Doemen of

The World BankFOR OMCIAL USE ONLY

Ciq. /)$'-4W2

Report No. 6212-MAI

STAFF APPRAISAL REPORT

MALAWI

SECOND LILONGWE WATER SUPPLY PROJECT

October 24, 1986

Water Supply and Urban Development DivisionEastern and Southern Africa Projects Department

This document has a restricted distribution and may be used by recipients only in the performanceof their offlcial duties. Its contents may not otherwise be disclosed without Wotid Bank authorization.

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MALAWI

APPRAISAL OF LILONGWE SECOND WATER SUPPLY PROJECT

Currency Equivalents

Currency Unit - Kwacha (MK)1 Kwacha - 100 Tambala US$0.5556US$1 - M 1.8

Weights and Measures

1 Imperial Gallon (Ig) - 1.2 US Gallons - 4.55 liters (1)1 cubic meter (m3 ) 220 Ig, 264.2 US gallons, or

1 kiloliter (kl)1 liter per capita per day 1 lcd1 million Imperial Gallon

per day (Imgd) - 4,546 m3/day1 meter (m) 3.28 feet (39.37 inches)1 millimeter (mm) - 0.039 inches1 kilometer (km) 0.62 miles1 square kilometer (km2) - 0.386 square miles - 247 acres (ac)

Abbreviations and Acronyms

BWB Blantyre Water BoardDLV = Department of Land and ValuationDLVW Department of Land, Valuation and WaterDOW Department of WaterDSB Department of Statutory BodiesERR - Economic Rate of ReturnGDP Gross Domestic ProductGNP = Gross National ProductGovernment (GOM) Government of MalawiIDA = International Development AssociationIDC Interest During ConstructionIMF - International Monetary FundLCC Lilongwe City CouncilLCS - Low Cost SanitationLWB = Lilongwe Water BoardMHC Malawi Housing CorporationMLG 8 Ministry of Local GovernmentMWS Ministry of Works and SuppliesODA - Overseas Development AdministrationSIDA - Swedish International Development AuthorityTA Technical AssistanceUK - United Kingdom of Great Britain and Northern TrelandUNDP United Nations Development ProgramWHO World Health Organisation

Fiscal Year (FY)April 1 to March 31

FOR OMCIAL USE ONLY

MALAWI

STAFF APPRAISAL REPORTLILONGWE SECOND WATER SUPPLY PROJECT

Table of Contents

Page No.

CREDIT AND PROJECT SUMMARY i-ii

I. THE WATER SUPPLY SECTOR

Country Background 1Water Resources 3Sector Legislation and Institutions 3Water Supply and Sewerage Systems 5Cost Recovery 6Manpower and Training fPrevious Bank Group Projects 7Sector Developments and Possible Constraints 7

II. TEE PROJECT AREA

Location and Features 8Existing Water Supply and Waste Disposal Systems 8Population Served and Standards of Service 10Population and Demand Projections 11

III. THE PROJECT

Genesis 12Objectives 13Technical Alternatives 13Description of the Project Components 14Cost Estimates 15Project Financing 18Imp lementat ion 18Land Acquisition and Relocation 1QProcurement 19Disbursement ?1Water Resource Aspects 22Environmental and Pealth Aspects 21

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

IV, THE BORROWER AND THE IMPLEMENTING AGENCY

The Borrower 23Organization of LWB 24Institution Building and Localization 26Training 27Accounting and Audit 27Billing and Collection 28

V. FINANCIAL ASPECTS

LWB's Past Operating Results and Financial Position 29Financial Performance of LWB 33Financing Plan for LWB as an Entity 33Future Operations and Financial Position of LWB 35Tariffs 36Revaluation of Assets 37Rate of Return 38Alternative Project Phasing 38Affordability for Low Income Groups 39

VI. PROJECT JUSTIFICATION

Project Benefits 40Least Cost Solution 40Economic Rate of Return and Pricing Considerations 40Project Risks 41Project Monitoring System 41

VII. AGREEENTS REACHED AND RECOMMENDATION

Agreements Reached 42Recommendations 44

LIST OF ANNEXES

Annex Description

1. Population/Water Demand Growth2. Description of the Proposed Water Supply Facilities3. Project Cost Estimates4. Project Implementation Schedule5. Estimated Schedule of Bank Disbursements6. Schedule for Withdrowal of Proceeds of the Credit7. Average Water Dev.AnA for Lilongwe8. LWB - Organization Chart9. Balance Sheet

Income StatementSource and Aprlication of FundsRevaluation of Fixed AssetsSchedule of Long Term Debt

10. Project Cost Summary and Financing Plan11. Economic Rate of Return Calculations12. Technical Assistance and Training Program (ODA assisted)13. Proposed Monitoring Guidelines14. Selected Data and Documents Available in the Project File

MAPS

I_RD 19698 - Project AreaIBRD 19697 - Supply Area

MALAWI

SECOND LILONGWE WATER SUPPLY PROJECT

Credit and Project Summary

Borrower: Republic of Malawi

Beneficiaries: Lilongwe Water Board, Ministry of Local Government, andLilongwe City Council

Amount: SDR 16.6 million (US$20.0 million equivalent)

Terms: Standard IDA terms

RelendingTerms: The Government will onlend US$19.4 million equivalent to

the Lilongwe Water Board (LWB) at a rate of interest of 11percent per annum, for a period of 25 years, including sixyears grace, during which period the interest due to theMalawi Government would be capitalized. The Governmentwould bear the exchange rate risk. The onlending rate isexpected to be positive in real terms over the life of theproject.

ProjectDescription: The objectives of the project are to extend and improve the

water supply system of Lilongwe, Malawi's capital city, tostrengthen LWB's management and operational efficiency, andto study future options for Lilongwe's water disposal andsanitation systems. The project includes construction of anew earthfill dam, remedial works on an existing dam,extension of the water treatment plant and of the waterdistribution system, training and management staff supportfor LWB, and feasibility sWudies on Lilongwe's sanitationand sewerage systems. The project would provide safe waterfor an additional 110,000 inhabitants of Lilongwe.

Risks: The main risk is that LWB would not generate enough revenueto ensure its financial viability. To minimize this risk,the project is based on conservative demand forecasts. TheGovernment, in line with its overall policy regardingfinancial self-sufficiency of parastatals, has agreed topermit LWB to increase water charges as needed so as to befinancially self-supporting.

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Estimated Cost: Local Foreign Total- ml ton) --

Water Supply Extension 7.1 11.8 18.9Management Staff Support and Training 0.0 1.0 1.0Sanitation Pilot Project and Study 0.1 0.4 0M5

Total Base Costs 7.2 13.2 20.4Physical Contingencies 0.9 1.4 2.3Price Contingencies 3.5 4.3 7.8TOTAL COSTS 11.6 18.9 30.31/

Financing Plan: Local Foreign Total----(US$ million)-

IDA 4.5 15.5 20.0European Investment Bank 3.7 2.8 6.5Overseas Development Administration - 0.7 0.7LAB 2.2 - 2.2Government of Malawi 1.1 - 1.1TOTAL 11.6 18.9 30.5

Estimated Disbursement of IDA Credit:

IDA FY 1987 1988 1989 1990 1991 1992 1993- _ _- (US$ million)-

Annual 0.6 2.6 4.7 4.9 4.4 2.3 0.5Cumulative 0.6 3.2 7.9 12.8 17.2 19.5 20.0

Rate of Return: Important non-quantifiable benefits would accrue fromimproved health, improved environmental conditions, andincreased labor productivity. Based on incremental watersales and increaased tariff levels the economic rate ofreturn is 5.5 percent.

I/ Taxes are negligible since virtually all items would be exempt fromimport duties and sales taxes.

MALAWI

LILONGWE SECOND WATFR SUPPLY PROJECT

I. THE WATER SUPPLY SECTOR

Country Background 1/

1.01 Malawi is a small, landlocked country in Southeastern Africa thatcovers an area of 118,500 square kilometers with a population of 7.06million in 1985. The country's major assets are moderately fertile soils,substantial water resources and a climate that is ideal for cropproduction. Three quarters of the land area of Malawi form plateau zones(the southern extension of the Gxeat Rift Valley system) with altitudesvarying between 800 meters and 1,400 meters. Unlike its reighbors, Malawihas no substantial explored mineral resources.

1.02 Although one of the world's poorest countries, Malawi, with a percapita GNP of US$210 (1983), recorded significant achievements over thelast two decades. Between 1967 and 1979, the Malawi economy displayedvigorous growth. Real GDP grew at an average rate of 5.5 percent perannum, corresponding to a per capita income growth rate of nearly 3.0percent per annum. During the same period, gross dorestic investment (GDI)increased at an annual rate of 12.5 percent, raising investment's share ofGDP to 29 percent in 1979 from below 15 percent in lQ67. Meanwhile,domestic savings rate rose from 4 percent of GDP in 1967 to 17 percent in1979, increasing the share of investment financed from domestic rescurcesto about 60 percent. Over the 1967-79 period, export volume grew at anannual rate of 4.5 percent, while import volume grew at 3.5 percent.The impressive growth was achieved, despite limited natural and humanresources, through a realistic Government economic policy that encouragedexport-oriented agricultural and agro-industrial growth. The overallpolicies of the Government provided an attractive environment forinvestments by foreign capital and private entreprises.

1.03 However, in recent years the growth of the economy has beenchecked by: (a) a rapid rise in import prices (particularly fuel, capitalgoods, and intermediate goods) and swings in export prices of tobacco, teaand sugar, resulting in a 40% fall in Malawi's terms of trade between1977-1980; (b) droughts in 1980 and 1981 which caused a decline in exportvolume and forced the country to import maize in large quantities; and (c)the rising external transport costs dte to increasing ocean freightcharges, port congestion in Mozambique and Tanzania and disruption of rail

1/ The Bark's country economic memoranda of February 8, 1982 "Growth andStructural Change: A Basic Economic Report (No. 3082a-MAI), and ofOctober 4, 1985 "Economic Recovery: Resource and Policy Needs, AnEconomic Memorandum (report No. 5801-MAI) give a detailed analysis ofMalawi's economy and its future prospects. The following summarycountry background Is drawn from both reports.

traffic from Beira and Nacala in Mozambique, Malawi's traditionalentry ports. As a result of these difficulties, between 1978 and 1981, thecountry experienced a period of: rising current account deficits in thebalance of payments; a rising debt service ratio; a sharp decline in GDPgrowth rates that reached a low of -5.2 percent in 1981; declining GDS andGDI rates; and rising Government budgetary deficits.

1.04 The crisis revealed important structural weaknesses in theMalawi economy. First, there was an acute lack of export diversificationwith a high dependence on tobacco, tea and sugar whose prices on theinternational markets are subject to wide fluctuations. Second, lowproducer prices slowed down the growth in smallholder agriculturalproduction. Third, the finances and management of key parastatals andquasi-public institutions deteriorated thereby placing an added financialburden on the Government. Fourth, as tne fiscal position weakened, theGovernment encountered difficulties in meeting recurrent costs of projectsfinanced by external assistance. Fifth, price controls weakened productionincentives in the manufacturing, service and agricultura', sectors.Finally, public administration needed to be strengthened if it was to dealefficiently and effectively with a crisis on this scale.

1.05 Tb cope with these problems, the Government prepared a structuraladjustment program in consultation with the Bank and the IMF, covering theperiod 1981/82-1985/86. The progrc was supported by a series ofstructural adjustment loans from the Bank and stand-by arrangements by theFund and was designed to: encourage diversification of production andexports; improve performance of the productive sectors through theformulation of appropriate policies and incentives; rehabilitate,restructure and strengthen key institutions to achieve improvements inplanning and coordination; and, improve resource mobilization in the publicsector.

1.06 Malawi carried out the structural adjustment ptogram under SAL Iand SAL II with considerable success, and implementation of SAL III is wellunder way. As a result of the improved policy environment, more favorableclimatic conditions and better export prices, the Malawian economy began torecover in 1983/84. The balance of payments deficits on the currentaccount was steadily reduced, despite rising interest charges, increasedtransportation costs, and declines in external capital flows. TheGovernment's budget as a percentage of GDP was also reduced significantlywith healthy revenue increases and fiscal discipline. Although estimatesindicate that Malawi's economic recovery eltwed in 1985, it is expectedthat with continued implementation of the Government's SAL program, growthof per capita income can resume and financial equilibrium restored.Prospects over the next five years are for modest growth rates of percapita income as the economy continues to face serious constraints whicbinclude: scarcity of trained manpower; a fast rate of population growthrelative to GDP growth; very high transportation costs, and a very lowper capita income that limits the levels of domestic saving andinvestments.

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Water Resources

1.07 Malawi has substantial water resources. About one quarter of thecountry is covered by lakes, with Lake Malawi being by far, the largest.Seventy percent of the country drains into Lake Malawi or the Shire River(the lake's only outlet). Malawi has distinct wet and dry seasons. Thewet season lasts from November to May with slight regional variations.Average annual rainfall is about 1,200 mm but varies widely, ranging fromaround 600 mm to about 3,000 mm. Because of the variations in altitude(from about 200 m to about 2,500 m above sea level), Malawi experiences awide range of climatic conditions from tropical to temperate, producingconditions that are ideal for the production of a wide range ofagricultural crops.

1.08 There is ample surface water in the lakes (Malawi, Chilwa andothers), the Shire River system and other minor rivers. However, supply toa great extent is dependent on the rainfall which has marked seasonalityand wide variation in total annual precipitation from year to year.Apart from the lakes and rivers, surface water in Malawi is stored inreservoirs of dams built for water supply and conservation purposes. Theseinclude the water supply dams at Blantyre, Kamuzu Dam on the LilongweRiver, small reservoirs at Kasungu, Zomba (Mulungushi), Lifupa, Tedzanibarrage and many other small dams in the tea growing areas. However,total storage capacity is not significant relative to the available waterresources.

1.09 Groundwater is widely available from dug wells and boreholes inthree hydrogeological zones: Plateau-Highland, Escarpment and the RiftValley alluvial Plains. Over most of the plateau areas, the geologicalformation is basement complex that is largely drained by "dambos" (broad,grass-covered, swampy areas with no defined channels). The highlands havelittle potential for groundwater supplies due to the steep slopes. A study"The Ground Water Resources of Malawi" was carried out in 1983 by ODA andthe Department of Water (then Department of Lands, Valuation and Water) toassess Malawi's water resources. The study indicated that the availablegroundwater resources in Malawi have sufficient recharge to support therelatively low level of groundwater abstraction needed to meet present andfuture medium-term domestic water requirements of smaller settlements. Thedevelopment of groundwater resources in Malawi has in the past beenprimarily for rural domestic use and fringe irrigation from boreholes anddug wells. By i982 there were, altogether, 5,500 boreholes (with about 10percent having been abandoned), the majority of which were equipped withhandpumps (about 10 percent motorpumps). According to the report,groundwater development in the immediate future will continue to beprincipally for rural domestic supplies because due to a widely dispersedpopulation and the consequent high cost of distribution, only 25 percent ofthe rural population can be served by the rural piped-water supply programfrom surface sources.

Sector Legislation and Institutions

1.10 The provision of piped water in Malawi is governed by theWaterworks Act of 28 April 1q26, The Act has, since then, undergone

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several amendments, the latest having been made in 1971. Supplementallegislative instruments, the Blantyre Waterworks Act and the LilongweWaterworks Proclamation of 1984, provide guidance for the provision ofwater in the cities of Blantyre and Lilongwe, respectively. The objectiveof tb-i Blantyre Waterworks Act and the Lilongwe Waterworks Proclamation isto strengthen the mandate of both Water Boards and provide them withautonomy to be financially self-supporting organizations,operating on soundcommercial basis and be able to efficiently supply water to users in bothcities. Overall, the legislative instruments provide an adequate frameworkwithin which the agencies responsible for water supply can operateeffectively, even though their budget and appointment of senior staff arestill subject to Ministerial approval.

1.11 The organization of the water supply and sanitation sector inMalawi was until recently fragmented. Until about 1972, the low level ofactivity hid the duplication of effort by the various Government of Malawiagencies involved in the sector. However, the increase in the level ofactivity during the 1970s highlighted the need to rationalize activities.In 1979, the first comprehensive reorganization of the management ofactivities in the sector was undertaken leading to the creation of theDepartment of Lands, Valuations and Water (DLVW) in the Ministry of Worksand supplies (M4WS). DLVW later split up to the Department of Water (DOW),and the Department of Lands and t'aluation (DLV) to become a separatedepartment within the MMWS. Currently, there are three major institutionsdealing with water supply in Malawi: the Department of Water; the BlantyreWater Board (BWB) and the Lilongwe Water Board (LWB). The Ministry ofHealth and the Office of the President and Cabinet have minor, mainlysupervisory, roles in the sector.

1.12 The Department of Water has primary responsibility for developingand managing water resources throughout Malawi, except in themunicipalities of Blantyre and Lilongwe. The Department plans andimplements rural and urban water systems in other urban centers besidesproviding untreated but protected piped water to rural areas wherever andwhenever feasible. The Department currently operates more than 59 urbanand institutionl water supply systems in the country and has constructedmore than 40 rural piped water supply schemes. The Department worksclosely with the 24 District Development Committees in its rural watersupply schemes. Besides water supply, the DOW is r,sponsible for waterresource planning and water pollution control, provides training for itslower level staff and technical assistance to the Lilongwe Water 'Roard.The latter service to LWB is in the process of being phased-out. TheDepartment uses its own staff to plan and implement water supply projectsin the smaller towns and the rural areas, but needs to retain consultantsand/or external assistance at times, to do more extensive, complex works inthe larger cities. Currently, UNDP is assisting DOW draw-up a WaterResources Master Plan for Malawi, while ODA in 1982 helped DOW carry out agroundwater study.

