Language: English Original: English

PROJECT: Niassa Provincial Towns Water Supply and Sanitation Project COUNTRY: Mozambique

PROJECT APPRAISAL REPORT

Date: January 2009

Appraisal Team

Team Leader: Team Members: Sector Manager: Sector Director: Regional Director:

Boniface OY Aleobua Paul Dzimiri Patrick Karani Egbert H.J. Schroten Carlos Noa Laisse Yolanda Arcelina Sering B. Jallow Andrian Rakotobe Frank Black

Principal Water & Sanitation Eng., OWAS.2 Senior Financial Analyst, OWAS.2 Principal Environmentalist, OWAS.2 Water and Sanit. Engineer, Consultant, OWAS.2 Water Specialist, Consultant, MZFO Social Sector Expert, MZFO OWAS.2 OWAS & AWF ORSB

Peer Reviewers

Noel Kulemeka, Principal Socio-Economist, OINF.2 Mehdi Khoali, Senior Financial Analyst, OWAS.2 Tom Roberts, Chief Program Coordinator, SEGL

TABLE OF CONTENTS I – STRATEGIC THRUST & RATIONALE............................................................................1

1.1. Project linkages with country strategy and objectives....................................................1 1.2. Rationale for Bank’s involvement ..................................................................................1 1.3. Donors coordination........................................................................................................2

II – PROJECT DESCRIPTION.................................................................................................2 2.1. Project components.........................................................................................................2 2.2. Technical solution retained and other alternatives explored...........................................3 2.3. Project type .....................................................................................................................3 2.4. Project cost and financing arrangements ........................................................................4 2.5. Project’s target area and population................................................................................5 2.7. Bank Group experience, lessons reflected in project design ..........................................5 2.8. Key performance indicators.......................................................................................6

III – PROJECT FEASIBILITY .................................................................................................6 3.1. Economic and financial performance .............................................................................6 3.2. Environmental and Social impacts..................................................................................6

IV – IMPLEMENTATION........................................................................................................8 4.1. Implementation arrangements.........................................................................................8 4.2. Monitoring ......................................................................................................................9 4.3. Governance .....................................................................................................................9 4.4. Sustainability...................................................................................................................9 4.5. Risk management..........................................................................................................10 4.6. Knowledge building......................................................................................................10

V – LEGAL INSTRUMENTS AND AUTHORITY...............................................................10 5.1. Legal instrument ...........................................................................................................10 5.2. Conditions associated with Bank’s intervention...........................................................10 5.3. Compliance with Bank Policies ....................................................................................11

VI – RECOMMENDATION...................................................................................................11 Appendix III. Key related projects financed by the Bank and other development partners in the country ...............................................................................................................................14 ..................................................................................................................................................14

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Currency Equivalents January 2009

UA 1.00 = MZN 37.6224 UA 1.00 = USD 1.54027 UA 1.00 = EURO 1.10675

Fiscal Year 1st January- 31st December

Weights and Measures

1metric tonne = 2204 pounds (lbs) 1 kilogramme (kg) = 2.200 lbs 1 metre (m) = 3.28 feet (ft) 1 millimetre (mm) = 0.03937 inch (“) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres

Acronyms and Abbreviations ADB = African Development Bank ADF = African Development Fund AdeM = Águas de Moçambique AFD = Agence Francais de Developpement AIAS = Administração de Infra-estruturas de Abastecimento de Água e Saneamento AMU = Asset Management Unit ARA = Administração Regional de Águas CRA = Conselho de Regulação do Abastecimento de Água DAR = Department of Rural Water Supply DAU = Department of Urban Water Supply DES = Sanitation Department DGRH = Water Resources Management Department DNA = Direcção Nacional de Águas EBIT = Earnings Before Interest and Taxes EdA = Empresa de Agua EIA = Environmental Impact Assessment EIRR = Economic Internal Rate of Return ESMP = Environmental and Social Management Plan EU = European Union FIPAG = Fundo de Investimento e Património do Abastecimento de Água FIRR = Financial Internal Rate of Return GOM = Government of Mozambique

GOP = Government of Portugal MICOA = Ministry for Coordination of Environmental Affairs MIS = Management Information System MOPH = Ministério das Obras Públicas e Habitação MOU = Memorandum of Understanding NDF = Nordic Development Fund NGO = Non-Governmental Organisation NPV = Net Present Value NWDP = National Water Development Program NWP = National Water Policy O & M = Operation and Maintenance PAP = Programme Aid Partners PARPA = Poverty Reduction Strategy Plan PID = Project Implementation Document PO = Private Operator PRSP = Poverty Reduction Strategy Program PSP = Private Sector Participation PTWSS = Provincial Towns Water Sector Study TA = Technical Assistance ToR = Terms of Reference UFW = Unaccounted For Water UWSSISP = Urban Water Supply, Sanitation and Institutional Support Project WACC = Weighted Average Cost of Capital WB = World Bank

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Loan Information

Client’s information BORROWER: Government of Mozambique EXECUTING AGENCY: Direcção Nacional de Águas (DNA) Financing plan

Source Amount (UA million)

Instrument

ADF

18.00

Loan

GOM 2.00 Contribution TOTAL COST 20.00

ADB’s key financing information

Loan / grant currency

UA

Interest type* N/A Interest rate spread* N/A Commitment fee* 0.5% (50 basis points) Other fees* 0.75% (service charge) Tenor 600 months Grace Period 120 months FIRR, NPV (base case) (5%, NPV MZM 611 206 242) EIRR (base) 14%

*if applicable

Timeframe - Main Milestones (expected)

Concept Note approval

January 2009

Project approval April 2009 Effectiveness September 2009 Last Disbursement December 2013 Completion December 2013 Last repayment December 2059

