GPOBA Commitment Paper: National OBA Facility for Water and Sanitation services in Honduras January 15, 2007

HONDURAS

PROJECT APPRAISAL-COMMITMENT DOCUMENT

Project Name:National OBA Facility for Water and Sanitation services in Honduras(P102474)

Scope: Develop an OBA Facility aimed at improving access to water and sanitation services to low income households (hh) in rural and peri-urban communities, including greenfield and brownfield projects.

Total project costs: $14,813,505

Initial Sub-Project Portfolio / Other contributions / Community contribution / OBA subsidy / Total sub project investment
PRAAC – EU Barrios en Desarrollo Water / $10,558,424 / $549,191 / $1,122,895 / $12,230,510
Barrios en Desarrollo (Tegucigalpa) Water Kiosks / $270,305 / $315,777 / $677,024 / $1,263,106
La Masica - Water / $284,867 / $384,139 / $236,316 / $905,322
La Esperanza - Water / $291,400 / $0 / $123,166 / $414,566
Totals / $11,404,996 / $1,249,107 / $2,159,401 / $14,813,504

NB: La Esperanza Water user contribution is through tariff only.

Additional funding sources: FHIS will contribute US$1.0 million to the proposed OBA Facility to provide ‘bridge financing’ for some sub-projects. Other funding will come from the private operators, user contributions by a mixture of in-kind contributions and up-front payments (this varies depending on the sub-project), through tariffs, standard sector contributions from Central Government, and/or Municipalities.

Total GPOBA funding requested: US$4,590,000 (although identified GPOBA subsidy for sub project portfolio referred to in the document is US$$2,159,401)

  • Subsidy funding = $4,000,000 (Window 3)
  • Project implementation through OBA Unit housed in FHIS = $240,000 (Window 3)
  • Independent Verification Agent = US$50,000 (Window3)
  • Bank/GPOBA supervision = $150,000
  • TA funding for subprojects and = $150,000 (Window 1)
  • Project has already been awarded US$155,000 of W1 TA for project preparation; of this amount approximately US$80,580 has been expended (including supervision). The remainder will be used towards funding the additional US$150,000 TA request, so that effectively the ‘new’ TA requested is approximately of US$75,000.

GPOBA funding:

  • IFC for Private Operators = US$1.5million
  • DFID for other operators (NGO, Municipality etc) = US$1.5 million
  • DGIS for other operators (NGO, Municipality etc) =US$1.5 million

Outputs: connections to water or sewerage network (average is 6 people per hh connection or water kiosk)

Expected beneficiaries: 25,627 hhs for the initial sub project portfolio but for the total GPOBA subsidy request of US$4,590,000expected beneficiaries are approximately 40,000.

GPOBA subsidy “efficiency”:

The table below shows average values pre sub project group:

Sub-project Name / # of hh / Total Investment US$ / Av hh cost US$ / GPOBA subsidy
US$ / GPOBA subsidy per hh / GPOBA subsidy per person
PRAAC – EU Barrios en Desarrollo Water / 17,843 / 12,230,510 / 685 / $1,122,895 / $63 / $10.50
Barrios en Desarrollo (Tegucigalpa) Water Kiosks / 6877 / 1,263,106 / 184 / $677,024 / $98 / $16.33
La Masica – Water / 438 / 905,322 / 2067 / $236,316 / $540 / $90.00
La Esperanza – Water / 469 / 414,566 / 884 / $123,166 / $263 / $43.83
Total / 25,627 / 14,813,504 / $2,159,401

NB: GPOBA maximum subsidy is US$ 90 per person for water services and US$96 per person for wastewater services

Targeting: poor communities and householdswhoseincome is less than $46 per month or US$2 per day

Grant recipient: Fondo Hondureño de Inversion Social (FHIS).