1.13 The Blantyre Water Board (BWB) is an autonomous statutory bodyresponsible for water supply in the city of Blantyre. BWB has a reputationfor good management. It uses local staff, with a few expatriate managers,

to plan, design, supervise minor construction, operate and maintain a largeand fairly sophisticated water eupply system. BWB appoints or awardscontracts to consultants for larger engineering designs and supervision ofconstruction. BWB is responsible to DOW for the technical review ofdevelopment plans and to the Controller of Statutory Bodies in the Officeof the President and Cabinet for the review of financial planning, budgetsand expenditure.

1.14 The Lilongwe Water Board (LWB) has responsibilities for Lilongwe,similar to BWB, except that DOW still provides some technical assis.ance inplanning, design, and construction supervision. The organization of LWB,the executing agency of the project's water supply component, is describedunder paras. 4.02-4.06. LWB's management has considerably imprived sincethe beginning of the Water Supply Engineering Project. To further Improvethe situation, substantial management staff support and training componentswill be included in the proposed project.

Water Supply and Sewerage Systems

1.15 Malawi's population is estimated at 7.06 million (in 1985), witha population growth of about 3.2 percent per annum. The urban population,contributing about 12 percent of the total population is growing at a rateof about 6 percent. About A3 percent of the urban population has access tosafe water. In Blantyre, the Blantyre Water Board (BW`B) serven ahout360,000 people through some 14,000 connections and 50 kiosks, produclng anaverage of about 45,000 m3 per day water. Piped water supply was madeavailable in about 50 smaller urban centers in the last decade.

1.16 About 42 percent of the rural population estimated at h.iqmill :n has access to safe water from piped gravity systems, boreholes anddug oells, and private or institutional supplies. Self-help. schemes aremaking a significar,t contribution to the improved wattr supplies in therural area. District development committees initiate a varie.y of smallscale projects, including gravity systems, wells and hand pump schemes.While the committees rely on go ernment for advise and trainings, the keyto the success of the projects has been the active contr4butlon of thecommunity, providing labor, part of the funds and ma,ntenance of thecomponents, allocating responsibilities among villagers. Such projectshave been attracting substsntial external support from both go-vernment andvolunteer agencies.

1.17 About 15 percent of the urban population are connected tocommunity waste water systems, the remainder generally using septic tar.ksand pit latrines. The Federal Republic of Germany has helpel to financePhase I and II of the Blantyre Sewerage Project. The city councils ofBlantyre and Lilongwe are responsible for providing sewer servicee to theirpopulations. In general, expansion of sewerage facil'ties has not keptpace with urban development in Malawi. To improve nd expanLd alterrativJ,low-cost sanitation (LCS) technologies, an LCS demonstration project hasbeen carried out under the Lilongwe Water Supply Engineering Projert (Co1272-MAI). Preparation of a Sanitation Feasibility Study for Lilongwe andcontinuation of the LCS program is included in the proposed project, withthe full support of the government.

Cost Recovery

1.18 In accordance with Government's stated policy, the Blantyre andLilongwe Water Boards should be self supporting, including recovery ofcapital costs. In order to achieve this goal, annual tariff increases wereintroduced in Blantyre, coupled with measures to increase the operationalefficiency of the BWB. However, at an average tariff level of MK 0.62 perm3, water sales grew only marginally in 1984 and 1985 in Blantyre. It was,therefore, .eecded that no tariff increase would take place in 1985. Therate of return on revalued net fixed assets varied between 3 and 5 percentin the last three years. The recovery of construction and recurrent costsin the rural areas has usually been limited to the provisioni of self-helpcontribution. To improve cost recovery of groundwater based supplies, theGovernment is modifying design and construction standards to minimizeinvestment and maintenance costs, supported by several externally financedprojects, including the Bank executed UNDP-financed Hand Pump TestProject. Cost recovery for sewerage and sanitation is limited to Blantyre,Lilongwe and Zomba, where costs are partially covered by direct charges onhouseholds.

Manpower, and Training

1.19 The Government has, since independence, made considerableprogress in the provision of safe drinking water throughout rural and urbanMalawi. However, these developments have placed a severe strain on theadministrative and technical capabilities of the DOW, LWB, BWB and thedistrict water supply units, most of which are still heavily dependent onexpatriate staff and consultants. The strain is bound to increase when theGovernment drafts an !.nvestment plan for the next decade based on theproposals of the National Water Resourcts Master Plan that is beingcompiled by DOW with assistance from the UNDP's Department of TechnicalCooperation for Development (final draft is expected in September, 1986).The DOW does not have the administrative and technical capabilities tocoordinate with donor agencies for funding, and to supervise theimplementation of such a national water supply investment plan. There isan urgent need to address at the national level the issue of manpowertraining for the sector. Although several manpower and training studiesof the sector have been conducted in recent years, little follow-up actionhas been taken by central agencies to develop sector training capacity andintroduce needed local programs. However, the training program, developedunder the recently completed Blantyre Water Supply Project, has beensuccessfully implemented as part of a twinning arramgement with a U.K.Waterwork Company, and assists, indirectly, the sector as a whole. Tostrengthen LWB, the Lilongwe Water Supply Engineering Project(CR 1272-MAI)included a technical assistance component aimed at improving management,assist the Government to assess the sector's organizat!on, manpower andtraining needs. The training component was a continuation of trainingstarted under the credit for the Blantyre Water Supply 'roject (CR 711-MAI)which also included an institutional development component. DOW and thecomptroller of statutory bodies, who also has supervisorr responsibilities

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on budgetary and recruitment matters, carry co-ordinating functions fortraining in the sector. The evolution and content of the trainingcomponent of the proposed project is described in more detail under paras.4.11 through 4.13.

Previous Bank Group Projects

1.20 The Bank Group has, to date, financed a total of three watersupply and urban sector development projects. The first was in 1971, aUS$7.0 million Blantyre Water Supply Project (CR 711-MAI) forthe augmentation of water supply to Blantyre and strengthening BWB'smanagement and technical capabilities. The project 's primary objectiveshave been achieved and the credit was closed on September 30, 1984.However, as highlighted in the Project Completion Report, due to the slowerthan expected consumption growth, BWB's financial performance has beenbelow expectation. The financial rate of return for the years 1981-84 hasaveraged 4.4% per annum and the economic rate of return 2.0% per annum ascompared with the projected 9.7% and 7.2% respectively. BWB's financialviability was maintained through tightened management, and increasedoperational efficiency, which were significant achievements during theproject implementation period. Average tariffs were raised from MK 0.20per m3 in 1976 to MK 0.62 per m3 in 1986, which appears to be at the priceelasticity level. The Lilongwe Water Supply Engineering Project (CR1272-MAI), which is currently under implementation, was designed to assistthe Government and LWB to formulate a long-range water supply, sewerage andsanitation program for Lilongwe, prepare a feasibility study and detailedengineering designs for the water supply extension, strengthen LWB throughimprovements in management, financial and cost recovery capabilities, helpthe Government develop low-cost technologies for sewerage and sanitation,and assess the sector's organizational, manpower and training needs. TheFirst Urban Project (CR 1528-MAI) of November 27, 1984 focuses on sectoralpolicy issues and provided for: development of market-based housingalternatives; establishment of a financially viable basis for replicabilityof the market-based program; strengthening of ancilliary functions in thehousing market; and assisting the Government to carry out a HousingSubsidies and Wage Policy Study as a first step toward the phasedresolution of the issue of housing subsidies. The proposed Lilongwe WaterSupply Project is a demonstration of the Bank Group's continued support ofthe water supply and urban sector in Malawi and will help provide the watersupply infrastructure necessary for Lilongwe's growth, and will assist tolay the foundation of improved sanitation in Lilongwe and other urbancenters through the project's sanitation component. The Bank's furtherrole in the sector is discussed in paras. 1.21-1.22.

Sector Developments and Possible Constraints

1.21 In Malawi, domestic water supply is of primary importance in thedevelopment and use of water resources. The Government made considerableprogress over the past 20 years in supplying water within reasonabledistance to the rural population. Current developments are expected toextend water supply to nearly all the population of Blantyre and Lilongweby about 1990. However, due to rapid population growth new investment will

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be required in the late 1990s. Recently completed and proposed watersupply projects will serve most of the population of the smaller urbancenters by the early 1990s. While it will be more difficult to providesafe water in all the rural areas by the end of the decade the developmentmomentum of recent years is expected to continue. Progress will, however,depend on adequate external financing and the ability of the Government toallocate sufficient funds for recurrent expenditure. In spite of seriousbudgetary constraints, the Government intends to ensure that essentialservices are funded. The Bank will provide financial assistance forhigh-priority, long-term water. supply projects, while increasing itssupport for institutional development and for initiatives in low-cost,low-maintenance technology. Assistance for institution building, whichbegan with the IDA-financed Blantyre Water Supply Project, and the LilongweWater Supply Engineering Credit, will be extented in future Bank Groupoperations, emphasizing manpower development, training and improvement inadministrative and financial management. The Bank will continue toencourage the authorities to focus on cost-recovery issues.

II. THE PROJECT ARFA

Location and Features

2.01 The City of Lilongwe is situated at an elevation of 1100 m abovesea level in the central region of Malawi, some 130 km to the west of LakeMalawi. In the early 1960's Lilongwe was a relatively small regionalcenter with a population of less than 20,000 people. A decision was madein 1964/65 to relocate the Capital of Malawi from the Southern town ofZomba to the more central town of Lilogwe. The decade following thisdecision saw the population of Lilongwe rise to nearly 100,000 people andcurrent estimates put the 1986 population at 169,000. The City has beenplanned as a fully integrated urban unit with provision being made forgovernment, commerce, industry, education, recreation etc. for a populationwhich it is projected, will approach 500,000 in the early years of the nextcentury. Physically the City is large covering 35 km from north to southand 19 km from east to west. In 1983 a large, modern international airportwas opened in the northern suburbs and the steadily increasing volume ofair traffic has tended to accelerate the City's growth particularly in thecommercial sector.

2.02 The climate in Lilongwe is generally pleasant being withoutextremes in the temperature and having two distinct seasons. The wetseason runs from October/November to March/April with an annual averagerainfall of 860 mm. Severe droughts are rare events and in 65 years ofrecords no year has had less than half the averge rainfall.

Existing Water Supply and Waste Disposal Systems

2.03 Lilongwe's principal source of water is an impounding reservoiron the Lilongwe river some 26 km to the south west of the City. A numberof wells, boreholes and small streams providr some domestic water but interms of volume, though not, to their users, -heir contribution isinsignificant compared to that of the river. The reservoir was formed by

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the construction of the Kamuzu dam in 1966 which is a composite structurecomprising a 15 m high central, free overfall, concrete gravity spillwayflanked by earthfill embankments. Concerns have been expressed over manyyears as to the stability of the concrete section and the concerns havebeen vindicated by investigations carried out in 1984/85. To achieve an

acceptable level of risk of structural failure the dam requires to bestrengthened and the crest level raised. The reservoir has an active

capacity of 4.5 million m3 and at the 1985 level of withdrawal (9.8 millionm3/annum for water supply and 5.3 million m3/annum for downstream users)the frequency of failure to meet demand is about 1 in 4 years. Thedrainage area upstream of the Kamuzu dam is about 760 kmZ and the riversystem has a mean annual discharge of 4.8 m3 /sec or 150 million m3 /annum.Thus with adequate regulation the river could satisfy water demands greatlyin excess of those currently being met.

2.04 Releases from the Kamuzu dam augment the river during times oflow natural flow and water is captured at the existing waterworks which issituated in the Southern part of the town on the left bank of the river.The works have a capacity (at overload) of 30,000 m3 /day, which wasapproximately the peak demand in 1985. The raw river water is treated by

conventional coagulation, upward flow clarification and rapid gravityfiltration followed by chlorine disinfection. The works were extended by10,000 m3/day in 1984 and in 1985 the supply was virtually unrestricted forthe first time since 1978. Restrictions are likely to be necessary againin 1986.

2.05 From the treatment works water is pumped east and west to twodistribution centers, Dedza and Livingstone. Each of these centers supplylocal demand areas but in addition Livigstone despatches water by gravityto the Northern booster station located near the new City Center. In turnthe Northern Booster station pumps water to Kanengo, the main distributioncenter of the northern suburbs.

2.06 Part of the water received at Kanengo is again pumped northwardto a ground level service at Sandula which provides a gravity supply to aground level reservoir at the international airport and to a boosterstation in the most northerly suburb of Lumbadzi. This recentlycommissioned booster station pumps water to an elevated service tank whichthen supplies Lumbadzi.

2.07 The existing and projected future service levels for sanitationare shown below:

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Current (1986) Projected (1993)

Population _ Population %

Sewerage 26,000 15 38,000 14Septic Tanks 29,000 17 32,000 12Pit Latrines 114,000 67 202,000 74

169,000 100 272,000 100

2.08 The Lilongwe City Council (LCC) is responsible for overalldevelopment, operation and maintenance of the sewerage system and forproviding an emptying service for septic tanks and pit latrines. It isalso responsible in broad terms for ensuring that the city developsadequate sanitation services to meet growth requirements. Construction oflatrines and septic tanks in the extensive Traditional Housing Areas arethe responsibility of the developer. There are LCC maintained separatesewerage treatment plants currently in operation: three extended aerationplants, two oxidation ditches and four stabilisation ponds serving about26,000 people. There are also two privately operated extended aerationplants.

2.09 The three major mechanical plants are in a poor state of repairlargely due to a lack of spare parts. This causes major pollutionproblems: the Lilongwe river receives virtually untreated effluent fromthese plants, which represents a major health hazard to many inhabitantsdownstream who use the river water for washing and drinking. The septictank emptying fleet is not able to fully meet the demand due toinsufficient equipment. Many of the existing latrines are full or in anunhygienic state due to poor maintenance.

2.10 Government is presently undertaking the first phase of an urbancn-site sanitation demonstration program, funded partially from IDA Credit1272-MAI, as part of the Master Plan activities. Support is provided bythe World Bank executed UNIP Project INT/81/047. The first phase isexpected to finish by mid-1987 and would be followed by a second phaseunder the proposed project.

Population Served and Standards of Service

2.11 Of Lilongwe's estimated population of 169,000 in 1986 about100,000 people receive full water service from 9,000 metered privateconnections. A further 50,000 purchase an average of 20 lcd from publicsales kiosks and some 20,000 rely upon wells and streams. Specificconsumption among the consumers with private connections varies widely withgarden irrigation in the dry season causing very high demands among themore affluent. The overall annual average consumption for those usingpiped water in 1985 was 136 lcd based upon sales recorded by the LW1.

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2.12 The water quality is good and the incidence of water relateddisease among those using pij.'d water is low. Since the completion of theKamuzu dam there has been no itOications of an increase in the incidence ofeither bilharzia or malaria in th? Project area.

Population and Demand Projections

2.13 The Government Department of Toum and Country Planning andStanley International have conducted extensive studies of both current andprojected populations and the officially accepred figures are as follows:

AnnualYear Population Increase %

1982 134,000 6.01983 142,000 5.61984 150,000 6.71985 160,000 5.61986 169,000 4.81990 213,000 5.01995 272,000 5.02000 348,000 5.02005 444,000 5.0

The future water requirements of Lilongwe have been the subjectof detailed investigation by the engineering consultants (StanleyInternational, Canada) and several scerarios were developed. Theprojections adopted for the project (see also Annexes 1 and 7) are asfollows in terms of raw water abstraction from the Lilongwe river:

Average Peak AverageYear day x 103 m3 day x 103 m3 Z Loss lcd

1985 21.8 30.5 29 1531986 22.7 31.8 26 1491987 23.4 32.8 23 1441988 24.16 33.8 20 1401989 24.9 34.9 17 1351990 26.0 36.4 15 1321995 38.7 54.2 15 1421997 47.7 66.7 15 1582000 61.1 85.5 15 1752005 85.8 120.1 15 193

Important assumptions in the above projections are that averageper capita consumptions remain at their present levels untii 1990,.and thatratio of peak to average demand is 1.4. The LWB was able to provide anunrestricted supply in 1985 for the first time since 1978 and recordedsales averaged 19,400 m3 /day with raw water abstraction averaging 26,900m3/day and peaking at 32,000 m3/day. (These two figures are less accuratethan the first which is well substantiated.) This leads to the conclusion

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that the averge demand for treated water in 1985 was corsiderably more thanprojected in the above table. The peak factor, on the other hand was only1.2.

III. THE PROJECT

Genesis

3.01 Malawi has made substantial progress since independence in theprovision of safe water but has given priority to Blantyre, to smallerurban areas and to rural locations. The need for additional water suppliesfor Lilongwe was first identified in 1978 through the Bank's CooperativeProgram with the World Health Organization (WHO) and a Cooperative Projectof the Swedish International Development Authority (SIDA) and WHO. As aresult, a number of short-term water supply extensions were implemented,while the Government began to explore means of meeting Lilongwe'slong-range needs. Under the aegis of the International Drinking WaterSupply and Sanitation Decade, the UNDP in 1980 provided financing to carryout prefeasibility studies for the long range development of Lilongwe'swater supply system and to prepare draft terms of reference for theassociated water supply master plan and feasibility studies. TheGovernment requested IDA assistance for the financing of the master planand feasibility studies and during a Bank mission to Malawi in September1981, agrement was reached with the Government on an engineering project toprepare a program for meeting Lilongw'~ 's long range water needs that IDAwould consider financing. The Lilongwe Water Supply Engineering Project(CR 1271-MAI, of SDR 3.6 million) was approved in June 1982, and becameeffective February 3, 1983.

3.02 Implementation of the engineering project (i.e preparation of theproposed project) commenr.ed with the mobilisation of the consultants(Stanley International Limited, Canada) early March, 1983 and was carriedout on schedule, except the low-cost sanitation (LCS) component of theproject. The start-up of the LCS component was delayed by about one year,due to difficulties in finding a sanitation advisor acceptable both to GOMand the Bank. In order to successfully complete this component and allowfor the tendering and evaluation of tenders by the engineering consultantsand to continue providing management staff support to LWB the closing dateof the credit was extended on GOM's request by one year to June 30, 1987.