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Project Summary The proposed Niassa Provincial Towns Water and Sanitation Project presents a next step of ADB’s involvement in the water sector of Mozambique. The sector reforms have been consistent and are making good progress, thus it is well justified for the Bank to assist (in response to Government’s request) the sector in Mozambique in order to reach the MDGs. The project includes institutional development support, water supply scheme rehabilitation and extension, sanitation program and project management and audit. The project will be implemented over a period of four years at a total cost of UA 20 million. The beneficiaries of the proposed project will be the population of the towns of Cuamba (2007 census: 77,914) and of Lichinga (2007 census: 142,253). The project will bring general improvements in public health within the project areas, curtail water borne diseases, and ensure environmental sustainability. The project will contribute towards meeting of the Millennium Development Goals (MDGs). The inadequate water supply infrastructure (Cuamba 9% and Lichinga 12% water supply coverage respectively) and sanitation infrastructure (Cuamba 3% and Lichinga 43% coverage respectively) in these two towns accounts for majority of incidences of water borne diseases and environmental degradation. The ADB’s proposal to support Cuamba and Lichinga is based upon the feasibility study for four northern towns, which study was financed, by the Bank, as part of the rural areas focussed Integrated Water Supply and Sanitation Project for Niassa and Nampula Provinces. While the World Bank is supporting the towns of Beira, Nampula, Quelimane and Pemba, the Millennium Challenge Corporation (MCC) is targeting Nacala, The Bank has a long experience in the water and sanitation sector development in Mozambique and elsewhere on the continent and has used this experience to develop the project. In recent years, the Bank also prepared a Gender Profile on Mozambique that includes water and sanitation aspects. By supporting the project the Bank demonstrates its commitment to engage with Government in addressing water supply and sanitation challenges in the country. The Bank’s experience in the preparation of the project and its implementation will be captured in the various project documents including study reports, progress reports, CRA consumers’ relation reports, audit reports, mid term review and completion reports. The additional experience will increase Bank’s institutional knowledge.

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NIASSA PROVINCIAL TOWNS WATER SUPPLY AND SANITATION PROJECT

Hierarchy of Objectives Expected Results Reach Performance Indicators

Indicative Targets Timeframe

Assumptions/Risks

Sector Goal:

To improve the health and quality of life and reduce poverty levels of the population of Mozambique through provision of water and sanitation services on a sustainable basis

Impact:

Improved health and socio-economic wellbeing of the population.

Beneficiaries:

Mozambique’s population

Impact Indicators: Population below poverty level Child mortality rates U5 children

Long term Progress:(2025)

Reduced proportion of population below the basic needs poverty line from 54% in 2003 to 40% in 2025

Reduced child U5 mortality from 206 in 2003 to 70 in 2025

Sources: Household budget survey, MDG progress report, National Census, Demographic Health Surveys, Agenda 2025.

Assumptions:

Stable macro economy GOM continuous commitment to support the water and sanitation sector

Project Purpose:

To improve the access, quality, availability and sustainability of water supply and sanitation services in Cuamba and Lichinga Towns in Niassa Province

Outcomes:

Water supply and sanitation facilities capable to satisfy demand

Water supply and sanitation facilities satisfactory operating

Enhanced sanitation and hygiene practice MDG for drinking water achieved. MDG for Sanitation achieved

Beneficiaries:

Cuamba (77 914)

Lichinga (142 253)

Outcome Indicators: Percentage of population with access to water supply Time saved in water fetching Unaccounted for water Average daily hours of supply Percentage of population practicing good health / hygiene / sanitation Incidence of diarrhoea, dysentery and cholera Maternal mortality rate

Medium Term Progress:(2015)

Water supply improved and coverage rose from average 12% in 2009 to 70% in 2015. Reduce time for fetching water from on average 1.5hrs/day in 2009 to 0.5 hrs/day in 2015

UFW reduced from over 50% in 2009 to 25% in 2015

Average daily hours of supply increased from 1.5 hours per day in 2009 to 24 hours per day in 2015

Increase of population practicing good health / hygiene / sanitation from 25% in 2009 to 50% by 2015

Incidence of diarrhea, dysentery and cholera reduced by at least 30% by 2015 Reduced maternal mortality rate of 408/1000 births in 2003 to 310/1000 births by 2015.

Source: Baseline data; monitoring system; DHS;

Assumptions: Water sector reforms and capacity development activities sustained GOM allocate timely and sufficient resources Mitigation: Twinning arrangements, in project TA support GOM to meet local counterpart funding obligations will be mitigated by keeping the counterpart fund requirement to the minimum.

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Activities: 1) CRA developing customers’ relations and M&E system in Cuamba and Lichinga 2) Community mobilization, hygiene education and environmental awareness creation 3) Water supply and sanitation rehabilitation and expansion of water supply systems in the project towns

4) Rehabilitation/construction of on-site systems for schools and health centres, and support for solid waste management of the municipal councils in the project towns (UA millions) ADF UA 18.00 GoM UA 2.00 Total UA 20.00

Outputs: 1) Educated customers aware of their rights and a M&E system 2) Sustainable sanitation and hygiene promotion 3) Water supply schemes rehabilitated and extended 4) On-site sanitary system constructed

Beneficiaries: Government institutions, schools and health facilities, Local Committees, Population in project towns, municipalities

Output Indicator:

Improved customer services

No of people and committees trained Gender issues addressed in training material Length of pipe laid, treatment plants rehabilitated and expanded,

Number of connections and meters installed

Number of on-site sanitation facilities constructed in schools, clinics, public places and household latrines

Source: Audit Reports; QPRs; PCR , CRA reports

Short Term Progress 1.1) Reduced number of complaints and faster response times, and up to date information on system performance 2.1) 50 Staff trained; 100 women trained; 100 men trained; 30 committees trained. 80% of population benefit from hygiene and health awareness 2.2) Gender specific training material on sanitation and health education 3.1) 36.4km and 26.6 km pipe laid and 2 water treatment plants and pumping stations rehabilitated and expanded for Lichinga and Cuamba respectively by 2013. 3.2) 5,000 and 7,000 new connections made and new meters installed by 2013 for Cuamba and Lichinga respectively. 4.1) 100 facilities constructed by 2013, 6,000 and 10,000 household latrines in Cuamba and Lichinga respectively rehabilitated and/or constructed by 2013.

