. 15.� The rural component is of singular importance. Paraguay has a large rural population (42.2 percent) compared to other Latin American countries, which increases the complexity of the organization and operation of the services. Given the relative importance of both urban and rural subsectors, policies and institutions for each must be closely coordinated and balanced. 16.� Coverage of services presents significant shortcomings. Despite Paraguay’s status as a middle-income country, the WSS sector is characterized by low service quality and coverage. Low levels of investment and other severe restrictions have resulted in a backlog in coverage levels of water and sanitation (W&S) services vis-à-vis the degree of development of the country, in particular with regard to sanitation services, leading to limited sectoral development. 17.� Service provision. The three typical modalities of service providers (Empresa de Servicios Sanitarios del Paraguay S.A. [ESSAP S.A.], and Servicio National de Salud Ambiental

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �32 Note the differences in the definition of “rural and urban”: The National Statistics Agency (Dirección Nacional de Encuestas Estadísticas y Censos-DGEEC) defines urban areas as those cities, heads of official districts, that have streets, electricity, public facilities, and others; and rural areas as those that are not urban. Regarding water service provision, urban centers in Paraguay are defined as those with a population over 10,000 inhabitants. Rural areas include small towns with a population of fewer than 10,000 inhabitants. Fifty-eight percent of the population lives in urban areas and 42 percent in rural areas. 33 Encuesta Permanente de Hogares, 2007 (EPH-2007) DGEEC, Paraguay. 34 The Asunción metropolitan area municipalities include (sewerage coverage in parenthesis): Asunción (67 percent), Lambare (16 percent), Fernando de la Mora (6 percent), San Lorenzo (9 percent), Luque (14 percent), Mariano Roque Alonso (12 percent), Limpio (14 percent), and Villa Elisa (0 percent). 35 There are 14 cities with sewerage services, with very low coverage. Of these, 4 have adequate wastewater treatment (Encarnación, San Pedro de Ycuamandyyú, Villeta, and Hohenau), and the rest have insufficient treatment and/or raw discharges.

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[SENASA]—through Juntas de Saneamiento and aguateros) manage around 730,000 water connections, supplying a population of nearly 3.6 million. ESSAP S.A. is the largest individual provider of services with 36.4 percent of the market share; the Juntas de Saneamiento, as a whole, has greater market participation serving 49.6 percent of all connections, and the private aguateros’s market share represents 14 percent of the total (Figure A1.5). The proper treatment of sewage is practically nonexistent. Beyond the issues regarding quality and continuity of the services, it is clear that the main challenge in terms of infrastructure is sanitation: there is an urgent need for coverage expansion of sewerage collection and proper disposal of the effluents (through treatment or an equivalent solution).

Figure A1.5.

Percentage of Network Water Connections

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18.� Achievement of the Millennium Development Goals. Paraguay undertook the obligation to halve the proportion of the population without sustainable access to safe drinking water and basic sanitation services by 2015. The coverage targets for drinking water (access to a reliable source of drinking water) were set at 81 percent of the total population, 93 percent in urban areas and 59 percent for rural areas. The United Nations Development Programme (UNDP) current forecast is that the achievement of the goals linked to drinking WSS is unlikely. However, in 2002, at the beginning of the institutionalization of the sector through a Regulatory Framework (Law 1614/00), and in the middle of the process of privatization (which was later suspended), compliance with the drinking water goal was considered likely. The amount required to cover the goal for water (taking into account the cost per connection, for 2000–15) was US$370 million,36 heavily concentrated in the urban sector (90 percent), with the aim of incorporating 1.8 million people into the system. � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �36 To express the values in current terms, the adjustment factor for inflation would be 2.04.

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Figure A1.6.

Relation of Annual Investment Necessary to Achieve the MDGs as Percentage of GDP

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19.� Urban and rural sector challenges. There are substantive differences between the challenges that the sector faces in rural and urban areas. In the rural sector, there was a profound transformation that has to be consolidated and strengthened,37 with programs to increase coverage in scattered and remote areas, in particular to indigenous communities, and to resolve the issue of basic sanitation. The challenge in urban areas is of a different nature: mainly the institutional constraints, detailed below, that prevent significant increases in investment, which are urgently needed to improve the coverage and quality of services.��

C. Institutional issues

20.� There are three types of water supply and sanitation service providers in Paraguay that together manage approximately 730,000 potable water connections serving 3.6 million people. In urban settlements, services are largely provided by the national WSS utility, (Empresa de Servicios Sanitarios del Paraguay S.A., ESSAP S.A.), and by small local private sector providers called aguateros, which partially satisfy service demands in peri-urban areas. The National Environmental Sanitation Service (Servicio National de Salud Ambiental, SENASA) enables the provision of water services through local water user committees, called Juntas de Saneamiento, to settlements with fewer than 10,000 inhabitants and to dispersed rural communities. ESSAP S.A. is the largest individual service provider, operating approximately 260,000 household connections (75.5 percent of which are in Asunción), representing 35.8 percent of the market share. The Juntas de Saneamiento collectively have the largest market share, supplying water to approximately 362,000 households (49.8 percent of the total). Private operators, aguateros, operate around 105,000 connections (representing 14.4 percent of total served population).� 21.� The central challenges: coverage and quality. The environmental problems caused by the absence of adequate wastewater management make sewerage a high priority. There is a challenge in terms of increasing safe and reliable network water coverage mainly in rural areas. � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �37 Mainly, the shift from construction of systems toward an institution in charge of rural sector planning, promotion, and technical assistance provider.

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However, a more urgent problem is increasing access to sanitation and adequate treatment of wastewater in urban areas. In the case of Greater Asunción, where the most pressing needs are located, the issue is aggravated by the vulnerability of the Patiño groundwater aquifer, with high risks of pollution, salinization, and overexploitation. In addition, the simultaneous coexistence of septic tanks, latrines, and technically inappropriate solutions, and industrial discharges that are not controlled or adequately regulated, negatively impact the receiving bodies of water. The leading role of the Environmental Secretariat (SEAM) in these issues is of key importance. The achievement of sustained WSS service expansion in urban and rural areas can be achieved only through efficient and solid institutions. Improving sector governance is a basic requirement to address those challenges. 22.� The sectoral problems affect the capacities of the sector’s institutions. The current situation of W&S services in Paraguay is conditioned by three limiting factors: (a) the lack of strength and adaptability of the institutions, (b) the inherent weakness of the operators, and (c) the fragility in the planning, control, and information management systems, in addition to the inefficient use of economic instruments. Overcoming these difficulties will not be possible by simply increasing the available financing resources. 23.� The main institutional problems are concentrated in the lack of coordination at the national level. The fragmentation of the sector is expressed in: (a) context variables, that is, low priority of the W&S sector in public policies, which can be clearly identified when analyzing the action/inaction of various actors when confronted with sector-related problems; (b) lack of coordination and overlapping of functions of different institutions; and (c) lack of capacity in planning and management. 24.� Characterization of actors and institutions of the sector. Prior to the current Regulatory Framework, the rural sector was managed through a centralized structure in the Ministry of Public Health and Social Welfare (MSPyBS). SENASA was in charge of developing technical standards for rural water supply and sanitation, a responsibility that was later transferred to ERSSAN. Prior to the new Regulation, the Environmental Secretariat (SEAM) was created, which has the responsibility to establish environmental standards and control the environmental impacts of sanitation solutions. The Law reorganized the sector, created the ERSSAN, and separated regulatory and control functions from operational functions. ERSSAN, an autonomous entity within the executive branch, was the institution through which the sector modernization was planned to take place. ERSSAN enjoyed wide powers in the areas of regulation and supervision of tariffs, technical aspects of provision, and service quality, regardless of status (public or private) of the provider; and the role of protecting the rights of users and the community in general. The Law determined that the policies and the ownership of the service and the affected property would rely on the Executive Branch. A Regulatory Decree established that the Executive Branch would be assisted by the Ministry of Public Works and Communications (MOPC), which would be the institution responsible for proposing and designing sectoral policies (including the financial policy). Two sectoral institutions are governed by the MSPyBS: SENASA, which is responsible for building W&S solutions for rural settlements and provides technical assistance to service providers (Juntas de Saneamiento), and the General Sanitation Directorate of Environmental Health (DIGESA),38 responsible for the � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �38 Created by Ministerial Resolution, MSPyBS N° 266/05.

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physical, chemical, and bacteriological control of drinking water and sewage. The Juntas de Saneamiento39 have strong community participation with local and independent administration. 25.� There is no efficient service without competent operators. Given the current lack of policies, there is no support or incentives for those successful Juntas de Saneamiento and aguateros that are capable of becoming concessionaires or permissionaires, in full compliance with the law.

D. Key sector issues include the following:

26.� Constraints of existing legal and institutional framework in sector management. Over the years, a series of institutional challenges have emerged in the management of the W&S sector. The first is the compliance with the existing Sector Legal Framework (Law 1.614/00), which has not been fully implemented. The Regulatory Decree of Law 1614/00 delegates to the Ministry of Public Works and Communication (MOPC) the lead role in WSS sector planning, policy development, and provision of technical assistance to service providers. However, no human or monetary resources have been assigned to the sector within the Ministry to carry out these tasks. Second, there is a lack of an integrated and comprehensive WSS sector policy that would establish coverage, while quality and efficiency objectives have yet to be developed. Third, the lack of a concession agreement between the state and the national public urban water utility, ESSAP S.A., not only impedes the regulation of ESSAP S.A. by the regulatory agency, the Sanitary Services Regulation Agency (Ente Regulador de Servicios Sanitarios, ERSSAN), but has ESSAP S.A. operating under unclear legal grounds. Fourth, ERSSAN lacks both the capacity and resources to regulate ESSAP and hundreds of small private local providers and over a thousand water user committees. Furthermore, the existence of only one large national monopoly poses significant regulatory challenges to ERSSAN. Fifth, SENASA, a directorate under the Ministry of Health, has the responsibility of expanding access to WSS in rural areas, but lacks the resources to respond efficiently to demands for increasing coverage. Sixth, strict and overambitious environmental standards have been established that constrain investments in sewerage, because there are not enough resources and capacity to comply with the associated levels of wastewater treatment. 27.� Poor sector performance caused by ESSAP’s operational and financial constraints. ESSAP has registered net losses since its creation in 2002. In 2004, the Ministry of Finance imposed a canon payment (as a proxy to the National Water and Sanitation Utility [Corporación de Obras Sanitarias, CORPOSANA]40 debt) that represented 57 percent of ESSAP’s operating income and 144 percent of its operational margin. Tariffs have not been adjusted since 2002, even though inflation during 2002–07 was estimated at around 35 percent. Despite these financial restraints, ESSAP has been able to control costs and cover all operating costs and partially the cannon payment. This has limited ESSAP’s capacity to plan and implement the needed investments that could increase coverage, improve the quality of service, and enhance efficiency. ESSAP’s market is concentrated in the Asunción metropolitan area; however, at the

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �39 A nongovernmental nonprofit organization created by Law 69/72 and permissionaires according to the Regulatory Framework. 40 CORPOSANA was the National Water and Sanitation Utility of Paraguay until 2002, when its services were transferred to ESSAP S.A. and its assets and liabilities to the Government.

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national level it presents high levels of fragmentation. ESSAP operates in 20 municipalities outside the Asunción metropolitan area, serving less than 10 percent of the population in many of those areas. Due to the lack of an entrepreneurial spirit within the institution, little attention has been paid to the potential for market growth and financial sustainability in the interior of the country. In addition, there is no incentive structure to increase the operational efficiency of the company, and the sector weight of a national company cannot be counteracted by the local interest demanding improved performance. 28.� In an attempt to address these challenges, in 1999 the Government initiated sector reforms that included a new regulatory framework and a plan to incorporate the private sector through a concession agreement for CORPOSANA, for which a new “clean” utility, ESSAP, S.A. was formed with no assets or liabilities, all of which remained with the Treasury. However, the lack of political leadership and the parallel failure of the telecommunications sector reforms diminished momentum to complete reforms in the water sector, leaving the newly created ESSAP S.A. to operate in an unclear legal and regulatory environment. Consequently, over the last several years, little sector investment has taken place, resulting in a decline in coverage rates and a fragile financial situation in ESSAP that prevents it from carrying out urgent investments needed to improve the quality of the services, expand access to the unserved urban consumers, and adequately operate and maintain systems. In addition, the company does not generate sufficient resources to pay the canon that the Government was imposing on ESSAP. The lack of modern management in the utility, especially regarding commercial systems and practices, further complicates the poor financial performance of the company.41 29.� Challenges in servicing rural areas persist. Water service in rural areas is provided by water user committees (Juntas de Saneamiento). SENASA is responsible for planning, construction of systems, and creation of juntas. The regulatory framework sets the same regulations for juntas and for private operators serving peri-urban areas. This makes it nearly impossible and very expensive for the smaller juntas to comply with regulatory requirements, resulting in requests for technical assistance to SENASA to fulfill negligible valued-added bureaucratic procedures. This weak regulatory framework, together with the lack of resources and institutional capacity to comply with it, limits the potential for scaling-up successful experiences in the rural sector in Paraguay.42 SENASA has been successful in responding to the demands of concentrated rural populations. However, those currently without service are the more remote and dispersed populations, making it even more difficult and costly to extend coverage. The challenge is to extend WSS coverage to dispersed populations (including the poor and highly vulnerable indigenous communities), to expand access to sanitation to rural and small towns, and to improve the sustainability of the existing WSS systems.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �41 This paragraph is based on the results of the financial and performance audits of ESSAP from December 2005, which were financed by the Bank-Netherlands Water Partnership, a World-Bank-managed trust fund. 42 For additional information on the experiences with private sector participation in rural areas in Paraguay, see F. Drees-Gross, J. Schwartz, M. A. Sotomayor, and A. Bakalian, “Output-Based Aid in Water, Lessons in Implementation from a Pilot in Paraguay,” in OBApproaches, Note 07, May 2005, World Bank; and F. Drees-Gross, J. Schwartz, and A. Bakalian, “Output-Based Aid in Water, Lessons from a Pilot in Paraguay,” in Public Policy for the Private Sector, No. 270, April 2004, World Bank.

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E. The Government’s strategy

30.� The Government’s strategy for the water and sanitation sector. One of the objectives of the new administration is improving transparency and accountability in the management of state-owned enterprises and enhancing their efficiency. In the case of the water sector, the Government is interested in implementing a modernization strategy for the sector and increasing service coverage in a sustainable manner. The main elements of this modernization process are expected to be (a) defining the market structure of ESSAP, favoring the creation of sustainable business units at the regional level; (b) strengthening sector finances through increased efficiency, adequate tariff schemes and levels, and clear policies for the use of public resources and subsidies; and (c) strengthening the regulatory, institutional, and legal frameworks, while opening the possibility of introducing partnerships with the local private sector to increase operational and commercial efficiency. This process is expected to generate an appropriate environment for sustainable investment in the sector in order to significantly increase access to WSS services in Paraguay. With respect to the rural WSS sector, the Government is committed to supporting the modernization of SENASA and to continue to expand coverage and promote sustainability of the systems. The first step was taken by the passing of a law43 eliminating the burden of the canon, with the Treasury assuming some of the liabilities of CORPOSANA, and thus allowing ESSAP to close its financial statements. In terms of corporate governance, a Board will be established differentiating the President of the Board and the General Manager. Furthermore, MOPC is preparing a ministerial decree to create a dedicated Water and Sanitation Unit, and its team has an initial draft for the concession agreement to be signed between the Government and ESSAP.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �43 Ley “Que autoriza la Reestructuración y Regularización del Estado Patrimonial de la Empresa de Servicios Sanitarios del Paraguay Sociedad Anónima (ESSAP S.A.)”

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

PARAGUAY: Water and Sanitation Sector Modernization Project

Urban (implemented through ESSAP S.A.)44

International Bank for Reconstruction and Development (IBRD): PY Asunción Sewerage, P007926 (US$72.2 million) 1. This project started in 1995 and was cancelled in 2002, failing to achieve either of its main objectives. The objectives of the project were to: (1) help improve the provision of urban water and sewerage services in the country by decentralizing activities, facilitating private sector participation, and strengthening the National Water and Sanitation Utility’s (CORPOSANA’s) planning capacity; and (2) improve the health and quality of life of about 250,000 lower-income residents of Greater Asunción by increasing coverage of sewerage services and mitigating the environmental impact of sewage disposal in the Paraguay River. Total amount: US$72.2 million. Executed: US$26.3 million. Latest Implementation Status Report (ISR): Implementation Progress: Unsatisfactory; Development Objective: Unsatisfactory. European Union 2. Ongoing nonreimbursable technical assistance to equip the Water Quality Control Laboratory was approved in 2007. Rural (implemented through SENASA) IBRD PY Fourth Rural Water Supply and Sanitation Project P039983 (US$40 million) 3. This project started in 1999 and was closed in June 2007. The Project Development Objective was to rapidly increase water supply and sanitation coverage in the rural areas and transform the National Environment Sanitation Service’s (SENASA) role in the sector from an implementer of projects to an efficiently managed promoter of activities. This project successfully built on three previous rural water supply and sanitation (WSS) projects, building water systems for rural and indigenous communities and sewerage systems in rural towns in all the country’s territory. Latest ISR: Implementation Progress: Satisfactory; Development Objectives: Satisfactory. Fund for the Structural Convergence of the MERCOSUR (Fondo para la Convergencia Estructural del MERCOSUR, FOCEM) Construction and Improvement of Basic Water and Sanitation Systems in Small Rural and Indigenous Communities of the Country (US$39.4 million)

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �44 Before 2002, CORPOSANA.

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4. This project started in 2008 and is expected to close in 2012. It finances the construction and improvement of basic WSS systems in small rural and indigenous communities in 14 departments of the country. It includes the construction of water systems following the junta model, installation of latrines, construction of sewerage systems in rural communities, and training for juntas. Inter-American Development Bank (IADB) Small Community Water Supply and Sanitation (US$17 million) 5. This project started in 2001 and was expected to close in November 2007, it has been extended to July 2009. It finances the construction of water supply systems and basic sanitation for rural (100 systems) and indigenous communities (10 systems) in all the country’s territory. Japan Bank for International Cooperation (JBIC) Agricultural Sector Strengthening Project. Potable Water Component (US$4.1 million) 6. This project started in 1998 and is expected to close in February 2009. It financed the construction of water supply systems for rural communities in all the Oriental Region of the country. European Union Water and Sanitation Sector Strengthening as part of the Fight against Poverty (US$6.5 million) 7. This project started in 2007 and is expected to close in February 2010. It financed the construction of water supply systems and basic sanitation for rural communities in the Oriental Region.

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Annex 3: Results Framework and Monitoring

PARAGUAY: Water and Sanitation Sector Modernization Project A. Methodology and Objectives

1.� The project will establish monitoring and evaluation (M&E) mechanisms at two distinct levels:

•� At the project level: A Monitoring and Evaluation Framework (MEF) will include detailed information of the communities included in the project and for a limited number of comparator rural communities not covered by the project under Component 3, and information on the interventions to be covered in Component 2; and

•� At the national level: Information System covering the entire water supply and sanitation (WSS) sector, whether benefiting from investments under the project or not.

2.� The project-level MEF will track progress in implementation, measure intermediate outcomes, and evaluate project impacts. The framework outlines key performance indicators, data collection methods, a timetable for collection, and responsible agencies. This framework will be used to supervise and monitor the implementation of the project. 3.� At the national level, the project will support the creation of a WSS information system that will allow for the tracking of key variables across various institutions. The information system will consist of a Rural Water Supply Information System (SIAR) for the internal use of the National Environmental Sanitation Service (SENASA) and a broader National Water Supply and Sanitation Information System (SIAPS) with data inputs by and for the use of various institutions, such as the Sanitary Services Company of Paraguay (ESSAP), Sanitary Services Regulation Agency (ERSSAN), and the Dirección General de Encuestas, Estadísticas y Censos (DGEEC), among others. B. Tools and Data

4.� The tools to be used for the M&E of the project are the following:

•� Progress Reports. A mechanism for quarterly progress reports will be established for describing the main achievements of the project. They will include complete information on contracts, procurements, disbursements, detailed information on the project’s financial status, inputs, number of beneficiaries, and other outputs, and a range of additional operational indicators to track project status. These reports will be produced by the Water and Sanitation Unit in the Ministry of Public Works and Communication (MOPC) and they will be used mainly by ESSAP, SENASA, the Ministry of Finance (MF), MOPC, and the World Bank.

•� Results-Based Monitoring and Evaluation. This tool will include information on results such as actual use of the services, hygiene behavior, user satisfaction, and affordability of the services, among other indicators. This activity will be carried out by a consultant firm using a representative sample of localities with interventions and a sample of communities without interventions. The information will be collected approximately one year after the completion of the local systems and the reports will be produced at the completion of each phase. For

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Component 2, the information will be provided by ESSAP. These reports will be used by the MF, SENASA, ESSAP, MOPC, and the World Bank.

5.� The main sources of information for this results-based M&E will be: (a) Baseline and Follow-Up Household Surveys: Socioeconomic household surveys will be carried out in a representative sample of households in project communities and in control communities that have similar characteristics. The surveys measure beneficiaries’ current level of satisfaction and perceptions about their WSS services, water consumption patterns, use of sanitation facilities, hygiene behavior, level of social and human capital, income and perceptions, and the incidence of waterborne diseases in their community. For Component 3, control communities will be selected and surveyed based on four key factors comparable with project communities including: (i) population density and size, (ii) location, (iii) level of basic services available, and (iv) prevailing socioeconomic conditions. The household surveys data will be collected as part of a consultancy, and will form the basis of the impact evaluation. This source of information will contribute mainly to the results-based M&E; (b) Participatory Focus Group Discussions: The household surveys will be complemented by participatory focus groups in project communities. Focus group discussions with beneficiaries in project communities will be held in order to build a profile of the project impact; and (c) Consumer satisfaction surveys: Sample consumer satisfaction surveys of beneficiaries in urban areas will be used to determine the status of project implementation in the urban area. 6.� Impact Evaluation. A rigorous impact evaluation may be designed to attribute causality to project interventions, using data from the surveys carried out for the project M&E. This impact evaluation will enable the Government of Paraguay and the Bank to effectively assess the overall success of the project and that of individual components. The impact evaluation would be based on a diverse set of data sources: primary data collection through baseline surveys, participatory focus group discussions, consumer satisfaction surveys, and selected secondary data sources (household surveys, census, and other types of secondary information). 7.� The project plans to implement two separate impact evaluations:

(a) Impact of Access to Water Infrastructure on Human Development Outcomes in Rural Areas: • � Since the localities have to contribute with a share of the total cost of the investment, in

principle, the municipalities self-select for this program. The list of the approximately 200 rural communities was already decided by the Government on a first-come, first-served basis. The team considered two identification strategies: (a) internal control group: the GOP agreed with the team on the randomization of the order in which the rural communities will begin the interventions. The identification strategy consists of using this sequence for selecting those that will enter last as a control group of the rural communities and those that will be intervened first; and (b) external control groups: the team considered two alternatives. First, the GOP already had other community candidates with interest in a (potential) sixth project and, hence, presents the same self-selection characteristic. A sample of these communities will be used in order to get an external control group; second, the team considered obtaining a sample of those communities intervened by the fourth loan that presents the same self-selection, but already underwent the intervention; This second control group will

� 43

(potentially) allow for controlling for trends, other than the project. In principle, the assumption is that both control groups have a similar time trend.

• � The proposed econometric methodology will be based on a difference-in-difference approach. Given the randomization of the communities, the average initial characteristics of the treated and control groups should be similar. Using this implementation strategy, the team believes that the design has a low probability of endogeneity bias and ensures internal validity of the selected sample.

• � The estimated sample size for each of the countries is 800 households in each of the groups. This sample size was estimated based on the likelihood that the intervention will identify changes in health outcomes (diarrhea).45 This sample size is a preliminary estimation. The team will refine these estimates as the first stage of the implementation of this evaluation.

(b) Impact of Access to Sewerage Infrastructure on Human Development Outcomes in Greater Asunción: • � Given the engineering constraints, the project cannot randomize households; however, the

project will define clusters of independent subprojects that are independent of the rest of the clusters. Once these clusters (about 50 in each project) are defined, the project will randomize the order in which the clusters will begin the interventions. The identification strategy consists of taking advantage of this sequence for producing an internal control group. More precisely, those clusters with the last interventions will serve as a control group for those with interventions during the first year of the project. The project will also look for external control groups in those cities where the project will have no interventions.

• � The proposed econometric methodology will be based on a difference-in-difference approach. By definition, randomization at cluster level ensures that the average initial characteristics of the treated and control groups should be similar. This will be corroborated using secondary data as well as the baseline data. Using this implementation strategy, the team believes that the design has a low probability of endogeneity bias. Considering that at a later time, the households with sewerage infrastructure access may self-select and request sewerage connection, the main estimator that this evaluation will capture is the intention-to-treatment parameter—the difference in expected outcomes between clusters assigned to treatment and control groups. A complementary evaluation (also being submitted in this call for proposals) will tackle this issue through a lottery assignment providing full subsidies to households for intrahousehold investment for connecting to the sewerage network.

• � The estimated sample size for each of the countries is 1,600 households.46 This sample size was estimated based on the likelihood that the intervention will identify changes in infant diarrhea—estimated at 10 percent of the households with infants. The project aims to reduce this indicator by 4 percentage points. This sample size is a preliminary estimation. The team will refine these estimates as the first stage of the implementation of this evaluation.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �45 The estimated sample size for two-sample comparison of means: Test Ho: m1 = m2, where m1 is the mean in population 1 and m2 is the mean in population. Assumptions: (a) alpha = .05 (one-sided); (b) power = .90; (c) m1 = .15; (d) m2 = .10; (e) sd1 = .36; (f) sd2 = .30; and (g) n2/n1 = 1.00. Estimated required sample sizes: n1 = n2 = 753. 46 The estimated sample size for two-sample comparison of means: Test Ho: m1 = m2, where m1 is the mean in population 1 and m2 is the mean in population. Assumptions: (a) alpha = .05 (one-sided); (b) power = .90; (c) m1 = .10; (d) m2 = .06; (e) sd1 = .30; (f) sd2 = .24; and (g) n2/n1 = 1.00. Estimated required sample sizes: n1 = n2 = 791.

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• � Human subject reviews for these evaluations will be conducted and ensured through the following means: (a) Concept Note Review Meeting; (b) Economic and Sector Work Procedures (Quality Enhancement Reviews); (c) Extensive Internal and External Peer Reviews; and (d) Two Workshops: In the first workshop, the team will share the preliminary design of the impact evaluation; in the second workshop, the team will present the first results of the evaluation.

• � To assure that the team successfully completes the evaluation with the proposed design, the team member composition will include: Word Bank teams, Academics, local partners and capacity, local supervision, and consultants, if necessary. The Impact Evaluation team will be led by Luis Andres, Senior Infrastructure Economist at the World Bank, and Sergio Urzua, Assistant Professor, Northwestern University. The team already identified a strategy local partner in Paraguay, the Fundación Desarrollo, an institute that has both local capacity for designing and implementing surveys and strong analytical skills. In addition, members of the GOP participated in the Impact Evaluation Workshop in Buenos Aires in 2006, and are already familiar with the methodologies and have committed their support for this initiative.

C. Institutional Arrangements

8.� The Water and Sanitation Unit under MOPC will be responsible for the overall management and implementation of the Project Monitoring and Evaluation Framework and the national information systems, in close coordination with other implementing agencies. This will include maintaining the databases, managing the flow of information, and producing periodic monitoring reports. It will be directly responsible for the Progress reports and the results-based M&E. The SIAPS will be operated and managed by the Water and Sanitation Unit with the support of a consulting firm during the initial period of the project. The governing unit for the system will be an executive technical committee composed of members from the different governmental agencies related to the sector. Training of MOPC staff to operate and maintain these tools will be carried out. 9.� SENASA’s team and technical and social consultants hired for the project will have a key role in providing timely monitoring reports with operational data. The SENASA’s social team will be responsible for carrying out focus group discussions and participatory exercises, contracting and supervising the midterm and final surveys, and conducting the evaluation and impact evaluation reports. Bank supervision teams will provide technical assistance for the implementation of the tools and for the design and analysis of the surveys and the impact evaluation. �10. The following matrix presents the PDOs, project outcome indicators, and use of project outcome information.