3.03 The draft Master Plan was submitted on October 31, 1983, reviewedby end-December and the revision was issued on February 24, 1984. Theconsultants submitted the draft Feasibility Study Report to the LilongweWater Board in August 1984. After the review of the Study the Bankexpressed concern that the cost of the proposed project identified in thefeasisility study (estimated at US$47 million) could exceed theGovernment's investment capability. Concern was also expressed that theprojected annual tariff increases in the financing plan required to supportthe proposed investment (40% in 1985 and decreasing to 11% in 1991) mightbe beyond the affordability of a large segment of the population and wouldnot be politically acceptable to the Government. Based on these comments

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the consultants were requested to investigate further alternatives adoptingthe low demand projection and analysing the impact of these alternatives onfuture levels of service.

3.04 As a result of the above request, a scaled down project proposalwas prepared and submitted by the Consultants on November 30, 1984 In formof an addendum to the feasibility study report. The proposed project wasfinally approved in early May 1985 by GOM and LWB was authorized to issue aletter of intent to the consultants to commence work on the preparation ofthe detailed engineering designs and bid documents. This work wascompleted by early 1986 and field appraisal of the proposed project tookplace in February, 1986.

Objectives

3.05 The principal objectives of the proposed project are to augmentand secure the water supply to Lilongwe, Malawi's rapidly developingcapital, through the construction of a new dam/reservoir and to expandLilongwe's water supply system to cater for the increased demand. Theadditional capacity would meet Lilongwe's water demands up to about1995-1997. The project also provides for management staff support andtraining for LWB. The sanitation component provides for the continuationof the on-site sanitation program currently being implemented under theengineering project, and for a sanitation/sewerage feasibility study inorder to prepare a long-term sanitation investment program essential tomeet the waste water and excreta disposal requirements as the City grows.

Technical Alternatives

3.06 In preparing the project, the consultant examined some 16potential dam-sites, run of the river abstractions, ground-water resourcesand the Lake Malawi as a water source. The last three options wereeliminated respectively on grounds of being impractical, inadequate oruneconomic. Cost and adequacy considerations eliminated all but four ofthe damaites all of which are located within the Lilongwe river basin.These four damsites were subjected to detailed examination and costed asone and two stage constructlon programs. The two-stage construction of adam 6 km downstream of the existing dam was found to be most cost effectivewith the first stage serving 1997 and the second until 2005. Tised inconjunction with the existing dam which will be strengthened and raised byabout 1 a, the proposed dam will assure a virtually zero risk of sourcefailure until the demand exceeds that projected for 1997. The design ofthe new dam and the proposed remedial works of the existing dam werereviewed by a panel of dam experts, whose recommendations were incorporatedin the final designs. It was also agreed during negotiations that a damexpert, preferably the one who had reviewed the design of the dam, would beinvited from time to time to review progress in implementation and toreview the completed dam, as and when agreed by the Borrower and theAssociation. Details of the proposed dam are given in Annex 2.

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3.07 The bid documents for the construction of the Water TreatmentPlant were based on performance specification, in agreement with Bank'spolicy. Detailed civil engineering and structural designs will be preparedby the consultants after the evaluation of bids and final selection of thetreatment process and equipment.

Description of the Project Components

3.08 The project, which is more fully described in Annex 2, consistsof the following parts:

A. Source Works

(1) Construction of a new dam on the Lllongwe river nearMasula. This is mainly a civil works contract and consistsof:

a) site clearance, drilling and grouting works;

b) earthworks for the dam construction;

c) concrete works for the spillway and outlet works;

d) instrumentation, pipework and fencing;

e) road and water pipeline diversions; and

f) land acquisition.

(2) Remedial works on the existing dam, consisting of:

a) drilling and grouting works;

b) post tensioning of the dam's concrete overflow section;

c) civil wotks for modifying spillway and outlet works;and

d) raising of crest, Including concrete and earthfill.

B. Extension of water supply facilities in Lilongwe. This willcomprise clvll works and supply contracts covering:

(1) Extension of the water treatment plant with an additIonalcapacity of 32,no l m-5/ay, including:

a) civil works for the extension of river intake, andtreated water storage tanks and for the' treatmentplant extension;

b) supply and installation of water treatment processequipment (based upon a performance specification);

c) supply and installation of mechanical andelectrical equipment for the raw and treated waterpumping stations and for the booster pumpingstations.

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(2) Extension of the Transmission and Distribution System,including:

a) supply of pipes, valves and fittings - steel or ductileiron - for transmission mains , approximate totallength of 23 km with diameters from 300 mm up to 500mm;

b) supply of PVC pipes, valves and fittingd fordistribution mains, 100 and 150 mm diameters;

c) laying steel and/or ductile iron transmission mains;

d) construction of three reinforced concrete servicereservoirs, two of 2,000 m3 and one of 7,500 m3

capacity and two elevated storage tanks each of 650 m3

capacity and 24 meter high together with four boosterpumping stations.

C. Supply of vehicles, water meters and miscellaneous equipmentsfor strengthening the metering and the direct labor departments

of LWB.

D. Consultancy Services for engineering and constructionsupervision.

E. Technical Assistance

(1) for management staff support; and

(2) for the implementation of a training program.

F. Sanitation Component

(1) Consultancy Services for the preparation of a feasibilitystudy for Lilongwe's sanitation and sewerage.

(2) Implementaticn of on-site sanitation systems (as acontinuatiot, of the low-cost sanitation pilot project of theLilongwe Water Supply Engineering Project, Credit1272-MAI).

Location of the various sites are shown on IBRD Maps 19697 and 19698.

Cost Estimates

3.09 Total project cost (exclusive of interest during construction) isestimated at MK 55.00 million (US$30.56 million). Goods and servicespurchased outside of Malawi would not be subject to duties and taxes. Noexemption of local taxes would apply, however, to goods and servicespurchased within the country.

Estimated costs of the proposed project are shown below and a more detailedbreakdown is given in Annex 3. Physical contingencies were calculated at

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15X for the dam construction, 5% for supply of pipes and equipment, and 102for civil works and other miscellaneous items, and were applied as aweighted average to the base line costs given in mid-1986 prices. Pricecontingencies reflect current international and Malawi price trends. 2,Cost for expansion of the distribution system (except minor works forinfilling mains in the existing system, and for providing piped watersupply in the unplanned areas) has been excluded from the projectcomponents and cost estimate. Under legislation currently in force, suchas the Malawi Housing Corporation Act and the Town and Country PlanningAct, developers of all new planned areas are required to pay for all waterreticulation and connections. In addition, all Government departments andMinistries are required to pay charges for water connections.

2/Price Increase,%

1986 1987 1988 1989 1990 1991-95

International: 7.2 6.8 6.8 7.0 7.1 4.0Malawi: 11.00 10.0 9.0 9.0 9.0 9.0

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Sutmary of Project Cost

ForeignMilLim wwiac MMion US$ asZ of %of a/

tcal w Total local Em4m Total lotal TOWal

Water Supply CVarent

1. %ter Supply fxtension(Part A, B, C aiid D of the Project) 12.70 21.29 33.99 7.05 11.83 18.89 63 62

2. 3naenent Staff Support(Part E(1) of the Project) - 1.26 1.26 - 0.70 0.70 100 2

3. Trainirg (Part E(2)of the Project) 0.08 0.45 0.53 0.04 0.25 0.29 86 1

Water Supply Omponent,Base Line Cost: 12.78 23.00 35.78 7.10 12.78 19.88 64 65

Physical (bntirgecles 1.53 2.53 4.06 0.85 1.41 2.26 62 7

Price Cbntirgencies 6.32 7.62 13.94 3.51 4.23 7.74 55 25

Total Water upply Qinpornt 20.63 33.15 53.78 11.46 18.42 29.88 62 98

Sanitation C onit

4. (Part F(1) and F(2) of the Project)Base Line Cost 0.23 0.72 0.95 0.13 0.40 0.53 76 2

Physical (bntirgencies 0.02 0.07 0.09 0.01 0.04 0.05 78 -

Price Contigencies 0.06 0.12 0.18 0.03 0.07 0.10 67 -

Tbtal Sanitation Omponet 0.31 0.91 1.22 0.17 0.51 0.68 75 2

1btal oost of Project: (1+2+344) 20.94 34.06 55.00 11.63 18.93 30.56 62 100

interest 1wirig i(strurtion IUC): 16.13 16.13 &96

a/ FKcludirg interest duriig contructiin.

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Project Financing

3.10 The proposed IDA credit of 1T1M20.n million would cover 65.42 ofthe total project cost. The remaining financing requirement of US$10.56million would he provided through cofinancing of ahout TISSn.67 millionequivalent from the Overseas Development Administration (ODA), about US$6.5million equivalent from the European Investment Bank (EIR), about tS9A2.23million equivalent from LWR self-generated funds; and the balance ofUS$1.16 million equivalent from GOM.

3.11 The IDA credit would be on-lent to the LWB at an interest rate ofliz (i.e. equivalent to 2% In real terms if inflation assumptions arecorrect), for 25 years including 6 yaars grace during which period theinterest due to the Malawi government would be capitalised. The ODAcontribution (which would finance the training program and part of themanagement staff support component of the project) would be 60% on grantbasis and 402 on-lent to LWB on terms similar to the on-lending of the IDAcredit to LWB, The EIB contribution would also be on-lent to LWB at 11%interest rate. Out of the GOM contribution US$1.11 million equivalent willbe made as loan to LWB at 112 interest paid annually, and US$0.05 millionequivalent would be made available on grant basis to assist financing ofthe sanitation component. The project financing is as follows:

US$ MillionTotal IDA ODA EIB LWD GO0

Local 11.63 4.54 - 3.70 2.23 1.16Foreign ExchangeCost 18.93 15.46 0.67 2.80 -

Total (ExcludingFinancial Costs) 0.5S6 20.00 0.67 6.SA 2.23 1.16

2 of Total 100% 65.4% 2.2% 21.32 7.32 1.81

IDC 8.96 8.96

Details are provided in Annex 10.

3.12 The IDA Credit of US$20.0 million together with the ODA and EIBcontribution would finance about 90% of the total costs (excluding IDC) or1002 of foreign cost and 70% of local costs.

Implementation

3.13 LWB would be responsible for the implementation of the watersupply component of the project, and would retain engineering consultantsfor construction supervision and for the detailed civil engineering andstructural design of the water treatment plant extension.

3.14 Project Implementation would begin with the construction of thenew dam and the remedial works of the existing dam in early 1987, thusproviding an adequate source of water by mid-I990. Other extension worksare planned to comence in 1990 and would be commissioned by end 1992. Animplementation schedule is included as Annex 4.

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3.15 Implementation of the sanitation component would be carried outby the Lilongwe City Council (LCC) under the supervision of the Ministry ofLocal Government (tMW) over the 1987-1989 period.

Land Acquisltion aud Relocation

3.16 The construction of the dam at Masula and a new water treatmentplant, 25 km downstream, will involve a maximm area of 302 ha, affecting30-40 families. Under iesign flood conditions, the inundation area wouldcover 370 ha. Approximately 502 of the land to be inundated is currentlyused for suallholder fallow farming. Acquisition of the land will becarried out as prescribed by the Land Acqulsition Act, Chapter 58.04 of theLaws of Malawi. The Act empowers the Minister whose portfolio covers landmatters, to acquire land within Malawi for public use and also provides forvaluation and ctapensation of such land. LWB will be required to pay for21.5 ha which Is the proposed site (25 km. downstream from Nasula) for thenew water treatment plant. The Government has indicated that it does notforesee difficulties of acquisition and relocation of the families. Thepeople affected and their traditional chiefs were consulted and agreed tomove away from the land needed for the project. Customary land for therelocated people is available in the vicinity of the recent settlement andthey would continue to live under circumstances similar to their currentsituation and under the same traditional Chief. However, to ensure theGovernment's full commitment to the satisfactory handling of the landacquisition, compensation and resettlement matters, Rorrower presented onthe Bank's request a resettlement plan during negotiations which was foundacceptable to the Bank. Current estimates by the consultants and the Bankmission put the value of the land and the developments at no more than MK200,000 (US$111,000), or approximately X3,700 (USA2,100) per hectare.Assurances were also sought from Government that guarantees of indemnitywill be given to LWB for future land value litigations in excess of theagreed compensation sum.

Procurement

3.17 Procurement would follow Bank guidelines for internationalcompetitive bidding except for purchase of vehicles and minormiscellaneous equipment. These items, whose total value would not exceedUS$300,000 could be procured through local competitive bidding.Construction of individual waste disposal units included in the sanitationcomponent would be carried out by force account. Construction materialsfor these individual waste disposal units that cannot be purchased as stockitems from the Ministry of Works and Supply would be procured under localprocedures acceptable to the Association.

3.18 A General Procurement Notice for the Lilongwe water supplyexpansion works was published in the Business Edition of the DevelopmentForum on August 31, 1985, which called for prequalification for thefollowing major contracts:

(A) Construction of an earth dam, 24 m high, 750 m long with afree overfall concrete spillway, requiring approximately500,000 cubic meters of fill, with remedial works to anexisting dam;

(B) Construction of a water treatment plent with a first phasecapaeity of 32,000 cubic meters per day;

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(C) Supply and installation of water treatment process equipmentbased upon a performance specification;

(D) Supply and installation of pumps, motors and associatedequipment;

(E) Construction of three reinforced concrete servicereservoirs, two of 2,000 cubic meters and one of 7.500 cubicmeters capacity; and two elevated storage tanks each of 650cubic meters and 24 meters high, with four booster pumpingstations;

(F) Supply of pipes, valves and fittings (steel or ductile iron)for transmission mains, approximate total length 23 km withdia. from 300 mm up to 500 mm;

(G) Supply of pipes, valves and fittings - UPVC for distributionmains;

(H) Laying steel and/or ductile iron transmission mains.

The response to the General Procurement Notice was substantial. A total of113 companies from 24 different countries submitted applications. Mostcontractors expressed interest in more than one contract and in all a totalof 350 applications were received for the eight contracts. Invitations forbids for the dam construction (Contract A) were issued end-May, 1986 andthe tenders will be submitted by end-August, with six months validity ofthe quoted prices.

3.19 Procurement under the Project is summarized below:

Procurement Method(US$ 1000') a/

TotalProject Element ICB LCB Other NA Cost

Dam Construction and 18.329 18.32Civil Works (9.700) (9.70

Supply of Water Treatment, 6.136 6.13Mechanical and ELectrical (5.530) (5.53Equipment and Pipes

Vehicles and Minor 0.189 0.18Miscellaneous Equipment (0.170) (0.17

Construction Material for 0.167 0.16the Sanitation Component (0.150) (0.15

Consultancy, Training, and 4.560 4.56Technical Assistance (3.500) (3.50

Land Acquisition and 0.167 0.16Resettlement Costs (-) (-)

Management Staff Support 1.009 1.00(0.950) (.95

Total 24.465 0.189 4.727 1.i76 30.55(15.230) (0.170) (3.650) (0.950) (20.00

a/ Figures in parentheses are the respective amounts financed by IDA.

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Disbursement

3.20 The credit would be disbursed as follows:(i) 70% .2 foreign and 60% of local expenditure of the dam

construction contract;

(ii) 100% of foreign and 70% of local expenditure of civil worksand supply contracts;

(iii) 100% of total expenditure for all consultancy and advisoryservices;

(iv) 100% of foreign expenditure for Management Staff Support(foreign cost of engineer/manager and financial controller).

Disbursement schedule is given in Annex 6 and Schedule of Withdrawal ofProceeds of the Credit in Annex 7. In order to expedite the fleo of fundsfor disbursement of small payments, a Special Account would be establishedin US dollars with a commercial bank for the water supply component(executing agency: LWB). 3/ For major payments for the constructioncontracts, however, direct payments could be made to the contractors usingProcedure III. Reimbursement of expenditures for all items under contractsor purchase orders of less than US$20,000.00 equivalent would be madeagainst statement of expenditure (SOE), documentation for which would beheld by the implementing agencies and be made available for inspection bysupervision missions.

3.21 ODA would disburse for 100% of the cost of the training componentand 100% of the foreign cost of management staff support other than that ofthe engineer/manager and financial controller. EIB would disburse for 30Xof both the local and foreign cost of the dam construction and 100l of thecost for the water treatment plant equipment and for the electrical andmechanical equipment of the pumping stations.

3/ It was noted during negotiations that the Government was havingdifficulty in utilizing Special Accounts in ongoing projects forforeign expenditures because of the internal procedures currentlybeing utilized. Because of this problem it was agreed that until theSpecial Account was operating smoothly, the threshold for directpayment for foreign expenditures would be reduced from the normalUS$10,000 equivalent to US$5,000 equivalent.

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Water Resource Aspects

3.22 The ability of the existing Kamuzu reservoir to satisfyLilongwe's water demands depends on three factors, namely:

a) the amount of water required at source;

b) the date when the natural river flows from both the Lilongweand Likuni rivers became less then the amount required andstored water must be drawn upon;

c) the date when rainfall (runoff) augments the flows in therivers, which will exceed the amount required (no furtherstored water release is required).

The worst combinatioin of (b) and (c) is an early end to the rains and alate start of the following wet season. Then depending upon the amountrequired a shortage or source failure of some degree is likely. Toquantify the degree of failure the following criteria have been used in theproject:

- a minor shortage - only 75% of the demand can he satisfiedduring a three month peak demand neriod frommid-September to mid-December;

- a serious shortage - less than 75% of demand can be satisfiedover a period exceeding three months.

To assess the reliability of a given volume of stored water to meet a givenrequirement the following criteria were used.

- the frequency of a serious shortage should not exceed once in 100years;

- the frequency of any shortfall should not exceed once in 15 years

- in a 60 years period over 99% of the 60 years total requirementshould be satisfied.