Assumptions Financing secured and ready for disbursement; Timely mobilization of all stakeholders;

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Project Timeframe

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REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE ADB GROUP TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN/GRANT TO MOZAMBIQUE FOR THE NIASSA PROVINCIAL TOWNS WATER SUPPLY AND SANITATION PROJECT Management submits the following Report and Recommendation on a proposed loan for UA 18.00 million to finance the Niassa Provincial Towns Water Supply and Sanitation Project in Mozambique.

I – STRATEGIC THRUST & RATIONALE

1.1. Project linkages with country strategy and objectives The Government has well articulated plans for poverty reduction and economic growth namely, the Five Year Program (2005-2009) and the second generation of Action Plan for the Reduction of Absolute Poverty, (PARPA II), for the period 2006-2009. The PARPA II (Mozambican PRSP I) has three pillars: governance, human capital, and economic development. The Project will contribute significantly to human development, by boosting the number of people in the two towns with access to safe drinking water and sanitation, and in turn contribute to the achievement of Mozambique's Millennium Development Goals (MDG) on water, health and poverty eradication, which are central to the country's Poverty Reduction Strategy.

1.2. Rationale for Bank’s involvement The rationale for the Bank’s involvement in the water supply and sanitation sector is built on the extensive experience the Bank has in Mozambique and in the region. In Mozambique alone, the Bank has since 1981, supported the water and sanitation sector with four investments projects which amount to UA 67.80 million. In the urban water supply sub-sector, the Bank is one of the few donors active. These investments have raised its profile and clout, and led to expectations in the sector. The project is designed to be a capital investment and institutional support for the on-going sector reforms to assist in reaching the MDGs. The feasibility study for the proposed project was financed by the Bank under the project targeting the rural areas of Niassa and Nampula Provinces. The African Water Facility is also supporting the development of a national rural Water Supply and sanitation Programme

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1.3. Donors coordination

Size2008 Sector or subsector* GDP Growth Exports Labor Force

2007 6.5 % 6.0 % Not available[%] Agriculture 23.00 Industry 30.10 Services 46.90 Total : 100%

Labor Force participation (total) 51,6% Female LFP 50,6%

Players - Public Annual Expenditure (average)**

Government Donors

2008

UA 891m UA 1 063m World Bank 13.4 %

45.6 % 54,4 % AfDB 10.0 % KFW 3.6%

Level of Donor Coordination Existence of Thematic Working Groups Y Existence of SWAPs or Integrated Sector Approaches Y

ADB's Involvement in donors coordination*** M Population Economically Active

Total Population ≥ 15ys = 49.9%

Donor coordination: Mozambique has a fairly strong donor coordination mechanism which has been in place for a long while. The umbrella grouping is termed the Programme Aid Partners (PAP, and comprises a Core Group of six key sector donors and the GoM; as well as technical working groups. As a whole, the water sector consists of 3 multilaterals and 15 bilaterals. The coordination within the urban sub-sector is not as active, when compared to the coordination with the rural water and sanitation sub-sector, due to the limited donor investment in the urban sub-sector. Besides the World Bank focussing on the towns of Beira, Nampula, Quelimane and Pemba, the Millennium Challenge Corporation (MCC) will invest in the urban water supply sub-sector aiming at Nampula and Cabo Delgado Provinces.

II – PROJECT DESCRIPTION

2.1. Project components Table 2.1: project components

Nr. Component name Est. cost (UA)

Component description

1 Institutional Development Support

1.07 Enhancing commercial, financial and technical capacity of Cuamba and Lichinga water services.

Support to DNA’s Sanitation delivery. Strengthening of the Municipal Sanitation

Departments in Cuamba and Lichinga Unaccounted for water programs Valuation of fixed assets

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Tariff studies Support for the regulator (CRA) with main focus

on consumers relation in general and women in particular, and establishing a M&E system

Procurement of equipment and transport Twinning arrangement for water companies

2 Cuamba and Lichinga Water Supply Rehabilitation and Extension

16.44 Detailed design/tender documents preparation / supervision

Immediate rehabilitation works for Cuamba and Lichinga.

Lichinga water supply rehabilitation and extension, including water lab facilities

Cuamba water supply rehabilitation and extension, including water lab facilities

3 Sanitation Program 1.61 • Determine the hygiene and sanitation profiles of Cuamba and Lichinga, including design of social gender sensitive mobilization materials

• Sanitation Program focussing on schools, health facilities, public places and demonstration facilities for households

Hygiene, sanitation and HIV/AIDS awareness creation campaigns

Support for sanitation departments of municipalities

Training support for private sector in the sanitation activities and identification of private sector opportunities especially for women

4 Project Management and Audit

0.88 Project Team Technical Assistance Operational Costs Procurement of equipment and transport

2.2. Technical solution retained and other alternatives explored As part of the feasibility study, comparative analyses were carried out to test the plausibility of meeting the needs of Cuamba from the current intake at Mepopole River versus that from a ground water well field. The result indicated that the zone capable of producing groundwater for Cuamba would not yield adequate amounts to meet the present and forecast demand. Similarly for Lichinga, a study to consider the feasibility of finding groundwater sources also did not yield satisfactory results. The records indicated a number of failed and low yielding wells, which dry up during the summer months. It was therefore concluded to retain the intake at the Locomue reservoir. Furthermore, hydrological analysis on the discharge at the river intake, and the reservoir yield, were performed using forecast and historical precipitation data.