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Project Development

Objective Project Outcome Indicators Use of Project Outcome

Information

To increase the efficiency, coverage, and sustainability of water supply and sanitation services in Paraguay through: (i)� Improving the governance

of the sector; (ii)� Increasing access to

sewerage services in the Asunción Metropolitan area;

(iii)� Increasing access to

sustainablea WSS services in rural areas, including indigenous communities.

o� Water and Sewerage

Services Unit within the MOPC staffed and equipped, defining the policies for the sector.

o� Timely availability of ESSAP’s external auditing of financial and performance data published through an annual report on ESSAP’s website.

o� Number of additional beneficiaries using sustainable sanitation systems in year 5 of the project in the Asunción metropolitan area.

o� Number of additional beneficiaries using sustainable water systems in year 5 of the project in rural and indigenous communities that were targeted in year 1 of the project.

o� Number of additional beneficiaries using basic sanitation systems in year 5 of the project in rural and indigenous communities that were targeted in year 1 of the project.

Assess the extent to which the project effectively contributes to increasing the efficiency, coverage, and sustainability of water supply and sanitation services in Paraguay.

Intermediate Outcomes Intermediate Outcome Indicators

Use of Intermediate Outcome Monitoring

COMPONENT 1: Support to the Modernization of the Sector—Governance and Institutional Strengthening

Subcomponent 1(a): Ministry of Public Works strengthened.

o� Water and Sewerage

Services Unit under the

These indicators will demonstrate the

� 46

Ministry of Public Works staffed and equipped, defining policies of the sector.

o� SIAPS developed and generating reports according to the “Conceptual Framework for the SIAPS.”

consolidation of the WSS.

Subcomponent 1(b): ERSSAN effectively regulating the sector.

o� Characterization of Service

Providers (Service Provider Mapping) developed and published on ERSSAN’s homepage.

These indicators will demonstrate the consolidation of ERSSAN’s capacities to regulate the sector.

Subcomponent 1(c): SEAM’s capacities on water resources and environmental licensing strengthened.

o� Environmental classification

standards reviewed by SEAM Water Resources Directorate.

This indicator will demonstrate the consolidation of SEAM’s Water Resources Department.

COMPONENT 2: Urban Water Supply and Sanitation—and Governance of ESSAP

Subcomponent 2(a): ESSAP governance improved.

o� ESSAP S.A. concession

agreement signed. o� Board of Directors

established. o� Information Management

System developed and generating reports for managerial decisions.

YR 3–5 flags increase in efficiency of ESSAP.

Subcomponent 2(b): Efficiency and access to sustainable services in the Asunción metropolitan area improved.

o� Percentage of water

connections with working micrometers.

o� Volume of wastewater of Asunción properly discharged into the Paraguay River.

o� Kilometers of sewerage collectors rehabilitated from the sewerage system of Asunción.

YR 3–5 flags the possibility that sustainability of WSS services can be achieved.

COMPONENT 3:

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Rural water supply, sanitation, and hygiene education—and institutional strengthening of SENASA Subcomponent 3(a): SENASA and its governance strengthened.

o� Procurement unit

strengthened and publishing procurement plans in SEPA.

o� Environmental unit created and processing environmental licenses.

Assess SENASA’s improvements on governance.

Subcomponent 3(b): Access to WSS services in indigenous communities increased.

o� Number of new systems

providing access to water supply services in indigenous communities.

o� Number of latrines for indigenous communities in use.

Assess the extent to which the project effectively contributes to providing access to WSS services in indigenous population.

Subcomponent 3(c): Access to sustainable WSS services in rural areas increased.

o� Number of new systems

providing access to sustainable water supply services to rural communities.

o� Number of sanitation on-site solutions (Menu de Opciones) in use in rural communities.

Assess the extent to which the project effectively contributes to providing access to WSS services in rural population.

Subcomponent 3(d): Water services in rural communities using minimum subsidy schemes constructed and/or expanded.

o Number of new systems

constructed or expanded providing access to water supply services to rural communities using minimum subsidy scheme.

Assess the extent to which the project effectively contributes to providing access to water services in rural communities.

a. Rural systems are considered to be “sustainable” if: (a) the systems are functioning as intended and deliver the service either continuously or regularly depending on the service level selected; (b) the water committees meet on a regular basis; (c) tariffs are set at a level that guarantees operation and routine maintenance of the system, and they are collected; and (d) the systems are designed to ensure long-term supply (designed appropriately for yield of source).

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Data Collection and Reporting

Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports

Data Collection Instruments

Responsibility for Data Collection

Project Outcome Indicators

Water and Sewerage Services Unit within the MOPC staffed and equipped, defining the policies for the sector.

N

N

Y

Y

Y

Y

Annually

Progress Reports

MOPC

Timely availability of ESSAP’s external auditing of financial and performance data published through an annual report in ESSAP’s website.

N

N

Y

Y

Y

Y

Annually

Progress Reports

ESSAP

Number of additional families using sanitation systems in YR5 of the project in the Asunción metropolitan area.

0

NA

NA

15,000 (accu-

mulated)

NA

50,000 (accu-

mulated)

Midterm, and at the end of the project

Baseline surveys and

ex-post surveys

MOPC

Number of additional beneficiaries using water systems in YR 5 of the project in rural and indigenous communities that were targeted in YR 1 of the project.

0

NA

�

NA

10,000 (accu-

mulated)

NA

28,000 (accu-

mulated)

Midterm, and at the end of the project

Baseline surveys and

ex-post surveys

MOPC

Number of additional beneficiaries using basic sanitation systems in YR5 of the project in rural communities that were targeted in YR 1 of the project.

0

NA

NA

8,000 (accu-

mulated)

NA

22,000 (accu-

mulated)

Midterm, and at the end of the project

Baseline surveys and

ex-post surveys

MOPC

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Data Collection and Reporting

Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports

Data Collection Instruments

Responsibility for Data Collection

Intermediate Outcome Indicators

Subcomponent 1(a): Water and Sewerage Services Unit within the MOPC staffed and equipped, defining the policies for the sector.

N

Y

Y

Y

Y

Y

Annually

Progress Reports

MOPC

SIAPS developed and generating reports according to the “Conceptual Framework for the SIAPS.”

N

N

N

N

Y

Y

Annually

Progress Reports

MOPC

Subcomponent 1(b): Characterization of Service Providers (Service Provider Mapping) developed and published in ERSSAN’s homepage.

N

N

N

Y

Y

Y

Annually

Progress Reports

MOPC

Subcomponent 1(c): Environmental classification standards reviewed by SEAM Water Resources Directorate.

N

N

N

N

Y

Y

Annually

Progress Reports

MOPC

Subcomponent 2(a): ESSAP S.A. concession agreement signed.

N

N

Y

Y

Y

Y

Annually

Progress Reports

ESSAP

ESSAP’s Board of Directors established.

N

N

N

Y

Y

Y

Annually

Progress Reports

ESSAP

Information Management System developed and

N

N

N

Y

Y

Y

Annually

Progress Reports

ESSAP

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Data Collection and Reporting

Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports

Data Collection Instruments

Responsibility for Data Collection

generating reports for managerial decisions. Subcomponent 2(b): Percentage of water connections with working micrometers.a

10%

10%

23%

23%

36%

50%

Annually

Progress Reports

ESSAP

Volume of wastewater of Asunción properly discharged to the Paraguay River.

TBD with a

baseline

NA

NA

TBD

NA

TBDb

Baseline, midterm, and at the end of the project

Progress Reports

ESSAP

Kilometers of sewerage collectors rehabilitated from the sewerage system of Asunción.

0

0

(cumu-lative)

2

(cumu-lative)

5

(cumu-lative)

8

(cumu-lative)

10

(cumu-lative)

Annually

Progress Reports

ESSAP

Subcomponent 3(a): Procurement unit strengthened and publishing procurement plans in SEPA.

N

N

Y

Y

Y

Y

Annually

Progress Reports

SENASA

Environmental unit created and processing environmental licenses.

N

N

Y

Y

Y

Y

Annually

Progress Reports

SENASA

Subcomponent 3(b): Number of new systems providing access to water supply services to indigenous communities.

0

0

(cumu-lative)

5

(cumu-lative)

10

(cumu-lative)

20

(cumu-lative)

30

(cumu-lative)

Annually

Progress Reports

MOPC

Number of latrines for indigenous communities.

0 0 200 (cumu-lative)

400 (cumu-lative)

700 (cumu-lative)

700 (cumu-lative)

Annually

Progress Reports

MOPC

Subcomponent 3(c): Number of new systems providing access to sustainable

0

0

20

30

50

70

Annually

Progress Reports

MOPC

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Data Collection and Reporting

Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports

Data Collection Instruments

Responsibility for Data Collection

water supply services to rural communities.

(cumu-lative)

(cumu-lative)

(cumu-lative)

(cumu-lative)

Number of sanitation on-site solutions (Menu de Opciones) in use in rural communities.

0

0

(cumu-lative)

1,400

(cumu-lative)

2,100

(cumu-lative)

3,500

(cumu-lative)

4,900

(cumu-lative)

Annually

Progress Reports

MOPC

Subcomponent 3(d): Construction and/or expansion of services implemented using minimum subsidy schemes.

0

0

(cumu-lative)

1

(cumu-lative)

2

(cumu-lative)

3

(cumu-lative)

4

(cumu-lative)

Annually

Progress Reports

MOPC

a. With less that five years of installation. b. To be confirmed by the Master Plan for Asunción’s metropolitan area.

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Annex 4: Detailed Project Description

PARAGUAY: Water and Sanitation Sector Modernization Project

1.� This project will partially finance the initial phase of a process of modernization of the water supply and sanitation (WSS) sector in Paraguay, through a Specific Investment Loan (SIL) of US$64 million. This Project will allow the Government of Paraguay (GOP) to develop a phased approach to planning and investing in the sector, while at the same time strengthening policymaking, enhancing the regulatory framework, and modernizing sector institutions to improve governance and support a series of investments to increase the coverage and reliability of urban and rural WSS services. It is envisioned that this project of US$83.5 million will: (a) help prioritize, strengthen, and consolidate the ongoing modernization process; (b) finance urgent investments to improve efficiency of the urban water utility, and some priority investments to expand access to sanitation services in the Asunción metropolitan area; and (c) expand access to WSS in rural areas, including indigenous communities. The Government plans to evaluate the results and to continue the process with additional financing from its own resources, and possible follow-up projects to incrementally deepen support for policy reforms and to finance expansion and improvement of WSS services in a sustainable manner in urban and rural areas in the country. 2.� The approach will seek to promote, as a guiding theme in all components: (i) transparency, through planning and programming all interventions based on objective and quantifiable criteria; (ii) performance, through the identification of targets for each intervention to be monitored and whose attainment will be the indication of success; and (iii) accountability, through the participation, publication, and presentation of the programmed activities and results to the stakeholders. Component 1: Support to the modernization of the sector—governance and institutional strengthening (US$4.0 million financed by the Bank loan): 3.� This component is designed to institutionally consolidate the WSS sector through the following actions that: (a) support the Ministry of Public Works and Communications in the strengthening of the recently created47 Water and Sewerage Services Unit, which will perform the functions related to the Lead Sector Agency (Titular del Servicio) as per Law 1614/00, including elaboration and implementation of strategic sector planning, definition of a financial policy for the sector, regularization of service provision in the country, oversight and implementation of the Good Governance Strategy for the sector, and in the implementation of a sector information system; (b) strengthen the Sanitary Services Regulation Agency (Ente Regulador de Servicios Sanitarios, ERSSAN) to effectively regulate the sector; and (c) support the Environmental Secretariat (Secretaría del Ambiente, SEAM) by strengthening the Water Resources and Environmental Licensing Directorates, classifying the different basins by discharge standards, and improving the environmental licensing process for investments in the WSS sector.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �47 Ministerial Resolution Nº 037/09, Ministry of Public Works and Communications (MOPC).

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(a) Support the Ministry of Public Works in the strengthening of the recently created Water and Sewerage Services Unit (US$ 2.0 million):

4.� This subcomponent will support the strengthening of a recently created unit within the Ministry of Public Works with the capacity to perform the functions given to the “Lead Sector Agency” (Titular del Servicio), as per Law 1614/00: i.� Sector Planning: The unit will be responsible for the elaboration and implementation of strategic sector planning for urban and rural areas in coordination with other sectoral agencies and service providers. The unit will oversee the WSS supply market promoting the development of sustainable service providers considering efficiency, capabilities, and scale aspects. ii.� Development of Sectoral Policies: The objective is to define a national financing policy with the aim of, among other things: (a) improving the quality of public expenditure in the sector; (b) creating incentives for the service providers’ improvement and generation of own resources; (c) increasing the total amount of resources for investments in the sector, using central government financing as a lever for mobilizing additional contributions, if possible; and (d) clearly defining pro-poor policies and subsidies to ensure adequate access to WSS services. iii.� Regularization of service provision in the country: According to Law 1614/00, WSS services are provided by concessionaires and permissionaires. Currently, no concession or permit contract has been signed according to the law.48 This subcomponent will support the unit in, among other things: (a) the establishment of conditions for the concessions and permissions, subject to the Regulatory Framework, including the concession agreement between the GOP and ESSAP; (b) the establishment of criteria for defining tariffs and analyzing ERSSAN’s recommendations; (c) establishing the obligations of the providers in relation to the investments, in the expansion of, and the quality and maintenance, of the service; (d) application of sanctions; (e) defining criteria for the segmentation of the market; (f) favoring actions that promote sectoral competitiveness and the transformation of the institutions; and (g) promoting technical assistance activities, capacity building, investigation, and sanitary education. iv.� Oversee the implementation of the Good Governance Strategy for the Sector: including policies and actions oriented to provide services with transparency and accountability, fostering the participation of civil society. v.� Integrated Sector Information System: The objective of this system is to have periodic information from the different providers for planning, policy development purposes, and transparency. All sector agencies will be responsible for maintaining and sharing their information. It will include hardware, software, and staff training (based on the results of the

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �48 This is one of the most urgent issues in the sector. According to the current regulation, all service providers, including Aguaterías and juntas, have de facto permits until 2012, even if they are not in compliance with the law in terms of service quality, expansion plans, tariffs, and other regulations. If, by 2012, providers are not able to comply with the law, measures should be foreseen to ensure that service for the population is not disrupted. Such measures include preparing ESSAP (or other providers) to take over service provision in such areas, which would require evaluating the state of the infrastructure, setting up compensations, and so forth. Provisions should also be considered for the cases in which some of the larger, best-performing service providers, currently classified as permissionaires, could become concessionaires, at the time of contract signing.

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diagnosis stage). In parallel, norms and procedures will be formulated to assure the disclosure of sector information to the public. vi.� Audits and other project management activities required for the proper implementation of the project.

(b) Strengthen ERSSAN to effectively regulate the sector (US$1.0 million): 5.� One of the problems that ERSSAN is facing is the large number of service providers (around 3,000) it has to regulate through a centralized structure and under the same norms and control criteria. This is impossible to do because of the difficulties it imposes not only on the regulator but on the service providers, many of which are small community-based organizations, juntas, that do not have the capacity or resources to fulfill all regulations. This situation requires the establishment of differentiated regulation and control criteria. The proposed subcomponent will be developed with the objective of providing improved efficiency to ERSSAN. The main activities include: (a) completing and updating the Characterization of Service Providers (Service Provider Mapping); (b) designing an adequate market segmentation of concessionaires and permissionaires, (based on their characteristics, that is, type of service, scale, and economic capacity), and imposing differentiated obligations on the service providers in accordance with the principles established in Law 1614/00; and (c) the provision of equipment and training. (c) Support the Environmental Secretariat (SEAM) by strengthening the Water Resources and Environmental Licensing Directorates (US$1.0 million): 6.� SEAM’s Water Resources Department plays a critical role in WSS development, but remains weak. Strengthening its human resources and technical capacity is critical to enable cost-effective and environmentally sustainable development of the sector. Current overly ambitious discharge standards limit sewerage investments. This subcomponent will finance key technical studies to: (a) classify the different basins according to their capacity to absorb effluents (including sewage); (b) define quality standards according to the source (surface water, groundwater, and rainwater); and (c) identify vulnerable zones, including zones for groundwater recharge. This subcomponent will also support the Environmental Licensing Directorate with equipment and training, and will assist it in developing streamlined processes for issuance of permits and licenses in the WSS sector. Component 2: Urban water supply and sanitation—and institutional strengthening of ESSAP (US$65.5 million, of which US$50.5 million will be financed by the Bank loan): 7.� This component will be implemented by ESSAP. It will focus both on the modernization of ESSAP and the financing of urgently needed WSS investments. The modernization of ESSAP is critical to enhance its service delivery performance and will include its partial decentralization, the introduction of some performance-based contracts, and the reengineering of key operational and commercial systems. In addition, urgent investments for improving efficiency and increasing access to water and sewerage systems are needed, including the rehabilitation of existing infrastructure. Given the low existing coverage of sewerage services in Asunción and its

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metropolitan area, a significant amount of this component is likely to be devoted to building sewerage infrastructure in the Asunción metropolitan area and to improving water services. 8.� This component will finance: (a) Institutional strengthening and corporate governance of ESSAP by: (i) implementing corporate governance activities related to ESSAP, such as the establishment of a Board of Directors, the implementation of the Good Governance Strategy related to ESSAP, including social accountability activities, and strengthening of, among other things, the internal control, auditing, and procurement units; (ii) restructuring ESSAP through the design and implementation of service units and enhancing their operational and commercial performance; (iii) strengthening ESSAP’s environmental and social unit, ensuring adherence to safeguards and adequate implementation of the Environmental and Social Management Framework (ESMF); (iv) supporting the communication strategy of ESSAP, including activities foreseen in the Good Governance Strategy and the ESMF; and (b) Priority WSS infrastructure investments including: (i) urgent investments targeting the reduction of nonrevenue water and increasing efficiency; (ii) rehabilitation of existing water and sewerage infrastructure; (iii) prioritized expansion of water and sewerage systems in the Asunción metropolitan area and the interior; and (iv) expansion of potable water capacity. All works will follow the methodology detailed in the ESMF of the project. Major sewerage infrastructure works will be carried out after updating the Sewerage Master Plan for the Asunción metropolitan area, which will fully integrate environmental and social baseline information and assessment criteria into the overall planning methodology. This study will provide an analysis of alternatives on which the Ministry of Finance, the Ministry of Public Works and Communications, and the Environmental Secretariat will base the investment decisions in Asunción’s metropolitan area. This component will also finance the final designs of all works and site-specific Environmental Impact Assessments of major works. i. Institutional Strengthening and Governance of ESSAP (US$ 5.9 million) 9.� The objective of this subcomponent is to finalize the transformation of the ex-CORPOSANA into a modern utility, ESSAP S.A., by: (a) Implementing Corporate Governance Activities 10.� Board of Directors. One of the most important actions that will be supported by the project is the separation of functions between the general manager and the president of the Board of Directors of ESSAP. The implementation of a real Board of Directors, nominated based on clear and sound criteria, and whose functions are separated from day-to-day operations of ESSAP, will be critical to improving transparency and accountability of ESSAP’s management. 11.� Regularizing ESSAP’s net assets. The net assets from former CORPOSANA, currently under the property of the Minister of Finance, will be assessed and valued in order to include them into ESSAP’s balance sheet. 12.� Implementation of the Good Governance Strategy related to ESSAP, including the signing of the concession agreement, regularizing the company’s net assets according to Law� 3684/08,

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social accountability activities, and strengthening of, among other things, the internal control, auditing, and procurement units. (For a detailed description see Annexes 7, 8, and 11.) 13.� Human resources plan—including training. Transparent and accountable human resources (HR) processes are an important part of improving corporate governance and enhancing the utility’s performance. A comprehensive HR plan, which will include training, will need to be developed by ESSAP, with the process jointly led by the department of HR and the Board of Directors, in consultation with ESSAP’s staff, including unions. 14.� Information management system. ESSAP currently lacks an effective information management system. This component will support the upgrade of its information systems, including purchase of computer hardware, software, and staff training. The system could be linked to provide information to ERSSAN and the Titular del Servicio. 15.� Audits and other project management activities required for the proper implementation of the project. Including the quarterly external concurrent audit reports on the eligibility of works financed under this component. (b) Restructuring ESSAP through the Design and Implementation of Service Units and Enhancing their Operational and Commercial Performance 16.� The creation of semi-independent Service Units. Decentralized service units within ESSAP S.A. will be established by geographic service zones (which could be composed of a specific municipality and/or a group of municipalities) for the provision of services, allowing provision of better services and the introduction of different management models (management and/or lease contracts).49 The exact number of service zones would depend on the municipality grouping and will be further analyzed during the implementation stage. The management and/or lease contracts between ESSAP S.A. and its service units or domestic private companies will allow the company to assign resources and risks at the most appropriate levels. The establishment of service zones will also lead to more direct service provision to the population outside of Greater Asunción. Currently, given the fact that Greater Asunción represents almost 80 percent of its market, ESSAP must focus on the provision of services to this area, which decreases the attention received by other zones. The proposed restructuring is presented in the Tables A4.1 and A4.2 below.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �49 Service, management, and lease contracts can be used by ESSAP without needing to change any laws.

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Figure A4.1. Proposed Structure for the Sector

Figure A4.2. Proposed Structure for ESSAP S.A.

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(c) Strengthening ESSAP’s Environmental and Social Unit 17.� The project will support the strengthening of the Environmental and Social Unit in ESSAP. The unit’s basic functions include: (i) supervision of compliance with environmental legislation and procedures; (ii) preparing Terms of Reference (TORs) and budgets for the execution of environmental studies and related works; (iii) supporting the Procurement Committee in the precontractual stages of the unit’s contracts and supervising their compliance; (iv) coordinating the Environmental Sanitation Program’s diffusion—informative publications—and integrating them into the Institutional Information System; (v) measuring the results of the Environmental Sanitation Program’s activities, calculating performance indicators for each activity for comparison with the norms and preestablished standards; and, if necessary, (vi) proposing corrective measures. This unit will be in charge of carrying out the activities set forth in the Environmental and Social Management Framework of the Project. (d) Supporting the Communication Strategy of ESSAP 18.� Strengthening the social communications unit. This component aims at strengthening this recently created unit, which is responsible for developing the communication and information strategies and implementing many of the tasks in the Good Governance Strategy and the ESMF. Social communication activities include publishing information through mass media and disclosing information to the public related to ESSAP’s functions and its relations with other public institutions, customers, and suppliers. The unit will also establish permanent communication with the personnel for the constant exchange of information, formulate the analysis of publications and opinions found in the media, and measure the results obtained by the execution of social communication functions. Finally, the unit will propose, if necessary, corrective measures for the improvement of social communication techniques. ii. Priority Water and Sanitation Infrastructure Investments (US$ 59.6 Million) (a) Urgent investments targeting the reduction of nonrevenue water and increasing efficiency A series of investments to reduce nonrevenue water and increase efficiency will be financed. These investments include: (i) creation of district metering areas through the installation of macro-meters and the installation of valves creating separate and independent supply zones, (ii) replacement of sections of leaking networks, (iii) leak reduction campaigns, (iv) registration of illegal connections and updating the user registry (cadastro de usuarios), (v) increasing micro-metering and replacing existing nonfunctioning meters, and (vi) improvement of the billing system. (b) Rehabilitation of existing water and sewerage infrastructure 19.� The sewerage system in the center of Asunción has been for many years overloaded because the diameters of the pipes are too small to convey the existing flows. In addition, in absence of adequate maintenance and lack of investment, many collectors urgently need to be replaced. This subcomponent will finance the replacement of some of the sewerage collectors that were already included in the latest 1985 Sanitation Master Plan for Asunción and still need to be replaced, among which a group of them will be prioritized by ESSAP and financed under the project. In addition, one of the main issues in ESSAP is leaking water pipes, many of which are inadequately fixed instead of replaced for lack of resources. This subcomponent will finance some urgent rehabilitation of water infrastructure.

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(c) Prioritized expansion of water and sewerage systems 20.� Updating the sewerage system Master Plan for Asunción’s metropolitan area and final designs, based on which ESSAP will have an analysis of alternatives on which to base the investment decisions. The Master Plan will analyze all of the municipalities in Asunción metropolitan area,50 establishes the baseline for this component, and recommends the sequencing of the prioritized works to be financed. This study will provide an analysis of alternatives on which the Ministry of Finance, the Ministry of Public Works and Communications, and the Environmental Secretariat will base the investment decisions in Asunción’s metropolitan area. For the prioritized works, final designs will be financed including the Environmental Impact Assessment. 21.� Water Quality Model of the Paraguay River. The required treatment level of the wastewater will be established by modeling the water quality of the Paraguay River. The treatment plant will be built in stages. It is estimated that, because of the high dilution level of the effluent in the river (over 1:1,000), the first stage will consist of preliminary treatment. This assumption will need to be confirmed by the results of the river water quality modeling that will be undertaken as part of the project. The area to be secured for locating the treatment plant is expected to be sufficient to host the installations necessary to achieve any treatment level required. 22.� Based on the results of the updated Master Plan, a series of investments will be analyzed, of which the following have been initially identified: (i) construction of the sewerage system of the Itay basin (Asunción, Fernando de la Mora, Limpio and others), (ii) improvement of the existing discharges of the wastewater of Asunción to the Paraguay River, (iii) expansion and improvement of the sewerage and disposal system of Luque, (iv) expansion and improvement of the sewerage and disposal system of San Lorenzo, (v) construction of the sewerage and disposal systems of Mariano Roque Alonso, and (vi) expansion and construction of the sewerage and disposal systems the Lambare basin (including Lambare, Villa Elisa, Asunción, and Fernando de la Mora). 23.� Completion of the sewerage disposal system of Caacupe has also been identified as an initial priority and, as with those in the Greater Asunción Region, its implementation will be based on the results of the Master Plan update, the Environmental Impact Assessments, and resources availability. (d) Expansion of potable water capacity 24.� The project could finance other minor works associated to the water services provided that the GOP follows the agreed Environmental and Social Management Framework, the expansion of the water treatment plant for Asunción metropolitan area and other cities in the interior, and provided that a service unit for the area is established.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �50 The municipalities in the Asunción metropolitan area include (sewerage coverage in parenthesis): Asunción (67 percent), Lambare (16 percent), Fernando de la Mora (6 percent), San Lorenzo (9 percent), Luque (14 percent), Mariano Roque Alonso (12 percent), Limpio (14 percent), and Villa Elisa (0 percent).

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Component 3: Rural water supply, sanitation, and hygiene education—and institutional strengthening of SENASA (US$14.0 million, of which US$9.5 million will be financed by the Bank loan) 25.� This component will build on the experience of previous rural WSS projects to increase service coverage and quality, by: (a) strengthening of the National Environmental Sanitation Service (SENASA) and its governance by supporting its decentralization process, equipment, and strengthening of its environmental and social management units following the ESMF provisions. It will also include its communication strategy, social accountability mechanisms foreseen in the Good Governance Strategy, and activities under the ESMF; (b) increasing coverage of WSS for indigenous communities; (c) increasing coverage of WSS, and hygiene education in rural communities prioritized according to social indexes that will be used in the consultation process of the specific subprojects. The social intervention process will include training of juntas for operations and maintenance, supporting existing juntas, through strengthening Associations of Juntas; and (d) construction and/or expansion of services in rural communities using minimum subsidy schemes. (a) Strengthening of SENASA and its governance (US$ 1.4 million): 26.� The following activities will be financed in order to guarantee the development and institutional strengthening of SENASA and improve its governance. Their implementation will help SENASA in scaling-up its current technical assistance activities to Associations and Juntas de Saneamiento countrywide. This will result in the improvement of WSS services and coverage rates in rural areas and will benefit the more dispersed and poorer communities in Paraguay. (i) Improvement of SENASA’s technical and planning capacity, including training: This subcomponent is expected to strengthen its social unit and planning capacity, and support SENASA in the implementation of its monitoring and evaluation functions. It will also include its communication strategy, social accountability mechanisms foreseen in the Good Governance Strategy, and activities under the ESMF. (ii) Strengthening of regional offices: To decentralize SENASA’s activities, the implementation of new offices and the strengthening of the existing ones at the national level are necessary. Under this project the creation of at least one new office in the Northern Chaco region and the strengthening of the existing one in the Southern Chaco region will be prioritized because they require longer-term and stronger assistance strategies. A secondary objective will be the strengthening of at least one regional office in Eastern Paraguay.51 (iii) Purchase of goods/equipment: SENASA needs various vehicles in order to carry out its supervision activities for social promotion, supervision of engineering designs, and the construction of WSS systems throughout the country. Although SENASA subcontracts these activities, continuous supervision is necessary to guarantee the quality of the contracted services. New office equipment for improving SENASA’s operational capacity will be attained through the acquisition and installation of new information technology (IT) and communications systems for all the offices. � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �51 SENASA has additional regional office in San Lorenzo, Minga Guazú, San Estanislao, and Juan León Mallorquín.