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3.23 Applying these definitions and ceriteria to the existing Kamuzureservoir's 4.5 million m3 capacity, the probability of shortages are:

Requirement Frequency of Frequency ofm3/day Minor Shortage Serious Shortage

20,000 1 in 7 years I in 24 years25,000 1 in 5 years 1 in 10 years30,000 1 in 4 years 1 in 6 years

The amount of water required in Lilongwe in 1986 is estimated to be 26,000to 27,000 m3/day and the source is therefore at a severe and increasingrisk of failure to meet requirements. Examination of records of riverflows for the 29 years from 1953 to 1982 shows that at the 19R6 level ofwater requirement shortages would have occured in 1954, 59, 60, 68, 70 and73. Of these six years 1954, 60 and 73 would have been years of seriousshortage and in 1960 for a period of about 6 months only 60% of therequired amount of water would have been available.

3.24 As the frequency of risk of failure substantially exceeds thegenerally accepted frequency of source failure (i.e. once in 20 years),construction of the new dam should commence without delay. This was takeninto account in preparation of the project implementation schedule. Inaddition, the condition of the existing Kamuzu Dam also requires that theremedial works be carried out urgently. These works have been incorporatedin the dam-construction contract.

3.25 The proposed dam will assure a virtually zero risk of sourcefailure until about 1997. By about this time the treatment plant anddistribution works will require a second phase extension. The source workscan also be expanded, approximately doubling the storage capacity of thereservoir, raising the crest level of the dam by 4 to 5 meters.

Environmental and Health Aspects

3.26 The project would contribute to maintain the present highstandard of water supply and health conditions. It also includes asanitation component aimed to improve the on-site sanitation facilities andto assist in preparing a long-term sanitation/sewerage program. Theproject has no adverse environmental impact. The remedial works on theexisting dam which have been included in the project, will eliminate thedanger of accidental flooding caased by malor damage or burst of the dam.

IV. THE BORROWER AND THE IMPLEMENTING AGENCY

The Borrower

4.01 The borrower would be the government of Malawi who would relendthe proceeds of the IDA Credit to LWB (the implementing agency) on theterms stated in para. 3.11.

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Organization of LWB

4.02 In 1959 subsidiary legislation under Sections 3 and 4, theWaterworks Act declared the Lilongwe Municipal Council to be the LilongweWater Board "for the time being". The Lilongwe Municipal Councilofficially ceased to act as LWB on March 31, 1982, and during the followingtwelve months there were further changes assisting its operation as anindependent body. The staff moved to new offices in October, 1982 and inearly 1983 au Engineer/Manager and a Financial Controller, both expatriatestook up duties as provided for under the Lilongwe Water Supply EngineeringProject (CR 1272-MAI).

4.03 Until early 1984 assistance for technical planning, design andconstruction management was provided by the Department of Lands, Valuationand Water. This arrangement has been gradually phased out with thecompletion of the water augmentation scheme. Apart from receiving theBoard's proposed capital development program each year for coordinatingwith those of the remainder of the country prior to submission to theDevelopment Office of the President, the now Department of Water(reorganized under the Ministry of Works and Supplies) has no activeinvolvement with the Board's affairs.

4.04. Both the Blantyre and Lilongwe Water Boards are responsihle togovernment through the Controller of Statutory Bodies (in the Office of thePresident and Cabinet). Financial plans and budget proposals are notimplemented until they have been reviewed by the Controller and a jointpresentation by the Controller and the Board is made to the Treasury forits approval. Senior Staff appointments are also subject to theController's approval.

4.05. The Board comprises a non-executive Chairman and twelve members(designated by the government) with an observer from the Department ofStatutory Bodies. Under the direction cf the Chairman the Board has theresponsibility of ensuring that the organization performs its functionseffectively to achieve its aims and objectives and that the decision of theBoard are compatible and in conformity with government policy at all times.

4.06. The Engineer/Manager is the chief executive officer and reportsto the Board and to the Controller of Statutory Bodies on all matters ofpolicy. In addition the Engineer/Manager is responsible for the following:

- day-to-day management and supervision of the organization;- coordination and direction of functions in the variousdepartments; and

- direction and supervision of the planning and execution of alldevelopment projects.

4.07. The organizational structure (shown in Annex 9) recommended inthe Master Plan and refined in the Feasibility Study was reviewed andapproved both by government and the Board. The recommendation has beenprepared to represent the estimated requirement at the time when theproposed project is commissioned. In the organizational structure, both at

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present and recommended, the Engineer/Manager directs and coordinatesthrough a Deputy Manager the technical department , through a FinancialController heading the finance department and through the Administrative/Personnel Manager the administrative department. The Internal Auditorreports directly to the Chief Executive.

4.08. The following are some of the more important changes planned inthe organizational structure:

(A) Engineering Department. The present arrangements would bebasically retained with a new division added to thedepartment: the Projects Division. This will take over theDrawing Office and the Property Maintenance Section(presently in the Distribution Division). The PlanningSection of the Division would he responsible for the designand preparation of contract documents for new worksincluding the planning of extensions to the distributionsystem (mains up to 150 mm diameter to he laid by directlabour and over 150 mm by contract). This section will alsohave the important function of collating and maintainingrecords of the systems including the evaluation ofperformance and recommendation of improvements needed. Itwould produce a monthly analysis of production andconsumption for management, and generally provide theplanning input for the engineering department. Whenconsultants are engaged by the board, this section wouldalso provide the necessary liaison on matters related todesign, contract documents and the letting of contracts.Another section of the Project Division would be responsiblefor the supervision of contruction contracts includingliaison with consultants in this respect.

(B) Finance Department. The present unit handling purchasingand stores will be separated into two as these functions aredifferent and improvement in their operations is needed.Purchasing, in this case, would be responsible for buyingmaterials and chemicals including obtaining quotations andannual tenders to ensure purchases are made at the mosteconomic prices. Stores would be responsible for thereceipt, safe keeping and issue of materials includingcosting of issues and maintenance of stores records.

The Internal Audit when strengthened with an audit clerkwould report to the Engineer/Manager rather than theFinancial Controller as at present. An Internal AuditManual needs to be produced to formalise procedures. (TheFinancial Controller has already commenced the preparationof an Accounts Manual for his department.)

C. Administration Department. To improve the personnelmanagement a separate personnel section will be formed. Atpresent personnel records in the form of employee files are

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being maintained for most senior staff. These need to beextended to cover all staff and to include more information(details of first appointment; subsequent actions includingpromotions, transfers, and salary raises; records pertainingto any disciplinary action; letters of commendation;information regarding training courses attended; healthrecords; copies of certificates of education and subsequenttraining, leaves requested and taken; and any performanceevaluation reports). Recruitment for existing posts thatbecome vacant or for new posts that are created as part ofthe programme for additional staff will be administrated bythe Personnel Section. Another important function ofPersonnel Section will he to assist management in theformulation and implementation of training programs andtheir annual updating.4 /

Institution Bullding and Localization

4.09. The implementation of the proposed changes in the organizationalstructure, improvements in the financial viability of the LWB and thesystematic planning and implementation of training programs is a continuousprocess. LWB's management will prepare an action program which will bereviewed and updated quarterly in consultation with the Bank and with thecofinancier of the management staff support and training comportent of theproject.

4.10 At the moment, apart from top management, the Board has only onequalified engineer. In recruiting for professional engineering staff, itis unlikely that any local engineers will have experience in urban watersupplies. The organisation chart therefore, allows for experiencedexpatriate engineers to occupy the three divisional engineering posts -Distribution, Operations and Projects - and for relatively inexperiencedlocal engi',eers to be appointed to deputy divisional engineering posts.The intention is that during the 1990s the deputy engineer posts shall bephased out and the incumbents, assuming they have performed satisfactorily,should tale over divisional engineers posts, with the expatriate'sdeparture. A parallel situation exists with the Chief and Deputy ChiefScientific Officers in charge of the laboratories and water qualitycontrol. Another temporary post is that of the engineer who will liaisewith the consultants during the construction of the new dam. In theAdministration Department the two leading accountants assisting theController have deputies as shown on the organisational chart. Part of thereasoning behind this is that there is a shortage of qualified accountantsin Malawi and the compensation offered in the private sector is oftendouble that which the Board can offer. Hence some turnover at this levelcan be expected. Also, as their local professional training foraccountants has been completed, they will spend more time overseas ontraining scholarships to complete their qualifications.

4/ The training component of the project is described in paras. 4.11through 4.13.

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Training

4.11. In order to develop into a self-supporting organization, asalready discussed under the previous paragraphs 4.09 and 4.10, thecontinuation of expatriate technical assistance (through management staffsupport) and a substantial training program is required. The institutionalsection of the Feasibility Study Report prepared by the consultants(Stanley International, Canada) provides a satisfactoryassessment ofstaffing, recruitment and training needs up to 1Q90. Based on these dataand recommendations, and in consultation with the British DevelopmentDivision of Southern Africa (a regional office of the ODA), LWR hadprepared a proposal for technical assistance and training. On the adviceof ODA Lilongwe,and with assistance from the Bank's water sector trainingspecialist during project preparation, the proposal was modelled on asimilar program prepared by the Blantyre Water Roard (BWB) and approved hyODA in September, 1983 (see para. 1.19).

4.12. The proposal comprises three separate, but related, packages asfollows (described in more detail in Annex 13):

(i) Long term institutional strengthening to include theappointment of three expatriate engineers (12 man-years),and provision of overseas professional level accountancytraining for two deputies to the Financial Controller;

(ii) Short term technical assistance and practical experienceprograms both in UK and Malawi (twinning arrangements); and

(iii) training awards of 3-6 months duration to UK technical andfinancial diploma level courses, to be administered underthe British Council's award scheme.

Priority will be given to the recruitment and training of a seniorpersonnel officer (under the twinning arrangement), who will be responsibleto the Administrative Manager for the overall coordination andimplementation of the Board's training program.

4.13. The technical assistance and training package funded by ODA(Annex 13), under a formal co-financing arrangement has been included as anintegral part of the proposed project. Detailed action program, terms ofreference for the training programs will be submitted to the Bank forreview and comment (see Annex 13, para. 2(d)).

Accounting and Audit

4.14 LWB's accounting system is now operating on a commercial basis.It was converted from a municipal accounting basis in 1983. Presentaccounting practices and procedures are adeQuate for recordingtransactions, preparing financial statements and annual budgets. However,the Board's management information system has, in the past, proven to beweak, particularly in relation to the availability of statistical data ontariffs which made relevant tariffs analyses very difficult. The need to

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develop a stronger data base has been more acute since the switch from theuniform tariff system to a block tariff system (para. 5.12). To overcomethis shortcoming, a data base on tariffs is currently being developed-atask made easier by the recent computerization of the billing system.

4.15 The project will provide for the employment of an expatriatefinancial controller until project completion. LWB so far has not heensuccessful in attracting and retaining qualified Malawian accountantsbecause of the non-competetiveness of public sector remuneration policies.To overcome this difficulty, the training program provides required localand overseas accountancy training.

4.16 LWB has an internal audit unit comprising of three positions, ofwhich only two are presently filled. The main responsibility of this unitis, as of now, to systematically review all recorded transactionsforaccuracy. It is expected that the unit's responsibilities will bebroadened in the future to include performance of procedural reviews andother usual audit functions as the Board reaches a full staffing stage.

4.17 LWB's external audit is currently conducted by the internationalfirm Coopers and Lybrand. This arrangement is satisfactory. LWB willcontinue to have its annual accounts audited by independent accountantsacceptable to the Association, and the audited accounts will be submittedto the Association within six months of the end of the fiscal year.Auditing of the Project's Special Accounts and Statement of Expenses willbe carried out by the same auditors.

Billing and Collection

4.18 Meter readings are made monthly and bills sent out by mail.Disconnections are normally made if payment is not made within 3n days ofbillings. Past collection performance is difficult to evaluate because thecapacity of the old electronic accounting machine was inadequate for theexisting 9000 customers, leading to a significant lagging of billings (upto four weeks). As a result past average collection periods derived fromthe financial statements of the past three years (79 days in FY83, 99 daysin Fy84, and 88 days in FY85), do not reflect actual collection periods.Collection performance is generally good, total accounts receivable do notexceed on average 60 days.

4.19 A computer has been acquired (under the Engineering Project) andthe billing system is now being computerized so that after conversion itwill have the capacity to handle up to 25,000 accounts. LWB has alsosignificantly reduced the unaccounted for eater during the implementationperiod of the Engineering Project.

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V. FINANCIAL ASPECTS

5.01 As mentioned above, LWB's accounts have been maintained on acommercial basis, only since FY83. To make comparisons between yearspossible, the accounts for the year ending March 31, 1983 have beenreformulated.

5.02 The audited income statements for the last three years, preparedon a historical cost basis, are analyzed below. The estimated futurefinancing plan and the forecast financial statements have been prepared onthe basis of assets revalued to March 31, 1985. This revaluation has notbeen done on a professional engineering basis and should therefore beregarded as indicative only (para. 5.15).

LWB's Past Operating Results and Financial Position

5.03 LWB's income statements for the three vears ending March 31, 1985are:

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LWB's Income Statements FY1983 through 1985

Year Ending March 31 1983 1984 1985

Population ('000) 135 142 151Connections ('000) 7.4 7.9 8.4Water Sales ('000 m3) 4,560 4,840 6,342Average Tariff-Tanbalas/m3 26.0 29.0 32.6

…- Kvacha nO0's - -- --

Gross Operating Revnues 1,373 1,55R 2,068Other Revenue 82 157 42

Total Net Revenue 1,455 1,715 2,110

Operating Costs:

Personnel 483 667 727Chemicals 169 230 295Power/Fuel 162 214 291Maintenance/Materials 214 287 311

1,028 1,398 1,624

Administration 256 223 260Capitalized Costs -- -- (71)Provident Fund 38 29 47

Total Operating Costs 1,322 1,650 1,860

Income before Depreciation 133 65 250

Depreciation 105 137 143

Income before Interest & Exceptional Items 28 (72) 107

Interest Expense 56 119 77

Surplus (28) (191) I0

Exceptional Ttems a/ 176 84 5

Net Surplus 148 (107) 35

Operating Ratio % 98.1 104.2 94.9 b/

a/ The exceptional items represent adjustments resulting from theconversion from a municipal accounting system to a commercial accrualaccounting system in 1983 (with some spillover into 1984).

b/ Corrected operating ratio is 107.1 after the adjustment of net surplusin 1985.

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It should be noted that the 1985 results overstate LWB's profitability,because revenues from the 10,000 m3/day augmentation scheme 5/ areincluded whereas the elated depreciation and financing costs are not.Assuming a depreciation charge of 3% of cost of the scheme, depreciationexpense should have increased by MK 180,000 and the stated net surplus ofMK 35,000 would have been reduced to a loss of MK 145,000.

5.04 LWB's audited financial position for the 3 years ending March 31,1985 is shown below. For comparative purposes, the position as at March31, 1985 is also shown with the provisional revaluation of fixed assets,and the inclusion of the augmentation scheme valued at K 6,000,000 whichis financed as an equity contribution:

5/ The augmentation scheme, physically completed during FY 1985,increased capacity from 20,000 m3/day to 30,000 m3/day.

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WE'ls B e suet oa f 1'rch 31WK Thoum-d 1eals

FfthAidted - Rtstorical Osts Assets1983 1984 1985 1985

d Assets:

Gross Fied Assets 2,.539 4,753 6,125 23,672Ltn: Accunmited Deprecatlm 945 1.079 1,216 4,323

Net Fixed Assets 1,594 3,674 4,909 19,349

Oent Assets:

Cosh 238 183 199 199kcwits Receivable 298 423 502 502Inventories 444 409 358 358

lamm Advace 204 156 157 157

Total O,ent Assets 1,184 1,171 1,216 1,216

.To Assets 2,778 4,845 6,125 2D,565

Equity ard Liabdilities:

EAtdty 126 126 126 6,126Deveo ' bntrlhbtions - - 174 174Ruluition Surplus - _ - 8870perat1a Surpilus 716 609 644 644

Total Equity, 842 735 944 15,331

T.g lbrm Det 1,274 3,488 4,02 4,255Provident Fuad 135 165 21i 211

Total tosg Term Ltabilities 1,409 3,653 4,413 4,466

Ourrnt LiabiLlities:

ots Payable 152 300 335 335Oent Pbrtien of LD 110 124 131 131MeerDepouits 33 33 36 36Misc. Lisbllitis 232 - 266 266

Tot Qwrent liUabilties 527 457 768 768

Ttl BqpAty ani tLahilities 2,778 4,845 6,125 D,565- _mwm

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Financial Performance of LWB

5.05 LWB past financial performance has not been good mainly becauseof the inadequacy of tariffs. In the 3 years ending March 31, 1985operating ratio was in the unsatisfactory 98-107% range. Revenues rose onaverage by 21% (mainly from a 33% increase in sales volume following thecompletion of the augmentation scheme in 1986) while operating expendituresincluding depreciation grew by 23.5%. Solvency was maintained only by aslight improvement in collections, limited investment in current assets andar. increase in accounts payable. The return on revalued net fixed assetswas negative. As an initial n-easure, 1WB was granted a tariff increase ofapproximately 23% effective June 1, 1985.