2.3. Project type The project fulfils the country wide effort in Mozambique to upgrade urban water supply and sanitation infrastructure as part of the country’s reconstruction activities since the cessation of hostilities in the eighties. Niassa Province was selected because it is one of the least developed in investment terms, compared with other Provinces. It will focus on urban water supply and sanitation since one of the on-going Bank project, addresses the needs of the rural

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people in the same province. This is a standalone operation. The sub sector does not have many active donors now, which is distinct from the rural sub sector, which because of the number of active players, is moving towards a SWAP.

2.4. Project cost and financing arrangements The overall cost of the project will be about UA 20 million. The cost will be funded by an ADF Loan of UA 18 million, representing 90% of the total financing need and GOM contribution of UA 2 million, representing 10% of the financing need. The cost estimates are based upon updated designs using unit costs of recent tenders in Mozambique. Total funding through the Bank Group will therefore be 90%.

Table 2.3: Project cost estimates by component [amounts in million UA equivalents]

Components For. currency costs

Loc. currency costs

Total Costs % foreign

Institutional Development Support 0.64 0.31 0.95 4.75% Water Supply, Rehabilitation & Extension 8.91 5.68 14.59 72.95% Sanitation Program 0.42 1.01 1.43 7.15% Project Management & Audit 0.32 0.46 0.78 3.90% Total base cost 10.29 7.46 17.75 Physical contingency 0.41 0.30 0.71 3.55% Price Contingency 0.89 0.65 1.54 7.70%

Total project cost 11.59 8.41 20.00 100%

Table 2.4: Sources of financing [amounts in million UA equivalents] Sources of financing For. currency

costs Loc. currency costs

Total Costs % total

ADB Group 11.59 6.41 18.00 90% GOM - 2.00 2.00 10% Total project cost 11.59 8.41 20.00 100%

Table 2.5: Project cost by category of expenditure [amounts in million UA equivalents]

Categories of expenditure For. currency costs

Loc. currency costs

Total Costs % foreign

Works 7.79 6.05 13.84 69.20% Goods 0.32 0.04 0.36 1.80% Services 2.15 1.27 3.42 17.10% Miscellaneous 0.03 0.10 0.13 0.65% Total base cost 10.29 7.46 17.75 88.75% Physical contingency 0.41 0.30 0.71 3.55% Price Contingency 0.89 0.65 1.54 7.70% Total project cost 11.59 8.41 20.00 100%

Table 2.6: Expenditure schedule by component [amounts in million UA equivalents] Components 2010 2011 2012 2013 Institutional Development Support 0.10 0.42 0.26 0.16 Water Supply, Rehabilitation & Extension 0.38 4.57 6.72 2.92 Sanitation Program 0.15 0.50 0.41 0.37 Project Management & Audit 0.15 0.28 0.24 0.12 Total base cost 0.78 5.77 7.63 3.57

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2.5. Project’s target area and population

The project’s target areas are the towns of Cuamba and Lichinga. Cuamba is the capital of Cuamba District located on the railway line from Nacala-Nampula towards Malawi. Cuamba is the second major urban center in Niassa and has an estimated population of 77,914. Its water supply is managed by an internal municipal departmental outfit, and serves about 9% of the people. During the last 12 months the city of Cuamba registered 798 cases of cholera. Lichinga is the Provincial capital of Niassa Province. It covers an area of 280km² and has a population of 142,253. Lichinga is divided into 14 Bairros (suburbs). The peri-urban areas are characterized by poor / informal settlements. The water services which supplies about 12% of the population, are managed by a state water company known as “Empresa de Agua” (EdA). The project will result in round-the-clock water supply; satisfying the demand for water for the population of both towns.

2.6. Participatory process for project identification, design and implementation The project preparation was jointly done by ADB and Officials of the Government of Mozambique, Ministry of Public Works and Housing, Niassa provincial administration, and several other relevant ministries took part in the preparation. The MCC and World Bank, among several other Development Partners in Mozambique, were consulted during the preparation and appraisal of the project. Further, there was close interaction with the ongoing Bank financed Integrated Water Supply and Sanitation Project for Niassa and Nampula Provinces. During the feasibility study, stakeholders (Municipal and community leaders, potential consumers, women and men), participated through individual interviews, semi-structured interviews, and focus group discussions which concentrated on the perceived problems, project objectives, the expected impact and benefits. During preparation and appraisal, field visits were made to the project sites. To intensify the participation of the beneficiary communities, the regulatory council Conselho de Regulação do Abastecimento de Água (CRA) will be supported during the project implementation, to develop and maintain consumer relations and education in the project towns and to establish an M&E system.

2.7. Bank Group experience, lessons reflected in project design The Bank has been supporting both urban water supply and sanitation (Maputo Emergency Water Supply Project; Maputo Water Supply Rehabilitation Project; and Urban Water Supply, Sanitation and Institutional Support Project) and rural water supply and sanitation (Integrated Water Supply and Sanitation Project for Niassa and Nampula Provinces). The Maputo Water Supply Rehabilitation Project, rated satisfactory, was completed in 2008 (draft PCR ready). The project achievements are mainly improved service delivery for the Maputo population from about 6 hours/day supply to 18 hours/day supply, improved reliability: increased storage of 20,000 m3, and the extension of the distribution network supplying an additional 250,000 beneficiaries. The Integrated Water Supply and Sanitation Project for Niassa and Nampula Provinces, rated satisfactory, (to be completed in June 2009) is focussing on improving the rural water supply and sanitation in two provinces. The main achievements of this project so far: increased water supply coverage, additional beneficiary population 403,000, people trained: 7,239, district base line surveys: 35 and established an M&E GIS based system. The Urban Water Supply, Sanitation and Institutional Support Project, rated satisfactory, (to be completed by end of 2009) is addressing problems in four secondary towns (Gaza and Inhambane Provinces). The achievements of this project include increased water supply coverage, for a total beneficiary population of about 246,000,

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coverage increased from 37% to 65%, improved service delivery, reliability and distribution network extension. Also the experiences from the World Bank supported National Water Development Project I and II (both completed) have been incorporated in the proposed project. The main lessons are: i) involve the key stakeholders throughout project formulation and through continuous dialogue, ii) placing the project within the GOM developed policies and sector institutions such as the Delegated Management Framework (DMF), FIPAG and CRA, (iii) use of an implementation Project Team within the existing organization, and (iv) incorporate lessons learned from recent PSP experiences in the Mozambican water sector (see Annex B1).