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(iv) Creation of an Environmental Unit: The project would support the creation of an Environmental Unit. The unit’s basic functions will be to: (a) supervise compliance with laws, decrees, instructions, and procedures, and will be responsible of the manuals for the Environmental Sanitation function; (b) prepare TORs and budgets for the execution of studies and environmental works; (c) support the Procurement Committee in the precontractual stages of the unit’s contracts, and supervise their fulfillment; and (d) conduct all the activities related to the ESMF.

(vi) Strengthening of financial management, procurement, and audit units (a detailed description is presented in Annexes 7 and 8). (vii) Audits and other project management activities required for the proper implementation of the project. (b) Increasing coverage of WSS for indigenous communities (US$ 2.6 million): 27.� Increasing coverage of WSS for indigenous communities in the Chaco and Eastern Paraguay.52 The communities to be served will be prioritized using social indexes, including poverty criteria that are being developed in the consultation process to define an Indigenous Peoples Plan. 28.� The investments include: (a) the construction and/or rehabilitation of about 30 new water supply systems for indigenous communities to provide improved water to around 6,000 indigenous people; monitoring, evaluating, and giving sanitary education and technical assistance to indigenous communities along with water supply systems; (b) the construction of 700 latrines for indigenous communities to serve approximately 5,000 inhabitants; and (c) a pilot for outsourced maintenance and rehabilitation of systems, and assistance to indigenous communities. SENASA will also have a permanent inspector in the Chaco who will be responsible for the projects. (c) Increasing coverage of WSS and hygiene education in rural areas (US$ 9.7 million): 29.� The following activities will improve WSS services in rural areas of Paraguay and contribute to the overall objective of increasing WSS coverage rates and will reflect on poverty reduction and health indicators for the population. 30.� Water Supply and Sanitation. The WSS subcomponent will aim at improving access to sustainable WSS by rural communities, including more recent settlements (asentamientos campesinos). The aim of this subcomponent is to bring integrated services WSS in accordance with Law 1614/00. Unlike the previous rural project (Fourth Rural Water Supply and Sanitation Project, BIRF IV), the subcomponent will jointly implement WSS interventions at the same time as improvement on health indicators, and saving costs. The drinking water systems will provide house connections and individual on-site sanitary facilities (Menú de Opciones) to the beneficiaries. This subcomponent also includes community development activities needed to promote rational and efficient water use and the creation and training of the juntas responsible

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �52 In close coordination with other Bank projects and working with indigenous communities to maximize the overall impact achieved with multiple interventions (for example, land regularization and road maintenance projects).

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for operating the systems. The planned activities for the subcomponent include the construction of 70 new systems in rural concentrated areas, and the construction of on-site sanitation solutions (Menú de Opciones) serving approximately 24,000 people. Monitoring, evaluating, and giving technical assistance to communities with water supply systems will also be included in the intervention. In addition to SENASA’s traditional preparatory promotion of the project, a training course for three members per community, including at least one woman, will be conducted as soon as the construction portion of the project is completed. 31.� This subcomponent will also support the strengthening of existing juntas through the Associations of Juntas, which have helped SENASA delegate some of its administrative and technical responsibilities, within the current legal framework. During this project, three associations will be strengthened, receiving training and additional equipment. 32.� The full implementation of a rural water project through the juntas model takes on average 36 months. It follows seven main steps: Step 1: Eligibility. A community is defined as eligible based on a set of prioritization criteria that include socioeconomic and technical characterization factors. The program targets the poor districts in favorable geographic areas53 that fulfill the technical and administrative condition imposed by the project. Following are the variables that are taken into consideration in the community eligibility process: o� Density and scale: There must be more than 50 households living in the community, such

that the maximum distance between households is 100 meters. o� Access to infrastructure: The community must have electricity and be connected by access

road. o� Economic sustainability: The community must have enough economic resources to repay

SENASA and to maintain a well-functioning distribution system. o� Groundwater availability: The community must have a suitable amount of groundwater

resources. o� Community interest: There must be a perceived need for clean water in the community by

both community members and SENASA. The community must evidence its interest and the overall acceptance of its members of the Project. Such evidence is provided by a letter of intention from the community (signed by local authorities) and by precollecting 3 percent of the total cost of the project for the down payment.

o� Support of local authorities: The community must evidence the predisposition of authorities and community leaders in supporting and committing to the project requirements, evidenced by their signature on the community’s letter of intention.

Step 2: Identification. Generally, a team of two, an engineer and a social promoter, visits the potentially eligible communities. The team looks for a community leader in order to get a first-hand impression of the community’s predisposition toward a water system. The team also looks into the existence of other community services (electricity, schools, churches, clubs, and so forth), which provide insight into the methods traditionally used by the community to pay for public services. � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �53 Areas with availability of water resources and low dispersion of households.

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Step 3: Promotion and Fieldwork. Once a community has expressed the desire to obtain a water system, a team (from SENASA or subcontracted to NGOs or consultancy companies) prepares a socioeconomic-cultural profile of the community. It assesses the community’s attitude toward WSS and its willingness and financial capacity to commit itself to the construction and sound management of a water system. Preliminary studies are also made to define the water source and check groundwater availability. This stage ends with announcing to the community the general feasibility of the project and detailing the requirements and responsibilities the community must adhere to in order to receive a water system from SENASA. Step 4: Preparation and Financing of the Project. SENASA will contract out the studies and designs and establish a reliable cost estimate of the project. With the estimated project cost, SENASA’s financial department provides the repayment scheme for the community. Financial schemes depend mainly of the number of households and consist of: (a) 3 percent of the investment cost, as down payment in cash, (b) from 15 percent (less than 150 households) to 27 percent (more than 150) of the costs paid in community labor and/or materials during the execution of the works, and (c) from 15 percent (for communities with less than 150 households) to 30 percent (more than 150) of the investment costs remains the responsibility of the juntas, to be repaid in real terms over a 10-year period. The residual part of the investment cost is covered by the Government. Step 5: Participation, Motivation, and Organization. Once the studies and designs are available, SENASA promoters (can also be contracted out) seek full community support for the project. There are meetings, open to all community members, in which the pros and cons of the project and the requirement for self-help are discussed. The community creates the junta (through a legal document supported by a specific law), and through public vote elects representatives for the duration of two years. One of the five junta members is nominated by the corresponding municipality. The junta is asked to sign a contract with SENASA defining its financial and legal responsibilities. Promotion activities also include community training and hygiene and health education. Step 6: Construction. Project construction starts after the signature of the contract between SENASA and the junta. SENASA’s water resource specialists drill and test the wells. The wells are then equipped and the electrical works completed. The community participates in the works by supplying some of the materials and providing labor (pipe-laying) under the guidance of a local foreman. SENASA keeps careful records of all community contributions. Step 7: Maintenance and Operation. Once inaugurated, the system becomes the property of the community. The junta has full responsibility for its administration, operation, and maintenance. SENASA assists the junta’s administration in the establishment of proper accounting systems and billing and collection procedures. The staff, named and paid by the junta, usually consists of a secretary who collects tariffs and keeps the books, and a plumber who does all technical work. The junta also decides on future system extensions and new connections. (d) Construction and/or expansion of services in rural communities using minimum subsidy schemes (US$ 0.3 million):

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33.� Building on the previous success in water supply services in rural communities using minimum subsidy schemes, new investments will be made in communities which, by their density and specific characteristics, are suitable for including private participation through minimum subsidy concessions. The construction and/or expansion of four new water supply systems with private participation with 6,000 new beneficiaries using the minimum subsidy scheme that was successfully used during the Fourth Rural Water Supply and Sanitation Project is planned.

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Annex 5: Project Costs

PARAGUAY: Water and Sanitation Sector Modernization Project

Project Cost by Component Local

US$ million

Foreign

US$ million

Total

US$ million

Support to the Modernization of the Sector—Governance and Institutional Strengthening

0.0 4.0 4.0

Urban water supply and sanitation—and institutional strengthening of ESSAP

15.0 50.5 65.5

Rural water supply, sanitation, and hygiene education—and institutional strengthening of SENASA

4.5 9.5 14.0

Total Baseline Cost 19.5 64 83.5

Total Project Costsa 19.5 64 83.5

Total Financing Required 19.5 64 83.5

a. Identifiable taxes and duties are US$8.35 million, and the total project cost, net of taxes, is US$75.15 million. Therefore, the share of project cost net of taxes is approximately 90 percent. Price and physical contingencies are included in the costs by component.

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Annex 6: Implementation Arrangements

PARAGUAY: Water and Sanitation Sector Modernization Project 1.� The project aims to support the modernization of the water sector in Paraguay, providing institutional strengthening to sector agencies and improving overall sector governance. As such, the project will comprise every public entity currently involved in the sector, namely:

•� MOPC (Ministry of Public Works and Communication), Lead Sector Agency (Titular del Servicio) responsible for sector planning and policy development;

•� ESSAP S.A. (Sanitary Services Company of Paraguay), a public company, responsible for service provision in urban areas with populations above 10,000;

•� SENASA (National Environmental Sanitation Service), a general directorate within the MSPyBS (Ministry of Public Health and Social Welfare), responsible for construction of water supply and sanitation (WSS) infrastructure for settlements with populations below 10,000;

•� ERSSAN (Sanitary Services Regulation Agency), the WSS sector regulatory agency; •� SEAM (Environmental Secretariat), responsible for setting discharge standards and

issuing the environmental licensing for all sector investments; •� The Unit for Monitoring of State Owned Enterprises under the Ministry of Finance has

the responsibility of overseeing ESSAP major investment and compliance with selected performance indicators.

2.� During project preparation, the Water and Sewerage Services Unit was formed under MOPC to oversee the overall process providing strategic leadership and direction and serving as the decision-making body, given the fragmentation and complexity of the sector in Paraguay. 3.� Given the large number of participating agencies, it was decided to work directly with the main agencies and to use as much as possible existing units within these agencies that have experience in the execution of World Bank-financed projects, thus avoiding the creation of new, temporary units in accordance with the Paris Declaration. It was agreed with the different agencies that the recently created Water and Sewerage Services Unit under MOPC will be the overall project coordinator for the Project. A small unit within MOPC that has been in charge of implementing a World-Bank-financed roads project will act as the procurement and financial reporting unit for Component 1, in close coordination with ERSSAN and SEAM for the subcomponents related to those agencies. Component 2 will be executed by ESSAP and Component 3 by SENASA. 4.� Each implementation agency (MOPC Unit, ESSAP and SENASA) will be responsible for the financial management (FM) functions of their respective components, including budgeting; accounting; and reporting, including preparation of Interim Unaudited Financial Reports (IFRs), internal control, flow of funds, and external auditing. Each entity will be accountable for the financial management (FM) arrangements of the component under its implementation responsibility and will produce a set of interim and annual financial statements. Thus, there will be three segregated sets of interim reports and annual financial statements to be audited separately. Financial reports will be prepared by MOPC, ESSAP, and SENASA for Components

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1, 2, and 3, respectively. Additional information related to FM and procurement arrangements is provided in Annexes 7 and 8, respectively. 5.� Specific training in the use of the World Bank’s FM and procurement procedures and guidelines will be delivered to all implementing agencies. In addition, the Bank’s Department of Institutional Integrity (INT) will also provide training in the areas of “ethics and integrity” to all sector agencies, as well as training open to construction and consulting companies and other project stakeholders. In the case of the rural subcomponent, specific workshops will be targeted to include some of the juntas and Associations of Juntas. These activities are expected to take place in the period between Board approval and Loan effectiveness. FM and procurement training will also allow for increased collegiality, sharing experiences and encouraging collaboration among fiduciary staff of MOPC, ESSAP, and SENASA. Component 1: Support to the modernization of the sector—governance and institutional strengthening

6.� MOPC is the agency that manages the biggest portion of the overall Government of Paraguay (GOP) budget for works, and has wide experience and administrative capacity to undertake multilaterally financed project implementation, including the Bank-financed Road Maintenance Project. ERSSAN and SEAM are smaller agencies with weaker administrative competence and lack of experience in the implementation of World-Bank-financed projects. Given the established capacity and experience with WB-financed projects, MOPC will undertake procurement and FM responsibilities for ERSSAN/SEAM activities to be implemented under Component 1. 7.� For the implementation of the Road Maintenance Project, the Borrower created a Project Preparation and Coordination Unit (Unidad de Preparación y Gestión de Proyectos, UPGP) in September 2004 through Ministerial Order No. 523. The Unit has been staffed since the preparation of the project and has been responsible for its satisfactory implementation, since effectiveness. As in the case of the Road Maintenance Project, a clear division of responsibilities was decided, with the Water and Sewerage Services Unit (WSSU) as the main promoter of project activities, but which would use the UPGP for carrying out the fiduciary activities (FM and procurement). From the Bank’s fiduciary point of view it simplifies execution and is in itself a risk mitigation action, since this UPGP has already been evaluated and trained and is fully familiar with Bank guidelines and procedures. 8.� The WSSU in MOPC will coordinate overall program implementation, will be the main interlocutor with the Bank, and will provide overall support and guidance to other sector agencies. This includes overall project coordination, monitoring and evaluation (M&E), supervision of the implementation of the Good Governance Strategy for the sector, and the overall coordination of the communications activities. The project could finance additional procurement and FM consultants for this unit or for UPGP to deal with additional workload and to sustain project-related activities, as needed. 9.� In the case of Subcomponent 1(b) for ERSSAN, it was agreed that MOPC, supported by its Directorate of Public Credit (Dirección de Crédito Público), will undertake the FM responsibilities for this subcomponent comprising budgeting, accounting, and financial reporting,

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flow of funds, and management of the designated account, internal control, and external auditing arrangements. The UPGP will be responsible for the procurement process of all the activities to be implemented under the subcomponent. However, ERSSAN will be responsible for, among other things, drafting Terms of Reference (TORs), participating in the technical evaluation, opening of envelops, negotiations, and other procurement processes in the selection of consultants and providing technical specifications for any goods and non-consultant services to be procured for this subcomponent. A subsidiary agreement between the GOP and ERSSAN will be signed as an effectiveness condition, detailing ERSSAN responsibilities in carrying out the project and its obligations with MOPC. 10.� In the case of Subcomponent 1(c) for SEAM, it was agreed that MOPC, supported by its Directorate of Public Credit, will undertake the FM responsibilities for this subcomponent comprising budgeting, accounting, and financial reporting, flow of funds, and management of the designated account, internal control, and external auditing arrangements. The UPGP will be responsible for the procurement process of all the activities to be implemented under the subcomponent. However, the Water Resources Directorate of SEAM will be responsible for, among other things, drafting TORs, participating in the technical evaluation, opening of envelops, negotiations, and other procurement processes in the selection of consultants and providing technical specifications for any goods and nonconsultant services to be procured for this subcomponent. 11.� The WSSU in MOPC will be responsible for the overall management and implementation of the Project Monitoring and Evaluation Framework and the national information systems. This will include maintaining the databases, managing the flow of information, and producing periodic monitoring reports. It will be directly responsible for the preparation of progress reports and the results-based M&E. The National Water Supply and Sanitation Information System (SIAPS) will be operated and managed by the Water and Sanitation Unit with the support of a consulting firm during the initial period of the project. The governing unit for the system will be the Coordination Water and Sanitation Sector Committee, chaired by the WSSU. Training of Water and Sanitation Unit staff to operate and maintain these tools will be carried out. 12.� SENASA’s team and technical and social consultants hired for the project will have a key role in providing timely monitoring reports with operational data. The social team in the WSSU will be responsible for carrying out focus group discussions and participatory exercises, contracting and supervising the midterm and final surveys, and conducting the evaluation and impact evaluation reports. Bank supervision teams will provide technical assistance for the implementation of the tools and for the design and analysis of the surveys and the impact evaluation. Component 2: Urban water supply and sanitation—ESSAP

13.� The implementation agency for this component is the Sanitary Services Company of Paraguay (Empresa de Servicios Sanitarios del Paraguay, ESSAP S.A.), the National Urban Water Supply and Sewerage Utility,54 a public company created in 2002. ESSAP S.A. is

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �54 CORPOSANA was the National Water and Sanitation Utility of Paraguay until 2002, when its services where transferred to ESSAP S.A. and its assets and liabilities to the GOP.

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responsible for the provision of water and sewerage services in most urban centers of the country, with population above 10,000. ESSAP S.A. has not implemented a World-Bank or other multilaterally funded project since its creation.55 14.� ESSAP, S.A. is not part of the Paraguayan government, but a decentralized public organism with a legal personality, autonomous structure, and budget. Since ESSAP, S.A. is a company, and not an entity, it is not considered in the annual budget of the country; therefore, a subsidiary agreement will have to be signed between the central government (Ministry of Finance) and ESSAP S.A. prior to project effectiveness. However, ESSAP’s, Finance Department (FD) through its Budget Unit is responsible for preparation of the entity annual budget that is submitted to the Ministry of Finance (MOF) for approval. Execution reports for internal and external purposes are prepared periodically using spreadsheets. ESSAP is not integrated within the GOP Financial Management Information System (SIAF). As agreed with the Ministry of Finance, loan proceeds will be passed on to ESSAP S.A. on the same financial terms as they were received from the Bank. 15.� Component 2 transactions will be recorded in the ESSAP’s accounting software, where a specific set of accounts will be prepared to reflect the sources and uses of funds for the project. Given that the software does not allow recording of multicurrency transactions, spreadsheets will be used for recording movements in the Designated Account and statement-of-expenditure (SOE) control. The accrual basis of accounting will be used following the International Accounting Standards (IAS). ESSAP’s accounting software is an old system that runs on DOS and requires that different transactions be entered off-line and manually. It is envisioned that throughout the project, activities to enhance and strengthen ESSAP institutional capacities and new information technology systems will be developed and implemented, including new accounting software. 16.� ESSAP’s internal audit function is the responsibility of the Internal Audit Department (Departamento de Auditoria Interna, IAD). IAD reports to the Head of the Board of Directors. It is headed by a professional accountant, but its function is undermined by organizational limitations and a lack of well-trained human resources. In addition, there is no audit manual other than some customary procedures that are neither standardized nor in line with sound international practices. IAD staff devotes a large portion of its time to carrying out ad hoc audits requested by line departments. It is concluded that the internal audit function is weak. 17.� Measures to mitigate internal control risk comprise: (1) strengthening of the ESSAP internal audit function: the auditor general and key professional staff would attend training courses on international internal audit standards and practices; (2) internal audit departments annual planning will include: (a) review of certification of works executed under the project, (b) physical inspection of works and the assets inventory register, (c) a sample review of eligibility of expenditures, and (3) quarterly external concurrent audit reports on the eligibility of works financed by the project under Component 2. Annex 7 provides more detail on this aspect.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �55 CORPOSANA was the implementing agency for a series of IADB-financed projects and a World Bank-financed project (Asunción Sewerage) in the late 1990s.

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18.� ESSAP S.A. is expected to implement the bulk of the project through its Technical Division and its Procurement Operational Unit (Unidad Operativa de Contrataciones, UOC). ESSAP is a stated-owned enterprise that follows public procurement regulations. Though ESSAP is adequately staffed for its current level of activity, its procurement, works supervision, and contract management capacity is considered weak for the project needs. This is in part due to the fact that ESSAP has been almost inactive in recent years in terms of civil works construction. Its experience in the implementation of multilaterally financed operations is limited and its Information Technology (IT) equipment requires renewal. Annex 8 provides more details on this aspect. Before carrying out the specific investments related to sewerage works as related in Annex 4, ESSAP will obtain approval to undertake the investments prioritized from the Sewerage Master Plan by MOPC, the Ministry of Finance, and SEAM, satisfactory to the Bank. Component 3: Sustainable water and sanitation services and hygiene education for rural areas—SENASA

19.� The main implementation agency for this project is the Servicio Nacional de Saneamiento Ambiental (SENASA), the entity within the Ministry of Health in charge of WSS for cities with populations below 10,000. SENASA has the legal mandate for building rural water and sanitation systems in the country and in urban centers of less than 10,000 inhabitants, and it is currently implementing several projects financed by other donors such as the Inter-American Development Bank (IADB), MERCOSUR’s Structural Convergence Funds (FOCEM), the Japan Bank for International Cooperation (JBIC), and the European Union. SENASA has also satisfactorily implemented a series of four dedicated National Rural Water and Sanitation Projects with World Bank financing. As with previous Bank-financed projects, overall project implementation will be under the responsibility of the Unidad de Apoyo Técnico (UAT) in the Planning Directorate. Fiduciary and safeguard functions will continue to be assumed by the line units within SENASA. 20.� SENASA has a dedicated group, the Management and Finance Directorate (Dirección de Administración y Finanzas, DAF), which was responsible for the previous World-Bank-financed project FM functions. Throughout the last three years of implementation of the previous project, SENASA made significant efforts to improve its FM functions. DAF will be the Bank counterpart in FM matters and will be responsible for the accounting, financial reporting, and disbursement functions of Component 3 of the project. Budgeting, flow of funds, and internal control will be carried out by the relevant SENASA-MSPyBS areas through mainstreamed processes. 21.� SENASA: Component 3 transactions will be recorded in the GOP budget execution system (SIAF-SICO) complemented by the accounting module of its information system and spreadsheets to maintain transactions in dollars, thus allowing adequate reporting and S.A. and SOE control. The accrual basis of accounting will be used following the International Accounting Standards (IAS). Per provisions of the FML, it is subject to internal audit of the Auditor General of the Executive Branch (AGPE) and the Ministry Internal Audit Unit (Auditoría Interna Institucional, AII), which prepares annual audit plans and conducts independent audits on SENASA operations. SENASA also has a small internal audit unit with limited capacity.

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22.� In terms of procurement, SENASA has a dedicated group that is responsible for the implementation of IFIs projects, including procurement and contract management. Throughout the past years of implementation of the previous Bank projects, SENASA made significant efforts to improve its capacity, which resulted in refurbishing the obsolete office building and the implementation of new facilities in an adequate office space, the improvement of the bidding documents and procurement procedures, the building of staff capacities, and the ongoing implementation of a project management system and digitalization of files. SENASA’s procurement capacity is considered adequate.

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Annex 7: Financial Management and Disbursement Arrangements

PARAGUAY: Water and Sanitation Sector Modernization Project 1. Executive Summary and Conclusion 1.� The purpose of the Financial Management Assessment (FMA) is to determine whether the implementing entities have acceptable financial management arrangements in place that meet minimum requirements in accordance with OP.BP 10.02 and Bank specific guidelines.56 The objective of the assessment is to analyze whether the FM system ensures: (a) funds are used only for the intended purposes in an efficient and economically viable way; (b) accurate, reliable, and timely periodic financial reports are prepared; (c) entity assets are safeguarded; and (d) entities are subject to acceptable auditing arrangements.

2.� An FMA of the implementing agencies that are proposed to implement the project was performed. Conclusions of the FMA are presented in the following paragraphs. 1.1 Project background and main findings

3.� The project aims to support the modernization of the water sector in Paraguay, and as such it will comprise every entity involved in this sector, namely:

•� MOPC (Ministry of Public Works and Communications, Ministerio de Obras Públicas y Comunicaciones), which is the lead sector agency;

•� SENASA (Servicio Nacional de Saneamiento), the entity within the MOH (Ministry of Health) in charge of water and sanitation for cities with population below 10,000;

•� ESSAP (Empresa de Servicios Sanitarios del Paraguay), the water supply company; •� ERSSAN (Ente Regulador de Servicios Sanitarios), the water regulatory agency; •� SEAM (Secretaria del Ambiente), the Environment Secretariat.

4.� SENASA has a dedicated group (Dirección de Administración y Finanzas, DAF) that was responsible for the FM functions of previous World-Bank-financed projects.57 DAF will be the Bank counterpart in FM matters and will be responsible for the accounting, financial reporting, and disbursement functions of Component 3 of the project. Budgeting, flow of funds, and internal control will be carried out by the relevant SENASA-MOH areas through mainstreamed processes. Throughout the last three years of implementation of the previous project, SENASA made significant efforts to improve its FM functions. 5.� ESSAP is a state-owned enterprise that provides water services to Asunción and other cities with populations above 10,000. ESSAP FM institutional capacity is considered weak, and its limited experience in the implementation of multilaterally financed operations poses additional implementation risk. Some measures have been incorporated into the project design to address FM weaknesses and mitigate risk.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �56 FM Practices in World-Bank-financed investment operations, FM Sector Board, November 3, 2005. 57 IBRD Loans 4222 and 4223: US$20 million each. Status: closed on December 31, 2006 and June 30, 2007, respectively.

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6.� ERSAN and SEAM are small agencies that have neither administrative competence nor experience in the implementation of multilaterally financed projects. 7.� The MOPC is the agency responsible for planning and policy development; it manages the biggest portion of the GOP budget for works and has experience and administrative capacity to undertake multilaterally financed project implementation. 1.2 Proposed additional fiduciary measures to mitigate project’s High risk

•� Concurrent external financial-technical audit of the eligibility of Works contracted by ESSAP and financed by the project and of the supervision and administration of civil works contracts with quarterly audit report for the life of the project. The concurrent audit will provide assurance to the Bank that Works financed by the Loan are in line with the agreed Procurement Plan, that adequate supervision arrangement are in place prior to the commencement of each works, that works are adequately supervised and payments effected were in line with the contract awarded.

•� Improvement of ESSAP internal audit function. During the project implementation

period and as part of the institutional strengthening of ESSAP, it has been proposed that the auditor general and key professional staff attend training courses on international internal audit standards and certification to enhance the internal audit unit.

•� ESSAP and SENASA internal audit departments annual planning will include: (a) review

of certification of works executed under the project, (b) physical inspection of works and assets inventory register, and (c) sample review of eligibility of expenditures.

•� Given its existing FM capacity and experience in the implementation of World Bank-

financed projects,58 it was agreed with the GOP that the MOPC through the Dirección de Crédito Publico will undertake the FM responsibilities for activities that will support the institutional strengthening of ERSAN and SEAM under Component 1.

•� Capacity-building activities of ESSAP financial and administrative functions. For

sustainability purposes, the project will provide support to strengthen the Financial and Administrative functions of ESSAP (Gerencia Financiera), including hiring of extra FM staff/consultants if deemed advisable to deal with the additional workload and sustain project-related activities.

•� Capacity-building activities through continuous support on Bank FM procedures and

accountability along with governance and transparency workshops with project stakeholders to be delivered during the Project implementation period. FM training will also allow increasing partnership, sharing experiences and encouraging collaboration among FM staff of MOPC, ESSAP, and SENASA.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �58 IBRD Loan 7406: US$74 million. Road Maintenance Project (P082026). Effectiveness date: 1/03/2008.

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1.3 Conclusion 8.� The FMA conclusion is that the FM arrangements in place, along with the additional mitigating measures that contribute to an enhanced fiduciary framework for the project, meet minimum Bank requirements. The enhanced fiduciary framework and the Good Governance Strategy (Annex 11) is intended to adequately deal with and mitigate project-identified FM risks. Control risk after the implementation of the proposed mitigation measures is considered moderate. The new Government of Paraguay, which took office in August 2008, has designed a program aimed to increase transparency, improve governance, and reduce corruption. However, the lack of law enforcement, absence of transparency, and weak attitude toward control, as identified in the Country Financial Accountability Assessment (CFAA) are still relevant in the country’s context and materially affect the overall project risk. Therefore, residual FM risk remains High. The evaluation of the impact of implementation and effectiveness of the enhanced fiduciary measures will be carried out during FM supervision, and project FM risk will be reassessed accordingly. 2. Country Issues 9.� The Paraguay CFAA59 and the Country Assistance Strategy (CAS),60 disclose the problems of governance and institutional weaknesses in Paraguay. The CAS states that Paraguay is renowned for corruption and contraband. Perceptions of corruption have increased during the past decade and Transparency International consistently ranks Paraguay among the 10 most corrupt nations. 10.� Corruption is not the only institutional weakness in Paraguay. The basic management systems of the GOP are also weak or nonexistent. Within the central administration, the personnel management system is in an embryonic stage and is only now pulling together a master roster of all civil servants. A much larger task is to professionalize the civil service, including competitive entrance exams, career streaming, and training. 11.� The CFAA lists the following as the most important weaknesses and shortcomings that threaten financial accountability in Paraguay:

•� Weak-control environment; •� Numerous and serious exceptions in the application of the financial administration law

and regulations; •� Weak internal audit and control, especially in revenue collection agencies; •� Disproportionate share of time and resources that the Auditor General devotes to ad hoc

review requests; •� Congressional introduction of budget increases without provision for corresponding

financing; •� Trade liabilities incurred by execution agencies, but unrecorded if they exceed the

authorized cash program;

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �59 Paraguay Country Financial Accountability Assessment, Report No. 30084-PY, August 26, 2004. 60 Paraguay Country Assistance Strategy, Report No. 27341-PY, November 26, 2003.