Financing Plan for LWB as an Entity

5.06 The financing plan covers the Lilongwe Water Board's fiscal yearsending March 31, 1987 through 1993. The physical implementation of theproject is expected to commence in January 1987 and to be completed byMarch 1992 with retention money to be disbursed in the latter months ofcalendar year 1992. The financing plan for LWB as an entity is summarizedbelow:

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MALAWI

Lilogwe Water Board

Funding Plan Fy March 31, 1987 - March 31, 1993

Kwacha US$millions millions %

Sources of Funds:

Internal Generation

Income Before Interest Expense 6.7 3.7Depreciation 11.6 6.4Other non-cash expenses 0.7 0.4

19.0 10.5 25.R

Less: Debt Service (P & I) 12.2 6.7 (16.5)Working Capital Requirement 2.2 1.2 ( 2.9)

Net Internal Cash Generation 4.6 2.6 6.4

External Sources:

IDA, ODA and EIB Borrowing(on-lent) - Principal 47.1 a/ 26.2 a/ 64.4- deferred interest 22.1 12.3 30.2

Government Borrowing-Principal 2.0 1.1 2.7ODA Grant 0.7 0.4 1.0Developers' Capital Contributions 2.8 1.5 3.7

Total External Sources 74.7 41.5 102.0Total Funds 79.3 44.1 108.4

Total Capital Expenditure:

Project 53.8 29.9 73.5IDC-IDA and EIB Borrowing 15.1 8.4 20.6

-Government Borrowing 1.0 0.5 1.2

69.9 38.8 95.3

Other Works 3.5 1.9 4.7

Total Expenditure 73.4 40.7 100.0

Cash Surplus (deficiency) 5.9 3.4 8.4

a/ Does not include US$0.6 million for low cost sanitation component (outof total IDA credit of US$26.5 which is being on lent).

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5.07 The existing weak financial position of the Lilongwe Water Board,together with the limited additional funding available from the MalawiGovernment, implies that the proposed financing plan is highly dependentupon the following factors:

1. The implementation of annual tariff increases effectiveApril 1 designed to ensure an average tariff increase of atleast 14% (5% in real terms) each year until 1991. Suchadditional tariff increases will be implemented as arerequired to achieve a return of at least 5.0% on revaluednet fixed assets in FY1991 and 1992.

2. The early implementation of the supplementary augmentationscheme so as to increase production capacity by 5,000 m3/dayto 35,000 m3/day by June 1988. This project estimated tocost 600,000 MK, is forecast to yield an increased annualcash flow of approximately MK 1,000,000 and can be financedby LWB's internal cash generation.

3. The cost of the recently completed augmentation scheme willbe either an equity contribution by the Government to LWB,or a subordinated loan requiring no repayment of principaland no interest obligation until 1994 at the earliest.

4. The on-lending of the IDA, ODA and EIR credits under termswhich defer all payments of interest and principal until theearliest calender year of 1Q93 or one year after projectcompletion, with repayment of principal and deferredinterest to be amortized over the remaining life of theloan.

5. The rate of interest on the Government contribution of MK2.0 million to the financing of the project will not exceedthe on-lending rate of the Credit and will be paid annually,with principal repayments commencing in calendar year 1993.

Future Operations and Financial Position of Lilongwe Water Board

5.08 The limited financial capability of both the Government andthe Board have necessitate.d a conservative approach to both the demandforecast and project cost forecast - which are also critical. Forecastincome statements, balance sheets, and funds flow statements for FY's 1986through 1993 are presented in Annex 9.

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5.09 Net revenues are forecast to increase from MY 2.8 million In 1986to MK 8.4 million in 1992, with a further increase to MK 11.4 million in1993 - the first year in which the Project will he fully operational. Outof the 200% increase in revenues from 1986 to 1992, 42% is accounted for byan increase in average daily sales volume from 18,520 m3/day in1986 to 26,378 m3/day in 1992. The remainder of the increase is accountedfor by an increase in tariff from an average of MK 0.42 per m3 in 1986 toMK 0.88 per m3 in 1992. As mentioned previously, not only are the presenttariffs totally inadequate to maintain financial viability of the LWB aspresently existing, but annual increases of at least 14% (to yield 5%increase in real terms) are critical to its ability to finace the project.A tariff of MK 0.88 per m3 in 1992 represents MK 0.52 per m3 in 1986 prices- or a real increase of approximately 25%. This tariff will not only yielda return of 5.8% on revalued net fixed assets in 1992 but will provide afinancial rate of return (net of inflation) of 4.6% on the new project.

5.10 The underlying demand forecast is based on the "Low Demand"forecast prepared by the Consultants in early 1984. However, as a resultof the elimination of suppressed demand, consequent to the implementationof the 10,000 m3/day augmentation scheme, estimated sales volume in FY 1986is at a level 25% higher than was projected for this year. The estimatedsales volume for FY 1986 has been used as a base to which the annualpercentage growth of the consultants' low growth forecast has beenapplied. Due to production capacity constraints, this forecast of demandcannot be met in the years 1987, 1988 and 1990-1992, and the prolectedsales volume and sales revenue is therefore determined by the productioncapability as indicated in the forecast income statement.

5.11 The financial assumptions (see Annex 9) with respect to expensesresult in a projected operating ratio of 110.8% in 1987 and 120.8% ir1988. Only when the cumulative effect of the required 14% annual tariffincreases and increased volume from the supplementary scheme begin to takeeffect in 1989 does the operating ratio fall to 88%, reaching a reasonable76% in 1991 at which point the system should be earning about 5% onrevalued net fixed assets. Because of the size of the incrementalexpansion and related incremental debt service requirement, it is projectedthat internal cash generation will not be sufficient to meet debt servicerequirements until FY95, in which year the debt service ratio will reach1.1. By FY98 when the new facility is producing at capacity, thedebt/service ratio is projected at 1.8, and the rate of return at 8.1%.

Tariffs

5.12 In June 1985, Government approved the introduction of a blocktariff system, with tariffs set at levels which represented an overall 23%tariff increase. Accordingly, an additional average tariff increase of 14%was authorized as from September 1, 1986. The tariff structure by block orclass is as follows:

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Tariff (Tambala/m3)June 1, 1985 - FromAug. 31, 1986 September 1, 1986

Class/Block

- Domestic - 1-lOm3/month 30.0 31.5- 10-40m3/month 34.0 38.1- excess over 40m3/month 42.0 50.0

- Kiosk sales 6/ 38.4 40.0- Government/Institutional 34.0 4n.o- Commercial/Industrial

- 1-100 m3/month 34.0 40.0- excess over 100 m3/month 42.0 50.0

Water rates are levied on all connections. The combination ofconsumption revenues and water rates is projected to result in revenueequivalent to an average tariff of 42 tambalas/m3 in 1986.

5.13 An analysis of the composition of consumption by block by volumefor the month of June, 1985 indicated the following:

Tariff -Class Tambala/m3 Consumption X

Block 1 and Kiosk 6/ 30 22Block 2 and Institutional 34 48Block 3 and Commercial 42 30

5.14 It should be stressed that annual tariff increases should not beless than 14% (to yield 5% in real terms) if LWB is to maintain a soundfinancial position. The existence of a block tariff system allows greatflexibility in the implementaion of tariff increases in the 15% per annumoverall average range. In addition, computerisation of the billing systemwill enable the LWB to target tariff increases more accurately to achievethe desired results.

Revaluation of Assets

5.15 The audited accounts of LWB for FY 1985 were prepared on ahistorical accounting basis. Because title has not passed to LWR for theaugmentation scheme, this was excluded from LWB's assets even though therelated revenue was included in income. The projected balance sheetincludes the augmentation scheme at a valuation of 6.0 million Kwachas. Inaddition, provision has been made in the forecast for the revaluation offixed assets as at FY85 - based on valuations for insurance purposes, as

6/ Actual tariffs collected by the Board from kiosk sales are 38.4 t/m 3

less remuneration paid to kiosk operators. Effective tariff on kiosksales is therefore about the same as the one paid by block 1customers.

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estimated by LWH management. However, the vatues determined on this hasisare indicative only. It is proposed that LW8 be required to have itsassets professionally revalued in order to determine a realistic assetvaluation for rate-of-return covenant purposes. The 1985 assetsrevaluation has then been projected to Increase by the local inflationindex in order to determine future net fixed asset values.

Rate of Return

5.16 On the basis of revalued net fixed assets, and correspondingdepreciation, the rate of return is projected to be negative in 1987 and1988. This is clearly unacceptable for a system operating virtually atcapacity. A return on revalued net fixed assets of 5% ought to be aboutthe minimum acceptable return for a public utility operating at capacity(i.e. when equipment is beig utilised at its most efficient). While thisreturn ideally ought to be achieved in 1987, this would require animmediate tariff increase of about 65% (rather than the 14% now proposed)which would be politically unacceptable.

5.17 It is therefore proposed that the achievement of a 5% return onrevalued assets for FY 1991 and 1992 be included as a covenant in thecredit agreement, in addition to the requirement for a minimum 14% p.a.tariff increase previously referred to. It is recognised that, immediatelyupon completion of the project in FY 1993 (which will result in an increasein capacity which will initially be tunderutilised), the rate of return maybe expected to fall to 2.0%. However, by FY 1996 total capacity isexpected to be 80% utilised at which time the system should again beearning 5.0% on revalued net fixed assets. In summary, it is proposed thatthe following returns on revalued net fixed assets be covenanted:

FY 1qsq - ?.ny190n - 3.0o1991 - 5.0%1992 - 5.0%19Q3 - 2.0% a/1994 - 3.0%1995 - 4.0%1996 - 5.0%

a/ (or in year following completion of project).

In order to achieve said objective Government shall, in consultation withthe Association, annually determine water tariff increases on the basisinter alia, of an assessment of the effects on LWB's rate of return of thewater tariff prevailing in the period immediately preceding. It was notedthat present projections indicate that an annual increase in water tariffsof 5% in real terms is necessary to achieve the above rates of return. Inthe event that LWB is unable to achieve this target in any one year, theGovernment shall take steps to ensure that in the following year measuresare implemented to recover the situation.

Alternative Project Phasing

5.18 Although the financial projections and resulting financing planhave been developed on the basis of the Rank's standard six-yeardisbursement profile for Malawi, two other approaches to the projectconstruction were also evaluated. Of the two approaches considered belowonly the second one, is financially viable for LWB.

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5.19 The first approach, a four-year construction/disbursementprogram, was proposed by the consultants and LWB's management and wouldresult in lower costs of construction (48.1 million Kwachas, excluding IDC,versus 33.8 million Kwachas over 6 years) and completion of the project inFY 1991 thus eliminating water shortages or suppressed demand in FY 1992and 1993. However, this approach requires funding in the early years - andwould involve either an immediate 50% tariff increase (with future annualincreases in line with inflation), or, alternatively, two annual tariffincreases of 20% and the renegotiation of an existing on-lending agreementto defer payment of interest previously committed to Government.Furthermore, the incremental demand which would be met in FY 1992 and 1993is comparatively limited. For these reasons, this approach is notconsidered to be financially viable.

5.,0 The second approach, a six-year construction/disbursement programwith two distinct phases to the project, is considered to be more desirableby the appraisal mission. This would involve early completion of the dam,followed by installation of the 32,000 m3/day additional capacity by FY1993. This scheme is projected to cost MK 53.7 million, excluding IDC, andis financeable with the same financing plan as proposed above, withcomparatively minor differences in timing of cash flow.

Affordability for Low Income Groups

5.21 The proposed financing plan for the project and water tariffincreases are in accordance with the Government's stated objective ofmaking LWB financially self-supporting, while at the same time not placingan undue burden on the consumer. Assessment of affordability in Malawiremains difficult due to lack of reliable statistics. For appraisalpurposes, income and consumption data are based upon socio-economic surveysof 1982 by the project consultants and by the Malawi National StatisticsOffice. The data was, wherever necessary, adjusted by the mission toreflect changes in income, consumption and inflation. The averagehousehold size in the low income groups (the Kiosk and High DensityTraditional housing area customers) was assumed to be 8.5 persons (see"Malawi: Growth and Structural Change. A Basic Economic Report", Reportno. 3082a-MAI) with a household income of between MK 150 and MK 300 permonth, yielding a monthly per capita income of approximately MK 27. Theminimum wage for both Lilongwe and Blantyre, set in 1984 by the Government,is MK 30 per month. Analysis of the tariff structure shows that watercharges for the low income groups, constituting no more than 2.2 percent ofper capita income in 1992, are still affordable. Water expenditure as aproportion of income is about the same for the higher income groups.Comparisons between cities, indicate that Lilongwe's avPrage tariff oftambala 42/m3 is below Blantyre's average of tambala 63/m3. Both analysesdemonstrate that Lilongwe still has some flexibility for tariff adjustmentbefore consumption is affected by issues of affordability. 1owever, thedegree of flexibility is limited by the very low level of per capita incomein Malawi.

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VI. PROJECT JUSTIFICATION

Project Benefits

6.01 The development of Lilongwe, as the country's administrativecapital and focus of the Central Region, has been given high priority bythe Government. Apart from the establishment of Government agencies inLilongwe, numerous financial institutions and companies are setting upheadquarters in the city, which is also a hub for agricultural services andmarketing, commerce and light industry. The proposed project would satisfythe water demands up to about 1995-1997, thus providing the necessary watersupply infrastructure for the development of the capital city.

6.02 Demand in Lilongwe at present has already outstripped the safeyield of the existing dam, which itself needs urgent strengthening. Theremedial works have been included in the project.

6.03 The Lilongwe Water Supply Engineering Project has not only helpedto prepare the physical components of the proposed project but considerablycontributed to the improvement of the operational and institutionalcapability of the Lilongwe Water Board. In accordance with both theGovernment's and the Bank's policy the proposed project was designed withthe aim to make LWB a self supporting organization. LWB is required aspart of its mandate to recover from existing water consumers all operatingand debt servicing costs. The introduction of the block tariff structurewhich allows limited cross-subsidization between consumer groups helps toalleviate the burden of rapidly increasing tariffs on the poorest segmentsof the population. The proposed organizational development plan andtraining program is expected to have an impact not only on LWB but also onthe sector as a whole.

Least Cost Solution

6.04 Based upon available information the proposed project representsthe least costly of the several technical alternatives considered. Thetwo-stage construction of a dam 6 km downstream of the existing dam wasfound to be most cost-effective. Used in conjunction with the existing damwhich will be strengthened and raised by I meter the proposed solution willassure a virtually zero risk of source failure until 1997.

Economic Rate of Return (ERR) and Pricing Considerations

6.05 The project economic rate of return (ERR) calculations includethe sanitation component which is not expected to generate directlyquantifiable benefits. The component was included because at K1.05 million(US$0.6 million) it accounts for only 1.9 percent of the total projectcost, and is therefore not large enough to have a significant impact on theERR. The incremental investments in the water supply component, accountingfor 98 percent of the project cost, yielded a 5.5 percent ERR on the entireproject (Annex 12). The ERR would be more if other non-quantifiablebenefits (improved health for users, fish farming potential, environmentaland social benefits such as time savings) had been taken into account. Asensitivy analysis on the rate of return, using a 10 percent reduction inbenefits produced on ERR of 4.6 percent. A similar analysis, using 10%reduction in costs yielded an ERR of 6.2 percent.

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6.06 Incremental investment costs were estimated at constant 1986prices plus appropriate physical contingencies, and adjustments for localunskilled labor and foreign exchange shadow prices. The cost streamincluded the costs for construction of the new dam, remedial work on theexisting dam, system expansion, distrihution network expansion, civilworks, management staff support, training, and the low-cost sanitationcomponent (Annex 12). Renefits from the additional Investments in theproject were calcuslated using incremental water sales at an average tariffrate of MK 0.52 per m3 in real terms.

6.07 The average incremental cost estimates of water supolied underthe proposed project ranged from MK 0.71 at a discount rate of 8 percent toMK 1.47 at a discount rate of 15 percent. The average incremental cost ata discount rate of 8 percent is higher than the average tariff rate of 1K0.52 per m3 in constant terms over the entire life of the pro.ject. Asensitivity analysis was done, and indicated that the incremental cost andthe average tariffs rate converge at a discottnt rate of about 6 percent.Rowever, the incremental cost is in line with the highest block tariff.The long term marginal cost of the water, i.e. including the second phaseof the long-term development plat, for water supply in the Lilongwe area(Master-Plan, prepared under the Engineering Project) is about ecual to theaverage tariff level projected for 1992.

Project Risks

6.08 The risk involved in the project are: (a) that LWB will not beable to generate sufficient revenue from incremental water sales for debtservice, maintenance, and needed additional investments; (b) that projectimplementation would suffer due the difficulty of attracting and keepingMalawian staff and implementation supervision expatriates; (c) that theGovernment may be unahle to authorize the necessary tariff increases; and(d) that the Government may he unable to finance its share of the projectcosts in a timely manner due to budgetary constraints. The first risk is,offset by the relatively rapid population growth of Lilongwe (the country'snew capital and potential center of commerce) which ensures that demand forwater supply will continue to grow at projected rates. To offset thesecond risk, both the Government and T.WR (which alreadv has a goodmanagement team in place) have made an undertaking to retain qualifiedpersonnel over the implementation period, which will be supported bv a teamof consultants. The Malawi Government has a policy of not subsidizingparastatals on the premise that they should be financially self-supportingand has in principle agreed to increase LWB's water charges over a numberof years, thereby offsetting risk number (c) above. In addition, LWB'stariff structure will be under constant review to ensure that it providesfor sufficient revenue to make LWB a financially viable and independentinstitution. To offset risk (d) above, the Governmeat has an undertakingto include its share of the project cost into the annual budgetaryestimates, as indicated in the Public Sector Investment Program.

Project Monitoring System

6.09 The most important monitoring aspects concern physicalimplementation of the proposed project, realization of the trainingcomponent and actions on tariffs. Suitable indicators for monitoringproject implementation and for measuring performance against project goalsare set out in Annex 14. After completion of the proposed project, LWB

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will prepare a "Project Completion Report' on the basis of an outline to beagreed with the Bank.

VII. AGREEMENTS REACHED AND RECOMMENDATIONS

Agreements Reached

7.01 During negotiations assurances were received from Governmentthat:

(a) it would take all measures necessary to enable LWR to earnan annual return on the average current net value of LWB'sfixed assets in operation of not less than indicated in thefollowing table (para. 5.17):

FY 1989 - 2.0%1990 - 3.0%1q91 - 5.0%1992 - 5.0%1993 - 2.0% a/1994 - 3.0%1995 - 4.0%1996 - 5.0%

a/ (or in year following completion of project).