2.8. Key performance indicators The key performance indicators (Annex C1), reported in a gender sensitive mode, will measure outcomes: access to improved water and sanitation facilities, scheme functionality, technical and institutional performance, hygiene behaviour change, number of water and sanitation facilities implemented and managed. .

III – PROJECT FEASIBILITY

3.1. Economic and financial performance Table C.1: key economic and financial figures

FIRR, NPV (base case) 5%, MZM 611 206 242 EIRR (base case) 14%

NB: detailed calculations are available in Annex B7 The main assumptions for this analysis are: i) the discount rate is 12% p.a. ii) operation and maintenance costs are estimated at 3.6% of the investment costs; iii) Weighted Average Cost of Capital (WACC) for the project is estimated at 1.525%; iv) project economic benefits are assumed to be realised from the third year after the commencement of the project. The project is therefore considered to be both economically and financially viable as FIRR exceeds WACC and EIRR exceeds the discount rate, respectively.

3.2. Environmental and Social impacts Environment The project is classified as category 2. There are minimum negative environmental impacts likely during construction works, operation and implementation of the project on water supply and sanitation since most works will be on rehabilitation of existing infrastructure. The impacts mainly associated with pipe-laying may displace some vegetation and affect some crops and road pavements. Improved sanitation will mitigate pollution from human waste and improve water quality. The project will be implemented within the country’s 2004 Environmental Act. The EA, FIPAG, will integrate environmental mitigation measures into contractor’s contract. There are no environmental sensitive areas. An ESMP has been developed and posted to the website in March 2009 in accordance with the new Bank’s environmental guidelines. The ESMP will in the medium term, enable both Lichinga and Cuamba to eliminate internal weaknesses in environmental management issues and enhance their skills in water quality control. Furthermore, by demarcating a buffer zone of between 250-500 meters from the intakes as required by the country’s environmental regulation, detrimental impacts to the source water quality, through the human activity brought about by the mushrooming of informal and illegal settlements will be minimised. Other measures which are to be taken by

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the water companies include the management, monitoring, documentation of chemical and biological analysis data for information and decision; establishing internal laboratory for water quality monitoring and applying water safety and hygiene plans; These measures will cost about UA 150,000. Climate Change Mozambique is a signatory to the 1992 UN Climate Change Convention and the 1997 Kyoto Protocol. The project will contribute to management of watershed, water conservation and efficiency in water use. The management of watershed has positive effect on climate change. The climate change adaptation strategies integrated in the project will encourage increase in vegetation cover that will reduce erosion and floods.. Gender According to the feasibility study, in both Lichinga and Cuamba municipalities, male headed households are dominant accounting for 71.2% and 72.8% respectively. The great majority of female headed households are found in peri-urban zones. Women headed households are the poorest, the housing infrastructure are mostly built with traditional materials and tend to use wells more frequently. Fetching of water is seen as a typically female responsibility and “a man would lose his “manhood” in society if seen fetching water frequently”, therefore the provision of safe water to the homesteads of target populace, will bring relief to the women, whose burden it is to search for and fetch water. The GoM recognizes the need to include community participation in water management. Women’s role and participation is also recognized and encouraged. The Project will ensure full participation of women in deciding the water point locations and latrines including training of women in the maintenance of these facilities (where technically feasible). Men will also be encouraged to actively share responsibility for household water and hygiene. The project will involve both men and women in the social mobilization and awareness campaigns in hygiene and sanitation, to encourage new behaviour and better living conditions. Special attention will be made in regards to user charges/ fees as they sometimes impact on the use of the facilities by all members of the community in particular women. Social By providing safe sufficient potable water 24 hours/day closer by the homes, improved sanitation and the promotion of safe hygiene practices the project will contribute towards the reduction of water borne diseases and also save time and energy spent by women and children – particularly girls – on water collection, which will, in turn, leave more time for attending school. The hygiene and sanitation profile will - as part of the process to determine the sanitary status and prioritise the activities to be carried out in the project area - undertake a gender assessment in order to respond to these specific roles, interests and needs of various categories of women as compared to men. The project will also include in the design of social mobilization materials, relevant gender issues. Finally, to insure increased gender sensitivity in all project activities, gender training will be provided to all project staff and beneficiaries as part of the general project’s training plan. The increasing HIV/AIDS prevalence poses a challenge to the water and sanitation sector in relation to its contribution to mitigating the impact of HIV/AIDS, as the prevalence rates show that women - especially young women- are most affected. Women and orphans are considered as a key target group of the project. Therefore, the project will, in line with the

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government include multi-sector plans, and undertake specific interventions with a view to addressing these groups.

Involuntary resettlement There is no involuntary resettlement foreseen. The rehabilitation and extension of the water supply and sanitation schemes would entail minimal disturbance of agricultural production and other activities in the project area.