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•� Many exceptions to Generally Accepted Accounting Standards, and financial statements not prepared in compliance with the GOP’s own regulations.

12.� The CFAA concludes that both inherent and control risks are high and states that the advances made in the modernization of Paraguay’s Public Financial Management System cannot compensate for the effects of a deficient control environment. 13.� The Bank’s country portfolio review of October 2003 also identified the main issues affecting portfolio implementation, including: (a) high staff turnover in the project implementation units, (b) lack of timely and adequate availability of counterpart funds, (c) cumbersome procedures for the flow of funds to the projects, (d) delays in effectiveness and project start-up, and (d) limited disbursement capacity and limited knowledge of Bank procedures. 14.� More recently, in April 2008, the Paraguay Integrated Fiduciary Assessment61 (IFA), prepared jointly by the Bank, IADB, and the European Union, identified the following: a.� Effectiveness of the control system is Paraguay’s biggest FM and Procurement challenge. First, shortcomings in the internal control framework and procedures weaken the performance in most expenditure categories related to salaries and goods and services. Second, internal audit is undermined by lack of trained staff, harmonized norms and procedures, and institutional independence. Third, external audit still experiences weaknesses such as the limited effectiveness of follow-up on audit recommendations. Fourth, the control environment is weak due to the lack of accountability and the high level of discretion given to senior management by insufficient and inadequate human resources policies and work practices. This is compounded by the lack of internal control standards and procedures for the public sector and in some cases by their disconnection from the Financial Management Integrated Systems (SIAF). With respect to foreign-financed investments, the weaknesses noted above are to some extent mitigated by an ad hoc ring-fenced control framework required by International Financial Institutions (IFIs) and donors operating in the country. 15.� Actions to address these issues have been agreed at the portfolio level and are in progress, and these issues have been taken into account in the design of this Project. In addition, as part of Project implementation, specific training on FM operational policies and procedures will be provided to relevant FM staff of the implementing agencies, but will be mainly focused on ESSAP. 3. Risk Assessment and Mitigation 16.� The FM risk assessment process aims to identify risks and incorporate appropriate risk mitigation measures into project design in order to enable the Bank to make decisions on the appropriate level of assessment and supervision intensity and to allocate FM resources in a manner consistent with assessed risks.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �61 Paraguay Integrated Fiduciary Assessment, Report No. 44007, April 2008.

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17.� Because of the existence of corrupt practices and administrative lapses reported by the control entities and independent surveys, it can only be concluded that the attitude toward control is weak and the country inherent risk is high. The mitigation measures are designed to address the identified risks. 18.� FM inherent risk at the Entity level is considered substantial in MOPC based on its current FM performance of another WB-funded project, and also in SENASA because of its satisfactory implementation of the actions agreed to with the Bank for the previous project (Loans 4222 and 4223). On the other hand, Entity risk level in ESSAP and overall Project inherent risk is assessed as High. Control risk after the implementation of the proposed mitigation measures is considered Moderate. However, the overall FM risk is maintained High due to country considerations. 19.� Since the overall FM risk remains high, the package will be subject to the FM Regional Manager review.

Table A7.1. Financial Management Risks Risk Risk after

Mitigating Measures

Risk Mitigating Measures Incorporated into Project Design

Condition

Inherent Risk High Country Level Lack of law enforcement. Absence of transparency. Weak attitude toward control.

High - Integrated Fiduciary Assessment (IFA) and related activities.

Entity SENASA/MOPC Key FM staff has experience in WB-financed operations. Cumbersome payment procedures.

Substantial - Improved Governance Framework for project implementation.

Entity ESSAP Weak FM institutional capacity and partial knowledge of World Bank procedures.

High -� Strengthen ESSAP FM capacities and reinforce staff in the Finance Department as part of project implementation.

Project Level Weak FM institutional capacity in ESSAP, and ERSSAN and SEAM lack of knowledge of World Bank procedures.

High - MOPC in charge of FM aspects of ERSSAN/SEAM activities under Component 1. - ESSAP. Quarterly concurrent audit report on eligibility of works financed by the project and adequacy of works supervision and contract management. - Planned incorporation of measures of the future Paraguay Financial Action Plan into the project fiduciary framework.

Legal clause

Control Risk Moderate Budgeting Risk of state capture and political abuse.

Moderate - MOPC/SENASA/ESSAP. Specific budget lines in Ministry budgets to monitor allocations and cash plan allotments.

Dated legal clause

Accounting Moderate SENASA.

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- Periodic reconciliation between project accounting and Country FM system (SICO) described in Operational Manual. ESSAP. - Strengthen Finance Department capacities (training and equipment) and reinforce staffs. - Capacity-building activities for FD, including new accounting software, will be part of project implementation.

Internal Control Insufficient capacity of the line departments (ESSAP) and Internal Audit functions (ESSAP and SENASA).

Moderate - ESSAP. Quarterly concurrent audit report on eligibility of works financed by the project and adequacy of works supervision and contract management. - Capacity building for Internal Audit Unit of ESSAP will be part of project implementation, and monitored by FM supervision. - IA planning will include: (a) review of certification of works, (b) physical inspection of works and review of asset inventory register.

Legal clause

Funds Flow Complex institutional arrangements involving several implementing entities: ERSSAN, SENASA, SEAM, and ESSAP pose some concerns.

Substantial - MOPC will undertake FM functions for activities to be implemented by ERSSAN/SEAM. - Monthly DA reconciliations between project records and bank statements (documented). - Each agency will operate a separate DA to manage funds of its Project component. - Specific training on WB procedures to be delivered between Board approval and Loan signing.

Financial Reporting

Moderate SENASA. - Use of country system (SICO) complemented by spreadsheets and FM module of SENASA software. ESSAP. - New accounting and reporting system to be developed during project implementation.

Auditing Timely audited financial statements track record in Paraguay.

Moderate - External audit will be carried out following International Auditing Standards. - Concurrent audit TOR acceptable to the Bank to be included in the Operational Manual.

Legal clause

Overall Residual Risk rating High

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4. Strengths and Weaknesses 20.� Strengths: FM line staff in MOPC and SENASA is widely experienced in implementation of World-Bank-funded operations and could collaborate with ESSAP by sharing experiences with Bank procedures. 21.� Weaknesses: Residual risks are mostly associated with country inherent risk. ESSAP partial lack of expertise in Bank-financed operations will be addressed by specific operational training and Bank supervision. 5. Implementing Entities 22.� The Project involves four GOP entities: SENASA, ESSAP, SEAM, and ERSSAN. To avoid additional complexity and help mitigate risk, it was agreed with ERSSAN and SEAM that MOPC through its Directorate of Public Credit (Dirección de Crédito Público) will undertake the FM responsibilities for project activities under Component 1, comprising budgeting, accounting, and financial reporting; flow of funds and management of the designated account; and internal control and external auditing arrangements. 23.� Each agency will be responsible for the FM functions of the component that is to be implemented by the same, comprising budgeting, accounting, and reporting, including preparation of Interim Unaudited Financial Reports (IFRs), internal control, flow of funds, and external auditing. Each entity will be accountable for the FM arrangements of the component under its implementation responsibility and will produce a set of interim and annual financial statements. Thus, there will be three segregated sets of interim reports and annual financial statements to be audited separately. Financial reports will be prepared by MOPC, ESSAP, and SENASA for Components 1, 2, and 3, respectively. 6. Budgeting 24.� In MOPC and SENASA the annual budget is prepared by the Accounting Department and the Administration and Finance Directorate, respectively, according to the National Budget format. The annual project budget is submitted to the Ministries for approval and consolidation in their annual budgets. The GOP Financial Management Information System (FMIS) (SIAF) will include specific lines for the project budget in order to keep track of the corresponding expenditures incurred during project implementation. 25.� In ESSAP, the Finance Department (FD), through the Budget Unit, is responsible for preparation of the entity annual budget that is submitted to the Ministry of Finance (MOF) for approval. Execution reports for internal and external purposes are prepared periodically using spreadsheets. ESSAP is not integrated within the GOP FMIS (SIAF). 7. Accounting and Financial Reporting 26.� MOPC will keep the accounting records for activities of Component 1. Transactions would be recorded in the Project Management Information System (MIS) and Government budget system (SIAF) as well, which would allow adequate reporting and SA and SOE control.

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27.� SENASA: Component 3 transactions will be recorded in the GOP budget execution system (SIAF-SICO) complemented by the accounting module of its information system and spreadsheets to maintain transactions in dollars, thus allowing adequate reporting and SA and SOE control. 28.� ESSAP: Component 2 transactions will be recorded in the entity accounting software, where a specific set of accounts will be prepared to reflect the sources and uses of funds for the project. Given that the software does not allow recording of multicurrency transactions, spreadsheets will be used for recording movements in the Designated Account and SOE control. The accounting software of ESSAP is an old system that runs on DOS, and requires that different transactions be entered off-line and manually. It is envisioned that throughout the project, activities to enhance and strengthen ESSAP institutional capacities as well as new information technology systems will be developed and implemented, including new accounting software. 29.� All the entities will use cash basis accounting to maintain the Project accounting records for the three components of the Project. 30.� Draft formats of the annual financial statements will be prepared by each agency, and they will be part of the Operational Manual. In addition, MOPC, ESSAP, and SENASA will also prepare semiannual Interim Financial Reports (IFRs) for monitoring and evaluation purposes that will be part of the Project progress reports, as follows: (a) A financial section stating for the period and cumulatively (project life) cash receipts by

sources and applications by main expenditures classification, and beginning and ending cash balances; accompanied by the Designated Accounts (DA) reconciliations and bank statements for the DA and operative accounts in local currency; and a statement of accumulated investments by project activity with a comparison between actual and planned expenditures.

(b) An output monitoring section that: (i) sets forth physical progress in project’s implementation, and (ii) explains variances between the actual and previously forecast implementation target.

31.� IFR review will be conducted by the assigned FM specialist during project supervision missions. 7. Internal Control and Internal Auditing 32.� As mandated by Paraguay’s Financial Management Law (FML) No. 1535-99, MOPC is subject to internal audit by the Auditor General of the Executive Branch (Auditoria General del Poder Ejecutivo, AGPE) and the Internal Audit Department (Departamento de Auditoría Interna), which plans yearly audits and conducts independent audits on MOPC operations, to verify obligations and payments and satisfactory compliance by suppliers with contract terms. 33.� SENASA is a Directorate within the Ministry of Health (MOH), and per provisions of the FML, is subject to internal audit by the AGPE and the Ministry Internal Audit Unit (Auditoría

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Interna Institucional, AII), which prepares annual audit plans and conducts independent audits on SENASA operations. SENASA also has a small internal audit unit with limited capacity. 34.� ESSAP is the national urban water utility62 created in 2002. The internal audit function is the responsibility of the Internal Audit Department (Departamento de Auditoria Interna, IAD). IAD reports to the Head of the Board of Directors. It is headed by a professional accountant but its function is undermined by organizational limitations and lack of well-trained human resources. In addition, there is no audit manual other than some customary procedures, which are not standardized or in line with sound international practices. IAD staff devotes a large portion of its time to carrying out ad hoc audits requested by line departments. It is concluded that the internal audit function is weak. 35.� Measures to mitigate internal control risk comprise: (a) strengthening of ESSAP internal audit function: auditor general and key professional staff would attend training courses on international internal audit standards and practices; (b) internal audit departments annual planning will include: (i) review of certification of works executed under the project, (ii) physical inspection of works and assets inventory register, (iii) sample review of eligibility of expenditures, and (c) quarterly external concurrent audit reports on the eligibility of Works financed by the project (ESSAP only). 8. Flow of Funds and Disbursements Arrangements 36.� Uses of Funds. All the project uses will be supported by documentary evidence for the related works, goods, and services procured in line with the Bank guidelines and procurement thresholds for the project. All consolidated SOEs supporting documentation will be maintained by MOPC, ESSAP, and SENASA for Components 1, 2, and 3 in that order for post-review and audit purposes for up to one year after the final withdrawal from the loan account. 37.� Designated Accounts. To facilitate project implementation, each of the agencies will operate a segregate Designated Account (DA) in U.S. dollars in the Central Bank of Paraguay (BCP) to be administrated by the Ministry of Finance (MOF). Funds will flow from the Loan account to a BCP account since this is mandatory for projects in Paraguay. Funds from BCP will be transferred to a MOPC, SENASA, or ESSAP general account in local currency as expenses are incurred through mainstreaming budget execution processes after a Request for Transfer (STR) is submitted to the MOF for approval. Funds deposited into the DAs as advances will follow the Bank’s disbursement operating policies and procedures described in the Disbursement Letter. Withdrawals from the DA will be made solely for payments of eligible expenditures incurred. 38.� The recommended ceilings for advances to the DAs that are deemed sufficient to cover the highest point of disbursements period for the project are as follows:

MOPC: US$800,000

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �62 CORPOSANA was the National Water and Sanitation Utility of Paraguay until 2002, when its services where transferred to ESSAP S.A. and its assets and liabilities to the GOP.

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ESSAP: US$2 million until disbursements reach US$5,000,000, and US$4 million thereafter SENASA: US$2 million.

Figure A7.1. describes the proposed flow of funds:

Figure A7.1. Flow of Funds

Loan Funds

World Bank

Ministry of Finance (MOF)

ESSAP Local Funds MH/MOPC 39.� Disbursement Methods. Loan proceeds will be withdrawn by MOPC, ESSAP, and SENASA using the advance method with supporting documentation based on SOEs. Direct payments to suppliers from the Loan Account may be used as well. 40.� The project incorporates the Bank’s policy on eligibility for Bank financing63 since the financing parameters for Paraguay have been approved by the Bank Regional Vice-Presidency. 41.� Retroactive financing. The Project will be eligible for retroactive reimbursement of eligible expenditures incurred in accordance with the Bank Procurement Guidelines up to 12 months prior to the date of the Loan Agreement. These expenditures should not exceed 20 percent of the loan amount.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �63 See OP 6.00, Bank Financing. Country’s financing parameters for Paraguay were approved by the Regional Vice President on May 31, 2005.

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through STR

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42.� MOPC, SENASA, and ESSAP will request access to Bank’s Client Connection web page to obtain the Withdrawal Application Form from the web and to periodically perform the reconciliation between its bank account and resources received from the different sources. Loan proceeds would be disbursed against the expenditure categories presented in Table A7.2.

Table A7.2. Disbursements per Expenditure Category Category Amount of the Loan

Allocated

(expressed in USD)

Percentage of Expenditures to be financed

(inclusive of Taxes)

(1) Goods, consultants’ services, audits, Non-Consultant Services, Training and/or Operating Costs under Part 1 (a), (b), (d) and (e) of the Project

2,940,000.-

100 %

(2) Goods, consultants’ services, Non-Consultant Services, Training and/or Operating Costs under Part 1 (c) of the Project

1,000,000.-

100 %

(3) Goods and consultants’ services (in respect of consulting firms) Part 2 (a), (b), (c), (e) and (d) of the Project

2,000,000.- 40%

(4) Consultants’ services (in respect of individual consultants’), audits, Non-Consultant Services, Training and/or Operating Costs Part 2 (a), (b), (c), (d) and (f) of the Project

2,000,000.- 100 %

(5) Works under Part 2 (b) of the Project

10,000,000.- 80%

(6) Works under Part 2 (e) of the Project

36,400,000.- 80%

(7) Goods and consultants’ services (in respect of consulting firms) under Part 3 (a), and (d) of the Project

1,500,000.-

40%

(8) Works, goods, consultants’ services and/or training under Subprojects

7,600,000.- 80%

(9) Consultants’ services (in respect of Individual consultants), audits, Non-Consultant Services, Training

400,000.-

100%

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and/or Operating Costs under Part 3 (a), (d) and (e) of the Project

(10) Front-end Fee 160,000.- Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Conditions

TOTAL AMOUNT 64,000,000

9. External Audit Arrangements 43.� Annual Financial Audit. The three sets of annual financial statements will be audited by an acceptable auditor, following Terms of Reference (TORs) prepared in line with the Bank’s guidelines and conducted in accordance with auditing standards acceptable to the Bank as well. The audit will cover all funding and expenditures reported in Project financial statements. Audit reports will be due within six months following the end of the reported year. The standard covered period is the calendar year. ESSAP entity’s annual financial statements will also be required to be submitted to the Bank. 44. � ESSAP – Concurrent Technical-Financial Audit. The audit Terms of Reference for ESSAP will also include an opinion on the eligibility of Works to be contracted by ESSAP and financed by the project, on the adequacy of supervision arrangements and practices and on the administration of civil works contracts and payments with quarterly audit reports for the life of the project. The concurrent audit will provide assurance to the Bank that Works under financed by the Bank were in line with the approved Procurement Plan, and that payments made were in line with the contract awarded. Table A7.3 identifies the audit reports that will be required to be submitted.

Table A7.3. Audit Reports Schedule Audit Report Due Date 1) Project Specific Financial Statements June 30 2) Special Opinions June 30 SOE June 30 Designated Account June 30 3) ESSAP financial statements as continuous revenue entity

June 30

4) ESSAP Technical-Financial Concurrent Audit 45 days after the end of each calendar quarter

10. Action Plan 45.� Financial management actions to be completed before Board approval are presented in the Table A7.4. Activities that are expected to be completed throughout the project implementation period are also detailed in the risk section above.

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Table A7.4. Financial Management Arrangements

11. Supervision Plan 46.� Supervision scope will be adjusted by the assigned FM specialist according to the fiduciary performance and updated risk. Table A7.5 shows the initial FM supervision objectives, tasks, and timing planned for this project.

Table A7.5. Supervision Plan Type Timing Mechanism Objective Visit General

Supervision: every four months.

Integrating supervision missions at least one time each semester. Others separately. At least one of the supervision visits will be done jointly with Procurement.

Supervise Designated Account Reconciliation. Use of funds. Review controls. Update Risk Follow-up on External Auditors issues. SOE Review if needed. Review staffing. Review IFR information consistency. Raise issues disclosed in IFR In addition to usual scope of FM supervision, FM visits will be aimed at evaluating the implementation/effectiveness of the enhanced fiduciary framework.

Action Responsible Entity

Estimated Completion Date

Propose staffing and project FM workflow organization satisfactory to the Bank.

ESSAP Completed

Draft Project Operational Manual (OM) acceptable to the Bank that will include: Chart of Accounts, draft format of Interim and Annual Financial Reports, and procedures.

MOPC-ESSAP-SENASA

An advanced draft version of the OM has been submitted and reviewed by negotiations. FS and IFR formats will be incorporated later.

Annual financial audit and quarterly concurrent audit (ESSAP only) TORs acceptable to the Bank (to be included in OM).

MOPC-ESSAP-SENASA

Advanced drafts of the FM Sections of the OM including TORs for the external audit of ESSAP were submitted for review and found acceptable

Bank FM training to project FM staff. World Bank-FM During the period between Board approval and loan signing.

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Concurrent Audit Review

Quarterly Over the concurrent technical audit report of Works.

Review Audit Report. Raise issues disclosed in Audit Report.

Audit Review

Yearly Over the Audit Reports submitted to the Bank.

Review Audit Report. Raise issues disclosed in Audit Report.

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Annex 8: Procurement

PARAGUAY: Water and Sanitation Sector Modernization Project

A. Introduction

1.� Procurement for the proposed project will be carried out in accordance with: (a) the World Bank’s “Guidelines: Procurement under IBRD Grants and IDA Credits,” and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers,” both published in May 2004 and revised in October 2006; (b) the “Guidelines On Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits,” dated October 2006; (c) the provisions stipulated in the Loan Agreement; and (d) the stipulations of the Operational Manual. The general description of various items under different expenditure categories are described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Implementing Agencies and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2.� Procurement of Works: Works procured under this project would include rehabilitation and construction of water and sewerage installations, including pipelines and treatment plants, both in rural and urban areas. Minimum subsidy schemes will be used for the provision of water services in rural areas. International Competitive Bidding (ICB) processes will be followed for all contracts estimated to cost US$3,000,000 or above. Packages amounting to under US$3,000,000 in the aggregate may be procured using National Competitive Bidding (NCB) processes. Shopping procedures may be used for contracts amounting up to US$20,000. The section below on “Country Procurement Assessment” presents the rationale for the proposed thresholds. Bank Standard Bidding Documents (SBDs) for ICB and SBD and Requests for Quotations agreed with or satisfactory to the Bank will be used for NCB and Shopping procedures, respectively. 3.� Procurement of Goods: Goods procured under this project would include information systems, vehicles, office and laboratory equipment, and equipment for water and sewerage installations (that is, water meters, pumps, and so forth). ICB processes will be followed for all contracts estimated to cost US$250,000 or above. Packages amounting to under US$250,000 in the aggregate may be procured using NCB processes. Shopping procedures may be used for contracts amounting up to US$20,000. The section below on “Country Procurement Assessment” presents the rationale for the proposed thresholds. Bank SBD for ICB and SBD and Requests for Quotations agreed with or satisfactory to the Bank be used for NCB and Shopping procedures, respectively. 4.� Procurement of non-consulting services: Non-consulting services under the project would include the implementation of a communications campaign. ICB processes will be followed for all contracts estimated to cost US$250,000 or above. Packages amounting to under US$250,000 in the aggregate may be procured using NCB. Shopping procedures may be used for contracts amounting up to US$20,000. The section below on “Country Procurement Assessment” presents the rationale for the proposed thresholds. Bank SBD for ICB and SBD and Requests for

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Quotations agreed with or satisfactory to the Bank be used for NCB and Shopping procedures, respectively. 5.� Selection of Consultants: Consulting Services to be financed under the project would include training, technical assistance (TA) on management techniques (ESSAP restructuring, ERSSAN strengthening, and SENASA modernization), experts for the design of a new commercial system for ESSAP, design of communication campaigns, concurrent technical and financial audits, engineering services (civil works design and supervision), and social promotion. These services would be rendered either by individual consultants or by consulting firms. Short-lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Consulting Firms would be selected following Quality- and Cost-based Selection (QCBS), Least-Cost Selection (LCS), or Fixed Budget, while individuals would be selected through the comparison of three CVs. 6.� Training: Training would include expenditures (other than those for consultants’ services) incurred by the Borrower to finance logistics for workshops, meetings, and seminars, and reasonable transportation costs and per diem of trainees and trainers (if applicable), training registration fees, and rental of training facilities and equipment. The procurement would be done using NCB and Shopping procedures as discussed below. Direct Contracting (paragraph 3.6 of the Procurement Guidelines) may be used for: (a) the payment of registration fees, up to a ceiling amount to be established annually in the Procurement Plan, and (b) individual transactions amounting to under US$200, up to a ceiling amount to be included annually in the Procurement Plan and to the extent that local procedures known as “Revolving Fund” (Fondo Rotatorio) be followed. B. Assessment of the agencies’ capacity to implement procurement

7.� A detailed assessment of the agencies’ capacity to implement procurement was shared with government authorities by means of the Aide Memoire of the Bank mission to Asunción held December 15–19, 2008. A summary follows: 8.� Organization and Staffing: The project is proposed to be implemented by four Implementing Agencies, as follows: •� ESSAP (Empresa de Servicios Sanitarios del Paraguay), the water supply company. ESSAP

is expected to implement the bulk of the project through its Technical Division and its Procurement Operational Unit (Unidad Operativa de Contrataciones, UOC). ESSAP is a stated-owned enterprise that follows public procurement regulations. It provides water services to Asunción and other cities with a population above 10,000. Though ESSAP is adequately staffed for its current level of activity, its procurement, works supervision, and contract management capacity is considered weak for the project needs. This is in part due to the fact that ESSAP has been almost inactive in recent years in terms of civil works construction. Its experience in the implementation of multilaterally financed operations is limited and its IT equipment requires renewal.

•� SENASA (Servicio Nacional de Saneamiento Ambiental), the entity within the Ministry of Health in charge of water and sanitation for cities with population below 10,000. In addition

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to its UOC, SENASA has a dedicated group that is responsible for the implementation of International Financial Institution (IFI) projects, including procurement and contract management. Throughout the past years of implementation of previous Bank projects, SENASA made significant efforts to improve its capacity, which resulted in refurbishing the obsolete office building and the implementation of new facilities in an adequate office space, the improvement of the bidding documents and procurement procedures, the building of staff capacities and the ongoing implementation of a project management system and digitalization of files. SENASA’s procurement capacity is considered adequate.

•� MOPC (Ministry of Public Works and Communications, Ministerio de Obras Públicas y Comunicaciones). MOPC, through the Unidad de Preparación y Gestión del Proyecto (UPGP), the unit in charge of the preparation and implementation of the PA–7406 Road Maintenance Project, and its UOC, will implement MOPC’s institutional strengthening subcomponent and carry out procurement for SEAM (Secretaría del Ambiente, the Environmental Secretariat) and ERSSAN (Ente Regulador de Servicios Sanitarios, the water regulatory agency). Both SEAM and ERSSAN will keep technical responsibility for the implementation of their respective subcomponents and will therefore prepare Terms of Reference, Technical Specifications, participate in bid and proposal evaluation, and supervise contracts. MOPC’s procurement capacity is assessed as modest and IT equipment requires renewal.

9.� Country Procurement Assessment: A Country Procurement Assessment Report (CPAR) prepared under the leadership of the Inter-American Development Bank (IADB) was conducted in 2006 based on the indicators developed by the Organization for Economic Co-operation and Development (OECD)/Development Assistance Committee (DAC) Issue # 4.64 It assesses the capacity of the public sector procurement system based on 12 baseline indicators with their respective compliance/performance indicators, organized around four pillars: (I) legal and regulatory framework, (II) institutional framework and management capacity, (III) procurement and market practices, and (IV) procurement integrity and transparency. The conclusion was that pillars (I) and (II) require improvement, while pillars (III) and (IV) require substantial improvement. On the other side, the country risk is High due to weaknesses in the control environment and in market practices (that is, indications of collusion in some sectors). 10.� The above notwithstanding, the high scores obtained for pillar (a) make possible the employment of amended local law methods for procurement below the ICB threshold. In effect, the Paraguayan legislation describes two alternatives for NCB and one for Shopping, which are acceptable to the Bank if: (a) they are slightly amended to permit that foreign companies not registered in the Country be allowed to participate in NCB; and (b) terms to submit bids and quotations be extended to make them consistent with Bank recommendations, as displayed in Table A8.1. Local-law thresholds for NCB and Shopping are lower than the maximum accepted by the Bank, as also illustrated in the table. Acceptance of these thresholds will bring benefits in terms of: (a) facilitating project implementation through harmonization with local procedures, and (b) taking advantage of increased transparency and competition resulting from lower NCB thresholds.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �� � � The “Methodology for Assessment of National Procurement Systems (version 4)” was published in July 2006 under the auspices of the joint World Bank / OECD Development Assistance Committee (DAC) Procurement Round Table initiative. �

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Table A8.1. Procurement Methods

Methods Applicable to the Project (using amended local law procedures)

Maximum Thresholds for Paraguay

Method Threshold (US$)

Amended Term (days)

Method Threshold (US$)

3,000,000 (Works)

3,000,000 (Works)

ICB

250,000 (Goods)

45 ICB

250,000 (Goods)

NCBa 100,000 30 250,000 (Works)

Shortened NCBb 20,000 20

NCB

50,000 (Goods) Shoppingc N/A 10 Shopping 20,000

a. Licitación Pública Nacional: Local NCB procedures comply with paragraphs 3.3 and 3.4 of the Procurement Guidelines, with an exception made of the requirements for foreign bidders to be registered in the country before submitting bids. b. Licitación por Concurso de Ofertas is an NCB process with reduced term to submit bids. c. Contratación Directa is a request for quotations that is advertised through the SICP (the country procurement portal). Three quotations are required before award. Contratación Directa complies with paragraph 3.5 of the Procurement Guidelines. d. Amounts above which the employment of the method is mandatory.