(b) the cost of the augmentation scheme will be either an equitycontribution by the Government to the Board, or asubordinated loan requiring no repayment of principal and nointerest obligation until 1994 at the earliest (para. 5.07,clause 3);

(c) it would, not later than June 30, 1987 enter into anagreement with ODA for financing of the cost of threeexpatriate engineers (12 man-year), and for financing thetraining component (paras. 4.12 and 4.13);

(d) the on-lending of the IDA funds to LWR would he made underterms which defer all payments of interest and principaluntil the earliest calendar year of 1993 or one year afterproject completion, with repayment of principal and deferredinterest to be amortized over the remaining life of the loan(para. 5.07, clause 4);

- 43 -

(e) it would make available to LWR funds in an aggregate amountof MK 2.0 million for the partial financing of Parts Athrough E of the Project, not later than June 30, 19R7. Therate of Interest on this loan shall not exceed theon-lending rate of the Credit, payment of interest shall hemade annually and repayment of principal shall commence notearlier than January 1, 19A3 (para. 5.07, Clause 5);

(f) it would ensure that all families to be displaced as aresult of lantd acquisition by LWB for purposes of theproject shall be adequately compensated and relocated inaccordance with the resettlement plan submitted to theAssociation during negotiations. Government would reimburseLWB for any land acquisition costs in excess of MK 200,000(para. 3.16);

(g) it would open and maintain a special account for thewater supply component of the Project, in a commercial bankon terms and conditions satisfactory to the Association(para. 3.20).

7.02 During negotiations assurances were received from LWB that:

(a) LWB would retain engineering consultants for projectimplementation whose qualifications, experience and termsand conditions of employment would be satisfactory to theAssociation (para. 3.13);

(b) LWB would take all reasonable measures to ensure that theexecution and operation of the Project are carried out withdue regard to ecological and environmental factors (para.3.16 and 3.26);

(c) LWB would continue to emply an Engineer/Manager and aFinancial Controller whose qualifications, experience andterms and conditions of employment would be satisfactory tothe Association (para. 4.07);

(d) LWR would annually revalue its fixed assets, using methodsacceptable to the Association (para. 5.15);

(e) LWB would submit its audited accounts together with theauditors' report not later than six months after the closeof each financial year and would continue to employindependent auditors, acceptable to the Association (para.4.17);

- 44 -

(f) LWB would prepare timely requests for the annual tariffincrease in each year, in accordance with Governmentregulations. The tariff increases will be designed asdescribed in para 7.01(a);

(g) LWB will implement the supplementary augmentation scheme soas to increase production capacity of the treatment plant by5,000 m3/day to 35,000 m3/day by June 1988 (para. 5.07,Section 2);

(h) LWB will obtain the Association's prior agreement beforeincurring any debt if the cash generation for the previousyear is less than 1.5 times maximum future debt servicingrequirement (para. 5.11);

(i) LWB would submit quarterly reports on the basis of anoutline to be agreed with the Association (para. 6.0Q andAnnex 13); and

(j) LWB would prepare, after completion of the proposed project,a "Project Completion Report" on the basis of an outline tobe agreed with the Association (para. 6.09).

Recommendations

7.03 The completion ef all conditions of effectiveness for the EIBcofinancing would be a condition of effectiveness for the proposed IDAcredit.

7.04 With the above assurances, the project would be suitable for anIDA credit of US$20.0 million equivalent. Approximately US$19.4 millionequivalent will be on-lent to LWB at a rate of 11%p.a., with six yearsgrace during which interest would be capitalised and 25 years repaymentperiod.

ANNEX I

MALAWI

STAFF APPRAISAL REPOR"r

LILONGWE SECOND WATER SUPPLY PROJECT

Population/Water Demand Growth (i983-2005)(Totals 1O3 M3/day, Population x 103)

got IS IM g.M MA CM1 k0 4 a .0IL 824 2.21 83 82.4 2.., 2.4, a,4 Z.Ri~ 2.440 . 28.8 a,4 I.'s n3.S 8A LIM4 25.0 842 X"5 *OA M 4.02 32.8 83 SA

MDT i3 2a* 3.. 28 W.i 40.4 a3 :.VS va. n 3AA LIs n 3 4.4 3.11 n Th i.t 23 S24 82 .2 03 4*0 0838 91 83.* M0 888 V.30 L V4.8 819 .24

ma .e in0 8.0 035 In *.41 .I In LA .8 8as 8.2 06. 83 8.x24 864 as 844 *3.8 in L.s iLa6 us .A6 (a 81 Ls8 3.0 88" 3.4 AA4 In 4.52

8A 1.0 33 323 883 M2 L9 U.S .0) 2.3) 98.8 33 3.08 *2.0 Le0 2.44 82 I 103 3.30 83. S1 I.St 82.8 33 2A* 8V 22 3.3 5.0, M4 442 22. 20 __ L

to a6 .0 so 3D 8.0 to 0 8.0 o 31 8.0 to 3) 8.0 0D 20 8.0 3 a? 8.0 la M 8.0 M0 20 8. 3 a 0 0

Cm- 0.3 0.3 G." I 040 Om 0.*8 0.0 0.90 L.4 84. 8.?

6mhw. 1~~.3 3.28 3.5 3* 3.84 2.4 3.1 4.3 .0 3.0 LO

5.07.80 8~~~~~2.0t 83.8 8.34 Is84 88.14 80.08 0.30 104 20.0 W*.0 QJ.8

-t8. M5 4.02 3244 4.50 9% 4.28 as 510 M2 S.21 .1. 4.3 IM4 4.3 IS I% 3.82 8S% 0.12 82% 9.04 IS% 82.2

Ps.... ~~~~~~0.20 0.82 0.80 0*0 0.020 0.0? 8* 4? 348 3.0

10748. 8~~~~~09.28 20.40 28.80 n2.2j 22.P3 22.68 24.88 22.41 30.8it 40.3 i40

rod. TM 83. 84.4 852.0 882.8 823.# 844.2 88.3 273. 241.2 '43.

Ahwt ~~~~~~~0.20 0.40 0.42 0.#A 0.#A 0.48 0.3 0.JZ C.4 0.12 O.K

so ZZ2.82.1 22.4 24.8s 24.3 WM .1 48.8 85.0

30 . P p4p84s8~ ** ... 8d 0. 844 A~~ 833.MObrSPO- -WIL. A-*"8@ MLL.8g.?w a88 78M08488 .- @.P.320Pop .5 ~ *4sPw948

46

ANNEX 2Page 1 of 4

MALAWI

LILONGWE SECOND WATER SUPPLY PROJECT

Description of Proposed Water Supply Facilities

Source Works

1. The source works consist of the construction of a new earthfilldam and remedial works on the existing dam. The two-stage construction ofthe new dam, located 6 km downstream of the existing dam, proved to be themost cost effective with the first stage serning until 1997 and the seconduntil year 2005. The source work also includes the relocation of the Rundacollege water supply intake works. Dimensions of the principal features ofthe source works are dasted below:

RESERVOIR

Full supply level (FSL) EL 1089.0Minimum operating level (MOL) EL 1080.0Top water level (TWL) EL 1093.9Live storage at FSL 8.6 x 106 m3

Gross storage at FSL 9.2 x 106 m3

Reservoir surface area at FSL 175 haCatchment area 800 km2

EMBANKMENT

Height above river bed(EL 1070.0) 25 m

Crest level EL 1095.0Crest length of embankment 750 mVolume of dam embankment 550,000 m3

SPILLWAY

Crest length 105 mCrest level EL 1089.0 mMaximum spillway discharge 2 260 m3/sLength of chute 150 mBucket invert level EL 1073.0

INTAKE TOWER

Height of tower 30.5 mNumber of offtakes 3Offtake elevations EL's 1088.5, 1083.5 and

1078.5Capacity at MOL 2 m3/sStand pipe diameter 0.9 m

- 47 - ANNEX 2Page 2 of 4

ACCESS CONDUIT

Conduit length 158 mInternal diameter 2.8 m, horseshoe shapeUpstream invert elevation FL 1072.5Downstream Insert elevation EL 1071.5Outlet pipe diameter O.Q int

OUTLET WOXKS

Design capacity 2 mi/s at MOL. nne outletoperating

Guard valves 2 at 0.6 m diameterbutterfly valves

Regulating valves 2 at 0.5 m diameter conevalves

RIPARIAN OUTLET

Design capacity 1 m3/s at EL 1079.0Guard valve 0.6 m diameter

butterfly valveRegulating valve 0.5 m diameter cone valve

BUNDA COLLEGE WATER SUPPLY

Design capcity 50 m3 /hourLow lift pumps 36 kWHigh lift pumps 50 kW

KAMUZU DAM

Full supply level EL 1100.0Minimum operating level EL 1094.5Top water level EL 1104.5Live storage at FSL 4.5 x 106 m3

Catchment area 760 km2

POST TENSIONING

Number of tendons 18Induced load per tendon Max. 1,900 kN

long term 1,375 kM

EMBANKMENT

Revised crest elevation EL 1105.7 m

2. Construction of the new dam is expected ½0 be completed bymid-1989. Used in conjunction with the existing dam it will assure avirtually zero risk of source failure until the demand exceeds thatprojected for 1997.

- 48 -

ANNEX 2Page 3 of 4

3. Water will be released from the reservoirs to augment the flowsin the Lilongwe and Likuni rivers, and will be extracted approximately 26km downstream of the new dam, where the intake structures and the watertreatment plant are located at the southern edge of Lilongwe.

The Water Treatment Plant

4. In sizing tie capacity of the proposed treatment works accounthas been taken of:

a) The peak demand projected in 1977 - 67,0no mV/dayb) Existing capacity in 1986 - 30,000 m3 /dayc) Proposed supplementary works utilizing

the treatment plant equipment availablesurplus from the augmentation project 5,000 mI/day

5. The additional capacity required from the project is therefore32,000 m3 /day. The principal components of the plant, which will belocated adjacent to and just upstream of the existing plant, are:

a) river intake and raw water pumps;b) raw water holding and pre-settling tank;c) chemical coagulation;d) sedimentation and rapid gravity filtratAon;e) chlo.l1nation;f) treated water storage (balancing) tank; andg) high lift pumping to Dedza and Livingstone reservoirs.

6. The bid documents for the construction of the Water TreatmentPlant are based on performance specification, in line with Bank's policy.Detailed civil engineering and structural designs will be prepared by theconsultants after the evaluation of bids and final selection of thetreatment process and equipment.

Transmission and Distribution system

7. As designed, the project would provide reinforcement to theexisting system by increasing pumping, storage and pipe capacities.Storage capacities are based upon 18 hours of average daily demand in Iq7for ground level reservoirs and a maximum of 2 hours demand of peak hourdemand for elevated storage. The various components of the systemextension are (shown on maps IBRD 19697 and 19698.

i) Transmission mains:

- 3,650 m long new main (diameter 350 mm) from thetreatment plant to the Dedsa reservoirs;

- 22,410 m long (500 m diameters) new main from thetreatment plant to the Livingstone reservoir and 6,420 m

- 49 -

ANNEX 2Page 4 of 4

long, 500 m diameter main from there to the Capitol Hillbooster station. This new transmission main continuesfrom the booster station to the Kananga reservoir andbooster station (8,310 m, diameter 500 mm);

- transmission main extensions from the Livingstone boosterstation to the new water-tower in Area Q (1,620 m,diameter 300 mm) and from there another 1,000 m longprimary distribution main (diameter 20O mm) within Area9;

- transmission main extension from the Tsabango reservoir(300 m long, diameter 300 mm) to the new water-tower inArea 23.

ii) Booster station extensions:

- 3,400 m3/day capacity at the Livingstone reservoir;

- 22,500 m3/day capacity at Capital Hill;

- 7,900 m3 /day capacity at the Kanengo reservoir;

- 2,000 m3/day capacity at the Dedza reservoir;

- 2,550 m3/day capacity at the Tsabango reservoir;

iii) Reservoirs:

- 7,500 m3 capacity at Kanengo.

- 2,000 m3 capacity at Sandule.

- 2,000 m3 capacity at Dedza.

- 650 m3 capacity elevated storage in Area 9.

- 650 m3 capacity elevated storage in Area 23.

8. In addition to reinforcing the transmission system the projectwill provide for additions to the existing distribution system by theprovision of 200 mm, 150 mm and 100 mm diameter pipes to the value of YK250,000.

MtIAI M 3

tlUM M aMwx Paw=

Pf11ct out Ebtital (19 amsMad)

tOW UhtaL 1987 1988 1989 199 1991 1592 1993PTn tac oA 31 loca l to tmdi t locad R loalK Fo cal - F lcl FoE _ t!5i- E h oat

1. NW Mm 5.0B5 9.448 0.064 0.118 0.470 0.874 1.195 2.2Z0 1.373 2.551 1.118 2.079 0.674 1.252 0.191 0.354 14.5332. Y al 3 b, Vd-ti hW 0.560 0.072 0.007 0.001 0.072 O.7 0.132 0.017 Ot5t 0.019 O.23 0.016 0.074 O.0 0M 0.1 0.6323. ltd S t Flmt (Cblv) 3.369 0.560 0.042 0.007 0.311 0.052 0.792 0.132 0.910 0.151 0.742 0.123 0.446 0.074 0.126 0.021 3.9294. Webit Pl1t (Bwuuit) 0.261 1.319 0.003 0.016 O.C24 O.1 0.061 0.310 0.070 0.356 0.058 0.290 0.05 0.175 0.010 0.0 1.59D5 toire aid RAW Statlm 1.495 0.299 0.019 0.004 0.139 0.028 0.351 0.070 0.403 0.0E0 0.329 0.066 0.198 0.010 0.056 0.011 1.7946. - camia Ziactrical . oo 1.672 O.0 0.01l 0.037 0.155 0.094 0.393 0.108 0.451 0.088 0.368 0.053 0.221 0.015 0.063 2.0727. aSP U=1aanso vivo O.05 3.276 0.001 0.041 0.005 0.303 0.011 0.770 0.01) O.84 0.011 0.721 0.007 0.434 0.002 0.123 3.3268. aq.y 6su. five 0.175 0.19D O.001 0.001 0.016 0.017 0.042 0.012 0.047 0.018 0.038 0.040 0.023 0.0M4 0.07 0.07 0.3559. lutul Sumsao 11. 0.550 0.470 0.007 0.006 0.051 0.043 0.129 011 0.148 0.127 0.121 0.104 0.073 0.062 0.021 0.017 1.02D10. £&by Mae. Upaz 0.100 0.126 0.001 0.001 0.009 0.012 3.04 O.0 0.017 0.04 01 0.026 O0 0.0 0.04 0.0% 0.22611. 9SKIV U ad 31.meari 0.450 3.870 0.006 0.0w8 0.041 0.358 0.106 0.909 0.122 1.045 0.099 0.851 0.060 0.513 0.016 0.146 4.32012. larA hqudsitic w1 ltit3z 0.W 0.000 0.002 - 0.019 - 0.0o7 - 0.054 - 0.044 - 0.026 - 0008 - 0.200

UD aO 12.695 21.292 0.159 0.265 1.174 1.971 2.9s4 5.04 3.426 5.746 2.793 4.686 1.682 2.821 0.477 0.799 33.987R1cal (lutwuCi 1.5 23 2.341 0.019 0.029 0.141 0.217 0.358 0.550 0.411 0.632 0.335 0.515 0.202 0.310 0.057 0.o e 3.864

Su-total 14.218 23.633 0.178 0.294 1.315 2.188 3.342 5.554 3.837 6.378 3.128 5.201 1.84 3.131 0.534 0.887 37.851

Prim Ok.tiencin 6.283 7.C49 O.W 0.033 0.305 0.333 1.036 1.155 1.610 1.824 1.673 1.910 1.203 1.364 0.427 0.430 13.332

Tota'L 30.501 30.682 0.207 0.327 1.620 2.521 4.378 6.7019 5.447 .202 4.901 7.111 3.087 4.495 0.961 1.317 51.183

13. Pugmt Staff a*it

Ue 1iue O.60D 1.260 - 0.016 - 0.117 - 0.296 - 0.340 - 0.277 - 0.167 - 0.047 1.260Nyakcal (axtiqena - 0.140 - 0.002 - 0.013 - 0.033 - 0.038 - 0.030 - 0.019 - O.-a 0.140

9Sb-t*Al - 1.40D - 0.018 - 0.130 - 0.329 - 0.378 - 0.307 - 0.186 - 0.052 1.400

him Qmttzwenci - 0.417 - O.00 - O.-Om - 0.069 - 0.108 - 0.113 - 0.080 - 0.26 0.417

Total 0.0O 1.817 - 0.019 - 0.150 - 0.398 - 0.486 - 0.420 - 0.266 - 0.078 1.817

14. 8aqi

Ba urn aOu 0.080 0.450 O.ODI 0.006 0.0% 0.042 0.019 0.106 0.021 0.122 0.017 0.099 0.011 0.0Q9 0.003 0.016 0.530Picdal Outiz nim 0.010 0.050 0.0% 0.M 0.0 0.044 0.02 0.012 0.004 0.014 0.003 0.011 0.001 0.007 0.000 0.002 0.06

91*-total 0.09D 0.500 0.001 0.006 0.008 0.046 0.021 0.118 O.Q,5 0.136 0 .00 0.110 0.012 0.066 0.003 0.018 .590

Prim amtiT o009 0.150 0.o 0.0101 0002 0.07 0.07 0.025 0.09 0.039 0.011 0.041 0.008 0.01 0.002 O0.G9 0.189

lbtal 0.129 0.650 0.001 0.007 0.010 0.053 0.028 0.143 0.034 0.175 0.031 0.ISI 0.00 0.096 0.05 0.027 0.779

Wta b xter t 20.630 33.149 0.208 0.353 1.630 2.724 4.406 7.25D 5.481 8863 4.832 7.682 3.107 4.55 0.966 1.422 53.779