IV – IMPLEMENTATION

4.1. Implementation arrangements . The GOM is the borrower of the ADF loan while DNA will be the Executing Agency (EA) There will be 3 Implementing Agencies for the Project, namely FIPAG, as Implementing Agency for the Institutional Development Support and the Water Supply Rehabilitation and Extension components of the project; DNA as Implementing Agency for the Sanitation Program, Project Management and Audit components and the CRA, as Implementing Agency for the Regulatory aspects of Customer satisfaction and M&E under the Institutional Development component. Each of the implementing agencies will use their existing structures. As such, at FIPAG, the Chief Executive Officer will have overall responsibility for their components, with the Investment’s Departmental Manager responsible for the day-today management of project component activities. At DNA the National Director will have overall responsibility for the Sanitation component, while the day–to-day activities will be executed by the Head of Department of DES. Due to capacity constraints within DNA, Technical Assistance will be provided to the DNA in the form of a Project Manager whose appointment will be a condition precedent to first disbursement for the project. Capacity building will be implemented in the water service providers in Cuamba and Lichinga and in the municipal sanitation departments. CRA will be supported in developing customers’ relations in all its aspects and will take charge of developing an M&E system for the two towns. The implementing agencies will hold regular coordination meetings, at which lesson sharing and general progress monitoring will take place. In addition, relevant stakeholders will be invited to attend on the basis of need. Procurement All procurement of goods, works and services will be in accordance with the Bank’s “Rules and Procedures for the Procurement of Goods and Works” or, as appropriate, “Rules and Procedures for the Use of Consultants” [as amended in November 2008] using relevant Bank Standard Bidding Documents. All major services, goods and works will be procured through a competitive process. FIPAG will be responsible for the procurement of goods, works, services, training and miscellaneous items for the Institutional Development Support, and the water supply rehabilitation and extension components, except the support to the CRA, whilst the DNA will be responsible for the procurement of goods, works and services for the sanitation component, project management and audits. A procurement plan is included in Annex B5. Financial Management

The assessment of DNA’s and FIPAG’s financial arrangements for the implementation of the project concluded that both have sufficient experience in managing projects of this nature and size following their experiences with other Bank Group Projects. The Project will support DNA with an Accountant to strengthen its Financial Management capacity. Their Internal Controls will be used for the Project. FIPAG has an Internal Audit Department, which reports

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directly to the Chairman of the Board. These are further augmented by MOPH’s Department of Inspection as well as the Ministry of Finance’s General Inspection Department. These Departments also have oversight for DNA. External Audits for the Project will be carried out by an Independent Auditor whose appointment through short-listing will be approved by the Bank. Disbursement of the ADF resources will be through direct disbursement to the suppliers and contractors for the ICB and NCB packages and for some consultancy services. Other disbursements for small NCB packages less than UA 200,000 will be through the Special Account.

4.2. Monitoring

Timeframe Milestone monitoring process / Feedback loop 04/2009 Loan Approval ADF 09/2009 Loan Effectiveness Launching Mission – Follow-up 12/2009 First Disbursement ADF – MZFO to monitor 03/2010 M&E system established CRA consumers’ relation mechanism

And M&E system established and Maintained; regular feedback to water Companies and FIPAG

06/2011 Mid Term Review All Stakeholders Involved – Follow-up 12/2013 Completion ADF/MZFO

4.3. Governance According to the World Bank’s Governance rankings for 2005, Mozambique’s performance on the six governance dimensions i) Voice and Accountability, ii) Political Stability and Lack of Violence/Terrorism, iii) Government Effectiveness, iv) Regulatory Quality, v) Rule of Law, and vi) Control of Corruption, is in the second percentile rank in comparison with countries in Sub-Saharan Africa that were surveyed. The Government is steadily implementing the required policy and regulatory reforms in the water sector. To further improve water sector governance the project will strengthen the regulatory oversight of water supply schemes and stimulate the adoption and implementation of transparency and participation as guiding principles.

4.4. Sustainability The water tariff in force was enacted by the GOM in 2006. This tariff is considerably lower than the one for the already rehabilitated schemes under FIPAG. Tariffs for the nine “FIPAG” cities range from $0.48 - $0.75 at the moment (Annex C2: current tariffs). The current water revenue collections for Cuamba and Lichinga are not sufficient to meet recurrent expenditures (O&M), due to the too low tariff and limited potable water being sold. It is estimated that the tariff for Cuamba and Lichinga will need to increase from an equivalence of USD0.24/m³ to one that covers operation and maintenance cost recovery by 2013 to ensure sustainability. This will compare favourably with the current USD4.00/m³ being paid for water in the informal water market. At completion of the proposed project, FIPAG will be able to provide a more reliable service to justify a tariff review. The project will fund a tariff and affordability study to ensure that the new tariff will be sufficient to meet at least Operations and Maintenance costs, and will be structured to take into account the

10

needs of the poor. The water regulatory council, CRA, is supportive of tariff reviews that enable water companies to operate viably. CRA is autonomous in its tariff reviews and has been so since inception. Prior to the implementation of the tariffs, GOM will provide an operational subsidy to FIPAG to cover part of the operating costs of the towns.

4.5. Risk management The risk of the water sector reforms failing, particularly in the Niassa Towns, from a lack of capacity or interest of the private sector, is mitigated by the introduction of twining with other successfully run international water operators. FIPAG, as the IA has a good performance record in 9 towns, as well as the TA and operational support available by other developing partners (e.g. MCC, World Bank etc). Given the price increases of construction material of late there is always a risk of cost overruns. This risk was partly reduced through the review of the designs and costs built up on the basis of most recent contract unit prices and the inclusion in the budget of adequate contingencies allowance. The sector reforms and regular tariff reviews are well established under the sector reforms and accepted by the beneficiaries and as such are not considered a risk. GOM’s commitment is undoubted given its commitment to reforms that has been evident in the sector for the past ten years. Tariffs are reviewed and approved by an autonomous body, CRA, in the country. The non timely availability of counterpart funds is a recurrent problem in many countries, including Mozambique and may affect project implementation. The issue was discussed in detail during preparation and appraisal with GOM in order to minimise the risk of non timely availability of counterpart funds.