11.� Integrated Fiduciary Assessment (IFA): The joint FM-PR assessment carried out in 2008 confirmed the limited ability of the Government of Paraguay to execute budgeted investments. This resulted in the systematic underexecution of the budget, which has been on the order of 40 percent for the investment budget during 2004–06. The IFA established that there is a rigid relationship between the Annual Contracting Plans (Planes Anuales de Contratación, PACs) and the budget, and adjustments require slow procedures.65 Moreover, according to several agencies implementing Bank projects in the country, procedures for confirming budget availability66 are cumbersome and lengthy. Also, although it is permitted, there is little delegation of authority for contract processing, which usually generates delays. To address this problem, the Bank is launching a study at MOPC (in the framework of the Road Maintenance Project) to elaborate a diagnosis of the processes that link procurement and budget management, propose streamlined procedures, and draft a procurement-budget manual and present it to MOPC authorities. The Bank and MOPC will share the outcome of this exercise with ESSAP and SENASA, and a course of action for streamlining procurement-budget procedures within the project will be agreed upon by the parties after discussions with the National Procurement Directorate. 12.� Portfolio issues: Recent experience with Bank projects in Paraguay has suggested that PIU staff and even management have problems in identifying some types of wrongdoing (that is, fraud) and that they do not have a clear understanding on how to proceed when facing evidence of such behavior. 13.� Corrective Measures: The corrective measures that have been agreed are:

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �65 Reprogramación del PAC. 66 Budget availability is confirmed through the issuance of the Código de Disponibilidad Presupuestaria (CDP).

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(a) � All implementing agencies will employ the Country Procurement Portal (Sistema de Información de Contrataciones Públicas, SICP) and the Sistema de Ejecución de Planes de Adquisiciones (SEPA) for all project activities.

(b) � The Loan Agreement will include the Special Procurement Provisions listed in Section F and the Covenants listed in Section G.

(c) � ESSAP will hire: (i) an experienced engineer or architect to support the UOC; (ii) individual consultants to help supervise the construction of works; and (iii) a concurrent, technical audit to control construction activities, including the certification of the adequacy of the supervision arrangements prior to the commencement of each Works and the audit of the eligibility of said Works (that is, all of them are in line with the approved Procurement Plan), and the audit of contract administration and construction supervision activities.

(d) � At least one procurement staff from each implementing agency and from its UOC will attend basic procurement training to be delivered by the Bank either in Paraguay or in a neighboring country during the first year of project implementation.

(e) � The need to streamline procurement processing will be assessed after the first year of project implementation. For that purpose, the implementing agencies will keep databases with detailed information on steps taken for processing actual procurement.

(f) � Project high-level staff will attend an “Ethics and Integrity” course to be delivered by the World Bank Department of Institutional Integrity (INT) staff in Paraguay during the first year of project implementation.

14.� Procurement Risk: Despite the comprehensive set of corrective measures proposed, the overall project risk for procurement remains high, which is the result of the risky country procurement environment, mainly due to: (a) the weaknesses of control institutions, (b) the lack of uniform ethics standards and established procedures to address wrongdoing, and (c) the lack of competitiveness of the market. The fact that most of the procurement would be done by ESSAP, the capacity of which was assessed as weak, has also been weighted at the time of proposing said level of risk. C. Procurement Plan

15.� The Borrower, at Negotiations, developed a Procurement Plan for project implementation that provides the basis for the procurement methods (the initial Procurement Plan). The initial Procurement Plan was agreed between the Borrower and the Project Team on February 6, 2009 and will be available at the Procurement Plan Evaluation System (SEPA) www.iniciativasepa.org within 30 days of Loan Agreement signature. Moreover, updated Procurement Plans along with information on actual procurement execution will be disclosed to the public and civil society through the SEPA, of which information concerning procurement progress will be updated on a monthly basis by the implementing agencies. In addition, a Good Governance Strategy with specific measures has been elaborated for the Project (Annex 11). D. Frequency of Procurement Supervision

16.� In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agencies has recommended biannual supervision missions to visit the field to carry out Procurement Post Reviews (PPR) and to recommend procurement

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Interim Strategy Report (ISR) ratings. 1:5 contracts will by post-reviewed by the Bank. Based on the finding of the PPRs and the proposed ratings, the Bank may determine the revision of the prior review requirements stated in Section G, below. E. Special Procurement Provisions

(a) � All procurement shall be done using standard bidding documents, standard requests for proposals, model bid evaluation forms, model proposal evaluation forms, and contract forms previously agreed with the Bank.

(b) � Foreign contractors, service providers, consultants, and suppliers shall not be required as a condition for submitting bids or proposals to: (a) register, or (b) establish residence in Paraguay, or (c) enter into association with other national bidders, or (d) submit legalized documentation.

(c) � Minimum terms for submitting bids and quotations shall be the following: 30 days for NCB processes amounting $100,000 and above, 20 days for NCB processes amounting $20,000 and above, and 10 days for Shopping procedures.

(d) � The provisos of article 40 of Law Nº 2051 shall not apply to Project procurement. (e) � The Implementing Agencies: (i) will feed the SEPA within 30 days of Loan Agreement

signature with the information contained in the initial Procurement Plan; (ii) will update the Procurement Plan at least biannually or as required to reflect the actual project implementation needs and progress, and will feed the SEPA with the information contained in the said updated Procurement Plan immediately thereafter; and (iii) will feed the SEPA with information on actual procurement progress on a monthly basis.

(f) � Payments in up to three foreign currencies shall be made to contractors, suppliers, and consultants, having required so in their bids or proposals through bank transfers to the suppliers’ or consultants’ accounts abroad.

F. Procurement-related Covenants

(a) � To disseminate project implementation requirements and procedures, the Implementing Agencies will implement the project following the stipulations of an Operational Manual (OM) acceptable to the Bank. The OM will include, among other things, the project’s institutional arrangements and operational, accounting, procurement, and disbursement procedures. The OM should be approved by the Bank prior to launching the first procurement process.

(b) � ESSAP will hire an engineer or architect, Procurement Expert, acceptable to the Bank. The hiring of this professional shall take place prior to launching the first procurement process.

(c) � ESSAP will contract a concurrent audit, both for administrative and physical control, under TORs satisfactory to the Bank. The hiring of the concurrent audit firm shall take place prior to the signature of the first civil works contract.

(d) � The three implementing agencies will operate a digital files system to store both the documentation related to the procurement process and to contract management (guarantees, payment certificates, invoices, receipts, and so forth). Digital filing systems should be operating prior to one year after loan effectiveness.

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(e) � The three implementing agencies will operate and maintain a web page to disseminate their most significant project information.67 These web pages should be in place within one year after loan effectiveness.

(f) � The three implementing agencies will operate an integrated project management system acceptable to the Bank, including internal administrative steps tracking project progress monitoring and consultant performance evaluations.

G. Details of the Procurement Arrangements Involving International Competition

1. Works, Goods, and Non-consulting Services

(a) Table A8.2 presents a list of contract packages to be procured following ICB and direct contracting.

Table A8.2. Contract Packages to be Procured Following ICB and Direct Contracting SENASA

1 2 3 4 5 6 7 8 9 Ref. No.

Contract (Description)

Estimated Cost

Procurement Method

P-Q Domestic Preference

(yes/no)

Review by

Bank (Prior / Post)

Expected Bid-

Opening Date

Comments

1 Group 1 Construction of Water Systems and Sanitation solutions

7,800,000

ICB No

Prior

2 Institutional Development Procurement of 10 vehicles 4wd

300,000 ICB No

Prior

3 Institutional Development Information system for SENASA

280,000 ICB No Prior

ESSAP

1 2 3 4 5 6 7 8 9 Ref. No.

Contract (Description)

Estimated Cost

Procurement

Method

P-Q Domestic Preference

(yes/no)

Review by Bank (Prior / Post)

Expected Bid-

Opening Date

Comments

1 Contract 1 Construction of sewerage network in Asunción metropolitan area

12,000,000 ICB No

Prior 03/19/2010

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �67 For example, the Operational Manual, Bidding Documents, and Standard Request for Proposal, technical background, designs, specifications and drawings of the works to be financed, TORs of the works to be executed with project funds; subprojects to be financed; beneficiaries of such subprojects; opportunities for scholarships, agreements with third parties, and progress and monitoring reports.

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(to be defined) 2 Contract 2

Construction of sewerage network in Asunción metropolitan area (to be defined)

12,000,000 ICB No

Prior 05/19/2011

3 Construction of wastewater treatment plant

4,000,000 ICB No

Prior 05/31/2011

4 Construction of wastewater emissary to the Paraguay River

3,000,000 ICB No

Prior 08/31/2011

5 Construction of improvement and rehabilitation for wastewater discharges into the Paraguay River

3,000,000 ICB No

Prior 03/20/2012

6 Improvement of water supply systems for Greater Asunción

10,000,000 ICB No

Prior 04/14/2012

7 Supply and installation of micro-meters

3,250,00 ICB No Prior 04/08/2009

8 Supply and installation of micro-meters

3,250,00 ICB No Prior 04/08/2010

9 Supply and installation of micro-meters

3,250,00 ICB No Prior 04/08/2011

10 Supply and installation macro-meters, valves, and accessories

950,000 ICB No Prior 08/17/2009

11 Supply and installation of macro-meters, valves, and accessories

950,000 06/10/2010

12 Procurement of hardware and software

1,800,000 ICB No Prior 04/08/2009

13 Procurement of vehicles

620,000 ICB No Prior 03/01/2010

ERSSAN

1 2 3 4 5 6 7 8 9 Ref. No.

Contract (Description)

Estimated Cost

Procure-ment

Method

P-Q Domestic Preference

(yes/no)

Review by Bank (Prior / Post)

Expected Bid-

Opening Date

Comments

Data gathering 300,000 ICB No No Prior 02/26/2010

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and unified information system update

(b) Prior review requirements for ESSAP and MOPC: Contracts for Works estimated to cost above US$3 million; Contracts for Goods, Non-Consulting Services and Training estimated to cost above US$250,000; and the first two (2) processes carried out by each implementing agency under each procurement method and category of expenses will be subject to prior review by the Bank. (c) Prior review requirements for SENASA: Contracts for Works estimated to cost above US$5 million; Contracts for Goods, Non-Consulting Services and Training estimated to cost above US$500,000; and the first two (2) processes carried out under each procurement method and category of expenses will be subject to prior review by the Bank. 2. Consulting Services

(a) Table A8.3 lists the consulting assignments with a short-list of international firms.

Table A8.3. Consulting Assignments with Short-list of International Firms ESSAP

1 2 3 4 5 6 7 Ref. No.

Description of

Assignment

Estimated Cost US$

Selection Method

Review by Bank (Prior / Post)

Expected Proposals

Submission Date

Comments

1 Environmental and Social Management Plan

1,000,000 QCBS Prior 06/13/2009

2 Administrative and technical concurrent audit

500,000 QCBS Prior 10/14/2009

3 Updating of Asunción Sewerage Master Plan and final engineering designs

600,000 QCBS Prior 03/10/2009

4 Asset valuation of ex-CORPOSANA

300,000 QCBS Prior 07/10/2009

5 Training 600,000 QCBS Prior 06/04/2010 6 Study on

reduction of water leakages

200,000 QCBS Prior 15/12/2009

SENASA

1 2 3 4 5 6 7 Ref. No.

Description of

Assignment

Estimated Cost US$

Selection Method

Review by Bank (Prior / Post)

Expected Proposals

Submission Date

Comments

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1 Social Promotion and Technical Assistance – Rural Population

350,000 QCBS Prior 04/01/2009

2 Works Supervision – Rural Population

385,000 QCBS Prior 08/29/2009

3 Training 200,000 QCBS Prior 03/01/2010 4 Safeguards

Framework 200,000 QCBS Prior 08/01/2009

ERSSAN

1 2 3 4 5 6 7

Ref. No.

Description of

Assignment

Estimated Cost US$

Selection Method

Review by Bank (Prior / Post)

Expected Proposals

Submission Date

Comments

1 Tariffs Study 200,000 QCBS Prior 02/26/2010

(b) Prior review requirements for ESSAP and MOPC: Consultancy services estimated to cost above US$150,000 per contract, the processes aimed at the hiring of a professional for ESSAP’s UOC, the process for the selection of the concurrent audit for ESSAP, and the first two (2) processes carried out under each selection method by each of the Implementing Agencies will be subject to prior review by the Bank. (c) Prior review requirements for SENASA: Consultancy services estimated to cost above US$200,000 per contract and the first two (2) processes carried out under each selection method will be subject to prior review by the Bank. (d) Short-lists composed entirely of national consultants: Short-lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

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Annex 9: Economic and Financial Analysis

PARAGUAY: Water and Sanitation Sector Modernization Project Economic Analysis 1.� The project will generate a broad set of benefits, including increasing the efficiency of water supply services, increasing access to the sewerage and disposal systems in Asunción’s metropolitan area and other urban centers, and consolidating and improving the management of water resources in the country. The project entails four different types of interventions, as follows: 2.� Increasing the efficiency and reducing the losses in the provision of water services. This type of intervention has a direct impact on the efficiency of the water company and allows for better use of water resources, resulting in a reduction or deferral of future investments. In addition, programs aimed at reducing losses through the installation of meters within an adequate tariff system often result in an optimal use of the resource by consumers, deferring the need for future investments. 3.� Rehabilitation and expansion of sewerage and disposal systems in urban areas. The impact of this type of works is directly associated to the environment. The alternative to being connected to the network is: (a) the construction of septic tanks, when the household has resources available to do so; or (b) the disposal of sewage in neighboring areas or water bodies. In all cases, this type of works has a positive impact on the overall health indicators of the affected population, and this impact will be higher in the second case of disposal. In addition, connection to the network will eliminate the costs of maintenance of septic tanks. 4.� Increasing water supply in rural areas. Normally, households that lack access to water supply have to resort to alternatives that are of lower quality at a higher cost. As such, this type of intervention results in an increase of water availability, hence an increase in consumption of water that is of better quality at lower costs. The better quality of water that will be available to households also has potential positive impacts on the health of the population affected, increasing its productive capacity and reducing expenditures associated to doctors and medication that would be incurred due to the consumption of lower-quality water. 5.� Capacity-building and institution-strengthening programs. This type of intervention is normally associated to at least one of the above interventions and aims at guaranteeing that the forecasted project impacts materialize and are sustainable in the long term. 6.� Specific infrastructure works financed under the project will be defined only after the Sewerage Master Plan for Asunción’s metropolitan area is updated, making it challenging to estimate and quantify the project’s detailed cost and benefits.

Urban Investments 7.� The economic evaluation of the urban investments to be financed under the Paraguay Water and Sanitation Sector Modernization Project was carried out through a cost-benefit analysis of the Itay basin sewerage project on the city limits between Asunción and Fernando de la Mora, an area deemed representative of the type of investments to be financed in the metropolitan area,

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and also probably the most expensive urban intervention to be financed given its large size. This project was selected because it involves the development of sewer works in an area in which currently the majority of beneficiaries use septic tanks for the disposal of their wastewater.

8.� Economic costs. The project costs are comprised of: (a) the investment costs of the works planned, and (b) the operation and maintenance costs over a 25-year period. Preliminary estimates place the cost of investment in sewerage and disposal systems at US$17 million. For the estimation of economic costs, specific adjustments were made to deduct embedded taxes in material and labor from investment, operation and maintenance costs of the system, and the connections. Average conversion factors were calculated for the sewerage and disposal systems investments (0.7900), operation and maintenance (0.8012), installation of new connections (0.7265), and operation and maintenance of these connections (0.7157).68

9.� Economic benefits. To estimate the economic benefits of the project, a hedonic pricing methodology was used, which in a simplified way consists of calculating the benefits as the average value of a house that does not have service, by a factor that measures the proportion in which that value would increase by the time of connection. This allows for the capturing of the marginal value that the population gives to the benefits they perceive from the sewer system, such as health benefits, reduced environmental degradation in their home’s surroundings, possibilities for urban soil use, or increased consumption of water due to a more efficient wastewater disposition system, among others. The analysis revealed that the interventions planned can generate a per-household benefit of 36.5 percent of its value, and given that the average rent of a house without this connection was estimated at US$132 per month,69 the monthly benefits are estimated to be US$48.2 per connected house, or US$578 per year. In addition, specifically for the area in question, the government exerts strict construction limits on the height of buildings that can be constructed with the use of septic tanks; therefore, on completion of the sewerage works, there is a high likelihood that its land use will be modified, and the population density in the area will increase. As such, these results cannot necessarily be extrapolated to other types of interventions.

10.� Economic evaluation. From the calculation of economic costs and benefits outlined above, and considering that preliminary estimates place the number of households that will directly benefit from the project at 32,400 (that is, 175,900 people), the flow of costs and benefits shown in Table A9.1 was built.

11.� The calculations carried out through an economic cost-benefit analysis show that the environmental sanitation project in the Itay basin, whose economic costs have a present value of US$34 million, would produce economic benefits of US$95.9 million. The resulting project economic rate of return is 43 percent, making the Itay project feasible from an economic point of view.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �68 Based on ESSAP S.A.’s preliminary budget estimates for the construction of tertiary network, it was concluded that the market price of a connection would be US$2,014 and its annual maintenance value US$70.7, assuming maintenance would represent 2 percent of the investment cost. 69 With an exchange rate of $1 = Gs. 4,000.

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Table A9.1. Results of the Economic Analysis of the Itay Basin

(based on preliminary cost estimates)

Investment O&M Investment O&M1 4,476,667 - - - 4,476,667 - (4,476,667) 2 4,476,667 - - - 4,476,667 - (4,476,667) 3 4,476,667 - 6,637,885 - 11,114,552 - (11,114,552) 4 - 2,377,518 6,637,885 130,784 9,146,187 9,363,600 217,413 5 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 6 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 7 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 8 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 9 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114

10 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 11 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 12 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 13 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 14 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 15 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 16 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 17 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 18 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 19 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 20 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 21 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 22 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 23 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 24 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114 25 - 2,377,518 - 261,568 2,639,086 18,727,200 16,088,114

NPV 10,752,198 12,936,805 8,943,212 1,340,158 33,972,373 95,949,723 61,977,350 Note: All figures are in US$ EIRR 43%

Net Economic Benefits

YearSewerage & Disposal Systems Connections Total Economic

CostEconomic Benefits

12.� This high rate of return is due to the fact that, 10 years ago, the government built a tunnel, which will be operational under this project. The cost of the tunnel was US$28 million, and it was not incorporated into the analysis, because it is considered a sunk cost. If these costs were to be considered, the Economic Internal Rate of Return (EIRR) for the project would fall to 23 percent.

13.� Sensitivity analysis shows that the project costs would have to rise by about 193 percent, or the assumed annual benefit per household would have to drop by 64 percent (that is, US$205), for the project to be considered infeasible. Rural Investments 14.� The project objective is to increase the efficiency, coverage, and sustainability of water supply and sanitation (WSS) services in Paraguay by, among other things, increasing access to sustainable WSS services in rural areas. The economic evaluation of the rural interventions was based on the economic analysis of a sample of rural subprojects analyzed for the Implementation Completion Report (ICR) of the Fourth Rural Water Supply and Sanitation Project, which represents the type of projects to be financed under this operation for rural communities.

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15.� A sample of subprojects in 18 representative communities that benefited from the project’s financing was analyzed to perform the economic evaluation of the rural component. The size range of the systems analyzed was between 418 to 1.728 connections, (in all cases households expressed their preference for a house connection, and so there is a 1 to 1 relation between number of households and estimated number of connections in each community). To perform the economic evaluation, a survey of 48 communities (3,190 observations) was designed and executed to determine the demand for water in these communities and estimate a demand curve.

16.� The major benefits of these projects were the improved water services received by approximately 90,425 beneficiaries of these 18 small communities. These included direct user benefits, such as resource services (time savings and savings that result from the elimination of individual water treatment (for example, the cost for boiling water), and estimated benefits of increased water consumption.

17.� The benefits for resource savings were estimated from the surveys of project communities, basically savings of building a new pond and other costs (monetary and nonmonetary), reported in the interviews. Based on the survey, it can be expected that where treatment/purification mechanisms are in place, households would substitute most other sources of consumption for the new piped water source. Health benefits known to users are captured in their willingness to pay for good-quality water.

18.� To estimate the benefits of increased water consumption due to better-quality, more reliable, and lower-cost water service provided by the project, a profile of consumption patterns was developed that indicates the quantity of water used and the amount of time and/or money spent for water from different sources. These data were collected by surveying communities with water services and selecting from the group of communities where metering was available.

19.� The typical costs included in the analysis were: (a) raw material, national and imported; (b) capital investment costs; (c) recurrent costs (operations and maintenance); and (d) labor costs of the system. All transfers including taxes and subsidies are excluded from the analysis. All costs included in the economic analysis were adjusted to reflect economic prices using conversion factors calculated by Paraguay’s Central Bank. The summary result of this ex post analysis is substantially positive based on the sample analyzed, as can be seen in Table A9.2.

20.� The 18 subprojects evaluated had an EIRR ranging from zero to 73 percent, an average return of 34 percent, and an average net present value (NPV) of US$73,950. Only three out of the 18 subprojects were economically infeasible.

21.� While the average rate of return per subproject and the overall economic NPV were higher than expected during the appraisal of these projects, the results of the ex post assessment led the project team to revise the economic assessment methodology in the Operational Manual for the new project to simplify its application and allow for easier screening of economically infeasible subprojects.

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Table A9.2. Results of the Economic Cost-Benefit Analysis of the Ex-Post Sample

for Fourth Rural Water Supply and Sanitation Project

Community served District Department NPV (12%) EIRRAverage

cost/connection EIRR Ex-Ante

1997 (10%)

78 &$1 * 8 $ � &2 5 ' ,/ / ( 5 $ $/ 72 6 &2 5 ' ,/ / ( 5 $ � � � � � � � � � � � � � � �9 ,/ / $ � / $6 � 0 ( 5 &( ' ( 6 72 %$7, &2 5 ' ,/ / ( 5 $ � � � � � � � � � � � � � � �<%8 � &,( 5 92 � &8 $ � � � 0 $7,$8 ' $ 6$1 � %( 5 1 $5 ' ,1 2 &2 5 ' ,/ / ( 5 $ � � � � � � � � � � � � � � � � �6$1 72 � ' 2 0 ,1 ,* 2 72 %$7, &2 5 ' ,/ / ( 5 $ � � � � � � � � � � � � � � � �3 ,5 $32 � &( 1 75 2 3 ,5 $32 ,7$38 $ � � � � � � � � � � � � � � � �%$5 5 ,2 � 2 %5 ( 5 2 � � � + 2 + ( 1 $8 � ,, +2 + ( 1 $8 ,7$38 $ � � � � � � � � � � � � � � � �7$- <� / 2 0 $ &$5 $3( * 8 $ 3$5 $* 8 $5 , � � � � � � � � � � � � � � � � �&( 5 5 2 � ) 5 ( 1 7( 4 8 <4 8 <+ 2 3$5 $* 8 $5 , � � � � � � � � � � � � � � �$5 $=$7< 6$1 � 5 2 4 8 ( � * 2 1 =$/ ( = 3$5 $* 8 $5 , � � � � � � � � � � � � � � � �0 ( 1 ' ,( 7$ � &8 ( 4 8 ,,1 ' < 3$5 $* 8 $5 , � � � � � � � � � � � � � � � �- 8 $1 � ( � � 2 A/ ( $5 <� � $0 3/ ,$&,– 1 - 8 $1 � ( � � 2 C/ ( $5 < $/ 72 � 3$5 $1 … � � � � � � � � � � � � � � � �&2 / � � &( 5 5 2 � / $5 * 2 6$1 7$ � 5 ,7$ $/ 72 � 3$5 $1 … � � � � � � � � � � � � � � � �. 0 � � � � � 0 2 1 ' $<� � 3$5 7� � 35 ,9$ ' $ 0 ,1 * $ � * 8 $=8 $/ 72 � 3$5 $1 … � � � � � � � � � � � � � � � �. 0 � � � � $&$5 $<� � 3$5 7� � 35 ,9$ ' $ 0 ,1 * $ � * 8 $=8 $/ 72 � 3$5 $1 … � � � � � � � � � � � � � � �( 64 8 ,1 $ � * $8 &+ $ 6$1 7$ � 5 ,7$ $/ 72 � 3$5 $1 … � � � � � � � � � � � � � � � �&$0 3,f $6 � 9 ( 5 ' ( 6$1 7$ � 5 ,7$ $/ 72 � 3$5 $1 … � � � � � � � � � � � � � � � � �- 8 * 8 $ � f $5 2 ,7$ &( 1 75 $/ � � � � � � � � � � � � � � � �&8 5 8 3,&$<7< ,7$ &( 1 75 $/ � � � � � � � � � � � � � �

$ YHUDJH � � � � � � � � � � � � � � � � � �8 6 � � 3<* � � � � � �� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �

Financial Analysis

22.� The project will generate financial benefits to ESSAP S.A. in the form of additional revenues stemming from increased sales due to an increase in the number of subscribers with access to sewerage services, higher efficiency in the provision of water services, and the sale of new sewerage connections. Specific interventions financed under the project will be defined only after the Sewerage Master Plan for the Asunción metropolitan area is updated and a program for increasing the efficiency of ESSAP S.A.’s operation is prepared, making it challenging to estimate and quantify the project’s detailed cost and benefits.

23.� Due to the above, the financial cost-benefit analysis was calculated based on: (a) an analysis of the Itay basin sewerage project, which is deemed representative of the type of investments to be financed in the Asunción metropolitan area, is likely to be considered a priority investment once the Sewerage Master Plan is updated, and will probably be the most expensive urban intervention given its large size; and (b) estimated efficiency gains that may be obtained through the replacement of meters, which is likely to feature as a priority intervention once ESSAP S.A.’s efficiency program is carried out. The analysis has been conducted in current terms based on net cash flows generated by the project over a 25-year period, and it shows that the combined financial rate of return (FRR) of the investment and efficiency interventions is 11 percent. The project’s cash flow is discounted at 12 percent, and the resulting NPV deficit of about US$1.7 million indicates that the project is able to generate enough cash to cover 97 percent of the costs and that the remaining 3 percent should be covered by either ESSAP or the Government (Table A9.3).

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Table A9.3. Results of the Financial Analysis of the Proposed Tentative Urban Interventions

Investment O&M Investment O&M Connection Collection Charges1 5,666,667 - - - 5,666,667 - - (5,666,667) 3,222,375 - - -3,222,375 (8,889,042) 2 5,666,667 - - - 5,666,667 - - (5,666,667) 6,253,711 901,470 88,729 -5,263,511 (10,930,178) 3 5,666,667 - 9,136,800 - 14,803,467 - - (14,803,467) 4,368,884 1,919,704 176,516 -2,272,664 (17,076,131) 4 - 2,129,328 9,136,800 365,472 11,631,600 1,838,700 1,732,104 (8,060,796) 5,383,896 2,331,723 263,370 -2,788,803 (10,849,599) 5 - 2,129,328 - 261,568 2,390,896 7,354,800 3,977,424 8,941,328 2,871,588 2,576,787 888,616 593,815 9,535,143 6 - 2,129,328 - 261,568 2,390,896 1,838,700 4,490,640 3,938,444 2,971,301 2,868,100 1,465,525 1,362,324 5,300,768 7 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,363,304 2,993,056 1,997,831 3,627,583 6,497,151 8 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,374,992 3,034,547 2,065,455 3,725,010 6,594,578 9 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,181,243 3,031,717 2,118,978 3,969,452 6,839,019

10 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,190,415 3,056,108 2,172,045 4,037,737 6,907,305 11 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 2,212,009 3,107,551 2,224,660 3,120,202 5,989,769 12 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,397,009 3,107,551 2,224,660 3,935,202 6,804,769 13 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,397,009 3,107,551 2,224,660 3,935,202 6,804,769 14 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,397,009 3,107,551 2,224,660 3,935,202 6,804,769 15 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 384,509 3,107,551 2,224,660 4,947,702 7,817,269 16 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 384,509 3,107,551 2,224,660 4,947,702 7,817,269 17 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 384,509 3,107,551 2,224,660 4,947,702 7,817,269 18 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 384,509 3,107,551 2,224,660 4,947,702 7,817,269 19 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 384,509 3,107,551 2,224,660 4,947,702 7,817,269 20 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 384,509 3,107,551 2,224,660 4,947,702 7,817,269 21 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,397,009 3,107,551 2,224,660 3,935,202 6,804,769 22 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,397,009 3,107,551 2,224,660 3,935,202 6,804,769 23 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,397,009 3,107,551 2,224,660 3,935,202 6,804,769 24 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 1,397,009 3,107,551 2,224,660 3,935,202 6,804,769 25 - 2,129,328 - 261,568 2,390,896 - 5,260,464 2,869,568 384,509 3,107,551 2,224,660 4,947,702 7,817,269

$13,610,377 $11,586,329 $12,309,995 $1,489,306 $38,996,008 $6,273,381 $25,263,419 ($7,459,208) $21,896,301 $17,953,473 $9,690,333 $5,747,506 ($1,711,702)Note: All figures are in US$ FRR 7% FRR 17% 11%

Net Benefits Eff. Improvements

Combined Net Financial Benefits

Additional Revenues Meters (+5 m3/month)

Additional Revenues Other

Cost of Efficiency Improvements

Net Benefits Sewerage

BenefitsYear

Sewerage & Disposal Systems Connections Total Financial Cost

24.� The cash flow for the Itay basin sewerage project was calculated based on the preliminary cost estimates of these investments from ESSAP S.A, while the benefits were quantified based on the following: (a) a connection fee of US$227 to be charged per connection to be paid over two years (these investments would yield 32,400 new connections), (b) recurring charges for sewage collection based on the assumption that the average annual water consumption of these households is 396 cubic meters (m3), and that the government will gradually increase sewerage tariffs as planned in the financial modeling of ESSAP S.A.