Financial Management: Clearance obtained. FHIS will be responsible for administering the OBA Facility and associated financial management (FM) tasks. A unit within FHIS will be created to manage the OBA Facility, which would include a Financial Management Specialist. Grant proceeds will be withdrawn by FHIS using the advance method supported by documentation based on interim financial statements (IFRs).

Disbursement Scheme:

  • Implementers will receive ten percent (10%) of the relevant OBA total award upon signing of contract to execute the proposed works.
  • A further sixty five percent (65%) will be paid upon a verified output
  • A final twenty five (25%) percent will be paid after six months of bills being sent and paid by each new connection

Economic Rate of Return of sample projects:

Project / E-NPV / E-IRR / Expenditure Benefits / Time Benefits / Health Benefits
PRAAC – EU Barrios en Desarrollo Water / $6,351, 238 / 20% / 62% / 31% / 7%
Barrios en Desarrollo (Tegucigalpa) Water Kiosks / $1, 793, 261 / 31% / 49% / 35% / 16%
La Masica, Water / $2,119,571 / 43% / 48% / 36% / 16%
La Esperanza, Water / $34, 931 / 13% / 41% / 51% / 8%

Procurement:Clearance obtained.FHIS will carry out procurement for the proposed project in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, and the “Guidelines: Selection and Employment of Consultants by World Bank Borrowers,” both dated May 2004, and the provisions stipulated in the Grant Agreement. The specific arrangements will be further detailed in the Operational Manual.

Safeguards:Clearance obtained

  • ISDS and relevant disclosures (include disclosure in Honduras and WB website):
  • Conceptual framework for Social and Environmental Management: Clearance obtained
  • Integrated Safeguards Disclosure Sheet (Concept and Appraisal): Clearance obtained
  • Indigenous Peoples: Clearance obtained
  • Physical Cultural Resources: Clearance obtained

Government endorsement: Yes

CURRENCY EQUIVALENTS

(Exchange Rate Effective August 29, 2006)

Currency Unit / = / Lempira
19.00 Lempiras / = / US$1

ABBREVIATIONS AND ACRONYMS

AHJASA / Asociación Hondureña de Juntas Administradoras de Sistemas de Agua.
CAS / Country Assistance Strategy
CABEI / Central American Bank for Economic Integration
CONASA / Consejo Nacional de Agua y Saneamiento (Planning Agency)
CNE / Comision Nacional de Energia
EA / Environmental Assessment
EIRR / Economic Internal Rate of Return
ERSAPS / Independent water and wastewater regulator
FHIS / Fondo Hondureño de Inversión Social
GOH / Government of Honduras
GPOBA / Global Partnership for Output-Based Aid
(hh) / Households
IADB- BID / Inter American Development Bank
INE / National Statistics Institute
IVA / Independent Verification Agent
JAS / Juntas de Agua y Saneamiento
KfW / Kreditanstalt für Wiederaufbau - Bankengruppe
OBA / Output Based Aid
OBA Facility / Output Based Grant Facility for water and wastewater infrastructure development
PEC / Projects Executed by the Community
PEMAPS / National Water Sector Plan
SANAA / National water utility still responsible for water and wastewater services in the capital City Tegucigalpa

CONTENTS

A. STRATEGIC CONTEXT AND RATIONALE

A.1. Country and Sector Issues

A. 2. Rationale for GPOBA involvement

A. 3. Higher level objectives to which the project contributes

B. PROJECT DESCRIPTION

B.1 Project Development Objectives and Key Indicators

B.2. Project Design

B.3. Sub-projects and unit costing

B.4. Eligibility Criteria and Ranking Methodology

B.5. Outputs and Subsidy Disbursement

B.6. Economic Analysis

C. INSTITUTIONAL & IMPLEMENTATION ARRANGEMENTS

C.1. Institutional Arrangements

C.2. Implementation

C.3. Financial Management and Disbursement Arrangements

C.4. Partnership arrangements

C.5. Milestones for project implementation

TECHNICAL ANNEXES

ANNEX 1 SUBSIDY CALCULATION, ELIGIBILITY AND RANKING METHODOLOGY

ANNEX 2.ECONOMIC ANALYSIS OF SAMPLE SUB PROJECTS......