4.6. Knowledge building The project will include comprehensive reporting, in agreed formats, comprising quarterly progress reports, audit reports, CRA consumers’ relation reports, mid-term review reports and completion reports. Information from various sources will also be routinely gathered, as part of the monitoring and evaluation framework for the project. The experience and lessons learned will be duly documented and the information will be shared among stakeholders through joint technical and sector reviews and other appropriate forums. The Bank, through its supervision missions, will share this knowledge and experiences with other development partners.

V – LEGAL INSTRUMENTS AND AUTHORITY

5.1. Legal instrument An ADF Loan Agreement will be executed between the Fund and the Borrower.

5.2. Conditions associated with Bank’s intervention • Conditions Precedent to Entry into Force of the Loan Agreement

(i) The Loan Agreement shall enter into force subject to the fulfilment by the Borrower of the provisions of section 12 of the General Conditions Applicable to Loan Agreements and Guarantee Agreement of the African Development Fund.

• Conditions Precedent to First Disbursement for the Loan:

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The Borrower shall provide evidence to the Fund: i) of a Subsidiary Financing Agreement between the Government of

Mozambique and FIPAG, prepared in due consultations with the ADB, on the transfer of the ADF loan proceed (section 2.4);

(ii) of DNA and FIPAG having opened two special accounts (one in foreign

currency and the other local currency) in a Bank acceptable to the Fund (section 4.1).

(iii) that the joint Ministerial Diploma enabling the transfer of water infrastructural

assets of the cities of Cuamba and Lichinga has been enacted according to Decree 72/98 of 23 December (section 4.1)..

(iv) that technical assistance in the form of a project manager whose qualifications

and experience are acceptable to the fund has been provided to DNA (section 4.1)..

• Undertakings:

The Borrower shall provide an undertaking: (i) that counterpart funds by GOM will be available during project

implementation (section 2.4); (ii) to cause an implementation of tariff adjustments, based upon a tariff and

affordability study, for water supply and sanitation services in order to ensure sustainability of service provision including investment (section 4.4).

Other Conditions

The Borrower shall Provide evidence to the Fund of the completion of the tariff and affordability study, the adoption of the recommendations and the implementation of an O&M cost recovery tariff no later than 31st January 2013 (section 4.4).

5.3. Compliance with Bank Policies This project complies with all applicable Bank policies.

VI – RECOMMENDATION

Management recommends that the Board of Directors approve the proposed loan of UA 18.00 million to the Government of Mozambique for the purposes and subject to the conditions stipulated in this report.

12

Year Mozam-bique Africa

Develo-ping

Countries

Develo-ped

CountriesBasic Indicators Area (‘000 Km²) 802 30 307 80 976 54 658Total Population (millions) 2007 21.4 963.7 5 448.2 1 223.0Urban Population (% of Total) 2007 36.1 39.8 43.5 74.2Population Density (per Km²) 2007 26.7 31.8 65.7 23.0GNI per Capita (US $) 2006 340 1 071 2 000 36 487Labour Force Participation - Total (%) 2005 51.6 42.3 45.6 54.6Labour Force Participation - Female (%) 2005 50.6 41.1 39.7 44.9Gender -Related Development Index Value 2005 0.373 0.486 0.694 0.911Human Develop. Index (Rank among 174 countries) 2005 172 n.a. n.a. n.a.Popul. Living Below $ 1 a Day (% of Population) 2003-05 54.1 34.3 … …

Demographic IndicatorsPopulation Growth Rate - Total (%) 2007 2.0 2.3 1.4 0.3Population Growth Rate - Urban (%) 2007 4.6 3.5 2.6 0.5Population < 15 years (%) 2007 44.4 41.0 30.2 16.7Population >= 65 years (%) 2007 3.3 3.5 5.6 16.4Dependency Ratio (%) 2007 90.4 80.1 56.0 47.7Sex Ratio (per 100 female) 2007 94.3 99.3 103.2 94.3Female Population 15-49 years (% of total population) 2007 23.8 24.2 24.5 31.4Life Expectancy at Birth - Total (years) 2007 42.1 54.2 65.4 76.5Life Expectancy at Birth - Female (years) 2007 42.4 55.3 67.2 80.2Crude Birth Rate (per 1,000) 2007 39.5 36.1 22.4 11.1Crude Death Rate (per 1,000) 2007 19.8 13.2 8.3 10.4Infant Mortality Rate (per 1,000) 2007 95.9 85.3 57.3 7.4Child Mortality Rate (per 1,000) 2007 163.7 130.2 80.8 8.9Total Fertility Rate (per woman) 2007 5.1 4.7 2.8 1.6Maternal Mortality Rate (per 100,000) 2005 520.0 723.6 450 8Women Using Contraception (%) 2003-06 16.5 29.9 61.0 75.0

Health & Nutrition IndicatorsPhysicians (per 100,000 people) 2004 2.6 39.6 78.0 287.0Nurses (per 100,000 people) 2004 19.7 120.4 98.0 782.0Births attended by Trained Health Personnel (%) 2003-06 47.7 50.4 59.0 99.0Access to Safe Water (% of Population) 2006 42.0 62.3 80.0 100.0Access to Health Services (% of Population)* 2004 39.0 61.7 80.0 100.0Access to Sanitation (% of Population) 2004 32.0 45.8 50.0 100.0Percent. of Adults (aged 15-49) Living with HIV/AIDS 2005 16.1 4.7 1.3 0.3Incidence of Tuberculosis (per 100,000) 2005 0.0 0.0 275.0 18.0Child Immunization Against Tuberculosis (%) 2006 87.0 83.7 85.0 93.0Child Immunization Against Measles (%) 2006 77.0 75.4 78.0 93.2Underweight Children (% of children under 5 years) 2003-05 23.7 28.6 27.0 0.1Daily Calorie Supply per Capita 2004 2 057 2 436 2 675 3 285Public Expenditure on Health (as % of GDP) 2004 2.7 2.4 1.8 6.3