25.� The project’s cash flow is discounted at 12 percent, and the resulting NPV deficit of about US$7.5 million, indicating that the project is able to generate only enough cash to cover 81 percent of the costs and that the remaining 19 percent should be covered by either ESSAP or the Government. The resulting FRR of 7 percent is relatively typical for this type of investment.

26.� As for the efficiency improvements, the resulting FRR is 17 percent and it was calculated based on preliminary estimates of activities to reduce nonrevenue water and on the assumption that 135,000 new meters would be installed throughout the Greater Asunción Metropolitan Area as part of a program to reduce system losses, and that these meters would need to be replaced every 10 years. As for the benefits, these were calculated based on the estimated marginal benefits of reduction of nonrevenue water, and on the assumption that after its replacement, each meter would yield an increase of 5 m3 per month in metered consumption.70 A sensitivity analysis was carried out on this assumption and the results are presented in Table A9.4.

Table A9.4. Results from Sensitivity Analysis

Increase in Monthly Consumption

FRR for Efficiency Improvements

Combined FRR

5 m3 17% 11% 4 m3 14% 10% 3 m3 11% 9% 2 m3 7% 7%

Financial Assessment of ESSAP S.A.

Context 27.� ESSAP S.A. was created in 2002 to be the new provider of water and sanitation services for the Greater Asunción Metropolitan Area, in lieu of the National Water and Sanitation Utility (CORPOSANA). The government’s objective at the time was to bring private sector participation through a concession contract; as such, ESSAP S.A. was formed as a “clean” utility, with no assets or liabilities, all of which remained with the Treasury. As the momentum to continue and complete sector reforms diminished, ESSAP S.A. was left to operate in an unclear legal and regulatory environment.

28.� Since 2004, the Government has imposed a fee on ESSAP S.A. for the rights to use the existing water and sanitation infrastructure in its service area (that is, the “canon payment”). This fee was set with the objective of enabling the Government to use the funds to service the debt

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �70 ESSAP S.A. has reported that consumption per household has increased by about 10 m3 per month for each meter it replaced in the past year. The company expects that consumers will start optimizing their water use, which will taper off this increase in consumption and result in an average consumption increase of 5 m3 per month.

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obligations of the extinct CORPOSANA. The fee was adjusted annually based on inflation, even though there has been no tariff adjustment for water or sanitation since 2002, making it only a matter of time before ESSAP S.A. would be in a negative equity situation, since there was no addition of capital into the company by the Government.

29.� To resolve this situation, on December 31, 2008, the Government approved a law (Law No. 3.684) that retroactively eliminates the burden of the canon payment on the company’s balance sheet, and transfers sector assets and a share of its liabilities from the ex-CORPOSANA to ESSAP S.A, part in exchange for all government unpaid arrears and part to be recorded as added capital to the company. This law establishes a six-month deadline for the Government to sign a concession agreement with ESSAP S.A. for the provision of WSS services in the Greater Asunción Metropolitan Area. This agreement is currently being negotiated.

Past and Current Performance of ESSAP S.A.

30.� ESSAP S.A.’s revenues stem from the provision of WSS services to the Greater Asunción Metropolitan Area. Based on the review of financial statements from 2004 to 2007, ESSAP S.A. had a negative net income, mainly due to the canon payment obligation, without which the company would have been profitable. In spite of these limitations, the company has been able cover all operating costs, and to keep costs relatively under control, with operating expenses increasing by 21 percent between 2004 and 2007, when inflation over this period reached 35 percent.

31.� Most of ESSAP S.A.’s liabilities were related to the canon payment, limiting the company’s capacity to plan and implement needed investments that could improve the quality of service, enhance efficiency, and increase coverage. A summary of the company’s results is presented in Tables A9.5 and A9.6, with the balance sheet adjusted to reflect the provisions of Law No. 3.684.

Future Performance of ESSAP S.A.

32.� Projections to assess ESSAP S.A.’s future financial position and performance have been carried out for 2008–20. These projections factored in: (a) regular water and sewerage tariff increases, (b) the preliminary investment plan of ESSAP S.A. aimed at improving its efficiency and increasing sewerage coverage, and (c) the associated targets the company aims to achieve in terms of improving the efficiency of service provision. The preliminary investment plan will be updated to reflect the outcome of the updated Sewerage Master Plan. The projections for ESSAP S.A.’s future financial performance were based on the following key assumptions, among others:

•� An annual increase in the water tariff to the annual projected inflation for that year;

•� A gradual increase in the sewerage tariff from 50 percent of the water bill to 100 percent of the water bill over 7 years (2009–15);

•� An increase in sewerage coverage in the Greater Asunción Metropolitan Area from 20.7 percent in 2009 to 48.9 percent in 2015, and to 60.4 percent in 2020.

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Table A9.5. Historic Financial Results for ESSAP S.A. (with and without the canon)

Income Statement (PYG)2004 2005 2006 2007

Operating Revenues 166,966,469,566 168,975,298,435 176,577,208,603 184,110,401,565 Operating Expenses 91,720,853,276 96,681,325,944 108,573,991,045 110,733,924,645

EBITDA 75,245,616,290 72,293,972,491 68,003,217,558 73,376,476,920 Depreciation 1,854,470,860 2,072,360,186 2,509,842,567 2,534,116,802

Operating Income 73,391,145,430 70,221,612,305 65,493,374,991 70,842,360,118 Other Income 1,308,707,833 596,299,792 1,238,784,959 1,381,924,210 Other Expenses (incl. canon pmt.) 121,812,730,382 132,517,944,784 142,861,384,672 151,997,381,382

EBIT (47,112,877,119) (61,700,032,687) (76,129,224,722) (79,773,097,054) Interest Expense 170,293,494 119,698,343 1,960,449,835 1,694,777,364 Taxes - - - -

Net Income (47,283,170,613) (61,819,731,030) (78,089,674,557) (81,467,874,418)

Net Income without canon payment 53,340,215,262 46,955,249,425 42,228,855,601 48,270,393,952

Working Ratio 0.55 0.57 0.61 0.60 Operating Ratio 0.56 0.58 0.63 0.62 EBITDA/Billed Revenue 45% 43% 39% 40%Net Income/Billed Revenue -28% -37% -44% -44%Net Income (without canon)/Billed Revenue 32% 28% 24% 26%

Table A9.6. Historic Balance Sheet for ESSAP S.A.

Balance Sheet (PYG)2004 2005 2006 2007

AssetsCurrent Assets 97,198,835,922 103,490,611,406 106,090,809,501 120,596,775,679 Fixed Assets 18,113,829,364 20,914,028,866 27,973,849,547 37,148,695,115

Total Assets 115,312,665,286 124,404,640,272 134,064,659,048 157,745,470,794

LiabilitiesCurrent Liabilities 45,852,562,557 49,507,094,295 49,765,974,727 55,862,698,235 Canon to be paid 17,843,097,871 - - -

Total Liabilities 63,695,660,428 49,507,094,295 49,765,974,727 55,862,698,235 Equity 51,617,004,858 74,897,545,977 84,298,684,321 101,882,772,559

Total Liabilities and Equity 115,312,665,286 124,404,640,272 134,064,659,048 157,745,470,794

Current Ratio 2.12 2.09 2.13 2.16Total Liabilities/Total Assets 0.55 0.40 0.37 0.35Total Liabilities/Billed Revenues 0.38 0.29 0.28 0.30Current Liabilities/Billed Revenues 0.27 0.29 0.28 0.30Net Income/Equity -91.6% -82.5% -92.6% -80.0%

33.� As can be seen in Table A9.7, the implementation of the above measures ensures a net profit for ESSAP S.A. and enables the company to continue to meet its current operating expenditures. It is also expected, although not guaranteed at this stage for the reasons stated in paragraph 36 below, that the company will be able to meet its debt obligations and in the longer term have a positive cash flow. The detailed projections and assumptions are available in the project files.

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Table A9.7. Income Statement for ESSAP S.A.

Income Statement (US$ million) 2008 2009 2010 2011 2012 2013 2020Billed Revenue Water and Sewerage 44.17 46.30 47.41 61.75 74.56 94.65 135.65 Operating Costs

Labor 10.47 10.47 10.47 10.47 10.47 11.17 12.59 Energy 4.83 5.14 5.32 6.35 6.28 6.19 6.17

Other 13.47 14.40 15.46 18.40 22.34 25.72 45.17 Total Operating costs 28.77 30.01 31.26 35.23 39.09 43.08 63.93

EBITDA 15.40 16.28 16.15 26.52 35.47 51.57 71.72 Depreciation (6.47) (6.77) (7.51) (8.80) (10.75) (13.15) (31.70)

EBIT 8.93 9.52 8.64 17.72 24.72 38.42 40.02 Interest (2.23) (2.29) (2.62) (4.04) (5.05) (5.90) (7.36)

Earning before income taxes 6.70 7.23 6.02 13.68 19.67 32.52 32.65 Taxes (0.67) (0.72) (0.60) (1.37) (1.97) (3.25) (3.27) Net Income 6.03 6.50 5.42 12.31 17.70 29.27 29.39

Financial IndicatorsBilled Revenue/Op costs (with dep) 198.06% 199.15% 199.63% 233.67% 263.09% 316.27% 420.95%Billed Revenue/Op costs (w/o dep) 153.53% 154.25% 151.67% 175.29% 190.73% 219.72% 212.19%

Operating ratio 0.50 0.50 0.50 0.43 0.38 0.32 0.24 Working ratio 0.65 0.65 0.66 0.57 0.52 0.46 0.47

EBITDA/Billed revenue 34.86% 35.17% 34.07% 42.95% 47.57% 54.49% 52.87%EBIT/Billed revenue 20.22% 20.56% 18.23% 28.70% 33.15% 40.59% 29.50%

Net income/Billed revenue 13.65% 14.05% 11.44% 19.94% 23.74% 30.92% 21.67%

34.� Due to uncertainty about the outcome of the implementation of provisions specified in Law No. 3.684 in terms of the level of assets and liabilities that will become part of ESSAP S.A.’s balance sheet, it is not possible to forecast the company’s balance sheet until the company’s assets and equity are restructured and regularized according to the provisions of the law. The project will be financing an inventory of assets and liabilities that will become an input into the decision-making process, and when a decision is made in this regard, there will be enough information to produce a balance sheet forecast for ESSAP S.A.

35.� The conclusion of this activity and the resulting restructuring and regularization of the company’s assets and equity are important steps in ensuring a greater degree of financial certainty that will enable the company to appropriately plan required investments and interventions that are needed for better service provision to the population of the Greater Asunción Metropolitan Area.

36.� Some of the key parameters featured in ESSAP S.A.’s model are highlighted in Table A9.8.

Table A9.8. Key Parameters Featured in ESSAP’s Model

2008 2009 2010 2013 2014 2015 2020Debt Service Coverage Ratio 1.66 1.53 1.82 1.93 1.99 1.96 2.31 Net Income 28,336 30,568 25,484 137,559 146,659 151,873 138,127

Indicators (En Gs x 106)

2008 2009 2010 2013 2014 2015 2020

Water coverage Gran Asuncion 60.2% 60.2% 60.2% 60.2% 61.7% 63.0% 65.4%Sewerage coverage Gran Asuncion 20.7% 20.7% 20.7% 34.5% 43.5% 48.9% 60.4%

Revenue Collection rate 87.0% 87.0% 87.0% 87.8% 88.5% 89.3% 93.0%

Unaccounted for water - G. Asuncion 46.8% 46.1% 44.4% 30.9% 27.7% 25.8% 23.2%

Unaccounted for water - Interior 51.1% 51.0% 47.4% 44.0% 41.5% 39.7% 36.3%

Targets

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2008 2009 2010 2013 2014 2015 2020G.Asuncion - Residential

Water

Average billed tariff Guaranies/ m3 1,880.34 1,878.88 1,873.10 1,854.22 1,853.18 1,852.89 1,850.88

Average billed tariff US$/ m3 0.40 0.40 0.40 0.39 0.39 0.39 0.39 Sewerage

Average billed tariff Guaranies/ m3 942.03 942.03 942.03 1,432.70 1,647.61 1,894.75 1,894.75

Average billed tariff US$/ m3 0.20 0.20 0.20 0.30 0.35 0.40 0.40

W&S average (per meter3 of water billed)

Average billed tariff Guaranies m3 2,318.81 2,300.99 2,286.62 2,792.11 3,099.07 3,447.09 3,657.23

Average billed tariff US$/ m3 0.49 0.49 0.49 0.59 0.66 0.73 0.78

G.Asuncion - Non ResidentialWater

Average billed tariff Guaranies/ m3 2,266.65 2,267.34 2,271.96 2,291.37 2,294.78 2,294.41 2,292.33

Average billed tariff US$/ m3 0.48 0.48 0.48 0.49 0.49 0.49 0.49 Sewerage

Average billed tariff Guaranies/ m3 1,131.69 1,131.69 1,131.69 1,721.15 1,979.33 2,276.22 2,276.22

Average billed tariff US$/ m3 0.24 0.24 0.24 0.37 0.42 0.48 0.48

W&S average (per meter3 of water billed)

Average billed tariff Guaranies m3 3,018.19 2,994.33 2,987.08 3,640.77 3,966.54 4,338.57 4,477.07 Average billed tariff US$/ m3

0.64 0.64 0.64 0.77 0.84 0.92 0.95

Interior - ResidentialWater

Average billed tariff Guaranies/ m3 1,900.08 1,900.19 1,899.86 1,822.70 1,837.15 1,836.12 1,850.49

Average billed tariff US$/ m3 0.40 0.40 0.40 0.39 0.39 0.39 0.39 Sewerage

Average billed tariff Guaranies/ m3 974.34 962.27 962.60 1,096.19 1,078.42 1,322.87 1,590.05

Average billed tariff US$/ m3 0.21 0.20 0.20 0.23 0.23 0.28 0.34

W&S average (per meter3 of water billed)

Average billed tariff Guaranies m3 2,160.32 2,213.71 2,251.48 2,621.34 2,788.93 3,016.43 3,393.54

Average billed tariff US$/ m3 0.46 0.47 0.48 0.56 0.59 0.64 0.72 Interior - Non Residencial

Water

Average billed tariff Guaranies/ m3 2,349.01 2,349.39 2,350.06 2,242.02 2,283.39 2,289.10 2,326.50

Average billed tariff US$/ m3 0.50 0.50 0.50 0.48 0.49 0.49 0.49 Sewerage

Average billed tariff Guaranies/ m3 998.24 994.36 995.31 1,139.28 1,106.55 1,452.97 1,865.31

Average billed tariff US$/ m3 0.21 0.21 0.21 0.24 0.24 0.31 0.40

W&S average (per meter3 of water billed)

Average billed tariff Guaranies m3 2,725.65 2,780.25 2,827.31 2,956.97 2,981.63 3,058.00 3,122.84 Average billed tariff US$/ m3

0.58 0.59 0.60 0.63 0.63 0.65 0.66

Average monthly water and sanitation tariffs

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Annex 10: Safeguard Policies

PARAGUAY: Water and Sanitation Sector Modernization Project

Introduction 1.� This annex summarizes the Environmental and Social Management Framework (ESMF) prepared for the proposed Paraguay Water and Sanitation Sector Modernization Project (WSSMP). Since the WSSMP is programmatic in nature, specific investments will not be known in advance, so a conventional Environmental Impact Assessment (EIA) is not yet feasible. The ESMF is a technical guideline describing procedures and institutional responsibilities for assessing and managing the potential environmental and social risks and impacts that could be faced throughout the project cycle. The ESMF supports three essential goals of the project: (a) to ensure the social and environmental sustainability of the subprojects, (b) to comply with the national environmental legislation, and (c) to comply with the World Bank Environmental and Social Safeguards Policies. 2.� The ESMF comprises (a) an assessment of likely environmental and social impacts of eligible project works, (b) a description of the legal and institutional framework in Paraguay, (c) a methodology for screening the environmental and social impacts of proposed subprojects during implementation, (d) an Involuntary Resettlement and Land Acquisition Policy Framework (IRLAPF), (e) an Indigenous Peoples Management Framework (IPMF), and (f) specific guidance on public consultation and disclosure procedures. The ESMF also includes Terms of Reference (TORs) for both the environmental and social dimensions of the study to revise the Sewerage System Master Plan for the Asunción metropolitan area and proposed large-scale civil works to be identified during project implementation. 3.� The ESMF is intended for use and application by the agencies responsible for the execution of the investment subprojects under each component. These agencies are the Sanitary Services Company of Paraguay (ESSAP), the national urban water and sanitation utility; and the National Environmental Health Service (SENASA), the public entity responsible for promotion of and technical assistance for water and sanitation in rural areas. The other national agencies of the sector involved in the WSSMP project are the Ministry of Public Works and Communications (MOPC), the Sanitary Services Regulation Entity (ERSSAN), and the Environmental Secretariat (SEAM). 4.� The ESMF provides a thorough review of the institutional and legal context of the water and sanitation sector in the country from an environmental and social perspective and the existing national requirements for the EIAs, and identified environmental and social issues related to the proposed investments that would be financed by the project. Specific procedures in the ESMF include: (a) environmental and social screening of activities, and construction manuals; (b) public consultation and complaint and conflict resolution mechanisms design; (c) mitigation measures required during and after works implementation; and (d) project monitoring. 5.� The ESMF was developed in a participatory manner facilitating intersectoral participation in which the various project counterparts and the Environmental Secretariat (SEAM) were active partners.

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6.� The detailed project description, including objectives and components, is presented in Annex 4. Potential Environmental and Social Impacts of the Project 7.� Both ESSAP and SENASA have an inventory of priority works that they propose to be financed with the proposed Loan. A long list of potential investments has been identified, and it will be finalized after the results of the updating of the Sewerage System Master Plan for Asunción and its metropolitan area are available, and through a process of subproject identification during implementation. At this time, eligible types of projects have been identified, but specific location and setting have not yet been finalized. These settings vary considerably with respect to their potential environmental and social impacts. 8.� SENASA’s civil works will mainly involve construction or expansion of existing water systems in rural areas. Thus, it is expected that the likely incremental environmental and social impacts will be LOW. On the other hand, ESSAP’s civil works are mainly large-scale sewer systems in urban centers. The likely environmental impacts of these works are considered to be potentially HIGH. 9.� A screening mechanism has been developed for evaluating the potential environmental and social impacts of proposed subprojects. The ESMF describes the detailed methodology that will be applied for the screening and scoping process and identifies the type of projects that will require a more thorough environmental and social assessment as subprojects are identified during implementation. The ESMF screening methodology will take these differences into account and has clear requirements for differentiated social and environmental analysis based on the level of risk and impacts. 10.� In addition, the country’s water and sanitation sector requires institutional strengthening measures with respect to the capacity for carrying out environmental and social responsibilities. The ESMF describes a program to address the sector’s environmental and social issues, and those of the project, by means of two groups of actions: (a) strengthening of sectoral issues through SEAM; and (b) application of a concrete mitigation Plan for the environmental and social impacts, the guidelines of which are included in the ESMF. 11.� While many of the subprojects to be financed by the project will be of a small scale, given the likely nature and scale of the urban sewerage and wastewater treatment works, the project has been classified as an environmental Category A. Since specific works are not yet identified it is not possible to conduct a conventional EIA at this time. However, it is possible to describe the most likely risks and impacts that the project will face. Preliminary risks and impacts are described in the following sections, and in more detail in the ESMF. Expected Environmental Impacts and Benefits 12.� Environmental baseline conditions. Paraguay’s water and sanitation sector requires measures to address current environmental problems. Low sewerage coverage is a critical

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problem in Asunción and its metropolitan area, where only 33 percent of the population71 is connected to the system. The rest of the wastewater infiltrates shallow aquifers (which in turn are used as a source of water supply), or are discharged directly into the streets, creating serious public health and environmental pollution consequences. Both ESSAP and SENASA have a preliminary inventory of prioritized works they are proposing to be financed through the proposed loan. 13.� Rural works, including construction or expansion of water supply systems, and communal sewerage. The environmental and social impacts associated with these works are considered low and no significant and irreversible environmental damage is expected. These works will have minor environmental impacts, mostly nuisances such as disposal of low levels of construction waste, dust, noise, and erosion control. The protection of spring catchments in rural areas will be addressed by appropriate guidelines that will be incorporated into the technical specifications of construction contracts. Appropriate environmental and social screening criteria (previously agreed for water and sanitation subprojects for the Fourth Rural Water Supply and Sanitation Project [BIRF IV] loan and applied since 1997) have been updated and presented in the ESMF. 14.� Urban works. The sewerage and wastewater treatment works being considered under the project have the potential for significant adverse environmental impacts if not properly planned and implemented. Potential environmental impacts of eligible subprojects could arise during both the construction and operational phases of the subprojects. During the construction phase, likely impacts include those commonly associated with civil works construction projects. Among other concerns, these typically include dust and noise control, traffic congestion, management of construction and demolition waste materials, loss of local habitats through land clearing, and management and disposal of hazardous construction materials such as fuels and lubricants. During the operational phase of subprojects, potential environmental impacts are mainly related to the operation of large wastewater treatment facilities. Possible impacts include reduction in water quality in the receiving waters and the resultant impacts on local and regional human and ecological health, odor and noise from plant operations, disposal and management of sludge (bio-solids) generated from plant operations, and loss of access to the site. 15.� However, according to what the program envisions to support for the urban areas, the potential adverse impacts of works should be considered against the project’s expected positive environmental impacts. These include: (a) consolidating and improving water resources management in the country; (b) connecting people to sewage collection and treatment systems in the Asunción metropolitan area and other urban centers, thereby protecting water sources and urban streams; (c) increasing efficiency of the water supply services; and (d) improvement in human and environmental health by reduction of exposure to contaminants. The most significant potential impacts are those associated with the proposed river outfall, which would dispose of sewage from a proposed treatment plant in Asunción.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �71 The municipalities in the Asunción metropolitan area include (sewerage coverage in parenthesis): Asunción (67%), Lambare (16%), Fernando de la Mora (6%), San Lorenzo (9%), Luque (14%), M. Roque Alonso (12%), Limpio (14%), and Villa Elisa (0%).

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Expected Social Impacts and Benefits 16.� Potential social impacts during the construction phase of subprojects include loss of land or structures, loss of access to areas for livelihood support, public safety, noise, and other nuisance disruptions at sensitive receptors such as schools. Site selection for major facilities such as the wastewater treatment plant can be expected to be locally controversial among directly affected people and other stakeholders. Resettlement 17.� According to the assessment of the preliminary list of prioritized works, the need for involuntary displacement of people or land acquisition is expected to be low for the subprojects in urban areas. Any resettlement—if it does materialize—would likely be of small scale and would not trigger the need for a full resettlement action plan. Nevertheless, as a precaution, the classification of subprojects of the ESMF describes actions and procedures to be followed in case any involuntary displacement in urban areas does occur. 18.� As part of the ESMF, the project counterparts have developed an Involuntary Resettlement and Land Acquisition Policy Framework (IRLAPF), which specifies the procedures, eligibility, conflict resolution, and other measures to be followed in the event that resettlement or land acquisition is required for any subproject. Once the location of the works is known during project implementation, individual resettlement or land acquisition plans will be prepared for each subproject as necessary. At this stage no expropriation or taking of land is envisioned. If Individual Resettlement Plans are necessary, they will be reviewed and approved by the Bank before being implemented. 19.� In rural areas, project works are not expected to cause involuntary displacement. The project will follow established practice where communities provide suitable land for the construction of water and sanitation systems. The planning and consultation process for individual community projects will verify that such contribution of land is voluntary and involves no coercion. The process will include verification that individuals and families have the option to refuse to donate their land. In the event that involuntary displacement as defined in the Bank’s policy 4.12 takes place, the principles and procedures defined in the project’s IRLAPF will apply. Indigenous Peoples 20.� Communities considered indigenous under the Bank’s policy definition will be direct beneficiaries of several of the rural works planned. No negative impacts to indigenous peoples (IP) are expected as a result of project works. Nevertheless, an Indigenous Peoples Management Framework (IPMF), as part of the Project’s ESMF, has been prepared to ensure that: (a) works are culturally appropriate, (b) works and services provided do not inadvertently induce inequality by limiting project benefits to the stronger elements of the community, and (c) the project engages with communities through a consultation process appropriate to the local cultural context and local decision-making processes.

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21.� IPs in Paraguay are the most excluded social group, experiencing extreme poverty and serious social problems. They represent only 1.7 percent of the total population (about 87,100 people), according to the most recent Indigenous Peoples Census (2002). IPs show a higher population growth rate (3.9 percent) than the average for the national population (2.7 percent). Therefore, it is possible to expect that the proportion of IP will continue to grow for some time, even though they will continue to be a small proportion of the total population, and will continue to be assimilated into the population. 22.� There are 19 different ethnic groups72 belonging to five linguistic families,73 with the most numerous belonging to the Guarari linguistic family74 (46,000 or 53 percent), followed by the Maskoy linguistic family groups75 (21,000 or 24 percent). The four largest IP groups are the Ava-Guarani (13,400 or 15.5 percent), Mbyá (14,300 or 16.7 percent), Pâí Tavyterâ (13,100 or 15.2 percent), and the Nivacle (12,000 or 13.9 percent). Most indigenous peoples speak their own language and have a limited command of Spanish. 23.� The great majority of IPs (91.5 percent) are in rural areas, distributed almost evenly between the Chaco region (49.3 percent) and the Oriental region (50.7 percent). The current distribution represents a significant change from the situation in the early 1980s, when about 67 percent of IPs were in the Chaco region. This change reflects population movements in search of more resources in the Oriental region, and a better counting of IPs in areas previously not included in the census in the Oriental region. 24.� IPs have little access to health services; only 26 percent of communities have access to a health post or center. Child mortality is 93.9 per thousand. Fertility rates among IP women are extremely high, reaching 6.3, compared with 3.9 for the average fertility rate and 5.1 for rural women. While there are differences among the fertility rates of various ethnic groups, most of them are above the national average. The five largest groups present fertility rates ranging from 5.5 in the case of the Nivacle to 8.4 among Aché women. Only the Tobas and the Enlhet Norte have lower fertility rates than the national average. 25.� Illiteracy among IPs (15 years of age or older) is 51 percent, compared with 7.1 percent for the total population. Furthermore, average school years for IPs 10 years of age and older is barely 2.2 years, while the national average is 7 years. 26.� Only 2.5 percent of IPs has access to drinking water and only 1.1 percent has sanitation services. Eighteen percent of the IPs living in urban areas has access to water and sanitation, while only 1.3 percent of those living in rural areas has access. This situation is also particularly important because water is part of indigenous culture, and IPs take open access to it for granted.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �72 According to the II Indigenous Census, there are 19 ethnic groups: Guaraní Occidental, Aché, Ava-Guaraní, Mbya, Pai-Tavytera, Ñandeva, Maskoy, Enlhet norte, Enxet sur, Sanapaná, Toba, Angaité, Guaná, Nivaclé, Maká, Manjui, Ayoreo, Chamacoco (Yvytoso & Tomaraho), and Toba-Qom. 73 Guaraní, Maskoy, Matako, Guaicurú, and Zamuco. 74 Guarani-occidental, Guarani-Ñandeva, Ava-guarani, Aché, Mbya, and Pai Tavyterá. 75 Enlhet norte, Enxet sur, Sanapaná, Toba, Toba-Maskoy, Angaité, and Guaná.