ANNEX 3.PROJECT SELECTION CRITERIA

ANNEX 4. PROJECT COSTS SCHEDULE

OBA PAYMENTS TO BE REQUIRED FROM GPOBA (WINDOW 3)......

ANNEX 5. FINANCIAL MANAGEMENT (OP/BP 10.02) AND DISBURSEMENT (OP/BP 12.00)

ANNEX 6. PROCUREMENT (OM, JULY 15, 2002)

ANNEX 7. SAFEGUARD POLICIES TRIGGERED BY THE PROJECT

ANNEX 8 - ENVIRONMENT (OP/BP 4.01).

ANNEX 9. RESULTS AND MONITORING

ANNEX 10. PROJECT PREPARATION AND SUPERVISION

ANNEX 11. DOCUMENTS IN PROJECT FILE

A. STRATEGIC CONTEXT AND RATIONALE

A.1. Country and Sector Issues

Honduras is a country rich in natural resources. Nevertheless, it has been classified by the international financial organizations as one of the three poorest countries in Latin America and the Caribbean (LAC). Some of the structural factors that contribute to the poverty are:

  • unequal distribution of the incomes and resources,
  • insufficient and poor investment in human capital, and
  • lack of a dynamic economy

In the World Report of Human Development of 2000, Honduras is 116 out of 173 countries, with an IDH of 0.638. Honduras has a surface area of 112,492 km2, with humid tropical climate in the North, dry mesothermic climate in the West, and tropical savanna in the rest of the country. It is divided in 18 Departments, which are subsequently sub-divided into 298 autonomous municipalities, 3,740 villages, and 19,937 houses. In 2000, Honduras’ population was 6,009,080 inhabitants with an annual growth rate of 2.6%. Though the population was 52.3% rural and 47.7% urban by the latest estimates, it is gradually becoming more urbanized. The Gross Domestic Product (GDP) as defined by purchase power parity (PPP) is USD $10.8 billion, growing at an annual rate of about 4% (real growth). The per capita income is USD $1,980, with a labor force of 1.3 million. The exports are about USD $843 million, consisting mainly of bananas, coffee, shrimp, lobster, minerals, meat, wood, and clothing.

Honduras’ GDP consists of 62% agriculture, 20% services, 9% manufacturing, 3% construction, and 6% other. Foreign debt has practically been canceled in the past 24 months.

Service coverage for potable water and sewerage is still low: 83% and 63% for urban and rural areas, respectively. PAHO points out that 23% of the contagious diseases in Honduras are waterborne.

The Presidential Commission for State Modernization (Comisión Presidencial de Modernización del Estado, CPME) has had an important role in the organization and reform of the sector, which resulted in the 2003 Drinking Water and Sanitation Sector Framework Law (Ley Marco del Sector Agua Potable y Saneamiento).

The design of this Output-Based Aid (OBA) macro-project takes the Strategic Plan for Modernization of the Potable Water and Sanitation Sector, developed by the Government of Honduras (GOH) with World Bank and PPIAF assistance, into account. The Strategic Plan aims to meet Millennium Development Goals (MDGs) by implementing fundamental transformations of the sector designed to promote societal well-being, economic growth and sustainable development.

The central problem of the potable water and sanitation sector is intimately linked with the lack of financial resources. Investment needs exceed the GOH’s financial capacity, thereby requiring additional support which may come in the form of donations, diverse subsidies and loans. Some characteristics of this problem are:

  • Low service coverage vis-à-vis GOH’s development goals and MDGs
  • Unfinished works, mainly due to lack of resources
  • Infrastructure with insufficient capacity to meet total demand

Current project portfolios with extended development and execution timelines, also mainly due to lack of financing

A. 2. Rationale for GPOBA involvement

The Government of Honduras expressed interest in developing a portfolio of water and sanitation projects using the World Bank OBA approach, in which payment of subsidies (aid) is made once agreed upon results (outputs) are verified.