Education Indicators Gross Enrolment Ratio (%) Primary School - Total 2006 105.0 96.4 91.0 102.3 Primary School - Female 2005 93.4 92.1 105.0 102.0 Secondary School - Total 2006 16.0 44.5 88.0 99.5 Secondary School - Female 2005 11.0 41.8 45.8 100.8Primary School Female Teaching Staff (% of Total) 2005 29.9 47.5 51.0 82.0Adult Illiteracy Rate - Total (%) 2007 47.0 33.3 26.6 1.2Adult Illiteracy Rate - Male (%) 2007 32.1 25.6 19.0 0.8Adult Illiteracy Rate - Female (%) 2007 61.4 40.8 34.2 1.6Percentage of GDP Spent on Education 2006 5.0 4.5 3.9 5.9

Environmental Indicators Land Use (Arable Land as % of Total Land Area) 2005-07 4.0 6.0 9.9 11.6Annual Rate of Deforestation (%) 2000-07 0.2 0.7 0.4 -0.2Annual Rate of Reforestation (%) 2000-07 4.0 10.9 … …Per Capita CO2 Emissions (metric tons) 2005-07 0.1 1.0 1.9 12.3

Sources : ADB Statistics Department Databases; World Bank: World Development Indicators; last update :UNAIDS; UNSD; WHO, UNICEF, WRI, UNDP; Country Reports

Note : n.a. : Not Applicable ; … : Data Not Available;

APPENDIX I- COMPARATIVE SOCIO-ECONOMIC INDICATORS

Mozambique

July 2008

Infant Mortality Rate ( Per 1000 )

0

20

40

60

80

100

120

2002 2003 2004 2005 2006 2007

Mozambique Africa

GNI per capita US $

0200 400 600 800 1000 1200

2001 2002 2003 2004 2005 2006

Mozambique Africa

Population Growth Rate (%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2002 2003 2004 2005 2006 2007

Mozambique Africa

Life Expectancy at Birth (years)

111213141516171

2002 2003 2004 2005 2006 2007

Mozambique Africa

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Appendix II-ADB Portfolio in Mozambique

Sector Name Long Name Type Rating Amount Approval Date Sector Totals

1 Agriculture ARTISANAL FISHERIES DEVELOPMENT PROJECT L 1.81 14,170,000 14-Nov-01

ARTISANAL FISHERIES DEVELOPMENT PROJECT G 1.81 1,730,000 14-Nov-01

1 FAMILY SECTOR INCOME ENHANCEMENT PROJECT L 2 12,460,000 31-Oct-00

FAMILY SECTOR INCOME ENHANCEMENT PROJECT G 2 1,000,000 31-Oct-00

1 MASSINGIR DAM AND SMALLHOLDER AGRICULTUR L 2.85 17,000,000 2-Mar-07

1 MASSINGIR DAM AND SMALLHOLDER AGRICULTURAL REHAB. L 55,000,000 24-Nov-93

1 RURAL FINANCE INTERM.SUPPORT PROJECT L 1.83 11,520,000 12-Nov-03

RURAL FINANCE INTERM.SUPPORT PROJECT G 1.83 3,840,000 12-Nov-03

1 SMALL SCALE IRRIGATION PROJECT L 2.18 12,430,000 2-Dec-98

SMALL SCALE IRRIGATION PROJECT G 2.18 1,210,000 2-Dec-98

1 Women's Entrepreneurship And Skills Deve G 2 2,510,000 25-Jan-06 132,870,000

Finance Financial Sector TA Project (FSTAP) G 2.07 6,800,000 4-Oct-05

Ind/Mini/Quar MINERALS RESOURCES MANAGT CAP. BUILDING L 1.39 3,290,000 3-Sep-01

MOMA MINERAL SANDS PROJECT L 1.53 26,811,089 21-May-03 30,101,089

Multi-Sector Inst. Support for Public Sector Reform G 1.47 2,126,000 22-Jun-05

POVERTY REDUCTION SUPPORT LOAN II L 60,000,000 22-Oct-08 62,126,000

Power ELECTRICITY IV PROJECT L 2.27 26,300,000 13-Sep-06

Energy Reform and Access Program L 2.47 9,017,000 5-Nov-03

Energy Reform and Access Program G 2.47 1,965,000 5-Nov-03

RURAL ELECTRIF.PROJECT (ELECT III) L 2.5 11,120,000 3-Sep-01 48,402,000

Social EDUCATION IV PROJECT L 2 10,000,000 13-Sep-01

HEALTH II PROJECT L 2.06 9,000,000 21-Dec-00

HEALTH II PROJECT G 2.06 600,000 21-Dec-00 19,600,000

Transport MONTEPUEZ-LICHINGA ROAD PROJECT L 30,100,000 27-Oct-06

VANDUZI-CHANGARA ROAD REHABILATATION PROJECT L 1.67 16,790,000 15-Dec-99

VANDUZI-CHANGARA ROAD REHABILATATION PROJECT G 1.67 800,000 15-Dec-99 47,690,000

Water Sup/Sanit INTEGRATED WATER SUPPLY AND SANITATION PROJECT L 2.22 15,770,000 8-Dec-00

INTEGRATED WATER SUPPLY AND SANITATION PROJECT G 2.22 1,000,000 8-Dec-00

MAPUTO WATER SUPPLY AUGMENTATION PROJECT L 2.39 17,500,000 17-Jun-99

MAPUTO WATER SUPPLY AUGMENTATION PROJECT G 2.39 2,160,000 17-Jun-99

URBAN WATER SUPPLY, SAN.& INST. SUPPORT L 2.69 19,064,810 20-Dec-02

URBAN WATER SUPPLY, SAN.& INST. SUPPORT G 2.69 2,310,000 20-Dec-02 57,804,810

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Appendix III. Key related projects financed by the Bank and other development partners

15

Appendix IV: Map of Mozambique