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27.� Poverty among IPs is extremely high. While there are no nationwide representative household survey data regarding poverty among IPs, existing data from various projects financed by the World Bank (PRODECO, PARN, JSDF) and other donors, and local nongovernmental organizations (NGOs) working with IPs in Paraguay, suggest that the poverty rate among IPs is above 95 percent. IP survival strategies include a combination of economic activities (subsistence farming, hunting, fishing, gathering, occasional paid labor, and handicrafts). However, the precarious state of these different activities results in persistent poverty and extreme vulnerability to shocks. The social organization of IP communities is based on kinship and co-residence. While Caciques (community leaders) have a great deal of authority and decision-making power, indigenous groups do not necessarily take their decisions as binding. This has important consequences for the establishment of contractual relationships among members of a community and conflict resolution, since if there is no strong agreement the dissenting party will walk away from community commitments. 28.� At the national level there are various indigenous organizations that claim either regional and/or national representation. These organizations do not have independent funding and have to rely on the Instituto Paraguayo del Indígena (INDI), church organizations, or other civil society groups for support. This situation has generated clientelism. In some cases, organizations supporting indigenous groups have sought from the communities exclusive legal powers to represent the community. This pattern of relationships has generated conflict among the various organizations and made it more difficult for them to coordinate activities across different IP organizations. 29.� The latest census data reveal that 54.1 percent of indigenous communities do not have land of their own, that is, they do not have a property title in the name and at the disposal of the community itself, while 21.8 percent have community land but without a title, and 23 percent have no land of their own, which means that 46 percent of indigenous communities do not have their own land. 30.� The indigenous ethnic groups of Paraguay that have not undergone the process of cultural interbreeding were seen as belonging to the wild nature of the forests of the Eastern and Western Regions of the country, where most of the IP had taken refuge during the colonial period. However, IPs, like the rest of the Paraguayan population, faced land problems after the so-called Guerra Grande of 1870 (the war in which Paraguay confronted Argentina, Brazil, and Uruguay), when large amounts of public land were sold to foreign companies, including their occupants. These lands became a sort of indigenous reserve, at least until they were divided into plots and sold to third parties, again including their occupants, in the 1960s. At present, IPs face loss of tribal territories, segregation, and an absence of public policies to accompany the legal adjudication of lands, so they can have possibilities of survival in the new conditions. Moreover, indigenous groups turn more and more to the Inter-American Court of Human Rights to claim rights as safeguarded by the National Constitution and by International Labour Organization (ILO) Conventions 107 and 169. 31.� Particular social organization and cultural aspects of each ethnic group will be recorded at the time of the social assessment of each Indigenous Peoples Plan (IPP) to ensure that the assistance provided to IP is respectful of their culture.

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Applicable World Bank Environmental and Social Safeguard Policies 32.� The project triggers the following World Bank safeguard policies: Environmental Assessment (OP 4.01), Indigenous Peoples (OP 4.10), Involuntary Resettlement (OP 4.12), and International Waterways Safeguard Policy (OP 7.50). The Natural Habitats (OP 4.04) and Physical Cultural Property (OP 4.11) are also triggered in case any of them is triggered in any particular subproject. 33.� The project will manage sectoral environmental and social issues and impacts caused by the project through two sets of related actions: (a) by strengthening the institutional capacity of implementing authorities to address sectoral issues through the Environmental Secretariat (SEAM); and (b) by applying a specific plan to mitigate environmental and social impacts, under guidelines set out in the ESMF for the project. An Involuntary Resettlement and Land Acquisition Policy Framework (IRLAPF) and an Indigenous Peoples Management Framework (IPMF) are already being disclosed by the borrower. To ensure the environmental and social sustainability of the subprojects proposed in the WSSMP, the Government of Paraguay, through the institutions responsible for the execution of the subprojects, adopted these guidelines, which are consistent with Bank policy requirements. � Environmental Assessment (OP 4.01) �34.� Based on the project’s potentially significant environmental and social impacts resulting from the construction and operation of urban sewage collection, wastewater treatment, and disposal into the Paraguay River, the project is considered an environmental risk Category A. As mentioned, an Environmental and Social Management Framework (ESMF) has been developed to guide the project’s overall approach during implementation. 35.� The project will incorporate consideration of environmental and social issues at various levels of analysis during implementation. First, explicit environmental and social planning criteria will be included as part of the updating process to the Sewerage System Master Plan of Asunción metropolitan area. The Master Plan revision provides an ideal opportunity for considering the environmental and social risks and benefits of different strategic alternatives at the system level. TORs for the environmental and social consideration of the Master Plan process have been developed and incorporated into the Master Plan study. 36.� Second, once specific works have been identified, site-specific Environmental Impact Assessments (EIAs) will be carried out during project implementation. Site-specific EIAs commensurate with expected levels of impacts would focus on operational details at each site and would include specifications for management of construction impacts and other impacts expected during the operational phase of implementation. For high-risk Category A-type subprojects, site-specific EIAs will be carried out in accordance with detailed TORs that have been agreed with the World Bank. These assessments will contain specific studies and recommendations on how to address environmental and social management issues for wastewater discharges, promote water efficiency, and support health issues related to the water sector.

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37.� The ESMF includes samples of generic EIA TORs for high-impact works such as the wastewater treatment plant. The sample EIA TORs includes general information about the project; the specific requirements, depending on the works; a description of the works and the physical, biological, and sociocultural environment; a review of the country’s relevant legislation; a description of potential impacts, both positive and negative, and the proposed measures to address them; an assessment of the institutional capacity of the agencies to implement the proposed measures; and a monitoring plan. It also includes the details about the qualifications of the consultant or consultant team, the schedule, and other relevant information. Indigenous Peoples (OP 4.10) 38.� Based on a rapid social evaluation of the last project (BIRF IV) interventions in IP communities, all the potential impacts of the project are expected to be positive. The direct beneficiaries of the project are IP communities, and all foreseen measures are aimed at enhancing its positive impacts. Based on the previous experience with interventions in IP communities, an Indigenous Peoples Management Framework (IPMF) was prepared, which aims to guide the responsible agencies’ interventions in IP communities, particularly in the preparation and implementation of Indigenous People’s Plans (IPP) for all beneficiaries during the implementation of the Project to ensure they are respectful of the IP communities, culture and the works are consulted and culturally appropriate. 39.� This Policy is triggered because indigenous communities will benefit from the project. The IPMF, which contains a framework for the IPP, has been prepared within the integrated assessment carried out as part of ex-post evaluation of the Bank’s now closed Fourth Rural Water Supply and Sanitation project (BIRF IV) and preparation of the present project. The assessment included various methods such as a review of the legal framework of the country, governed mainly by the national agency in charge of IPs, the Intituto Paraguayo del Indígena (INDI); institutional capabilities of project implementers; quantitative and qualitative data including socioeconomic, cultural and political, and participation context. The results of these studies served as the basis for the informed consultations with stakeholders, including beneficiaries, those that have already been benefited by BIRF IV (ex-post evaluation), and new ones for the proposed project. 40.� Assessment objectives included: (a) refining eligibility criteria to prioritize areas of intervention and groups to benefit; (b) participation strategies and delivery modes with positive identification of the most vulnerable groups, including a gender perspective; (c) mechanisms to coordinate the supply and demand of water and sanitation investment in indigenous communities; and (d) addressing training needs, among other aspects, that will fully include the main lessons of BIRF IV ex-post evaluation. 41.� The IPMF, elaborated during project preparation, aims at effectively promoting IP participation throughout the project cycle. The general objective of the IPMF is the inclusion of the IP communities in the project in order to achieve the highest possible positive impact of the interventions to improve their quality of life, through strengthening of their organization, self-management, and integral capacity of their members. The specific objectives of the IPMF are to:

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(a) achieve institutional capacities to attain the proposed goals and objectives; (b) establish appropriate information-, communication-, and diversity-training strategies with the different IPs and communities in all stages of the project; and (c) articulate support networks with indigenous organizations, local GOP, and indigenous institutions to guarantee diverse and efficient participation. Involuntary Resettlement (OP 4.12) 42.� Specific works, for both rural and urban areas, are still in the process of definition. Nevertheless, based on experience from other projects and from an initial screening of eligible expenditures, it is anticipated that works are not likely to lead to significant involuntary displacement. An Involuntary Resettlement and Land Acquisition Policy Framework (IRLAPF) has been prepared to guide the project’s implementing teams in the event that resettlement or land acquisition, as defined in the Bank’s policy 4.12, takes place. 43.� This Framework envisions the development of measures that bridge the gaps of national legislation due to, among other factors, the nonexistence of a national law of expropriation and compensation that is equivalent to the principles of the OP 4.12. Therefore, the IRLAPF established a group of principles to be observed in the IRLAPF): (a) inclusion and reestablishment of previous conditions regardless of the form of ownership or use given to the property; (b) equity in the entitlement, and equal treatment for all affected people; (c) information to all affected people in a clear, truthful, and timely way about their rights and obligations; and (d) freedom of choice of the compensatory measure to all persons affected. Possible sites for the plants in the urban area would be assigned by the Municipality of Asunción or would be acquired by ESSAP. If these negotiations do not materialize and private property has to be acquired, it will be done according to the principles and procedures stated in the IRLAPF. Among other aspects, this framework foresees that payment in the cited case has to be made at the total cost and always prior to initiation of the works, and assistance for replacement has to be provided if relevant. 44.� In rural areas, project works are not expected to cause involuntary displacement. The project will follow established practice where communities provide suitable land for the construction of water and sanitation systems. The planning and consultation process for individual community projects will verify that such contribution of land is voluntary and involves no forms of coercion. The process will include verification that individuals and families have the option to refuse to donate their land International Waterways (OP 7. 50) 45.� The proposed Project requires application of the Bank policy on International Waterways OP/BP 7.50 as the Paraguay River is an international waterway as defined under OP 7.50. Riparian countries of the Paraguay River Basin are Argentina, Bolivia, Brazil, and Uruguay. The Project aims to improve the current situation by addressing raw sewerage discharges to the Paraguay River and to improve the overall environmental and sanitary conditions of Asuncion’s metropolitan area. The Bank’s staff technical assessment has concluded that the nature of the works envisaged under the proposed Project are not expected to adversely affect the quality or

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quantity of water flows to the other riparians, nor are they expected to be adversely affected by other riparians’ water use. On the contrary, the project should contribute to improve the water quality of the river, and have a positive impact on its environment. 46.� Notification under OP 7.50 to these four riparian countries took place for the first time on June 16, 2008 but no project details were provided at that time. Notification with project details was provided on January 28, 2009 to Argentina and Uruguay and on February 5, 2009 to Bolivia and Brazil. However, while these notification letters provided project details, they did not contain a specific deadline to respond, as required by BP 7.50 paragraph 4. These countries were notified by the Bank, on behalf of the Borrower, under OP 7.50, and were requested to provide a response by March 19, 2009. The nature of the works envisaged under the proposed Project are not expected to adversely affect the quality or quantity of water flows to the other riparians, nor are they expected to be adversely affected by other riparians’ water use, but on the contrary, should contribute to improve the quality of the river, and have a positive impact on the environment. 47.� By March 19, 2009, the Bank received a positive response from the Government of Uruguay, but did not receive any response from any of the other three riparian countries. Subsequently, Management approved further processing the proposed operation, including the presentation of the proposed operation to the Bank’s Board of Executive Directors, for approval thereof. Natural Habitats (OP 4.04) 48.� Since the precise location and operational details of planned civil works are not known at this point, it is not possible to rule out potential impacts on natural habitats. The planning criteria for the Master Plan study, subproject screening mechanisms, and the site-specific EIA for subprojects will all include specific assessment of potential impacts on natural habitats with particular emphasis on critical natural habitats as defined under the Bank policy. Physical Cultural Resources (OP 4.11) 49.� As with Natural Habitats, since the precise location and operational details of planned civil works are not known at this point, it is not possible to rule out potential impacts on physical cultural resources as defined under the Bank policy. Screening procedures and TORs for site-specific EIAs will include assessment of potential impacts. In addition, construction contracts will include a chance-find clause, which will specify measures to be taken in the event that physical cultural resources are encountered unexpectedly during construction of civil works. Environmental and Social Management Framework (ESMF) Purpose of the ESMF 50.� The objective of the ESMF is to provide a management instrument that provides technical guidance on applicable legal and regulatory requirements, institutional responsibilities,

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methodologies, instruments, and procedures in order to ensure adequate analysis, mitigation, and management of socio-environmental risks and impacts during the entire project cycle. Scope and Coverage of the ESMF 51.� The ESMF is intended to be both flexible and dynamic in order to adapt to the needs and special characteristics of the project, and to include elements aimed at addressing socio-environmental risks and impacts assessment and their management during the entire project cycle. 52.� The complete ESMF document is available on the ESSAP, SENASA, ERSSAN, and SEAM webpages. The ESMF includes the following: (a) a diagnosis of the standards, laws, and regulations that need to be taken into account in the framework of the socio-environmental issues, and identifying the institutions that will be involved in the project; (b) a description of an easy and efficient methodology to categorize subprojects according to the level of socio-environmental risk, to identify the assessments required to comply with national environmental legislation, and with the Bank Safeguard Policies; (c) a description of a series of internal-use instruments that need to be developed in each phase of the project cycle to ensure the incorporation of the socio-environmental variables during the entire project cycle; (d) a discussion of agreed responsibilities and socio-environmental management procedures that need to be applied during the entire project cycle to ensure adequate management during the execution of the works; and (e) a plan to strengthen environmental and social institutional capacity, identifying a series of activities leading to benefiting the sector and enhancing the quality of the subprojects. Public Consultation and Disclosure in Designing the ESMF 53.� The development of the final ESMF has been based on a consultative process that sought feedback from key stakeholders. Disclosure and consultation of the ESMF, including a Resettlement and Land Acquisition Policy Framework, and the Indigenous Peoples Management Framework have been completed and are being carried out as follows. Project Preparation 54.� Multiple stakeholder groups were involved in defining the overall framework for environmental and social management scope, as defined in the ESMF. Disclosure and consultation of the ESMF started with a presentation of the document carried out on April 10, 2008. Following the presentation, the document was published on the ESSAP, SENASA, ERSSAN, and SEAM websites on April 14, 2008, and via the Bank’s Infoshop on May 7, 2008. The ESMF was later updated incorporating the comments received and a new version was published on the institution’s websites and via the Bank’s Infoshop on June 2, 2008. Another updated ESMF comprising the extensive IPMF and the IRPLAF were all presented in local workshops, followed by their disclosure on the ESSAP and SENASA websites on December 26, 2008. The last group of consultation workshops of the ESMF, the IPMF, and the IRLAP took place on January 30th.

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Consultation and Disclosure during Project Implementation 55.� Project implementation: The ESMF’s disclosure on the websites of the counterpart institutions will continue during project implementation. The ESMF’s instruments disclosure and consultation will be carried out following the procedures foreseen in their disclosure and consultation plans, which are consistent with the general principles and procedures of the ESMF disclosure and consultation plan. 56.� The ESMF and its specific instruments provide guidelines and procedures for further consultations during project implementation, in particular in defining and designing subprojects and specific works. The consultation frameworks provide systematic guidance to address potential risks and to enhance quality, targeting, and benefits to the population. Dialogue and disclosure actions during the assessment and execution process of a subproject are designed to ensure that those stakeholders involved, whether they benefit from or are affected by the impacts of works, are well informed and participate in the decision-making process. The ESMF procedures consider the level of environmental and social risk of each work to allocate time and effort to consultation. Analysis of Alternatives 57.� Project alternatives will be considered at various stages of project implementation, first, during the updating to the Sewerage System Master Plan of Asunción metropolitan area, when various alternative strategies and design options will be finalized. Second, since the project is essentially demand-driven and participatory in nature, specific alternatives will be discussed in the context of community planning and identification of subproject proposals. The planning methodologies proposed for the project are highly participatory in nature and will provide numerous opportunities for beneficiaries and other stakeholders to provide input to the decision process. Third, for subprojects requiring a site-specific EIA, such as large infrastructure works associated with sewerage, wastewater treatment, and river outfall construction, alternatives will be addressed at two levels: through the master planning level and through the specific project technical design. Terms of Reference for the EIAs include specific requirements for alternatives analysis. In addition, the project will support overall system planning including evaluation of strategic options. Environmental and Social Categorization Methodology of the Subprojects 58.� The methodology comprises these five macro-processes: (a) typology of the subproject, (b) classification of subproject according to the sensitivity of the natural environment where they will be developed, (c) environmental categorization of the subproject, (d) classification of a subproject in function of its sensitivity to the social environment, and (e) environmental and social categorization of the subproject. Procedures to be followed and the instruments to be used for each category of subproject throughout the entire project cycle are presented in the ESMF.

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Environmental and Social Management Instruments Internal environmental and social instruments according to subproject categories through the project cycle

59.� The reports prepared for internal use in the different stages of the project cycle are as follows: (a) Preliminary Environmental and Social Assessment Form (PESAF), (b) Environmental and Social Assessment Report (ESAR), (c) Environmental and Social Follow-up Report (ESFR), and (d) Final Environmental and Social Report (FESR). All these reports must be completed by the agency that executes works or to whomever said responsibility is delegated. Preliminary Environmental and Social Assessment Form (PESAF) 60.� The Environmental and Social Category of a subproject, according to the above-mentioned methodology, is completed in the PESAF, generally by means of secondary information and a field visit as required. By applying this form it will be possible to determine whether an Environmental and Social Impact Assessment (ESIA) is necessary or whether complementary environmental and/or social studies are required to comply with the Bank’s Safeguard Policies and national environmental legislation. Environmental and Social Assessment Report (ESAR) 61.� This is a summary of the results of the environmental and social assessment process of a specific subproject. Some of the aspects included in this document are the studies carried out, the environmental and/or social budget required for the implementation of environmental and social actions and measures, among others.

Environmental and Social Follow-up Report (ESFR) 62.� This report is required for follow-up before contracting and during the execution of the works in order to ensure the execution of the actions agreed in the respective Environmental and Social Management Plans. During the execution of works, the ESFR contains information on the regular field visits performed during the execution of the works with other complementary Plans identified during the assessment of the subproject. It also includes information on the people that visited the subproject and concludes with recommendations. Final Environmental and Social Report (FESR) 63.� This document is required once the construction stage of the works has been completed to verify compliance with all the actions and measures agreed on in the respective plans.

64.� Procedures for the management of environmental and social instruments according to subproject categories through the abreviated project cycle.

65.� The following matrix summarizes required studies, plans, and documents according to subproject categories during their assessment, execution, and finalization.

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Matrix 1. Summary of Environmental and Social Studies, Plans, and Documents through the Abbreviated Project Cicle

Level of Environmental and Social Risk Stage of Analysis Category A Category B Category C

Profile

PESAF

PESAF PESAF

Prefeasibility Study of

alternatives; planimetric design.

CAB Municipal Location Certificate (MLC) and the Declaration of Departmental Interest (DDI). TORs for ESIA. Public consultations.

CAB Municipal Location Certificate (MLC) and the Declaration of Departmental Interest (DDI). TORs for ESIA. Public consultations.

Environmental and Social Assesments (ESA). IR or LAP; IPP; among others. Public consultations.

Feasibility ESAR Environmental and Social Impact Assessment (ESIA) IR or LAP; IPP; among others. Public consultations.

ESAR Environmental and Social Assesments (ESA). Environmental and Social Management Plan. IR or LAP; IPP; amongothers. Public consultations.

ESAR Application of General Environmental Technical Specifications for the Water and Sanitation Sector Manual GETSWS; and Sworn Declaration of Application of GETSWS.

Assessment

Engineering Design ESFR

ESFR

ESFR

Environmental License.

Environmental License.

Non-objection of the Bank.

Non-objection of the Bank.

Non-objection of the Bank.

Bidding and Contracting

Bidding for Works Contracting.

Bidding for Works Contracting.

Bidding for Works Contracting.

Execution of Works and Supervision

ESFR

ESFR

ESFR

Construction of the Works Completed

and Administrative

Closure

FESR FESR FESR

Operation and Maintenance

Follow-up is the responsibility of each of the operational areas.

CAB = Basic Environmental Questionnaire. FESR = Final Environmental and Social Report. ESAR = Environmental and Social Assessment Report. IPP = Indigenous Peoples Plan. ESFR = Environmental and Social Follow-up Report. LAP = Land Acquisition Plan.

66.� The process and procedures to apply the above-cited instruments in each stage of the subproject cycle are available in the ESMF of the Project.

�

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Strengthening Environmental and Social Management Capacity

67.� The ESMF describes a number of weaknesses and opportunities for improving and strengthening of the environmental and social management capacity at the sector level. The institutional capacity-building plan proposes specific activities aiming to enhance environmental and social management skills, training, and equipment. A specific budget has been allocated and will be executed during project implementation. There is full agreement with the Borrower on the actions required to strengthen institutional capacity, and staff with expertise in these areas have already been hired prior to project approval, indicating commitment on the part of the Borrower to address these issues in an integrated manner. This is also reflected in the organizational structure, where environmental and social management is integrated with planning units rather than working in isolation.

68.� Capacity building of human resources to comply with the functions expected from the Environmental and Social Unit include: (a) supervision of compliance with environmental and social laws, decrees, instructions, procedures, and manuals; (b) preparation of TORs and budgets for the execution of the environmental and social studies, tools, and works; (c) support of the Procurement Unit and others as needed to ensure compliance on environmental and social issues; (d) coordination with the Communication Unit or whatever instance the issues relating to the Communication Plans of the ESMF, including the Plans arising from it; (e) monitoring of the activities results according to specific indicators to compare with preestablished standards, and if necessary; (f) the proposal of corrective measures.

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Annex 11: Good Governance Strategy

PARAGUAY: Water and Sanitation Sector Modernization Project Governance and Anticorruption in Paraguay76 (a) Context 1.� Paraguay presents serious challenges in the areas of governance and control of corruption. The 2006 World Bank Institute (WBI) Governance Indicators and the Transparency International indicators presented Paraguay as an outlier in all dimensions of governance performance compared to other countries in the region. Similarly, Paraguay underperforms countries with similar economic development (middle income) in the various dimensions of governance (Figure A11.1). The recent Presidential elections had a strong focus on the need to improve governance and bring about significant change in what is perceived as a critical handicap for moving into a more advanced phase of development. The Lugo Administration obtained a strong mandate from the electorate to improve governance conditions in the country and has shown a strong commitment and determination to take serious steps in that direction. 2.� The root of the problem can be traced back to Paraguay’s history and political economy. Under a dictatorship during most of the second half of the 20th century, during the early 1990s Paraguay began a timid transition to democracy under the same party—the Colorado Party—that had been the cornerstone of the dictatorship and had a firm grip on all state activities. Since the 1990s, there has been steady progress toward political competition and democratic processes. However, there has been limited progress in removing the pervasive culture of patronage, clientelism, and political control in the management of government that continues to be the legacy of the Stroessner dictatorship. One dimension of this culture is the exorbitant powers provided to Congress over the selection and salary scales of civil servants. As a result, Paraguay’s civil service is among the weakest and most politicized in Latin America, despite the fact that the country’s expenditure on public sector salaries is well above the regional average (Figure A11.2). Figure A11.1: Index of Corruption Figure A11.2: Quality of the Civil Service

Source: DEEG household survey data, and LAC.

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3.� Over the past 10 years, Paraguay has made some progress in selected areas of governance. The Bank, through the WBI, played an important role in helping the country define its first Anti-Corruption Strategy in the late 1990s and, as a result, there has been some tangible progress in the areas of public procurement and customs. Despite this progress, overall achievements remain limited and public distrust of the state and its institutions is deeply rooted. Paraguay has, however, shown some relative improvement in the drive and strength of its civil society, and has exhibited an increase in social and political openness and an improvement in political stability as the political system has more systematically abided by constitutional rules. As clearly reflected in the recent presidential elections, there is growing impatience in society as a whole with the slow progress achieved in the areas of control of corruption, government effectiveness, and the prevalence of rule of law in resolving social and political conflict. The decision by the electorate to vote out the Colorado Party and bring a broad opposition coalition to govern the country is a reflection of both the increased maturity of Paraguayan democratic institutions and the strong will of the citizenry that there is a need for radical change in all the dimensions of governance. 4.� During the last administration, there was a significant effort to improve governance effectiveness, which had been seriously eroded to the point that the state’s short-term financial viability was at stake. Improving tax collection and strengthening the revenue base became a critical priority. The Duarte Administration achieved an important success in this area, as evidenced by an average budget surplus of 1 percent of gross domestic product since 2004. This effort has been complemented by important initiatives aimed at modernizing fiscal institutions. The strengthening of the Ministry of Finance and its various dependencies was identified as a key priority and an area in which the Bank played an active role. 5.� Despite several accomplishments in modernizing fiscal institutions, most institutions and fiduciary systems remain weak. There is wide scope for collusion in public procurement, despite the progress made in increasing transparency and improving competition. The new Government will continue to face challenges in the fiscal area, including the need to develop a fiscal framework to evaluate and prioritize expenditures and to introduce further improvements to public expenditure management. The budget process remains very weak, while treasury and payments systems are rudimentary. In addition, the new Government will have to address the issues of (a) reforming public employment and compensation, and (b) improving the management of the public investment program. 6.� There are also new demands for action in other critical governance areas. The strong stance taken by the new administration regarding the treatment of corrupt practices is very quickly straining the Government’s ability to investigate and sanction corruption. There is also a growing concern that a dysfunctional judiciary may soon become a bottleneck for the type of progress the Government is expecting to achieve on the anticorruption front. Progress is also needed in other areas that may help prevent corruption, including improving transparency and access to information on public decision-making activities and introducing civil service reform. In all these areas there will be a need to ensure coordination with other donors who are also actively assisting Paraguay in handling this far-reaching, emerging agenda.

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(b) Bank Assistance 7.� Despite the significant constraints that governance conditions impose on Paraguay’s development, the Bank’s interventions to assist Paraguay in improving its governance performance and its institutions have, in the past, been limited. The 2004–07 Country Assistance Strategy represents a first attempt for the Bank to play a more active, albeit limited, role in improving governance and institutional performance. Therefore, the proposed project included the preparation of an Institutional and Governance Review, focused on functional assessments of the Ministry of Finance, Congress, and some courts, and an attempt to finance the strengthening of the Ministry of Finance, which was later suspended at the request of the incoming authorities. The Bank also made available an Institutional Development Fund (IDF) grant to Congress to strengthen its transparency, access to information, and to explore ways to improve efficiency. The grant has been successfully implemented and it has facilitated a dialogue on how to modernize the political system. 8.� As a result of the 2006 Risk Review, and, more recently, the launch of the Bank Strategy on Governance and Anticorruption (GAC), the Bank has taken a more proactive stance in assisting Paraguay in dealing with its governance challenges. Paraguay has been selected as a pilot country for the implementation of the GAC in the region, and a number of initiatives have been taken since to enhance the Bank’s role in governance and anticorruption matters.

•� Individual Projects: A full-fledged corporate governance component was introduced for the first time in the Road Maintenance Project approved in FY06. New governance and fiduciary features were also introduced in other projects, with the idea of gradually extending such features to all projects in the portfolio. •� On the portfolio side, the Bank has, over the past three years, moved increasingly toward risk-based management. Country Portfolio Performance Reviews (CPPRs) are held twice a year and look more comprehensively into corporate governance issues affecting the portfolio, including the need to integrate projects into regular state structures, to do away with outsourcing implementation to international executing agencies, to strengthen institutional oversight (especially on fiduciary aspects), and to create the incentives within the civil service to attract domestic capacity to manage public investments.