15. SAtti tam Ume ot 0.230 0.720 O-02 0.068 0.115 0.315 0.086 0.337 0.950FayElcal 0mt1io-c- 0.03 0.072 0.03 0.007 0.011 0.031 0.009 0.034 0.095

£b-tot 0.253 0.792 0.032 0.075 0.126 0.346 0.095 0.371 1.045

Prtim OxuiI.d_ 0.056 0.123 O.OD5 0.08 0.05 0.047 0.026 0.068 0.179

Total 0.309 0.915 0.037 O.03 0.151 0.393 0.121 0.439 1.224

Cab Prnjea Om 20.933 34.064 0.245 0.436 1.781 3.117 4.57 7.689 5.481 8.863 4.832 7.682 3.107 4.855 0.9S6 1.422 55.003

ANNEX 4

MALAWiULONGWE i:COND WATER SUPPLY PROJECT

Project Implementation Schedule

190$ "O IM 49" T

JiF _M J U _ __ D J F AM M A BA S N FUM-AMJ J5A 0|N J F M A M J J A S|O|N D J |F MUAM J J OA S N D J4 F MAM J JI AIN

WET SEASON =

NEW DAM

C. l re* Stuc1 - - -- - -

KAMUZU DAM

An-h Shl a

f*l0 c5V &Od & wiNo wo2*

&ml* 11, Erot E St M Eqsjpmnwrt g]lepit

BOO1M SrTAI1O & ESBRONS

C"calameno

-mjkvw MAW$

- Condcorn mP$ 9aoh

- 5.? -

ANNEX 5Page 1 of 2

MALAWI

LILONGWE SECOND WATER SUPPLY PROJECT

Estimated Schedule of Bank Disbursements(US$ Million)

Bank FY and Disbursed Cummulative DisbursementsQuarter Ending in Quarter Actual % of Total

1987

March 31, 1987 0.25 0.25 1.2June 30, 1987 0.31 0.56 2.8

1988

September 30, 1987 0.40 0.96 4.8December 31, 1987 0.48 1.44 7.2March 31, 1988 0.60 2.04 10.2June 30, 1988 1.14 3.18 15.9

1989

September 30, 1988 1.14 4.32 21.6December 31, 1988 1.04 5.36 26.8March 31, 1989 1.14 6.50 32.5June 30, 1989 1.42 7.92 39.6

1990

September 30, 1989 1.28 9.20 46.0December 31, 1989 1.28 10.48 52.4March 31, 1990 1.24 11.72 58.6June 30, 1990 1.08 12.80 64.0

1991

September 30, 1990 1.20 14.00 70.0December 31, 1990 1.20 15.20 76.0March 31, 1991 1.06 16.26 81.3June 30, 1991 1.06 17.20 86.0

- 53 -

ANNEX 5Page 2 of 2

1992

September 30, 1991 0.80 18.00 90.0December 31, 1991 0.70 18.70 93.5March 31, 1992 0.42 19.12 95.6June 30, 1992 0.34 19.46 97.3

1993

September 30, 1992 0.24 19.70 98.5December 31, 1992 0.14 19.84 99.2March 31, 1993 0.10 19.94 99.7June 30, 1993 0.06 20.00 100.0

- 54 -ANNEX6

MALAWI

LILONGWE SECOND WATER STPPLY PRnJCrT

Schedule of V'ithdrawal of Proceeds of the Credit

Account of theLoan Allocated(Expressed in % of Expenditure

Category Dollar Equivalent) to be Financed

1. Civil Works:

a) Dam construction under 7,000,000 70% of foreign andPart A of the Project. 60% of local

expenditure.

b) Extension of the Water 2,300,000 100% of foreign andTreatment Plant, under 70% of localPart B(1) of the Project. expenditure.

c) Extension of the Trans- 1,200,000 100% of the foreignmission and Distribution and 70% of localSvstem, under Part B(2) expenditure.of the Project.

2. Supply of:

a) Transmission and distrihu- 2,900,000 100% of foreign andtion mains under Part 70% of localB(2) of the ProJect. expenditure.

b) Vehicles, flow metering 200,000 100% of foreign andequipment and miscellaneous 70% of localequipment and supplies under expenditure.Part C and F(2) of theProject.

3. Consultants' and adviser's 3,500,000 100% of totalservices under Part D expenditures.of the Project.

4. Salaries and benefits for the 950,000 100% of foreignEngineer/Manager and Financial expenditures.Controller under E(1) of theProject.

5. Unallocated 1,950,000

TOTAL 20,000,000

ULONGWE MALAWI

nE

ULN~SE'COND WAtER SUppypOE

120

Dernond pro,eetj,0 Y PROJECT

90

>~~~~~~~~~~~~~~~~0co pox> of

21 1 .

s80o

30 t

; 1

-

W

t\ I

\ I~~~~~~~~Prm

Design pr,,j,tIcis

84 8 8-0 -

9, Salt

0~~~~~~3

3 > 0 , 9

87 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Wr

ANNE 8Page 1 of 4

MALAWILILONGWE SECOND WATER SUPPLY PROJECT

LILONGWE WATER BOARDORGANIZATION CHART

ENGINEER/

DEPUTY FINANCIAL ADMIN. & I NTERNAL

MANAGERA OFWLAER

WORLD BANK 30550A

AN=E 8Page 2 of 4

MALAWILILONGWE SECOND WATER SUPPLY PROJECT

ULONGWE WATER BOARDORGANIZATION CHART

4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'4

LIAVA,- I,Utg I A O A _

[ k 9 9 1 XA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,we c,stow S,tnw

.*w,ww,w Afli,A*t swoSThAl SAleR AIst*At ASiettAw? wAItwAw, ASSlSThm *w,flt.A, wt.,,tewt wSb,wl*wt wwtww,Co @ *62

*0*5J swnn,wn nfl...,.. *,flwwwww St cwnwwA *wtwv.www~ ~ ~ ~ ~~~~~~~~ORLD0AN 311"0

AMI= 8

MALAWI Page 3 of 4

ULONGWE SECOND WATER SUPPLY PROJECTULONGWE WATER BOARD

ORGANIZATION CHART

A

SUPgRYISOR Su (ISO* $PVSR SPtiO CoWI*OLLEU SUU44viso*

ASII, AU ACCOUNTANCY COWAWY ACU ACCOUACOUTNC SUONSCtN (NO ACCONAC

CI.SNKS STIOSn ASSAT ASSISTAASISAN ASSISTANT CASHICII NETCl` KIOSCL(NKS CI.KAKS CCCO.O(NKS^>t ClCNKS NEAUCYS c NSftCTN LPRATN TIAW

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~WUOAI~ 3OO

ANNEX 8Page 4 of 4

MALAWILILONGWE SECOND WATER SUPPLY PROJECT

LILONGWE WATER BOARDORGANIZATION CHART

|ADMIN. L & I NTERNAL PERSONNEL AUDIDtOR

[ ADMINIST- |SENIORRATIVE PERSONNEL/OFFICER TRASNING

T PERSONNEL ROFFICER

I SENIOR SEN IOR;;

RCLERKS CLERKS

r SECURITY O A TRANSPORT |OfFFICER OFfICER

SEIO SENIOR SENIOR TY7 PIST

l l l l l ~~~~~CLERK

i I I I I ~~~~~REGIsTRY r OrFFICEr WATHME DRiVERS CLERKS CLEANERS M ESSENGERS CLERKS CLERKS

ItORLO BAIK o05500

ANNEX 9- 60 - Pagel 'of 6

MALAWI

LILONGWE SECOND WATER SUPPLY PROJECT

Ass tionswith Respect to Expenses in Financial Projections

For 1987, LWB's internal budget has been used in the expenseprojection. Thereafter, operating expenses are projected to increase inline with local inflation (as forecast by the Bank at 11% for FY 1987, 10%for FY 1988, and 9X in subsequent years) with additional adjustments toeach item of expense as follows: Personnel and administration expense areprojected to increase at 2% p.a. in real terms, reflecting the addition oflower-level staff related to the increased customer base and the new damuntil additional personnel are hired for the new treatment plant in thelast quarter of FY 1992. Chemicals, power and fuel are proportional toproduction volume. Maintenance and materials are set at 1.65% of revaluedgross fixed assets until 1992, from which point onwards they areproportional to production. Commencing in FY 1987, depreciation is basedon a rate of 3S of revalued gross fixed assets.

- 61 -

mlAime =1M.? Bond 2 of 6

B1La ghost e At Nbrch 31 al

Ackual Fst. - re-FixNed ets 1985 1986 1987 1968 1989 199g 1991 1992 1993

oNss FxedAsseats 23,672 29,573 33,113 37,032 41,152 45,252 49,723 54,579 129,892lms Ace. Devcat osn 4=2 5,2A4 6J 8,579 10M- 12JB 15,05 18,516 24,379

Not Fixeu Aasts 19,349 24,329 26,308 26,453 30,590 32,394 34,22B 36,063 105,513Witk-1n-fr - - - 588 5,431 18,65 36,164 53,410 67,517 -

Dtal Fixed Anast 19,349 24,329 26,896 33,886 49,289 68,558 87,638 103,580 105,513

,wret Assets

Cash 198 477 149 1,357 256 (26) 731 2,695 6,351Aceout te ivable 502 723 859 1,037 1,394 1,615 1,947 2,148 2,907Dlatorie 358 276 312 359 426 468 523 572 733lflscellwams Advaw 156 164 172 181 190 199 209 220 230

Total Qwrut Assts 1,214 1,639 1,492 2,934 2,266 2,256 3,410 5,635 10,221

btal Assts 20,563 25,968 28,388 36,818 51,555 70,814 91,048 109,215 115,734

Equlty 6,126 6,126 6,133 6,191 6,344 6,531 6,693 6,796 6,826DoVl.op*rBt Oxttlbution 174 369 619 919 1,269 1,669 2,119 2,619 3,169lbvalwtloii AurplB 8,387 11,289 13,965 16,596 19,157 21,910 24,826 27,906 31,152Operatioual 9urpaus 642 694 (101) (660) (388) 265 1,677 3,344 (2,828)

Tbtal Equdty 15329 18,479 20,616 23,046 26,382 30,375 35,315 40,745 38,319

lowu Tom Debt 4,256 6,416 6,627 12,492 23,768 38,908 54,048 66,578 74,056Prowldet Pbud 211 269 341 421 510 609 719 843 988

Currt tabiltlas

Aoots ayable 334 161 188 215 251 277 310 341 427Owraet Portion of LID 131 340 310 336 334 32D 315 350 1,568HbterDbposlt 36 38 40 42 44 46 48 51 53leac. 1iabilitIas 266 266 266 266 266 279 293 308 323

Tbta1 Orreit LtAilties 767 805 804 859 895 922 966 1,049 2,371

Tb4tl Eqplty auA Ueailitin 2D,563 25,968 28,388 36,818 51,555 70,814 91,048 109,215 115,734

Debt/Equity Rbtl 22/78 27173 25/75 36/64 48/52 56/44 61/39 62/38 66/34

Si haul on pan uoIsima rwalvatlm. o£ Fixed Assets at Mwd& 31, 1985

- 62 -MAWL" ta 9

- =sof 6

FY (Mbrdh 31) 1986 1987 1988 1989 1990 1991 1992 1993

Ptoducia-i Cascty - '000 z3/day 30,000 30,000 30,00 35,00 35,00 35,000 35,000 67,000Fat. Pe8k/lv fctar 1.18 1.18 1.15 1.15 1.15 1.10 1.10 N.A.Production Vlume - '000 m3/day 25.370 25.370 26.080 30.411 30.411 31.781 31.781 39.063Eat./4Unacohtei for lte 27.0 24.0 22.0 20*0 19.0 18O 17.0 16.0Sales Wmb2he - '000 m3/day 18.520 19*282 2D.347 24.329 24.633 26.060 26.378 32.814Ahnual SaleS Vol. (muLllI,n m3) 6.760 7.038 7.427 8.880 8.991 9.512 9.628 11.977Averqe Thrff - t/m3 42.0 48.0 55.0 62.0 71.0 81.0 88.3 96.2

oebvenjes

Sale of Water 2,839 3,378 4,085 5,506 6,384 7,705 8,501 11,526Otber PRsles 52 57 63 69 76 83 92 101Exrlsism fbr w"IleasbJle accts. (57) (68) .(82) (110) tl28) (1S4) (170) (231)

Net Bvneom 2,834 3,367 4,066 5,464 6,332 7,634 8,422 11*396

operstlng Empesess

Bersomdel 923 1,106 1,246 1,392 1,548 1,722 1,914 2,210(hmicals 349 375 448 572 623 710 774 1,037Power/FRal 427 389 442 536 553 578 573 767?ntdalsw=mue/~kteda1rs 439 517 579 645 713 784 860 1,058bdmildstrdtion 309 384 433 483 537 597 663 766

me-ash" peses 58 72 80 89 99 110 124 145Caetdissd costs (84) (95) (105) (115) (126) (137) (149) (163)

2,421 2,747 3,122 3,602 3,948 4,363 4,759 5,821

Incae before Dpreiat1on 413 620 944 1,862 2,384 3,271 3,663 5,5751~precLadou 272 985 1,093 1,211 1,346 1,480 1,626 4,196Ine1 Before oterest 141 (365) (149) 651 1,038 1,791 2,038 1,379Intedest (Iuzg to qeaticn 89 430 410 380 385 380 370 7.550Net Tne 52 95) (559) 271 653 411 1,668 (6,171)

Profl lhtiD % 95.0 110.8 120.8 88.1 83.6 76.5 75.8 87.0'late of Ptn an Net xed Aets % 0.6 - - 2.2 3.3 5.4 5.8 1.9

- 63 -1WLAI HulK9

LUau. WterBond Pqs 4of 6

Saiwoe a-P 4 of F6ts

FY (Mrch 31) 1986 1987 1988 1989 1990 1991 1992 1993 TbCal

Souce

Inrcm before nbtert & Depreclatlon 413 620 944 1,862 2,384 3,271 3,663 5,575 18,732N Oisbn Ca3h xpes 58 72 80 89 99 110 124 145 777

Gross Internal Cash Gbneration 471 692 1,024 1,951 2,483 3,381 3,787 5,720 19,509

Developers' Oontrlbut±io 195 250 300 350 400 450 500 550 2,995

!qutty/Arants - 7 58 153 187 162 103 30 700

Project to"t:

MDA & COA Cki-1ahiI - Principal - 494 3,821 10,218 12,559 10,943 6,955 2,076 47,066- Cpftalieed Iterest - 27 380 1,392 2,901 4,512 5,925 6,970 22,107

*oeran.at loan - Principal - - 2,000 - - - - - 2,000Other loans (Existixg ProJects) 2,500 - - -

Total loan 2,500 521 6,201 11,610 15,460 15,455 12,880 9,046 73,673

Total Sources 3,166 1,470 7,83 14,04 18,530 19,448 17,270 15,346 96,877

Project - Investmnit - 561 4,353 11,656 14,344 12,514 7,962 2,389 53,779- Capitalised Interest - 27 490 1,612 3,121 4,732 6,145 - 16,127

- W7 4,843 13,268 17,465 17,246 14,107 2,38-9 69,906

Otber Wotias 2,350 288 702 772 383 417 455 496 _,6

2,350 876 5,545 14,040 17,848 17,663 14,562 2,885 75,769

Debt epayment 131 '0 310 336 334 320 315 350 2,436

Interest Oharged tD CPeratior. 89 430 410 380 385 380 370 7,550 9,994

tnerease (decreese) In Worklrg C(ial 317 152 110 409 245 328 59 905 2,525

TDtal Ap1licatiom 2,887 1,798 6,375 15,165 18,812 18,691 15,306 11,690 90,724

9bplw (Deflcit) of Fbnds 279 (328) 1,208 (1,101) (282) 757 1,964 3,656 6,153

Balanos Beinmiig of Year 198 477 149 1,357 256 (26) 731 2,695 198

Eblanc end of Year 477 149 1,357 256 (26) 731 2,695 6,351 6,351

Debt Service overge 2.14 0.90 1.42 2.72 3.45 4.38 5.53 0.72Internal Omtribution Patio Z - - 3.8 6.7 10.3 18.2 36.1 -

- 64 -tALW.j am 9

u1aumB 3W Sof 6

Revalnmtio of Tlhd AMus

Fn (Ib 31) 1985 1986 1987 19 1989 1990 1991 1992 1993

Thflation Factor 10.0 15.0 11.0 10.0 9.0 9.0 9.0 9.0 9.0

Gross nxed Assets

matorical asts (OpaFrg) 6,126 12,178 14,528 14,816 15,518 16,290 16,673 17,090 17,545RFevaltmt1m - 11,494 15,045 18,297 21.514 24.852 28,571 3 37,034

luead Meets (qsdul) 6,126 23,672 29,573 33,113 37,032 41,152 45,252 49,123 54,579

Aqitet1oo ScIu 6,000

hlditm frm WI? - 2,350 288 Af 772 383 417 455 70,402

AMdit levAustlan 1/ 11,494 3,551 3,252 3,217 3,346 3,717 4,054 4,401 4,911

IsftoricalMeats (Clos) 12,126 14,528 14,816 15,518 16,290 16,673 17,090 17,545 87,%S7

52

hvebndmtl 11,494 15,045 18,297 21,514 24,6 28,7 32,633 37,034 41,45

-elmd Meots (Clog) 23,672 29,573 33,113 37,032 41,152 45,212 49,723 54,579 129,892

Dq------tt-

Illtorlcal J edAtn (ped) 1,079 1,216 1,349 1,790 2,248 2,727 3,222 3,730 4,252

Rwal mion - 3,107 3,895 5,016 6,331 7,835 9,636 11,765 14,264

ialbud nVreclation (4n1r) - 4,323 5,244 6,806 8,579 10,562 12,858 15,495 18,516

Mddtions - Hstodea 137 133 441 458 479 495 508 522 2,841- RMvalugti3n _ - 139 544 635 732 851 972 1,104 1,355

AInnuil DeFpedatks 137 272 985 1,93 1,211 1,346 1,480 1,626 4,1961uuzlative 3,107 649 577 680 772 95D 1,157 1,395 1,667

Historieal DIncfat1n (CQog) 1,216 1,349 1,790 2,248 2,727 3,222 3,730 4,252 7,093

wahlumtion 3,107 3,895 5,016 6,331 7,835 9,636 11,765 14,264 1,286

Rvalued DIpracsat1on (Closi1) 4,323 5,244 6,806 8,579 10,562 12,858 15,495 18,516 24,379

I/ anss to cmpxator zuwduzg orro xi"al revalutim Hpre are t acrate sterciq In 198. As the dif£wremnJ=olvsd ass 3nor and do Mot Mexdday affact tde fr t of fliancal eatmets, it m emided to jmseit thmfig s gIven by thi earp .