Over the past five years, water and sanitation investments in municipalities have been carried mainly by the Honduran Fund for Social Investment (Fondo Hondureño de Inversión Social, FHIS) with modest investment in basic maintenance activities from the National Water and Sanitation Authority (Servicio Autónomo Nacional de Agua y Alcantarillado, SANAA). Additionally, there are a number of donors which are active in the sector, and a consistent strategy is needed for the implementation of projects as well as their respective funding.

As a result, there is a need to explore innovative financing sources and mechanisms to satisfy investment needs, while providing transparency in the management of resources, better application of subsidies, and improved output quality within a reasonable timeframe. Therefore, OBA may constitute a sustainable and realistic option to contribute to the development of the water and sanitation sector in Honduras as well as mitigate increasing poverty.

The proposed project would constitute an OBA Grant Facility that will finance a portfolio of several diverse sub-projects in water and wastewater. These sub-projects would benefit various poor households in cities and communities throughout the country. The project envisages the participation of all sector actors including, FHIS, SANAA, andprivate organizations in low-income neighborhoods (such as Barrios en Desarrollo) in peri-urban areas. The project also envisages the involvement of the private sector (where it is already responsible for provision of water and wastewater services such as in Aguas de San Pedro (ACEA) and Puerto Cortes). In some instances, such as the peri urban areas of Tegucigalpa (where some form or public private management structure is currently being designed) the OBA intervention seeks to leverage macro investments already made[1].

By setting up an OBA Facility, the proposed scheme seeks to increase water and sanitation coverage and improve quality of service to poor household currently not served or under served, promote new sector administration models that are consistent with the national policy of decentralization of services (thus contributing to the national priority to modernize the sector) and provide a financial mechanism by which targeted investments can be made. Additionally, this OBA project contributes to consolidate the roleof the private sector by partially financing extension of services in poor areas served by existing private operators (Aguas de San Pedro and Aguas de Puerto Cortes), and promotescommunity involvement and private intervention at the local level through small water Juntas and organized communities. The project shifts increased performance risk to service providers/ sub-project implementers by disbursing subsidies upon the delivery of pre-agreed outputs. Enhancing the sustainability of rural and peri-urban water systems is a key aspect of the Honduras OBA project design.

The OBA Facility will target in the initial set of sub-projects 25,843 low income hh in various locations throughout the country. Targeting will be geographical but each sub project will have to meet pre-specified eligibility criteria (see section B4).

It is the intention of the Government to channel future donor interventions and government sector transfers through the proposed OBA Facility and following the methodology established for this project. Other donors such EU andCAREhave expressed interest in the proposed concept. In some instances, the OBA Facility will augment funds already earmarked by such donors.

In summary, this project meets the following GPOBA eligibility criteria and core OBA principles:

  • Explicit use (i.e. targeting) of subsidies (section B4);
  • Subsidies are (solely) investment subsidies (section B3);
  • Increased accountability for service providers regardless of whether they are public or private;
  • Requirement that tariffs cover at least O&M expenditure as a key eligibility criteria;
  • Subsidy payments generally made after output delivery, and some retention of subsidy payable after a period of operation;
  • Promotes increased private participation in operations and financing;
  • Provides incentives for innovation and efficiency;
  • Enhances sustainability through a structure that provides accountability, allocates risk to the service providers and is a model for scaling-up for water and other infrastructure sectors (section B5);
  • Incorporates monitoring of results (section C),
  • Is consistent with Country Assistance Strategy
  • Applies lessons learned by the World Bank on sustainability of rural water and sanitation systems.