•� Broader support: Starting in FY08, the governance agenda in Paraguay gained momentum and broadened beyond government effectiveness and fiduciary matters. In early 2008, the Bank prepared Policy Notes for the incoming administration, which were presented to the authorities in a seminar in June 2008. Some of these notes were highly relevant to and complemented the governance agenda. In particular, through the note on public employment and the public service salary system, the Bank is assisting the Ministry of Finance in reviewing the civil service compensation system and public investment processes. Although the ultimate objective of the Notes is to provide an input to the Government’s medium-term fiscal framework, the results and information gathering are useful in understanding governance issues in public employment and investment programs. A short Policy Note on improving public service delivery in a key sector (that is, education), from the perspective of key stakeholders including civil society, was also prepared.

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9.� In August 2008, the Bank, jointly with other donors, organized an International Seminar on Governance and Development in Asunción to discuss with international leaders and experts the challenges ahead for an administration facing major shortcomings in governance. The seminar, which was formally part of the activities for the inauguration of President Lugo, was financed with grant funds from the Department for International Development (DFID). It was extremely successful from a number of perspectives. First, ownership was high, as marked by the presence of President Lugo, his designated Cabinet, and local political leaders throughout the various events, and by the excellent dialogue the President had with the principal invitees in private sessions. Second, the presentations covered highly relevant subjects, providing the incoming administration advice on some of the critical issues they will be facing in governance. Third, the Bank met government needs in a knowledge area that had been outside the regular scope of its dialogue with the country and played a catalytic role vis-à-vis the international community in putting together a highly prominent event. 10.� As part of the ongoing dialogue with the country on GAC matters, it is our intention to continue to provide the Government with advice and assistance in those areas that are deemed strategic in order to ensure continuous progress in the governance and anticorruption area. The Bank will be mobilizing internal and external resources to meet the needs that are identified by the GAC agenda. To further the GAC agenda, Paraguay was also included as one of the applicant countries of a multidonor grant from the Governance Partnership Facility. The purpose of the grant will be to support the strengthening of upstream governance arrangements and institutions to help prevent downstream corruption and assist Paraguay in implementing the preventive measures of the Organization of American States’s (OAS’s) Inter-American Convention against Corruption, which Paraguay has ratified. Good Governance Strategy for the Project 11.� The increased efficiency, and thus accrued effectiveness and sustainability, of water supply and sanitation (WSS) services depends highly on the governance77 environment and practices, including normative, regulatory, and institutional conditions of the sector and the agencies; and on transparency, accountability, and anticorruption efforts. Transparency is a key element of the supply side of governance that can make public agencies more accountable to governmental and nongovernmental stakeholders, providing them tailored information based on their individual needs through appropriate channels. Social accountability initiatives such as empowering stakeholders to better understand their entitlements and relevant sector issues are crucial to increase the demand side of governance and strengthen the overall governance environment. 12.� Therefore, any effort to establish incentives for improved WSS sector efficiency, effectiveness, and sustainability must be accompanied by an enabling framework to enhance the supply and demand sides of governance.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �77 The WBI defines governance as the traditions and institutions by which authority in a country is exercised for the common good. This includes: (a) the process by which those in authority are selected, monitored, and replaced; (b) the capacity of the Government to effectively manage its resources and implement sound policies; and (c) the respect of citizens and the state for the institutions that govern economic and social interactions among them.

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13.� All preliminary assessments showed that if the project was to increase its chances of attaining its development objectives, it would have to be designed in such a way as to strengthen both the supply and demand sides of governance at the sectoral and agency level. The main challenges the sector faces are: (a) the existence of a mosaic of governmental and nongovernmental institutions (intrasectoral, intersectoral, or interjurisdictional), which operate, directly or indirectly, in the sector; (b) the lack of integral planning of services; (c) absence of a sectoral policy capable of maintaining an equilibrium between water supply and sanitation, the rural and urban, and the infrastructure works and the improvement of operational efficiency; and (d) lack of coordination among related sectors, especially an effective coordination with local governments and other service provisions, that is, pluvial networks and solid waste. At the interior of the institutions, constraints to an effective management were identified in planning, communication, human resources, financial, and control functions. 14.� As a result, the overall approach of the project from the outset of its design has been to promote as a guiding theme in all components: (a) transparency, (b) participation, and (c) accountability.78 In addition, a Good Governance Strategy has been created with the aim of helping the agencies gradually reform toward improved corporate, regulatory, institutional, and sectoral governance environments and practices. 15.� The Good Governance Strategy for the sector comprises institutional-based and social accountability activities that are thought to (a) provide a comprehensive sectoral framework, which clarifies the roles and responsibilities of the different WSS sector agencies, and proposes measures to better coordinate interventions; (b) strengthen the corporate governance79 of ESSAP S.A. (the state-owned water and sanitation utility); (c) improve regulatory governance of ERSSAN (the sector’s regulator); (d) improve the institutional governance of SENASA (the agency responsible for rural water supply and sanitation provision), and SEAM (the Environmental Secretariat); and (e) increase cross-sectoral and sectoral governance. An Action Plan with a Monitoring Framework, including specific activities to address main good governance risk areas, was prepared by the involved agencies. Mitigation measures and possible remedies and sanctions for the risks are grouped into two areas: (a) effective management of the involved agencies; and (b) improved relationships of these agencies among themselves and with key stakeholders. Control of corruption is included in both areas. 16.� The objective of the Good Governance Strategy for the Paraguay Water and Sanitation Sector Modernization Project is to improve the accountability and responsiveness of service delivery. It seeks, on the one hand, to improve efficiency and effectiveness, and on the other, to

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �78 (a) Transparency: flow of timely and reliable information on the progress of activities and results obtained made accessible to all relevant stakeholders; (b) Participation: mechanisms designed to facilitate stakeholders having the opportunity to influence and share control over the decisionmaking about the initiatives that affect them; and (c) Accountability: planning and programming all interventions based on objective and quantifiable criteria that can be presented for public scrutiny. 79 Corporate Governance: In addition to the definition provided in Annex 4, Corporate Governance refers to the internal system encompassing policies, processes, and people, which serve the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture that safeguards policies and processes (Gabrielle O’Donovan).

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mitigate corrupt80 practices in the sector. In particular, the Strategy intends to promote: (a) an improved environment in which the sector agencies involved in the project assume a common sectoral vision translated into a concrete action plan; (b) ownership of the improvement process by the agencies, which besides managing their own commitments, would advocate for actions needed beyond their own realm of responsibility; and (c) the maintenance of an ethical and equitable approach in the distribution of results of the achieved vision and action plan. 17.� The Strategy encompasses institutional-based and social accountability activities aligned with the overall approach of the Project. Activities in the Strategy are intended to strengthen: (a) corporate governance of ESSAP S.A.; (b) regulatory governance of ERSSAN; (c) institutional governance of SENASA and SEAM; and (d) to provide a comprehensive sectoral framework, which clarifies the roles and responsibilities of the different WSS sector agencies, and proposes measures to better coordinate interventions. 18.� A monitoring matrix was developed as a tool to monitor and mitigate potential risks to good governance in the sector. This matrix was prepared in a participatory manner by the involved agencies. Mitigation measures to address these risks are grouped into two areas: (a) effective management of the involved agencies; and (b) the relationship of these agencies with key stakeholders. Control of corruption is included in both areas. General Criteria of Transparency, Social Accountability, and Procurement Processes 19.� All of the sector’s institutions must improve their governance and transparency as defined by law (the internal functioning of the institution and vis-à-vis the public). This is a high-priority issue for efficient service providers. Good governance norms that improve transparency and anticorruption will be generated. Explicit compromises (simple and verifiable goals and objectives) will be established between staff members and the community through the implementation of Citizen’s Commitment Charts. Ethic codes, public audiences, internal and external efficient audits, and in the case of institutions with a Directorate, audit councils, will be developed and implemented. Cross-cutting transparency and social accountability 20.� Transparency is key to improving sector governance, making providers more accountable to government, regulators, and clients, and therefore better aligning incentives for improved WSS sector efficiency. This activity supports the development of three key elements of this process: (a) empowering stakeholders to better understand their entitlements and key sector issues, (b) providing tailored information based on individual stakeholder needs, and (c) identifying the appropriate channels to disseminate information—and to receive feedback.

� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �80 Corruption is generally defined as “the abuse of public office for private gain.” In an environment of weak governance, it is believed that corruption may thrive; however, weak governance itself is not necessarily synonymous with corruption, but rather with different manners of inefficiencies. For instance, due to budgetary structure, bureaucracy, scarce resources, or inadequate management capacity, agencies may distort priorities, or otherwise not adequately prepare programs—all of which lead to inefficiency, but not necessarily as a result of or due to corrupt practices.

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21.� A comprehensive WSS social accountability program will be jointly developed by and for SESAN, ESSAP, ERSSAN, and SEAM, to empower stakeholders and raise awareness of sector issues. Activities for each agency will then be tailored to specific stakeholders (including other sector actors, clients, NGOs, media, and contractors) to raise awareness of sensitive issues such as environmental and service standards, operator roles and responsibilities, and developing effective feedback/complaint mechanisms. 22.� To foster improved partnerships with each stakeholder group, a wide range of instruments will be used, including (as appropriate) extensive communication campaigns, training of students and professors, cultivating specific journalists, workshops, site visits, and so forth. Effective communication also requires an intimate understanding of different stakeholder information needs, which will be assessed (including through a series of focus groups). Based on this assessment, an integrated system for data measurement and collection will need to be established (including the careful design of protocols for each set of data). 23.� Staff will need to be recruited and/or trained to manage these data and share them through the integrated data system (see above). In some cases, this will involve the creation of dedicated communication units (SENASA). An internal benchmarking system to measure performance across juntas or ESSAP service units will also be developed. 24.� Care will be taken to ensure that the above information is presented and disseminated in a user-friendly manner, tailored according to its specific audience (internal decisionmakers, other sector agencies, contractors, and clients). Technical assistance will be provided to develop and refine the agencies’ websites; link these to a unified sector website, and provide close tracking of the number of hits. However, to better reach key stakeholders, other (often more effective) channels will be used including providing information along with the water bill and developing interviews or programs on the radio. 25.� This transparency and social accountability program will be closely monitored and modified as appropriate. Contracting processes 26.� Transparent contracting processes are key instruments for improving sector governance and reducing corruption opportunities. Technical assistance will be provided across all sector agencies to ensure coherent implementation of best practices. These include (a) the establishment of a clear conflict-of-interest policy; (b) consistent procurement processes across the sector; (c) publication of all procurement plans, procurement notices, number offers, contracted firms, proposed activities, and dates through appropriate channels (as part of the information and accountability program); (d) creation and sharing of blacklists; (e) review of specifications by an independent entity; (f) separation of functions for staff involved in the procurement process; and (g) design of clear approval and certification processes to be included in the Operational Manual. This component will also finance regular technical audits in the field. 27.� The following matrix presents good governance risks and mitigation efforts.

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Good Governance Monitoring Matrix Effective Management

Improved Relationship with

Stakeholders

Control of Corruption

Planning and Human Resources

Procurement Audit and Control; Financial

Management

Communication and Coordination

Internal & Sectoral Internal Internal Internal &

sectoral External

Ris

k

Absence of the governing body of the sector that could integrate the basic functions of the sector into a single governmental unit as foreseen in the law (No. 1614). Therefore, no enforcement of existing sector regulations, no existing policies for the services, lack of strategic and operational planning capacity, etc.

Risks of conflict of interest in contracting processes.

Weak technical and human capacity of internal audit units.

Absence of a system (policies, tools, and technical and human resources) to ensure a coherent internal, inter-institutional, and external communication in (and among) sector agencies.

Absence of mechanisms to interact systematically with the public (dissemination of information, complaints and queries) resulting in poor awareness of sector needs.

Mit

igat

ion

Mea

sure

The Project will support the development of a unit within MOPC to assume the role of the Titular del Servicio, which will lead strategic planning for urban and rural areas. This unit will also oversee the offer in the water supply and sanitation market and will promote the development of sustainable service providers considering efficiency, capabilities, and scale aspects.

Prior to project implementation, conflict of interest and anti-nepotism policies and processes will be clearly identified in the Operational Manual. Such regulations will also be adopted by each sector institution.

Systematic procedures clearly outlined in the Operational Manual, recruitment of specialized staff, and training. Key quality targets to be agreed at management level.

Design and implementation of a comprehensive communication strategy for the sector (coordinated by the Water and Sewerage Services Unit) as a whole and for ERSSAN, SEAM, ESSAP, and SENASA, individually.

Communication campaign to include (a) raising awareness tailored to specific stakeholders; (b) focus groups to better understand stakeholder information needs; and (c) establishment of appropriate dissemination-communication channels. Signature of a citizen commitment chart setting key quality-of-service standards and governing relations between citizens and sector agencies.

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Effective Management

Improved Relationship with Stakeholders

Control of Corruption

Planning and Human Resources

Procurement Audit and Control; Financial

Management

Communication and Coordination

Internal & Sectoral Internal Internal Internal &

sectoral External

Ris

k

Lack of adequate legal and organizational framework for human resources management based on merit and performance. Constraints include lack of wage policy, trained technical personnel in all areas, policy for officials at retirement age, among others.

Inadequate Terms of Reference and specifications.

Lack of action if inconsistencies are detected by audit firms.

Lack of dedicated communication units in sector institutions.

Lack of two-way communication channels with key NGOs and project beneficiaries.

Mit

igat

ion

Mea

sure

Elaboration and implementation of regulations for management of human resources (recruitment, promotion, meritocracy, etc.), wage policy, among other measures to increase human resources management.

Recruitment of procurement specialists, training in procurement processes, and World Bank prior-review where appropriate.

Systematic actions/sanctions to be identified in Operational Manual (and later become agency internal policy).

Creation and staffing of communication units in Water and Sewerage Services Unit, ERSSAN, SEAM, ESSAP, SENASA.

The project’s social and environmental framework includes mechanisms for information exchange and active engagement of NGOs during the overall life of the project. This will be implemented in coordination with a Communications Plan (including training on key sector sanitary-environmental issues).

Ris

k

Information on procurement contracts is not readily available, even within each institution.

Audit results are not disseminated internally or externally.

Lack of inter-sectoral communication.

Inadequate relationship with the press.

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Effective Management

Improved Relationship with Stakeholders

Control of Corruption

Planning and Human Resources

Procurement Audit and Control; Financial

Management

Communication and Coordination

Internal & Sectoral Internal Internal Internal &

sectoral External

Mit

igat

ion

Mea

sure

Information on all procurement plans and processes recorded in a centralized database managed by the Water and Sewerage Services Unit; communication strategy (in partnership with the media and NGOs) to ensure contracting processes are actively shared with public.

Dissemination of audit results (particularly to Titular del Servicio) will be included within communication strategy.

Water Secretary to build common communication strategy and information systems.

The Com-munications Plan pays particular focus to improving media awareness and quality of reporting, by nurturing relationships with key national/local journalists through site visits, press events, issue-based interviews/ briefings, and better information sharing (including of procurement processes).

Ris

k

Nontransparent evaluation of proposals / bids and awarding of contract.

Insufficient political support for the modernization process.

Mit

igat

ion

Mea

sure

Specific and transparent processes need to be included in the operational manual (and ideally adopted among all sector agencies). These include a clear separation of functions between those involved in drawing up bidding documents and those evaluating the bids.

Sensitization of political actors, targeting potential champions; promotion campaigns for Members of Parliament (to be further developed in Communications Plan).

Ris

k Possibility of collusion between firms.

Lack of partnerships with local governments.

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Effective Management

Improved Relationship with Stakeholders

Control of Corruption

Planning and Human Resources

Procurement Audit and Control; Financial

Management

Communication and Coordination

Internal & Sectoral Internal Internal Internal &

sectoral External

Mit

igat

ion

Mea

sure

Best practices will be set out in the Operational Manual (and supported by project TA where necessary), such as forming a committee including engineers from universities to review costs where discrepancies occur, creating a database of all costs and providers by sector that will be publicly disseminated, public audiences for large works, and encouraging ICB where possible.

Specific outreach programs are included in the Communications Plan and Environmental and Social Frameworks, including raising awareness of the role of ERSSAN and SEAM and existing environmental and water resources management legislation.

Ris

k Discretionality of payment.

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Effective Management

Improved Relationship with Stakeholders

Control of Corruption

Planning and Human Resources

Procurement Audit and Control; Financial

Management

Communication and Coordination

Internal & Sectoral Internal Internal Internal &

sectoral External

Mit

igat

ion

Mea

sure

Operational Manual will include a contracting code, a flowchart for the certification of works and payment approval (currently under implementation within SENASA), and improvements/ clarifications of the processes established by MEF and Dept. of Public Procurement. In addition, some payments will be outsourced, and the reengineering of processes and integrated databases will streamline and systematize payments.

Ris

k Weak supervision of works.

Mit

igat

ion

Mea

sure

Activities will include strengthening the internal supervision unit, including assigning and training key staff for these functions, regular randomized field visits (methodology to be detailed in Operational Manual), technical audits, establishment and sharing of blacklists.

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Annex 12: Project Team/Costs

PARAGUAY: Water and Sanitation Sector Modernization Project

Planned Actual PCN review 10/26/2007 Initial PID to PIC 08/06/2008 Initial ISDS to PIC 05/20/2008 Appraisal 01/26/2009 01/27/2009 Negotiations 02/04/2009 02/13/2009 Board/RVP approval 04/14/2009 Planned date of effectiveness 12/21/2009 Planned date of midterm review 09/15/2012 Planned closing date 03/31/2015

Key institutions responsible for preparation of the project: ESSAP - Sanitary Services Company of Paraguay; SENASA - National Environmental Health Service; ERSSAN - Sanitary Services Regulation Agency; MOPC - Ministry of Public Works and Communications; SEAM - Environmental Secretariat.

Bank staff and consultants who worked on the project included: Name Title Unit Maria Angelica Sotomayor Senior Economist, TTL LCSUW Franz Drees-Gross Sector Leader LCSSD Miguel Vargas-Ramirez Water and Sanitation Specialist LCSUW Graciela Sanchez Martinez Social Development Specialist LCSSO Menahem Libhaber Lead Water and Sanitation Specialist LCSUW Gustavo Saltiel Sector Leader LCSSD Catherine Signe Tovey Water and Sanitation Specialist LCSUW Glenn S. Morgan Lead Environmental Specialist LCSEN Andres Mac Gaul Senior Procurement Specialist LCSPT Alejandro Roger Solanot Financial Management Analyst LCSFM Luis Alberto Andres Sr. Infrastructure Economist LCSSD Lizmara Kirchner Water and Sanitation Specialist LCSUW Reynaldo Pastor Sr. Counsel LEGLA Jose C. Janeiro Senior Finance Officer LOAFC Ignacio M. Urrutia Junior Professional Associate LCSUW Luis A. Poggi Consultant LCSUW Marcelo Daniel Barg Consultant LCSUW Michele Bruni Consultant EXTCD Alejandro Meleg Consultant LCSUW Nicola Saporitti Investment Officer CIADR Jordan Schwartz Peer Reviewer LCSSD Meike van Geinneken Peer Reviewer ETWWA Christophe Prevost Peer Reviewer ETWSA Silvia Delgado Program Assistant LCSUW Rosa Bellido Program Assistant LCSUW

Bank funds expended to date on project preparation: 1.� Bank resources: US$566,711.46 2.� Trust funds: US$71,914.76 3.� Total: US$638,626.30

Estimated Approval and Supervision costs: 1.� Remaining costs to approval: US$20,000.00 2.� Estimated annual supervision cost: US$120,000.00

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Annex 13: Documents in File

PARAGUAY: Water and Sanitation Sector Modernization Project

A. Bank Staff Assessments

•� Economic analysis of the Itay Basin sanitation investments, Juan Manuel Garcia.Diaz. •� Economic analysis of rural water and sanitation investments, Hugo Daniel Rodriguez and

Jorge Oyaumada, SENASA. •� Ex-post Economic Analysis of BIRF IV, Juan Carlos Junca. •� Financial Analysis of ESSAP S.A., Luis Alberto Poggi. •� World Bank. 2003. Country Assistance Strategy Paraguay. Report 27341-PA. •� World Bank. 2004. Implementation Completion Report – Asunción Sewerage

Project,Report 28964-PA. •� World Bank and Dress and others. 2004. Output-Based Aid in Water, Lessons from a

Pilot in Paraguay, in Public Policy for the Private Sector, No. 270. •� World Bank. 2007. Implementation Completion Results Report – Fourth Rural Water

Supply & Sanitation Project, Paraguay, Report ICR0000253. •� World Bank. 2008. Paraguay Policy Notes.

B. Project Preparation Documents

•� Project Concept Note. •� Project Information Document (Concept Stage), Report No. AB1814, 2008. •� Executive Summary of Environmental and Social Management Framework, June 2008. •� Environmental and Social Management Framework, January 2009. •� Involuntary Resettlement and Land Acquisition Policy Framework, January 2009. •� Indigenous Peoples Management Framework, January 2009. C. Legal Background

•� Sector Legal Framework (Law 1.614/00). •� The Regulatory Decree of Law 1614/00. •� Ley de Recursos Hídricos SEAM 2007. •� Ley de Nov. 2008 de ESSAP. D. Other

•� Drees and others. 2005. Output-Based Aid in Water, Lessons in Implementation from a Pilot in Paraguay, in OBA approaches, Note 07.

•� Resumen Ejecutivo de Empresa de Servicios Sanitarios del Paraguay (ESSAP), Parquet & Asoc. Abogados, September 2007.

•� Bank Netherlands Water Partnership Program (BNWPP), Results of the Financial and Performance audits of ESSAP.

•� Auditoría Contable de Gestión ESSAP S. A. BDO – Planeación, Sistemas y Control. November 2005.

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•� Technical Audit for the National Water Utility in Paraguay, ESSAP - BDO Rubinztein & Guillen, November 2005.

•� Contrato de Gestión por Resultados. Poder Ejecutivo / ESSAP S. A., Consejo Superior de Empresas del Estado.

•� “Effect of Washing Hands with Soap on Diarrhea Risk in the Community: A Systematic Review.” V. Curtis, and S. Cairncross, Lancet Vol. 3, May 2003.

•� Implementation Completion Report on the Asunción Sewerage Project (later Reform Project for Water and Telecommunications Sectors), Report No. 28964, June 25, 2004, World Bank.

•� Implementation Completion and Results Report on the Fourth Rural Water Supply and Sanitation Project, Report No. ICR0000253, December 21, 2007, World Bank.

•� Las Tarifas aplicadas en Agua y Alcantarillado en América Latina. Grupo Tarifas y Subsidios. ADERASA. PPIAF. BM, 2005.

•� Modernización del Sector Agua y Saneamiento. Elaboración de un Plan de Desarrollo de Negocio para ESSAP S. A. Castalia Strategic Advisors – Parquet & Asociados. BM.

•� Objetivos de Desarrollo del Milenio. Informe Paraguay. PNUD, Paraguay. •� Objetivo de Desarrollo del Milenio: Una Mirada desde América Latina y el Caribe. José

Luis Machinea, Alicia Barcena y Arturo León. Coordinadores. CEPAL. •� World Health Organization (WHO), “Meeting the MDG Drinking-water and Sanitation

Target: A Mid-term Assessment of Progress,” 2008. •� “Output-Based Aid in Water. Lessons in Implementation from a Pilot in Paraguay.”

Franz Drees, Jordan Schwartz, and Alex Bakalian, World Bank Viewpoint Series, Note 270, April 2004.

•� “Output-Based Aid in Water. Lessons in implementation from a pilot in Paraguay.” Franz Drees, Jordan Schwartz, Maria Angelica Sotomayor, and Alex Bakalian; World Bank OBApproaches, Note 07, May 2005.

•� “Elaboracion del Plan de Negocios para la Empresa de Servicios Sanitarios del Paraguay ESSAP,” GTD, November 2005.

•� Preliminary Restructuring of Business Units for Water and Sanitation Service Provision in Urban Paraguay, funded by BNWP.

� 137

Annex 14: Statement of Loans and Credits

PARAGUAY: Water and Sanitation Sector Modernization Project

Original Amount in US$

Millions

Difference between Expected

and Actual Disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P088799 2008 PY Sustainable Agric. and Rural Develop.

37.50 0.00 0.00 0.00 0.00 37.50 0.00 0.00

P082026 2007 PY Road Maintenance

74.00 0.00 0.00 0.00 0.00 74.00 20.06 0.00

P073526 2004 PY- EDUCATION REFORM PROJECT

24.00 0.00 0.00 0.00 0.00 6.84 6.84 0.00

P069269 2002 PY Pilot Community Develop. Project

9.00 0.00 0.00 0.00 0.00 0.81 0.81 0.64

Total: 144.5

0

0.00

0.00 0.00 0.00 119.15 27.71 0.64

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STATEMENT OF IFC’s

Held and Disbursed Portfolio

In Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2005 Telecel Paraguay 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00

Total portfolio: 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00

� 138

Annex 15: Country at a Glance

PARAGUAY: Water and Sanitation Sector Modernization Project

�

� 139

�

� 140

MAP

PARAGUAY: Water and Sanitation Sector Modernization Project

� 141

� 142

wb21088

P:\~LCR\FPSI\WTR-FPSI\Maria Angelica\PARAGUAY Wat.& San. Sec.Mod.P095235\Board\5. PY W&S Sector Modernization. PAD.doc

03/20/2009 11:40:00 AM

P R E S I D E N T E

H A Y E S S A NP E D R O

CANENDIYÚ

CAAGUAZUCORDILLERA

I TA P U A

PARA-GUARI

CENTRAL

A LTO

PA

RAN

A

C A A Z A PA GUAIRA

MISIO

NES

NEEM

BUCÚ

AMAMBAY

CONCEPCION

A L T O

PA R A G U AY

B O Q U E R O N

Caacupé

San Juan Bautista

Caazapá

Ciudad del Este

Salto del Guairá

Pilar

Encarnación

Coronel Oviedo

San Pedro

Concepción Pozo Colorado

Pedro Juan Caballero

Coronel Bogado

Villarrica

Paraguari

Fuerte Olimpo

MariscalEstigarribia

ASUNCIÓNA R G E N T I N A

B O L I V I A

B R A Z I L

Pilcomayo

Pilcomayo Verde

Paraguay

Paraná

Monte Lindo

Aquidabán

Para

ná

To Santa Fé

To Boyuibe

To Campo Grande

To Dourados

To Cascavel

To Santo Tomé

To Formosa

To Las Lomitas

For detail see IBRD 36807For detail see IBRD 36807For detail see IBRD 36807

62°W 60°W 58°W 56°W 54°W

60°W 58°W 56°W 54°W

26°S

24°S

20°S

18°S

28°S

26°S

24°S

22°S

20°S

18°S

PARAGUAY

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

0 50 100

0 50 100 Miles

150 Kilometers

IBRD 36806

MARCH 2009

PARAGUAYWATER AND SANITATION SECTOR

MODERNIZATION PROJECTPIPED WATER COVERAGE BY DEPARTMENT

DEPARTMENT CAPITALS

NATIONAL CAPITAL

PAN-AMERICAN HIGHWAY

MAIN ROADS

RAILROADS

DEPARTMENT BOUNDARIES

INTERNATIONAL BOUNDARIES

COVERAGE LEVEL:

0 – 39%

40 – 59%

60 – 75%

57°25'0"W

57°25'0"W

57°30'0"W

57°30'0"W57°30'0"W

57°35'0"W

57°35'0"W

57°40'0"W

57°40'0"W

25°10'0"S 25°10'0"S

25°15'0"S 25°15'0"S

25°20'0"S 25°20'0"S

25°25'0"S 25°25'0"S

Mariano Roque Alonso

Luque

Asunción

Lambaré

Villa Elisa

Ñemby

San Lorenzo

Fernando dela Mora

Paraguay

River

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

ARGENTINA

PARAGUAY

BOLIVIA

BRAZIL

Asunción

20° 20°

60° 50°

60°

25° 25°

30° 30°R. U

rugu

ay

R. P

aran

á

ParaguayR.

PARAGUAYWATER AND SANITATION SECTOR

MODERNIZATION PROJECTASUNCION METROPOLITAN AREA

RIVERS AND STREAMS

EXISTING RAW SEWERAGE DISCHARGES

CURRENT SEWERAGE COVERAGE

STREETS

MUNICIPAL BOUNDARIES

IBRD 36807

MARCH 2009

2Miles

Kilometers

10

0 1 2 3