- 65 -IWAII mom 9

lokiw. Wter loatd Pq56 -of 6

Sdudujjs of La.4~ Debt

7co~~~~~~Cl

Year tUD o it plus Twa Had, 31 (Not) PosEtt1m Total Tom ArnStzatima Total QOxmrt Net

1985 4,256 131 4,387 2,500 131 6,756 340 6,4161986 6,416 340 6,756 521 340 6,937 310 6,6271987 6,627 310 6,937 6,2D1 310 12,=8 336 12,4921988 12,492 336 12,82B 11,610 336 24,102 334 23,7681989 23,768 334 24,102 15,460 334 39,228 32D 38,9081990 38,908 32D 39,228 15,455 32D 54,363 315 54,0481991 54,048 315 54,363 12,880 315 66,928 350 66,5781992 66,578 350 66,928 9,046 350 75,624 1,568 74,056

- 66 -

10

LEaf sQQD wAnR suPY crj=

PrQject Cost wmary a Fid V ti% PXan(UBS HLima)

water Ccupcgeit FaiainOspii ull Pro,jectT.ocal Foel Total local 1Foreisn Thta local Foreig~n Total Z

IDA on-leit 4.42 14.95 19.37 - - - 4.42 14.9S 19.37 63.4Grant - - - 0.12 0.51 0.63 0.12 0.51 0.63 2.0

MAL Total 4.42 14.95 19.37 0.12 0.51 0.63 4.54 15.46 20.00 65.4

M#i oan-lert - 0.28 0.28 - - - - 0.28 0.28 0.4Grant - 0.39 0.39 - - - 0.39 0.39 1.3

ODA ¶T81 - 0.67 0.67 - - - - 0.67 0.67 2.2

EIBIlo 3.70 2.80 6.50 - - - 3.70 2.80 6.50 21.3Granit - - - _- -

EIB Total 3.70 2.80 6.50 - - - 3.70 2.80 6.50 21.3

4K Leam 1.11 - 1.11 - - - 1.11 - 1.11 3.6Grant - - - 0.05 - 0.05 0.05 - 0.05 0.2

G Tlbtal 1.11 - 1.11 0.05 - 0.05 1.16 - 1.16 3.8

LWB Cah Genratimi 2.23 - - - - 2.23 - 2.23 7.3

Totals 10.35 18.42 27.65 0.17 0.51 0.68 11.63 18.43 10.56 10.0l

- 67 -

ANEX 11Page 1 of 5

MALAWI

LILONGWE WATER SUPPLY PROJECT

Economic Rate of Return Calculation

Assumptions

The economic rate of return analysis is based on thefinancial costs and benefits data used for the financial rate of return(FRR) calculations with the following adjustments:

1. Capital expenditures (in conatant prices) are computedusing 1986 base line costs plus physical contingencies and include:

a) Cost of new dam and remedial works on existing dam;

b) Costs of water treatment plant, reservoirs, pumpstations and land acquisition;

c) Expansion of distribution/transmission network;

d) Other costs, consisting of management staff support,training and the sanitation component.

2. Operating costs. Incremental operating costs are basedon actual 1985 costs and increase generally in line with water productionand connections. They are expressed in constant 1985 prices.

3. Tariffs. The average tariff is assumed to increase inreal terms up to 1991, thereafter it only increases in nominal terms.

4. Incremental Benefits. Incremental benefits are derivedfrom the value of incremental water sales calculated at the proposedaverage tariff in real terms.

5. Construction Schedule. The project completionassumptions are the same as those used in FRR calculations.

AN= 11MAWJI Fap 2 of 5

LILG E SVXN Ws

Ecmdc Rate of Retmn Calulatim

* ar ire Mwd 31-

throlghcost Desipdzn1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 202

1. ?wv IS2 1,344 3,415 3,924 3,197 1,926 545

2. Seem Un Iion 117 868 2,203 2,529 2,064 1,242 352 192 176 161 148 136 124 114 55

3. maLibtion %twlk &pmowon 61 456 1,159 1,328 1,085 653 185

4. othr (b;tal (bt 112 835 2,119 2,434 1,983 1,194 339 Co

5. P LqTemw Staff Supprt 18 130 329 378 307 186 52

6. fr1zE 7 54 139 161 130 78 21

7. Other Costs 107 472 466

8. S9btDt 604 4,159 9,830 10,754 8,766 5,279 1,494

9. nrewntal Cpemtim Cbets 23 180 201 207

10. Tal bOptal ad Perati% (bsts 604 4,159 9,830 10,754 8,766 5,459 1,695 399 386 480 578 602 599 580 521

- 69 -

ANNEX 11Page 3 of 5

MALAWI

LILONGWE SECOND wATER SUPPLY PROJECT

Economic Rate of Return Calculations

AnticipatedAdditional Tariff Incremental

Water Sales (in real terms) RevenueFY PERIOD 000's M3 K/M3 K O0o's

1987 0 0.421988 1 0.441989 2 0.451990 3 0.471991 4 0.491992 5 0.52 1/1993 6 2,233 0.52 1,1611994 7 3,069 0.52 1,5961995 8 4,110 0.52 2,1371996 9 5,228 0.52 2,7191997 10 6,435 0.52 3,3461998 11 7,730 0.52 4,0201999 12 8,211 0.52 4,2702000 13 8,211 0.52 4,2702001 14 8,211 0.52 4,2702022 35 8,211 0.52 4,270

1/ After period 5 (FY1991) tariff increases are expected to be nominal,reflecting the rate of inflation in Malawi. There will be noincrease in real terms.

- 70 -

ANNEX 11Page 4 of 5

MALAWI

LILONGWE SECOND WATER SUPPLY PROJECT

Economic Rate of Return Calculations

Data Streams

Investment Total NetCosts Benefits Benefits

Period K'000s K'000s K'000s

0 604 -6041 4,159 -4,1592 9,830 -9,8303 10,754 -10,7544 8,789 -8,7895 5,456 -5,4596 1,695 1,161 -5347 399 1,596 1,1978 386 2,137 1,7519 480 2,719 2,23910 578 3,346 2,76811 602 4,020 3,41812 590 4,270 3,68013 580 4,270 3,69014 521 4,270 3,74935 521 4,270 3,749

Economic Rate of Return: 5.5%

- 71 -

ANNE 11Page 5 of 5

MALAWI

LILONGWE SECOND WATER SUPPLY PROJECT

Average Incremental Cost of Water

Capital CostsIncremental &

Fiscal Year Annual IncrementalEnding Water Sales Operating CostsMarch 31 PERIOD 000st M3 K 000's

1987 0 6041988 1 4,1591989 2 9,8301990 3 10,7541991 4 8,7891992 5 5,4591993 6 2,233 1,6951994 7 3,069 3991995 8 4,110 3861996 9 5,228 4801997 10 6,435 5781998 11 7,730 6021999 12 8,211 5902000 13 8,211 5802001 14 8,211 5212022 35 8,211 521

Incremental Cost Per M3 of WaterPresent Value of

Costs Consumption Incremental CostDiscount Rate K 000's (000's M3 Per M3 in Kwacha

8% 36,407 51,407 0.7112% 31,528 28,734 1.1015% 28,723 19,556 1.47

- 72 -

ANNEX 12Page 1 of 4

MALAWI

LILONGWE SECOND WATER SUPPLY PROJECT

Lilongwe Water Board

Outline of Technical Assistance and Training Program a/

1. Long term Institutional Development

Year Period Discipline Traini!g

87/88 Up to Projects To manage the Projects Section and trainto 4 years Engineer an understudy.

90/92

87/88 Up to Operation To manage the Operations Section andto 4 years Engineer train an understudy.

90/92

87/88 up to Distribution To manage the Distribution Section andto 4 years Engineer train an understudy.

90/92

87/88 3 years Deputy Full time study course leading to fullManagement A.C.C.A. qualification.Accountant

3 years Deputy Full time study course leading to fullFinancial A.C.C.A. qualification.Accountant.

15 months Accountancy Financial & Cost Accounting at AbingdonAssistant College for Further Education.

a/ ODA financed package. The program will be reviewed annually andmodified as required depending on availability of courses, trainers,trainees and cost.

- 73 -

ANNEX 12Page 2 of 4

2. Short Term Practical Experience Program(Through Twinning)

Year Period Officer Training

Engineering

87/88 3 months Electrical & Mechanical Maintenance of ElectricalSuperintendent Mechanical Plant

3 months Distribution Operation of DistributionSuperintendent System & Maintenance of

Records.

2 months Laboratory Laboratory ProceduresSuperintendent

2 months Assistant Supervisor Meter Testing and Repairs

2 months Waste Control Waste ControlSuperintendent

Finance

1 month Financial Controller Management of FinancialSystems in the Water Industry

3 months Management Accountant Revenue Collection andBilling System

2 months Supply Officer Purchasing/Stores Control

Administration

3 months Senior Personnel Officer Personnel Management

Technical Assistance

3 months Technical ) To examine existing mains) network and obtain basic) data for network analysis

2 months Technical ) Improvement of waste control) In Malawi procedures

3 months Technical ) Water quality control

3 months Financial ) Assessment of accounting) and control systems

- 74 -

ANNEX 12Page 3 of 4

Year Period Officer Training

Finance

2 months Internal Auditor Audit procedures

Technical Assistance

88/89 1 month Technical ) Monitoring progress on waste) control

2 months Financial ) In Malawi Payroll and other financial) records on computer

3 months Technical j Organization of Direct Labour) Force

Engineering

89/90 3 months Operation Superintendent Operations Management Control

3 months Assistant Projects Evaluation of OperationalEngineer Performance & Planning

Proposals

90/91 3 months Assistant Chief Management of WaterScientific Officer Quality Control

6 months Treatment Plant Supervision of WaterSupervisor Treatment Plant

3 months Deputy Operatioins Operational ProceduresEngineer

91/92 6 months Mains Supervisor Organization of direct labour

6 months Electrical & Mechanical Maintenance of Electrical &Engineer Mechanical Plant

- 75 -

ANNEX 12Page 4 of 4

3. British Council Training Awards

Year Period Officer Training

88/89 6 months Deputy Projects Water Supply & Sanitation forEngineer Developing Countries at

Middlesex Polytechnic

15 Costing Financial & Cost Accountingmonths Supervisor at Abington College for

Further Education

6 months Computer Manager Suitable course relevant tohis duties

89/90 6 months Operations Water Supply & Sanitation inSuperintendent Developing Countries at

Middlesex Polytechnic

6 months Assistant Projects , a a

6 months Credit Controller Accounting and Finance forDeveloping Countries,University of Strathclyde

15 Senior Audit Financial & Cost Accountingmonths Clerk at Abingdon College for

Further Education

90/91 3 months Assistant Chief Diploma course atScientific Officer Middlesex Polytechnic

6 months Deputy Operations Water Resources inEngineer Developing Countries at

Birmingham University.

91/92 6 months Supply Supervisor Water Supply & Sanitationin Developing Countries atMiddlesex Polytechnic

6 montbs Data Control Suitable course relevantSupervisor to his duties

- 76 -

ANNEX 13

Page 1 of 2

MALAWI

LILONGWE SECOND WATER SUPPLY PROJECT

Proposed Monitoring Guidelines

General

1. The following guidelines are prepared to facilitate planning andto evaluate achievement of technical, financial, management and traininggoals. Certain of these will be included in periodic reports to besubmitted to the Bank whereas the remaining data may be included in LWB'sannual reports.

Monitoring Guidelines

2. LWB would develop and maintain records for the following:

a) Water System Operation Data

1. Water production: daily, water level recording in thereservoirs, water release recording, metered productionby month at the treatment plant;

2. Water consumption: metered monthly consumption for allcategories of water demand and consumption blocksincluding, but not restricted to, the following uses:(i) residential; (ii) commercial/industrial and (iii)governmental/institutional;

3. Unaccounted-for water by month;

4. Numbers of connections at year-end listed byconsumption blocks and category (see para. a(2) above)including residential connections of the followingtypes: (i) private connections; (ii) public standposts,(iii) kiosks, and (iv) other;

5. Interruptions in service: the extent to which waterservice was interrupted on an annual basis withspecific consideration of: (a) frequency, (b)duration, and (c) cause of interruption.

- 77 -

ANNEX 13Page 2 of 2

b. Treated Water Quality: Summary of physical, chemical andbacteriological quality.

c. Project implementation: Quarterly forecasts of expendituresare to be prepared for each contract within three months ofsignature of contract. Quarterly reports are to indicatepercentage completion of original forecasts and revisedforecast of expenditure for remainder of contract.

d. Financial Indicators (required annually).

i. Contributions to capital expenditures from Internalcash generation during the Project construction periodas measured by historic performance and LWB's five-yearforecast;

2. Annual rate of return on revalued net fixed assets inoperation;

3. Operating ratio;

4. Debt service coverage; and

5. Audited Accounts.

d. Staffing and Training

1. Staffing (end of financial year)

a. Number of permanent empoloyees;

i. Professional;ii. Subprofessional.

2. Training: Number of staff trained during financial yearby category, duration, and type of training (viz.,on-the-job, off-the-job).

Consultation with World Bank

3. The Borrower would consult with the Bank, at least on an annualbasis, relative to the revaluations of net fixed assets in operation, andthe calculations of annual rates of return relative thereto.

- 78 -

ANNEX 14

MALAWI

LILONGWE SECOND WATER RUPPLY PROJECT

Selected Data and Documents Available in the Project File

Master Plan Report (4 Vols.), 1983, by Stanley International.

Feasibility Study Report (4 Vols.), 1984, by Stanley International.

General Procurement Notice (Aug. 31, 1985).

Appraisal Report on Contractors' PrequalificationApplications, December 1985, by Stanley International.

Quarterly Reports on Management and Operation, 1983 through 1986,Lilongwe Water Board.

Accounts (Audited), 1982 through 1986, Lilongwe Water Board.

.Annual Budget for 1986 and 1987, Lilongwe Water Board.

Detailed Design and Bid Documents, 1986, by Stanley International.

Contract A Construction of Dam No. 2 and Repair of Kamuzu Dam.B Construction of Civil Works at Water Treatment Site.C Supply and Installation of Water Treatment Equipment.D Supply and Installation of Ptumps, Motors and Associated

Equipment.E Construction of Reservoirs and Pump Stations.F Supply of Pipes, Valves and Fittings for Transmission

Pipelines.G Supply of Pipes, Valves and Fittings for Distribution

Pipelines.

IBRD 19698

MALAWI

LILONGWE SECOND WATER SUPPLY PROJECTPROJECT AREA Lilongwe

* Existing Waterworks*ffi Proposed Waterworks

- <L Existing Dam and Reservoir~ Proposed Dam and Reservoir

Roads>Z Towns and Villages

International Boundaries

. \ G TANZANIA

ZAMBIA.

MOZAMBIQUE

M A L A W I

_-'" _ DLIongwe

A reaLof Map \

Dam No.2 2

Masula Village 1-~~~- - 5 . --N

', XKamuzu Dam \

1/ , v ) ZAIRE - A TANZANIA

ff :ANGOLA ; Wi

ZAMBIA

.'.; . / _ _ _ < > ,> .. ,:>.

lb. 'Wnv &*.u .NAMIBIA \ .t"

44S i , j 'BOTSWANA>-.4

-" - m. ~~~~~~~ I ~'SWkAZILANDo 5 ~~~~~~~~~~10SOT° * - -5W t__ . , a - - C S LSOOHO

KILOMETERS a A _ES _ .

JUNE 1986

Lumbadzi Water Tower95Cm3

~^ u Lumbadzi Booster Station

Service Reservoir 4,600m3

Water Tower 150m3

KamuzuMALAWI International Airport

LILONGWE SECOND WATER )SUPPLY PROJECT

SUPPLY AREA /

Existing: Proposed: Sandula Reservoir /Pipelines 2,00m3,@

A A& Booster Pumps 4,00@* ( Reservoirs 4,600m8i *! Waterworks

B.S. Booster Station m3/day

Residential Areas: 'KHigh DensityMedium DensityLow Density

Industrial Areas 700m x 400mm

6,800m3 B.S. 7,900

7,500m3 Kanengo ReservoirTo Sal&ma

1~~~~~~/1TO Mchinji

i \2 h B.S. 22.0 l

E

oo'°t/ / ,X' 1¢ ~~Center i\

650m3' Area 9 Y( / k4j

Water Tower / /¢o'

N. /v/g

B.S. 3,460 Kt/tamuzu

2.410m

Livingstone Reservoirs g)) TownGround 15,900m 3

Water Tower 140m3 650m3Water Tower

Waterworks 2servronr x < Area 2332, 000m 3 /dDez

//t-X<a,:s Reservoir".

3.650m x 350mm Southern Booster

Dam No.2 2

C- . Kamuzu Dam . Da TW *h b. ~ 4 w a_ i hX*m_z ~ -- 0 ?hWWo,"^B.

rn~~~~~~~~~~~~~~~~~~~~ U. w,.* ~ U.^.V * 8 , ~ U,~

as_~C-__ . 1