A. 3. Higher level objectives to which the project contributes

Sustainable access to water supply and sanitation services is a high priority that is now well recognized in the international development agenda. The United Nations has declared access to safe water a basic human right; it is now widely recognized to directly contribute to poverty alleviation. The project has the following high level objectives:

  • Contribute to meeting Honduras’ Millennium Development Goals (MDGs) for safe and sustainable drinking water and sanitation,
  • Test an innovative mechanism for efficient and transparent funding of the water and wastewater sector that if proven successful, could be scaled-up and replicated at a national level to include government and donor financing. Ultimately, this may lead to lower costs in the sector.

The Honduran Fund for Social Investment (Fondo Hondureño de Inversión Social, FHIS) was established in 1990 as a GOH institution with the mandate to provide support to the social sector including education, water and sanitation, rural electricity, and other infrastructure projects. Over the past years, FHIS has been the implementing agency for a number of World Bank projects. It has the technical, operational, and administrative capacity to implement this project.

B. PROJECT DESCRIPTION

B.1 Project Development Objectives and Key Indicators

To develop an OBA Grant Facility (OBA Facility) aimed at establishing an efficient, transparent mechanism for financing infrastructure in Honduras. Additionally, the project aims at improving access to water and sanitation services to about 40,000low income households (hh)to be geographically targeted (see B4. Eligibility Criteria). The OBA project envisages to: (i) increase the number of domestic water connections with meters, yard taps, public points (stand posts), water availability (quantity); and (ii) increase water quality and household connections to sewer systems in selected peri-urban and rural communities.

The project will test the viability of an OBA approach with full participation and ownership from the national and municipal institutions including FHIS, SANAA, rural water boards (“juntas de agua”), community groups in developing neighborhoods (“barrios en desarrollo”), and the private sector (where it is responsible for the provision of water and wastewater services), in the development and execution of sub-projects.

In addition to increasing water and sanitation coverage and quality of service, the proposed OBA project seeks to further promote new water sector administration models that target poor people with inadequate/inexistent service, thus contributing to the transformation of the sector, which is a national priority[2]. Notably the project would ensure that:

  • Subsidies are one-off unit cost subsidies, and not consumption subsidies.
  • Tariffs for each sub-project will cover at least operation and maintenance costs.
  • FHIS will arrange pre-financing for public sector implementersand has committedto depositaround US$1 million in the OBA Facility as a condition precedent to Grant Agreement effectiveness. In the case of private implementers, pre-financing will be done through their own revenues or local commercial banks.Once outputs are verified, funds used for pre-financing are repaid by the implementer directly into the OBA Facility[3]. These funds are to be used at a latter date for pre-financing other sub projects.
  • For those projects where pre-financing has been provided by FHIS, the bridge loans will be repaid by using the OBA subsidy.
  • Other donors have requested OBA funding to complete projects (e.g.EU for PRRAC Barrios en Desarrollo in Tegucigalpa).

Implementation of the proposed OBA Facility will bring about:

  • Less time spent collecting water from distant sources as well as avoided costs from water tankers
  • Reduction of disease and death related to water-borne illness;
  • Locally tailored and cost-effective solutions for system design, including more co-ordination at the community level in aspects such as technology selection, infrastructure maintenance and operation, micro-metering acceptance, tariff setting; and
  • Improved financial viability of the existing water supply systems, including mobilizing alternative sources of finance for the sector.

B.2. Project Design

The project consists of setting up an OBA Grant Facility for the financing and management of a portfolio of several sub-projects. Each sub-project will define specific outputs mainly as final working connections (either domestic water or sewerage connections or yard taps). The diagram in Figure 1 shows how the OBA Facility will operate.Technical Assistance funds have been allocated to help local authorities, water boards, municipalities and private operators (the implementers) formulate viable and eligible proposals for funding. These funds will also, as appropriate, be used to engage a Project Engineer to support the project management and its implementation. A typical sub project cycle involves the following: